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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________________________
FORM 10-Q
(Mark One)
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended
April 30, 2020
Or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from            to            
Commission file number
1-4423
_________________________________________
HP INC.
(Exact name of registrant as specified in its charter)
Delaware

94-1081436
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. employer
identification no.)
1501 Page Mill Road

94304
Palo Alto,
California
 
(Zip code)
(Address of principal executive offices)
 
 
(650) 857-1501
(Registrant’s telephone number, including area code)
_______________________________________
Securities registered pursuant to Section 12(b) of the Securities Exchange Act of 1934:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common stock, par value $0.01 per share
HPQ
New York Stock Exchange
Preferred Share Purchase Rights
 
New York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 (the “Exchange Act”) during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  No 
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes  No 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer Accelerated filer
Non-accelerated filer  Smaller reporting company
                                 Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  No 
The number of shares of HP common stock outstanding as of April 30, 2020 was 1,429,956,853 shares.
 




HP INC. AND SUBSIDIARIES
Form 10-Q
For the Quarterly Period ended April 30, 2020
Table of Contents
In this report on Form 10-Q, for all periods presented, “we”, “us”, “our”, “company”, the “Company”, “HP” and “HP Inc.” refer to HP Inc. (formerly Hewlett-Packard Company) and its consolidated subsidiaries.


2


Forward-Looking Statements
This Quarterly Report on Form 10-Q, including “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 2 of Part I, contains forward-looking statements based on current expectations and assumptions that involve risks and uncertainties. If the risks or uncertainties ever materialize or the assumptions prove incorrect, the results of HP Inc. and its consolidated subsidiaries (“HP”) may differ materially from those expressed or implied by such forward-looking statements and assumptions. All statements other than statements of historical fact are statements that could be deemed forward-looking statements, including, but not limited to, any statements regarding the potential impact of the COVID-19 pandemic and the actions by governments, businesses and individuals in response to the situation; projections of net revenue, margins, expenses, effective tax rates, net earnings, net earnings per share, cash flows, benefit plan funding, deferred taxes, share repurchases, foreign currency exchange rates or other financial items; any projections of the amount, timing or impact of cost savings or restructuring and other charges, planned structural cost reductions and productivity initiatives; any statements of the plans, strategies and objectives of management for future operations, including, but not limited to, our business model and transformation, our sustainability goals, our go-to-market strategy, the execution of restructuring plans and any resulting cost savings, net revenue or profitability improvements or other financial impacts; any statements concerning the expected development, performance, market share or competitive performance relating to products or services; any statements regarding current or future macroeconomic trends or events and the impact of those trends and events on HP and its financial performance; any statements regarding pending investigations, claims or disputes; any statements of expectation or belief, including with respect to the timing and expected benefits of acquisitions and other business combination and investment transactions; and any statements of assumptions underlying any of the foregoing. Forward-looking statements can also generally be identified by words such as “future,” “anticipates,” “believes,” “estimates,” “expects,” “intends,” “plans,” “predicts,” “projects,” “will,” “would,” “could,” “can,” “may,” and similar terms. Risks, uncertainties and assumptions include factors relating to the effects of the COVID-19 pandemic and the actions by governments, businesses and individuals in response to the situation, the effects of which may give rise to or amplify the risks associated with many of these factors listed here; HP’s ability to execute on its strategic plan, including the recently announced initiatives, business model changes and transformation; execution of planned structural cost reductions and productivity initiatives; HP’s ability to complete any contemplated share repurchases, other capital return programs or other strategic transactions; the need to address the many challenges facing HP’s businesses; the competitive pressures faced by HP’s businesses; risks associated with executing HP’s strategy and business model changes and transformation; successfully innovating, developing and executing HP’s go-to-market strategy, including online, omnichannel and contractual sales, in an evolving distribution and reseller landscape; the development and transition of new products and services and the enhancement of existing products and services to meet customer needs and respond to emerging technological trends; successfully competing and maintaining the value proposition of HP’s products, including supplies; the need to manage third-party suppliers, manage HP’s global, multi-tier distribution network, limit potential misuse of pricing programs by HP’s channel partners, adapt to new or changing marketplaces and effectively deliver HP’s services; challenges to HP’s ability to accurately forecast inventories, demand and pricing, which may be due to HP’s multi-tiered channel, sales of HP’s products to unauthorized resellers or unauthorized resale of HP’s products; integration and other risks associated with business combination and investment transactions; the results of the restructuring plans, including estimates and assumptions related to the cost (including any possible disruption of HP’s business) and the anticipated benefits of the restructuring plans; the protection of HP’s intellectual property assets, including intellectual property licensed from third parties; the hiring and retention of key employees; the impact of macroeconomic and geopolitical trends and events; risks associated with HP’s international operations; the execution and performance of contracts by HP and its suppliers, customers, clients and partners; disruptions in operations from system security risks, data protection breaches, cyberattacks, extreme weather conditions, medical epidemics or pandemics such as the COVID-19 pandemic, and other natural or manmade disasters or catastrophic events; the impact of changes in tax laws; potential liabilities and costs from pending or potential investigations, claims and disputes; and other risks that are described herein, including but not limited to the items discussed in “Risk Factors” in Item 1A of Part II of this report as well as in Item 1A “Risk Factors” of Part I in our Annual Report on Form 10-K for the fiscal year ended October 31, 2019 and that are otherwise described or updated from time to time in HP’s other filings with the Securities and Exchange Commission (the “SEC”). The forward-looking statements in this report are made as of the date of this filing and HP assumes no obligation and does not intend to update these forward-looking statements.

