HP Inc. 10-Q Summary
Business context and reporting period. HP is a global provider of personal computers, printing products and related services. This unaudited filing covers the quarter and six months ended April 30, 2020, the second quarter of HP’s fiscal 2020. The quarter occurred amid the COVID-19 pandemic, which disrupted supply chains and shifted demand between commercial and home markets.
Key financial results
| Metric | Quarter ended April 30, 2020 | Prior-year quarter | Six months ended April 30, 2020 | Prior-year six months |
|---|---|---|---|---|
| Net revenue | $12.469 billion | $14.036 billion | $27.087 billion | $28.746 billion |
| Gross profit / margin | $2.493 billion / 20.0% | $2.729 billion / 19.4% | $5.365 billion / 19.8% | $5.341 billion / 18.6% |
| Operating earnings / margin | $826 million / 6.6% | $928 million / 6.6% | $1.691 billion / 6.2% | $1.854 billion / 6.4% |
| Net earnings | $764 million | $782 million | $1.442 billion | $1.585 billion |
| Diluted EPS | $0.53 | $0.51 | $0.99 | $1.02 |
| Operating cash flow | Quarterly value not separately stated | Quarterly value not separately stated | $775 million | $1.723 billion |
Quarterly revenue declined 11.2% year over year (10.1% in constant currency); six-month revenue fell 5.8% (4.7% in constant currency). Gross margin improved, primarily from favorable Personal Systems commodity costs, but quarterly operating earnings and net earnings declined. Quarterly diluted EPS rose from $0.51 to $0.53 as the weighted-average diluted share count fell to 1.440 billion from 1.536 billion.
Segments and material changes
- Personal Systems: Quarterly revenue was $8.313 billion, down 6.8%; operating earnings were $552 million, up 43.4%, with operating margin rising to 6.6% from 4.3%. Notebook demand partly offset declines in desktops and workstations. Supply disruptions constrained shipments.
- Printing: Quarterly revenue was $4.158 billion, down 18.7%; operating earnings fell 34.7% to $548 million and margin declined to 13.2% from 16.4%. Lower supplies and commercial hardware demand reflected office closures, remote work and logistics constraints. Consumer printing demand also faced supply disruption.
- For the six months, Personal Systems revenue declined 2.0%, while Printing revenue declined 12.7%. Printing margin fell to 14.7% from 16.3%; Personal Systems margin increased to 6.7% from 4.3%.
- Restructuring and other charges totaled $81 million for the quarter and $372 million for six months, versus $69 million and $124 million in the prior-year periods. The six-month increase primarily reflects HP’s Fiscal 2020 Plan.
Cash, liquidity and debt
- Cash and cash equivalents were $4.054 billion at April 30, 2020, down from $4.537 billion at October 31, 2019. Six-month operating cash flow was $775 million, versus $1.723 billion a year earlier; HP attributed the reduction primarily to back-end-loaded manufacturing activity affected by COVID-19.
- Six-month investing cash outflow was $380 million; financing cash outflow was $878 million. HP used $814 million for share repurchases and paid $508 million in dividends during the six months.
- Outstanding borrowings totaled approximately $5.5 billion, versus $5.1 billion at October 31, 2019. This included $613 million of commercial paper. HP reported a $4.0 billion committed revolving facility available through March 2023 and $725 million of uncommitted lines; a further $1.0 billion 364-day facility was entered into on May 29, 2020, after quarter-end.
- Current assets were $19.660 billion and current liabilities $25.276 billion. HP stated it expected cash, operating cash flow, borrowing resources and credit facilities to cover operating needs, planned capital spending, debt service, benefit funding, authorized repurchases and dividends.
Outlook, commentary, risks and unusual items
- No numerical earnings or revenue guidance is provided in the supplied filing text. HP said the duration and full financial impact of COVID-19 were uncertain. Manufacturing capacity returned to normalized levels in April through early May, but the company warned that future demand, supply, liquidity and working-capital effects remained uncertain.
- COVID-19 increased demand for Personal Systems in some markets, while office and graphics printing weakened as workplaces and events closed. Factory closures, component shortages and logistics delays affected fulfillment. HP identified continuing risks from economic conditions, competition, foreign exchange, tariffs, supply-chain dependencies and cybersecurity/remote-work operations.
- HP’s Fiscal 2020 restructuring plan, expected to be implemented through fiscal 2022, targets a reduction of approximately 7,000–9,000 employees and about $1.0 billion of pre-tax charges. HP estimated approximately $0.7 billion of future cash payments under restructuring plans, with payments extending through fiscal 2023.
- HP incurred significant costs responding to Xerox’s unsolicited exchange offer and proxy activity; Xerox terminated the offer and withdrew its director nominees on March 31, 2020. HP’s board had adopted a shareholder rights plan with a 20% ownership trigger; it was scheduled to expire February 20, 2021 unless ended earlier.
- Material matters to monitor include patent litigation and investigations concerning printer-supply authentication, the India customs-duty proceedings, tax audits and uncertain tax positions, and the appeal of HP’s approximately $3.0 billion jury award against Oracle. HP recorded no asset for the Oracle award pending appeal. HP said it had accrued adequate provisions for contingencies and did not consider a material loss in excess of amounts recognized reasonably possible as of April 30, 2020.
- 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
- Whether post-quarter demand and supply-chain recovery sustain Personal Systems performance and whether Printing’s declines persist.
- How operating cash flow and working capital evolve: inventory days rose to 57 from 43 a year earlier, while six-month operating cash flow fell substantially.
- Borrowing maturities, commercial-paper usage, facility availability and the effect of further borrowing on debt costs and liquidity.
- Progress, cash costs and realized savings from the Fiscal 2020 Plan, and the continuation of dividends and share repurchases.
- Developments in COVID-19-related uncertainty, significant litigation and investigations, tax exposures, and the shareholder rights plan.