HP INC (HPQ) FY 2024 MD&A
This page reproduces the company's own Item 7 MD&A text from the linked SEC filing. It is filer text, not grepcent analysis, scoring, or investment advice.
ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The discussion of financial condition and results of our operations that follows provides information that will assist the reader in understanding our Consolidated 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 Financial Statements. This discussion should be read in conjunction with our Consolidated Financial Statements and the related notes that appear elsewhere in this document. This section generally discusses the results of operations for the fiscal year ended October 31, 2024 compared to the fiscal year ended October 31, 2023. For a discussion of fiscal year ended October 31, 2023 compared to the fiscal year ended October 31, 2022, please refer to Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the fiscal year ended October 31, 2023.
34
Table of Contents
HP INC. AND SUBSIDIARIES
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
OVERVIEW
HP delivers innovative and sustainable devices, services, and subscriptions for personal computing, printing, 3D printing, hybrid work, gaming and other related technologies. We have three reportable segments: Personal Systems, Printing, and Corporate Investments. The Personal Systems segment offers commercial and consumer desktops, notebooks and workstations (including HP’s portfolio of AI PCs and workstations), thin clients, retail POS systems, displays, hybrid systems, software, solutions including endpoint security, and services. The Printing segment provides consumer and commercial printer hardware, supplies, solutions and services. Corporate Investments include certain business incubation and investment projects.
•In Personal Systems, our long-term strategic focus is on:
◦profitable growth through innovation, market segmentation and simplification of our portfolio;
◦enhanced innovation in multi-operating systems, multi-architecture, 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 shifts to subscription-based solutions, and accelerating in attractive adjacencies such as hybrid systems; and
◦driving innovation to enable productivity and collaboration, with AI PCs and workstations playing a critical role in the transformation of how people live and work.
•In Printing, our long-term strategic focus is on:
◦offering innovative, intelligent printing experiences and subscription-based solutions designed to securely serve consumer and SMB customers through our Instant Ink Services and HP All-In Plan, as well as large enterprises through our Managed Print Services solutions;
◦providing digital printing solutions for industrial graphics segments and applications including commercial publishing, labels, packaging, and textiles; and
◦expanding our footprint in 3D printing across digital manufacturing and strategic applications.
We have focused on growing our hybrid systems, gaming, workforce solutions, consumer subscriptions, industrial graphics and our 3D and personalization businesses at a rate faster than our core business with accretive margins in the longer term. We believe our ability to innovate will help us gain momentum in growth areas like hybrid systems and gaming, and we see significant opportunities to drive greater recurring revenues across Personal Systems and Printing. Our Workforce Solutions organization drives integration across our commercial services, software and security portfolio. We continue to build on strong portfolios 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 3D and Personalization, we are creating end-to-end solutions that we believe can capture more value with our differentiated technology.
We believe we are well positioned to lead the future of work with our competitive product lineup and enhanced portfolio of hybrid systems, remote-computing solutions, and intelligent print solutions. We are driving innovation by accelerating the delivery of AI across our product portfolio and focusing on growth opportunities in commercial, solutions, and premium consumer and gaming markets. We are consolidating all our software resources under the Technology and Innovation Organization to evolve from a transactional hardware company to a more experience-led organization, further strengthening our ability to capture these opportunities.
We continue to experience challenges that are representative of the trends and uncertainties that may affect our industry, generally, and our business and financial results, specifically, and we expect these challenges to continue in the short-term. One set of challenges relates to the current macroeconomic environment and the adverse impact on demand for certain of our products. 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. Specific challenges we face at the segment level are set forth below.
•In Personal Systems, we face challenges with a competitive pricing environment, variability in commodity costs, and demand softness in certain geographic regions.
•In Printing, we face challenges from changing customer behaviors as well as competitors with a favorable foreign currency environment and non-original supplies (which includes imitation, refill, or remanufactured alternatives). We also obtain many Printing components from single source suppliers due to technology, availability, price, quality, or other considerations.
35
Table of Contents
HP INC. AND SUBSIDIARIES
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
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, efficiencies and simplification of our product portfolio. 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, effective cost management, strengthening our pricing strategy, and developing and capitalizing on market opportunities.
Macroeconomic Environment
Our business and financial performance depend significantly on worldwide economic conditions. We face global macroeconomic challenges such as ongoing geopolitical conflicts (including the military conflicts in Ukraine and the Middle East, and tensions in the Taiwan Strait and South China Sea), uncertainty in the markets, volatility in exchange rates, inflationary trends and evolving dynamics in the global trade environment. We also experience seasonality in the sale of our products and services which may be affected by general economic conditions.