3


Part I. Financial Information

ITEM 1. Financial Statements and Supplementary Data.
Index
 
Page


4


HP INC. AND SUBSIDIARIES
Consolidated Condensed Statements of Earnings
(Unaudited)
 
Three months ended April 30
 
Six months ended April 30
 
2020
 
2019
 
2020
 
2019
 
In millions, except per share amounts
Net revenue
$
12,469

 
$
14,036

 
$
27,087

 
$
28,746

Costs and expenses:
 
 
 

 
 
 
 
Cost of revenue
9,976

 
11,307

 
21,722

 
23,405

Research and development
338

 
353

 
738

 
697

Selling, general and administrative
1,216

 
1,339

 
2,506

 
2,587

Restructuring and other charges
81

 
69

 
372

 
124

Acquisition-related charges
3

 
11

 
3

 
21

Amortization of intangible assets
29

 
29

 
55

 
58

Total costs and expenses
11,643

 
13,108

 
25,396

 
26,892

Earnings from operations
826

 
928
 
1,691

 
1,854

Interest and other, net

 
(45
)
 
13

 
(71
)
Earnings before taxes
826

 
883
 
1,704

 
1,783

Provision for taxes
(62
)
 
(101
)
 
(262
)
 
(198
)
Net earnings
$
764

 
$
782

 
$
1,442

 
$
1,585

 
 
 
 
 
 
 
 
Net earnings per share:
 

 
 

 
 
 
 
Basic
$
0.53

 
$
0.51

 
$
1.00

 
$
1.03

Diluted
$
0.53

 
$
0.51

 
$
0.99

 
$
1.02

 
 
 
 
 
 
 
 
Weighted-average shares used to compute net earnings per share:
 

 
 

 
 
 
 
Basic
1,435

 
1,529

 
1,444

 
1,543

Diluted
1,440

 
1,536

 
1,450

 
1,551

The accompanying notes are an integral part of these Consolidated Condensed Financial Statements.


5


HP INC. AND SUBSIDIARIES
Consolidated Condensed Statements of Comprehensive Income
(Unaudited)
 
Three months ended April 30
 
Six months ended April 30
 
2020
 
2019
 
2020
 
2019
 
In millions
Net earnings
$
764

 
$
782

 
$
1,442

 
$
1,585

Other comprehensive income (loss) before taxes:
 

 
 

 
 

 
 

Change in unrealized components of available-for-sale debt securities:
 

 
 

 
 

 
 

Unrealized losses arising during the period
(2
)
 

 
(1
)
 

Losses reclassified into earnings

 
3

 

 
3

 
(2
)
 
3

 
(1
)
 
3

Change in unrealized components of cash flow hedges:
 

 
 

 
 

 
 

Unrealized gains arising during the period
231

 
198

 
291

 
91

(Gains) losses reclassified into earnings
(53
)
 
6

 
(112
)
 
(173
)

178

 
204

 
179

 
(82
)
Change in unrealized components of defined benefit plans:
 

 
 

 
 

 
 

Losses arising during the period
(1
)
 
(4
)
 
(1
)
 
(4
)
Amortization of actuarial loss and prior service benefit
21

 
12

 
41

 
23

Curtailments, settlements and other
1

 
1

 
1

 
(1
)

21

 
9

 
41

 
18

Change in cumulative translation adjustment
(17
)
 
13

 
(11
)
 
8

Other comprehensive income (loss) before taxes
180

 
229

 
208

 
(53
)
Provision for taxes
(22
)
 
(42
)
 
(33
)
 
(2
)
Other comprehensive income (loss), net of taxes
158

 
187

 
175

 
(55
)
Comprehensive income
$
922

 
$
969

 
$
1,617

 
$
1,530

The accompanying notes are an integral part of these Consolidated Condensed Financial Statements.

6


HP INC. AND SUBSIDIARIES
Consolidated Condensed Balance Sheets
(Unaudited)
 
As of
 
April 30, 2020
 
October 31, 2019
 
In millions, except par value 
ASSETS
 

 
 

Current assets:
 

 
 

Cash and cash equivalents
$
4,054

 
$
4,537

Accounts receivable, net
5,146

 
6,031

Inventory
6,354

 
5,734

Other current assets
4,106

 
3,875

Total current assets
19,660

 
20,177

Property, plant and equipment, net
2,714

 
2,794

Goodwill
6,370

 
6,372

Other non-current assets
5,029

 
4,124

Total assets
$
33,773

 
$
33,467

LIABILITIES AND STOCKHOLDERS’ DEFICIT
 

 
 

Current liabilities:
 

 
 

Notes payable and short-term borrowings
$
1,551

 
$
357

Accounts payable
14,195

 
14,793

Other current liabilities
9,530

 
10,143

Total current liabilities
25,276

 
25,293

Long-term debt
3,941

 
4,780

Other non-current liabilities
5,299

 
4,587

Stockholders’ deficit:
 

 
 

Preferred stock, $0.01 par value (300 shares authorized; none issued)

 

Common stock, $0.01 par value (9,600 shares authorized; 1,430 and 1,458 shares issued and outstanding at April 30, 2020 and October 31, 2019, respectively)
14

 
15

Additional paid-in capital
926

 
835

Accumulated deficit
(633
)
 
(818
)
Accumulated other comprehensive loss
(1,050
)
 
(1,225
)
Total stockholders’ deficit
(743
)
 
(1,193
)
Total liabilities and stockholders’ deficit
$
33,773

 
$
33,467

The accompanying notes are an integral part of these Consolidated Condensed Financial Statements.

7


HP INC. AND SUBSIDIARIES
Consolidated Condensed Statements of Cash Flows
(Unaudited)
 
Six months ended April 30
 
2020
 
2019
 
In millions
Cash flows from operating activities:
 

 
 

Net earnings
$
1,442

 
$
1,585

Adjustments to reconcile net earnings to net cash provided by operating activities:
 

 
 

Depreciation and amortization
396

 
349

Stock-based compensation expense
172

 
173

Restructuring and other charges
372

 
124

Deferred taxes on earnings
114

 
118

Other, net
153

 
113

Changes in operating assets and liabilities, net of acquisitions:
 

 
 

Accounts receivable
856

 
(103
)
Inventory
(645
)
 
362

Accounts payable
(518
)
 
(963
)
Net investment in leases
(85
)
 

Taxes on earnings
(149
)
 

Restructuring and other
(337
)
 
(79
)
Other assets and liabilities
(996
)
 
44

Net cash provided by operating activities
775

 
1,723

Cash flows from investing activities:
 

 
 

Investment in property, plant and equipment
(347
)
 
(303
)
Proceeds from sale of property, plant and equipment
3

 

Purchases of available-for-sale securities and other investments
(303
)
 
