Notes to Consolidated Condensed Financial Statements
(Unaudited)
Note 1: Basis of Presentati
on
Separation Transaction
On November 1, 2015, Hewlett-Packard Company completed the separation of Hewlett Packard Enterprise Company (“Hewlett Packard Enterprise”), Hewlett-Packard Company’s former enterprise technology infrastructure, software, services and financing businesses (the “Separation”). In connection with the Separation, Hewlett-Packard Company changed its name to HP Inc. (“HP”) and entered into a separation and distribution agreement as well as various other agreements with Hewlett Packard Enterprise that provide a framework for the relationships between the parties, including among others a tax matters agreement, an employee matters agreement, a transition service agreement, a real estate matters agreement, a master commercial agreement and an information technology service agreement. For more information on the impacts of these agreements, see Note 6, “Taxes on Earnings”, Note 7, “Supplementary Financial Information”, Note 13, “Litigation and Contingencies” and Note 14, “Guarantees, Indemnifications and Warranties”.
Basis of Presentation
The accompanying Consolidated Condensed Financial Statements of HP and its wholly-owned subsidiaries are prepared in conformity with United States (“U.S.”) generally accepted accounting principles (“GAAP”). The interim financial information is unaudited but reflects all normal adjustments that are necessary to provide a fair statement of results for the interim periods presented. This interim information should be read in conjunction with the Consolidated Condensed Financial Statements for the fiscal year ended October 31,
2017
in the Annual Report on Form 10-K, filed on December 14,
2017
. The Consolidated Condensed Balance Sheet for October 31,
2017
was derived from audited financial statements.
Principles of Consolidation
The Consolidated Condensed Financial Statements include the accounts of HP and its subsidiaries and affiliates in which HP has a controlling financial interest or is the primary beneficiary. All intercompany balances and transactions have been eliminated.
Reclassifications
HP implemented an organizational change to align its segment and business unit financial reporting more closely with its current business structure. HP reflected this change to its segment and business unit information in prior reporting periods on an as-if basis. The reporting changes had no impact on previously reported consolidated net revenue, earnings from operations, net earnings or net earnings per share (“EPS”). See Note 2, “Segment Information”, for a further discussion of HP’s segment and business unit realignments.
Use of Estimates
The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in HP’s Consolidated Condensed Financial Statements and accompanying notes. Actual results could differ materially from those estimates.
Recently Issued Accounting Pronouncements Not Yet Adopted
In February 2018, the Financial Accounting Standards Board (“FASB”) issued guidance, which eliminates the stranded tax effects in other comprehensive income resulting from the Tax Cuts and Jobs Act (the “TCJA”). Because the amendments only relate to the reclassification of the income tax effects of the TCJA, the underlying guidance that requires that the effect of a change in tax laws or rates be included in income from continuing operations is not affected. HP is required to adopt the guidance in the first quarter of fiscal year 2020. Earlier adoption is permitted. HP is currently evaluating the timing and the impact of this guidance on the Consolidated Condensed Financial Statements.
In August 2017, the FASB issued guidance, which amends the existing accounting standards for derivatives and hedging. The amendment improves the financial reporting of hedging relationships to better represent the economic results of an entity’s risk management activities in its financial statements and made certain targeted improvements to simplify the application of the hedge accounting guidance in current U.S. GAAP. HP is required to adopt the guidance in the first quarter of fiscal year 2020. Earlier adoption is permitted. HP is currently evaluating the timing and impact of this guidance on the Consolidated Condensed Financial Statements.
In January 2017, the FASB issued guidance, which amends the existing accounting standards for business combinations. The amendments clarify the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. HP is required to adopt the guidance in the first quarter of fiscal year 2019. Earlier adoption is permitted. HP currently expects to adopt this guidance early, in the fourth quarter of fiscal year 2018. HP expects that the implementation of this guidance will not have a material impact on its Consolidated Condensed Financial Statements.
HP INC. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements (Continued)
(Unaudited)
Note 1: Basis of Presentation (Continued)
In November 2016, the FASB issued guidance, which addresses the presentation of restricted cash in the statement of cash flows. The guidance requires entities to present the changes in the total of cash, cash equivalents, restricted cash, and restricted cash equivalents in the statement of cash flows. As a result, entities will no longer present transfers between cash and cash equivalents and restricted cash and restricted cash equivalents in the statement of cash flows. HP is required to adopt the guidance retrospectively in the first quarter of fiscal year 2019. Earlier adoption is permitted. HP will adopt this guidance in the first quarter of fiscal year 2019. HP expects that the implementation of this guidance will not have a material impact on its Consolidated Condensed Financial Statements.
In October 2016, the FASB issued guidance, which amends the existing accounting for Intra-Entity Transfers of Assets Other Than Inventory. The guidance requires an entity to recognize the income tax consequences of intra-entity transfers, other than inventory, when the transfer occurs. It also requires modified retrospective transition with a cumulative catch-up adjustment to opening retained earnings in the period of adoption. HP is required to adopt the guidance in the first quarter of fiscal year 2019. Earlier adoption is permitted. HP will adopt this guidance in the first quarter of fiscal year 2019. HP is currently evaluating the impact of this guidance on the Consolidated Condensed Financial Statements.
In August 2016, the FASB issued guidance, which amends the existing accounting standards for the classification of certain cash receipts and cash payments on the statement of cash flows. HP is required to adopt the guidance in the first quarter of fiscal year 2019. Earlier adoption is permitted. HP will adopt this guidance in the first quarter of fiscal year 2019. HP expects that the implementation of this guidance will not have a material impact on its Consolidated Condensed Financial Statements.
In June 2016, the FASB issued guidance, which requires credit losses on financial assets measured at amortized cost basis to be presented at the net amount expected to be collected, not based on incurred losses. Further, credit losses on available-for-sale debt securities should be recorded through an allowance for credit losses limited to the amount by which fair value is below amortized cost. HP is required to adopt the guidance in the first quarter of fiscal year 2021. Earlier adoption is permitted. HP is currently evaluating the timing and the impact of this guidance on the Consolidated Condensed Financial Statements.
In February 2016, the FASB issued guidance, which amends the existing accounting standards for leases. Consistent with current guidance, the recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee primarily will depend on its classification. Under the new guidance, a lessee will be required to recognize assets and liabilities for all leases with lease terms of more than twelve months. Under the current amendments, HP is required to adopt the guidance in the first quarter of fiscal year 2020 using a modified retrospective approach. Earlier adoption is permitted. HP is currently evaluating the timing and the impact of this guidance on the Consolidated Condensed Financial Statements.
In January 2016, the FASB issued guidance, which amends the existing accounting standards for the recognition and measurement of financial assets and financial liabilities. The guidance primarily addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. HP is required to adopt the guidance in the first quarter of fiscal year 2019. The amendments should be applied by means of a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption, with other amendments related specifically to equity securities without readily determinable fair values applied prospectively. Earlier adoption is permitted. HP will adopt this guidance in the first quarter of fiscal year 2019. HP expects that the implementation of this guidance will not have a material impact on its Consolidated Condensed Financial Statements.
In May 2014, the FASB issued guidance, which amends the existing accounting standards for revenue recognition. The amendments (Topic 606) are based on the principle that revenue should be recognized to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The amendments may be applied retrospectively to each prior period presented (“full retrospective method”) or retrospectively with the cumulative effect recognized as of the date of initial application (“modified retrospective method”). HP will adopt the new revenue standard in the first quarter of fiscal 2019 and intends to apply the modified retrospective method. Based on the initial assessment, it is not anticipated that the adoption will have a material impact on the amount or timing of revenue recognized in the Consolidated Condensed Financial Statements. We continue to make progress on assessing the overall impact of adoption of the standard on our business processes, systems and controls.
HP INC. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements (Continued)
(Unaudited)
Note 2. Segment Information
HP is a leading global provider of personal computing and other access devices, imaging and printing products, and related technologies, solutions and services. HP sells to individual consumers, small and medium-sized businesses (“SMBs”) and large enterprises, including customers in the government, health and education sectors.
HP’s operations are organized into
three
segments for financial reporting purposes: Personal Systems, Printing and Corporate Investments. HP’s organizational structure is based on a number of factors that the chief operating decision maker uses to evaluate, view and run its business operations, which include, but are not limited to, customer base and homogeneity of products and technology. The segments are based on this organizational structure and information reviewed by HP’s chief operating decision maker to evaluate segment results. The chief operating decision maker uses several metrics to evaluate the performance of the overall business, including earnings from operations, and uses these results to allocate resources to each of the segments.
A summary description of each segment is as follows:
Personal Systems
provides Commercial and Consumer desktop and notebook personal computers (“PCs”), workstations, thin clients, Commercial mobility devices, retail point-of-sale systems, displays and other related accessories, software, support and services for the commercial and consumer markets. HP groups Commercial notebooks, Commercial desktops, Commercial services, Commercial mobility devices, Commercial detachables and convertibles, Workstations, retail point-of-sale systems and thin clients into Commercial PCs and Consumer notebooks, Consumer desktops, Consumer services and Consumer detachables into Consumer PCs when describing performance in these markets. Described below are HP’s global business capabilities within Personal Systems:
|
|
•
|
Commercial PCs
are optimized for use by customers, including enterprise and SMBs, with a focus on robust designs, security, serviceability, connectivity, reliability and manageability in networked environments. Additionally, HP offers a range of services and solutions to enterprise and SMBs to help them manage the lifecycle of their PC and mobility installed base.
|
|
|
•
|
Consumer PCs
are optimized for consumer usage, focusing on multi-media consumption, online browsing, gaming and light productivity.
|
Personal Systems groups its global business capabilities into Notebooks, Desktops, Workstations and Other when reporting business performance.
|
|
•
|
Notebooks
consists of Consumer notebooks, Commercial notebooks, Mobile workstations and Commercial mobility devices;
|
|
|
•
|
Desktops
includes Consumer desktops, Commercial desktops, thin clients, and retail point-of-sale systems;
|
|
|
•
|
Workstations
consists of Desktop Workstations and accessories; and
|
|
|
•
|
Other
consists of Consumer and Commercial services as well as other Personal Systems capabilities.
|
Printing
provides Consumer and Commercial printer hardware, Supplies, solutions and services, as well as scanning devices. Printing is also focused on imaging solutions in the commercial markets. Described below are HP’s global business capabilities within Printing:
|
|
•
|
Office Printing Solutions
delivers HP’s office printers, supplies, services, and solutions to SMBs and large enterprises. It also includes Samsung Electronics Co., Ltd (“Samsung”)-branded and Original Equipment Manufacturer (“OEM”) hardware, supplies and solutions. HP goes to market through its extensive channel network and directly with HP sales. Ongoing key initiatives include design and deployment of A3 products and solutions for the copier and multifunction printer market, printer security solutions, PageWide solutions and award-winning JetIntelligence LaserJet products.
|
|
|
•
|
Home Printing Solution
s delivers innovative printing products and solutions for the home and home business or small office customers utilizing both HP’s Ink and Laser technologies. Initiatives such as Instant Ink and Continuous Ink Supply System provide business model innovation to benefit and expand HP’s existing customer base, while new innovations like Photo Lifestyle products drive print relevance for a mobile generation.
|
|
|
•
|
Graphics Solutions
delivers
large-format, commercial and industrial solutions to print service providers and packaging converters through the largest portfolio of printers and presses (HP DesignJet, HP Latex, HP Scitex, HP Indigo and HP PageWide Web Presses).
|
|
|
•
|
3D Printing
delivers HP’s Multi-Jet Fusion 3D Printing Solution designed for prototyping and production of functional parts and functioning on an open platform facilitating the development of new 3D printing materials.
|
Printing groups its global business capabilities into the following business units when reporting business performance:
HP INC. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements (Continued)
(Unaudited)
Note 2: Segment Information (Continued)
|
|
•
|
Commercial Hardware
consists of Office Printing Solutions, Graphics Solutions and 3D Printing, excluding supplies;
|
|
|
•
|
Consumer Hardware
includes Home Printing Solutions, excluding supplies; and
|
|
|
•
|
Supplies
comprises a set of highly innovative consumable products, ranging from Ink and Laser cartridges to media, graphics supplies, 3D Printing supplies and Samsung-branded A4 and A3 supplies and OEM supplies, for recurring use in Consumer and Commercial Hardware.
|
Corporate Investments
includes HP Labs and certain business incubation projects.
The accounting policies HP uses to derive segment results are substantially the same as those used in preparing these financial statements. HP derives the results of the business segments directly from its internal management reporting system.
HP does not allocate certain operating expenses, which it manages at the corporate level, to its segments. These unallocated amounts include certain corporate governance costs and market-related retirement credits, stock-based compensation expense, restructuring and other charges, acquisition-related charges, amortization of intangible assets, defined benefit plan settlement charges.
Realignment
Effective at the beginning of its first quarter of fiscal year 2018, HP implemented an organizational change to align its segment and business unit financial reporting more closely with its current business structure. The organizational change resulted in the transfer of long life consumables from Commercial to Supplies within the Printing segment. Certain revenues related to service arrangements, which are being eliminated for the purposes of reporting HP’s consolidated net revenue, have now been reclassified from Other to segments. HP has reflected this change to its segment and business unit information in prior reporting periods on an as-if basis. The reporting change had no impact on previously reported consolidated net revenue, earnings from operations, net earnings or net earnings per share.
