Business context and reporting period
HP Inc. filed this unaudited Form 10-Q for the first quarter of fiscal 2023, the three months ended January 31, 2023, compared with the three months ended January 31, 2022. HP sells personal computing products, printing hardware and supplies, and related services through Personal Systems, Printing, and Corporate Investments. Amounts below are in U.S. dollars; financial statement amounts are in millions unless stated otherwise.
Financial and operating results
- Revenue: $13.83 billion, down 18.8% year over year (14.7% lower on a constant-currency basis). HP attributed the decline mainly to weak Personal Systems and Supplies demand and currency effects.
- Profit and margins: Gross profit was $2.81 billion and gross margin was 20.3%, up 0.4 percentage points. Operating earnings were $765 million versus $1.36 billion; operating margin fell to 5.5% from 8.0%. Net earnings were $487 million versus $1.09 billion; diluted EPS was $0.49 versus $0.99.
- Interest and taxes: Net interest and other expense was $181 million, up from $32 million, primarily because of higher borrowing interest expense. The effective tax rate was 16.6%, compared with 18.2%; current-quarter tax expense included $56 million of net discrete tax benefits.
- Segments: Personal Systems revenue fell 24.4% to $9.22 billion and segment operating earnings fell 47.9% to $497 million; its operating margin declined to 5.4% from 7.8%. Printing revenue fell 4.5% to $4.61 billion, while operating earnings were nearly flat at $870 million and its margin improved to 18.9% from 18.1%. Corporate Investments reported a $33 million operating loss.
- Cash flow: Operating activities used $16 million, compared with $1.66 billion provided a year earlier. Management cited unfavorable working-capital changes and lower earnings. Investing activities used $435 million, including $192 million for property and equipment; financing activities used $925 million. Cash, cash equivalents and restricted cash decreased $1.38 billion to $1.77 billion.
- Liquidity and debt: Cash and cash equivalents were $1.41 billion, with another $364 million of restricted cash. Total debt was $10.76 billion, down from $11.01 billion at October 31, 2022; the reported weighted-average borrowing rate was 3.9%. Current liabilities of $25.05 billion exceeded current assets of $17.31 billion. HP had a $5.0 billion revolving credit facility available through May 2026 and $975 million of additional available resources from uncommitted lines of credit.
- Capital returns: HP paid $259 million in dividends and repurchased $100 million of shares in the quarter. Approximately $2.0 billion remained under share repurchase authorizations.
Material changes versus the prior comparable period
- Revenue declined $3.20 billion, with weakness across regions and particularly in Personal Systems. Personal Systems client PC unit volume fell 27.9%; Printing revenue was more resilient, with Commercial Printing increasing 1.6%.
- Net earnings declined $599 million and diluted EPS fell by $0.50. Lower revenue and operating earnings, higher restructuring and acquisition-related charges, and increased interest expense contributed to the decline.
- Operating cash flow swung from a $1.66 billion inflow to a $16 million outflow. Accounts payable decreased $1.71 billion in the quarter, compared with a $2.04 billion increase in the prior-year quarter.
- Cash and cash equivalents declined from $3.15 billion at October 31, 2022. Debt declined modestly, while total stockholders’ deficit increased to $3.73 billion from $2.92 billion, reflecting comprehensive loss and shareholder distributions, partly offset by other equity activity.
Outlook, management commentary, and risks
- Management expects both Personal Systems and Printing markets to decline in fiscal 2023 versus fiscal 2022. It expects near-term demand weakness, competitive pricing pressure, and negative foreign-exchange impacts to persist; it also reported improving logistics constraints and supply availability.
- HP’s Fiscal 2023 Plan is expected to run through fiscal 2025 and focuses on digital transformation, portfolio optimization, and operational efficiency. HP expects to reduce global headcount by approximately 4,000–6,000 and incur about $1.0 billion of pretax charges, including approximately $0.7 billion primarily for labor actions. HP reported $141 million of restructuring and other charges in the quarter and said it was on track to achieve its targeted gross annual run-rate structural cost savings by fiscal year-end 2023. Future cash payments under approved restructuring plans are estimated at approximately $0.7 billion.
- HP cited macroeconomic uncertainty, inflation, geopolitical tensions, currency volatility, weaker consumer and enterprise demand, channel inventory, competitive pressure, and execution of business-model changes among key risks. It also noted dependence on certain single-source Printing components, including Canon-sourced laser printer engines and toner cartridges.
- Litigation and contingencies include claims concerning printer supplies authentication, patent disputes, securities matters, and an India customs proceeding. HP said it had adequate provisions and that a material loss beyond recognized amounts was not reasonably possible as of January 31, 2023, while cautioning that litigation outcomes are unpredictable. A potential recovery in Autonomy-related UK litigation had not been recognized; any recovery would be shared equally with Hewlett Packard Enterprise.
- Gross unrecognized tax benefits were $1.0 billion, of which up to $807 million could affect the effective tax rate if realized. HP said it was reasonably possible that $51 million could be reduced within 12 months. The filing also describes ongoing tax audits, including an IRS audit of HP’s 2018 and 2019 returns.
- Management stated that available cash, operating cash flow, borrowing capacity, and credit facilities should be sufficient for foreseeable operating and capital needs. HP reported effective disclosure controls and no material changes to internal control over financial reporting during the quarter. It reported no material change in risk factors from its latest Form 10-K.
Important facts for investors to verify
- Whether demand, pricing, and currency trends continue to pressure revenue and Personal Systems profitability, and whether Printing’s margin resilience persists.
- How quickly working capital and operating cash flow recover, particularly given the quarter’s cash outflow and sharp decline in accounts payable.
- Actual restructuring costs, employee reductions, cash payments, and realized savings relative to the Fiscal 2023 Plan’s targets and timeline.
- Debt servicing and liquidity needs, including the effect of interest rates, derivative collateral requirements, and planned dividends or share repurchases.
- Developments in material litigation and tax matters, including any changes to recorded contingencies or the possible Autonomy-related recovery.