Discussion and analysis of the financial condition and results of operations by the management of HP INC. (Form 10-Q)
Management's Discussion and Analysis of
Financial Condition and Results of Operations
This Management Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is organized as follows:
•Overview. A discussion of our business and other highlights affecting the company to provide context for the remainder of this MD&A.
•Critical Accounting Policies and Estimates. A discussion of accounting policies and estimates that we believe are important to understanding the assumptions and judgments incorporated in our reported financial results. •Results of Operations. An analysis of our financial results comparing the three and six months endedApril 30, 2022 to the prior-year period. A discussion of the results of operations is followed by a more detailed discussion of the results of operations by segment.
•Liquidity and capital resources. An analysis of changes in our cash flows and a discussion of our cash and financial position.
•Contractual and Other Obligations. An overview of contractual obligations,
retirement and post-retirement benefit plan contributions, cost-saving plans,
uncertain tax positions and off-balance sheet arrangements of our operations.
The discussion of financial condition and results of our operations that follows
provides information that will assist the reader in understanding our
Consolidated Condensed Financial Statements, the changes in certain key items in
those financial statements from year to year, and the primary factors that
accounted for those changes, as well as how certain accounting principles,
policies and estimates affect our Consolidated Condensed Financial Statements.
This discussion should be read in conjunction with our Consolidated Condensed
Financial Statements and the related notes that appear elsewhere in this
document.
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HP INC. AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
OVERVIEW
We are a leading global provider of personal computing and other access devices, imaging and printing products, and related technologies, solutions, and services. We sell to individual consumers, SMBs and large enterprises, including customers in the government, health, and education sectors. We have three reportable segments: Personal Systems, Printing, and Corporate Investments. The Personal Systems segment offers commercial and consumer desktop and notebook PCs, workstations, thin clients, commercial mobility devices, retail POS systems, displays and peripherals, software, support, and services. The Printing segment provides consumer and commercial printer hardware, supplies, solutions and services. Corporate Investments includeHP Labs and certain business incubation and investment projects.
•At Personal Systems, our strategic focus is on
•profitable growth through innovation and market segmentation
•Enhanced innovation in multi-OS, multi-architecture, geography, customer segments and other key attributes
•investing in endpoint services and solutions. We are focused on services, including Device as a Service, as the market begins to shift to contractual solutions, and accelerating in attractive adjacencies such as peripherals; as well as
• Driving innovation to enable PC productivity and collaboration that will become essential for hybrid work, learn and play.
We believe we are well positioned in the peripherals and remote computing solutions space based on our competitive product range as well as our recent acquisitions.
•In the area of printing, our strategic focus is on
•offering innovative printing solutions and contractual solutions to serve consumers, SMBs and large enterprises through our Instant Ink Services, HP+ and Managed Print Services solutions,
•Providing digital printing solutions for graphics segments and applications, including commercial publishing, labels, packaging and textiles; as well as
•Expanding our 3D printing footprint to include digital manufacturing and strategic applications.
In addition to focusing on growing our subscription business, we are also focused on realigning system profitability to deliver higher upfront profit units through our product offerings, including HP+ and Big Tank.
We are focused on growing our gaming, peripherals, workforce solutions, consumer
subscriptions, 3D and industrial graphics businesses. Our ability to innovate is
helping us gain momentum in growth areas like gaming and peripherals, and we see
significant opportunities to drive greater recurring revenues across Personal
Systems and Printing. We have integrated and expanded our Device-as-a-Service
and Managed Print Services offerings to create new Workforce Solutions that help
customers manage and secure hybrid IT ecosystems. We continue to build on strong
assets like Instant Ink to grow our Consumer Subscription business. In
Industrial Graphics, we are driving the shift from analog to digital in segments
like labels and packaging. In Personalization & 3D, we are creating end-to-end
solutions that can capture more value with our differentiated technology.
We continue to experience challenges that are representative of trends and
uncertainties that may affect our business and results of operations. One set of
challenges relates to dynamic market trends that may adversely impact our
product mix. A second set of challenges relates to changes in the competitive
landscape. Our primary competitors are exerting competitive pressure in targeted
areas and are entering new markets, our emerging competitors are introducing new
technologies and business models, and our alliance partners in some businesses
are increasingly becoming our competitors in others. A third set of challenges
relates to business model changes and our go-to-market execution in an evolving
distribution and reseller landscape, with increasing online and omnichannel
presence. Additional challenges we face at the segment level are set forth
below.
•In Personal Systems, we face challenges with industry component availability
which we expect to continue to negatively impact our ability to meet demand at
least in the short-term. Also, as component availability improves we expect the
pricing environment to get more competitive.
•In Printing, we face challenges from a competitive environment, including
non-original supplies (which includes imitation, refill, or remanufactured
alternatives), and we face component constraints and other supply chain
disruptions particularly in printer hardware which we expect to continue to
negatively impact our ability to meet demand at least in the short-term. We also
obtain many Printing components from single source due to technology,
availability, price,
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Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
quality or other considerations. For instance, we source the majority of our A4
and a portion of our A3 portfolio of laser printer engines and laser toner
cartridges from Canon . Any decision by either party to not renew our agreement
with Canon or to limit or reduce the scope of the agreement could adversely
affect our net revenue from LaserJet products; however, we have a long-standing
business relationship with Canon and anticipate renewal of this agreement.
