filings.toolsItem 8. Financial Statements and Supplementary Data.
306K characters. Original on sec.gov ·
Item 8. Financial Statements and Supplementary Data.
Table of Contents
Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of HP Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of HP Inc. and subsidiaries (the Company) as of October 31, 2020 and 2019, the related consolidated statements of earnings, comprehensive income, stockholders' deficit and cash flows for each of the three years in the period ended October 31, 2020, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at October 31, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended October 31, 2020, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of October 31, 2020, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated December 10, 2020 expressed an unqualified opinion thereon.
Adoption of New Accounting Standard
As discussed in Note 1 to the consolidated financial statements, the Company changed its method for recognizing revenue in 2019 due to the adoption of Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers (Topic 606), and the amendments effective November 1, 2018 and its method of accounting for leases in 2020 due to the adoption of Accounting Standards Update (ASU) No. 2016-02, Leases (Topic 842) effective November 1, 2019.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
| Income Taxes | |||||
| Description of the Matter | As described in Notes 1 and 6 of the consolidated financial statements, the Company is subject to income taxes in the United States and several other countries and is subject to routine corporate income tax audits in many of those jurisdictions. Uncertainty in the Company’s tax positions may arise as tax laws are subject to interpretation and the Company’s positions are subject to examination by taxing authorities, which may result in assessments of additional amounts owed. Determining the income tax provision for these potential assessments and recording the related effects requires significant management judgment in estimating whether a tax position’s technical merits are more-likely-than-not to be sustained and measuring the amount of tax benefit that qualifies for recognition. Additionally, the Company records a valuation allowance to reduce deferred tax assets to the amount which are more likely than not to be realized. In determining the need for a valuation allowance, the Company considers certain subjective factors such as future market growth, forecasted earnings, future taxable income, mix of earnings in the jurisdictions in which they operate and prudent and feasible tax planning strategies. Our assessment of management’s analyses of the reserve for uncertain tax positions and the realizability of its deferred tax assets are significant to our audit because the amounts are material to the financial statements and the assessment process involves significant judgment. For example, management’s assumptions that may be affected by future market and economic conditions or interpretations of tax laws and legal rulings are challenging to audit. | ||||
| How We Addressed the Matter in Our Audit | We tested controls over management’s processes relating to the recording of unrecognized tax benefits, including controls over the Company’s process to assess the technical merits of its uncertain tax positions, and the realizability of deferred tax assets, including the development of the above described assumptions and judgments. Our audit procedures included an evaluation of the Company’s key assumptions and judgments and testing the completeness and accuracy of the underlying data used to determine the amount of unrecognized tax benefits recognized. For example, we evaluated the measurement of the amounts recorded taking into consideration the applicable tax laws and the Company’s positions examined by taxing authorities. We also evaluated the key assumptions and judgments used by management in determining the need for a valuation allowance and testing the completeness and accuracy of the underlying data used in the Company’s process. For example, we compared the projections of future taxable income with the actual results of prior periods as well as management’s consideration of current industry and economic trends. In each of these areas, we involved our tax professionals to assess the technical merits of the Company’s tax positions. This included assessing the Company’s correspondence with the relevant tax authorities and evaluating income tax opinions or other third-party advice obtained by the Company. | ||||
| Revenue Recognition | |||||
| Description of the Matter | As described in Note 1 of the consolidated financial statements, the Company enters into certain contracts to sell their products and services that contain non-standard terms and conditions and multiple performance obligations. For such contracts, significant interpretation may be required to determine the appropriate accounting, including the allocation of the transaction price among performance obligations in the arrangement and the timing of the transfer of control of promised goods or services for each of those performance obligations. In addition, the Company reduces revenue for customer and distributor programs and incentive offerings including rebates, promotions, other volume-based incentives and expected returns. The Company uses significant estimates to determine the expected variable consideration for such programs based on factors like historical experience, forecasted sales, expected customer behavior and market conditions. Our assessment of management’s evaluation of the appropriate accounting for revenue contracts and the determination of the variable consideration for sales incentives are significant to our audit because the amounts are material to the financial statements and the assessment process involves significant judgment. |
| How We Addressed the Matter in Our Audit | We tested relevant controls over the identified risks related to the Company’s accounting for revenue recognition, including the controls to evaluate the appropriate accounting treatment for contracts containing non-standard terms and conditions and multiple performance obligations and the controls related to the estimation process to record the variable consideration related to certain sales incentives. Our audit procedures included, among others, inspection of contracts entered into during the period, evaluation of management’s judgments related to the interpretation of certain contract provisions including the identification of performance obligations, the method of allocating the transaction price to the performance obligations in the arrangement, and the assessment of the appropriateness of the amount of revenue recognized. We also evaluated the Company’s key assumptions and judgments and tested the completeness and accuracy of the underlying data used to determine the variable consideration for sales incentives. This included analyzing data related to the historical experience of sales incentive payments as well as understanding the current market dynamics that can affect the estimate of variable consideration to assess the Company’s judgments and estimates. |
/s/ ERNST & YOUNG LLP
We have served as the Company’s auditor since 2000
San Jose, California
December 10, 2020
Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of HP Inc.
Opinion on Internal Control over Financial Reporting
We have audited HP Inc. and subsidiaries’ internal control over financial reporting as of October 31, 2020, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, HP Inc. and subsidiaries (the Company) maintained, in all material respects, effective internal control over financial reporting as of October 31, 2020, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of HP Inc. and subsidiaries as of October 31, 2020 and 2019, the related consolidated statements of earnings, comprehensive income, stockholders' deficit and cash flows for each of the three years in the period ended October 31, 2020, and the related notes and our report dated December 10, 2020 expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ ERNST & YOUNG LLP
San Jose, California
December 10, 2020
Management’s Report on Internal Control Over Financial Reporting
HP’s management is responsible for establishing and maintaining adequate internal control over financial reporting. HP’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles. HP’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of HP; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of HP are being made only in accordance with authorizations of management and directors of HP; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of HP’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
HP’s management assessed the effectiveness of HP’s internal control over financial reporting as of October 31, 2020, utilizing the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control—Integrated Framework (2013 framework). Based on the assessment by HP’s management, we determined that HP’s internal control over financial reporting was effective as of October 31, 2020. The effectiveness of HP’s internal control over financial reporting as of October 31, 2020 has been audited by Ernst & Young LLP, HP’s independent registered public accounting firm, as stated in their report which appears on page 56 of this Annual Report on Form 10-K.
| /s/ ENRIQUE LORES | /s/ MARIE MYERS | |||||||
| Enrique Lores President and Chief Executive Officer December 10, 2020 | Marie Myers Acting Chief Financial Officer December 10, 2020 |
HP INC. AND SUBSIDIARIES
Consolidated Statements of Earnings
| For the fiscal years ended October 31 | |||||||||||||||||
| 2020 | 2019 | 2018 | |||||||||||||||
| In millions, except per share amounts | |||||||||||||||||
| Net revenue | $ | 56,639 | $ | 58,756 | $ | 58,472 | |||||||||||
| Costs and expenses: | |||||||||||||||||
| Cost of revenue | 46,202 | 47,586 | 47,803 | ||||||||||||||
| Research and development | 1,478 | 1,499 | 1,404 | ||||||||||||||
| Selling, general and administrative | 4,906 | 5,368 | 5,099 | ||||||||||||||
| Restructuring and other charges | 462 | 275 | 132 | ||||||||||||||
| Acquisition-related charges | 16 | 35 | 123 | ||||||||||||||
| Amortization of intangible assets | 113 | 116 | 80 | ||||||||||||||
| Total costs and expenses | 53,177 | 54,879 | 54,641 | ||||||||||||||
| Earnings from operations | 3,462 | 3,877 | 3,831 | ||||||||||||||
| Interest and other, net | (231) | (1,354) | (818) | ||||||||||||||
| Earnings before taxes | 3,231 | 2,523 | 3,013 | ||||||||||||||
| (Provision for) benefit from taxes | (387) | 629 | 2,314 | ||||||||||||||
| Net earnings | $ | 2,844 | $ | 3,152 | $ | 5,327 | |||||||||||
| Net earnings per share: | |||||||||||||||||
| Basic | $ | 2.01 | $ | 2.08 | $ | 3.30 | |||||||||||
| Diluted | $ | 2.00 | $ | 2.07 | $ | 3.26 | |||||||||||
| Weighted-average shares used to compute net earnings per share: | |||||||||||||||||
| Basic | 1,413 | 1,515 | 1,615 | ||||||||||||||
| Diluted | 1,420 | 1,524 | 1,634 |
The accompanying notes are an integral part of these Consolidated Financial Statements.
HP INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
| For the fiscal years ended October 31 | |||||||||||||||||
| 2020 | 2019 | 2018 | |||||||||||||||
| In millions | |||||||||||||||||
| Net earnings | $ | 2,844 | $ | 3,152 | $ | 5,327 | |||||||||||
| Other comprehensive (loss) income before taxes: | |||||||||||||||||
| Change in unrealized components of available-for-sale debt securities: | |||||||||||||||||
| Unrealized gains (losses) arising during the period | 2 | 1 | (3) | ||||||||||||||
| Losses (gains) reclassified into earnings | — | 3 | (5) | ||||||||||||||
| 2 | 4 | (8) | |||||||||||||||
| Change in unrealized components of cash flow hedges: | |||||||||||||||||
| Unrealized (losses) gains arising during the period | (201) | 252 | 341 | ||||||||||||||
| (Gains) losses reclassified into earnings | (85) | (380) | 258 | ||||||||||||||
| (286) | (128) | 599 | |||||||||||||||
| Change in unrealized components of defined benefit plans: | |||||||||||||||||
| (Losses) gains arising during the period | (29) | (303) | 11 | ||||||||||||||
| Amortization of actuarial loss and prior service benefit | 83 | 43 | 48 | ||||||||||||||
| Curtailments, settlements and other | 215 | 42 | 3 | ||||||||||||||
| 269 | (218) | 62 | |||||||||||||||
| Change in cumulative translation adjustment | (4) | 4 | — | ||||||||||||||
| Other comprehensive (loss) income before taxes | (19) | (338) | 653 | ||||||||||||||
| Benefit from (provision for) taxes | 1 | (42) | (80) | ||||||||||||||
| Other comprehensive (loss) income, net of taxes | (18) | (380) | 573 | ||||||||||||||
| Comprehensive income | $ | 2,826 | $ | 2,772 | $ | 5,900 |
The accompanying notes are an integral part of these Consolidated Financial Statements.