Segment Operating Results from Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Personal
Systems
|
|
Printing
|
|
Corporate
Investments
|
|
Total
Segments
|
|
Other
|
|
Total
|
|
In millions
|
Three months ended April 30, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
$
|
8,762
|
|
|
$
|
5,241
|
|
|
$
|
1
|
|
|
$
|
14,004
|
|
|
$
|
(1
|
)
|
|
$
|
14,003
|
|
Earnings (loss) from operations
|
$
|
331
|
|
|
$
|
839
|
|
|
$
|
(21
|
)
|
|
$
|
1,149
|
|
|
|
|
|
|
|
Three months ended April 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
$
|
7,653
|
|
|
$
|
4,728
|
|
|
$
|
3
|
|
|
$
|
12,384
|
|
|
$
|
1
|
|
|
$
|
12,385
|
|
Earnings (loss) from operations
|
$
|
244
|
|
|
$
|
820
|
|
|
$
|
(26
|
)
|
|
$
|
1,038
|
|
|
|
|
|
|
|
Six months ended April 30, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
$
|
18,202
|
|
|
$
|
10,317
|
|
|
$
|
2
|
|
|
$
|
28,521
|
|
|
$
|
(1
|
)
|
|
$
|
28,520
|
|
Earnings (loss) from operations
|
$
|
668
|
|
|
$
|
1,640
|
|
|
$
|
(40
|
)
|
|
$
|
2,268
|
|
|
|
|
|
|
|
Six months ended April 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
$
|
15,869
|
|
|
$
|
9,192
|
|
|
$
|
5
|
|
|
$
|
25,066
|
|
|
$
|
3
|
|
|
$
|
25,069
|
|
Earnings (loss) from operations
|
$
|
556
|
|
|
$
|
1,534
|
|
|
$
|
(49
|
)
|
|
$
|
2,041
|
|
|
|
|
|
|
|
The reconciliation of segment operating results to HP consolidated results was as follows:
HP INC. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements (Continued)
(Unaudited)
Note 2: Segment Information (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended April 30
|
|
Six months ended April 30
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
In millions
|
Net Revenue:
|
|
|
|
|
Total segments
|
$
|
14,004
|
|
|
$
|
12,384
|
|
|
$
|
28,521
|
|
|
$
|
25,066
|
|
Other
|
(1
|
)
|
|
1
|
|
|
(1
|
)
|
|
3
|
|
Total net revenue
|
$
|
14,003
|
|
|
$
|
12,385
|
|
|
$
|
28,520
|
|
|
$
|
25,069
|
|
Earnings before taxes:
|
|
|
|
|
|
|
|
|
|
Total segment earnings from operations
|
$
|
1,149
|
|
|
$
|
1,038
|
|
|
$
|
2,268
|
|
|
$
|
2,041
|
|
Corporate and unallocated costs and other
|
—
|
|
|
(11
|
)
|
|
32
|
|
|
(4
|
)
|
Stock-based compensation expense
|
(63
|
)
|
|
(48
|
)
|
|
(148
|
)
|
|
(123
|
)
|
Restructuring and other charges
|
(57
|
)
|
|
(140
|
)
|
|
(88
|
)
|
|
(203
|
)
|
Acquisition-related charges
|
(45
|
)
|
|
(20
|
)
|
|
(87
|
)
|
|
(36
|
)
|
Amortization of intangible assets
|
(20
|
)
|
|
(1
|
)
|
|
(40
|
)
|
|
(1
|
)
|
Interest and other, net
|
(881
|
)
|
|
(64
|
)
|
|
(949
|
)
|
|
(145
|
)
|
Total earnings before taxes
|
$
|
83
|
|
|
$
|
754
|
|
|
$
|
988
|
|
|
$
|
1,529
|
|
Net revenue by segment and business unit was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended April 30
|
|
Six months ended April 30
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
In millions
|
Notebooks
|
$
|
5,153
|
|
|
$
|
4,493
|
|
|
$
|
10,748
|
|
|
$
|
9,383
|
|
Desktops
|
2,752
|
|
|
2,377
|
|
|
5,707
|
|
|
4,911
|
|
Workstations
|
538
|
|
|
495
|
|
|
1,081
|
|
|
986
|
|
Other
|
319
|
|
|
288
|
|
|
666
|
|
|
589
|
|
Personal Systems
|
8,762
|
|
|
7,653
|
|
|
18,202
|
|
|
15,869
|
|
Supplies
|
3,434
|
|
|
3,188
|
|
|
6,785
|
|
|
6,223
|
|
Commercial Hardware
|
1,186
|
|
|
936
|
|
|
2,256
|
|
|
1,775
|
|
Consumer Hardware
|
621
|
|
|
604
|
|
|
1,276
|
|
|
1,194
|
|
Printing
|
5,241
|
|
|
4,728
|
|
|
10,317
|
|
|
9,192
|
|
Corporate Investments
|
1
|
|
|
3
|
|
|
2
|
|
|
5
|
|
Total segment net revenue
|
14,004
|
|
|
12,384
|
|
|
28,521
|
|
|
25,066
|
|
Other
|
(1
|
)
|
|
1
|
|
|
(1
|
)
|
|
3
|
|
Total net revenue
|
$
|
14,003
|
|
|
$
|
12,385
|
|
|
$
|
28,520
|
|
|
$
|
25,069
|
|
Note 3: Restructuring and Other Charges
Summary of Restructuring Plans
HP’s restructuring activities for the six months ended April 30, 2018 and 2017 summarized by the plans outlined below were as follows:
HP INC. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements (Continued)
(Unaudited)
Note 3: Restructuring and Other Charges (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2017 Plan
|
|
Fiscal 2015 Plan
|
|
Fiscal 2012 Plan
|
|
|
|
Severance
|
|
Infrastructure and other
(1)
|
|
Severance and PRP
(2)
|
|
Infrastructure and other
|
|
Severance and EER
(3)
|
|
Infrastructure and other
|
|
Total
|
|
In millions
|
|
|
Accrued balance as of October 31, 2017
|
$
|
76
|
|
|
$
|
19
|
|
|
$
|
6
|
|
|
$
|
2
|
|
|
$
|
3
|
|
|
$
|
2
|
|
|
$
|
108
|
|
Charges
|
52
|
|
|
12
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
64
|
|
Cash payments
|
(86
|
)
|
|
(31
|
)
|
|
(1
|
)
|
|
(2
|
)
|
|
—
|
|
|
—
|
|
|
(120
|
)
|
Non-cash and other adjustments
|
—
|
|
|
—
|
|
|
1
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1
|
|
Accrued balance as of April 30, 2018
|
$
|
42
|
|
|
$
|
—
|
|
|
$
|
6
|
|
|
$
|
—
|
|
|
$
|
3
|
|
|
$
|
2
|
|
|
$
|
53
|
|
Total costs incurred to date as of April 30, 2018
|
$
|
193
|
|
|
$
|
106
|
|
|
$
|
171
|
|
|
$
|
27
|
|
|
$
|
1,075
|
|
|
$
|
44
|
|
|
$
|
1,616
|
|
Reflected in Consolidated Condensed Balance Sheets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other accrued liabilities
|
$
|
42
|
|
|
$
|
—
|
|
|
$
|
6
|
|
|
$
|
—
|
|
|
$
|
3
|
|
|
$
|
1
|
|
|
$
|
52
|
|
Other non-current liabilities
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1
|
|
|
1
|
|
Accrued balance as of October 31, 2016
|
$
|
24
|
|
|
$
|
—
|
|
|
$
|
21
|
|
|
$
|
4
|
|
|
$
|
7
|
|
|
$
|
2
|
|
|
$
|
58
|
|
Charges
|
81
|
|
|
58
|
|
|
10
|
|
|
—
|
|
|
1
|
|
|
—
|
|
|
150
|
|
Cash payments
|
(20
|
)
|
|
(4
|
)
|
|
(31
|
)
|
|
(2
|
)
|
|
(3
|
)
|
|
—
|
|
|
(60
|
)
|
Non-cash and other adjustments
|
—
|
|
|
(52
|
)
|
|
1
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(51
|
)
|
Accrued balance as of April 30, 2017
|
$
|
85
|
|
|
$
|
2
|
|
|
$
|
1
|
|
|
$
|
2
|
|
|
$
|
5
|
|
|
$
|
2
|
|
|
$
|
97
|
|
HP’s restructuring charges for the three months ended April 30, 2018 summarized by the plans outlined below were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2017 Plan
|
|
Fiscal 2015 Plan
|
|
Fiscal 2012 Plan
|
|
|
|
Severance
|
|
Infrastructure and other
|
|
Severance and PRP
(2)
|
|
Infrastructure and other
|
|
Severance and EER
(3)
|
|
Infrastructure and other
|
|
Total
|
|
In millions
|
|
|
For the three months ended April 30, 2018
|
$
|
40
|
|
|
$
|
6
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
46
|
|
|
|
(1)
|
Infrastructure and other includes asset impairment charges of
$52 million
for the three and six months ended April 30, 2017 associated with the consolidation of manufacturing into global hubs.
|
|
|
(2)
|
PRP represents Phased Retirement Program.
|
|
|
(3)
|
EER represents Enhanced Early Retirement.
|
Fiscal 2017 Plan
On October 10, 2016, HP’s Board of Directors approved a restructuring plan (the “Fiscal 2017 Plan”), which it had expected would be implemented through fiscal year 2019. HP estimated that it would incur aggregate pre-tax charges of approximately
$500 million
relating to labor and non-labor actions. HP expected around
4,000
employees to exit by the end of fiscal year 2019.
On May 26, 2018, HP’s Board of Directors approved amending the Fiscal 2017 Plan. HP now expects approximately
4,500
to
5,000
employees to exit by the end of fiscal year 2019, subject to certain jurisdictional labor law requirements. HP estimates that it will now incur aggregate pre-tax charges of approximately
$700 million
relating to labor and non-labor actions. HP estimates that approximately half of the expected cumulative pre-tax costs will relate to severance and the remaining costs will relate to infrastructure, non-labor actions and other charges.
Fiscal 2015 Plan
In connection with the Separation, on September 14, 2015, HP’s Board of Directors approved a cost savings plan (the “Fiscal 2015 Plan”), which includes labor and non-labor actions. The Fiscal 2015 Plan was considered substantially complete as of October 31, 2016 and HP does not expect any further activity associated with this plan.
Fiscal 2012 Plan
HP initiated a restructuring plan in fiscal year 2012 (the “Fiscal 2012 Plan”), which includes severance and infrastructure costs. The Fiscal 2012 Plan was considered substantially complete as of October 31, 2016 and HP does not expect any further activity associated with this plan.
HP INC. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements (Continued)
(Unaudited)
Note 3: Restructuring and Other Charges (Continued)
Other Charges
Other charges include non-recurring costs, including those as a result of Separation, and are distinct from ongoing operational costs. These costs primarily relate to information technology costs such as advisory, consulting and non-recurring labor costs. For the three and six months ended
April 30, 2018
, HP incurred
$11 million
and
$24 million
of other charges, respectively. For the three and six months ended
April 30, 2017
, HP incurred
$22 million
and
$53 million
of other charges, respectively.
Note 4: Retirement and Post-Retirement Benefit Plans
The components of HP’s pension and post-retirement benefit (credit) cost recognized in the Consolidated Condensed Statements of Earnings were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended April 30
|
|
U.S. Defined Benefit Plans
|
|
Non-U.S. Defined Benefit Plans
|
|
Post-Retirement Benefit Plans
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
In millions
|
Service cost
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
14
|
|
|
$
|
12
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Interest cost
|
113
|
|
|
117
|
|
|
6
|
|
|
4
|
|
|
4
|
|
|
5
|
|
Expected return on plan assets
|
(179
|
)
|
|
(170
|
)
|
|
(10
|
)
|
|
(8
|
)
|
|
(6
|
)
|
|
(6
|
)
|
Amortization and deferrals:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actuarial loss (gain)
|
16
|
|
|
18
|
|
|
7
|
|
|
10
|
|
|
(4
|
)
|
|
(5
|
)
|
Prior service benefit
|
—
|
|
|
—
|
|
|
(1
|
)
|
|
(1
|
)
|
|
(5
|
)
|
|
(5
|
)
|
Net periodic (credit) benefit cost
|
(50
|
)
|
|
(35
|
)
|
|
16
|
|
|
17
|
|
|
(11
|
)
|
|
(11
|
)
|
Settlement loss
|
—
|
|
|
3
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total periodic (credit) benefit cost
|
$
|
(50
|
)
|
|
$
|
(32
|
)
|
|
$
|
16
|
|
|
$
|
17
|
|
|
$
|
(11
|
)
|
|
$
|
(11
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended April 30
|
|
U.S. Defined Benefit Plans
|
|
Non-U.S. Defined Benefit Plans
|
|
Post- Retirement Benefit Plans
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
In millions
|
Service cost
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
28
|
|
|
$
|
24
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Interest cost
|
226
|
|
|
234
|
|
|
12
|
|
|
8
|
|
|
8
|
|
|
9
|
|
Expected return on plan assets
|
(360
|
)
|
|
(339
|
)
|
|
(20
|
)
|
|
(16
|
)
|
|
(12
|
)
|
|
(12
|
)
|
Amortization and deferrals:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actuarial loss (gain)
|
31
|
|
|
36
|
|
|
14
|
|
|
20
|
|
|
(8
|
)
|
|
(7
|
)
|
Prior service benefit
|
—
|
|
|
—
|
|
|
(2
|
)
|
|
(2
|
)
|
|
(10
|
)
|
|
(10
|
)
|
Net periodic benefit (credit) cost
|
(103
|
)
|
|
(69
|
)
|
|
32
|
|
|
34
|
|
|
(22
|
)
|
|
(20
|
)
|
Settlement loss
|
1
|
|
|
3
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total periodic benefit (credit) cost
|
$
|
(102
|
)
|
|
$
|
(66
|
)
|
|
$
|
32
|
|
|
$
|
34
|
|
|
$
|
(22
|
)
|
|
$
|
(20
|
)
|
Employer Contributions and Funding Policy
HP’s policy is to fund its pension plans so that it makes at least the minimum contribution required by local government, funding and taxing authorities.
During fiscal year
2018
, HP anticipates making contributions of approximately
$33 million
to its non-U.S. pension plans, including an increase of
$9 million
related to the acquisition of Samsung’s printer business, approximately
$33 million
to its U.S. non-qualified plan participants and approximately
$7 million
to cover benefit claims under HP’s post-retirement benefit plans. During the
six
months ended
April 30, 2018
, HP contributed
$16 million
to its non-U.S. pension plans and paid
$20 million
to cover benefit payments to U.S. non-qualified plan participants.
HP INC. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements (Continued)
(Unaudited)
Note 4: Retirement and Post-Retirement Benefit Plans (Continued)
HP’s pension and other post-retirement benefit costs and obligations depend on various assumptions. Differences between expected and actual returns on investments and changes in discount rates and other actuarial assumptions are reflected as unrecognized gains or losses, and such gains or losses are amortized to earnings in future periods. A deterioration in the funded status of a plan could result in a need for additional company contributions or an increase in net pension and post-retirement benefit costs in future periods. Actuarial gains or losses are determined at the measurement date and amortized over the remaining service life for active plans or the life expectancy of plan participants for frozen plans.
Note 5: Stock-Based Compensation
HP’s stock-based compensation plans permit the issuance of restricted stock awards, stock options and performance-based awards.
Stock-based compensation expense and the resulting tax benefits were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended April 30
|
|
Six months ended April 30
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
In millions
|
Stock-based compensation expense
|
$
|
63
|
|
|
$
|
48
|
|
|
$
|
148
|
|
|
$
|
123
|
|
Income tax benefit
|
(14
|
)
|
|
(15
|
)
|
|
(33
|
)
|
|
(39
|
)
|
Stock-based compensation expense, net of tax
|
$
|
49
|
|
|
$
|
33
|
|
|
$
|
115
|
|
|
$
|
84
|
|
Restricted Stock Awards
Restricted stock awards are non-vested stock awards that may include grants of restricted stock or restricted stock units. For the
three and six
months ended
April 30, 2018
and
2017
, HP granted only restricted stock units. HP uses the closing stock price on the grant date to estimate the fair value of service-based restricted stock units. HP did not grant any restricted stock units subject to performance-adjusted vesting conditions for the three months ended April 30, 2018 and 2017. HP estimates the fair value of restricted stock units subject to performance-adjusted vesting conditions using a combination of the closing stock price on the grant date and a Monte Carlo simulation model. The weighted-average fair value and the assumptions used to measure the fair value of restricted stock units subject to performance-adjusted vesting conditions in the Monte Carlo simulation model were as follows:
|
|
|
|
|
|
|
|
|
|
Six months ended April 30
|
|
2018
|
|
2017
|
Weighted-average fair value
(1)
|
$
|
24
|
|
|
$
|
20
|
|
Expected volatility
(2)
|
29.8
|
%
|
|
30.5
|
%
|
Risk-free interest rate
(3)
|
1.9
|
%
|
|
1.4
|
%
|
Expected performance period in years
(4)
|
2.9
|
|
|
2.9
|
|
|
|
(1)
|
The weighted-average fair value was based on performance-adjusted restricted stock units granted during the period.
|
|
|
(2)
|
The expected volatility was estimated using the historical volatility derived from HP’s common stock.
|
|
|
(3)
|
The risk-free interest rate was estimated based on the yield on U.S. Treasury zero-coupon issues.
|
|
|
(4)
|
The expected performance period was estimated based on the length of the remaining performance period from the grant date.
|
HP INC. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements (Continued)
(Unaudited)
Note 5: Stock-Based Compensation (Continued)
A summary of restricted stock unit activity was as follows:
|
|
|
|
|
|
|
|
|
Six months ended April 30, 2018
|
|
Shares
|
|
Weighted-Average
Grant Date Fair Value
Per Share
|
|
In thousands
|
|
|
Outstanding at beginning of period
|
31,822
|
|
|
$
|
14
|
|
Granted
|
13,862
|
|
|
$
|
21
|
|
Vested
|
(13,706
|
)
|
|
$
|
14
|
|
Forfeited
|
(577
|
)
|
|
$
|
17
|
|
Outstanding at end of period
|
31,401
|
|
|
$
|
17
|
|
As of
April 30, 2018
, there was
$282 million
of unrecognized pre-tax stock-based compensation expense related to non-vested restricted stock units, which HP expects to recognize over the remaining weighted-average vesting period of
1.4
years.