On May 31, 2022 , we announced our decision to wind down business operations in
Russia having already suspended all new shipments and paused marketing and
advertising activities. Russia contributed approximately $1.0 billion of total
net revenue in fiscal 2021. Though, we do not have significant operations or
assets in Russia , Belarus or Ukraine , the Russian invasion of Ukraine has
aggravated, and is expected to continue to aggravate supply chain and overall
macroeconomic challenges. A significant escalation or expansion of the
situation's current scope could have a material adverse effect on our business,
results of operations, cash flows or financial position. We continue to be
focused on the safety and security of our employees and their families in the
impacted regions and we have provided, and expect to continue to provide, grants
to support Ukrainian relief efforts.
Our business and financial performance also depend significantly on worldwide
economic conditions. Accordingly, we face global macroeconomic challenges,
particularly in light of the effects of the COVID-19 pandemic as discussed
below, tariff-driven headwinds, uncertainty in the markets, volatility in
exchange rates, inflationary trends and evolving dynamics in the global trade
environment. The full impact of these and other global macroeconomic challenges
on our business cannot be known at this time.
To address these challenges, we continue to pursue innovation with a view
towards developing new products and services aligned with generating market
demand and meeting the needs of our customers and partners. In addition, we
continue to work on improving our operations and adapting our business models,
with a particular focus on enhancing our end-to-end processes, analytics and
efficiencies. We also continue to work on optimizing our sales coverage models,
aligning our sales incentives with our strategic goals, improving channel
execution and inventory, production and backlog management, strengthening our
capabilities in our areas of strategic focus, strengthening our pricing
discipline, and developing and capitalizing on market opportunities.
In October 2019 , we announced cost-reduction and operational efficiency
initiatives intended to simplify the way we work, move closer to our customers
and facilitate specific investment in our business. These were further updated
in February 2020 . These efforts included transforming our operating model to
integrate our sales force into a single commercial organization and reducing
structural costs across the Company through our restructuring plan approved in
September 2019 (the "Fiscal 2020 Plan"). We have invested and expect to invest
some of the savings from these efforts across our businesses, including
investing to build our digital capabilities. Over time, we expect these
investments will make us more efficient and allow us to advance our positions in
Personal Systems and Printing, while also disrupting new industries where we see
attractive medium to long-term growth opportunities. However, the rate at which
we are able to invest in our business and the returns that we are able to
achieve from these investments will be affected by many factors, including the
efforts to address the execution, industry and macroeconomic challenges facing
our business as discussed above. As a result, we may experience delays in the
anticipated timing of activities related to these efforts, and the anticipated
benefits of these efforts may not materialize.
In the third year of our program, we continued to look at new cost savings
opportunities and are on track to deliver $1.2 billion dollars in gross run-rate
structural cost reductions by year end. In the third quarter of fiscal year
2021, we completed the initial deployment of our SAP S/4 HANA system, one of the
largest ERP implementations. Also, as part of our end-to-end business planning
and forecasting efforts, we went live with our new cloud-based platform which we
believe will improve our forecasting agility as part of our digital
transformation. We continue to optimize our real estate footprint, including 15
real estate actions in the first half of 2022, as we rebuild and modernize our
key locations, focusing on collaboration and hybrid work for our employees. For
more information on our Fiscal 2020 Plan, see Note 3, "Restructuring and Other
Charges", to the Consolidated Condensed Financial Statements in Item 1 of Part I
of this report, which is incorporated herein by reference.
We typically experience higher net revenues in our fourth quarter compared to
other quarters in our fiscal year due in part to seasonal holiday demand.
Historical seasonal patterns may not continue in the future and have been
impacted by supply constraints, shifts in customer behavior and the continuing
impacts of the COVID-19 pandemic.
Our COVID-19 response
We continue to closely monitor the COVID-19 pandemic, including its resurgence
in key markets. We will continue promoting the health, safety, and well-being of
workers and their loved ones. In response to the COVID-19 pandemic, we have
established a cross-functional COVID-19 program management office that reviews
the latest data from our business and site leaders and identifies and addresses
emerging risks and issues, and we have put in place global policies and
protocols based on
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guidance from healthcare experts and public health leaders, which we continue to
review and update. We balance our company-wide approach by assessing risk and
adjusting our response at the site level, taking into consideration each
country's or area's COVID-19 case trends and related measures. We have commenced
a phased approach to returning our employees onsite, which included
modifications to certain of our facilities as we adapt to a hybrid work
environment.
The business impact of the COVID-19 pandemic has created new and different
demand dynamics in the market. Our Personal Systems business benefited from the
hybrid work environment and growth in gaming. For the six months ended April 30,
2022 , we saw strong demand in non-Chromebook Commercial PCs, and mix shifts from
low end to premium products. In Consumer PCs, we are seeing softening of demand,
however demand still exceeds pre-pandemic levels. In Printing, Consumer print
demand remained strong despite some softening in Europe , and Commercial print is
expected to continue its gradual improvement as more offices reopen. Also,
favorable pricing has contributed towards higher average selling prices ("ASPs")
in both Personal Systems and Printing. Demand fulfillment has been and is
expected to continue to be impacted by industry wide commodity and component
constraints, ASICs (application specific integrated circuits) that are unique to
our products and manufacturing disruptions in China , and logistics challenges
globally, at least in the short-term.