HP INC. AND SUBSIDIARIES
Consolidated Balance Sheets
| As of October 31 | |||||||||||
| 2020 | 2019 | ||||||||||
| In millions, except par value | |||||||||||
| ASSETS | |||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | 4,864 | $ | 4,537 | |||||||
| Accounts receivable, net | 5,381 | 6,031 | |||||||||
| Inventory | 5,963 | 5,734 | |||||||||
| Other current assets | 4,440 | 3,875 | |||||||||
| Total current assets | 20,648 | 20,177 | |||||||||
| Property, plant and equipment, net | 2,627 | 2,794 | |||||||||
| Goodwill | 6,380 | 6,372 | |||||||||
| Other non-current assets | 5,026 | 4,124 | |||||||||
| Total assets | $ | 34,681 | $ | 33,467 | |||||||
| LIABILITIES AND STOCKHOLDERS’ DEFICIT | |||||||||||
| Current liabilities: | |||||||||||
| Notes payable and short-term borrowings | $ | 674 | $ | 357 | |||||||
| Accounts payable | 14,704 | 14,793 | |||||||||
| Other current liabilities | 10,842 | 10,143 | |||||||||
| Total current liabilities | 26,220 | 25,293 | |||||||||
| Long-term debt | 5,543 | 4,780 | |||||||||
| Other non-current liabilities | 5,146 | 4,587 | |||||||||
| Commitments and contingencies | |||||||||||
| Stockholders’ deficit: | |||||||||||
| Preferred stock, $0.01 par value (300 shares authorized; none issued) | — | — | |||||||||
| Common stock, $0.01 par value (9,600 shares authorized; 1,304 and 1,458 shares issued and outstanding at October 31, 2020, and 2019 respectively) | 13 | 15 | |||||||||
| Additional paid-in capital | 963 | 835 | |||||||||
| Accumulated deficit | (1,961) | (818) | |||||||||
| Accumulated other comprehensive loss | (1,243) | (1,225) | |||||||||
| Total stockholders’ deficit | (2,228) | (1,193) | |||||||||
| Total liabilities and stockholders’ deficit | $ | 34,681 | $ | 33,467 |
The accompanying notes are an integral part of these Consolidated Financial Statements.
HP INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
| For the fiscal years ended October 31 | |||||||||||||||||
| 2020 | 2019 | 2018 | |||||||||||||||
| In millions | |||||||||||||||||
| Cash flows from operating activities: | |||||||||||||||||
| Net earnings | $ | 2,844 | $ | 3,152 | $ | 5,327 | |||||||||||
| Adjustments to reconcile net earnings to net cash provided by operating activities: | |||||||||||||||||
| Depreciation and amortization | 789 | 744 | 528 | ||||||||||||||
| Stock-based compensation expense | 278 | 297 | 268 | ||||||||||||||
| Restructuring and other charges | 462 | 275 | 132 | ||||||||||||||
| Deferred taxes on earnings | 70 | 133 | (3,653) | ||||||||||||||
| Defined benefit plan settlement charges | 214 | — | — | ||||||||||||||
| Other, net | 325 | 254 | 319 | ||||||||||||||
| Changes in operating assets and liabilities, net of acquisitions: | |||||||||||||||||
| Accounts receivable | 575 | (761) | (491) | ||||||||||||||
| Inventory | (386) | (68) | (136) | ||||||||||||||
| Accounts payable | (35) | (53) | 1,429 | ||||||||||||||
| Net investment in leases | (152) | — | — | ||||||||||||||
| Taxes on earnings | (147) | (851) | 389 | ||||||||||||||
| Restructuring and other | (489) | (154) | (237) | ||||||||||||||
| Other assets and liabilities | (32) | 1,686 | 653 | ||||||||||||||
| Net cash provided by operating activities | 4,316 | 4,654 | 4,528 | ||||||||||||||
| Cash flows from investing activities: | |||||||||||||||||
| Investment in property, plant and equipment | (580) | (671) | (546) | ||||||||||||||
| Proceeds from sale of property, plant and equipment | 3 | — | 172 | ||||||||||||||
| Purchases of available-for-sale securities and other investments | (693) | (80) | (367) | ||||||||||||||
| Maturities and sales of available-for-sale securities and other investments | 417 | 771 | 847 | ||||||||||||||
| Collateral posted for derivative instruments | (163) | (32) | (1,165) | ||||||||||||||
| Collateral returned for derivative instruments | — | 32 | 1,379 | ||||||||||||||
| Payments made in connection with business acquisitions, net of cash acquired | — | (458) | (1,036) | ||||||||||||||
| Net cash used in investing activities | (1,016) | (438) | (716) | ||||||||||||||
| Cash flows from financing activities: | |||||||||||||||||
| (Payments of) Proceeds from short-term borrowings with original maturities less than 90 days, net | — | (856) | 743 | ||||||||||||||
| Proceeds from short-term borrowings with original maturities greater than 90 days | 27 | — | 712 | ||||||||||||||
| Proceeds from debt, net of issuance costs | 3,081 | 127 | — | ||||||||||||||
| Payment of short-term borrowings with original maturities greater than 90 days | — | — | (1,596) | ||||||||||||||
| Payment of debt | (1,849) | (680) | (2,098) | ||||||||||||||
| Stock-based award activities and others | (128) | (61) | 52 | ||||||||||||||
| Repurchase of common stock | (3,107) | (2,405) | (2,557) | ||||||||||||||
| Cash dividends paid | (997) | (970) | (899) | ||||||||||||||
| Net cash used in financing activities | (2,973) | (4,845) | (5,643) | ||||||||||||||
| Increase (decrease) in cash and cash equivalents | 327 | (629) | (1,831) | ||||||||||||||
| Cash and cash equivalents at beginning of period | 4,537 | 5,166 | 6,997 | ||||||||||||||
| Cash and cash equivalents at end of period | $ | 4,864 | $ | 4,537 | $ | 5,166 | |||||||||||
| Supplemental cash flow disclosures: | |||||||||||||||||
| Income taxes paid, net of refunds | $ | 464 | $ | 89 | $ | 951 | |||||||||||
| Interest expense paid | $ | 227 | $ | 240 | $ | 329 | |||||||||||
| Supplemental schedule of non-cash activities: | |||||||||||||||||
| Purchase of assets under finance leases | $ | 19 | $ | 366 | $ | 258 | |||||||||||
The accompanying notes are an integral part of these Consolidated Financial Statements.
HP INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders’ Deficit
| 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, 2017 | 1,649,580 | $ | 16 | $ | 380 | $ | (2,386) | $ | (1,418) | $ | (3,408) | ||||||||||||||||||||||||
| Net earnings | 5,327 | 5,327 | |||||||||||||||||||||||||||||||||
| Other comprehensive income, net of taxes | 573 | 573 | |||||||||||||||||||||||||||||||||
| Comprehensive income | 5,900 | ||||||||||||||||||||||||||||||||||
| Issuance of common stock in connection with employee stock plans and other | 21,728 | 47 | 47 | ||||||||||||||||||||||||||||||||
| Repurchases of common stock | (111,038) | (32) | (2,515) | (2,547) | |||||||||||||||||||||||||||||||
| Cash dividends ($0.56 per common share) | (899) | (899) | |||||||||||||||||||||||||||||||||
| Stock-based compensation expense | 268 | 268 | |||||||||||||||||||||||||||||||||
| Balance October 31, 2018 | 1,560,270 | $ | 16 | $ | 663 | $ | (473) | $ | (845) | $ | (639) | ||||||||||||||||||||||||
| Net earnings | 3,152 | 3,152 | |||||||||||||||||||||||||||||||||
| Other comprehensive loss, net of taxes | (380) | (380) | |||||||||||||||||||||||||||||||||
| Comprehensive income | 2,772 | ||||||||||||||||||||||||||||||||||
| Issuance of common stock in connection with employee stock plans and other | 15,047 | (69) | (69) | ||||||||||||||||||||||||||||||||
| Repurchases of common stock | (117,598) | (1) | (55) | (2,340) | (2,396) | ||||||||||||||||||||||||||||||
| Cash dividends ($0.64 per common share) | (968) | (968) | |||||||||||||||||||||||||||||||||
| Stock-based compensation expense | 296 | 296 | |||||||||||||||||||||||||||||||||
| Adjustment for adoption of accounting standards | (189) | (189) | |||||||||||||||||||||||||||||||||
| Balance October 31, 2019 | 1,457,719 | $ | 15 | $ | 835 | $ | (818) | $ | (1,225) | $ | (1,193) | ||||||||||||||||||||||||
| Net earnings | 2,844 | 2,844 | |||||||||||||||||||||||||||||||||
| Other comprehensive loss, net of taxes | (18) | (18) | |||||||||||||||||||||||||||||||||
| Comprehensive income | 2,826 | ||||||||||||||||||||||||||||||||||
| Issuance of common stock in connection with employee stock plans and other | 14,065 | (37) | (37) | ||||||||||||||||||||||||||||||||
| Repurchases of common stock | (167,857) | (2) | (113) | (3,017) | (3,132) | ||||||||||||||||||||||||||||||
| Cash dividends ($0.70 per common share) | (997) | (997) | |||||||||||||||||||||||||||||||||
| Stock-based compensation expense | 278 | 278 | |||||||||||||||||||||||||||||||||
| Adjustment for adoption of accounting standards (Note 1) | 27 | 27 | |||||||||||||||||||||||||||||||||
| Balance October 31, 2020 | 1,303,927 | $ | 13 | $ | 963 | $ | (1,961) | $ | (1,243) | $ | (2,228) |
The accompanying notes are an integral part of these Consolidated Financial Statements.
HP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Note 1: Summary of Significant Accounting Policies
Basis of Presentation
The accompanying Consolidated Financial Statements of HP and its wholly-owned subsidiaries are prepared in conformity with U.S. GAAP.
Principles of Consolidation
The Consolidated 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 has reclassified certain prior-year amounts to conform to the current-year presentation.
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 Financial Statements and accompanying notes. Actual results may differ materially from those estimates. As of October 31, 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 may 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.