Stock Options
HP utilizes the Black-Scholes-Merton option pricing model to estimate the fair value of stock options subject to service-based vesting conditions. HP estimates the fair value of stock options subject to performance-contingent vesting conditions using a combination of a Monte Carlo simulation model and a lattice model, as these awards contain market conditions. HP did not grant any stock options for the three and six months ended April 30, 2017. The weighted-average fair value and the assumptions used to measure the fair value of stock options for the three and six months ended April 30, 2018 were as follows:
|
|
|
|
|
|
|
|
|
|
Three months ended April 30, 2018
|
|
Six months ended April 30, 2018
|
Weighted-average fair value
(1)
|
$
|
5
|
|
|
$
|
5
|
|
Expected volatility
(2)
|
29.4
|
%
|
|
29.4
|
%
|
Risk-free interest rate
(3)
|
2.5
|
%
|
|
2.5
|
%
|
Expected dividend yield
(4)
|
2.6
|
%
|
|
2.6
|
%
|
Expected term in years
(5)
|
5
|
|
|
5
|
|
|
|
(1)
|
The weighted-average fair value was based on stock options granted during the period.
|
|
|
(2)
|
The expected volatility was estimated based on a blended volatility (
50%
historical volatility and
50%
implied volatility from traded options on HP's common stock).
|
|
|
(3)
|
The risk-free interest rate was estimated based on the yield on U.S. Treasury zero-coupon issues.
|
|
|
(4)
|
The expected dividend yield represents a constant dividend yield applied for the duration of the expected term of the award.
|
|
|
(5)
|
Due to the lack of historical exercise and post-vesting termination patterns of the post-Separation employee base, the expected term was estimated using the simplified method; and for the performance-contingent awards, the expected term represents an output from the lattice model.
|
HP INC. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements (Continued)
(Unaudited)
Note 5: Stock-Based Compensation (Continued)
A summary of stock option activity was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended April 30, 2018
|
|
Shares
|
|
Weighted-
Average
Exercise Price
|
|
Weighted-
Average
Remaining
Contractual
Term
|
|
Aggregate
Intrinsic Value
|
|
In thousands
|
|
|
|
In years
|
|
In millions
|
Outstanding at beginning of period
|
18,067
|
|
|
$
|
13
|
|
|
|
|
|
|
Granted
|
54
|
|
|
$
|
21
|
|
|
|
|
|
|
Exercised
|
(6,942
|
)
|
|
$
|
12
|
|
|
|
|
|
|
Forfeited and expired
|
(110
|
)
|
|
$
|
22
|
|
|
|
|
|
|
Outstanding at end of period
|
11,069
|
|
|
$
|
14
|
|
|
4.4
|
|
$
|
87
|
|
Vested and expected to vest
|
10,973
|
|
|
$
|
14
|
|
|
4.4
|
|
$
|
86
|
|
Exercisable
|
7,603
|
|
|
$
|
13
|
|
|
4.0
|
|
$
|
62
|
|
The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value that option holders would have realized had all option holders exercised their options on the last trading day of the
second
quarter of fiscal year
2018
. The aggregate intrinsic value is the difference between HP’s closing stock price on the last trading day of the
second
quarter of fiscal year
2018
and the exercise price, multiplied by the number of in-the-money options. The total intrinsic value of options exercised for the
three and six
months ended
April 30, 2018
was
$40 million
and
$70 million
respectively.
As of
April 30, 2018
, there was
$3 million
of unrecognized pre-tax, stock-based compensation expense related to unvested stock options, which HP expects to recognize over the remaining weighted-average vesting period of
0.4
years.
In January 2018, the Board approved an amendment and restatement of HP’s 2004 Stock Incentive Plan, which included retiring
80 million
shares from the plan’s share reserves.
Note 6: Taxes on Earnings
Tax Matters Agreement and Other Income Tax Matters
In connection with the Separation, HP entered into the tax matters agreement (“TMA”) with Hewlett Packard Enterprise, effective on November 1, 2015. The TMA provides that HP and Hewlett Packard Enterprise will share certain pre-Separation income tax liabilities. In addition, if the distribution of Hewlett Packard Enterprise’s common shares to the HP stockholders is determined to be taxable, Hewlett Packard Enterprise and HP would share the tax liability equally, unless the taxability of the distribution is the direct result of action taken by either Hewlett Packard Enterprise or HP subsequent to the distribution, in which case the party causing the distribution to be taxable would be responsible for any taxes imposed on the distribution.
HP records income tax indemnification receivables from various third parties for certain income tax liabilities that HP is jointly and severally liable for, but for which it is indemnified by those same third parties under existing legal agreements. The actual amount that the third parties pay may be obligated to pay HP could vary depending on the outcome of certain unresolved tax matters, which may not be resolved for several years. The net receivable as of
April 30, 2018
was
$898 million
.
Provision for Taxes
On December 22, 2017, the TCJA was signed by the President of the United States and enacted into law. The law includes significant changes to the U.S. corporate income tax system, including a federal corporate rate reduction from
35%
to
21%
, limitations on the deductibility of interest expense and executive compensation, and the transition of U.S. international taxation from a worldwide tax system to a territorial tax system. ASC 740, Accounting for Income Taxes, requires companies to recognize the effect of tax law changes in the period of enactment even though the effective date for most provisions is for tax years beginning after December 31, 2017 (the “Effective Date”), or in the case of certain other provisions,
January 1, 2018
.
HP INC. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements (Continued)
(Unaudited)
Note 6: Taxes on Earnings (Continued)
When a U.S. federal tax rate change occurs during a fiscal year, taxpayers are required to compute a weighted daily average rate for the fiscal year of enactment. As a result of the TCJA, HP has calculated a blended U.S. federal statutory corporate income tax rate of
23%
for the fiscal year ending October 31, 2018 and applied this rate in computing the first and second quarters’ income tax provision for fiscal year
2018
. The blended U.S. federal statutory corporate income tax rate of
23%
is the weighted daily average rate between the pre-enactment U.S. federal statutory tax rate of
35%
applicable to HP’s 2018 fiscal year prior to the Effective Date and the post-enactment U.S. federal statutory tax rate of
21%
applicable to the 2018 fiscal year thereafter. HP expects the U.S. federal statutory rate to be
21%
for fiscal years beginning after October 31, 2018.
Given the significance of the legislation, the SEC staff issued Staff Accounting Bulletin No. 118 (SAB 118), which allows registrants to record provisional amounts during a one year “measurement period”. During the measurement period, impacts of the TCJA are expected to be recorded at the time a reasonable estimate for all or a portion of the effects can be made, and provisional amounts can be recognized and adjusted as information becomes available, prepared or analyzed.
SAB 118 summarizes a three-step process to be applied at each reporting period to account for and qualitatively disclose: (1) the effects of the change in tax law for which accounting is complete; (2) provisional amounts (or adjustments to provisional amounts) for the effects of the tax law where accounting is not complete, but that a reasonable estimate has been determined; and (3) a reasonable estimate cannot yet be made and therefore taxes are reflected in accordance with law prior to the enactment of the TCJA.
As of
April 30, 2018
, HP has not completed its accounting for the tax effects of the TCJA, however, in certain cases HP has made a reasonable estimate of the effects for remeasurement on its existing deferred tax balances and the one-time transition tax. With respect to the Global Intangible Low Taxed Income (“Global Minimum Tax”) provisions, further discussed below, HP has not been able to make a reasonable estimate and continues to account for this item based on its existing accounting under ASC 740, Income Taxes, and the provisions of the tax laws that were in effect immediately prior to enactment. The impact of the TCJA may differ materially from this estimate due to changes in interpretations and assumptions HP has made, additional guidance that may be issued and actions HP may take as a result of the TCJA. The impacts of HP's estimates are described further below.
While HP has not yet completed its analysis to the impact on its deferred tax balances, for the three months ended January 31, 2018, HP recorded provisional income tax expense of
$1.2 billion
related to the remeasurement of its deferred tax assets and liabilities at the new statutory rate. In addition, for the three months ended April 30, 2018, due to additional information and a subsequent refinement of its analysis HP recorded provisional tax expense of
$379 million
related to remeasurement of its U.S. deferred tax assets that are expected to be realized at a lower rate by recording a valuation allowance. HP is still analyzing certain aspects of the TCJA and refining its calculations, which could potentially affect the measurement of these balances or potentially give rise to new deferred tax amounts.
The TCJA also includes a one-time mandatory deemed repatriation transition tax on the net accumulated post-1986 earnings and profits (“E&P”) of a U.S. taxpayer’s foreign subsidiaries. HP has computed a provisional deemed repatriation tax of approximately
$3.1 billion
, of which more than half is expected to be offset with existing and future tax attributes, reducing HP’s cash outlay. Companies may elect to pay this tax over 8 years, and HP intends to make this election. HP has not yet completed its calculation of the total post-1986 E&P for its foreign subsidiaries. Further, the transition tax is based, in part, on the amount of those earnings held in cash and other specified assets. This amount may change when HP finalizes the calculation of post-1986 E&P previously deferred from U.S. federal taxation and finalizes the amounts held in cash or other specified assets. No additional income taxes have been provided for any remaining undistributed foreign earnings not subject to the transition tax, or any additional outside basis difference inherent in these entities, as these amounts continue to be indefinitely reinvested in foreign operations.
As a result of the deemed repatriation tax noted above, which is based on HP’s total post-1986 deferred foreign income, HP redetermined
$5.5 billion
of its U.S. deferred tax liability on those unremitted earnings with a provisional tax payable of
$3.1 billion
, as noted above. This resulted in a net benefit. This tax benefit is provisional as HP is still analyzing certain aspects of the legislation and refining calculations, which could potentially materially affect the measurement of these amounts.
Upon further analysis of certain aspects of the TCJA and refinement of the calculations during the three months ended April 30, 2018, HP adjusted the provisional tax payable by recording a tax expense of
$336 million
primarily comprised of a tax expense of
$379 million
for reduction to its deferred tax assets and a tax benefit of
$43 million
as an adjustment to the provisional deemed repatriation tax amount due to further analysis and additional guidance. During the three months ended April 30, 2018, HP remeasured its deferred taxes to reflect the reduced rate that will apply when these deferred taxes are settled or realized in future periods. HP has not yet completed the accounting for the remeasurement of deferred taxes. To calculate the remeasurement of deferred taxes, HP has estimated when the existing deferred taxes will be settled or realized. The
HP INC. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements (Continued)
(Unaudited)
Note 6: Taxes on Earnings (Continued)
remeasurement of deferred taxes included in the financial statements will be subject to further revisions if the current estimates are different from the actual future operating results.
In January 2018, the FASB released guidance on the accounting for tax on the Global Minimum Tax provisions of TCJA. The Global Minimum Tax provisions impose a tax on foreign income in excess of a deemed return on tangible assets of foreign corporations. The guidance indicates that either accounting for deferred taxes related to Global Minimum Tax inclusions or to treat any taxes on Global Minimum Tax inclusions as period cost are both acceptable methods subject to an accounting policy election. HP is still evaluating whether to make a policy election to treat the Global Minimum Tax as a period cost or to provide U.S. deferred taxes on foreign temporary differences that are expected to generate Global Minimum Tax income when they reverse in future years. There could be additional changes to HP's deferred taxes once it completes its evaluations.
As a result of U.S. tax reform, HP revised its estimated annual effective tax rate to reflect the change in the U.S. federal statutory tax rate from
35%
to
21%
. Since HP has a fiscal year ending October 31, it is subject to transitional tax rate rules. Therefore, a blended rate of
23%
was computed as effective for the current fiscal year. HP’s effective tax rate was (
1,162%
) and
25.9%
for the three months ended
April 30, 2018
and
2017
, respectively, and (
203%
) and
23.5%
for the six months ended April 30, 2018 and April 30, 2017, respectively. The difference between the current fiscal year blended U.S. federal statutory tax rate of
23%
and HP’s effective tax rate for the three and six months ended April 30, 2018 is primarily due to transitional impacts of U.S. tax reform and resolution of various audits and tax litigation, partially offset by favorable tax rates associated with certain earnings from HP’s operations in lower-tax jurisdictions throughout the world. For the three and six months ended
April 30, 2017
HP’s effective tax rate generally differs from the U.S. federal statutory rate of
35%
due to favorable tax rates associated with certain earnings from HP’s operations in lower-tax jurisdictions throughout the world. HP has not provided U.S. taxes for all foreign earnings because HP plans to reinvest some of those earnings indefinitely outside the United States.
During the three and six months ended April 30, 2018, HP recorded
$1.1 billion
and
$2.2 billion
, respectively, of net tax benefits related to discrete items in the provision for taxes. As noted above, HP has not yet completed its analysis of the full impact of TCJA. However, for the three months ended January 31, 2018, HP recorded a provisional tax benefit of
$1.1 billion
related to
$5.5 billion
net benefit for the decrease in our deferred tax liability on unremitted foreign earnings, partially offset by
$3.2 billion
net expense for the deemed repatriation tax payable in installments over
eight years
and
$1.2 billion
net expense for remeasurement of its deferred tax assets and liabilities for the remeasurement of its deferred assets and liabilities to the new U.S. statutory tax rate. In addition, for the three months ended April 30, 2018, HP recorded provisional tax expense of
$379 million
related to remeasurement of its U.S. deferred tax assets that are expected to be realized at a lower rate and a
$43 million
tax benefit as an adjustment to the provisional deemed repatriation tax amount due to further analysis and additional guidance. This amount also included tax benefits related to audit settlements of
$1.4 billion
and
$1.5 billion
for the three and six months ended April 30, 2018, respectively, and loss on extinguishment of debt of
$33 million
for the three and six months ended April 30, 2018. These tax benefits were offset by uncertain tax position charges of
$8 million
and
$51 million
for the three and six months ended April 30, 2018, respectively. During the three and six months ended April 30, 2018, in addition to the discrete items mentioned above, we recorded excess tax benefits of
$6 million
and
$34 million
, respectively, on stock options, restricted stock units and performance-adjusted restricted stock units.