As the COVID-19 pandemic continues and new variants of the virus emerge, we are
seeing a resurgence of the pandemic in key markets including China . We have
experienced and may experience future disruptions in supply, manufacturing and
logistics, including in Asia , and with our suppliers and outsourcing partners.
The full extent of the impact of the COVID-19 pandemic on our business, results
of operations, cash flows and financial position will depend on many factors
that are not within our control, including, but not limited to: the severity,
duration and scope of the pandemic, including the impact of coronavirus
mutations and resurgences; the effectiveness of actions taken to contain or
mitigate the pandemic and prevent or limit any reoccurrence; the development,
availability and public acceptance of effective treatments or vaccines;
governmental, business and individuals' actions that have been and continue to
be taken in response to the pandemic; general economic uncertainty in key global
markets and financial market volatility; global economic conditions and levels
of economic growth; and the pace of recovery when the COVID-19 pandemic
subsides.
For a further discussion of trends, uncertainties and other factors that could
impact our operating results, see the section entitled "Risk Factors" in Item 1A
of Part II of this report as well as in Item 1A of Part I in our Annual Report
on Form 10-K for the fiscal year ended October 31, 2021 .
RECENT DEVELOPMENTS
OnMarch 25, 2022 , we entered into a definitive agreement to acquire Plantronics, Inc. ("Poly"), a leading global provider of workplace collaboration solutions, in an all-cash transaction for$40 per share, implying a total enterprise value of$3.3 billion , inclusive of Poly's net debt. Poly is a leader in video conferencing solutions, cameras, headsets, voice and software. With the acquisition, we aim to deliver a complete ecosystem of devices, software, and digital services to create premium employee experiences, improve workforce productivity, and provide enterprise customers with better visibility, insights, security, and manageability across their hybrid IT environments. We expect this acquisition to close by the end of calendar year 2022, subject to approval by Poly's shareholders, required regulatory clearances, and the satisfaction of other customary closing conditions.
CRITICAL ACCOUNTING PRINCIPLES AND ESTIMATES
MD&A is based on our Consolidated Condensed Financial Statements, which have been prepared in accordance withU.S. GAAP. The preparation of these financial statements requires management to make estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, net revenue and expenses, and the disclosure of contingent liabilities. As ofApril 30, 2022 , the impact of COVID-19 on our business continued to unfold. As a result, many of our estimates and assumptions required increased judgment and may carry a higher degree of variability and volatility. As events continue to evolve and additional information becomes available, our estimates may change in future periods. Our management believes that there have been no significant changes during the six months endedApril 30, 2022 to the items that we disclosed as our critical accounting policies and estimates in MD&A in our Annual Report on Form 10-K for the fiscal year endedOctober 31, 2021 , except as mentioned in Note 1, "Basis of Presentation".
ACCOUNTING
For a summary of recent accounting pronouncements applicable to our Consolidated
Condensed Financial Statements see Note 1, "Basis of Presentation", to the
Consolidated Condensed Financial Statements in Item 1 of Part I of this report,
which is incorporated herein by reference.
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Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
RESULTS
Revenue from our international operations has historically represented, and we
expect will continue to represent, a majority of our overall net revenue. As a
result, our net revenue growth has been impacted, and we expect it will continue
to be impacted, by fluctuations in foreign currency exchange rates. In order to
provide a framework for assessing performance excluding the impact of foreign
currency fluctuations, we supplement the year-over-year percentage change in net
revenue with the year-over-year percentage change in net revenue on a constant
currency basis, which excludes the effect of foreign currency exchange
fluctuations calculated by translating current period revenues using monthly
average exchange rates from the comparative period and excluding any hedging
impact recognized in the current period, and does not adjust for any repricing
or demand impacts from changes in foreign currency exchange rates. This
information is provided so that net revenue can be viewed with and without the
effect of fluctuations in foreign currency exchange rates, which is consistent
with how management evaluates our net revenue results and trends, as management
does not believe that the excluded items are reflective of ongoing operating
results. The constant currency measures are provided in addition to, and not as
a substitute for, the year-over-year percentage change in net revenue on a GAAP
basis. Other companies may calculate and define similarly labeled items
differently, which may limit the usefulness of this measure for comparative
purposes.