Foreign Currency Translation
HP predominantly uses the U.S. dollar as its functional currency. Assets and liabilities denominated in non-U.S. dollars are remeasured into U.S. dollars at current exchange rates for monetary assets and liabilities and at historical exchange rates for nonmonetary assets and liabilities. Net revenue, costs and expenses denominated in non-U.S. dollars are recorded in U.S. dollars at monthly average exchange rates prevailing during the period. HP includes gains or losses from foreign currency remeasurement in Interest and other, net in the Consolidated Statements of Earnings. Certain foreign subsidiaries designate the local currency as their functional currency, and HP records the translation of their assets and liabilities into U.S. dollars at the balance sheet dates as translation adjustments and includes them as a component of Accumulated other comprehensive loss.
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 7, “Supplementary Financial Information”, Note 14, “Litigation and Contingencies” and Note 15, “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 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 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 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.
HP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 1: Summary of Significant Accounting Policies (Continued)
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 Balance Sheets. The net impact of adoption to accumulated deficit as on November 1, 2019 is not 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 as cash flows from financing activities on the Consolidated Statements of Cash Flows. These changes did not have a material impact on the Consolidated Financial Statements.
Refer to Note 17, “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 has evaluated the impact of this standard on the consolidated financial statements, including accounting policies, processes, and systems and does not expect it to have a material impact on the Consolidated 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.
- 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.
- 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.
- 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.
- 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 INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 1: Summary of Significant Accounting Policies (Continued)
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.
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 7, “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.
HP adopted the new revenue standard in the first quarter of fiscal year 2019 using the modified retrospective method applied to contracts that were not completed as of November 1, 2018. HP recognized the net impact of adoption as an increase to accumulated deficit by $212 million, net of tax, on November 1, 2018.
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 Balance Sheets and are expensed on a straight-line basis over the lease term in the Consolidated 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.
Stock-Based Compensation
HP determines stock-based compensation expense based on the measurement date fair value of the award. HP recognizes compensation cost only for those awards expected to meet the service and performance vesting conditions on a straight-line basis over the requisite service period of the award. HP determines compensation costs at the aggregate grant level for service-based awards and at the individual vesting tranche level for awards with performance and/or market conditions. HP estimates the forfeiture rate based on its historical experience.
HP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 1: Summary of Significant Accounting Policies (Continued)
Retirement and Post-Retirement Plans
HP has various defined benefit, other contributory and non-contributory retirement and post-retirement plans. HP generally amortizes unrecognized actuarial gains and losses on a straight-line basis over the average remaining estimated service life of participants. In limited cases, HP amortizes actuarial gains and losses using the corridor approach. See Note 4, “Retirement and Post-Retirement Benefit Plans” for a full description of these plans and the accounting and funding policies.
Advertising cost
Costs to produce advertising are expensed as incurred during production. Costs to communicate advertising are expensed when the advertising is first run. Such costs totaled approximately $578 million, $652 million and $568 million in fiscal years 2020, 2019 and 2018, respectively.
Restructuring and Other Charges
HP records charges associated with management-approved restructuring plans to reorganize one or more of HP’s business segments, to remove duplicative headcount and infrastructure associated with business acquisitions or to simplify business processes and accelerate innovation. Restructuring charges can include severance costs to reduce a specified number of employees, enhanced early retirement incentives, infrastructure charges to vacate facilities and consolidate operations, and contract cancellation costs. HP records restructuring charges based on estimated employee terminations, committed early retirements and site closure and consolidation plans. HP accrues for severance and other employee separation costs under these actions when it is probable that benefits will be paid and the amount is reasonably estimable. The rates used in determining severance accruals are based on existing plans, historical experiences and negotiated settlements. 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.
Taxes on Earnings
HP recognizes deferred tax assets and liabilities for the expected tax consequences of temporary differences between the tax bases of assets and liabilities and their reported amounts using enacted tax rates in effect for the year the differences are expected to reverse. HP records a valuation allowance to reduce the deferred tax assets to the amount that is more likely than not to be realized.
HP records accruals for uncertain tax positions when HP believes that it is not more likely than not that the tax position will be sustained on examination by the taxing authorities based on the technical merits of the position. HP makes adjustments to these accruals when facts and circumstances change, such as the closing of a tax audit or the refinement of an estimate. The provision for income taxes includes the effects of adjustments for uncertain tax positions, as well as any related interest and penalties.
Accounts Receivable
HP establishes an allowance for doubtful accounts for accounts receivable. HP records a specific reserve for individual accounts when HP becomes aware of specific customer circumstances, such as in the case of a bankruptcy filing or deterioration in the customer’s operating results or financial position. If there are additional changes in circumstances related to the specific customer, HP further adjusts estimates of the recoverability of receivables. HP maintains bad debt reserves for all other customers based on a variety of factors, including the use of third-party credit risk models that generate quantitative measures of default probabilities based on market factors, the financial condition of customers, the length of time receivables are past due, trends in the weighted-average risk rating for the portfolio, macroeconomic conditions, information derived from competitive benchmarking, significant one-time events and historical experience. The past due or delinquency status of a receivable is based on the contractual payment terms of the receivable.
HP has third-party short-term financing arrangements intended to facilitate the working capital requirements of certain customers. These financing arrangements, which in certain cases provide for partial recourse, result in the transfer of HP’s trade receivables to a third party. HP reflects amounts transferred to, but not yet collected from the third party in accounts receivable in the Consolidated Balance Sheets. For arrangements involving an element of recourse, the fair value of the recourse obligation is measured using market data from similar transactions and reported as a current liability in the Consolidated Balance Sheets.
Concentrations of Risk
Financial instruments that potentially subject HP to significant concentrations of credit risk consist principally of cash and cash equivalents, investments, receivables from trade customers and contract manufacturers and derivatives.
HP maintains cash and cash equivalents, investments, derivatives and certain other financial instruments with various financial institutions. These financial institutions are located in many different geographic regions, and HP’s policy is designed to limit exposure from any particular institution. As part of its risk management processes, HP performs periodic evaluations of
HP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 1: Summary of Significant Accounting Policies (Continued)
the relative credit standing of these financial institutions. HP has not sustained material credit losses from instruments held at these financial institutions. HP utilizes derivative contracts to protect against the effects of foreign currency, interest rate and, on certain investment exposures. Such contracts involve the risk of non-performance by the counterparty, which could result in a material loss. The likelihood of which HP deems to be remote.
HP sells a significant portion of its products through third-party distributors and resellers and, as a result, maintains individually significant receivable balances with these parties. If the financial condition or operations of these distributors’ and resellers’ aggregated business deteriorates substantially, HP’s operating results could be adversely affected. The ten largest distributor and reseller receivable balances, which were concentrated primarily in North America and Europe, collectively represented approximately 47% and 32% of gross accounts receivable as of October 31, 2020 and 2019, respectively. No single customer accounts for more than 10% of gross accounts receivable as of October 31, 2020 or 2019. Credit risk with respect to other accounts receivable is generally diversified due to HP’s large customer base and their dispersion across many different industries and geographic markets. HP performs ongoing credit evaluations of the financial condition of its third-party distributors, resellers and other customers and may require collateral, such as letters of credit and bank guarantees, in certain circumstances.
HP utilizes outsourced manufacturers around the world to manufacture HP-designed products. HP may purchase product components from suppliers and sell those components to its outsourced manufacturers thereby creating receivable balances from the outsourced manufacturers. The three largest outsourced manufacturer receivable balances collectively represented 89% and 77% of HP’s supplier receivables of $1.2 billion and $1.2 billion as of October 31, 2020 and 2019, respectively. HP includes the supplier receivables in Other current assets in the Consolidated Balance Sheets on a gross basis. HP’s credit risk associated with these receivables is mitigated wholly or in part, by the amount HP owes to these outsourced manufacturers, as HP generally has the legal right to offset its payables to the outsourced manufacturers against these receivables. HP does not reflect the sale of these components in net revenue and does not recognize any profit on these component sales until the related products are sold by HP, at which time any profit is recognized as a reduction to cost of revenue.
HP obtains a significant number of components from single source suppliers due to technology, availability, price, quality or other considerations. The loss of a single source supplier, the deterioration of HP’s relationship with a single source supplier, or any unilateral modification to the contractual terms under which HP is supplied components by a single source supplier could adversely affect HP’s net revenue, cash flows and gross margins.
Upon completion of the Separation on November 1, 2015, HP recorded net income tax indemnification receivables from Hewlett Packard Enterprise for certain income tax liabilities that HP is jointly and severally liable for, but for which it is indemnified by Hewlett Packard Enterprise under the tax matters agreement (“TMA”). The TMA was terminated during the fourth quarter of fiscal year 2019.
Inventory
HP values inventory at the lower of cost or market. Cost is computed using standard cost which approximates actual cost on a first-in, first-out basis. Adjustments, if required, to reduce the cost of inventory to market (net realizable value) are made, for estimated excess, obsolete or impaired balances.
Property, Plant and Equipment, Net
HP reflects property, plant and equipment at cost less accumulated depreciation. HP capitalizes additions and improvements and expenses maintenance and repairs as incurred. Depreciation expense is recognized on a straight-line basis over the estimated useful lives of the assets. Estimated useful lives are five to 40 years for buildings and improvements and three to 15 years for machinery and equipment. HP depreciates leasehold improvements over the life of the lease or the asset, whichever is shorter. HP depreciates equipment held for lease over the initial term of the lease to the equipment’s estimated residual value. On retirement or disposition, the asset cost and related accumulated depreciation are removed from the Consolidated Balance Sheets with any gain or loss recognized in the Consolidated Statements of Earnings.
Internal Use Software and Cloud Computing Arrangements
HP capitalizes external costs and directly attributable internal costs to acquire or create internal use software which are incurred subsequent to the completion of the preliminary project stage. These costs relate to activities such as software design, configuration, coding, testing, and installation. Costs related to post-implementation activities such as training and maintenance are expensed as incurred. Once the software is substantially complete and ready for its intended use, capitalized development costs are amortized straight-line over the estimated useful life of the software, generally not to exceed five years.
HP also enters into certain cloud-based software hosting arrangements that are accounted for as service contracts. For internal-use software obtained through a hosting arrangement that is in the nature of a service contract, HP incurs certain implementation costs such as integrating, configuring, and software customization, which are consistent with costs incurred
HP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 1: Summary of Significant Accounting Policies (Continued)
during the application development stage for on-premise software. HP applies the same guidance to determine costs that are eligible for capitalization. For these arrangements, HP amortizes the capitalized development costs straight-line over the fixed, non-cancellable term of the associated hosting arrangement plus any reasonably certain renewal periods. HP also applies the same impairment model to both internal-use software and capitalized implementation costs in a software hosting arrangement that is in the nature of a service contract.
