HP Inc. 10-Q Summary
Business context and reporting period
HP Inc. reported its unaudited first quarter of fiscal 2021, the three months ended January 31, 2021, compared with the same period in 2020. HP sells personal computers and related products and printing hardware, supplies, services, and solutions. Its reportable segments are Personal Systems, Printing, and Corporate Investments. Amounts below are in U.S. dollars; financial statement figures are in millions unless noted.
Financial performance and liquidity
| Metric | Q1 FY2021 | Q1 FY2020 |
|---|---|---|
| Net revenue | $15.646 billion | $14.618 billion |
| Gross profit / margin | $3.324 billion / 21.2% | $2.872 billion / 19.6% |
| Operating earnings / margin | $1.321 billion / 8.4% | $865 million / 5.9% |
| Net earnings | $1.068 billion | $678 million |
| Diluted EPS | $0.83 | $0.46 |
| Operating cash flow | $1.022 billion | $1.285 billion |
- Revenue rose 7.0% year over year (6.6% on a constant-currency basis). Management attributed growth principally to notebooks, consumer printing, and supplies; U.S. revenue increased 15.5%, while international revenue increased 2.8%.
- Operating margin improved 2.5 percentage points, reflecting stronger gross margin and lower restructuring charges. The effective tax rate was 17.5%, down from 22.8%.
- Personal Systems revenue increased 7.2% to $10.603 billion, with operating earnings of $758 million and a 7.1% margin. Printing revenue increased 6.8% to $5.044 billion, with operating earnings of $998 million and a 19.8% margin.
- Operating cash flow declined $263 million year over year, primarily from less favorable working-capital movements, partly offset by higher operating earnings. Capital expenditures were $131 million; operating cash flow less capital expenditures was approximately $891 million, versus approximately $1.087 billion a year earlier.
- Cash and cash equivalents were $4.160 billion at quarter-end, down from $4.864 billion at October 31, 2020. Total current assets were $20.438 billion and current liabilities $27.880 billion.
- Short- and long-term borrowings totaled approximately $6.177 billion ($1.238 billion current and $4.939 billion long-term); management reported outstanding borrowings of $6.2 billion and a 3.9% weighted-average interest rate. Cash less borrowings was approximately negative $2.0 billion.
- Financing cash outflow was $1.723 billion, including $1.378 billion of share repurchases and $250 million of dividends. HP repurchased about 60 million shares during the quarter and had $11.3 billion remaining under authorizations.
Material changes and management commentary
- Personal Systems growth reflected strong notebook demand associated with remote work and learning: notebook revenue rose 23.3%, while desktop and workstation revenue declined 17.9% and 35.7%, respectively. Consumer PC revenue increased 34.1%; commercial PC revenue declined 6.1%.
- Printing growth was led by consumer printers, whose revenue rose 55.0%; supplies revenue increased 3.5%. Commercial printing revenue fell 11.1%, reflecting lower average selling prices and subdued onsite business activity.
- Management cited favorable pricing and commodity costs in Personal Systems and favorable pricing in Printing as contributors to higher gross margin. R&D expense rose 17.8% to $471 million, primarily reflecting innovation and growth investments; SG&A rose 6.7% to $1.376 billion, primarily due to higher variable compensation and litigation settlements.
- Restructuring and other charges fell to $121 million from $291 million. HP’s Fiscal 2020 Plan targets approximately 7,000–9,000 employee reductions and about $1.0 billion of pretax charges, with implementation expected through fiscal 2022. HP expected approximately $0.4 billion of future restructuring cash payments, including $0.2 billion in fiscal 2021.
Outlook, risks, and contingencies
- The filing provides no specific quarterly or annual earnings guidance. Management said it expected at least $1.0 billion of share repurchases per quarter in coming quarters unless higher-return opportunities emerge.
- Management described strong remote-work and learning demand, but warned that commercial printing recovery may be gradual and uneven. Component availability, printer and supplies constraints, logistics costs, competitive pressure, and reliance on certain single-source suppliers could affect performance.
- COVID-19’s future effects remain uncertain, including potential disruptions at HP or supplier manufacturing sites and changes in demand, economic conditions, and supply chains. Management said estimates may be more variable as the pandemic evolves.
- HP said current cash, operating cash flow, borrowing capacity, and credit facilities should meet foreseeable requirements. It had a $4.0 billion committed revolving facility available through March 2023, a $1.0 billion facility available through May 28, 2021, and $679 million of additional uncommitted lines; it reported compliance with facility covenants.
- HP disclosed $4.1 billion in unconditional purchase obligations, primarily for inventory and service support. It also reported $4.0 billion of remaining performance obligations, with approximately $1.8 billion expected to be recognized within 12 months.
- Material legal matters include the unresolved Oracle appeal concerning a jury award of approximately $3.0 billion to HP; HP recorded no financial-statement adjustment for the potential recovery. HP said it had accrued adequate amounts for ordinary-course litigation and did not consider material losses beyond recorded amounts reasonably possible, while cautioning that litigation outcomes are inherently unpredictable.
- HP paid €10 million in fines imposed by Italy’s competition authority regarding printer cartridge and warranty practices and appealed the decision. Other disclosed matters include patent litigation, securities class actions, and consumer claims concerning printer cartridge authentication. The filing states that the outcome of contingencies may affect cash flows or results in a particular period.
- Subsequent events: HP paid $170 million on February 5, 2021 to acquire a company focused on microfluidics technology, and announced a proposed $425 million acquisition of HyperX on February 24, subject to customary conditions. Neither event was completed as of the filing date.
Important facts for investors to verify
- Whether notebook and consumer printing demand persists, and whether component supply constraints limit shipments or raise costs.
- Whether margin improvement is sustainable given mix shifts, logistics expenses, competitive pricing, and ongoing R&D investment.
- Working-capital and cash-flow trends, especially inventory growth and the pace of share repurchases relative to cash generation and borrowings.
- Debt maturities and refinancing needs, including the $1.205 billion current portion of long-term debt and the 2021 revolving-facility expiration.
- Potential cash or earnings effects from litigation, the Italian regulatory appeal, uncertain tax positions, and restructuring commitments.
- COVID-19-related demand, supplier, and manufacturing developments, plus closing and integration progress for the announced acquisitions.