Results of operations in dollars and as a percentage of net revenue were as
follows:
Three months ended April 30 Six months ended April 30
2022 2021 2022 2021
Dollars % of Net Dollars % of Net Dollars % of Net Dollars % of Net
Revenue Revenue Revenue Revenue
Dollars in millions
Net revenue $ 16,490 100.0 % $ 15,877 100.0 % $ 33,518 100.0 % $ 31,523 100.0 %
Cost of revenue 13,157 79.8 % 12,437 78.3 % 26,800 80.0 % 24,759 78.5 %
Gross profit 3,333 20.2 % 3,440 21.7 % 6,718 20.0 % 6,764 21.5 %
Research and development 425 2.6 % 514 3.2 % 843 2.5 % 985 3.1 %
Selling, general and administrative 1,464 8.8 % 1,483 9.4 % 2,932 8.7 % 2,859 9.1 %
Restructuring and other charges 82 0.5 % 39 0.2 % 150 0.4 % 160 0.5 %
Acquisition-related charges 32 0.2 % 10 0.1 % 52 0.2 % 16 0.1 %
Amortization of intangible assets 52 0.3 % 32 0.2 % 104 0.2 % 61 0.2 %
Earnings from operations 1,278 7.8 % 1,362 8.6 % 2,637 7.9 % 2,683 8.5 %
Interest and other, net (39) (0.3) % (26) (0.2) % (71) (0.2) % (51) (0.2) %
Earnings before taxes 1,239 7.5 % 1,336 8.4 % 2,566 7.7 % 2,632 8.3 %
Provision for taxes (239) (1.4) % (108) (0.7) % (480) (1.5) % (336) (1.0) %
Net earnings $ 1,000 6.1 % $ 1,228 7.7 % $ 2,086 6.2 % $ 2,296 7.3 %
Net Revenue
For the three months ended April 30, 2022 , net revenue increased 3.9% (increased
4.9% on a constant currency basis) as compared to the prior-year period. U.S.
net revenue remained flat at $5.5 billion , while net revenue from international
operations increased 6.1% to $11.0 billion . The increase in net revenue was
primarily driven by growth in Desktops, Notebooks and Workstations, partially
offset by decline in Supplies, Consumer Printing and foreign currency impacts.
The increase was driven by higher ASP's due to favorable pricing and mix shifts,
partially offset by unit decline. Units were down in both Personal Systems and
Printing driven by the continued supply chain challenges and overall
macroeconomic environment.
For the six months ended April 30, 2022 , total net revenue increased 6.3%
(increased 6.5% on a constant currency basis) as compared to the prior-year
period. U.S. net revenue decreased 0.3% to $11.1 billion , while net revenue from
international operations increased 10.0% to $22.4 billion . The increase in net
revenue was primarily driven by growth in Notebooks, Desktops and Workstations
partially offset by decline in Consumer Printing and Supplies. The increase was
driven by higher ASP's due to favorable pricing and mix shifts, partially offset
by unit decline. Units were down in both Personal Systems and Printing driven by
the continued supply chain challenges and overall macroeconomic environment.
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A detailed discussion of the factors contributing to changes in segment net sales is included in “Segment Information” below.
gross margin
For both the three months and six endedApril 30, 2022 , gross margin decreased by 1.5 percentage points, primarily driven by mix shift towards Personal Systems, higher commodity costs, foreign currency impacts partially offset by favorable pricing.
A detailed discussion of the factors contributing to the changes in segment gross margins is included under “Segment Information” below.
operating expenses
Research and Development (“R&D”)
R&D expense decreased 17.3% for the three months endedApril 30, 2022 , primarily due to last year's increased investments in Personal Systems. R&D expense decreased 14.4% for the six months endedApril 30, 2022 , primarily due to joint R&D partner funding and last year's increased investments in Personal Systems.
Sales, General and Administration (“SG&A”)
SG&A expenses decreased 1.3% in the trailing three months
SG&A expenses increased 2.6% over the past six months
Restructuring and Other Fees
Restructuring and other charges for the three and six months endedApril 30, 2022 relate primarily to the Fiscal 2020 Plan. For more information, see Note 3, "Restructuring and other charges", to the Consolidated Condensed Financial Statements in Item 1 of Part I of this report, which is incorporated herein by reference.
amortization of intangible assets
Amortization of intangible assets for the three and six months endedApril 30, 2022 relates primarily to intangible assets resulting from prior acquisitions. Amortization of intangible assets increased by$20 million and$43 million for the three and six months endedApril 30, 2022 , respectively, primarily due to recent acquisitions including HyperX andTeradici .
Interest and other, net
Interest and other, net expense increased$13 million and$20 million for the three months and six months endedApril 30, 2022 , respectively, primarily due to lowerNet Periodic Post -retirement Benefit Credit, higher interest expense on debt, partially offset by foreign currency movements.
provision for taxes
Our effective tax rate was 19.3% for the three months endedApril 30, 2022 and 18.7% for the six months endedApril 30, 2022 . The difference between theU.S. federal statutory tax rate of 21% and our effective tax rate for the three and six months endedApril 30, 2022 , was primarily due to tax effects of favorable tax rates associated with certain earnings from our operations in lower-tax jurisdictions throughout the world. During the three and six months endedApril 30, 2022 , we recorded$8 million and$35 million , respectively, of net income tax charges related to discrete items in the provision for taxes. These amounts included income tax charges of$18 million related to the filing of tax returns in various jurisdictions for the six months endedApril 30, 2022 and$17 million and$56 million related to withholding taxes on undistributed foreign earnings for the three and six months endedApril 30, 2022 , respectively. These charges were partially offset by income tax benefits of$20 million and$31 million related to restructuring charges and$7 million and$8 million related to other tax benefits for the three and six months endedApril 30, 2022 , respectively. In addition to the discrete items mentioned above, we recorded excess tax benefits of$36 million associated with stock options, restricted stock units and performance-adjusted restricted stock units for the six months endedApril 30, 2022 . 45
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segment information
A description of the products and services for each segment can be found in
Note 2, "Segment Information" to the Consolidated Condensed Financial Statements
in Item 1 of Part I of this report, which is incorporated herein by reference.