During fiscal year 2024, we experienced continued industry wide demand softness in Printing and a competitive pricing environment, particularly from our Japanese competitors benefiting from a favorable foreign currency environment. In Personal Systems, we faced a competitive pricing environment, variability in commodity costs, and demand softness in certain regions. We experienced gradual market recovery in Commercial PS resulting in overall PC unit growth in fiscal year 2024 and net revenue growth in Personal Systems in the second half of fiscal year 2024.
We are also exposed to fluctuations in foreign currency exchange rates. We have a large global presence, with approximately 65% of our net revenue from outside the United States. 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 I in this Annual Report on Form 10-K.
Transformation Update
In November 2022, we announced our Future Ready Plan (the “Fiscal 2023 Plan” or “Future Ready”) to become a more digitally enabled company, focus investments on key growth opportunities and simplify our operating model. The Fiscal 2023 Plan is expected to run through end of fiscal 2025. The three key elements of our Fiscal 2023 Plan are digital transformation, portfolio optimization, and operational efficiency. We accelerated our cumulative savings target for fiscal year 2024 and are on track to achieve our overall program savings.
Since announcing our Fiscal 2023 Plan, we have enhanced our digital capabilities in Workforce Solutions and continued to leverage AI to positively impact our products, solutions and operations. Additionally, we are reducing portfolio complexity, improving continuity of supply, and increasing our forecast accuracy across our business to drive reduction in our cost of sales and operating expenses. We also continued to reduce our structural cost through headcount reductions and are on track to achieve our overall headcount reduction goal. We expect to continue to invest some of the savings into our growth areas and our people.
See “Risk Factors—Strategic and Operational Risk Factors—We may not achieve some or all of the expected benefits of our restructuring plans and our restructuring may adversely affect our business” in Item 1A, which is incorporated herein by reference. For more information on our Fiscal 2023 Plan, see Note 3, “Restructuring and Other Charges,” to the Consolidated Financial Statements in Item 8 of Part II of this report, which is incorporated herein by reference.
CRITICAL ACCOUNTING ESTIMATES
General
Our Consolidated Financial Statements are prepared in accordance with United States (“U.S.”) generally accepted accounting principles (“GAAP”), which require 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. Critical accounting estimates are those that involve a significant level of estimation uncertainty and have had or are reasonably likely to have a material impact on our financial condition or results of operations. Management bases its estimates on historical experience and on various other assumptions that it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying amount of assets and liabilities. Management believes that the accounting estimates employed and the resulting amounts are reasonable; however, actual results may differ from these estimates.
A summary of our significant accounting policies is included in Note 1, “Summary of Significant Accounting Policies” to the Consolidated Financial Statements in Item 8, which is incorporated herein by reference. Management believes the following accounting policies reflect the critical accounting estimates used in the preparation of our Consolidated Financial Statements.
36
Table of Contents
HP INC. AND SUBSIDIARIES
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
Revenue Recognition - Variable Consideration
We recognize revenue depicting the transfer of promised goods or services to customers in an amount that may include variable consideration. When the transaction price includes a variable amount, we estimate the amount using either the expected value or most likely amount method. At the time of revenue recognition, we reduce the transaction price by the estimated variable consideration (e.g., customer and distributor programs and incentive offerings, rebates, promotions, other volume-based incentives and expected returns). We use estimates to determine the expected variable consideration for such programs based on historical experience, expected consumer behavior and market conditions.
Taxes on Earnings
As a result of certain employment actions and capital investments we have undertaken, income from manufacturing activities in certain jurisdictions is subject to reduced tax rates and, in some cases, is wholly exempt from taxes for fiscal years through 2029.
Material changes in our estimates of cash, working capital and long-term investment requirements in the various jurisdictions in which we do business could impact how future earnings are repatriated to the United States, and our related future effective tax rate.
We record a valuation allowance to reduce deferred tax assets to the amount that we are more likely than not to realize. In determining the need for a valuation allowance, we consider future market growth, forecasted earnings, future taxable income, the mix of earnings in the jurisdictions in which we operate and prudent and feasible tax planning strategies. In the event we were to determine that it is more likely than not that we will be unable to realize all or part of our deferred tax assets in the future, we would increase the valuation allowance and recognize a corresponding charge to earnings or other comprehensive income in the period in which we make such a determination. Likewise, if we later determine that we are more likely than not to realize the deferred tax assets, we would reverse the applicable portion of the previously recognized valuation allowance. In order for us to realize our deferred tax assets, we must be able to generate sufficient taxable income in the jurisdictions in which the deferred tax assets are located.