In the second quarter of 2018, HP settled audits with multiple tax jurisdictions covering numerous open years while also achieving resolution on certain tax litigations. HP has agreed with all of the adjustments contained within the various final closing agreements and has redetermined its unrecognized tax positions for all open years based on the closing agreements and associated information and analysis of those agreements. HP recorded net benefit of
$1.4 billion
in the quarter due to the completion of the various audits, the resolution of certain tax litigations and associated reserve redeterminations.
During the
three
and
six
months ended
April 30, 2017
, HP recorded
$4 million
and
$5 million
, respectively, of net tax benefit related to discrete items in the provision for taxes. These amounts included a tax benefit of
$12 million
and
$31 million
for the
three
and
six
months ended April 30, 2017, respectively, related to restructuring charges. The
three
months ended April 30, 2017 also included various other tax charges of
$8 million
. The
six
months ended April 30, 2017 also included a tax charge of
$26 million
related to state provision to return adjustments.
Uncertain Tax Positions
As of
April 30, 2018
, the amount of unrecognized tax benefits was
$8.0 billion
, of which up to
$1.7 billion
would affect HP’s effective tax rate if realized. The amount of unrecognized tax benefits decreased by
$2.8 billion
for the
six
months ended
April 30, 2018
, primarily related to the resolution of various audits. HP recognizes interest income from favorable settlements and interest expense and penalties accrued on unrecognized tax benefits in the provision for taxes in the Consolidated Condensed Statements of Earnings. As of
April 30, 2018
, HP had accrued
$141 million
for interest and penalties.
HP engages in continuous discussions and negotiations with taxing authorities regarding tax matters in various jurisdictions. HP expects to complete resolution of certain tax years with various tax authorities within the next
12 months
. It is
HP INC. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements (Continued)
(Unaudited)
Note 6: Taxes on Earnings (Continued)
also possible that other federal, foreign and state tax issues may be concluded within the next
12 months
. HP believes it is reasonably possible that its existing unrecognized tax benefits may be reduced by up to
$6.4 billion
within the next
12 months
. These unrecognized tax benefits have associated gain contingencies which will be settled in the same period resulting in a net release of
$822 million
.
HP is subject to income tax in the United States and approximately
58
other countries and is subject to routine corporate income tax audits in many of these jurisdictions. In addition, HP is subject to numerous ongoing audits by federal, state and foreign tax authorities. The U.S. Internal Revenue Service is conducting an audit of HP’s 2013, 2014 and 2015 income tax returns.
Note 7: Supplementary Financial Information
Accounts Receivable
|
|
|
|
|
|
|
|
|
|
As of
|
|
April 30, 2018
|
|
October 31, 2017
|
|
In millions
|
Accounts receivable
|
$
|
4,732
|
|
|
$
|
4,515
|
|
Allowance for doubtful accounts
|
(127
|
)
|
|
(101
|
)
|
|
$
|
4,605
|
|
|
$
|
4,414
|
|
The allowance for doubtful accounts related to accounts receivable and changes was as follows:
|
|
|
|
|
|
Six months ended April 30, 2018
|
|
In millions
|
Balance at beginning of period
|
$
|
101
|
|
Provision for doubtful accounts
|
29
|
|
Deductions, net of recoveries
|
(3
|
)
|
Balance at end of period
|
$
|
127
|
|
HP has third-party arrangements, consisting of revolving short-term financing, which provide liquidity to certain partners in order to facilitate their working capital requirements. These financing arrangements, which in certain circumstances may contain partial recourse, result in a transfer of HP’s receivables and risk to the third party. As these transfers qualify as true sales under the applicable accounting guidance, the receivables are derecognized from the Consolidated Condensed Balance Sheets upon transfer, and HP receives a payment for the receivables from the third party within a mutually agreed upon time period. For arrangements involving an element of recourse, the recourse obligation is measured using market data from the similar transactions and reported as a current liability in the Consolidated Condensed Balance Sheets. The recourse obligations as of
April 30, 2018
and
October 31, 2017
were not material. The costs associated with the sales of trade receivables for the
three
and six months ended
April 30, 2018
and
2017
were not material.
The following is a summary of the activity under these arrangements:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended April 30
|
|
Six months ended April 30
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
In millions
|
Balance at beginning of period
(1)
|
$
|
172
|
|
|
$
|
104
|
|
|
$
|
147
|
|
|
$
|
149
|
|
Trade receivables sold
|
2,434
|
|
|
2,252
|
|
|
5,370
|
|
|
4,701
|
|
Cash receipts
|
(2,430
|
)
|
|
(2,235
|
)
|
|
(5,351
|
)
|
|
(4,728
|
)
|
Foreign currency and other
|
(5
|
)
|
|
2
|
|
|
5
|
|
|
1
|
|
Balance at end of period
(1)
|
$
|
171
|
|
|
$
|
123
|
|
|
$
|
171
|
|
|
$
|
123
|
|
|
|
(1)
|
Amounts outstanding from third parties reported in Accounts Receivable in the Consolidated Condensed Balance Sheets.
|
HP INC. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements (Continued)
(Unaudited)
Note 7: Supplementary Financial Information (Continued)
Inventory
|
|
|
|
|
|
|
|
|
|
As of
|
|
April 30, 2018
|
|
October 31, 2017
|
|
In millions
|
Finished goods
|
$
|
3,579
|
|
|
$
|
3,857
|
|
Purchased parts and fabricated assemblies
|
1,978
|
|
|
1,929
|
|
|
$
|
5,557
|
|
|
$
|
5,786
|
|
Other Current Assets
|
|
|
|
|
|
|
|
|
|
As of
|
|
April 30, 2018
|
|
October 31, 2017
|
|
In millions
|
Value-added taxes receivable
|
$
|
803
|
|
|
$
|
857
|
|
Available-for-sale investments
(1)
|
1,083
|
|
|
1,149
|
|
Supplier and other receivables
|
1,945
|
|
|
1,891
|
|
Prepaid and other current assets
|
1,193
|
|
|
1,224
|
|
|
$
|
5,024
|
|
|
$
|
5,121
|
|
|
|
(1)
|
See Note 8, “Fair Value” and Note 9, “Financial Instruments” for detailed information.
|
Property, Plant and Equipment
|
|
|
|
|
|
|
|
|
|
As of
|
|
April 30, 2018
|
|
October 31, 2017
|
|
In millions
|
Land, buildings and leasehold improvements
|
$
|
1,900
|
|
|
$
|
2,082
|
|
Machinery and equipment, including equipment held for lease
|
4,110
|
|
|
3,876
|
|
|
6,010
|
|
|
5,958
|
|
Accumulated depreciation
|
(3,949
|
)
|
|
(4,080
|
)
|
|
$
|
2,061
|
|
|
$
|
1,878
|
|
Other Non-Current Assets
|
|
|
|
|
|
|
|
|
|
As of
|
|
April 30, 2018
|
|
October 31, 2017
|
|
In millions
|
Tax indemnifications receivable
(1)
|
$
|
911
|
|
|
$
|
1,695
|
|
Deferred tax assets
(2)
|
2,174
|
|
|
342
|
|
Other
(3)
|
1,567
|
|
|
1,058
|
|
|
$
|
4,652
|
|
|
$
|
3,095
|
|
HP INC. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements (Continued)
(Unaudited)
Note 7: Supplementary Financial Information (Continued)
|
|
(1)
|
During the three months ended April 30, 2018, HP adjusted
$671 million
of indemnification receivable, pursuant to resolution of various audit settlements. See Note 6, “Taxes on Earnings” for further information.
|
|
|
(2)
|
See Note 6, “Taxes on Earnings” for detailed information.
|
|
|
(3)
|
Includes marketable equity securities and mutual funds classified as available-for-sale investments of
$57 million
and
$61 million
as of
April 30, 2018
and
October 31, 2017
, respectively.
|
Other Accrued Liabilities
|
|
|
|
|
|
|
|
|
|
As of
|
|
April 30, 2018
|
|
October 31, 2017
|
|
In millions
|
Other accrued taxes
|
$
|
897
|
|
|
$
|
895
|
|
Warranty
|
651
|
|
|
660
|
|
Sales and marketing programs
|
2,650
|
|
|
2,441
|
|
Other
|
1,999
|
|
|
1,945
|
|
|
$
|
6,197
|
|
|
$
|
5,941
|
|
Other Non-Current Liabilities
|
|
|
|
|
|
|
|
|
|
As of
|
|
April 30, 2018
|
|
October 31, 2017
|
|
In millions
|
Pension, post-retirement, and post-employment liabilities
|
$
|
1,843
|
|
|
$
|
1,999
|
|
Deferred tax liability
(1)
|
86
|
|
|
1,410
|
|
Tax liability
(1)
|
2,577
|
|
|
2,005
|
|
Deferred revenue
|
956
|
|
|
921
|
|
Other
|
867
|
|
|
827
|
|
|
$
|
6,329
|
|
|
$
|
7,162
|
|
|
|
(1)
|
See Note 6, “Taxes on Earnings” for detailed information.
|
Interest and other, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended April 30
|
|
Six months ended April 30
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
In millions
|
Loss on extinguishment of debt
|
$
|
(126
|
)
|
|
$
|
—
|
|
|
$
|
(126
|
)
|
|
$
|
—
|
|
Tax indemnifications
(1)
|
(671
|
)
|
|
5
|
|
|
(673
|
)
|
|
14
|
|
Interest expense on borrowings
|
(88
|
)
|
|
(73
|
)
|
|
(175
|
)
|
|
(146
|
)
|
Foreign exchange loss
|
(27
|
)
|
|
(18
|
)
|
|
(40
|
)
|
|
(47
|
)
|
Other, net
|
31
|
|
|
22
|
|
|
65
|
|
|
34
|
|
|
$
|
(881
|
)
|
|
$
|
(64
|
)
|
|
$
|
(949
|
)
|
|
$
|
(145
|
)
|
|
|
(1)
|
For the three and six months ended April 30, 2018, includes an adjustment of
$671 million
of indemnification receivable, pursuant to resolution of various audit settlements. See Note 6, “Taxes on Earnings” for further information.
|
HP INC. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements (Continued)
(Unaudited)
Note 8: Fair Value
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the measurement date.
Fair Value Hierarchy
HP uses valuation techniques that are based upon observable and unobservable inputs. Observable inputs are developed using market data such as publicly available information and reflect the assumptions market participants would use, while unobservable inputs are developed using the best information available about the assumptions market participants would use. Assets and liabilities are classified in the fair value hierarchy based on the lowest level input that is significant to the fair value measurement:
Level 1—Quoted prices (unadjusted) in active markets for identical assets or liabilities.
Level 2—Quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability and market-corroborated inputs.
Level 3—Unobservable inputs for the asset or liability.
The fair value hierarchy gives the highest priority to observable inputs and lowest priority to unobservable inputs.
The following table presents HP’s assets and liabilities that are measured at fair value on a recurring basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of April 30, 2018
|
|
As of October 31, 2017
|
|
Fair Value Measured Using
|
|
|
|
Fair Value Measured Using
|
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
In millions
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate debt
|
$
|
—
|
|
|
$
|
960
|
|
|
$
|
—
|
|
|
$
|
960
|
|
|
$
|
—
|
|
|
$
|
1,390
|
|
|
$
|
—
|
|
|
$
|
1,390
|
|
Financial institution instruments
|
—
|
|
|
10
|
|
|
—
|
|
|
10
|
|
|
—
|
|
|
6
|
|
|
—
|
|
|
6
|
|
Government debt
(1)
|
1,641
|
|
|
56
|
|
|
—
|
|
|
1,697
|
|
|
3,902
|
|
|
100
|
|
|
—
|
|
|
4,002
|
|
Available-for-Sale Investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate debt
|
—
|
|
|
554
|
|
|
—
|
|
|
554
|
|
|
—
|
|
|
629
|
|
|
—
|
|
|
629
|
|
Financial institution instruments
|
—
|
|
|
66
|
|
|
—
|
|
|
66
|
|
|
—
|
|
|
78
|
|
|
—
|
|
|
78
|
|
Government debt
(1)
|
—
|
|
|
463
|
|
|
—
|
|
|
463
|
|
|
—
|
|
|
442
|
|
|
—
|
|
|
442
|
|
Mutual funds
|
51
|
|
|
—
|
|
|
—
|
|
|
51
|
|
|
49
|
|
|
—
|
|
|
—
|
|
|
49
|
|
Marketable equity securities
|
6
|
|
|
—
|
|
|
—
|
|
|
6
|
|
|
6
|
|
|
6
|
|
|
—
|
|
|
12
|
|
Derivative Instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency contracts
|
—
|
|
|
189
|
|
|
10
|
|
|
199
|
|
|
—
|
|
|
110
|
|
|
10
|
|
|
120
|
|
Other derivatives
|
—
|
|
|
1
|
|
|
—
|
|
|
1
|
|
|
—
|
|
|
1
|
|
|
—
|
|
|
1
|
|
Total Assets
|
$
|
1,698
|
|
|
$
|
2,299
|
|
|
$
|
10
|
|
|
$
|
4,007
|
|
|
$
|
3,957
|
|
|
$
|
2,762
|
|
|
$
|
10
|
|
|
$
|
6,729
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative Instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate contracts
|
$
|
—
|
|
|
$
|
23
|
|
|
$
|
—
|
|
|
$
|
23
|
|
|
$
|
—
|
|
|
$
|
12
|
|
|
$
|
—
|
|
|
$
|
12
|
|
Foreign currency contracts
|
—
|
|
|
314
|
|
|
23
|
|
|
337
|
|
|
—
|
|
|
358
|
|
|
2
|
|
|
360
|
|
Total Liabilities
|
$
|
—
|
|
|
$
|
337
|
|
|
$
|
23
|
|
|
$
|
360
|
|
|
$
|
—
|
|
|
$
|
370
|
|
|
$
|
2
|
|
|
$
|
372
|
|
__________________
|
|
(1)
|
Government debt includes instruments such as U.S. Treasury notes, U.S. agency securities and non-U.S. government bonds. Money market funds invested in government debt and traded in active markets are included in Level 1.
|
There were
no
transfers between levels within the fair value hierarchy during the
six
months ended
April 30, 2018
.
HP INC. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements (Continued)
(Unaudited)
Note 8: Fair Value (Continued)
Valuation Techniques
Cash Equivalents and Investments: HP holds time deposits, money market funds, mutual funds, other debt securities primarily consisting of corporate and government notes and bonds, and common stock and equivalents. HP values cash equivalents and equity investments using quoted market prices, alternative pricing sources, including net asset value, or models utilizing market observable inputs. The fair value of debt investments is based on quoted market prices or model-driven valuations using inputs primarily derived from or corroborated by observable market data, and, in certain instances, valuation models that utilize assumptions which cannot be corroborated with observable market data.
Derivative Instruments: From time to time, HP uses forward contracts, interest rate and total return swaps and option contracts to hedge certain foreign currency and interest rate exposures. HP uses industry standard valuation models to measure fair value. Where applicable, these models project future cash flows and discount the future amounts to present value using market-based observable inputs, including interest rate curves, HP and counterparty credit risk, foreign exchange rates, and forward and spot prices for currencies and interest rates. See Note 9, “Financial Instruments” for a further discussion of HP’s use of derivative instruments.