Future changes to this organizational structure may result in changes to the
segments disclosed.
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Personal Systems
Three months ended April 30 Six months ended April 30
2022 2021 % Change 2022 2021 % Change
Dollars in millions
Net revenue $ 11,532 $ 10,555 9.3 % $ 23,728 $ 21,158 12.1
%
Earnings from operations $ 798$ 710 12.4 %$ 1,755 $ 1,468 19.6
%
Earnings from operations as a % of net 6.9 % 6.7 % 7.4 % 6.9 %
revenue
The components of net revenue and the weighted net revenue change by business
unit were as follows:
Three months ended April 30 Six months ended April 30
Net Revenue Weighted Net Net Revenue Weighted Net
2022 2021 Revenue Change(1) 2022 2021 Revenue Change(1)
Dollars in millions Percentage Points Dollars in millions Percentage Points
Notebooks $ 7,734 $ 7,489 2.3 $ 16,155 $ 14,855 6.1
Desktops 2,855 2,225 6.0 5,662 4,625 4.9
Workstations 494 407 0.8 1,028 789 1.1
Other 449 434 0.2 883 889 -
Total Personal Systems $ 11,532 $ 10,555 9.3 $ 23,728 $ 21,158 12.1
(1)Weighted Net Revenue Change Percentage Points measures contribution of each
business unit towards overall segment revenue growth. It is calculated by
dividing the change in revenue of each business unit from the prior-year period
by total segment revenue for the prior-year period.
Three months passed
Personal Systems net revenue increased 9.3% (increased 10.6% on a constant currency basis) for the three months endedApril 30, 2022 as compared to the prior-year period. The increase was driven by 30.9% increase in ASPs, partially offset by 16.5% decrease in unit volume. The increase in ASPs was primarily due to mix shifts to premium and favorable pricing, partially offset by foreign currency impacts. The decrease in unit volume was primarily driven by a decline in Notebooks due to lower Chromebooks and softening consumer demand, partially offset by increases in Desktops and Workstations. Also, units were impacted due to the continued supply chain challenges and overall macroeconomic environment. Commercial PCs revenue increased 18.4% primarily driven by higher ASPs and unit growth in Desktops and Workstations, partially offset by unit decline in Notebooks due to lower Chromebooks. Consumer PCs net revenue decreased 6.1% driven by unit declines in Notebooks and Desktops, partially offset by higher ASPs.
As a result, net sales increased 3.3% for notebooks, 28.3% for desktops and 21.4% for workstations.
Personal Systems earnings from operations as a percentage of net revenue increased by 0.2 percentage points, primarily due to a decrease in operating expenses as a percentage of revenue, partially offset by decrease in gross margin. The gross margin decreased primarily due to higher costs including commodity costs, and foreign currency impacts, partially offset by favorable pricing and mix shifts. Operating expenses as a percentage of revenue decreased by 1.2 percentage points primarily driven by last year's increased R&D investments and lower variable compensation.
Six months have passed
Personal Systems net revenue increased 12.1% (increased 12.5% on a constant currency basis) for the six months endedApril 30, 2022 as compared to the prior-year period. The increase was driven by 26.5% increase in ASPs, partially offset by 11.3% decrease in unit volume. The increase in ASPs was primarily due to favorable pricing and mix shifts to premium. The decrease in unit volume was primarily driven by a decline in Notebooks due to lower Chromebooks and softening consumer demand, partially offset by increases in Desktops and Workstations. Also, units were impacted due to the continued supply chain challenges and overall macroeconomic environment. 47
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Commercial PCs revenue increased 22.2% primarily driven by higher ASPs and unit
growth in Desktops and Workstations, partially offset by unit decline in
Notebooks due to lower Chromebooks. Consumer PCs net revenue decreased 3.3%
driven by unit declines in Notebooks and Desktops, partially offset by higher
ASPs.
As a result, net sales increased 8.8% for notebooks, 22.4% for desktops and 30.3% for workstations.
Personal Systems earnings from operations as a percentage of net revenue
increased by 0.5 percentage points, primarily due to a decrease in operating
expenses as a percentage of revenue, partially offset by decrease in gross
margin. The gross margin decreased primarily due to higher costs including
commodity costs, and foreign currency impacts, partially offset by favorable
pricing and mix shifts. Operating expenses as a percentage of revenue decreased
by 1.0 percentage points primarily driven by joint partner funding and last
year's increased R&D investments.
Printing
Three months ended April 30 Six months ended April 30
2022 2021 % Change 2022 2021 % Change
Dollars in millions
Net revenue $ 4,963 $ 5,323 (6.8) % $ 9,794 $ 10,367 (5.5) %
Earnings from operations $ 958 $ 951 0.7 % $ 1,837 $ 1,949 (5.7) %
Operating profit in % of net 19.3% 17.9%
18.8 % 18.8 %
revenue
The components of net revenue and the weighted net revenue change by business
unit were as follows:
Three Months Ended April 30 Six months ended April 30
Net Revenue Weighted Net Net Revenue Weighted Net
2022 2021 Revenue Change(1) 2022 2021 Revenue Change(1)
Dollars in millions Percentage Points Dollars in millions Percentage Points
Supplies $ 3,131 $ 3,337 (3.9) $ 6,199 $ 6,483 (2.7)
Commercial 1,042 1,085 (0.8) 2,081 2,042 0.4
Consumer 790 901 (2.1) 1,514 1,842 (3.2)
Total Printing $ 4,963 $ 5,323 (6.8) $ 9,794 $ 10,367 (5.5)
(1)Weighted Net Revenue Change Percentage Points measures contribution of each
business unit towards overall segment revenue growth. It is calculated by
dividing the change in revenue of each business unit from the prior-year period
by total segment revenue for the prior-year period.