Business Combinations
HP includes the results of operations of the acquired business in HP’s consolidated results prospectively from the acquisition date. HP allocates the purchase consideration to the assets acquired, liabilities assumed, and non-controlling interests in the acquired entity generally based on their fair values at the acquisition date. The excess of the fair value of purchase consideration over the fair value of these assets acquired, liabilities assumed and non-controlling interests in the acquired entity is recorded as goodwill. The primary items that generate goodwill include the value of the synergies between the acquired company and HP, and the value of the acquired assembled workforce, neither of which qualify for recognition as an intangible asset. Acquisition-related charges are recognized separately from the business combination and are expensed as incurred. These charges primarily include, direct third-party professional and legal fees, and integration-related costs.
Goodwill
HP reviews goodwill for impairment annually during its fourth quarter and whenever events or changes in circumstances indicate the carrying amount of goodwill may not be recoverable. HP can elect to perform a qualitative assessment to test a reporting unit’s goodwill for impairment or HP can directly perform the quantitative impairment test. Based on the qualitative assessment, if HP determines that the fair value of a reporting unit is more likely than not (i.e., a likelihood of more than 50 percent) to be less than its carrying amount, a quantitative impairment test will be performed.
In the quantitative impairment test, HP compares the fair value of each reporting unit to its carrying amount with the fair values derived most significantly from the income approach, and to a lesser extent, the market approach. Under the income approach, HP estimates the fair value of a reporting unit based on the present value of estimated future cash flows. HP bases cash flow projections on management’s estimates of revenue growth rates and operating margins, taking into consideration industry and market conditions. HP bases the discount rate on the weighted-average cost of capital adjusted for the relevant risk associated with business-specific characteristics and the uncertainty related to the reporting unit’s ability to execute on the projected cash flows. Under the market approach, HP estimates fair value based on market multiples of revenue and earnings derived from comparable publicly-traded companies with similar operating and investment characteristics as the reporting unit. HP weights the fair value derived from the market approach depending on the level of comparability of these publicly-traded companies to the reporting unit. When market comparables are not meaningful or not available, HP estimates the fair value of a reporting unit using only the income approach.
In order to assess the reasonableness of the estimated fair value of HP’s reporting units, HP compares the aggregate reporting unit fair value to HP’s market capitalization on an overall basis and calculates an implied control premium (the excess of the sum of the reporting units’ fair value over HP’s market capitalization on an overall basis). HP evaluates the control premium by comparing it to observable control premiums from recent comparable transactions. If the implied control premium is determined to not be reasonable in light of these recent transactions, HP re-evaluates its reporting unit fair values, which may result in an adjustment to the discount rate and/or other assumptions. This re-evaluation could result in a change to the estimated fair value for certain or all reporting units.
If the fair value of a reporting unit exceeds the carrying amount of the net assets assigned to that reporting unit, goodwill is not impaired. If the fair value of the reporting unit is less than its carrying amount, goodwill is impaired and the excess of the reporting unit’s carrying value over the fair value is recognized as an impairment loss.
Debt and Marketable Equity Securities Investments
HP determines the appropriate classification of its investments at the time of purchase and re-evaluates the classifications at each balance sheet date. Debt and marketable equity securities are generally considered available-for-sale. All highly liquid investments with maturities of three months or less at the date of purchase are classified as cash equivalents. Marketable debt securities with maturities of twelve months or less are classified as short-term investments and marketable debt securities with maturities greater than twelve months are classified based on their availability for use in current operations. Marketable equity securities, including mutual funds, are classified as either short-term or long-term based on the nature of each security and its availability for use in current operations.
Debt and marketable equity securities are reported at fair value with unrealized gains and losses, net of applicable taxes, in Accumulated other comprehensive loss, Consolidated Statement of Earnings and the Consolidated Balance Sheets. Realized gains and losses on available-for-sale securities are calculated based on the specific identification method and included in
HP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 1: Summary of Significant Accounting Policies (Continued)
Interest and other, net in the Consolidated Statements of Earnings. HP monitors its investment portfolio for potential impairment on a quarterly basis. When the carrying amount of an investment in debt securities exceeds its fair value and the decline in value is determined to be other-than-temporary (i.e., when HP does not intend to sell the debt securities and it is not more likely than not that HP will be required to sell the debt securities prior to anticipated recovery of its amortized cost basis), HP records an impairment charge to Interest and other, net in the amount of the credit loss and the remaining amount, if any, is recorded in Accumulated other comprehensive loss in the Consolidated Balance Sheets.
Derivatives
HP uses derivative instruments, primarily forwards, swaps, treasury rate locks and at times, options, to hedge certain foreign currency, interest rate, and return on certain investment exposures. HP also may use other derivative instruments not designated as hedges, such as forwards used to hedge foreign currency balance sheet exposures. HP does not use derivative instruments for speculative purposes. See Note 10, “Financial Instruments” for a full description of HP’s derivative instrument activities and related accounting policies.
Loss Contingencies
HP is involved in various lawsuits, claims, investigations and proceedings that arise in the ordinary course of business. HP records a liability for contingencies when it believes it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. See Note 14, “Litigation and Contingencies” for a full description of HP’s loss contingencies and related accounting policies.
HP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
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 goes to market through its extensive channel network and direct sales.
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 (“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:
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Commercial PCs are optimized for use by enterprise, public sector which includes education, 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.
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Consumer PCs are optimized for consumer usage, focusing on gaming, learning and working remotely, consuming multi-media for entertainment, managing personal life activities, staying connected, sharing information, getting things done for work including creating content, staying informed and secure.
Personal Systems groups its global business capabilities into the following business units when reporting business performance:
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Notebooks consists of consumer notebooks, commercial notebooks, mobile workstations and commercial mobility devices;
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Desktops includes consumer desktops, commercial desktops, thin clients, and retail POS systems;
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Workstations consists of desktop workstations and accessories; and
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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. 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.
*•*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 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:
HP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 2: Segment Information (Continued)
*•*Commercial Hardware consists of office printing solutions, graphics solutions and 3D printing & digital manufacturing, excluding supplies;
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Consumer Hardware consists of home printing solutions, excluding supplies; and
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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.
HP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 2: Segment Information (Continued)
Segment Operating Results from Operations and the reconciliation to HP consolidated results were as follows:
| For the fiscal years ended October 31 | |||||||||||||||||
| 2020 | 2019 | 2018 | |||||||||||||||
| In millions | |||||||||||||||||
| Net revenue: | |||||||||||||||||
| Notebooks | $ | 25,766 | $ | 22,928 | $ | 22,547 | |||||||||||
| Desktops | 9,806 | 12,046 | 11,567 | ||||||||||||||
| Workstations | 1,816 | 2,389 | 2,246 | ||||||||||||||
| Other | 1,609 | 1,331 | 1,301 | ||||||||||||||
| Personal Systems | 38,997 | 38,694 | 37,661 | ||||||||||||||
| Supplies | 11,586 | 12,921 | 13,575 | ||||||||||||||
| Commercial Hardware | 3,539 | 4,612 | 4,514 | ||||||||||||||
| Consumer Hardware | 2,516 | 2,533 | 2,716 | ||||||||||||||
| Printing | 17,641 | 20,066 | 20,805 | ||||||||||||||
| Corporate Investments | 2 | 2 | 5 | ||||||||||||||
| Total segment net revenue | 56,640 | 58,762 | 58,471 | ||||||||||||||
| Other | (1) | (6) | 1 | ||||||||||||||
| Total net revenue | $ | 56,639 | $ | 58,756 | $ | 58,472 | |||||||||||
| Earnings before taxes: | |||||||||||||||||
| Personal Systems | $ | 2,312 | $ | 1,898 | $ | 1,402 | |||||||||||
| Printing | 2,495 | 3,202 | 3,314 | ||||||||||||||
| Corporate Investments | (69) | (96) | (82) | ||||||||||||||
| Total segment earnings from operations | $ | 4,738 | $ | 5,004 | $ | 4,634 | |||||||||||
| Corporate and unallocated costs and other | (407) | (404) | (200) | ||||||||||||||
| Stock-based compensation expense | (278) | (297) | (268) | ||||||||||||||
| Restructuring and other charges | (462) | (275) | (132) | ||||||||||||||
| Acquisition-related charges | (16) | (35) | (123) | ||||||||||||||
| Amortization of intangible assets | (113) | (116) | (80) | ||||||||||||||
| Interest and other, net | (231) | (1,354) | (818) | ||||||||||||||
| Total earnings before taxes | $ | 3,231 | $ | 2,523 | $ | 3,013 |
Segment Assets
HP allocates assets to its business segments based on the segments primarily benefiting from the assets. Total assets by segment and the reconciliation of segment assets to HP consolidated assets were as follows:
| As of October 31 | |||||||||||
| 2020 | 2019 | ||||||||||
| In millions | |||||||||||
| Personal Systems | $ | 14,697 | $ | 14,092 | |||||||
| Printing | 14,170 | 14,309 | |||||||||
| Corporate Investments | 3 | 4 | |||||||||
| Corporate and unallocated assets | 5,811 | 5,062 | |||||||||
| Total assets | $ | 34,681 | $ | 33,467 |
HP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 2: Segment Information (Continued)
Major Customers
No single customer represented 10% or more of HP’s net revenue in any fiscal year presented.
Geographic Information
Net revenue by country is based upon the sales location that predominately represents the customer location. For each of the fiscal years of 2020, 2019 and 2018, other than the United States, no country represented more than 10% of HP net revenue.
Net revenue by country in which HP operates was as follows:
| For the fiscal years ended October 31 | |||||||||||||||||
| 2020 | 2019 | 2018 | |||||||||||||||
| In millions | |||||||||||||||||
| United States | $ | 20,227 | $ | 20,605 | $ | 20,602 | |||||||||||
| Other countries | 36,412 | 38,151 | 37,870 | ||||||||||||||
| Total net revenue | $ | 56,639 | $ | 58,756 | $ | 58,472 |
Net property, plant and equipment by country in which HP operates was as follows:
| As of October 31 | |||||||||||
| 2020 | 2019 | ||||||||||
| In millions | |||||||||||
| United States | $ | 1,262 | $ | 1,260 | |||||||
| Singapore | 326 | 372 | |||||||||
| Other countries | 1,039 | 1,162 | |||||||||
| Total property, plant and equipment, net | $ | 2,627 | $ | 2,794 |
No single country other than those represented above exceeds 10% or more of HP’s total net property, plant and equipment in any fiscal year presented.
