HP Inc. Form 10-Q Summary
Reporting period: Third quarter of fiscal 2020, three months ended July 31, 2020; year-to-date figures cover the nine months ended July 31, 2020. Amounts are in U.S. dollars; financial statement amounts are in millions unless stated otherwise.
Business context and results
HP sells personal computing devices, printing products and related services through Personal Systems, Printing and Corporate Investments. The quarter reflected COVID-19-driven demand shifts: remote work, learning and gaming supported notebooks and consumer printing, while office closures weighed on commercial PCs, printing hardware and supplies.
| Metric | Q3 2020 | Q3 2019 | Change |
|---|---|---|---|
| Net revenue | $14,294 | $14,603 | Down 2.1% (down 0.2% constant currency) |
| Gross profit / margin | $2,393 / 16.7% | $2,905 / 19.9% | Margin down 3.2 percentage points |
| Operating earnings / margin | $779 / 5.4% | $1,079 / 7.4% | Down 27.8% |
| Earnings before taxes | $751 | $248 | Higher, largely because prior-year interest and other expense included a tax-indemnification adjustment |
| Net earnings | $734 | $1,179 | Down 37.7% |
| Diluted earnings per share | $0.52 | $0.78 | Down 33.3% |
The prior-year comparison is affected by substantial unusual tax benefits: HP recorded $1.1 billion of discrete tax benefits in the three and nine months ended July 31, 2019. In Q3 2020, HP recorded $116 million of net discrete tax benefits. Q3 2019 interest and other expense also included a $764 million adjustment primarily related to indemnification receivables following resolution of tax matters.
Segment performance and year-to-date comparison
- Personal Systems: Q3 revenue rose 6.9% to $10.36 billion; operating earnings were $570 million, with a 5.5% margin versus 5.6%. Notebook revenue grew 29.7%, while desktop revenue fell 28.6%. Consumer revenue rose 41.9%; commercial revenue declined 6.2%.
- Printing: Q3 revenue fell 19.9% to $3.93 billion; operating earnings declined 37.3% to $480 million and margin fell to 12.2% from 15.6%. Supplies revenue declined 18.7% and commercial hardware revenue declined 36.9%; consumer hardware grew 6.8%.
- Nine months: Revenue declined 4.5% to $41.38 billion (down 3.2% constant currency); net earnings were $2.18 billion versus $2.76 billion, and diluted EPS was $1.51 versus $1.80. Personal Systems revenue increased 1.1%; Printing revenue decreased 15.0%.
Cash flow, debt and liquidity
- For the nine months ended July 31, operating cash flow was $2.44 billion, down from $4.07 billion a year earlier. HP attributed the decline primarily to lower cash from working capital amid COVID-19 demand changes and lower operating earnings.
- Year-to-date investing cash outflow was $931 million; financing cash outflow was $1.37 billion. Cash increased $142 million from the fiscal-year start to $4.68 billion.
- At July 31, cash was $4.68 billion, current assets $20.27 billion and current liabilities $25.03 billion. Debt was approximately $6.26 billion, including $276 million of short-term borrowings and $5.98 billion of long-term debt. The resulting cash less debt was approximately negative $1.58 billion.
- HP issued $3.0 billion of senior notes in June, with coupons of 2.2% to 3.4% and maturities from 2025 to 2030; proceeds partly funded tender offers and redemptions of existing debt. HP reported a 3.8% weighted-average borrowing rate, compared with 4.6% at October 31, 2019.
- Available facilities included a $4.0 billion revolving credit facility, a $1.0 billion 364-day facility and $725 million of uncommitted lines. HP said it was in compliance with credit-facility covenants and believed available cash, operating cash flow and borrowing resources would meet foreseeable needs.
Outlook, management commentary and risks
- HP provided no specific revenue, earnings or cash-flow guidance in the supplied filing text. Management said the duration and full financial effects of COVID-19 remained uncertain and could affect liquidity and working capital.
- Supply-chain disruptions and temporary factory closures caused shortages and logistics delays; manufacturing capacity had largely normalized by the end of June. Notebook and consumer-printing demand strengthened, while office and graphics printing remained weak, with recovery timing uncertain.
- The fiscal 2020 restructuring plan targets approximately 7,000–9,000 workforce reductions through fiscal 2022 and about $1.0 billion of pretax charges. HP reported $431 million of restructuring and other charges for the first nine months and expected approximately $0.6 billion of future restructuring cash payments through fiscal 2023.
- Approximately 12,000 pension participants elected a lump-sum option; HP expected about $2.0 billion of payments from plan assets in Q4 fiscal 2020 and an estimated $240 million noncash settlement expense.
- HP identified risks from prolonged pandemic effects, weak office-related demand, supply-chain disruption, competitive pricing, currency movements, debt and refinancing needs, and execution of restructuring and strategic initiatives. It also cited ongoing litigation and regulatory matters, including printer-supplies and Dynamic Security proceedings. HP had reached an understanding in principle for an SEC settlement with a proposed $6 million civil penalty, subject to SEC approval; HP said it would neither admit nor deny the allegations.
- HP reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Whether notebook strength and consumer demand can offset continued weakness in commercial PCs, printing hardware and supplies.
- How quickly gross and segment margins recover from Q3 declines, including the effects of product mix, pricing and currency.
- Whether operating cash flow and working capital improve, and whether HP sustains liquidity while servicing debt, paying dividends and repurchasing shares.
- Execution, costs and expected benefits of the workforce restructuring, including the timing of remaining charges and cash payments.
- Final outcomes and financial exposure from the SEC matter, printer-related litigation and investigations, tax audits, and the pension lump-sum settlement expense.
- COVID-19’s continuing effects on demand, supply chains, customer and partner collections, and the timing of commercial-market recovery.