Three months passed
Printing net revenue decreased 6.8% (decreased 6.5% on a constant currency basis) for the three months endedApril 30, 2022 . Net revenue for Supplies decreased 6.2%, primarily due to normalization in home printing and gradual return to office. Also, Supplies revenue was impacted byChina lockdowns and theRussia -Ukraine conflict. Printer ASPs increased 15.5% and unit volume decreased 23.1%. Printer ASPs increased primarily due to favorable pricing and mix shifts. The decrease in printer unit volume was due to component availability and supply chain disruptions which continued to limit unit availability for both Commercial and Consumer, during the three months endedApril 30, 2022 . Net revenue for Commercial decreased by 4.0%, primarily due to 17.2% decrease in printer unit volume, partially offset by 9.6% increase in ASPs. The increase in ASPs was primarily driven by mix shifts and favorable pricing, partially offset by foreign currency impacts. Net revenue for Consumer decreased 12.3%, primarily due to 23.9% decrease in printer unit volume, partially offset by 14.7% increase in ASPs. The increase in ASPs was primarily driven by favorable pricing. Printing earnings from operations as a percentage of net revenue increased by 1.4 percentage points, primarily due to lower operating expenses as a percentage of revenue and increase in gross margin. The increase in gross margin is primarily 48
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due to mix shifts and favorable pricing, partially offset by higher commodity
costs. Operating expenses as a percentage of revenue decreased primarily due to
lower variable compensation and go-to-market initiative expenses.
Six months have passed
Printing net revenue decreased 5.5% (decreased 5.6% on a constant currency basis) for the six months endedApril 30, 2022 . Net revenue for Supplies decreased 4.4%, primarily due to normalization in home printing and gradual return to office. Also, Supplies revenue was impacted byChina lockdowns andRussia -Ukraine conflict in the second quarter of fiscal 2022. Printer unit volume decreased 25.5% and ASPs increased 20.1%. The decrease in printer unit volume was primarily driven by decreases in both Consumer and Commercial due to component availability and supply chain disruptions. Printer ASPs increased primarily due to favorable pricing and mix shifts. Net revenue for Commercial increased by 1.9%, primarily due to 11.9% increase in ASPs, partially offset by 10.2% decrease in printer unit volume. The increase in ASPs was primarily driven by favorable pricing and mix shifts. Net revenue for Consumer decreased 17.8%, primarily due to a 27.5% decrease in printer unit volume, partially offset by 12.6% increase in ASPs. The increase in ASPs was primarily driven by favorable pricing and mix shifts. Printing earnings from operations as a percentage of net revenue remained flat for the six months endedApril 30, 2022 , primarily due to decrease in gross margin offset by lower operating expense as a percentage of revenue. The decrease in gross margin is driven by higher commodity and supply chain costs, partially offset by mix shifts and favorable pricing. Further, the hardware gross margin was impacted by component shortages and supply chain disruptions which impacted mix and unit availability for both Commercial and Consumer. Operating expenses as a percentage of revenue decreased primarily due to lower investments in go-to-market initiative expenses and variable compensation.
business investments
Loss from operations of Corporate Investments for the past three and six months
LIQUIDITY AND CAPITAL RESOURCES
We use cash generated by operations as our primary source of liquidity. The impacts from the COVID-19 pandemic were originally expected to be temporary, however, with the emergence of new variants, there remains uncertainty around the extent and duration of the pandemic and how our liquidity and working capital needs may be impacted in the future periods as a result. We believe that current cash, cash flow from operating activities, new borrowings, available commercial paper authorization and the credit facilities will be sufficient to meetHP 's operating cash requirements, planned capital expenditures, interest and principal payments on all borrowings, pension and post-retirement funding requirements, authorized share repurchases and annual dividend payments for the foreseeable future. Additionally, if suitable acquisition opportunities arise, the Company may obtain all or a portion of the required financing through additional borrowings. While our access to capital markets may be constrained and our cost of borrowing may increase under certain business, market and economic conditions, our access to a variety of funding sources to meet our liquidity needs is designed to facilitate continued access to capital resources under all such conditions. Our liquidity is subject to various risks including the risks identified in the section entitled "Risk Factors" in Item 1A of Part II of this report as well as Item 1A of Part I in our Annual Report on Form 10-K for the fiscal year endedOctober 31, 2021 and the market risks identified in the section entitled "Quantitative and Qualitative Disclosures about Market Risk" in Item 3 of Part I of this report. OnMarch 25, 2022 , we entered into a definitive agreement to acquire Poly, a leading global provider of workplace collaboration solutions, in an all-cash transaction for$40 per share, implying a total enterprise value of$3.3 billion , inclusive of Poly's net debt.HP plans to fund the transaction through a combination of cash and new debt. The transaction is expected to close by the end of calendar year 2022, pending regulatory reviews, approval by Poly's shareholders, and other customary closing conditions. Our cash and cash equivalents balances are held in numerous locations throughout the world. We utilize a variety of planning and financing strategies in an effort to ensure that our worldwide cash is available when and where it is needed. Amounts held outside ofthe United States are generally utilized to support non-U.S. liquidity needs and may from time to time be distributed tothe United States . The Tax Cuts and Jobs Act ("TCJA") made significant changes to theU.S. tax law, including a one-time transition tax on accumulated foreign earnings. The payments associated with this one-time transition tax will be paid over eight years and began in fiscal year 2019. We expect a significant portion of the cash and cash equivalents held by our foreign subsidiaries will no longer be subject toU.S. income tax consequences upon a subsequent repatriation tothe United States as a result of the transition tax on accumulated foreign earnings. However, a portion of this cash may still be subject to foreign income tax or withholding tax consequences upon repatriation. As we evaluate the future cash needs of our operations, we may revise the amount of foreign earnings considered to be permanently reinvested in our foreign subsidiaries and how to utilize such funds, including reducing our gross debt level, or other uses. 49