(69
)
Maturities and sales of available-for-sale securities and other investments
303

 
754

Collateral posted for derivative instruments

 
(32
)
Collateral returned for derivative instruments

 
32

Payment made in connection with business acquisitions, net of cash acquired
(36
)
 
(404
)
Net cash used in investing activities
(380
)
 
(22
)
Cash flows from financing activities:
 

 
 

Payments of short-term borrowings with original maturities less than 90 days, net
613

 
(856
)
Proceeds from short-term borrowings with original maturities greater than 90 days
11

 

Proceeds from debt, net of issuance costs
58

 
64

Payment of debt
(126
)
 
(538
)
Stock-based award activities
(112
)
 
(76
)
Repurchase of common stock
(814
)
 
(1,411
)
Cash dividends paid
(508
)
 
(494
)
Net cash used in financing activities
(878
)
 
(3,311
)
Decrease in cash and cash equivalents
(483
)
 
(1,610
)
Cash and cash equivalents at beginning of period
4,537

 
5,166

Cash and cash equivalents at end of period
$
4,054

 
$
3,556

Supplemental schedule of non-cash activities:
 

 
 

Purchase of assets under finance leases
$
19

 
$
165

The accompanying notes are an integral part of these Consolidated Condensed Financial Statements.

8


HP INC. AND SUBSIDIARIES
Consolidated Condensed Statements of Stockholders’ Deficit
(Unaudited)
 
Common Stock
 
Additional
Paid-in Capital
 
 
 
Accumulated
Other
Comprehensive Loss
 
 Total Stockholders’ Deficit
 
Number of Shares
 
Par Value
 
 
Accumulated Deficit
 
 
 
In millions, except number of shares in thousands
Balance January 31, 2019
1,539,372

 
$
15

 
$
666

 
$
(1,431
)
 
$
(1,087
)
 
$
(1,837
)
Net earnings
 
 
 
 
 
 
782

 
 
 
782

Other comprehensive income, net of taxes
 
 
 
 
 
 
 
 
187

 
187

Comprehensive income
 
 
 
 
 
 
 
 
 
 
969

Issuance of common stock in connection with employee stock plans and other
765

 
 
 
5

 
 
 
 
 
5

Repurchases of common stock
(33,845
)
 
 
 
(14
)
 
(679
)
 
 
 
(693
)
Cash dividends
 
 
 
 
 
 
3

 
 
 
3

Stock-based compensation expense
 
 
 
 
66

 
 
 
 
 
66

Balance April 30, 2019
1,506,292

 
$
15

 
$
723

 
$
(1,325
)
 
$
(900
)
 
$
(1,487
)
 
 
 
 
 
 
 
 
 
 
 
 
Balance January 31, 2020
1,433,346

 
$
14

 
$
866

 
$
(1,306
)
 
$
(1,208
)
 
$
(1,634
)
Net earnings
 
 
 
 
 
 
764

 
 
 
764

Other comprehensive income, net of taxes
 
 
 
 
 
 
 
 
158

 
158

Comprehensive income
 
 
 
 
 
 
 
 
 
 
922

Issuance of common stock in connection with employee stock plans and other
954

 
 
 


 
 
 
 
 

Repurchases of common stock
(4,343
)
 


 
(3
)
 
(94
)
 
 
 
(97
)
Cash dividends
 
 
 
 
 
 
3

 
 
 
3

Stock-based compensation expense
 
 
 
 
63

 
 
 
 
 
63

Balance April 30, 2020
1,429,957

 
$
14

 
$
926

 
$
(633
)
 
$
(1,050
)
 
$
(743
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Common Stock
 
Additional
Paid-in Capital
 
 
 
Accumulated
Other
Comprehensive Loss
 
 Total Stockholders’ Deficit
 
Number of Shares
 
Par Value
 
 
Accumulated Deficit
 
 
 
In millions, except number of shares in thousands
Balance October 31, 2018
1,560,270

 
$
16

 
$
663

 
$
(473
)
 
$
(845
)
 
$
(639
)
Net earnings


 


 


 
1,585

 


 
1,585

Other comprehensive loss, net of taxes


 


 


 


 
(55
)
 
(55
)
Comprehensive income


 


 


 


 


 
1,530

Issuance of common stock in connection with employee stock plans and other
12,144

 


 
(86
)
 


 


 
(86
)
Repurchases of common stock
(66,122
)
 
(1
)
 
(27
)
 
(1,381
)
 


 
(1,409
)
Cash dividends ($0.32 per common share)


 


 


 
(493
)
 


 
(493
)
Stock-based compensation expense


 


 
173

 


 


 
173

Adjustment for adoption of accounting standards


 


 


 
(563
)
 


 
(563
)
Balance April 30, 2019
1,506,292

 
$
15

 
$
723

 
$
(1,325
)
 
$
(900
)
 
$
(1,487
)
 
 
 
 
 
 
 
 
 
 
 
 
Balance October 31, 2019
1,457,719

 
$
15

 
$
835

 
$
(818
)
 
$
(1,225
)
 
$
(1,193
)
Net earnings


 


 


 
1,442

 


 
1,442

Other comprehensive income, net of taxes


 


 


 


 
175

 
175

Comprehensive income


 


 


 


 


 
1,617

Issuance of common stock in connection with employee stock plans and other
10,763

 


 
(58
)
 


 


 
(58
)
Repurchases of common stock
(38,525
)
 
(1
)
 
(23
)
 
(776
)
 


 
(800
)
Cash dividends ($0.35 per common share)


 


 


 
(508
)
 


 
(508
)
Stock-based compensation expense


 


 
172

 


 


 
172

Adjustment for adoption of accounting standards (Note 1)


 


 


 
27

 


 
27

Balance April 30, 2020
1,429,957

 
$
14

 
$
926

 
$
(633
)
 
$
(1,050
)
 
$
(743
)
The accompanying notes are an integral part of these Consolidated Condensed Financial Statements.