We are subject to income taxes in the United States and approximately 61 other countries, and we are subject to routine corporate income tax audits in many of these jurisdictions. We believe that positions taken on our tax returns are fully supported, but tax authorities may challenge these positions, and our positions may not be fully sustained on examination by the relevant tax authorities. Accordingly, our income tax provision includes amounts intended to satisfy assessments that may result from these challenges. Our accrual for uncertain tax positions is attributable primarily to uncertainties concerning the tax treatment of our domestic operations, including the allocation of income among different jurisdictions, intercompany transactions, pension and related interest. We adjust our uncertain tax positions to reflect the impact of negotiations, settlements, rulings, advice of legal counsel, and other information and events pertaining to a particular audit. Determining the appropriate provision for potential deficiencies or reductions in tax benefits that could reasonably result from an audit requires management judgments and estimates, and income tax audits are inherently unpredictable. We may not accurately predict the outcomes of these audits, and the amounts ultimately paid on resolution of an audit could be materially different from the amounts previously included in our income tax provision and, therefore, could have a material impact on our provision for taxes, net earnings and cash flows. For a further discussion on taxes on earnings, refer to Note 6, “Taxes on Earnings” to the Consolidated Financial Statements in Item 8, which is incorporated herein by reference.
Legal Contingencies
We are involved in various lawsuits, claims, investigations and proceedings including those consisting of IP, commercial, securities, employment, employee benefits and environmental matters that arise in the ordinary course of business. We record a liability when we believe that it is both probable that a liability has been incurred and the amount of loss can be reasonably estimated. Significant judgment is required to determine both the probability of having incurred a liability and the estimated amount of the liability. We review these matters at least quarterly and adjust these liabilities to reflect the impact of negotiations, settlements, rulings, advice of legal counsel and other updated information and events, pertaining to a particular case. Litigation is inherently unpredictable. However, we believe we have valid defenses with respect to legal matters pending against us. Nevertheless, cash flows or results of operations could be materially affected in any particular period by the resolution of one or more of these contingencies. We believe we have recorded adequate provisions for any such matters and, as of October 31, 2024, it was not reasonably possible that a material loss had been incurred in excess of the amounts recognized in our financial statements.
37
Table of Contents
HP INC. AND SUBSIDIARIES
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
RECENT ACCOUNTING PRONOUNCEMENTS
For a summary of recent accounting pronouncements applicable to our consolidated financial statements see Note 1, “Summary of Significant Accounting Policies” to the Consolidated Financial Statements in Item 8, which is incorporated herein by reference.
RESULTS OF OPERATIONS
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 exchange rates from the comparative period and excluding any hedging impact recognized in the current period, and without adjusting 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:
| For the fiscal years ended October 31 | ||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2024 | 2023 | 2022 | ||||||||||||||||||
| Dollars | % of Net Revenue | Dollars | % of Net Revenue | Dollars | % of Net Revenue | |||||||||||||||
| Dollars in millions | ||||||||||||||||||||
| Net revenue: | ||||||||||||||||||||
| Products | $ | 50,453 | 94.2 | % | $ | 50,660 | 94.3 | % | $ | 60,041 | 95.4 | % | ||||||||
| Services | 3,106 | 5.8 | % | 3,058 | 5.7 | % | 2,869 | 4.6 | % | |||||||||||
| Total net revenue | 53,559 | 100.0 | % | 53,718 | 100.0 | % | 62,910 | 100.0 | % | |||||||||||
| Cost of net revenue: | ||||||||||||||||||||
| Products(1) | 39,952 | 79.2 | % | 40,484 | 79.9 | % | 48,881 | 81.4 | % | |||||||||||
| Services(2) | 1,789 | 57.6 | % | 1,726 | 56.4 | % | 1,766 | 61.6 | % | |||||||||||
| Total cost of net revenue | 41,741 | 77.9 | % | 42,210 | 78.6 | % | 50,647 | 80.5 | % | |||||||||||
| Gross margin | 11,818 | 22.1 | % | 11,508 | 21.4 | % | 12,263 | 19.5 | % | |||||||||||