Other Fair Value Disclosures
Short- and Long-Term Debt: HP estimates the fair value of its debt primarily using an expected present value technique, which is based on observable market inputs using interest rates currently available to companies of similar credit standing for similar terms and remaining maturities, and considering its own credit risk. The portion of HP’s debt that is hedged is reflected in the Consolidated Condensed Balance Sheets as an amount equal to the debt’s carrying amount and a fair value adjustment representing changes in the fair value of the hedged debt obligations arising from movements in benchmark interest rates. The fair value of HP’s short- and long-term debt was
$6.2 billion
as of
April 30, 2018
, compared to its carrying amount of
$6.1 billion
at that date. The fair value of HP’s short- and long-term debt was
$8.1 billion
as of October 31, 2017, compared to its carrying value of
$7.8 billion
at that date. If measured at fair value in the Consolidated Condensed Balance Sheets, short and long-term debt would be classified in Level 2 of the fair value hierarchy.
Other Financial Instruments: For the balance of HP’s financial instruments, primarily accounts receivable, accounts payable and financial liabilities included in Other accrued liabilities on the Consolidated Condensed Balance Sheets, the carrying amounts approximate fair value due to their short maturities. If measured at fair value in the Consolidated Condensed Balance Sheets, these other financial instruments would be classified in Level 2 or Level 3 of the fair value hierarchy.
Non-Marketable Equity Investments and Non-Financial Assets: HP’s non-marketable equity investments and non-financial assets, such as goodwill, intangible assets and property, plant and equipment, are recorded at fair value in the period of acquisition and a subsequent impairment charge is recognized. If measured at fair value in the Consolidated Condensed Balance Sheets, non-marketable equity investments and non-financial assets would generally be classified within Level 3 of the fair value hierarchy.
HP INC. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements (Continued)
(Unaudited)
Note 9: Financial Instruments
Cash Equivalents and Available-for-Sale Investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of April 30, 2018
|
|
As of October 31, 2017
|
|
Cost
|
|
Gross Unrealized Gain
|
|
Gross Unrealized Loss
|
|
Fair Value
|
|
Cost
|
|
Gross Unrealized Gain
|
|
Gross Unrealized Loss
|
|
Fair Value
|
|
In millions
|
Cash Equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate debt
|
$
|
960
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
960
|
|
|
$
|
1,390
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,390
|
|
Financial institution instruments
|
10
|
|
|
—
|
|
|
—
|
|
|
10
|
|
|
6
|
|
|
—
|
|
|
—
|
|
|
6
|
|
Government debt
|
1,697
|
|
|
—
|
|
|
—
|
|
|
1,697
|
|
|
4,002
|
|
|
—
|
|
|
—
|
|
|
4,002
|
|
Total cash equivalents
|
2,667
|
|
|
—
|
|
|
—
|
|
|
2,667
|
|
|
5,398
|
|
|
—
|
|
|
—
|
|
|
5,398
|
|
Available-for-Sale Investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate debt
(1)
|
557
|
|
|
—
|
|
|
(3
|
)
|
|
554
|
|
|
629
|
|
|
—
|
|
|
—
|
|
|
629
|
|
Financial institution instruments
(1)
|
66
|
|
|
—
|
|
|
—
|
|
|
66
|
|
|
78
|
|
|
—
|
|
|
—
|
|
|
78
|
|
Government debt
(1)
|
465
|
|
|
—
|
|
|
(2
|
)
|
|
463
|
|
|
443
|
|
|
—
|
|
|
(1
|
)
|
|
442
|
|
Marketable equity securities
|
4
|
|
|
2
|
|
|
—
|
|
|
6
|
|
|
5
|
|
|
7
|
|
|
—
|
|
|
12
|
|
Mutual funds
|
41
|
|
|
10
|
|
|
—
|
|
|
51
|
|
|
39
|
|
|
10
|
|
|
—
|
|
|
49
|
|
Total available-for-sale investments
|
1,133
|
|
|
12
|
|
|
(5
|
)
|
|
1,140
|
|
|
1,194
|
|
|
17
|
|
|
(1
|
)
|
|
1,210
|
|
Total cash equivalents and available-for-sale investments
|
$
|
3,800
|
|
|
$
|
12
|
|
|
$
|
(5
|
)
|
|
$
|
3,807
|
|
|
$
|
6,592
|
|
|
$
|
17
|
|
|
$
|
(1
|
)
|
|
$
|
6,608
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
HP classifies its marketable debt securities as available-for-sale investments within Other current assets on the Consolidated Condensed Balance Sheets, including those with maturity dates beyond one year, based on their highly liquid nature and availability for use in current operations.
All highly liquid investments with original maturities of three months or less at the date of acquisition are considered cash equivalents. As of
April 30, 2018
and
October 31, 2017
, the carrying amount of cash equivalents approximated fair value due to the short period of time to maturity. The estimated fair value of the available-for-sale investments may not be representative of values that will be realized in the future.
Contractual maturities of investments in available-for-sale debt securities were as follows:
|
|
|
|
|
|
|
|
|
|
As of April 30, 2018
|
|
Amortized
Cost
|
|
Fair Value
|
|
In millions
|
Due in one year or less
|
$
|
757
|
|
|
$
|
755
|
|
Due in one to five years
|
$
|
331
|
|
|
$
|
328
|
|
Equity securities in privately held companies include cost basis and equity method investments and are included in Other non-current assets on the Consolidated Condensed Balance Sheets. These amounted to
$33 million
and
$37 million
as of
April 30, 2018
and
October 31, 2017
, respectively.
HP INC. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements (Continued)
(Unaudited)
Note 9: Financial Instruments (Continued)
Derivative Instruments
HP uses derivatives to offset business exposure to foreign currency and interest rate risk on expected future cash flows and on certain existing assets and liabilities. As part of its risk management strategy, HP uses derivative instruments, primarily forward contracts, interest rate swaps, total return swaps and, at times, option contracts to hedge certain foreign currency, interest rate and, to a lesser extent, equity exposures. HP may designate its derivative contracts as fair value hedges or cash flow hedges and classifies the cash flows with the activities that correspond to the underlying hedged items. Additionally, for derivatives not designated as hedging instruments, HP categorizes those economic hedges as other derivatives. HP recognizes all derivative instruments at fair value in the Consolidated Condensed Balance Sheets.
As a result of its use of derivative instruments, HP is exposed to the risk that its counterparties will fail to meet their contractual obligations. Master netting agreements mitigate credit exposure to counterparties by permitting HP to net amounts due from HP to counterparty against amounts due to HP from the same counterparty under certain conditions. To further limit credit risk, HP has collateral security agreements that allow HP to hold collateral from, or require HP to post collateral to, counterparties when aggregate derivative fair values exceed contractually established thresholds which are generally based on the credit ratings of HP and its counterparties. If HP’s or the counterparty’s credit rating falls below a specified credit rating, either party has the right to request full collateralization of the derivatives’ net liability position. The fair value of derivatives with credit contingent features in a net liability position was
$217 million
and
$258 million
as of
April 30, 2018
and as of
October 31, 2017
, respectively, all of which were fully collateralized within
two
business days.
Under HP’s derivative contracts, the counterparty can terminate all outstanding trades following a covered change of control event affecting HP that results in the surviving entity being rated below a specified credit rating. This credit contingent provision did not affect HP’s financial position or cash flows as of
April 30, 2018
and
October 31, 2017
.
Fair Value Hedges
HP enters into fair value hedges, such as interest rate swaps, to reduce the exposure of its debt portfolio to changes in fair value resulting from changes in interest rates by achieving a primarily U.S. dollar London Interbank Offered Rate (“LIBOR”)-based floating interest expense.
For derivative instruments that are designated and qualify as fair value hedges, HP recognizes the change in fair value of the derivative instrument, as well as the offsetting change in the fair value of the hedged item, in Interest and other, net on the Consolidated Condensed Statements of Earnings in the period of change.
Cash Flow Hedges
HP uses forward contracts and at times, option contracts designated as cash flow hedges to protect against the foreign currency exchange rate risks inherent in its forecasted net revenue and, to a lesser extent, cost of revenue, operating expenses, and intercompany loans denominated in currencies other than the U.S. dollar. HP’s foreign currency cash flow hedges mature generally within twelve months. However, hedges related to longer-term procurement arrangements extend several years and forward contracts associated with intercompany loans extend for the duration of the loan term, which typically range from
two
to
five
years.
For derivative instruments that are designated and qualify as cash flow hedges, HP initially records changes in fair value for the effective portion of the derivative instrument in accumulated other comprehensive loss as a separate component of stockholders’ deficit on the Consolidated Condensed Balance Sheets and subsequently reclassifies these amounts into earnings in the period during which the hedged transaction is recognized in earnings. HP reports the effective portion of its cash flow hedges in the same financial statement line item as the hedged transaction.
Other Derivatives
Other derivatives not designated as hedging instruments consist primarily of forward contracts used to hedge foreign currency-denominated balance sheet exposures. HP uses total return swaps to hedge its executive deferred compensation plan liability.
For derivative instruments not designated as hedging instruments, HP recognizes changes in fair value of the derivative instrument in Interest and other, net in the Consolidated Condensed Statements of Earnings in the period of change.
Hedge Effectiveness
For interest rate swaps designated as fair value hedges, HP measures hedge effectiveness by offsetting the change in fair value of the hedged item with the change in fair value of the derivative. For foreign currency options and forward contracts designated as cash flow hedges, HP measures hedge effectiveness by comparing the cumulative change in fair value of the hedge contract with the cumulative change in fair value of the hedged item, both of which are based on forward rates. HP recognizes any ineffective portion of the hedge in the Consolidated Condensed Statements of Earnings in the same period in
HP INC. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements (Continued)
(Unaudited)
Note 9: Financial Instruments (Continued)
which ineffectiveness occurs. Amounts excluded from the assessment of effectiveness are recognized in the Consolidated Condensed Statements of Earnings in the period they arise.
As of April 30, 2018 and April 30, 2017, no portion of the hedging instruments’ gain or loss was excluded from the assessment of effectiveness for fair value and cash flow hedges. Hedge ineffectiveness for fair value and cash flow hedges recognized in earnings were not material for the
three and six
months ended
April 30, 2018
and 2017.
Fair Value of Derivative Instruments in the Consolidated Condensed Balance Sheets
The gross notional and fair value of derivative instruments in the Consolidated Condensed Balance Sheets were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of April 30, 2018
|
|
As of October 31, 2017
|
|
Outstanding
Gross
Notional
|
|
Other Current Assets
|
|
Other
Non-Current
Assets
|
|
Other
Accrued
Liabilities
|
|
Other
Non-Current
Liabilities
|
|
Outstanding
Gross
Notional
|
|
Other
Current
Assets
|
|
Other
Non-Current
Assets
|
|
Other
Accrued
Liabilities
|
|
Other
Non-Current
Liabilities
|
|
In millions
|
Derivatives designated as hedging instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value hedges:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate contracts
|
$
|
1,000
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1
|
|
|
$
|
22
|
|
|
$
|
2,500
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
12
|
|
Cash flow hedges:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency contracts
|
17,361
|
|
|
147
|
|
|
20
|
|
|
225
|
|
|
97
|
|
|
16,149
|
|
|
92
|
|
|
12
|
|
|
245
|
|
|
100
|
|
Total derivatives designated as hedging instruments
|
18,361
|
|
|
147
|
|
|
20
|
|
|
226
|
|
|
119
|
|
|
18,649
|
|
|
92
|
|
|
12
|
|
|
245
|
|
|
112
|
|
Derivatives not designated as hedging instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency contracts
|
4,606
|
|
|
32
|
|
|
—
|
|
|
15
|
|
|
—
|
|
|
5,801
|
|
|
16
|
|
|
—
|
|
|
15
|
|
|
—
|
|
Other derivatives
|
111
|
|
|
1
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
123
|
|
|
1
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total derivatives not designated as hedging instruments
|
4,717
|
|
|
33
|
|
|
—
|
|
|
15
|
|
|
—
|
|
|
5,924
|
|
|
17
|
|
|
—
|
|
|
15
|
|
|
—
|
|
Total derivatives
|
$
|
23,078
|
|
|
$
|
180
|
|
|
$
|
20
|
|
|
$
|
241
|
|
|
$
|
119
|
|
|
$
|
24,573
|
|
|
$
|
109
|
|
|
$
|
12
|
|
|
$
|
260
|
|
|
$
|
112
|
|
In March 2018, HP terminated several interest rate swaps with a notional amount of
$1.5 billion
that were de-designated as fair value hedges of certain fixed rate debt securities. See Note 10, “Borrowings” for detailed information.
Offsetting of Derivative Instruments
HP recognizes all derivative instruments on a gross basis in the Consolidated Condensed Balance Sheets. HP does not offset the fair value of its derivative instruments against the fair value of cash collateral posted under its collateral security agreements. As of
April 30, 2018
and
October 31, 2017
, information related to the potential effect of HP’s master netting agreements and collateral security agreements was as follows:
HP INC. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements (Continued)
(Unaudited)
Note 9: Financial Instruments (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In the Consolidated Condensed Balance Sheets
|
|
|
|
|
|
|
|
|
|
|
|
Gross Amounts Not Offset
|
|
|
|
|
|
Gross Amount
Recognized
(i)
|
Gross Amount
Offset
(ii)
|
Net Amount
Presented
(iii) = (i)–(ii)
|
|
Derivatives
(iv)
|
|
Financial
Collateral
(v)
|
|
|
|
Net Amount
(vi) = (iii)–(iv)–(v)
|
|
In millions
|
As of April 30, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative assets
|
$
|
200
|
|
|
$
|
—
|
|
|
$
|
200
|
|
|
$
|
137
|
|
|
$
|
13
|
|
(1)
|
|
$
|
50
|
|
Derivative liabilities
|
$
|
360
|
|
|
$
|
—
|
|
|
$
|
360
|
|
|
$
|
137
|
|
|
$
|
219
|
|
(2)
|
|
$
|
4
|
|
As of October 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative assets
|
$
|
121
|
|
|
$
|
—
|
|
|
$
|
121
|
|
|
$
|
108
|
|
|
$
|
4
|
|
(1)
|
|
$
|
9
|
|
Derivative liabilities
|
$
|
372
|
|
|
$
|
—
|
|
|
$
|
372
|
|
|
$
|
108
|
|
|
$
|
219
|
|
(2)
|
|
$
|
45
|
|
_______________________________________________________________________________
|
|
(1)
|
Represents the cash collateral posted by counterparties as of the respective reporting date for HP’s asset position, net of derivative amounts that could be offset, as of, generally,
two
business days prior to the respective reporting date.
|
|
|
(2)
|
Represents the collateral posted by HP through re-use of counterparty cash collateral as of the respective reporting date for HP’s liability position, net of derivative amounts that could be offset, as of, generally,
two
business days prior to the respective reporting date.