9


HP INC. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements
(Unaudited)
Note 1: Basis of Presentation
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 Financial Statements for the fiscal year ended October 31, 2019 in the Annual Report on Form 10-K, filed on December 12, 2019. The Consolidated Condensed Balance Sheet for October 31, 2019 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.
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 may differ materially from those estimates. As of April 30, 2020, the extent to which the COVID-19 pandemic will impact our business going forward depends on numerous dynamic factors which we cannot reliably predict. As a result, many of our estimates and assumptions required increased judgment and carry a higher degree of variability and volatility. As the events continue to evolve with respect to the pandemic, our estimates may materially change in future periods.
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, HP and Hewlett Packard Enterprise entered into a separation and distribution agreement, an employee matters agreement and various other agreements which remain enforceable and provide a framework for the continuing relationships between the parties. For more information on the impacts of these agreements, see Note 6, “Supplementary Financial Information”, Note 12, “Litigation and Contingencies” and Note 13, “Guarantees, Indemnifications and Warranties”.
Recently Adopted Accounting Pronouncements
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 adopted this guidance in the first quarter of fiscal year 2020. The implementation of this guidance did not have a material impact on its Consolidated Condensed Financial Statements.
In February 2016, the FASB issued amended guidance on the accounting for leasing transactions. The primary objective of this update is to increase transparency and comparability among organizations by requiring lessees to recognize a lease liability for the obligation to make lease payments and a right-of-use (“ROU”) asset for the right to use the underlying asset over the lease term. The guidance also results in some changes to lessor accounting and requires additional disclosures about all leasing arrangements.
HP adopted the standard (the “new lease standard”) as of November 1, 2019 using a modified retrospective approach, with the cumulative effect adjustment to the opening balance of accumulated deficit as of the adoption date. HP elected to apply the practical expedient using the transition option whereby prior comparative periods were not retrospectively adjusted in the Consolidated Condensed Financial Statements. HP also elected the package of practical expedients, which does not require reassessment of initial direct costs, classification of a lease, and definition of a lease. The Company has elected not to record leases with an initial term of 12 months or less on the Consolidated Condensed Balance Sheets. Lease expense on such leases is recognized on a straight-line basis over the lease term. HP has also elected the lessee practical expedient to combine lease and non-lease components for certain asset classes.
The adoption of the new lease standard resulted in the recognition of $1.2 billion in operating lease liabilities and $1.2 billion of related ROU assets on the Consolidated Condensed Balance Sheets. The net impact of adoption to accumulated deficit as on November 1, 2019 is not considered material. As of November 1, 2019, there were no material finance leases for which HP was a lessee.
The new lease standard also made some changes to lessor accounting, including alignment with the new revenue recognition standard. HP now records revenue upfront on certain aspects of its as-a-service offerings and reflects financing of these offerings

10

HP INC. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements (Continued)
(Unaudited)
Note 1: Basis of Presentation (Continued)

as cash flows from financing activities on the Consolidated Condensed Statements of Cash Flows. These changes did not have a material impact on the Consolidated Condensed Financial Statements.
Refer to Note 14 “Leases” for additional disclosures related to leases.
Recently Issued Accounting Pronouncements Not Yet Adopted
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 will adopt the guidance in the first quarter of fiscal year 2021 using a modified retrospective approach. HP is currently evaluating the impact of this guidance on the Consolidated Condensed Financial Statements.
Revenue Recognition
General
HP recognizes revenues at a point in time or over time depicting the transfer of promised goods or services to customers in an amount that reflects the consideration to which HP expects to be entitled in exchange for those goods or services. HP follows the five-step model for revenue recognition as summarized below:
1. Identify the contract with a customer - A contract with customer exists when (i) it is approved and signed by all parties,
(ii) each party’s rights and obligations can be identified, (iii) payment terms are defined, (iv) it has commercial substance and (v) the customer has the ability and intent to pay. HP evaluates customers’ ability to pay based on various factors like historical payment experience, financial metrics and customer credit scores. While the majority of our sales contracts contain standard terms and conditions, there are certain contracts with non-standard terms and conditions.
2. Identify the performance obligations in the contract - HP evaluates each performance obligation in an arrangement to
determine whether it is distinct, such as hardware and/or service. A performance obligation constitutes distinct goods or services when the customer can benefit from such goods or services either on its own or together with other resources that are readily available to the customer and the performance obligation is distinct within the context of the contract.
3. Determine the transaction price - Transaction price is the amount of consideration to which HP expects to be entitled in
exchange for transferring goods or services to the customer. If the transaction price includes a variable amount, HP estimates the amount it expects to be entitled to using either the expected value or the most likely amount method.
HP reduces the transaction price at the time of revenue recognition for customer and distributor programs and incentive
offerings, rebates, promotions, other volume-based incentives and expected returns. HP uses estimates to determine the expected variable consideration for such programs based on factors like historical experience, expected consumer behavior and market conditions.
HP has elected the practical expedient of not accounting for significant financing components if the period between
revenue recognition and when the customer pays for the product or service is one year or less.
4. Allocate the transaction price to performance obligations in the contract - When a sales arrangement contains multiple
performance obligations, such as hardware and/or services, HP allocates revenue to each performance obligation in proportion to their selling price. The selling price for each performance obligation is based on its Standalone Selling Price (“SSP”). HP establishes SSP using the price charged for a performance obligation when sold separately (“observable price”) and, in some instances, using the price established by management having the relevant authority. When observable price is not available, HP establishes SSP based on management judgment considering internal factors such as margin objectives, pricing practices and controls, customer segment pricing strategies and the product life cycle. Consideration is also given to market conditions such as competitor pricing strategies and technology industry life cycles.
5. Recognize revenue when (or as) the performance obligation is satisfied - Revenue is recognized when, or as, a
performance obligation is satisfied by transferring control of a promised good or service to a customer. HP generally invoices the customer upon delivery of the goods or services and the payments are due as per contract terms. For fixed price support or maintenance contracts that are in the nature of stand-ready obligations, payments are generally received in advance from customers and revenue is recognized on a straight-line basis over the duration of the contract.
HP reports revenue net of any taxes collected from customers and remitted to government authorities, and the collected taxes are recorded as other current liabilities until remitted to the relevant government authority. HP includes costs related to shipping and handling in cost of revenue.
HP records revenue on a gross basis when HP is a principal in the transaction and on a net basis when HP is acting as an agent between the customer and the vendor. HP considers several factors to determine whether it is acting as a principal or an agent, most notably whether HP is the primary obligor to the customer, has established its own pricing and has inventory and credit risks.

