HP Inc. — Q2 FY2023 Form 10-Q
Reporting period: Three and six months ended April 30, 2023. HP sells personal computing products, printers and supplies, and related services through its Personal Systems and Printing segments; Corporate Investments is its third reportable segment. Comparisons below are year over year unless stated otherwise.
Financial performance
| Metric | Q2 FY2023 | Q2 FY2022 | Six months FY2023 | Six months FY2022 |
|---|---|---|---|---|
| Net revenue | $12.913B | $16.490B | $26.741B | $33.518B |
| Gross margin | 22.7% | 20.2% | 21.5% | 20.0% |
| Operating earnings | $762M | $1.278B | $1.527B | $2.637B |
| Net earnings | $1.066B | $1.000B | $1.553B | $2.086B |
| Diluted EPS | $1.07 | $0.94 | $1.56 | $1.94 |
| Operating cash flow | Not separately provided | Not separately provided | $620M | $2.165B |
- Quarterly revenue declined 21.7% (18.0% in constant currency); first-half revenue declined 20.2% (16.4% in constant currency). Quarterly operating margin fell to 5.9% from 7.8%, while gross margin expanded 2.5 percentage points.
- Quarterly net earnings rose despite lower operating earnings, primarily because of a $464M tax benefit. HP recorded $636M of net income tax benefits from discrete items in the quarter, including $691M of benefits related to an internal reorganization. The reported effective tax rate was (77.1)%; results therefore include a significant unusual tax benefit.
- Personal Systems revenue was $8.176B, down 29.1%; segment operating earnings were $445M, down 44.0%, with a 5.4% operating margin versus 6.9%. Printing revenue was $4.736B, down 4.6%; operating earnings were $899M, down 5.3%, and margin was 19.0% versus 19.1%.
- Within Printing, Commercial Printing revenue increased 4.5% in the quarter; Supplies declined 4.0% and Consumer Printing declined 18.9%. The six-month segment revenue declines were 26.7% in Personal Systems and 4.6% in Printing.
Liquidity, debt and capital returns
- At April 30, 2023, cash and cash equivalents were $1.923B, restricted cash was $17M, and total debt was $10.6B, down from $11.014B at October 31, 2022. The reported weighted-average borrowing rate was 3.9%, compared with 3.7% at fiscal year-end.
- Current assets were $17.023B and current liabilities $24.034B. HP reported a $2.0B decrease in cash, cash equivalents and restricted cash during the first half, to $1.940B.
- First-half investing cash outflow was $441M and financing cash outflow was $1.384B. HP paid $518M in cash dividends and repurchased $100M of shares. Approximately $2.0B remained under share-repurchase authorizations.
- HP reported $5.0B of committed revolving credit availability through May 2026, a further $1.0B 364-day facility, and $1.2B of available uncommitted lines. It said available cash and funding sources should meet foreseeable operating and capital needs.
- Operating cash flow fell $1.5B year over year in the first half, which management attributed to lower earnings, unfavorable working capital and changes in receivables from contract manufacturers. Inventory days of supply rose to 65 from 61 a year earlier.
Material changes, outlook and risks
- Management cited weak demand, elevated reseller inventory, budget tightening and lower consumer spending, particularly affecting Personal Systems. It expects both Personal Systems and Printing markets to decline in FY2023 and said near-term competitive pricing pressure and foreign-exchange headwinds are likely to continue. No specific revenue or EPS guidance is provided in the supplied filing text.
- HP expects the Future Ready Plan to run through fiscal 2025, reduce global headcount by approximately 4,000–6,000, and incur about $1.0B of pretax charges. First-half restructuring and other charges were $341M; HP expects about $0.6B of future cash payments under approved restructuring plans, including $0.2B in FY2023. Management said it was on track for targeted gross annualized structural savings by the end of FY2023.
- Other pressures include foreign-exchange movements, geopolitical and trade uncertainty, competitive pricing, and reliance on certain single-source Printing components. HP noted its long-standing Canon relationship and anticipated renewal of the relevant agreement.
- HP reported $1.1B in gross unrecognized tax benefits; up to $853M could affect its effective tax rate if realized. It said $67M could be reduced within 12 months, while timing of cash settlements is uncertain. The IRS is auditing HP’s 2018 and 2019 returns.
- Legal matters include ongoing patent, securities, supplies-authentication and other proceedings. HP stated it had recorded adequate provisions and did not consider a material loss above recognized amounts reasonably possible as of April 30, while acknowledging that litigation outcomes are unpredictable. A New Zealand investigation into printer-supplies practices closed in May 2023 with no adverse action. A potential Autonomy-related damages recovery was not recorded and, if received, would be shared equally with Hewlett Packard Enterprise.
- Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.
Investor verification priorities
- Assess underlying earnings and EPS excluding the unusually large internal-reorganization tax benefit.
- Track whether PC demand, reseller inventories and segment margins stabilize, and whether Printing supplies and consumer hardware recover.
- Compare operating cash flow with earnings and monitor inventory, payables and cash levels.
- Verify delivery, timing, total charges and cash costs of the Future Ready Plan and expected savings.
- Follow tax audit outcomes and material litigation developments, including the potential Autonomy recovery and supplies-related claims.