HP Inc. (HPQ) — Q3 FY2022 Form 10-Q
Reporting period: Three and nine months ended July 31, 2022. HP sells personal computing devices, printing products and supplies, and related services. Amounts below are in U.S. dollars; financial statement amounts are in millions unless noted.
Financial performance
| Metric | Q3 FY2022 | Q3 FY2021 | Nine months FY2022 | Nine months FY2021 |
|---|---|---|---|---|
| Net revenue | $14,664 | $15,289 | $48,182 | $46,812 |
| Gross profit / margin | $2,900 / 19.8% | $3,388 / 22.2% | $9,618 / 20.0% | $10,152 / 21.7% |
| Operating earnings / margin | $1,272 / 8.7% | $1,381 / 9.0% | $3,909 / 8.1% | $4,064 / 8.7% |
| Net earnings | $1,119 | $1,108 | $3,205 | $3,404 |
| Diluted EPS | $1.08 | $0.92 | $3.01 | $2.73 |
- Q3 revenue declined 4.1% year over year (1.9% on a constant-currency basis); nine-month revenue increased 2.9% (3.8% constant currency).
- Q3 gross margin fell 2.4 percentage points. HP cited prior-year sales-incentive estimate changes and currency impacts; for the nine-month period, higher commodity costs and mix also weighed, partly offset by pricing.
- Q3 earnings improved modestly despite lower revenue, while nine-month net earnings declined 5.8%. Q3 effective tax rate was 7.0%; the nine-month rate was 15.0%, with discrete tax benefits contributing.
Segments
- Personal Systems: Q3 revenue was $10.1 billion, down 3.0%; operating earnings were $695 million, down 20%, and operating margin was 6.9% versus 8.4%. Notebook revenue fell 10.3%, while Desktop and Workstation revenue rose 13.0% and 38.5%. Units declined 25.0%, partly offset by a 29.3% increase in average selling prices.
- Printing: Q3 revenue was $4.6 billion, down 6.3%; operating earnings rose 6.3% to $911 million and margin improved to 19.9% from 17.6%, mainly on lower operating expenses. Supplies revenue declined 9.0%. For nine months, Printing revenue fell 5.8% and operating earnings fell 2.1%.
Cash flow, debt and liquidity
- Nine-month operating cash flow was $2.56 billion, down from $3.56 billion. Investing used $673 million and financing used $799 million; cash increased by $1.09 billion to $5.39 billion.
- Capital spending was $647 million. HP returned $4.3 billion to shareholders during the nine months: $3.5 billion in repurchases and $788 million in dividends.
- At July 31, cash and cash equivalents were $5.4 billion and total debt was $11.0 billion, compared with $4.3 billion and $7.5 billion at October 31, 2021. Debt increased following $4.0 billion of senior-note issuance in March and June. Weighted-average borrowing rates were 3.8% versus 3.1%.
- HP reported a $5.0 billion committed revolving credit facility available through May 2026, no borrowings under it, and $539 million of additional uncommitted lines. Management said available cash, operating cash flow and borrowing capacity should cover foreseeable needs.
- Inventory was $8.19 billion, up from $7.93 billion at fiscal year-end. Inventory days of supply were 63, up 10 days from October 2021; HP attributed the increase partly to supply-chain buffering in Printing.
Developments, outlook and risks
- HP said it expected to exceed $1.2 billion in gross run-rate structural cost reductions by fiscal year-end and was finalizing a new multiyear transformation program for communication in Q1 FY2023. The filing gives no specific revenue or earnings guidance.
- Management described softening Consumer PC and Consumer Printing demand, expected near-term pressure on Commercial PC demand, component shortages, China manufacturing disruptions, logistics constraints, inflation, foreign-exchange volatility and heightened competition. Supply constraints were expected to persist in the near term, with some improvement.
- HP recorded $23 million of Russia exit charges in Q3 and said it was winding down Russian operations. It cited geopolitical and macroeconomic uncertainty, including the Russia-Ukraine war, as risks.
- On August 29, 2022, after quarter-end, HP completed its $3.3 billion enterprise-value cash acquisition of Poly, funded with cash and new debt. Poly’s results will be included from the acquisition date. HP also completed an exchange of approximately $0.5 billion of Poly notes on September 1.
- HP reported $4.3 billion of unconditional purchase obligations, primarily for inventory and service support. It reported $961 million of gross unrecognized tax benefits; up to $777 million could affect the effective tax rate if realized. Management said it was not reasonably possible that material litigation losses exceeded recorded amounts, but noted litigation outcomes can affect results or cash flows. A potential Autonomy-related damages award had not been recorded.
Important facts for investors to verify
- Whether demand and unit volumes stabilize, and whether supply constraints ease without greater pricing pressure.
- Whether gross margins recover from higher costs, foreign-exchange effects and the prior-year incentive comparison.
- Whether operating cash flow improves as inventory and other working-capital requirements evolve.
- The impact of Poly’s integration and acquisition financing on debt, interest expense, cash generation and shareholder returns.
- How tax examinations, unrecognized tax positions, litigation and the unrecorded potential Autonomy recovery ultimately resolve.