11

HP INC. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements (Continued)
(Unaudited)
Note 1: Basis of Presentation (Continued)

Hardware
HP transfers control of the products to the customer at the time the product is delivered to the customer and recognizes revenue accordingly, unless customer acceptance is uncertain or significant obligations to the customer remain unfulfilled. HP records revenue from the sale of equipment under sales-type leases as revenue at the commencement of the lease.
Services
HP recognizes revenue from fixed-price support, maintenance and other service contracts over time depicting the pattern of service delivery and recognizes the costs associated with these contracts as incurred.
Contract Assets and Liabilities
Contract assets are rights to consideration in exchange for goods or services that HP has transferred to a customer when such right is conditional on something other than the passage of time. Such contract assets are not material to HP’s Consolidated Financial Statements.
Contract liabilities are recorded as deferred revenues when amounts invoiced to customers are more than the revenues recognized or when payments are received in advance for fixed price support or maintenance contracts. The short-term and long-term deferred revenues are reported within the other current liabilities and other non-current liabilities respectively.
Cost to obtain a contract and fulfillment cost
Incremental direct costs of obtaining a contract primarily consist of sales commissions. HP has elected the practical expedient to expense as incurred the costs to obtain a contract with a benefit period equal to or less than one year. For contracts with a period of benefit greater than one year, HP capitalizes incremental costs of obtaining a contract with a customer and amortizes these costs over their expected period of benefit provided such costs are recoverable.
Fulfillment costs consist of set-up and transition costs related to other service contracts. These costs generate or enhance resources of HP that will be used in satisfying the performance obligation in the future and are capitalized and amortized over the expected period of the benefit, provided such costs are recoverable.
See Note 6, “Supplementary Financial Information” for details on net revenue by region, cost to obtain a contract and fulfillment cost, contract liabilities and value of remaining performance obligations.
Leases
At the inception of a contract, HP assesses whether the contract is, or contains, a lease. The assessment is based on (1) whether the contract involves the use of a distinct identified asset, (2) whether HP obtains the right to substantially all the economic benefit from the use of the asset throughout the period, and (3) whether HP has the right to direct the use of the asset.
All significant lease arrangements are recognized at lease commencement. Leases with a lease term of 12 months or less at inception are not recorded on the Consolidated Condensed Balance Sheets and are expensed on a straight-line basis over the lease term in the Consolidated Condensed Statement of Earnings. HP determines the lease term by assuming the exercise of renewal options that are reasonably certain. As most of the leases do not provide an implicit interest rate, HP uses the unsecured borrowing rate and risk-adjusts that rate to approximate a collateralized rate at the commencement date to determine the present value of future payments that are reasonably certain.



12

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 reportable segments: Personal Systems, Printing and Corporate Investments. HP’s organizational structure is based on many factors that the chief operating decision maker (“CODM”) 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 CODM to evaluate segment results. The CODM 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 offers commercial and consumer desktop and notebook personal computers (“PCs”), workstations, thin clients, commercial mobility devices, retail point-of-sale (“POS”) systems, displays and other related accessories, software, support and services. HP groups commercial notebooks, commercial desktops, commercial services, commercial mobility devices, commercial detachables and convertibles, workstations, retail POS 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 enterprise, public sector and SMB customers, with a focus on robust designs, security, serviceability, connectivity, reliability and manageability in networked and cloud-based environments. Additionally, HP offers a range of services and solutions to enterprise, public sector and SMB customers to help them manage the lifecycle of their PC and mobility installed base. 
Consumer PCs are optimized for consumer usage, focusing on gaming, consuming multi-media for entertainment, managing personal life activities, staying connected, sharing information, getting things done for work including creating content, staying informed and security.
Personal Systems groups its global business capabilities into the following business units 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 POS 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, services and solutions, as well as scanning devices. Printing is also focused on imaging solutions in the commercial and industrial 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 OEM hardware and solutions, and some Samsung-branded supplies. HP goes to market through its extensive channel network and directly with HP sales.
Home Printing Solutions delivers innovative printing products, supplies, services and solutions for the home, home business and micro business customers utilizing both HP’s Ink and Laser technologies. It also includes some Samsung-branded supplies.
Graphics Solutions delivers large-format, commercial and industrial solutions and supplies to print service providers and packaging converters through a wide portfolio of printers and presses (HP DesignJet, HP Latex, HP Stitch, HP Indigo and HP PageWide Web Presses).
3D Printing & Digital Manufacturing offers a portfolio of additive manufacturing solutions and supplies to help customers succeed in their additive and digital manufacturing journey. HP offers complete solutions in collaboration with an ecosystem of partners.
Printing groups its global business capabilities into the following business units when reporting business performance:

13

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 & digital manufacturing, excluding supplies;
Consumer Hardware consists of 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 and 3D printing & digital manufacturing supplies, for recurring use in consumer and commercial hardware.
Corporate Investments includes HP Labs and certain business incubation and investment projects.
The accounting policies HP uses to derive segment results are substantially the same as those used by HP 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 infrastructure investments, stock-based compensation expense, restructuring and other charges, acquisition-related charges and amortization of intangible assets.