| Research and development | 1,640 | 3.1 | % | 1,578 | 2.9 | % | 1,653 | 2.6 | % | |||||||||||
| Selling, general and administrative | 5,658 | 10.6 | % | 5,357 | 10.0 | % | 5,264 | 8.4 | % | |||||||||||
| Restructuring and other charges | 301 | 0.5 | % | 527 | 1.0 | % | 218 | 0.3 | % | |||||||||||
| Acquisition and divestiture charges | 83 | 0.2 | % | 240 | 0.4 | % | 318 | 0.5 | % | |||||||||||
| Amortization of intangible assets | 318 | 0.6 | % | 350 | 0.7 | % | 228 | 0.4 | % | |||||||||||
| Russia exit charges | — | — | % | — | — | % | 23 | — | % | |||||||||||
| Total operating expenses | 8,000 | 15.0 | % | 8,052 | 15.0 | % | 7,704 | 12.2 | % | |||||||||||
| Earnings from operations | 3,818 | 7.1 | % | 3,456 | 6.4 | % | 4,559 | 7.2 | % | |||||||||||
| Interest and other, net | (539) | (1.0) | % | (519) | (0.9) | % | (235) | (0.4) | % | |||||||||||
| Earnings before taxes | 3,279 | 6.1 | % | 2,937 | 5.5 | % | 4,324 | 6.8 | % | |||||||||||
| (Provision for) benefit from taxes | (504) | (0.9) | % | 326 | 0.6 | % | (1,192) | (1.9) | % | |||||||||||
| Net earnings | $ | 2,775 | 5.2 | % | $ | 3,263 | 6.1 | % | $ | 3,132 | 4.9 | % |
(1) Products cost of net revenue as a percentage of net revenue is calculated as a percentage of product net revenue.
(2) Services cost of net revenue as a percentage of net revenue is calculated as a percentage of services net revenue.
38
Net Revenue
Products net revenue includes revenue from the sale of hardware, supplies, subscriptions and software licenses. Services net revenue includes revenue from our service offerings and support on hardware devices.
In fiscal year 2024, total net revenue decreased 0.3% (decreased 0.2% on a constant currency basis) as compared to the prior-year period. Net revenue from the United States decreased 0.2% and remained at $18.8 billion, and outside of the United States decreased 0.3% to $34.8 billion. The decrease in products net revenue was primarily driven by lower hardware units in Printing and competitive pricing in Printer hardware and Personal Systems, partially offset by market recovery in Commercial PS and higher net revenue in key growth areas. Services net revenue remained flat.
A detailed discussion of the factors contributing to the changes in segment net revenue is included under “Segment Information” below.
Gross Margin
In fiscal year 2024, gross margin increased by 0.7 percentage points, primarily driven by products gross margin due to lower supply chain costs, and cost savings, including Future Ready transformation savings, partially offset by competitive pricing in Printer hardware and Personal Systems, and mix shifts towards Personal Systems while services gross margin decreased.
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 increased 3.9% in fiscal year 2024, primarily due to continued investments in innovation, partially offset by disciplined cost management including Future Ready transformation savings.
Selling, general and administrative (“SG&A”)
SG&A expense increased 5.6% in fiscal year 2024, primarily due to higher litigation costs and go-to-market initiatives, partially offset by disciplined cost management including Future Ready transformation savings.
Restructuring and other charges
Restructuring and other charges relate primarily to the Fiscal 2023 Plan. For more information, see Note 3, “Restructuring and Other Charges”, to the Consolidated Financial Statements in Item 8 of Part II of this report, which is incorporated herein by reference.
Acquisition and divestiture charges
Acquisition and divestiture charges primarily include direct third-party professional and legal fees, and integration and divestiture-related costs, as well as non-cash adjustments to the fair value of certain acquired assets such as inventory and certain compensation charges related to cash settlement of restricted stock units and performance-based restricted stock units from acquisitions. Acquisition and divestiture charges decreased by $157 million in the fiscal year 2024, primarily due to reduced integration activities associated with the fiscal year 2022 Poly acquisition.
Amortization of intangible assets
Amortization of intangible assets decreased in fiscal year 2024 and relates to intangible assets resulting from acquisitions.
Interest and other, net
Interest and other, net increased $20 million in the fiscal year 2024 primarily due to the net gain on extinguishment of debt as well as retirement benefits associated with our Enhanced Early Retirement (“EER”) program recorded in the prior year period, partially offset by lower interest expense on debt.