HP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 3: Restructuring and Other Charges
Summary of Restructuring Plans
HP’s restructuring activities in fiscal years 2020, 2019 and 2018 summarized by plan were as follows:
| Fiscal 2020 Plan | Other prior year plans (1) | Total | |||||||||||||||||||||
| Severance and EER | Non-labor | ||||||||||||||||||||||
| In millions | |||||||||||||||||||||||
| Accrued balance as of October 31, 2017 | $ | — | $ | — | $ | 108 | $ | 108 | |||||||||||||||
| Charges | — | — | 99 | 99 | |||||||||||||||||||
| Cash payments | — | — | (175) | (175) | |||||||||||||||||||
| Non-cash and other adjustments | — | — | 27 | 27 | |||||||||||||||||||
| Accrued balance as of October 31, 2018 | — | — | 59 | 59 | |||||||||||||||||||
| Charges | 82 | — | 165 | 247 | |||||||||||||||||||
| Cash payments | — | — | (140) | (140) | |||||||||||||||||||
| Non-cash and other adjustments | (6) | — | (18) | (24) | |||||||||||||||||||
| Accrued balance as of October 31, 2019 | 76 | — | 66 | 142 | |||||||||||||||||||
| Charges | 346 | 10 | 1 | 357 | |||||||||||||||||||
| Cash payments | (319) | (10) | (52) | (381) | |||||||||||||||||||
| Non-cash and other adjustments | (48) | (2) | — | (3) | (51) | ||||||||||||||||||
| Accrued balance as of October 31, 2020 | $ | 55 | $ | — | $ | 12 | $ | 67 | |||||||||||||||
| Total costs incurred to date as of October 31, 2020 | $ | 428 | $ | 10 | $ | 1,817 | $ | 2,255 | |||||||||||||||
| Reflected in Consolidated Balance Sheets: | |||||||||||||||||||||||
| Other current liabilities | $ | 55 | $ | — | $ | 12 | $ | 67 | |||||||||||||||
(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 other 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.
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. HP incurred $105 million, $28 million and $33 million of other charges in fiscal year 2020, 2019 and 2018, respectively.
HP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 4: Retirement and Post-Retirement Benefit Plans
Defined Benefit Plans
HP sponsors a number of defined benefit pension plans worldwide. The most significant defined benefit plan, the HP Inc. Pension Plan (“Pension Plan”) is a frozen plan in the United States.
HP reduces the benefit payable to certain U.S. employees under the Pension Plan for service before 1993, if any, by any amounts due to the employee under HP’s frozen defined contribution Deferred Profit-Sharing Plan (“DPSP”). At October 31, 2020 and 2019, the fair value of plan assets of the DPSP was $463 million and $543 million, respectively. The DPSP obligations are equal to the plan assets and are recognized as an offset to the Pension Plan when HP calculates its defined benefit pension cost and obligations. The Pension Plan and the DPSP both remain entirely with HP post-Separation.
Post-Retirement Benefit Plans
HP sponsors retiree health and welfare benefit plans, of which the most significant are in the United States. Under the HP Inc. Retiree Welfare Benefits Plan, certain pre-2003 retirees and grandfathered participants with continuous service to HP since 2002 are eligible to receive partially subsidized medical coverage based on years of service at retirement. HP’s share of the premium cost is capped for all subsidized medical coverage provided under the HP Inc. Retiree Welfare Benefits Plan. HP currently leverages the employer group waiver plan process to provide HP Inc. Retiree Welfare Benefits Plan post-65 prescription drug coverage under Medicare Part D, thereby giving HP access to federal subsidies to help pay for retiree benefits.
Certain employees not grandfathered for partially subsidized medical coverage under the above programs, and employees hired after 2002 but before August 2008, are eligible for credits under the HP Inc. Retiree Welfare Benefits Plan. Credits offered after September 2008 are provided in the form of matching credits on employee contributions made to a voluntary employee beneficiary association upon attaining age 45 or as part of early retirement programs. On retirement, former employees may use these credits for the reimbursement of certain eligible medical expenses, including premiums required for coverage.
Defined Contribution Plans
HP offers various defined contribution plans for U.S. and non-U.S. employees. Total defined contribution expense was $108 million in fiscal year 2020, $107 million in fiscal year 2019 and $110 million in fiscal year 2018.
U.S. employees are automatically enrolled in the HP Inc. 401(k) Plan when they meet eligibility requirements, unless they decline participation. The employer matching contributions in the HP Inc. 401(k) Plan is 100% of the first 4% of eligible compensation contributed by employees, and the employer match is vested after three years of employee service. Generally, an employee must be employed by HP Inc. on the last day of the calendar year to receive a match.
HP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 4: Retirement and Post-Retirement Benefit Plans (Continued)
Pension and Post-Retirement Benefit Expense
The components of HP’s pension and post-retirement (credit) benefit cost recognized in the Consolidated Statements of Earnings were as follows:
| For the fiscal years ended October 31 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2020 | 2019 | 2018 | 2020 | 2019 | 2018 | 2020 | 2019 | 2018 | |||||||||||||||||||||||||||||||||||||||||||||
| U.S. Defined Benefit Plans | Non-U.S. Defined Benefit Plans | Post-Retirement Benefit Plans | |||||||||||||||||||||||||||||||||||||||||||||||||||
| In millions | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Service cost | $ | — | $ | — | $ | — | $ | 64 | $ | 57 | $ | 55 | $ | 1 | $ | 1 | $ | 1 | |||||||||||||||||||||||||||||||||||
| Interest cost | 412 | 491 | 452 | 17 | 24 | 24 | 11 | 17 | 15 | ||||||||||||||||||||||||||||||||||||||||||||
| Expected return on plan assets | (700) | (581) | (717) | (43) | (37) | (39) | (23) | (22) | (23) | ||||||||||||||||||||||||||||||||||||||||||||
| Amortization and deferrals: | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Actuarial loss (gain) | 64 | 59 | 58 | 43 | 31 | 28 | (10) | (31) | (17) | ||||||||||||||||||||||||||||||||||||||||||||
| Prior service benefit | — | — | — | (2) | (3) | (3) | (12) | (13) | (18) | ||||||||||||||||||||||||||||||||||||||||||||
| Net periodic (credit) benefit cost | (224) | (31) | (207) | 79 | 72 | 65 | (33) | (48) | (42) | ||||||||||||||||||||||||||||||||||||||||||||
| Curtailment gain | — | — | — | — | (22) | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||
| Settlement loss | 217 | 2 | 2 | 1 | 1 | 5 | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||
| Special termination benefit cost | — | — | — | — | — | — | 44 | 6 | — | ||||||||||||||||||||||||||||||||||||||||||||
| Total (credit) benefit cost | $ | (7) | $ | (29) | $ | (205) | $ | 80 | $ | 51 | $ | 70 | $ | 11 | $ | (42) | $ | (42) |
The components of net periodic benefit costs other than the service cost component are included in Interest and other, net in our Consolidated Statements of Earnings.
The weighted-average assumptions used to calculate the total periodic (credit) benefit cost were as follows:
| For the fiscal years ended October 31 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2020 | 2019 | 2018 | 2020 | 2019 | 2018 | 2020 | 2019 | 2018 | |||||||||||||||||||||||||||||||||||||||||||||
| U.S. Defined Benefit Plans | Non-U.S. Defined Benefit Plans | Post-Retirement Benefit Plans | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Discount rate | 3.2 | % | 4.5 | % | 3.8 | % | 1.3 | % | 2.0 | % | 2.1 | % | 2.9 | % | 4.4 | % | 3.5 | % | |||||||||||||||||||||||||||||||||||
| Expected increase in compensation levels | 2.0 | % | 2.0 | % | 2.0 | % | 2.5 | % | 2.5 | % | 2.5 | % | — | % | — | % | — | % | |||||||||||||||||||||||||||||||||||
| Expected long-term return on plan assets | 6.0 | % | 6.0 | % | 6.9 | % | 4.4 | % | 4.4 | % | 4.5 | % | 5.9 | % | 6.0 | % | 7.1 | % |
Funded Status
The funded status of the defined benefit and post-retirement benefit plans was as follows:
HP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 4: Retirement and Post-Retirement Benefit Plans (Continued)
| As of October 31 | ||||||||||||||||||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | 2020 | 2019 | |||||||||||||||||||||||||||||||||
| U.S. Defined Benefit Plans | Non-U.S. Defined Benefit Plans | Post-Retirement Benefit Plans | ||||||||||||||||||||||||||||||||||||
| In millions | ||||||||||||||||||||||||||||||||||||||
| Change in fair value of plan assets: | ||||||||||||||||||||||||||||||||||||||
| Fair value of assets — beginning of year | $ | 12,017 | $ | 10,018 | $ | 969 | $ | 850 | $ | 404 | $ | 388 | ||||||||||||||||||||||||||
| Acquisition/ deletion of plan | — | — | — | (1) | — | — | ||||||||||||||||||||||||||||||||
| Actual return on plan assets | 1,260 | 2,499 | 22 | 85 | 107 | 44 | ||||||||||||||||||||||||||||||||
| Employer contributions | 34 | 32 | 45 | 44 | 4 | 5 | ||||||||||||||||||||||||||||||||
| Participant contributions | — | — | 18 | 17 | 45 | 36 | ||||||||||||||||||||||||||||||||
| Benefits paid | (422) | (523) | (33) | (28) | (79) | (69) | ||||||||||||||||||||||||||||||||
| Settlement | (2,426) | (9) | (7) | (4) | — | — | ||||||||||||||||||||||||||||||||
| Currency impact | — | — | 50 | — | — | — | ||||||||||||||||||||||||||||||||
| Transfers | — | — | — | 6 | — | — | ||||||||||||||||||||||||||||||||
| Fair value of assets — end of year | $ | 10,463 | $ | 12,017 | $ | 1,064 | $ | 969 | $ | 481 | $ | 404 | ||||||||||||||||||||||||||
| Change in benefits obligation | ||||||||||||||||||||||||||||||||||||||
| Projected benefit obligation — beginning of year | $ | 13,191 | $ | 11,167 | $ | 1,457 | $ | 1,227 | $ | 390 | $ | 397 | ||||||||||||||||||||||||||
| Acquisition/ deletion of plan | — | — | 3 | — | — | — | ||||||||||||||||||||||||||||||||
| Service cost | — | — | 64 | 57 | 1 | 1 | ||||||||||||||||||||||||||||||||
| Interest cost | 412 | 491 | 17 | 24 | 11 | 17 | ||||||||||||||||||||||||||||||||
| Participant contributions | — | — | 18 | 17 | 45 | 36 | ||||||||||||||||||||||||||||||||
| Actuarial loss (gain) | 589 | 2,065 | 78 | 219 | (10) | 35 | ||||||||||||||||||||||||||||||||