14

HP INC. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements (Continued)
(Unaudited)
Note 2: Segment Information (Continued)

Segment Operating Results from Operations and the reconciliation to HP consolidated results were as follows:
 
Three months ended April 30
 
Six months ended April 30
 
2020
 
2019
 
2020
 
2019
 
In millions
Net revenue:
 
 
 
 
Notebooks
$
5,083

 
$
5,099

 
$
11,057

 
$
11,018

Desktops
2,409

 
2,940

 
5,332

 
5,797

Workstations
439

 
569

 
1,033

 
1,131

Other
382

 
313

 
783

 
632

Personal Systems
8,313

 
8,921

 
18,205

 
18,578

Supplies
2,841

 
3,331

 
5,882

 
6,598

Commercial Hardware
808

 
1,179

 
1,884

 
2,269

Consumer Hardware
509

 
606

 
1,116

 
1,305

Printing
4,158

 
5,116

 
8,882

 
10,172

Corporate Investments

 

 
1

 
1

Total segment net revenue
12,471

 
14,037

 
27,088

 
28,751

Other
(2
)
 
(1
)
 
(1
)
 
(5
)
Total net revenue
$
12,469

 
$
14,036

 
$
27,087

 
$
28,746

 
 

 
 

 
 
 
 
Earnings before taxes:
 
 
 
 
 
 
 
Personal Systems
$
552

 
$
385

 
$
1,214

 
$
795

Printing
548

 
839

 
1,302

 
1,660

Corporate Investments
(14
)
 
(24
)
 
(27
)
 
(48
)
Total segment earnings from operations
$
1,086

 
$
1,200

 
$
2,489

 
$
2,407

Corporate and unallocated costs and other
(84
)
 
(97
)
 
(196
)
 
(177
)
Stock-based compensation expense
(63
)
 
(66
)
 
(172
)
 
(173
)
Restructuring and other charges
(81
)
 
(69
)
 
(372
)
 
(124
)
Acquisition-related charges
(3
)
 
(11
)
 
(3
)
 
(21
)
Amortization of intangible assets
(29
)
 
(29
)
 
(55
)
 
(58
)
Interest and other, net

 
(45
)
 
13

 
(71
)
Total earnings before taxes
$
826

 
$
883

 
$
1,704

 
$
1,783




15

HP INC. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements
(Unaudited)

Note 3: Restructuring and Other Charges
Summary of Restructuring Plans
HP’s restructuring activities for the six months ended April 30, 2020 and 2019 summarized by plan were as follows:
 
Fiscal 2020 Plan
 


 
Severance and EER
 
Non-labor
 
Other prior-year Plans (1)
 
Total
 
In millions
Accrued balance as of October 31, 2019
$
76

 
$

 
$
66

 
$
142

Charges
282

 
2

 
1

 
285

Cash payments
(205
)
 
(2
)
 
(40
)
 
(247
)
Non-cash and other adjustments
(49
)
(2 
) 

 
(3
)
 
(52
)
Accrued balance as of April 30, 2020
$
104

 
$

 
$
24

 
$
128

Total costs incurred to date as of April 30, 2020
$
364

 
$
2

 
$
1,817

 
$
2,183

 
 
 
 
 
 
 
 
Reflected in Consolidated Condensed Balance Sheets
 
 
 
 

 

Other current liabilities
$
104

 
$

 
$
24

 
$
128

 
 
 
 
 
 
 
 
Accrued balance as of October 31, 2018
$

 
$

 
$
59

 
$
59

Charges

 

 
116

 
116

Cash payments

 

 
(72
)
 
(72
)
Non-cash and other adjustments

 

 
(14
)
 
(14
)
Accrued balance as of April 30, 2019
$

 
$

 
$
89

 
$
89



HP’s restructuring charges for the three months ended April 30, 2020 summarized by the plans outlined below were as follows:
 
Fiscal 2020 Plan
 
 
 
 
 
Severance and EER
 
Non-labor
 
Other prior-year plans(1)
 
Total
 
In millions
For the three months ended April 30, 2020
$
26

 
$
2

 
$

 
$
28

    
(1) 
Primarily includes the fiscal 2017 plan along with other legacy plans, all of which are substantially complete. HP does not expect any further material activity associated with these plans.

(2) 
Includes reclassification of liability related to the Enhanced Early Retirement (“EER”) plan of $44 million for certain healthcare and medical savings account benefits to pension and post-retirement plans. See Note 4 “Retirement and Post -Retirement Benefit Plans” for further information.

Fiscal 2020 Plan
On September 30, 2019, HP’s Board of Directors approved the Fiscal 2020 Plan intended to optimize and simplify its operating model and cost structure that HP expects will be implemented through fiscal 2022. HP expects to reduce global headcount by approximately 7,000 to 9,000 employees through a combination of employee exits and voluntary EER. HP estimates that it will incur pre-tax charges of approximately $1.0 billion relating to labor and non-labor actions. HP expects to incur approximately $0.9 billion primarily in labor costs related to workforce reductions and the remaining costs will relate to non-labor actions and other charges.



16

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, information technology rationalization efforts and proxy contest activities, and are distinct from ongoing operational costs. These costs primarily relate to third-party legal, professional services and other non-recurring costs. For the three and six months ended April 30, 2020, HP incurred $53 million and $87 million of other charges, respectively. For the three and six months ended April 30, 2019, HP incurred $6 million and $8 million of other charges, respectively.

17

HP INC. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements
(Unaudited)

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
 
2020
 
2019
 
2020
 
2019
 
2020
 
2019
 
In millions
Service cost
$

 
$

 
$
15

 
$
15

 
$
1

 
$

Interest cost
103

 
123

 
4

 
6

 
2

 
4

Expected return on plan assets
(175
)
 
(146
)
 
(10
)
 
(9
)
 
(5
)
 
(5
)
Amortization and deferrals:
 

 
 

 
 

 
 

 
 

 
 

Actuarial loss (gain)
16

 
15

 
11

 
8

 
(3
)
 
(8
)
Prior service benefit

 

 

 

 
(3
)
 
(3
)
Net periodic (credit) benefit cost
(56
)
 
(8
)
 
20

 
20

 
(8
)
 
(12
)
Settlement loss
1

 
1

 

 

 

 

Total periodic (credit) benefit cost
$
(55
)
 
$
(7
)
 
$
20

 
$
20

 
$
(8
)
 
$
(12
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Six months ended April 30
 
U.S. Defined Benefit Plans
 
Non-U.S. Defined Benefit Plans
 
Post- Retirement Benefit Plans
 
2020
 
2019
 
2020
 
2019
 
2020
 
2019
 
In millions
Service cost
$

 
$

 
$
31

 
$
29

 
$
1

 
$

Interest cost
206

 
246

 
9

 
12

 
5

 
8

Expected return on plan assets
(350
)
 
(291
)
 
(21
)
 
(19
)
 
(11
)
 
(10
)
Amortization and deferrals:


 


 


 


 


 


