HP Inc. Form 10-Q Summary
Reporting period: Quarter ended April 30, 2022 (second quarter of fiscal 2022). HP sells personal computing devices, printing products and related services through Personal Systems, Printing and Corporate Investments. Amounts below are in U.S. dollars.
Financial performance
| Metric | Q2 FY2022 | Q2 FY2021 | Six months FY2022 | Six months FY2021 |
|---|---|---|---|---|
| Net revenue | $16.49B | $15.88B | $33.52B | $31.52B |
| Gross margin | 20.2% | 21.7% | 20.0% | 21.5% |
| Operating earnings | $1.28B | $1.36B | $2.64B | $2.68B |
| Net earnings | $1.00B | $1.23B | $2.09B | $2.30B |
| Diluted EPS | $0.94 | $0.98 | $1.94 | $1.81 |
- Quarterly revenue rose 3.9% (4.9% constant currency); six-month revenue rose 6.3% (6.5% constant currency). Higher average selling prices and favorable product mix supported revenue, while unit volumes declined.
- Quarterly operating margin declined to 7.8% from 8.6%; net margin declined to 6.1% from 7.7%. HP attributed lower gross margin mainly to product mix, higher commodity costs and foreign-currency impacts, partly offset by pricing.
- Personal Systems revenue increased 9.3% in the quarter, with operating margin of 6.9% versus 6.7%. Printing revenue fell 6.8%; its operating margin improved to 19.3% from 17.9%, supported by pricing, mix and lower operating expenses.
- Six-month operating cash flow was $2.17B, down from $2.47B. Investing used $462M and financing used $1.53B; cash increased $178M to $4.48B.
- At April 30, cash was $4.48B and total debt was approximately $9.0B, up from $7.5B at October 31, 2021. Current assets were $23.52B versus current liabilities of $28.91B; stockholders’ deficit was $1.90B. HP reported a $5.0B committed revolving credit facility available through May 2026 and compliance with its covenants.
- HP returned $3.1B to shareholders during the first half: $2.5B in repurchases and $533M in dividends. It had about $3.9B remaining under repurchase authorizations.
Material changes and management commentary
- Personal Systems growth was led by desktops, notebooks and workstations; commercial PC revenue increased, while consumer PC revenue declined. Printing weakness reflected lower supplies and printer volumes, including normalization in home printing and a gradual return to offices.
- HP said component shortages, manufacturing disruptions in China and logistics constraints were limiting its ability to meet demand. Inventory rose to $8.94B from $7.93B at October 31, 2021, partly as HP built supply buffers. Days of inventory increased year over year.
- HP issued $2.0B of senior unsecured notes in March, with maturities in 2029 and 2032. The filing reports weighted-average borrowing rates of 3.5% at April 30, versus 3.1% at October 31.
- HP continued its Fiscal 2020 restructuring plan. Management said it was on track to deliver $1.2B of gross annualized structural cost reductions by year-end; the plan was expected to incur approximately $1.0B in pretax charges overall.
Outlook, risks and contingencies
- The filing provides no specific quarterly or full-year revenue, earnings or EPS guidance. Management said available cash, operating cash flow, borrowing capacity and credit facilities should cover foreseeable operating needs, planned capital expenditures, debt service, pension funding, repurchases and dividends.
- HP expected supply constraints to continue affecting near-term demand fulfillment. It also cited inflation, commodity costs, foreign-exchange volatility, competitive pricing, COVID-19 resurgences and macroeconomic uncertainty as risks.
- On May 31, 2022, after quarter-end, HP announced it would wind down business operations in Russia, having already suspended new shipments and paused marketing. Russia contributed approximately $1.0B of fiscal 2021 revenue. HP warned that escalation of the war in Ukraine could materially affect its business and results.
- HP agreed to acquire Poly for $40 per share in an all-cash transaction with an enterprise value of $3.3B, including Poly’s net debt. Closing was expected by calendar year-end 2022, subject to approvals and other conditions; HP planned to fund the deal with cash and new debt.
- Unconditional purchase obligations were $5.4B, primarily for inventory and service support. HP reported $843M of gross unrecognized tax benefits; it said up to $80M could be reduced within 12 months. The IRS was auditing HP’s 2018 and 2019 returns.
- Material legal matters include ongoing claims involving supplies authentication and other litigation. The filing says HP had recorded adequate provisions and did not consider a material loss above recognized amounts reasonably possible as of April 30, 2022. A May 17, 2022 U.K. judgment found in HP’s favor in the Autonomy-related civil case, but damages were deferred, could be substantially below the amount claimed, and no potential recovery was recorded.
Important facts for investors to verify
- Whether supply and logistics constraints ease, and whether lower unit volumes or increased inventory lead to further margin or cash-flow pressure.
- How much of revenue and earnings growth reflects pricing and product mix versus underlying unit demand, particularly in Personal Systems and Printing.
- Financing, regulatory approval, closing timing and integration costs for the proposed Poly acquisition.
- Execution of the $1.2B structural cost-reduction target and the remaining costs and cash payments under the restructuring plan.
- Potential financial effects of the Russia wind-down, Ukraine-related risks, tax audits and ongoing litigation; no Autonomy damages recovery was included in reported results.