Provision for taxes
Our effective tax rate was 15.4% in fiscal year 2024. The effective tax rate differs from the U.S. federal statutory rate of 21% primarily due to impacts of changes in valuation allowances and favorable tax rates associated with certain earnings from HP’s operations in lower-tax jurisdictions throughout the world.
For a reconciliation of our effective tax rate to the U.S. federal statutory rate of 21% in fiscal year 2024, and further explanation of our provision for income taxes, see Note 6, “Taxes on Earnings” to the Consolidated Financial Statements in Item 8, which is incorporated herein by reference.
39
In fiscal year 2024, we recorded $214 million of net income tax benefits related to non-recurring items in the provision for taxes. This amount included $198 million related to changes in valuation allowances, $60 million related to restructuring charges, $14 million related to the filing of tax returns in various jurisdictions, and $11 million related to acquisition charges. These benefits were partially offset by $39 million of uncertain tax position charges and $25 million related to changes in tax rates.
In December 2021, the Organisation for Economic Co-operation and Development (the “OECD”) introduced model rules for a global minimum tax framework known as (“BEPS Pillar Two”). Numerous governments worldwide have enacted or are in the process of enacting legislation to implement this framework. Where applicable, these rules will take effect for us beginning in the fiscal year 2025 and we plan to treat the tax as a period cost. We do not anticipate a material impact on our effective tax rate or cash tax payments in these jurisdictions for fiscal year 2025. Our assessment for subsequent fiscal years may be influenced by additional legislative guidance and the enactment of further provisions within the BEPS Pillar Two framework.
Segment Information
During the first quarter of fiscal year 2024, HP realigned its business unit financial reporting more closely with its customer market segmentation. Future changes to this organizational structure may result in changes to the segments disclosed. For more information on our segments see Note 2, “Segment Information,” to the Consolidated Financial Statements in Item 8, which is incorporated herein by reference.
Personal Systems
| For the fiscal years ended October 31 | ||||||||
|---|---|---|---|---|---|---|---|---|
| 2024 | 2023 | 2022 | ||||||
| Dollars in millions | ||||||||
| Net revenue | $ | 36,195 | $ | 35,684 | $ | 44,011 | ||
| Earnings from operations | $ | 2,194 | $ | 2,129 | $ | 2,761 | ||
| Earnings from operations as a % of net revenue | 6.1% | 6.0 | % | 6.3% |
The components of net revenue and the weighted net revenue change by business unit were as follows:
| For the fiscal years ended October 31 | ||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Net Revenue | Weighted Net Revenue Change Percentage Points(1) | |||||||||||||||
| 2024 | 2023 | 2022 | 2024 | 2023 | ||||||||||||
| In millions | ||||||||||||||||
| Commercial PS | $ | 25,486 | $ | 24,712 | $ | 29,616 | 2.1 | (11.1) | ||||||||
| Consumer PS | 10,709 | 10,972 | 14,395 | (0.7) | (7.8) | |||||||||||
| Total Personal Systems | $ | 36,195 | $ | 35,684 | $ | 44,011 | 1.4 | (18.9) |
(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.
Fiscal year 2024 compared with fiscal year 2023
Personal Systems net revenue increased 1.4% (increased 1.3% on a constant currency basis) in the fiscal year 2024, as compared to the prior-year period. The net revenue increase was primarily due to a 3.3% increase in PC unit volume driven by Commercial PS, partially offset by a 1.4% decrease in average selling price (“ASPs”). The decrease in ASPs is primarily due to competitive pricing, partially offset by favorable mix shifts.
Commercial PS revenue increased 3.1% primarily driven by a 5.7% increase in units due to market recovery, partially offset by a 1.6% decrease in ASPs. The decrease in ASPs was driven by unfavorable mix shifts and competitive pricing.
Consumer PS net revenue decreased 2.4% driven by a 2.5% decrease in ASPs and a 0.3% decrease in units due to demand softness, especially in China. The decrease in ASPs was driven by competitive pricing and unfavorable mix shifts, partially offset by favorable foreign currency impacts.