Actuarial loss (gain)
32

 
30

 
21

 
16

 
(5
)
 
(16
)
Prior service benefit

 

 
(1
)
 
(1
)
 
(6
)
 
(6
)
Net periodic (credit) benefit cost
(112
)
 
(15
)
 
39

 
37

 
(16
)
 
(24
)
Settlement loss
1

 
1

 

 

 

 

Special termination benefits

 

 

 

 
44

 

Total periodic (credit) benefit cost
$
(111
)
 
$
(14
)
 
$
39

 
$
37

 
$
28

 
$
(24
)

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 2020, HP anticipates making contributions of approximately $76 million to its non-U.S. pension plans, approximately $36 million to its U.S. non-qualified plan participants and approximately $6 million to cover benefit claims under HP’s post-retirement benefit plans. During the six months ended April 30, 2020, HP contributed $24 million to its non-U.S. pension plans, paid $15 million to cover benefit payments to U.S. non-qualified plan participants and paid $3 million to cover benefit claims under HP’s post-retirement benefit plans.
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.

18

HP INC. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements (Continued)
(Unaudited)
Note 4: Retirement and Post-Retirement Benefit Plans (Continued)

Retirement Incentive Program
As part of the Fiscal 2020 Plan, HP announced the voluntary EER program for its U.S. employees in October 2019. Voluntary participation in the EER program was limited to those employees who are at least 50 years old with 20 or more years of service at HP. Employees accepted into the EER program will leave HP on dates ranging from December 31, 2019 to September 30, 2020. The EER benefit will be a cash lump sum payment which is calculated based on years of service at HP at the time of the retirement and ranging from 13 to 52 weeks of pay.
All employees participating in the EER program were offered the opportunity to continue health care coverage at the active employee contribution rates for up to 36 months following retirement. In addition, HP provided up to $12,000 in employer credits under the Retirement Medical Savings Account (“RMSA”) program. In relation to the continued health care coverage and employer credits under the RMSA program, HP recognized special termination benefit costs of $44 million as restructuring and other charges for the six months ended April 30, 2020.
Lump Sum Program
HP is currently offering a lump sum program that began June 3, 2020, whereby certain terminated vested participants of the HP Inc. Pension Plan (“Pension Plan”) could elect to take a one-time voluntary lump sum payment equal to the present value of future benefits. This program closes on July 15, 2020. Payment will be made from plan assets in the fourth quarter of fiscal 2020 and settlement expense will be recorded in such quarter.


19

HP INC. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements
(Unaudited)

Note 5: Taxes on Earnings
Provision for Taxes
HP’s effective tax rate was 7.6% and 11.4% for the three months ended April 30, 2020 and 2019, respectively and 15.4% and 11.1% for the six months ended April 30, 2020 and 2019, respectively. The difference between the U.S. federal statutory tax rate of 21% and HP’s effective tax rate for the three and six months ended April 30, 2020 is primarily due to audit settlements in various jurisdictions and 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, 2019, HP’s effective tax rate generally differs from the U.S. federal statutory rate of 21% due to favorable tax rates associated with certain earnings from HP’s operations in lower-tax jurisdictions throughout the world.
During the three and six months ended April 30, 2020, HP recorded $59 million and $66 million, respectively, of net tax benefits related to discrete items in the provision for taxes. These amounts included tax benefits of $42 million and $40 million related to audit settlements in various jurisdictions, $11 million and $17 million related to acquisition charges, and $7 million and $55 million related to restructuring charges for the three and six months ended April 30, 2020, respectively. These benefits were partially offset by uncertain tax position charges of $3 million and $51 million for the three and six months ended April 30, 2020 respectively. For the three and six months ended April 30, 2020, excess tax benefits associated with stock options, restricted stock units and performance-adjusted restricted stock units were immaterial.
During the three and six months ended April 30, 2019, HP recorded $40 million and $49 million, respectively, of net tax benefits related to discrete items in the provision for taxes. These amounts included tax benefits of $42 million and $48 million related to one-time items for the three and six months ended April 30, 2019, respectively, and $14 million and$26 million related to restructuring charges for the three and six months ended April 30, 2019, respectively. These benefits were partially offset by uncertain tax position charges of$12 million and $32 million for the three and six months ended April 30, 2019, respectively, and other charges of $4 million and $14 million for the three and six months ended April 30, 2019, respectively. The six months ended April 30, 2019 also included a tax benefit of $21 million related to final tax reform adjustments. In addition to the discrete items mentioned above, HP recorded $20 million of excess tax benefits associated with stock options, restricted stock units and performance-adjusted restricted stock units for the six months ended April 30, 2019.
Uncertain Tax Positions
As of April 30, 2020, the amount of gross unrecognized tax benefits was $965 million, of which up to $818 million would affect HP’s effective tax rate if realized. Total gross unrecognized tax benefits increased by $36 million for the six months ended April 30, 2020. 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, 2020 and 2019, HP had accrued $29 million and $193 million, respectively, 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. HP believes it is reasonably possible that its existing gross unrecognized tax benefits may be reduced by up to $86 million within the next 12 months, affecting HP’s effective tax rate if realized.
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 (“IRS”) is conducting an audit of HP’s 2016 income tax return.

20

HP INC. AND SUBSIDIARIES
Consolidated Condensed Statements of Earnings (Continued)
(Unaudited)

Note 6: Supplementary Financial Information
Accounts Receivable, net
 
As of
 
April 30, 2020
 
October 31, 2019
 
In millions
Accounts receivable
$
5,266

 
$
6,142

Allowance for doubtful accounts
(120
)
 
(111
)
 
$
5,146

 
$
6,031


The allowance for doubtful accounts related to accounts receivable and changes were as follows:
 
Six months ended April 30, 2020
 
In millions
Balance at beginning of period
$
111

Provision for doubtful accounts
32

Deductions, net of recoveries
(23
)
Balance at end of period
$
120


HP has third-party arrangements, consisting of revolving short-term financing, which provide liquidity to certain partners 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 de-recognized 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 similar transactions and reported as a current liability in the Consolidated Condensed Balance Sheets. The recourse obligations as of April 30, 2020 and October 31, 2019 were not material. The costs associated with the sale of trade receivables for the three and six months ended April 30, 2020 and 2019 were not material.
The following is a summary of the activity under these arrangements:
 
Three months ended April 30
 
Six months ended April 30
 
2020
 
2019
 
2020
 
2019
 
In millions
Balance at beginning of period(1)
$
88

 
$
194

 
$
235

 
$
165

Trade receivables sold
2,323

 
2,490

 
5,181

 
5,525

Cash receipts
(2,286
)
 
(2,498
)
 
(5,291
)
 
(5,507
)
Foreign currency and other
(1
)
 
(4
)
 
(1
)
 
(1
)
Balance at end of period(1)
$
124

 
$
182

 
$
124

 
$
182


(1) 
Amounts outstanding from third parties reported in Accounts Receivable in the Consolidated Condensed Balance Sheets.