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HP INC. AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
liquidity
Our cash and cash equivalents and total debt are as follows:
As of
April 30, 2022 October 31, 2021
In billions
Cash and cash equivalents $ 4.5 $ 4.3
Total debt $ 9.0 $ 7.5
Our key cash flow metrics were as follows:
Six months ended April 30
2022 2021
In millions
Net cash provided by operating activities $ 2,165 $ 2,468
Net cash used in investing activities (462) (315)
Net cash used in financing activities (1,525) (3,593)
Net increase (decrease) in cash and cash equivalents $ 178 $ (1,440)
Operating Activities
Compared to the corresponding period in fiscal year 2021, net cash provided by operating activities decreased by
Key working capital metrics
Management utilizes current cash conversion cycle information to manage our
working capital level. Our working capital metrics and cash conversion cycle
impacts were as follows:
As of As of
April 30, 2022 October 31, 2021 Change April 30, 2021 October 31, 2020 Change Y/Y Change
Days of sales outstanding in 29 30 (1) 28 32 (4) 1
accounts receivable ("DSO")
Days of supply in inventory ("DOS") 61 53 8 54 43 11 7
Days of purchases outstanding in (116) (108) (8) (110) (105) (5) (6)
accounts payable ("DPO")
Cash conversion cycle (26) (25) (1) (28) (30) 2 2
The cash conversion cycle is the sum of days of DSO and DOS less DPO. Items which may cause the cash conversion cycle in a particular period to differ from historical trends include, but are not limited to, changes in business mix, changes in payment terms and timing, extent of receivables factoring, seasonal trends and the timing of revenue recognition and inventory purchases within the period. DSO measures the average number of days our receivables are outstanding. DSO is calculated by dividing ending accounts receivable, net of allowance for credit losses, by a 90-day average net revenue. The increase in DSO was primarily due to unfavorable revenue linearity. DOS measures the average number of days from procurement to sale of our product. DOS is calculated by dividing ending inventory by a 90-day average cost of revenue. The increase in DOS was primarily due to higher inventory to mitigate supply chain constraints in Printing.
DPO measures the average number of days that our liabilities are outstanding. DPO is calculated by dividing ending liabilities by 90-day average cost of sales. The increase in DPO was mainly due to higher inventory and working capital management activities.
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HP INC. AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
investment activity
Compared to the corresponding period in fiscal year 2021, net cash used in investing activities increased by$0.1 billion for the six months endedApril 30, 2022 , primarily due to lower proceeds from sale of investments of$0.3 billion and increase in net investment in property, plant and equipment of$0.2 billion , partially offset by lower collateral posted for derivative instruments of$0.2 billion and lower net payments for acquisitions of$0.1 billion .
financing activity
Compared to the corresponding period in the 2021 financial year, the cash outflow from financing activities decreased by
Share buybacks and dividends
During the six months endedApril 30, 2022 ,HP returned$3.1 billion to the shareholders in the form of share repurchases of$2.5 billion and cash dividends of$533 million . As ofApril 30, 2022 ,HP had approximately$3.9 billion remaining under the share repurchase authorizations approved byHP 's Board of Directors.
For more information on our share repurchases, see Note 10, “Shareholder Deficit,” to the Consolidated Condensed Financial Statements in Item 1 of Part I of this report, which is incorporated herein by reference.
capital resources
level of debt
We maintain debt levels that we establish through consideration of a number of factors, including cash flow expectations, cash requirements for operations, investment plans (including acquisitions), share repurchase activities, our cost of capital and targeted capital structure. Depending on these factors, we may, from time to time, incur additional indebtedness or refinance existing indebtedness. Outstanding borrowings increased to$9.0 billion as ofApril 30, 2022 as compared to$7.5 billion as ofOctober 31, 2021 , bearing weighted-average interest rates of 3.5% and 3.1% forApril 30, 2022 andOctober 31, 2021 , respectively. InMarch 2022 , we issued$2.0 billion in aggregate principal amount of senior unsecured notes across various maturities. For more information on the new notes, see Note 9, "Borrowings", to the Consolidated Condensed Financial Statements in Item 1 of Part I of this report, which is incorporated herein by reference. Our weighted-average interest rate reflects the effective rate on our borrowings prevailing during the period and reflects the effect of interest rate swaps. For more information on our interest rate swaps, see Note 8, "Financial Instruments", to the Consolidated Condensed Financial Statements in Item 1 of Part I of this report, which is incorporated herein by reference. As ofApril 30, 2022 , we maintained the 5-year sustainability-linked senior unsecured committed revolving credit facility with aggregate lending commitments of$5.0 billion which will be available untilMay 26, 2026 . Funds borrowed under the revolving credit facility may be used for general corporate purposes.