40
Personal Systems earnings from operations as a percentage of net revenue increased by 0.1 percentage points driven by an increase in gross margin, partially offset by an increase in operating expenses as a percentage of revenue. Gross margin increased primarily due to lower supply chain cost, favorable mix shifts as well as Future Ready transformation savings, partially offset by competitive pricing. Operating expenses as a percentage of revenue increased primarily due to higher litigation costs, go-to-market initiatives and continued investments in innovation, partially offset by disciplined cost management including Future Ready transformation savings.
Printing
| For the fiscal years ended October 31 | ||||||||
|---|---|---|---|---|---|---|---|---|
| 2024 | 2023 | 2022 | ||||||
| Dollars in millions | ||||||||
| Net revenue | $ | 17,338 | $ | 18,029 | $ | 18,902 | ||
| Earnings from operations | $ | 3,290 | $ | 3,399 | $ | 3,619 | ||
| Earnings from operations as a % of net revenue | 19.0% | 18.9% | 19.1% |
The components of the net revenue and weighted net revenue change by business unit were as follows:
| For the fiscal years ended October 31 | ||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Net Revenue | Weighted Net Revenue Change Percentage Points(1) | |||||||||||||||
| 2024 | 2023 | 2022 | 2024 | 2023 | ||||||||||||
| In millions | ||||||||||||||||
| Supplies | $ | 11,295 | $ | 11,452 | $ | 11,761 | (0.9) | (1.6) | ||||||||
| Commercial Printing | 4,841 | 5,250 | 5,339 | (2.2) | (0.5) | |||||||||||
| Consumer Printing | 1,202 | 1,327 | 1,802 | (0.7) | (2.5) | |||||||||||
| Total Printing | $ | 17,338 | $ | 18,029 | $ | 18,902 | (3.8) | (4.6) |
(1) Weighted Net Revenue Change Percentage Points measures the 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 period by total segment revenue for the prior-year period.
Fiscal year 2024 compared with fiscal year 2023
Printing net revenue decreased 3.8% (decreased 3.2% on a constant currency basis) for fiscal year 2024 as compared to the prior-year period. The decline in net revenue was primarily driven by Commercial Printing, Consumer Printing and Supplies as well as unfavorable foreign currency impacts. Net revenue for Supplies decreased 1.4% primarily due to decline in the installed base and usage as well as foreign currency impacts, partially offset by disciplined pricing. Printer unit volume decreased 7.2% due to demand weakness and hardware ASPs decreased 3.2%. Printer hardware ASPs decreased primarily due to competitive pricing, particularly from our Japanese competitors benefiting from a favorable foreign currency environment, and mix shifts.
Net revenue for Commercial Printing decreased by 7.8%, primarily due to an 8.8% decrease in printer unit volume and a 1.8% decrease in ASPs. The decrease in ASPs was primarily driven by competitive pricing, partially offset by favorable mix shifts.
Net revenue for Consumer Printing decreased 9.4%, primarily due to a 6.2% decrease in printer unit volume and a 3.3% decrease in ASP’s. The decrease in ASPs was primarily driven by competitive pricing, partially offset by favorable mix shifts.
Printing earnings from operations as a percentage of net revenue increased by 0.1 percentage points driven by an increase in gross margin, partially offset by higher operating expenses as a percentage of revenue. The increase in gross margin was primarily driven by favorable mix shifts as well as cost savings including Future Ready transformation savings, partially offset by competitive pricing. Operating expenses as a percentage of revenue increased primarily due to higher go-to-market initiatives, partially offset by disciplined cost management including Future Ready transformation savings.
Corporate Investments
The loss from operations in Corporate Investments for the fiscal year 2024 was primarily due to expenses associated with our incubation projects and investments in digital enablement.
41
LIQUIDITY AND CAPITAL RESOURCES
We use cash generated by operations as our primary source of liquidity. We believe that current cash, cash flow from operating activities, new borrowings, available commercial paper authorization and the credit facility will be sufficient to meet HP’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 and market risks identified in the section entitled “Quantitative and Qualitative Disclosures about Market Risk” in Item 7A, which are incorporated herein by reference.
Amounts held outside of the U.S. are generally utilized to support non-U.S. liquidity needs and may from time to time be distributed to the U.S. Repatriations of amounts held outside the U.S. generally will not be taxable from a U.S. federal tax perspective but may be subject to state income or foreign withholding tax 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.
