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Rating Action:

Moody's assigns Baa2 rating to HP's proposed debt issuance; outlook stable

06 Jun 2022

New York, June 06, 2022 -- Moody's Investors Service ("Moody's") assigned a Baa2 senior unsecured rating to HP Inc.'s ("HP") proposed offering, the proceeds of which, together with other available funds, will be used to fund the pending $3.3 billion enterprise value acquisition of Plantronics, Inc, (Poly) and to repay Poly's existing term loan. The ratings outlook is stable.

Assignments:

..Issuer: HP Inc.

....Senior Unsecured Regular Bond/Debenture, Assigned Baa2

RATINGS RATIONALE

HP's Baa2 senior unsecured rating is supported by strong to leading market positions in printing and personal computers, global presence, and modest leverage that is supported by a strong liquidity profile. Balancing good demand with ongoing supply chain challenges and developing economic uncertainty, Moody's expects HP will generate 4% revenue growth in 2022 with stable-to-higher profit margins and strong cash flow. The company has significant scale, with projected revenue of about $66 billion and adjusted EBITDA of $6.5 billion this year. Despite these strengths, ongoing secular growth challenges in both the printing and PC markets will persist and will generally require market share gains or served available market expansion to grow revenue over the longer term. Moody's expects that despite effective execution and selectively targeting more profitable market segments of printing and PC's, supply chain challenges will keep adjusted EBITDA margins around 10% this year, essentially flat to 10.4% last year and 8.9% the year prior. Moody's expects HP will maintain a conservative financial policy with moderate leverage and excellent liquidity. Moody's projects adjusted gross debt to EBITDA will remain just over 2x, while free cash flow to adjusted gross debt exceeds 25% as HP generates over $3.5 billion in free cash flow after dividends in fiscal 2022.

Moody's expects that following the PC industry's strongest unit growth in a decade in 2021, worldwide market for PC units will decline in the mid-to-high single digits in 2022 due to ongoing component shortages, supply chain constraints, and developing economic uncertainty. Over time, a continuation of a work, learn and play from anywhere environment will drive steady demand. Despite total units being down 17% in the most recent quarter, HP's PC revenue grew 9% (the eighth consecutive quarter of year-over-year growth) due to pricing and higher commercial mix. PC segment operating margins of 7.4% for the trailing twelve months ended April 2022 have doubled from four years ago, reflecting steady execution in a variety of difficult operating environments.

The printing segment continues to show strong profitability with near record operating margins of 19.3%, above the company's 16% to 18% target range. As a result of component shortages and logistics disruptions, the COVID lockdown in China, and winding down operations in Russia ($1 billion of revenue in fiscal 2021), printing revenue declined 7% in the January quarter (up 2% on a trailing twelve-month basis).  Overall demand is solid, and backlog remains elevated, with strength from corporate, industrial, and 3D printing while consumer markets are softer.

HP maintains an excellent liquidity profile, with $4.5 billion of cash and access to an unused $5 billion unsecured revolving credit facility that matures in May 2026 that supports a similarly sized commercial paper program (zero outstanding as of April 2022). Moody's expects HP will generate around $3.5 billion of free cash flow after dividends in 2022.

The stable outlook reflects Moody's expectation that HP will maintain a conservative leverage profile and robust liquidity while the company generates 4% revenue growth in fiscal 2022 with EBITDA approximating $6.5 billion and free cash flow after dividends around $3.5 billion.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

Moody's would consider an upgrade to HP's ratings if HP is positioned to achieve and sustain revenue growth while maintaining or expanding profitability. Also, the company would need to sustain EBITDA margins above 10%, adjusted debt to EBITDA of less than 1.75x and free cash flow to adjusted debt in excess of 20% while maintaining conservative financial policies and robust liquidity.

Moody's would consider a downgrade to HP's rating if HP revenue sustains declines that are indicative of poor execution or competitive positioning, if the company fails to maintain EBITDA margins above 7%, or if HP adopts a more aggressive capital structure such that adjusted debt to EBITDA stays above 2.75x or free cash flow to adjusted debt falls below 15% for an extended period.

HP Inc. is the world's largest printer manufacturer and second largest personal computer maker. HP generated $65.4 billion of revenue for the twelve months ended April 2022.

The principal methodology used in these ratings was Diversified Technology published in February 2022 and available at https://ratings.moodys.com/api/rmc-documents/379525. Alternatively, please see the Rating Methodologies page on https://ratings.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found on https://ratings.moodys.com/rating-definitions.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the issuer/deal page for the respective issuer on https://ratings.moodys.com.

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Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://ratings.moodys.com/documents/PBC_1288235.

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Please see https://ratings.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the issuer/deal page on https://ratings.moodys.com for additional regulatory disclosures for each credit rating.

Richard J. Lane
Senior Vice President
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Lenny J. Ajzenman
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
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