Available Lending Resources
As ofApril 30, 2022 , we had available borrowing resources of$550 million from uncommitted lines of credit in addition to the revolving credit facility. The amendment to our 2019 Shelf Registration Statement to convert to a non-automatic shelf registration statement was declared effective by theSEC onFebruary 25, 2021 and, as ofApril 30, 2022 , enables us to offer for sale, from time to time, in one or more offerings,$3.0 billion , in the aggregate, of debt securities, common stock, preferred stock, depository shares and warrants. For more information on our borrowings, see Note 9, "Borrowings", to the Consolidated Condensed Financial Statements in Item 1 of Part I of this report, which is incorporated herein by reference.
credit ratings
Our credit risk is evaluated by major independent rating agencies based upon
publicly available information as well as information they obtain during our
ongoing discussions. While we currently do not have any rating downgrade
triggers that would accelerate the maturity of a material amount of our debt, a
downgrade from our current credit rating may increase the cost of borrowing
under our credit facility, reduce market capacity for our commercial paper,
require the posting of additional collateral under some of our derivative
contracts and may have a negative impact on our liquidity and capital position,
depending on the extent of such downgrade. We can access alternative sources of
funding, including drawdowns under our credit facility, if necessary, to offset
potential reductions in the market capacity for our commercial paper.
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HP INC. AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
CONTRACTUAL AND OTHER OBLIGATIONS
Payments of principal and interest on debt
InMarch 2022 , we issued$2.0 billion in aggregate principal amount of senior unsecured notes across various maturities. As a result, our future principal payments on debt increased from$7.6 billion as atOctober 31, 2021 to$9.1 billion as atApril 30, 2022 and future interest payments on debt increased from$2.3 billion as atOctober 31, 2021 to$2.9 billion as atApril 30, 2022 . For more information on the new notes, see Note 9, "Borrowings", to the Consolidated Condensed Financial Statements in Item 1 of Part I of this report, which is incorporated herein by reference.
Unconditional acceptance obligation
Purchase obligations include agreements to purchase goods or services that are enforceable and legally binding onHP and that specify all significant terms, including fixed or minimum quantities to be purchased; fixed, minimum or variable price provisions; and the approximate timing of the transaction. These unconditional purchase obligations are primarily related to inventory and service support. Unconditional purchase obligations exclude agreements that are cancellable without penalty. As ofApril 30, 2022 , the Company had outstanding purchase commitments of$5.4 billion . The majority of these commitments are due within five years, see Note 14, "Commitments", to the Consolidated Condensed Financial Statements in Item 1 of Part I of this report, which is incorporated herein by reference.
Retirement and Retirement Plan Contributions
As ofApril 30, 2022 , we anticipate making contributions for the remainder of fiscal year 2022 of approximately$25 million to our non-U.S. pension plans,$21 million to cover benefit payments toU.S. non-qualified pension plan participants and$2 million to cover benefit claims for our post-retirement benefit plans. Our policy is to fund our pension plans so that we meet the minimum contribution required by local government, funding and taxing authorities. For more information on our retirement and post-retirement benefit plans, see Note 4, "Retirement and Post-Retirement Benefit Plans", to the Consolidated Condensed Financial Statements in Item 1 of Part I of this report, which is incorporated herein by reference.
cost savings plan
As a result of our approved restructuring plans, we expect to make future cash payments of approximately$0.1 billion . For more information on our restructuring activities that are part of our cost improvements, see Note 3, "Restructuring and Other Charges", to the Consolidated Condensed Financial Statements in Item 1 of Part I of this report, which is incorporated herein by reference. Uncertain Tax Positions As ofApril 30, 2022 , we had approximately$634 million of recorded liabilities and related interest and penalties pertaining to uncertain tax positions. We are unable to make a reasonable estimate as to when cash settlement with the tax authorities might occur due to the uncertainties related to these tax matters. Payments of these obligations would result from settlements with taxing authorities. For more information on our uncertain tax positions, see Note 5, "Taxes on Earnings", to the Consolidated Condensed Financial Statements in Item 1 of Part I of this report, which is incorporated herein by reference.
Off-Balance Sheet Arrangements
As part of our ongoing business, we have not participated in transactions that
generate material relationships with unconsolidated entities or financial
partnerships, such as entities often referred to as structured finance or
special purpose entities, which would have been established for the purpose of
facilitating off-balance sheet arrangements or other contractually narrow or
limited purposes.
We have third-party short-term financing arrangements intended to facilitate the
working capital requirements of certain customers. For more information on our
third-party short-term financing arrangements, see Note 6, "Supplementary
Financial Information", to the Consolidated Condensed Financial Statements in
Item 1 of Part I of this report, which is incorporated herein by reference.
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