21

HP INC. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements (Continued)
(Unaudited)
Note 6: Supplementary Financial Information (Continued)

Inventory
 
As of
 
April 30, 2020
 
October 31, 2019
 
In millions
Finished goods
$
3,874

 
$
3,855

Purchased parts and fabricated assemblies
2,480

 
1,879

 
$
6,354

 
$
5,734



Other Current Assets
 
As of
 
April 30, 2020
 
October 31, 2019
 
In millions
Supplier and other receivables
$
2,094

 
$
1,951

Prepaid and other current assets
1,173

 
967

Value-added taxes receivable
839

 
957

 
$
4,106

 
$
3,875



Property, Plant and Equipment, net
 
As of
 
April 30, 2020
 
October 31, 2019
 
In millions
Land, buildings and leasehold improvements
$
2,046

 
$
1,977

Machinery and equipment, including equipment held for lease
5,201

 
5,060

 
7,247

 
7,037

Accumulated depreciation
(4,533
)
 
(4,243
)
 
$
2,714

 
$
2,794



Other Non-Current Assets
 
As of
 
April 30, 2020
 
October 31, 2019
 
In millions
Deferred tax assets
$
2,452

 
$
2,620

Right-of-use assets from operating leases, net(1)
1,111

 

Intangible assets
592

 
661

Tax indemnifications receivable
35

 
42

Other(2)
839

 
801

 
$
5,029

 
$
4,124

(1)  
See Note 1, “Basis of Presentation” and Note 14, “Leases” for detailed information.
(2) 
Includes marketable equity securities and mutual funds classified as available-for-sale investments of $52 million and $56 million as of April 30, 2020 and October 31, 2019, respectively. See Note 8, “Financial Instruments” for detailed information.

22

HP INC. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements (Continued)
(Unaudited)
Note 6: Supplementary Financial Information (Continued)

Other Current Liabilities
 
As of
 
April 30, 2020
 
October 31, 2019
 
In millions
Sales and marketing programs
$
3,029

 
$
3,361

Deferred revenue
1,208

 
1,178

Other accrued taxes
907

 
1,060

Employee compensation and benefit
795

 
1,103

Warranty
645

 
663

Operating lease liabilities(1)
242

 

Tax liability
192

 
237

Other
2,512

 
2,541

 
$
9,530

 
$
10,143


(1)  
See Note 1, “Basis of Presentation” and Note 14, “Leases” for detailed information.

Other Non-Current Liabilities
 
As of
 
April 30, 2020
 
October 31, 2019
 
In millions
Pension, post-retirement, and post-employment liabilities
$
1,599

 
$
1,762

Deferred revenue
1,042

 
1,069

Operating lease liabilities(1)
899

 

Tax liability
843

 
848

Deferred tax liability
62

 
60

Other
854

 
848

 
$
5,299

 
$
4,587


(1)     See Note 1, “Basis of Presentation” and Note 14, “Leases” for detailed information.

Interest and other, net
 
Three months ended April 30
 
Six months ended April 30
 
2020
 
2019
 
2020
 
2019
 
In millions
Tax indemnifications
$
1

 
$
5

 
$
1

 
$
15

Interest expense on borrowings
(64
)
 
(61
)
 
(122
)
 
(125
)
Other, net
63

 
11

 
134

 
39

 
$

 
$
(45
)

$
13

 
$
(71
)







23

HP INC. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements (Continued)
(Unaudited)
Note 6: Supplementary Financial Information (Continued)

Net revenue by region
 
Three months ended April 30
 
Six months ended April 30
 
2020
 
2019
 
2020
 
2019
 
In millions
Americas
$
5,205

 
$
5,785

 
$
11,164

 
$
11,817

Europe, Middle East and Africa
4,654

 
5,110

 
9,886

 
10,468

Asia-Pacific and Japan
2,610

 
3,141

 
6,037

 
6,461

Total net revenue
$
12,469

 
$
14,036


$
27,087

 
$
28,746



Value of Remaining Performance Obligations
As of April 30, 2020, the estimated value of transaction price allocated to remaining performance obligations was $4.3 billion. HP expects to recognize approximately $1.8 billion of the unearned amount in next 12 months and $2.5 billion thereafter.
HP has elected the practical expedients and accordingly does not disclose the aggregate amount of the transaction price allocated to remaining performance obligations if:
the contract has an original expected duration of one year or less; or
the revenue from the performance obligation is recognized over time on an as-invoiced basis when the amount corresponds directly with the value to the customer; or
the portion of the transaction price that is variable in nature is allocated entirely to a wholly unsatisfied performance obligation.
The remaining performance obligations are subject to change and may be affected by various factors, such as termination of contracts, contract modifications and adjustment for currency.
Contract Liabilities
As of April 30, 2020 and October 31, 2019, HP’s contract liabilities balances were $2.3 billion and $2.1 billion, respectively, included in Other Current Liabilities and Other Non-Current Liabilities in the Consolidated Condensed Balance Sheet.
The increase in the contract liabilities balance for the six months ended April 30, 2020 is primarily driven by sales of fixed price support and maintenance services, partially offset by $631 million of revenue recognized that were included in the contract liabilities balance as of October 31, 2019.




24

HP INC. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements (Continued)
(Unaudited)

Note 7: 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, 2020
 
As of October 31, 2019
 
Fair Value Measured Using