|
HP INC. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements (Continued)
(Unaudited)
Note 9: Financial Instruments (Continued)
Effect of Derivative Instruments in the Consolidated Condensed Statements of Earnings
The pre-tax effect of derivative instruments and related hedged items in a fair value hedging relationship for the
three and six
months ended
April 30, 2018
and 2017 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (Loss) Recognized in Earnings on Derivative and Related Hedged Item
|
Derivative Instrument
|
|
Location
|
|
Three months ended April 30, 2018
|
|
Six months ended April 30, 2018
|
|
Hedged Item
|
|
Location
|
|
Three months ended April 30, 2018
|
|
Six months ended April 30, 2018
|
|
|
|
|
In millions
|
|
|
|
|
|
In millions
|
Interest rate contracts
|
|
Interest and other, net
|
|
$
|
29
|
|
|
$
|
(11
|
)
|
|
Fixed-rate debt
|
|
Interest and other, net
|
|
$
|
(29
|
)
|
|
$
|
11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (Loss) Recognized in Earnings on Derivative and Related Hedged Item
|
Derivative Instrument
|
|
Location
|
|
Three months ended April 30, 2017
|
|
Six months ended April 30, 2017
|
|
Hedged Item
|
|
Location
|
|
Three months ended April 30, 2017
|
|
Six months ended April 30, 2017
|
|
|
|
|
In millions
|
|
|
|
|
|
In millions
|
Interest rate contracts
|
|
Interest and other, net
|
|
$
|
4
|
|
|
$
|
(48
|
)
|
|
Fixed-rate debt
|
|
Interest and other, net
|
|
$
|
(4
|
)
|
|
$
|
48
|
|
The pre-tax effect of derivative instruments in cash flow hedging relationships for the
three and six
months ended
April 30, 2018
was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) Gain Recognized in
Other Comprehensive
Income (“OCI”) on Derivatives (Effective Portion)
|
|
(Loss) Gain Reclassified from Accumulated OCI Into
Earnings (Effective Portion)
|
|
Three months ended April 30, 2018
|
|
Six months ended April 30, 2018
|
|
Location
|
|
Three months ended April 30, 2018
|
|
Six months ended April 30, 2018
|
|
In millions
|
|
|
|
In millions
|
Cash flow hedges:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency contracts
|
$
|
297
|
|
|
$
|
(254
|
)
|
|
Net revenue
|
|
$
|
(277
|
)
|
|
$
|
(329
|
)
|
|
|
|
|
|
|
|
Cost of revenue
|
|
—
|
|
|
(18
|
)
|
|
|
|
|
|
Operating expenses
|
|
1
|
|
|
1
|
|
Total
|
$
|
297
|
|
|
$
|
(254
|
)
|
|
|
|
$
|
(276
|
)
|
|
$
|
(346
|
)
|
The pre-tax effect of derivative instruments in cash flow hedging relationships for the
three and six
months ended
April 30, 2017
was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss Recognized in
Other Comprehensive
Income (“OCI”) on Derivatives (Effective Portion)
|
|
Gain (Loss) Reclassified from Accumulated OCI Into
Earnings (Effective Portion)
|
|
Three months ended April 30, 2017
|
|
Six months ended April 30, 2017
|
|
Location
|
|
Three months ended April 30, 2017
|
|
Six months ended April 30, 2017
|
|
In millions
|
|
|
|
In millions
|
Cash flow hedges:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency contracts
|
$
|
(70
|
)
|
|
$
|
(239
|
)
|
|
Net revenue
|
|
$
|
39
|
|
|
$
|
115
|
|
|
|
|
|
|
|
|
Cost of revenue
|
|
(19
|
)
|
|
(19
|
)
|
|
|
|
|
|
|
|
Interest and other, net
|
|
(4
|
)
|
|
(9
|
)
|
Total
|
$
|
(70
|
)
|
|
$
|
(239
|
)
|
|
|
|
$
|
16
|
|
|
$
|
87
|
|
HP INC. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements (Continued)
(Unaudited)
Note 9: Financial Instruments (Continued)
As of
April 30, 2018
, HP expects to reclassify an estimated accumulated other comprehensive loss (“AOCI”) of
$75 million
, net of taxes, to earnings within the next twelve months associated with cash flow hedges along with the earnings effects of the related forecasted transactions. The amounts ultimately reclassified into earnings could be different from the amounts previously included in AOCI based on the change of market rate, and therefore could have a different impact on earnings.
The pre-tax effect of derivative instruments not designated as hedging instruments in the Consolidated Condensed Statements of Earnings for the
three and six
months ended
April 30, 2018
and 2017 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (Loss) Recognized in Earnings on Derivatives
|
|
Location
|
|
Three months ended April 30, 2018
|
|
Three months ended April 30, 2017
|
|
Six months ended April 30, 2018
|
|
Six months ended April 30, 2017
|
|
|
|
In millions
|
Foreign currency contracts
|
Interest and other, net
|
|
$
|
8
|
|
|
$
|
(47
|
)
|
|
$
|
(9
|
)
|
|
$
|
(49
|
)
|
Other derivatives
|
Interest and other, net
|
|
(2
|
)
|
|
1
|
|
|
—
|
|
|
4
|
|
Total
|
|
|
$
|
6
|
|
|
$
|
(46
|
)
|
|
$
|
(9
|
)
|
|
$
|
(45
|
)
|
Note 10: Borrowings
Notes Payable and Short-Term Borrowings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of April 30, 2018
|
|
As of October 31, 2017
|
|
Amount
Outstanding
|
|
Weighted-Average
Interest Rate
|
|
Amount
Outstanding
|
|
Weighted-Average
Interest Rate
|
|
In millions
|
|
|
|
In millions
|
|
|
Commercial paper
|
$
|
1,041
|
|
|
2.8
|
%
|
|
$
|
943
|
|
|
1.8
|
%
|
Current portion of long-term debt
|
537
|
|
|
3.0
|
%
|
|
96
|
|
|
3.5
|
%
|
Notes payable to banks, lines of credit and other
|
39
|
|
|
1.2
|
%
|
|
33
|
|
|
1.5
|
%
|
|
$
|
1,617
|
|
|
|
|
|
$
|
1,072
|
|
|
|
|
HP INC. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements (Continued)
(Unaudited)
Note 10: Borrowings (Continued)
Long-Term Debt
|
|
|
|
|
|
|
|
|
|
As of
|
|
April 30, 2018
|
|
October 31, 2017
|
|
In millions
|
U.S. Dollar Global Notes
(1)
|
|
|
|
|
|
2009 Shelf Registration Statement:
|
|
|
|
|
|
$1,350 issued at discount to par at a price of 99.827% in December 2010 at 3.75%, due December 2020
|
$
|
648
|
|
|
$
|
648
|
|
$1,250 issued at discount to par at a price of 99.799% in May 2011 at 4.3%, due June 2021
|
666
|
|
|
1,249
|
|
$1,000 issued at discount to par at a price of 99.816% in September 2011 at 4.375%, due September 2021
|
537
|
|
|
999
|
|
$1,500 issued at discount to par at a price of 99.707% in December 2011 at 4.65%, due December 2021
|
693
|
|
|
1,498
|
|
$500 issued at discount to par at a price of 99.771% in March 2012 at 4.05%, due September 2022
|
499
|
|
|
499
|
|
$1,200 issued at discount to par at a price of 99.863% in September 2011 at 6.0%, due September 2041
|
1,199
|
|
|
1,199
|
|
2012 Shelf Registration Statement:
|
|
|
|
|
|
$750 issued at par in January 2014 at three-month USD LIBOR plus 0.94%, due January 2019
|
102
|
|
|
102
|
|
$1,250 issued at discount to par at a price of 99.954% in January 2014 at 2.75%, due January 2019
|
300
|
|
|
300
|
|
|
4,644
|
|
|
6,494
|
|
Other, including capital lease obligations, at 0.51%-8.50%, due in calendar years 2018-2025
|
430
|
|
|
360
|
|
Fair value adjustment related to hedged debt
|
(26
|
)
|
|
8
|
|
Less: Unamortized debt issuance cost
|
(17
|
)
|
|
(19
|
)
|
Less: current portion of long-term debt
|
(537
|
)
|
|
(96
|
)
|
Total long-term debt
|
$
|
4,494
|
|
|
$
|
6,747
|
|
|
|
(1)
|
HP may redeem some or all of the fixed-rate U.S. Dollar Global Notes at any time in accordance with the terms thereof. The U.S. Dollar Global Notes are senior unsecured debt.
|
In December 2016, HP filed a shelf registration statement (the “2016 Shelf Registration Statement”) with the SEC to enable the company to offer for sale, from time to time, in one or more offerings, an unspecified amount of debt securities, common stock, preferred stock, depositary shares and warrants.
As disclosed in Note 9, “Financial Instruments”, HP uses interest rate swaps to mitigate some of the exposure of its debt portfolio to changes in fair value resulting from changes in interest rates by achieving a primarily U.S. dollar LIBOR-based floating interest expense. Interest rates shown in the table of long-term debt have not been adjusted to reflect the impact of any interest rate swaps.
Extinguishment of Debt
In March 2018, HP commenced and completed a cash tender offer (the “Tender Offer") to purchase approximately
$1.85 billion
in aggregate principal amount of outstanding U.S. Dollar
4.650%
Global Notes due December 9, 2021,
4.375%
Global Notes due September 15, 2021 and
4.300%
Global Notes due June 1, 2021. In connection with the Tender Offer, HP also solicited consents from holders of its
4.650%
Notes due December 2021, (the “
4.650%
Notes”) to amend the indenture under which the
4.650%
Notes were issued to, among other things, eliminate substantially all of the restrictive covenants of the indenture (the “Proposed Amendments”). Holders of a majority in principal amount of the outstanding
4.650%
Notes consented to the Proposed Amendments, and as a result, a supplemental indenture was executed on March 26, 2018 to effect the Proposed Amendments. This extinguishment of debt resulted in a loss of
$126 million
, which was recorded as "Interest and other, net" on the Consolidated Condensed Statements of Earnings.
Commercial Paper
On November 1, 2015, HP’s Board of Directors authorized HP to borrow up to a total outstanding principal balance of
$4.0 billion
, or the equivalent in foreign currencies, for the use and benefit of HP and HP’s subsidiaries, by the issuance of commercial paper or through the execution of promissory notes, loan agreements, letters of credit, agreements for lines of credit or overdraft facilities. HP increased the issuance authorization under its commercial paper program from
$4.0 billion
to
$6.0 billion
in November 2017. As of
April 30, 2018
, HP maintained two commercial paper programs. HP’s U.S. program provides for the issuance of U.S. dollar-denominated commercial paper up to a maximum aggregate principal amount of
$6.0 billion
. HP’s Euro program provides for the issuance of commercial paper outside of the United States denominated in U.S. dollars, Euros or British pounds up to a maximum aggregate principal amount of
$6.0 billion
or the equivalent in those alternative
HP INC. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements (Continued)
(Unaudited)
Note 10: Borrowings (Continued)
currencies. The combined aggregate principal amount of commercial paper outstanding under those programs at any one time cannot exceed the
$6.0 billion
authorized by HP’s Board of Directors.
Credit Facility
As of
April 30, 2018
, HP maintains a
$4.0 billion
, senior unsecured committed revolving credit facility to support the issuance of commercial paper or for general corporate purposes. Commitments under the revolving credit facility will be available until March 30, 2023. Commitment fees, interest rates and other terms of borrowing under the credit facilities vary based on HP’s external credit ratings. As of
April 30, 2018
, HP was in compliance with the financial covenants in the credit agreement governing the revolving credit facility.
In December 2017, HP also entered into an additional revolving credit facility with certain institutional lenders that provides HP with
$1.5 billion
of available borrowings until November 30, 2018.
Available Borrowing Resources
As of
April 30, 2018
, HP and its subsidiaries had available borrowing resources of
$722 million
from uncommitted lines of credit in addition to the commercial paper and revolving credit facilities discussed above.
Note 11: Stockholders’ Deficit
Share Repurchase Program
HP’s share repurchase program authorizes both open market and private repurchase transactions. During the
three and six
months ended
April 30, 2018
, HP executed share repurchases of
35 million
shares and
56 million
shares and settled total shares for
$0.8 billion
and
$1.3 billion
, respectively. During the
three and six
months ended
April 30, 2017
, HP executed share repurchases of
13 million
shares and
39 million
shares and settled total shares for
$0.2 billion
and
$0.6 billion
, respectively. Share repurchases executed during the three months ended
April 30, 2018
and April 30, 2017 included
0.6 million
and
1 million
shares settled in May 2018 and May 2017, respectively.
The shares repurchased during the
six
months ended
April 30, 2018
and 2017 were all open market repurchase transactions. As of
April 30, 2018
, HP had approximately
$1.2 billion
remaining under the share repurchase authorizations approved by HP’s Board of Directors.
HP INC. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements (Continued)
(Unaudited)
Note 11: Stockholder’s Deficit (Continued)
Tax effects related to Other Comprehensive Income (Loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended April 30
|
|
Six months ended April 30
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
In millions
|
Tax effect on change in unrealized components of available-for-sale securities:
|
|
|
|
|
|
|
|
|
|
|
|
Tax benefit (provision) on unrealized (losses) gains arising during the period
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1
|
|
|
$
|
(1
|
)
|
|
—
|
|
|
—
|
|
|
1
|
|
|
(1
|
)
|
Tax effect on change in unrealized components of cash flow hedges:
|
|
|
|
|
|
|
|
|
|
Tax (provision) benefit on unrealized gains (losses) arising during the period
|
(37
|
)
|
|
10
|
|
|
33
|
|
|
7
|
|
Tax (benefit) provision on losses (gains) reclassified into earnings
|
(29
|
)
|
|
7
|
|
|
(32
|
)
|
|
11
|
|
|
(66
|
)
|
|
17
|
|
|
1
|
|
|
18
|
|
Tax effect on change in unrealized components of defined benefit plans:
|
|
|
|
|
|
|
|
|
|
|
|
Tax provision on gains arising during the period
|
—
|
|
|
(4
|
)
|
|
—
|
|
|
(4
|
)
|
Tax provision on amortization of actuarial loss and prior service benefit
|
(3
|
)
|
|
(5
|
)
|
|
(6
|
)
|
|
(11
|
)
|
Tax provision on curtailments, settlements and other
|
—
|
|
|
(1
|
)
|
|
—
|
|
|
(9
|
)
|
|
(3
|
)
|
|
(10
|
)
|
|
(6
|
)
|
|
(24
|
)
|
Tax (provision) benefit on other comprehensive income
|
$
|
(69
|
)
|
|
$
|
7
|
|
|
$
|
(4
|
)
|
|
$
|
(7
|
)
|
Changes and reclassifications related to Other Comprehensive Income (Loss), net of taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended April 30
|
|
Six months ended April 30
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
In millions
|
Other comprehensive income (loss), net of taxes:
|
|
|
|
|
|
|
|
|
|
|
|
Change in unrealized components of available-for-sale securities:
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized (losses) gains arising during the period
|
$
|
(2
|
)
|
|
$
|
1
|
|
|
$
|
(4
|
)
|
|
$
|
3
|
|
Gains reclassified into earnings
|
—
|
|
|
—
|
|
|
(5
|
)
|
|
—
|
|
|
(2
|
)
|
|
1
|
|
|
(9
|
)
|
|
3
|
|
Change in unrealized components of cash flow hedges:
|
|
|
|
|
|
|
|
|
|
Unrealized gains (losses) arising during the period
|
260
|
|
|
(60
|
)
|
|
(221
|
)
|
|
(232
|
)
|
Losses (gains) reclassified into earnings
(1)
|
247
|
|
|
(9
|
)
|
|
314
|
|
|
(76
|
)
|
|
507
|
|
|
(69
|
)
|
|
93
|
|
|
(308
|
)
|
Change in unrealized components of defined benefit plans:
|
|
|
|
|
|
|
|
|
|
|
|
Gains arising during the period
|
—
|
|
|
9
|
|
|
—
|
|
|
9
|
|
Amortization of actuarial loss and prior service benefit
(2)
|
10
|
|
|
12
|
|
|
19
|
|
|
26
|
|
Curtailments, settlements and other
|
—
|
|
|
2
|
|
|
1
|
|
|
(6
|
)
|
|
10
|
|
|
23
|
|
|
20
|
|
|
29
|
|
Other comprehensive income (loss), net of taxes
|
$
|
515
|
|
|
$
|
(45
|
)
|
|
$
|
104
|
|
|
$
|
(276
|
)
|
|
|
(1)
|
Reclassification of pre-tax losses (gains) on cash flow hedges into the Consolidated Condensed Statements of Earnings was as follows:
|
HP INC. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements (Continued)
(Unaudited)
Note 11: Stockholder’s Deficit (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended April 30
|
|
Six months ended April 30
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
In millions
|
Net revenue
|
$
|
277
|
|
|
$
|
(39
|
)
|
|
$
|
329
|
|
|
$
|
(115
|
)
|
Cost of revenue
|
—
|
|
|
19
|
|
|
18
|
|
|
19
|
|
Operating expenses
|
(1
|
)
|
|
—
|
|
|
(1
|
)
|
|
—
|
|
Interest and other, net
|
—
|
|
|
4
|
|
|
—
|
|
|
9
|
|
Total
|
$
|
276
|
|
|
$
|
(16
|
)
|
|
$
|
346
|
|
|
$
|
(87
|
)
|
|
|
(2)
|
These components are included in the computation of net pension and post-retirement benefit (credit) charges in Note 4, “Retirement and Post-Retirement Benefit Plans.”
