HP Inc. Form 10-Q Summary
Reporting period: Quarter and nine months ended July 31, 2023. 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 FY2023 | Q3 FY2022 | Nine months FY2023 | Nine months FY2022 |
|---|---|---|---|---|
| Net revenue | $13,196 | $14,648 | $39,901 | $48,136 |
| Gross profit / margin | $2,822 / 21.4% | $2,884 / 19.7% | $8,523 / 21.4% | $9,572 / 19.9% |
| Earnings from operations / margin | $952 / 7.2% | $1,256 / 8.6% | $2,442 / 6.1% | $3,818 / 7.9% |
| Net earnings | $766 | $1,122 | $2,289 | $3,155 |
| Diluted EPS | $0.76 | $1.08 | $2.29 | $2.97 |
| Operating cash flow | Not separately provided | Not separately provided | $1,596 | $2,559 |
Q3 revenue fell 9.9% year over year (7.4% at constant currency); nine-month revenue fell 17.1% (13.6% at constant currency). Management attributed the declines mainly to softer demand, lower average selling prices, competitive pricing and foreign currency effects. Gross margin improved year over year, chiefly from lower commodity and logistics costs and a more favorable mix, but operating margin declined as revenue fell and operating costs rose relative to sales.
Segments: Q3 Personal Systems revenue was $8.9 billion, down 11.3%, and segment operating earnings were $592 million, down 12.0%. Printing revenue was $4.3 billion, down 6.8%, and segment operating earnings were $794 million, down 12.2%. For the nine months, Personal Systems revenue fell 22.2% and Printing revenue fell 5.3%. Consumer printing and consumer PCs were particularly weak.
Cash, debt and liquidity
- Cash, cash equivalents and restricted cash were $1.718 billion at July 31, 2023, including $45 million restricted cash, versus $3.145 billion at October 31, 2022.
- Total debt was $9.679 billion, down from $11.014 billion; the weighted-average borrowing rate was 4.2%, versus 3.7% at fiscal year-end. HP reported $200 million of commercial paper outstanding.
- For the first nine months, operating cash flow was $1.596 billion, investing cash outflow $570 million and financing cash outflow $2.453 billion. Cash declined by $1.427 billion. Capital expenditures were $459 million.
- Current assets were $17.463 billion versus current liabilities of $25.190 billion. HP cited operating cash generation, borrowing capacity and credit facilities as sources expected to support foreseeable requirements. It had $5 billion and $1 billion revolving credit facilities, plus $1.2 billion in available uncommitted lines.
- HP paid $777 million in dividends and repurchased $100 million of shares during the nine months. No shares were repurchased in Q3; approximately $2.0 billion remained authorized.
Material changes and unusual items
- HP recorded a net tax benefit of $724 million for the nine months, including $697 million from an internal reorganization. The reported nine-month effective tax rate was negative 9.8%; this benefit materially affected reported earnings.
- A July debt tender and redemption generated a $115 million net gain on debt extinguishment. HP repurchased or redeemed approximately $1.15 billion principal amount of notes during the nine months.
- Restructuring and other charges were $416 million for the nine months, primarily related to the Fiscal 2023 Plan. HP expects approximately $1.0 billion of pretax plan charges through fiscal 2025, including a targeted reduction of about 4,000–6,000 employees. It expects about $0.6 billion of future cash payments under approved restructuring plans.
- HP corrected a revenue-contract accounting error and other immaterial errors in prior-period financial statements. HP said the errors were not material to the annual periods when they occurred, but that correcting them would be material to the current three- and nine-month results; comparative periods were revised.
Outlook, commentary and risks
HP expects market declines to continue in the short term and stated that fiscal 2023 markets were expected to be lower than fiscal 2022. It described cautious enterprise IT spending, weaker discretionary consumer spending, elevated industry reseller inventory, pricing pressure and foreign-exchange headwinds. Management said the Future Ready Plan was on track for its targeted gross annual run-rate structural cost savings by fiscal year-end, but the filing text does not provide a clear dollar target for those savings. HP did not provide a specific quarterly or annual revenue or EPS forecast in the supplied filing text.
Key risks include continued demand and pricing weakness, foreign-exchange and geopolitical uncertainty, competition, channel inventory and forecasting, and reliance on certain suppliers. HP also identified dependence on Canon for most A4 and some A3 laser printer engines and toner cartridges. The company reported ongoing litigation and investigations, including printer-supplies authentication claims, patent matters, securities and employment litigation, and a substantial customs-duty dispute in India; HP said it had accrued what it considered adequate amounts and that material loss beyond recognized amounts was not reasonably possible as of July 31, 2023, while noting litigation outcomes remain uncertain.
Controls concern: HP concluded disclosure controls were not effective due to material weaknesses in internal control over financial reporting. The weaknesses concerned revenue recognition for a Personal Systems customer transaction involving third-party financing and controls over an EMEA sales-incentive payment application. HP was designing remediation; the weaknesses were not yet considered remediated.
Most important facts for investors to verify
- How demand, unit volumes, pricing and reseller inventory evolve in Personal Systems and Printing, and whether the reported margin improvement can persist.
- Progress and actual costs, cash outlays and realized savings from the Fiscal 2023 Plan.
- Cash conversion and liquidity needs, including the effect of working-capital movements, debt repayment and financing costs.
- Whether HP remediates the identified control weaknesses effectively and whether further financial statement revisions are needed.
- The durability of the unusually large tax benefit and the outcome of tax audits, including the IRS audit of HP’s 2018 and 2019 returns.
- Developments in material legal matters and the potential financial effect of unresolved claims and contingencies.