| Benefits paid | (422) | (523) | (33) | (28) | (79) | (69) | ||||||||||||||||||||||||||||||||
| Plan amendments | — | — | — | 4 | (8) | (33) | ||||||||||||||||||||||||||||||||
| Curtailment | — | — | — | (63) | — | — | ||||||||||||||||||||||||||||||||
| Settlement | (2,426) | (9) | (7) | (4) | — | — | ||||||||||||||||||||||||||||||||
| Special termination benefits | — | — | — | — | 44 | 6 | ||||||||||||||||||||||||||||||||
| Transfers | — | — | — | 7 | — | — | ||||||||||||||||||||||||||||||||
| Currency impact | — | — | 67 | (3) | — | — | ||||||||||||||||||||||||||||||||
| Projected benefit obligation — end of year | $ | 11,344 | $ | 13,191 | $ | 1,664 | $ | 1,457 | $ | 394 | $ | 390 | ||||||||||||||||||||||||||
| Funded status at end of year | $ | (881) | $ | (1,174) | $ | (600) | $ | (488) | $ | 87 | $ | 14 | ||||||||||||||||||||||||||
| Accumulated benefit obligation | $ | 11,344 | $ | 13,191 | $ | 1,515 | $ | 1,320 |
The weighted-average assumptions used to calculate the projected benefit obligations for the fiscal years ended October 31, 2020 and 2019 were as follows:
| For the fiscal years ended October 31 | |||||||||||||||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||||||||||||
| U.S. Defined Benefit Plans | Non-U.S. Defined Benefit Plans | Post-Retirement Benefit Plans | |||||||||||||||||||||||||||||||||
| Discount rate | 2.8 | % | 3.2 | % | 1.1 | % | 1.3 | % | 2.3 | % | 2.9 | % | |||||||||||||||||||||||
| Expected increase in compensation levels | 2.0 | % | 2.0 | % | 2.4 | % | 2.5 | % | — | % | — | % |
The net amounts of non-current assets and current and non-current liabilities for HP’s defined benefit and post-retirement benefit plans recognized on HP’s Consolidated Balance Sheet were as follows:
HP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 4: Retirement and Post-Retirement Benefit Plans (Continued)
| As of October 31 | |||||||||||||||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||||||||||||
| U.S. Defined Benefit Plans | Non-U.S. Defined Benefit Plans | Post-Retirement Benefit Plans | |||||||||||||||||||||||||||||||||
| In millions | |||||||||||||||||||||||||||||||||||
| Other non-current assets | $ | — | $ | — | $ | 20 | $ | 14 | $ | 93 | $ | 21 | |||||||||||||||||||||||
| Other current liabilities | (35) | (36) | (8) | (7) | (5) | (6) | |||||||||||||||||||||||||||||
| Other non-current liabilities | (846) | (1,138) | (612) | (495) | (1) | (1) | |||||||||||||||||||||||||||||
| Funded status at end of year | $ | (881) | $ | (1,174) | $ | (600) | $ | (488) | $ | 87 | $ | 14 |
The following table summarizes the pre-tax net actuarial loss (gain) and prior service benefit recognized in Accumulated other comprehensive loss for the defined benefit and post-retirement benefit plans.
| As of October 31, 2020 | |||||||||||||||||
| U.S. Defined Benefit Plans | Non-U.S. Defined Benefit Plans | Post-Retirement Benefit Plans | |||||||||||||||
| In millions | |||||||||||||||||
| Net actuarial loss (gain) | $ | 1,119 | $ | 475 | $ | (220) | |||||||||||
| Prior service benefit | — | (10) | (90) | ||||||||||||||
| Total recognized in Accumulated other comprehensive loss (gain) | $ | 1,119 | $ | 465 | $ | (310) |
The following table summarizes HP’s pre-tax net actuarial loss (gain) and prior service benefit that are expected to be amortized from Accumulated other comprehensive loss and recognized as components of net periodic benefit cost (credit) during the next fiscal year.
| As of October 31, 2020 | |||||||||||||||||
| U.S. Defined Benefit Plans | Non-U.S. Defined Benefit Plans | Post-Retirement Benefit Plans | |||||||||||||||
| In millions | |||||||||||||||||
| Net actuarial loss (gain) | $ | 59 | $ | 54 | $ | (17) | |||||||||||
| Prior service benefit | — | (2) | (11) | ||||||||||||||
| Total expected to be recognized in net periodic benefit cost (credit) | $ | 59 | $ | 52 | $ | (28) |
Defined benefit plans with projected benefit obligations exceeding the fair value of plan assets were as follows:
| As of October 31 | |||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||
| U.S. Defined Benefit Plans | Non-U.S. Defined Benefit Plans | ||||||||||||||||||||||
| In millions | |||||||||||||||||||||||
| Aggregate fair value of plan assets | $ | 10,463 | $ | 12,017 | $ | 998 | $ | 905 | |||||||||||||||
| Aggregate projected benefit obligation | $ | 11,344 | $ | 13,191 | $ | 1,620 | $ | 1,410 |
Defined benefit plans with accumulated benefit obligations exceeding the fair value of plan assets were as follows:
HP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 4: Retirement and Post-Retirement Benefit Plans (Continued)
| As of October 31 | |||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||
| U.S. Defined Benefit Plans | Non-U.S. Defined Benefit Plans | ||||||||||||||||||||||
| In millions | |||||||||||||||||||||||
| Aggregate fair value of plan assets | $ | 10,463 | $ | 12,017 | $ | 920 | $ | 838 | |||||||||||||||
| Aggregate accumulated benefit obligation | $ | 11,344 | $ | 13,191 | $ | 1,419 | $ | 1,226 |
Fair Value of Plan Assets
The table below sets forth the fair value of plan assets by asset category within the fair value hierarchy as of October 31, 2020. Refer to Note 9, “Fair Value” for details on fair value hierarchy. Certain investments that are measured at fair value using the Net Asset Value (“NAV”) per share as a practical expedient have not been categorized in the fair value hierarchy. The fair value amounts presented in this table provide a reconciliation of the fair value hierarchy to the total value of plan assets.
| As of October 31, 2020 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| U.S. Defined Benefit Plans | Non-U.S. Defined Benefit Plans | Post-Retirement Benefit Plans | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | Level 1 | Level 2 | Level 3 | Total | Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| In millions | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Asset Category: | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Equity securities(1) | $ | 283 | $ | 51 | $ | — | $ | 334 | $ | 7 | $ | 75 | $ | — | $ | 82 | $ | 1 | $ | 1 | $ | 2 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Debt securities(2) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Corporate | — | 5,891 | — | 5,891 | — | 124 | — | 124 | — | 53 | — | 53 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Government | — | 1,758 | — | 1,758 | — | 4 | — | 4 | — | 136 | — | 136 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Real Estate Funds | — | — | — | — | 1 | 28 | — | 29 | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Insurance Contracts | — | — | — | — | — | 90 | — | 90 | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Common Collective Trusts and 103-12 Investments Entities(3) | — | — | — | — | — | 7 | — | 7 | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Investment Funds(4) | 348 | — | — | 348 | — | 329 | — | 329 | 63 | — | 63 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Cash and Cash Equivalents(5) | 11 | 61 | — | 72 | 25 | — | — | 25 | — | 1 | — | 1 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Other(6) | (466) | (19) | — | (485) | 1 | 19 | — | 20 | (16) | — | (16) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net plan assets subject to leveling | $ | 176 | $ | 7,742 | $ | — | $ | 7,918 | $ | 34 | $ | 676 | $ | — | $ | 710 | $ | 48 | $ | 191 | $ | — | $ | 239 | |||||||||||||||||||||||||||||||||||||||||||||||
| Investments using NAV as a Practical Expedient(7) | 2,545 | 354 | 242 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Investments at Fair Value | $ | 10,463 | $ | 1,064 | $ | 481 |
HP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 4: Retirement and Post-Retirement Benefit Plans (Continued)
The table below sets forth the fair value of plan assets by asset category within the fair value hierarchy as of October 31, 2019.
| As of October 31, 2019 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| U.S. Defined Benefit Plans | Non-U.S. Defined Benefit Plans | Post-Retirement Benefit Plans | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | Level 1 | Level 2 | Level 3 | Total | Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| In millions | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Asset Category: | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Equity securities(1) | $ | 697 | $ | 58 | $ | — | $ | 755 | $ | 132 | $ | 8 | $ | — | $ | 140 | $ | — | $ | 1 | $ | — | $ | 1 | |||||||||||||||||||||||||||||||||||||||||||||||
| Debt securities(2) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Corporate | — | 6,098 | — | 6,098 | — | 139 | — | 139 | — | 40 | — | 40 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Government | — | 2,979 | — | 2,979 | — | 19 | — | 19 | — | 61 | — | 61 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Real Estate Funds | — | — | — | — | 1 | 69 | — | 70 | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Insurance Contracts | — | — | — | — | — | 78 | — | 78 | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Common Collective Trusts and 103-12s(3) | — | — | — | — | — | 7 | — | 7 | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Investment Funds(4) | 324 | — | — | 324 | — | 311 | — | 311 | 57 | — | — | 57 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Cash and Cash Equivalents(5) | 4 | 62 | — | 66 | 18 | — | — | 18 | — | 2 | — | 2 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Other(6) | (517) | (488) | — | (1,005) | 1 | 16 | — | 17 | (16) | — | — | (16) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net plan assets subject to leveling | $ | 508 | $ | 8,709 | $ | — | $ | 9,217 | $ | 152 | $ | 647 | $ | — | $ | 799 | $ | 41 | $ | 104 | $ | — | $ | 145 | |||||||||||||||||||||||||||||||||||||||||||||||
| Investments using NAV as a Practical Expedient(7) | 2,800 | 170 | 259 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Investments at Fair Value | $ | 12,017 | $ | 969 | $ | 404 |
(1)Investments in publicly traded equity securities are valued using the closing price on the measurement date as reported on the stock exchange on which the individual securities are traded.