Liquidity
Our cash, cash equivalents and restricted cash and total debt were as follows:
| As of October 31 | ||||||
|---|---|---|---|---|---|---|
| 2024 | 2023 | |||||
| In millions | ||||||
| Cash and cash equivalents | $ | 3,238 | $ | 3,107 | ||
| Restricted cash | $ | 15 | $ | 125 | ||
| Total debt | $ | 9,669 | $ | 9,484 |
Our key cash flow metrics were as follows:
| For the fiscal years ended October 31 | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| 2024 | 2023 | 2022 | ||||||||
| In millions | ||||||||||
| Net cash provided by operating activities | $ | 3,749 | $ | 3,571 | $ | 4,463 | ||||
| Net cash used in investing activities | (646) | (590) | (3,549) | |||||||
| Net cash used in financing activities | (3,082) | (2,894) | (2,068) | |||||||
| Net increase (decrease) in cash, cash equivalents, and restricted cash | $ | 21 | $ | 87 | $ | (1,154) |
Operating activities
Net cash provided by operating activities increased by $0.2 billion for fiscal year 2024 due to favorable working capital impacts, partially offset by changes in receivables from contract manufacturers due to higher manufacturing activity and amounts collected and held on behalf of a third party for trade receivables previously sold.
42
Key working capital metrics
Management utilizes current cash conversion cycle information to manage our working capital level. The table below presents the cash conversion cycle:
| As of October 31 | |||||||
|---|---|---|---|---|---|---|---|
| 2024 | 2023 | 2022 | |||||
| Days of sales outstanding in accounts receivable (“DSO”) | 33 | 28 | 28 | ||||
| Days of supply in inventory (“DOS”) | 63 | 57 | 57 | ||||
| Days of purchases outstanding in accounts payable (“DPO”) | (138) | (117) | (114) | ||||
| Cash conversion cycle | (42) | (32) | (29) |
October 31, 2024 as compared to October 31, 2023
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, timing and 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 of 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 of cost of goods sold. The increase in DOS is primarily due to strategic buys in Personal Systems and higher in-transit shipments.
DPO measures the average number of days our accounts payable balances are outstanding. DPO is calculated by dividing ending accounts payable by a 90-day average of cost of goods sold. The increase in DPO as compared to prior-year period, was primarily due to higher manufacturing volumes in Personal Systems as well as favorable changes in payment terms.
Investing activities
Net cash used in investing activities increased $0.1 billion for fiscal year 2024 as compared to the prior-year period, primarily due to payments made in connection with acquisitions.
Financing activities
Net cash used in financing activities increased by $0.2 billion in fiscal year 2024 compared to the prior-year period, primarily due to higher share repurchases of $2.0 billion, partially offset by lower net debt repayment of $1.6 billion and collateral returned for derivative instruments of $0.2 billion in the prior-year period.
43
Share repurchases and dividends
In fiscal year 2024, HP returned $3.2 billion to shareholders in the form of share repurchases of $2.1 billion and cash dividends of $1.1 billion. On August 27, 2024, HP’s Board of Directors increased HP’s total share repurchase authorization to $10.0 billion, inclusive of the amount remaining under previously authorized share repurchases. As of October 31, 2024, HP had approximately $9.3 billion remaining under the share repurchase authorizations approved by HP’s Board of Directors.
For more information on our share repurchases, see Note 12, “Stockholders’ Deficit”, to the Consolidated Financial Statements in Item 8, which is incorporated herein by reference.
Capital resources
Debt Levels
| As of October 31 | |||||
|---|---|---|---|---|---|
| 2024 | 2023 | ||||
| Dollars in millions | |||||
| Short-term debt | $ | 1,406 | $ | 230 | |
| Long-term debt | $ | 8,263 | $ | 9,254 | |
| Weighted-average interest rate | 4.5 | % | 4.2 | % |
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.
Short-term debt increased by $1.2 billion and long-term debt decreased by $1.0 billion for fiscal year 2024 as compared to prior-year period. These changes are due to reclassification of Global Notes due in June 2025 to short-term.
Our weighted-average interest rate reflects the effective interest 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 10, “Financial Instruments” in the Consolidated Financial Statements and notes thereto in Item 8, “Financial Statements and Supplementary Data”, which is incorporated herein by reference.
For more information on our outstanding debt, see Note 11, “Borrowings”, to the Consolidated Financial Statements in Item 8 of Part II of this report, which is incorporated herein by reference.
As of October 31, 2024, we maintained a $5.0 billion sustainability-linked senior unsecured committed revolving credit facility maturing August 1, 2029. Funds borrowed under the revolving credit facility may be used for general corporate purposes.