|
The components of accumulated other comprehensive loss, net of taxes and changes were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended April 30, 2018
|
|
Net unrealized
gains on
available-for-sale
securities
|
|
Net unrealized
gains (losses) on cash
flow hedges
|
|
Unrealized
components
of defined
benefit plans
|
|
Accumulated
other
comprehensive
loss
|
|
In millions
|
Balance at beginning of period
|
$
|
12
|
|
|
$
|
(240
|
)
|
|
$
|
(1,190
|
)
|
|
$
|
(1,418
|
)
|
Other comprehensive loss before reclassifications
|
(4
|
)
|
|
(221
|
)
|
|
—
|
|
|
(225
|
)
|
Reclassifications of (gains) losses into earnings
|
(5
|
)
|
|
314
|
|
|
19
|
|
|
328
|
|
Reclassifications of curtailments, settlements and other into earnings
|
—
|
|
|
—
|
|
|
1
|
|
|
1
|
|
Balance at end of period
|
$
|
3
|
|
|
$
|
(147
|
)
|
|
$
|
(1,170
|
)
|
|
$
|
(1,314
|
)
|
Note 12: Net Earnings Per Share
HP calculates basic net EPS using net earnings and the weighted-average number of shares outstanding during the reporting period. Diluted net EPS includes any dilutive effect of restricted stock awards, stock options, performance-based awards and shares purchased under the 2011 employee stock purchase plan.
HP INC. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements (Continued)
(Unaudited)
Note 12: Net Earnings Per Share (Continued)
A reconciliation of the number of shares used for basic and diluted net EPS calculations is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended April 30
|
|
Six months ended April 30
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
In millions, except per share amounts
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings
|
$
|
1,058
|
|
|
$
|
559
|
|
|
$
|
2,996
|
|
|
$
|
1,170
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares used to compute basic net EPS
|
1,630
|
|
|
1,688
|
|
|
1,640
|
|
|
1,696
|
|
Dilutive effect of employee stock plans
|
16
|
|
|
21
|
|
|
18
|
|
|
20
|
|
Weighted-average shares used to compute diluted net EPS
|
1,646
|
|
|
1,709
|
|
|
1,658
|
|
|
1,716
|
|
Net earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
$
|
0.65
|
|
|
$
|
0.33
|
|
|
$
|
1.83
|
|
|
$
|
0.69
|
|
Diluted
|
$
|
0.64
|
|
|
$
|
0.33
|
|
|
1.81
|
|
|
0.68
|
|
Anti-dilutive weighted-average stock-based compensation awards
(1)
|
—
|
|
|
3
|
|
|
—
|
|
|
4
|
|
|
|
(1)
|
HP excludes stock options and restricted stock units where the assumed proceeds exceed the average market price from the calculation of diluted net EPS because their effect would be anti-dilutive. The assumed proceeds of a stock option include the sum of its exercise price, and average unrecognized compensation cost. The assumed proceeds of a restricted stock unit represent unrecognized compensation cost.
|
Note 13: Litigation and Contingencies
HP is involved in lawsuits, claims, investigations and proceedings, including those identified below, consisting of intellectual property, commercial, securities, employment, employee benefits and environmental matters that arise in the ordinary course of business. HP accrues a liability when management believes that it is both probable that a liability has been incurred and the amount of loss can be reasonably estimated. HP believes it has recorded adequate provisions for any such matters and, as of April 30, 2018, it was not reasonably possible that a material loss had been incurred in excess of the amounts recognized in HP’s financial statements. HP reviews these matters at least quarterly and adjusts its accruals to reflect the impact of negotiations, settlements, rulings, advice of legal counsel, and other information and events pertaining to a particular case. Pursuant to the separation and distribution agreement, HP shares responsibility with Hewlett Packard Enterprise for certain matters, as indicated below, and Hewlett Packard Enterprise has agreed to indemnify HP in whole or in part with respect to certain matters. Based on its experience, HP believes that any damage amounts claimed in the specific matters discussed below are not a meaningful indicator of HP’s potential liability. Litigation is inherently unpredictable. However, HP believes it has valid defenses with respect to legal matters pending against it. 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.
Litigation, Proceedings and Investigations
Copyright Levies
.
Proceedings are ongoing or have been concluded involving HP in certain European countries, including litigation in Belgium and other countries, seeking to impose or modify levies upon IT equipment (such as multifunction devices (“MFDs”) and PCs), alleging that these devices enable the production of private copies of copyrighted materials. The levies are generally based upon the number of products sold and the per-product amounts of the levies, which vary. Some European countries that do not yet have levies on digital devices are expected to implement similar legislation to enable them to extend existing levy schemes, while other European countries have phased out levies or are expected to limit the scope of levy schemes and applicability in the digital hardware environment, particularly with respect to sales to business users. HP, other companies and various industry associations have opposed the extension of levies to the digital environment and have advocated alternative models of compensation to rights holders.
Reprobel, a collecting society administering the remuneration for reprography to Belgian copyright holders, requested by extrajudicial means that HP amend certain copyright levy declarations submitted for inkjet MFDs sold in Belgium from January 2005 to December 2009 to enable it to collect copyright levies calculated based on the generally higher copying speed when the MFDs are operated in draft print mode rather than when operated in normal print mode. In March 2010, HP filed a lawsuit against Reprobel in the Court of First Instance of Brussels seeking a declaratory judgment that
no
copyright levies are payable
HP INC. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements (Continued)
(Unaudited)
Note 13: Litigations and Contingencies (Continued)
on sales of MFDs in Belgium or, alternatively, that payments already made by HP are sufficient to comply with its obligations. The Court of Appeal in Brussels (the “Court of Appeal”) stayed the proceedings and referred several questions to the Court of Justice of the European Union (“CJEU”). On November 12, 2015, the CJEU published its judgment providing that a national legislation such as the Belgian one at issue in the main proceedings is incompatible with EU law on multiple legal points, as argued by HP, and returned the proceedings to the referring court. On May 12, 2017, the Court of Appeal held that (1) reprographic copyright levies are due notwithstanding the lack of conformity of the Belgian system with EU law in certain aspects and (2) the applicable levies are to be calculated based on the objective speed of each MFD as established by an expert appointed by the Court of Appeal. HP appealed this decision before the Belgian Supreme Court on January 18, 2018.
Based on industry opposition to the extension of levies to digital products, HP’s assessments of the merits of various proceedings and HP’s estimates of the number of units impacted and the amounts of the levies, HP has accrued amounts that it believes are adequate to address the ongoing disputes.
Hewlett-Packard Company v. Oracle Corporation
.
On June 15, 2011, HP filed suit against Oracle Corporation (“Oracle”) in California Superior Court in Santa Clara County in connection with Oracle’s March 2011 announcement that it was discontinuing software support for HP’s Itanium-based line of mission-critical servers. HP asserted, among other things, that Oracle’s actions breached the contract that was signed by the parties as part of the settlement of the litigation relating to Oracle’s hiring of Mark Hurd. The matter eventually progressed to trial, which was bifurcated into two phases. HP prevailed in the first phase of the trial, in which the court ruled that the contract at issue required Oracle to continue to offer its software products on HP’s Itanium-based servers for as long as HP decided to sell such servers. The second phase of the trial was then postponed by Oracle’s appeal of the trial court’s denial of Oracle’s “anti-SLAPP” motion, in which Oracle argued that HP’s damages claim infringed on Oracle’s First Amendment rights. On August 27, 2015, the California Court of Appeals rejected Oracle’s appeal. The matter was remanded to the trial court for the second phase of the trial, which began on May 23, 2016 and was submitted to the jury on June 29, 2016. On June 30, 2016, the jury returned a verdict in favor of HP, awarding HP approximately
$3.0 billion
in damages, which included approximately
$1.7 billion
for past lost profits and
$1.3 billion
for future lost profits. On October 20, 2016, the court entered judgment for HP for this amount with interest accruing until the judgment is paid. Oracle’s motion for a new trial was denied on December 19, 2016, and Oracle filed its notice of appeal from the trial court’s judgment on January 17, 2017. On February 2, 2017, HP filed a notice of cross-appeal challenging the trial court’s denial of prejudgment interest. The schedule for appellate briefing and argument has not yet been established. HP expects that the appeals process could take several years to complete. Litigation is unpredictable, and there can be no assurance that HP will recover damages, or that any award of damages will be for the amount awarded by the jury’s verdict. The amount ultimately awarded, if any, would be recorded in the period received.
No
adjustment has been recorded in the financial statements in relation to this potential award. Pursuant to the terms of the separation and distribution agreement, HP and Hewlett Packard Enterprise will share equally in any recovery from Oracle once Hewlett Packard Enterprise has been reimbursed for all costs incurred in the prosecution of the action prior to the Separation.
Forsyth, et al. v. HP Inc. and Hewlett Packard Enterprise
.
This is a purported class and collective action filed on August 18, 2016 in the United States District Court, Northern District of California, against HP and Hewlett Packard Enterprise alleging the defendants violated the Federal Age Discrimination in Employment Act (“ADEA”), the California Fair Employment and Housing Act, California public policy and the California Business and Professions Code by terminating older workers and replacing them with younger workers. Plaintiffs seek to certify a nationwide collective class action under the ADEA comprised of all U.S. residents employed by defendants who had their employment terminated pursuant to a workforce reduction (“WFR”) plan on or after May 23, 2012 and who were
40
years of age or older. Plaintiffs also seek to represent a Rule 23 class under California law comprised of all persons
40
years or older employed by defendants in the state of California and terminated pursuant to a WFR plan on or after May 23, 2012. Following a partial motion to dismiss, a motion to strike and a motion to compel arbitration that the defendants filed in November 2016, the plaintiffs amended their complaint. New plaintiffs were added, but the plaintiffs agreed that the class period for the nationwide collective action should be shortened and now starts on December 9, 2014. On January 30, 2017, the defendants filed another partial motion to dismiss and motions to compel arbitration as to several of the plaintiffs. On March 20, 2017, the defendants filed additional motions to compel arbitration as to a number of the opt-in plaintiffs. On September 20, 2017, the Court granted the motions to compel arbitration as to the plaintiffs and opt-ins who signed WFR release agreements (
17
individuals), and also stayed the entire case until the arbitrations are completed. On November 30, 2017,
three
named plaintiffs and
twelve
opt-in plaintiffs filed a single arbitration demand. On December 22, 2017, the defendants filed a motion to (1) stay the case pending arbitrations and (2) enjoin the demanded arbitration and require each plaintiff to file a separate arbitration demand. On February 6, 2018, the Court granted the motion to stay and denied the motion to enjoin.
Jackson, et al. v. HP Inc. and Hewlett Packard Enterprise
.
This putative nationwide class action was filed on July 24, 2017 in federal district court in San Jose, California. The plaintiffs purport to bring the lawsuit on behalf of themselves and
HP INC. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements (Continued)
(Unaudited)
Note 13: Litigations and Contingencies (Continued)
other similarly situated African-Americans and individuals over the age of forty. The plaintiffs allege that the defendants engaged in a pattern and practice of racial and age discrimination in lay-offs and promotions. The plaintiffs filed an amended complaint on September 29, 2017. On January 12, 2018, the defendants moved to transfer the matter to the federal district court in the Northern District of Georgia. The defendants also moved to dismiss the claims on various grounds and to strike certain aspects of the proposed class definition. The defendants’ motions remain pending.
India Directorate of Revenue Intelligence Proceedings
.
On April 30 and May 10, 2010, the India Directorate of Revenue Intelligence (the “DRI”) issued show cause notices to Hewlett-Packard India Sales Private Limited (“HP India”), a subsidiary of HP,
seven
HP India employees and
one
former HP India employee alleging that HP India underpaid customs duties while importing products and spare parts into India and seeking to recover an aggregate of approximately
$370 million
, plus penalties. Prior to the issuance of the show cause notices, HP India deposited approximately
$16 million
with the DRI and agreed to post a provisional bond in exchange for the DRI’s agreement to not seize HP India products and spare parts and to not interrupt the transaction of business by HP India.
On April 11, 2012, the Bangalore Commissioner of Customs issued an order on the products-related show cause notice affirming certain duties and penalties against HP India and the named individuals of approximately
$386 million
, of which HP India had already deposited
$9 million
. On December 11, 2012, HP India voluntarily deposited an additional
$10 million
in connection with the products-related show cause notice. The differential duty demand is subject to interest. On April 20, 2012, the Commissioner issued an order on the parts-related show cause notice affirming certain duties and penalties against HP India and certain of the named individuals of approximately
$17 million
, of which HP India had already deposited
$7 million
. After the order, HP India deposited an additional
$3 million
in connection with the parts-related show cause notice so as to avoid certain penalties.
HP India filed appeals of the Commissioner’s orders before the Customs Tribunal along with applications for waiver of the pre-deposit of remaining demand amounts as a condition for hearing the appeals. The Customs Department has also filed cross-appeals before the Customs Tribunal. On January 24, 2013, the Customs Tribunal ordered HP India to deposit an additional
$24 million
against the products order, which HP India deposited in March 2013. The Customs Tribunal did not order any additional deposit to be made under the parts order. In December 2013, HP India filed applications before the Customs Tribunal seeking early hearing of the appeals as well as an extension of the stay of deposit as to HP India and the individuals already granted until final disposition of the appeals. On February 7, 2014, the application for extension of the stay of deposit was granted by the Customs Tribunal until disposal of the appeals. On October 27, 2014, the Customs Tribunal commenced hearings on the cross-appeals of the Commissioner’s orders. The Customs Tribunal rejected HP India’s request to remand the matter to the Commissioner on procedural grounds. The hearings scheduled to reconvene on April 6, 2015 and again on November 3, 2015 and April 11, 2016 were canceled at the request of the Customs Tribunal. Pursuant to the separation and distribution agreement, Hewlett Packard Enterprise has agreed to indemnify HP in part, based on the extent to which any liability arises from the products and spare parts of Hewlett Packard Enterprise’s businesses.