(2)The fair value of corporate, government and asset-backed debt securities is based on observable inputs of comparable market transactions. Also included in this category is debt issued by national, state and local governments and agencies.
(3)Department of Labor 103-12 IE (Investment Entity) designation is for plan assets held by two or more unrelated employee benefit plans which includes limited partnerships and venture capital partnerships. Certain common collective trusts and interests in 103-12 entities are valued using NAV as a practical expedient.
(4)Includes publicly traded funds of investment companies that are registered with the SEC, funds that are not publicly traded and a non-U.S. fund-of-fund arrangement. The non-U.S. fund-of-fund arrangement is a custom portfolio valued at NAV consisting primarily of fixed income and common contractual funds.
(5)Includes cash and cash equivalents such as short-term marketable securities. Cash and cash equivalents include money market funds, which are valued based on NAV. Other assets were classified in the fair value hierarchy based on the lowest level input (e.g., quoted prices and observable inputs) that is significant to the fair value measure in its entirety.
(6)Includes primarily reverse repurchase agreements, unsettled transactions, and derivative instruments.
(7)These investments include alternative investments, which primarily consist of private equities and hedge funds. The valuation of alternative investments, such as limited partnerships and joint ventures, may require significant management judgment. For alternative investments, valuation is based on NAV as reported by the asset manager or investment company and adjusted for cash flows, if necessary. In making such an assessment, a variety of factors are reviewed by management, including but not limited to the timeliness of NAV as reported by the asset manager and changes in general economic and market conditions subsequent to the last NAV reported by the asset manager.
-
Private equities include limited partnerships such as equity, buyout, venture capital, real estate and other similar funds that invest in the United States and internationally where foreign currencies are hedged.
-
Hedge funds include limited partnerships that invest both long and short primarily in common stocks and credit, relative value, event-driven equity, distressed debt and macro strategies. Management of the hedge funds has the ability to shift investments from value to growth strategies, from small to large capitalization stocks and bonds, and from a net long position to a net short position.
In addition, these investments include the Common Contractual Fund, which is an investment arrangement in which
HP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 4: Retirement and Post-Retirement Benefit Plans (Continued)
institutional investors pool their assets. Units may be acquired in different sub-funds focused on equities, fixed income, alternative investments and emerging markets. Each sub-fund is invested in accordance with the fund’s investment objective and units are issued in relation to each sub-fund. While the sub-funds are not publicly traded, the custodian strikes a NAV either once or twice a month, depending on the sub-fund. These assets are valued using NAV as a practical expedient. These investments also include Common Collective Trusts and 103-12 Investment Entities as defined in note (3) above and Investment Funds as defined in note (4) above.
Plan Asset Allocations
Refer to the fair value hierarchy table above for actual assets allocations across the benefit plans. The weighted-average target asset allocations across the benefit plans represented in the fair value tables above were as follows:
| 2020 Target Allocation | ||||||||||||||||||||
| Asset Category | U.S. Defined Benefit Plans | Non-U.S. Defined Benefit Plans | Post-Retirement Benefit Plans | |||||||||||||||||
| Equity-related investments | 29.4 | % | 35.4 | % | 39.6 | % | ||||||||||||||
| Debt securities | 70.6 | % | 33.1 | % | 48.4 | % | ||||||||||||||
| Real estate | — | % | 12.1 | % | — | % | ||||||||||||||
| Cash and cash equivalents | — | % | 3.1 | % | 12.0 | % | ||||||||||||||
| Other | — | % | 16.3 | % | — | % | ||||||||||||||
| Total | 100.0 | % | 100.0 | % | 100.0 | % |
Investment Policy
HP’s investment strategy is to seek a competitive rate of return relative to an appropriate level of risk depending on the funded status of each plan and the timing of expected benefit payments. The majority of the plans’ investment managers employ active investment management strategies with the goal of outperforming the broad markets in which they invest. Risk management practices include diversification across asset classes and investment styles and periodic rebalancing toward asset allocation targets. A number of the plans’ investment managers are authorized to utilize derivatives for investment or liability exposures, and HP may utilize derivatives to affect asset allocation changes or to hedge certain investment or liability exposures.
The target asset allocation selected for each U.S. plan (pension and post-retirement) reflects a risk/return profile HP believes is appropriate relative to each plan’s liability structure and return goals. HP conducts periodic asset-liability studies for U.S. plans to model various potential asset allocations in comparison to each plan’s forecasted liabilities and liquidity needs and to develop a policy glide path which adjusts the asset allocation with funded status. A 2021 asset-liability study is planned to reconfirm the current policy glide path for the U.S. Pension Plan. Due to the strong funded status for the U.S. Pension Plan and the high level of liability hedging in the pension assets, no material changes are anticipated other than additional movement to fixed-income investments in the 401(h) account with the U.S. Pension Plan. HP invests a portion of the U.S. defined benefit plan assets and post-retirement benefit plan assets in private market securities such as private equity funds to provide diversification and a higher expected return on assets.
Outside the United States, asset allocation decisions are typically made by an independent board of trustees for the specific plan. As in the United States, investment objectives are designed to generate returns that will enable the plan to meet its future obligations. In some countries, local regulations may restrict asset allocations, typically leading to a higher percentage of investment in fixed-income securities than would otherwise be deployed. HP reviews the investment strategy and where appropriate, can offer some assistance in the selection of investment managers, with final decisions on asset allocation and investment managers made by the board of trustees for the specific plan.
Basis for Expected Long-Term Rate of Return on Plan Assets
The expected long-term rate of return on plan assets reflects the expected returns for each major asset class in which the plan invests and the weight of each asset class in the target mix. Expected asset returns reflect the current yield on government bonds, risk premiums for each asset class and expected real returns which considers each country’s specific inflation outlook. Because HP’s investment policy is to employ primarily active investment managers who seek to outperform the broader market, the expected returns are adjusted to reflect the expected additional returns net of fees.
HP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
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 were at least 50 years old with 20 or more years of service at HP. Employees accepted into the EER program left HP on dates ranging from December 31, 2019 to September 30, 2020. The EER benefit was a cash lump sum payment which was 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 twelve months ended October 31, 2020.
Lump Sum Program
HP offered a lump sum program during the third quarter of fiscal year 2020. Certain terminated vested participants in 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. Approximately 12,000 participants elected the lump sum option. Payments of $2.2 billion were made from plan assets to the participants in the fourth quarter of fiscal year 2020. A non-cash settlement expense of $214 million arising from the accelerated recognition of previously deferred actuarial losses was recorded in the fourth quarter of fiscal year 2020.
Future Contributions and Funding Policy
In fiscal year 2021, HP expects to contribute approximately $77 million to its non-U.S. pension plans, $34 million to cover benefit payments to U.S. non-qualified plan participants and $5 million to cover benefit claims for HP’s post-retirement benefit plans. 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.
Estimated Future Benefits Payments
As of October 31, 2020, HP estimates that the future benefits payments for the retirement and post-retirement plans are as follows:
| Fiscal year | U.S. Defined Benefit Plans | Non-U.S. Defined Benefit Plans | Post-Retirement Benefit Plans | |||||||||||||||||
| In millions | ||||||||||||||||||||
| 2021 | $ | 680 | $ | 43 | $ | 47 | ||||||||||||||
| 2022 | 680 | 41 | 44 | |||||||||||||||||
| 2023 | 682 | 45 | 33 | |||||||||||||||||
| 2024 | 690 | 50 | 27 | |||||||||||||||||
| 2025 | 699 | 55 | 27 | |||||||||||||||||
| Next five fiscal years to October 31, 2030 | 3,306 | 323 | 131 |
HP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 5: Stock-Based Compensation
HP’s stock-based compensation plans include incentive compensation plans and an employee stock purchase plan.
Stock-Based Compensation Expense and Related Income Tax Benefits for Operations
Stock-based compensation expense and the resulting tax benefits for operations were as follows:
| For the fiscal years ended October 31 | |||||||||||||||||
| 2020 | 2019 | 2018 | |||||||||||||||
| In millions | |||||||||||||||||
| Stock-based compensation expense | $ | 278 | $ | 297 | $ | 268 | |||||||||||
| Income tax benefit | (48) | (47) | (59) | ||||||||||||||
| Stock-based compensation expense, net of tax | $ | 230 | $ | 250 | $ | 209 |
Cash received from option exercises and purchases under the HP Inc. 2011 Employee Stock Purchase Plan (the “2011 ESPP”) was $56 million in fiscal year 2020, $59 million in fiscal year 2019 and $158 million in fiscal year 2018. The benefit realized for the tax deduction from option exercises in fiscal years 2020, 2019 and 2018 was $2 million, $3 million and $23 million, respectively.
Stock-Based Incentive Compensation Plans
HP’s stock-based incentive compensation plans include equity plans adopted in 2004 and 2000, as amended and restated (“principal equity plans”), as well as various equity plans assumed through acquisitions under which stock-based awards are outstanding. Stock-based awards granted under the principal equity plans include restricted stock awards, stock options and performance-based awards. Employees meeting certain employment qualifications are eligible to receive stock-based awards. The aggregate number of shares of HP’s stock authorized for issuance under the 2004 principal equity plan is 593.1 million. No further grants may be made under the 2000 principal equity plan and all outstanding awards under this plan will remain outstanding according to the terms of the plan.
Restricted stock awards are non-vested stock awards that may include grants of restricted stock or restricted stock units. Restricted stock awards and cash-settled awards are generally subject to forfeiture if employment terminates prior to the lapse of the restrictions. Such awards generally vest one to three years from the date of grant. During the vesting period, ownership of the restricted stock cannot be transferred. Restricted stock has the same dividend and voting rights as common stock and is considered to be issued and outstanding upon grant. The dividends paid on restricted stock are non-forfeitable. Restricted stock units do not have the voting rights of common stock, and the shares underlying restricted stock units are not considered issued and outstanding upon grant. However, shares underlying restricted stock units are included in the calculation of diluted net EPS. Restricted stock units have forfeitable dividend equivalent rights equal to the dividend paid on common stock. HP expenses the fair value of restricted stock awards ratably over the period during which the restrictions lapse. The majority of restricted stock units issued by HP contain only service vesting conditions. HP also grants performance-adjusted restricted stock units which vest only on the satisfaction of both service and the achievement of certain performance goals including market conditions prior to the expiration of the awards.