Available borrowing resources
As of October 31, 2024, we had available borrowing resources of $0.9 billion from uncommitted lines of credit in addition to funds available under the revolving credit facility.
In February 2024, we filed an automatically effective shelf registration statement with the SEC, which enables us to offer for sale, at any time and from time to time, in one or more offerings, an unspecified amount of debt securities, common stock, preferred stock, depository shares and warrants.
For more information on our borrowings, see Note 11, “Borrowings”, to the Consolidated Financial Statements in Item 8 of Part II of this report, which is incorporated herein by reference.
44
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 facilities, 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 and our contractual business going forward, depending on the extent of such downgrade. See “Risk Factors—Macroeconomic, Industry and Financial Risks—Failure to maintain our credit ratings could adversely affect our liquidity, capital position, borrowing costs and access to capital markets, as well as our subscription based and other offerings.” in Item 1A, which is incorporated herein by reference. 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.
45
Table of Contents
HP INC. AND SUBSIDIARIES
Management’s Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
CONTRACTUAL AND OTHER OBLIGATIONS
Our contractual and other obligations as of October 31, 2024, were as follows:
| Payments Due by Period | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| Total | Short-term | Long-term | ||||||||
| In millions | ||||||||||
| Principal payments on debt(1) | $ | 9,717 | $ | 1,406 | $ | 8,311 | ||||
| Interest payments on debt(2) | 2,724 | 404 | 2,320 | |||||||
| Purchase obligations(3) | 1,366 | 896 | 470 | |||||||
| Operating lease obligations | 1,361 | 513 | 848 | |||||||
| Finance lease obligations | 31 | 13 | 18 | |||||||
| Total(4)(5)(6) | $ | 15,199 | $ | 3,232 | $ | 11,967 |
(1)Amounts represent the principal cash payments relating to our short-term and long-term debt and do not include any fair value adjustments, discounts or premiums.
(2)Amounts represent the expected interest payments relating to our short-term and long-term debt. We have outstanding interest rate swap agreements accounted for as fair value hedges that have the economic effect of changing fixed interest rates associated with some of our U.S. Dollar Global Notes to variable interest rates. The impact of our outstanding interest rate swaps as of October 31, 2024 was factored into the calculation of the future interest payments on debt.
(3)Purchase obligations include agreements to purchase goods or services that are enforceable and legally binding on us and that specify all significant terms, including fixed or minimum quantities to be purchased; fixed, minimum or variable price and volume provisions; and the approximate timing of the transaction. These purchase obligations are related principally to inventory and other items. Purchase obligations exclude agreements that are cancellable without penalty. Purchase obligations also exclude open purchase orders that are routine arrangements entered into in the ordinary course of business as they are difficult to quantify in a meaningful way. Even though open purchase orders are considered enforceable and legally binding, the terms generally allow us the option to cancel, reschedule, and adjust terms based on our business needs prior to the delivery of goods or performance of services.
(4)Retirement and Post-Retirement Benefit Plan Contributions. In fiscal year 2025, we expect to contribute approximately $36 million to our non-U.S. pension plans, $30 million to cover benefit payments to U.S. non-qualified pension plan participants and $4 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. Expected contributions and payments to our pension and post-retirement benefit plans are excluded from the contractual obligations table because they do not represent contractual cash outflows as they are dependent on numerous factors which may result in a wide range of outcomes. For more information on our retirement and post-retirement benefit plans, see Note 4, “Retirement and Post-Retirement Benefit Plans”, to the Consolidated Financial Statements in Item 8, which is incorporated herein by reference.
(5)Cost Savings Plans. As a result of our approved restructuring plans, we expect to make future cash payments of approximately $0.2 billion in the fiscal year 2025. For more information on our restructuring activities that are part of our cost improvements, see Note 3, “Restructuring and Other Charges”, to the Consolidated Financial Statements in Item 8, which is incorporated herein by reference.
(6)Uncertain Tax Positions. As of October 31, 2024, we had approximately $1.0 billion of recorded liabilities including 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 liabilities would result from settlements with taxing authorities. For more information on our uncertain tax positions, see Note 6, “Taxes on Earnings”, to the Consolidated Financial Statements in Item 8, which is incorporated herein by reference.
46
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 and HP. For more information on our third-party short-term financing arrangements, see Note 7 “Supplementary Financial Information” to the Consolidated Financial Statements in Item 8, which is incorporated herein by reference.
47
Table of Contents