Russia GPO Anti-Corruption Investigation
.
The German Public Prosecutor’s Office (“German PPO”) conducted an investigation into allegations that current and former employees of HP engaged in bribery, embezzlement and tax evasion relating to a transaction between Hewlett-Packard ISE GmbH in Germany, a former subsidiary of HP, and the General Prosecutor’s Office of the Russian Federation. The approximately
$35 million
transaction, which was referred to as the Russia GPO deal, spanned the years 2001 to 2006 and was for the delivery and installation of an IT network. The German PPO issued an indictment of
four
individuals, including
one
current and
two
former HP employees, on charges including bribery, breach of trust and tax evasion. The German PPO also requested that HP be made an associated party to the case, and, if that request is granted, HP would participate in any portion of the court proceedings that could ultimately bear on the question of whether HP should be subject to potential disgorgement of profits based on the conduct of the indicted current and former employees. On August 29, 2017, the Regional Court of Leipzig decided not to admit the matter to trial. The German PPO appealed this decision. On March 20, 2018, the Higher Regional Court in Dresden agreed with the decision to not admit the matter to trial. In light of this decision, the prosecution is expected to come to an end.
Class Actions re Authentication of Supplies
Five
purported consumer class actions were filed against HP, arising out of the supplies authentication protocol in certain OfficeJet printers. This authentication protocol rejects some third-party ink cartridges that use non-HP security chips.
Two
of the cases were dismissed, and the remaining cases were consolidated in the United States District Court for the Northern District of California, captioned
In re HP Printer Firmware Update Litigation
. The remaining plaintiffs’ consolidated amended complaint was filed on February 15, 2018, alleging eleven causes of action: (1) unfair and unlawful business practices in violation of the Unfair Competition Law, Cal. Bus. & Prof. Code § 17200,
et seq.
; (2) fraudulent business practices in violation of the Unfair Competition Law, Cal. Bus. & Prof. Code § 17200,
et seq.
; (3) violations of the False Advertising Law, Cal. Bus.
HP INC. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements (Continued)
(Unaudited)
Note 13: Litigations and Contingencies (Continued)
& Prof. Code § 17500,
et seq.
; (4) violations of the Consumer Legal Remedies Act, Cal. Civ. Code § 1750,
et seq.
; (5) violations of the Texas Deceptive Trade Practices ‒ Consumer Protection Act, Tex. Bus. & Com. Code Ann. § 17.01,
et seq.
; (6) violations of the Washington Consumer Protection Act, Wash. Rev. Code Ann. § 19.86.010,
et seq.
; (7) violations of the New Jersey Consumer Fraud Act, New Jersey Statutes Ann. 56:8-1,
et seq.
; (8) violations of the Computer Fraud and Abuse Act, 18 U.S.C. § 1030,
et seq.
; (9) violations of the California Computer Data Access and Fraud Act, Cal. Penal Code § 502; (10) Trespass to Chattels; and (11) Tortious Interference with Contractual Relations and/or Prospective Economic Advantage. On February 7, 2018, the plaintiffs moved to certify an injunctive relief class of “[a]ll persons in California who own a Class Printer” under the “unfair” prong of the California unfair competition statute and a class of “[a]ll persons in the United States who purchased a Class Printer and experienced a print failure while using a non-HP aftermarket cartridge during the period between March 1, 2015 and December 31, 2017” under the Computer Fraud and Abuse Act and common law trespass to chattels. On March 29, 2018, the court granted in part and denied in part HP’s motion to dismiss. The court dismissed the plaintiffs’ claim under the “unfair” prong of the California unfair competition statute, claims under the non-California consumer protection statutes, and claim for tortious interference with contractual relations and/or prospective economic advantage. The court also dismissed in part the plaintiffs’ fraud-based claims under the California consumer protection statutes and computer hacking claims under the Computer Fraud and Abuse Act and California Computer Data Access and Fraud Act. The court denied HP’s motion to dismiss with respect to the plaintiffs’ claim for trespass to chattels and claim under the “unlawful” prong of the California unfair competition statute. The court granted the plaintiffs leave to amend on all of the dismissed claims, except the California Computer Data Access and Fraud Act claim to the extent it was based on two specific subsections of that statute. The deadline for the plaintiffs to file a consolidated second amended complaint is July 12, 2018.
Autonomy-Related Legal Matters
Investigations
.
As a result of the findings of an ongoing investigation, HP has provided information to the U.K. Serious Fraud Office, the U.S. Department of Justice (“DOJ”) and the SEC related to the accounting improprieties, disclosure failures and misrepresentations at Autonomy that occurred prior to and in connection with HP’s acquisition of Autonomy. On January 19, 2015, the U.K. Serious Fraud Office notified HP that it was closing its investigation and had decided to cede jurisdiction of the investigation to the U.S. authorities. On November 14, 2016, the DOJ announced that a federal grand jury indicted Sushovan Hussain, the former CFO of Autonomy. Mr. Hussain was charged with conspiracy to commit wire fraud, securities fraud, and multiple counts of wire fraud. The indictment alleged that Mr. Hussain engaged in a scheme to defraud purchasers and sellers of securities of Autonomy and HP about the true performance of Autonomy’s business, its financial condition, and its prospects for growth. A jury trial commenced on February 26, 2018. On April 30, 2018, the jury found Mr. Hussain guilty of all charges against him. On November 15, 2016, the SEC announced that Stouffer Egan, the former CEO of Autonomy’s U.S.-based operations, settled charges relating to his participation in an accounting scheme to meet internal sales targets and analyst revenue expectations. HP is continuing to cooperate with the ongoing enforcement actions.
Autonomy Corporation Limited v. Michael Lynch and Sushovan Hussain
.
On April 17, 2015,
four
former-HP subsidiaries that became subsidiaries of Hewlett Packard Enterprise at the time of the Separation (Autonomy Corporation Limited, Hewlett Packard Vision BV, Autonomy Systems, Limited, and Autonomy, Inc.) initiated civil proceedings in the U.K. High Court of Justice against
two
members of Autonomy’s former management, Michael Lynch and Sushovan Hussain. The Particulars of Claim seek damages in excess of
$5 billion
from Messrs. Lynch and Hussain for breach of their fiduciary duties by causing Autonomy group companies to engage in improper transactions and accounting practices. On October 1, 2015, Messrs. Lynch and Hussain filed their defenses. Mr. Lynch also filed a counterclaim against Autonomy Corporation Limited seeking
$160 million
in damages, among other things, for alleged misstatements regarding Lynch. The Hewlett Packard Enterprise subsidiary claimants filed their replies to the defenses and the asserted counter-claim on March 11, 2016. The parties are actively engaged in the disclosure process. A
six
-month trial is scheduled to begin on March 25, 2019.
Environmental
HP’s operations and products are subject to various federal, state, local and foreign laws and regulations concerning environmental protection, including laws addressing the discharge of pollutants into the air and water, the management and disposal of hazardous substances and wastes, the cleanup of contaminated sites, the content of HP’s products and the recycling, treatment and disposal of those products. In particular, HP faces increasing complexity in its product design and procurement operations as it adjusts to new and future requirements relating to the chemical and materials composition of its products, their safe use, and the energy consumption associated with those products, including requirements relating to climate change. HP is also subject to legislation in an increasing number of jurisdictions that makes producers of electrical goods, including computers and printers, financially responsible for specified collection, recycling, treatment and disposal of past and future covered products (sometimes referred to as “product take-back legislation”). HP could incur substantial costs, its products could be restricted from entering certain jurisdictions, and it could face other sanctions, if it were to violate or become liable under
HP INC. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements (Continued)
(Unaudited)
Note 13: Litigations and Contingencies (Continued)
environmental laws or if its products become noncompliant with environmental laws. HP’s potential exposure includes fines and civil or criminal sanctions, third-party property damage or personal injury claims and clean-up costs. The amount and timing of costs to comply with environmental laws are difficult to predict.
HP is party to, or otherwise involved in, proceedings brought by U.S. or state environmental agencies under the Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA”), known as “Superfund,” or state laws similar to CERCLA, and may become a party to, or otherwise involved in, proceedings brought by private parties for contribution towards clean-up costs. HP is also conducting environmental investigations or remediations at several current or former operating sites pursuant to administrative orders or consent agreements with state environmental agencies.
The separation and distribution agreement includes provisions that provide for the allocation of environmental liabilities between HP and Hewlett Packard Enterprise including certain remediation obligations; responsibilities arising from the chemical and materials composition of their respective products, their safe use and their energy consumption; obligations under product take back legislation that addresses the collection, recycling, treatment and disposal of products; and other environmental matters. HP will generally be responsible for environmental liabilities related to the properties and other assets, including products, allocated to HP under the separation and distribution agreement and other ancillary agreements. Under these agreements, HP will indemnify Hewlett Packard Enterprise for liabilities for specified ongoing remediation projects, subject to certain limitations, and Hewlett Packard Enterprise has a payment obligation for a specified portion of the cost of those remediation projects. In addition, HP will share with Hewlett Packard Enterprise other environmental liabilities as set forth in the separation and distribution agreement. HP is indemnified in whole or in part by Hewlett Packard Enterprise for liabilities arising from the assets assigned to Hewlett Packard Enterprise and for certain environmental matters as detailed in the separation and distribution agreement.
Note 14: Guarantees, Indemnifications and Warranties
Guarantees
In the ordinary course of business, HP may issue performance guarantees to certain of its clients, customers and other parties pursuant to which HP has guaranteed the performance obligations of third parties. Some of those guarantees may be backed by standby letters of credit or surety bonds. In general, HP would be obligated to perform over the term of the guarantee in the event a specified triggering event occurs as defined by the guarantee. HP believes the likelihood of having to perform under a material guarantee is remote.
Indemnifications
In the ordinary course of business, HP enters into contractual arrangements under which HP may agree to indemnify a third party to such arrangement from any losses incurred relating to the services they perform on behalf of HP or for losses arising from certain events as defined within the particular contract, which may include, for example, litigation or claims relating to past performance. HP also provides indemnifications to certain vendors and customers against claims of intellectual property infringement made by third parties arising from the vendors’ and customers’ use of HP’s software products and services and certain other matters. Some indemnifications may not be subject to maximum loss clauses. Historically, payments made related to these indemnifications have been immaterial.
Cross-Indemnifications with Hewlett Packard Enterprise
Under the separation and distribution agreement, HP agreed to indemnify Hewlett Packard Enterprise, each of its subsidiaries and each of their respective directors, officers and employees from and against all liabilities relating to, arising out of or resulting from, among other matters, the liabilities allocated to HP as part of the Separation. Hewlett Packard Enterprise similarly agreed to indemnify HP, each of its subsidiaries and each of their respective directors, officers and employees from and against all liabilities relating to, arising out of or resulting from, among other matters, the liabilities allocated to Hewlett Packard Enterprise as part of the Separation. HP expects Hewlett Packard Enterprise to fully perform under the terms of the separation and distribution agreement.
For information on the cross-indemnifications related to the tax matter agreements and litigations effective upon the Separation on November 1, 2015, see Note 6, “Taxes on Earnings”, and Note 13, “Litigation and Contingencies”, respectively.
Warranties
HP accrues the estimated cost of product warranties at the time it recognizes revenue. HP engages in extensive product quality programs and processes, including actively monitoring and evaluating the quality of its component suppliers; however, contractual warranty terms, repair costs, product call rates, average cost per call, current period product shipments and ongoing
HP INC. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements (Continued)
(Unaudited)
Note 14: Guarantees, Indemnifications and Warranties (Continued)
product failure rates, as well as specific product class failures outside of HP’s baseline experience, affect the estimated warranty obligation.
HP’s aggregate product warranty liabilities and changes were as follows:
|
|
|
|
|
|
Six months ended April 30, 2018
|
|
In millions
|
Balance at beginning of period
|
$
|
898
|
|
Accruals for warranties issued
|
501
|
|
Adjustments related to pre-existing warranties (including changes in estimates)
|
(8
|
)
|
Settlements made (in cash or in kind)
|
(490
|
)
|
Balance at end of period
|
$
|
901
|
|
Note 15: Acquisitions
On November 1, 2017, HP completed the acquisition of Samsung’s printer business. With this acquisition, HP now offers the industry’s strongest portfolio of A3 multifunction printers that deliver the simplicity of printers with the high performance of copiers. The fully integrated portfolio, including next-generation PageWide technologies, offers opportunities to grow managed print and document services as sales models shift from transactional to contractual. HP reports the financial results of the above business in the Printing segment.
The table below presents the preliminary purchase price allocation for HP's acquisition as of
November 1, 2017
and reflects various preliminary fair value estimates and analyses, including preliminary work performed by third-party valuation specialists, which are subject to change within the measurement period as valuations are finalized. The primary areas of the preliminary purchase price allocation that are not yet finalized relate to the fair values of certain tangible assets and liabilities acquired, the valuation of intangible assets acquired, certain legal matters, income and non-income based taxes, and residual goodwill. HP expects to continue to obtain information to assist it in determining the fair value of the net assets acquired at the acquisition date during the measurement period.
|
|
|
|
|
|
In millions
|
Goodwill
|
$
|
319
|
|
Amortizable intangible assets
|
520
|
|
Net assets assumed
|
184
|
|
Total fair value of consideration
|
$
|
1,023
|
|
HP INC. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements (Continued)
(Unaudited)
Note 16: Intangibles
HP’s acquired intangible assets were composed of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average Useful Lives
|
|
As of April 30, 2018
|
|
As of October 31, 2017
|
|
|
Gross
|
|
Accumulated Amortization
|
|
Net
|
|
Gross
|
|
Accumulated Amortization
|
|
Net
|
|
In years
|
|
In millions
|
Customer contracts, customer lists and distribution agreements
|
8
|
|
$
|
112
|
|
|
$
|
86
|
|
|
$
|
26
|
|
|
$
|
85
|
|
|
$
|
84
|
|
|
$
|
1
|
|
Technology and patents
|
7
|
|
591
|
|
|
134
|
|
|
457
|
|
|
98
|
|
|
96
|
|
|
2
|
|
Total intangible assets
|
|
|
$
|
703
|
|
|
$
|
220
|
|
|
$
|
483
|
|
|
$
|
183
|
|
|
$
|
180
|
|
|
$
|
3
|
|
During the
six
months ended
April 30, 2018
, the increase in gross intangible assets was primarily due to intangible assets resulting from the acquisition of Samsung’s printer business. The reported amounts are based on preliminary fair value estimates of the assets acquired.
As of April 30, 2018, estimated future amortization expense related to intangible assets was as follows:
|
|
|
|
|
Fiscal year
|
In millions
|
Remainder of 2018
|
$
|
39
|
|
2019
|
79
|
|
2020
|
79
|
|
2021
|
79
|
|
2022
|
79
|
|
Thereafter
|
128
|
|
Total
|
$
|
483
|
|