Stock options granted under the principal equity plans are generally non-qualified stock options, but the principal equity plans permit some options granted to qualify as incentive stock options under the U.S. Internal Revenue Code. Stock options generally vest over three to four years from the date of grant. The exercise price of a stock option is equal to the closing price of HP’s stock on the option grant date. The majority of stock options issued by HP contain only service vesting conditions. Starting in fiscal year 2011 through fiscal year 2016, HP granted performance-contingent stock options that vest only on the satisfaction of both service and market conditions prior to the expiration of the awards.
RSU and stock option grants provide for accelerated vesting in certain circumstances as defined in the plans and related grant agreements, including termination in connection with a change in control.
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 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 the Monte Carlo simulation model. 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:
HP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 5: Stock-Based Compensation (Continued)
| For the fiscal years ended October 31 | |||||||||||||||||
| 2020 | 2019 | 2018 | |||||||||||||||
| Expected volatility(1) | 27.6 | % | 26.5 | % | 29.5 | % | |||||||||||
| Risk-free interest rate(2) | 1.6 | % | 2.7 | % | 1.9 | % | |||||||||||
| Expected performance period in years(3) | 2.9 | 2.9 | 2.9 |
(1)The expected volatility was estimated using the historical volatility derived from HP’s common stock.
(2)The risk-free interest rate was estimated based on the yield on U.S. Treasury zero-coupon issues.
(3)The expected performance period was estimated based on the length of the remaining performance period from the grant date.
A summary of restricted stock units activity is as follows:
| As of October 31 | |||||||||||||||||||||||||||||||||||
| 2020 | 2019 | 2018 | |||||||||||||||||||||||||||||||||
| Shares | Weighted- Average Grant Date Fair Value Per Share | Shares | Weighted- Average Grant Date Fair Value Per Share | Shares | Weighted- Average Grant Date Fair Value Per Share | ||||||||||||||||||||||||||||||
| In thousands | In thousands | In thousands | |||||||||||||||||||||||||||||||||
| Outstanding at beginning of year | 29,960 | $ | 21 | 30,784 | $ | 18 | 31,822 | $ | 14 | ||||||||||||||||||||||||||
| Granted | 18,109 | $ | 20 | 17,216 | $ | 22 | 16,364 | $ | 21 | ||||||||||||||||||||||||||
| Vested | (14,929) | $ | 20 | (16,934) | $ | 16 | (15,339) | $ | 15 | ||||||||||||||||||||||||||
| Forfeited | (3,309) | $ | 21 | (1,106) | $ | 20 | (2,063) | $ | 17 | ||||||||||||||||||||||||||
| Outstanding at end of year | 29,831 | $ | 21 | 29,960 | $ | 21 | 30,784 | $ | 18 |
The total grant date fair value of restricted stock units vested in fiscal years 2020, 2019 and 2018 was $297 million, $273 million and $224 million, respectively. As of October 31, 2020, total unrecognized pre-tax stock-based compensation expense related to non-vested restricted stock units was $266 million, which is expected to be recognized over the remaining weighted-average vesting period of 1.4 years.
Stock Options
HP utilizes the Black-Scholes-Merton option pricing formula 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. The weighted-average fair value and the assumptions used to measure fair value were as follows:
| For the fiscal years ended October 31 | |||||||||||||||||
| 2020 | 2019 | 2018 | |||||||||||||||
| Weighted-average fair value(1) | $ | 3 | $ | 3 | $ | 5 | |||||||||||
| Expected volatility(2) | 29.8 | % | 29.8 | % | 29.4 | % | |||||||||||
| Risk-free interest rate(3) | 1.6 | % | 1.7 | % | 2.5 | % | |||||||||||
| Expected dividend yield(4) | 4.0 | % | 3.7 | % | 2.6 | % | |||||||||||
| Expected term in years(5) | 6.0 | 6.0 | 5.0 |
(1)The weighted-average fair value was based on stock options granted during the period.
(2)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.
HP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 5: Stock-Based Compensation (Continued)
(5)For awards subject to service-based vesting, the expected term was estimated using a simplified method; and for performance-contingent awards, the expected term represents an output from the lattice model.
A summary of stock options activity is as follows:
| As of October 31 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2020 | 2019 | 2018 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Shares | Weighted- Average Exercise Price | Weighted- Average Remaining Contractual Term | Aggregate Intrinsic Value | Shares | Weighted- Average Exercise Price | Weighted- Average Remaining Contractual Term | Aggregate Intrinsic Value | Shares | Weighted- Average Exercise Price | Weighted- Average Remaining Contractual Term | Aggregate Intrinsic Value | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| In thousands | In years | In millions | In thousands | In years | In millions | In thousands | In years | In millions | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Outstanding at beginning of year | 7,093 | $ | 16 | 7,086 | $ | 14 | 18,067 | $ | 13 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Granted | 996 | $ | 18 | 2,451 | $ | 17 | 54 | $ | 21 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Exercised | (2,213) | $ | 14 | (2,429) | $ | 13 | (10,644) | $ | 13 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Forfeited/cancelled/expired | (239) | $ | 19 | (15) | $ | 10 | (391) | $ | 16 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Outstanding at end of year | 5,637 | $ | 17 | 6.4 | $ | 10 | 7,093 | $ | 16 | 5.7 | $ | 15 | 7,086 | $ | 14 | 4.2 | $ | 73 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Vested and expected to vest | 5,637 | $ | 17 | 6.4 | $ | 10 | 7,093 | $ | 16 | 5.7 | $ | 15 | 7,084 | $ | 14 | 4.2 | $ | 73 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Exercisable | 3,196 | $ | 15 | 4.4 | $ | 9 | 4,707 | $ | 14 | 3.6 | $ | 15 | 4,707 | $ | 14 | 3.7 | $ | 49 |
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 fiscal years 2020, 2019 and 2018. The aggregate intrinsic value is the difference between HP’s closing stock price on the last trading day of the fiscal year and the exercise price, multiplied by the number of in-the-money options. The total intrinsic value of options exercised in fiscal years 2020, 2019 and 2018 was $12 million, $20 million and $109 million, respectively. The total grant date fair value of options vested in fiscal years 2020, 2019 and 2018 was $3 million, $9 million and $12 million, respectively.
As of October 31, 2020, total unrecognized pre-tax stock-based compensation expense related to stock options was $7 million, which is expected to be recognized over a weighted-average vesting period of 1.5 years.
Employee Stock Purchase Plan
HP sponsors the 2011 ESPP, pursuant to which eligible employees may contribute up to 10% of base compensation, subject to certain income limits, to purchase shares of HP’s common stock.
Pursuant to the terms of the 2011 ESPP, employees purchase stock under the 2011 ESPP at a price equal to 95% of HP’s closing stock price on the purchase date. No stock-based compensation expense was recorded in connection with those purchases because the criteria of a non-compensatory plan were met. The aggregate number of shares of HP’s stock authorized for issuance under the 2011 ESPP is 100 million. The 2021 ESPP comes into effect on May 1, 2021 upon expiry of the 2011 ESPP. The 2021 ESPP terms are similar to the current ESPP. The aggregate number of shares of HP’s stock authorized for issuance under the 2021 ESPP is 50 million.
Shares Reserved
Shares available for future grant and shares reserved for future issuance under the stock-based incentive compensation plans and the 2011 ESPP were as follows:
| As of October 31 | |||||||||||||||||
| 2020 | 2019 | 2018 | |||||||||||||||
| In thousands | |||||||||||||||||
| Shares available for future grant | 229,334 | 265,135 | 305,767 | ||||||||||||||
| Shares reserved for future issuance | 264,110 | 301,608 | 343,076 |
HP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 6: Taxes on Earnings
Provision for Taxes
The domestic and foreign components of earnings before taxes were as follows:
| For the fiscal years ended October 31 | |||||||||||||||||
| 2020 | 2019 | 2018 | |||||||||||||||
| In millions | |||||||||||||||||
| U.S. | $ | 884 | $ | (1,021) | $ | 242 | |||||||||||
| Non-U.S. | 2,347 | 3,544 | 2,771 | ||||||||||||||
| $ | 3,231 | $ | 2,523 | $ | 3,013 |
The provision for (benefit from) taxes on earnings was as follows:
| For the fiscal years ended October 31 | |||||||||||||||||
| 2020 | 2019 | 2018 | |||||||||||||||
| In millions | |||||||||||||||||
| U.S. federal taxes: | |||||||||||||||||
| Current | $ | (24) | $ | (987) | $ | 751 | |||||||||||
| Deferred | (68) | 149 | (3,132) | ||||||||||||||
| Non-U.S. taxes: | |||||||||||||||||
| Current | 319 | 386 | 528 | ||||||||||||||
| Deferred | 164 | (3) | (563) | ||||||||||||||
| State taxes: | |||||||||||||||||
| Current | 23 | (160) | 61 | ||||||||||||||
| Deferred | (27) | (14) | 41 | ||||||||||||||
| $ | 387 | $ | (629) | $ | (2,314) |
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 a transitional rate of 23.3% in fiscal year 2018. The 2019 and 2020 U.S. federal statutory tax rate is 21%.
The differences between the U.S. federal statutory income tax rate and HP’s effective tax rate were as follows:
| For the fiscal years ended October 31 | |||||||||||||||||
| 2020 | 2019 | 2018 | |||||||||||||||
| U.S. federal statutory income tax rate from operations | 21.0 | % | 21.0 | % | 23.3 | % | |||||||||||
| State income taxes, net of federal tax benefit | 1.4 | % | 1.5 | % | 0.5 | % | |||||||||||
| Impact of foreign earnings including GILTI and FDII, net | (6.1) | % | (4.4) | % | (10.9) | % | |||||||||||
| U.S. Tax Reform enactment | — | % | (2.6) | % | (35.8) | % | |||||||||||
| Research and development (“R&D”) credit | (0.7) | % | (1.1) | % | (0.7) | % | |||||||||||
| Valuation allowances | 2.3 | % | (3.7) | % | (9.3) | % | |||||||||||
| Uncertain tax positions and audit settlements | (4.1) | % | (41.1) | % | (50.3) | % | |||||||||||
| Indemnification related items | — | % | 6.8 | % | 5.2 | % | |||||||||||
| Other, net | (1.8) | % | (1.3) | % | 1.2 | % | |||||||||||
| 12.0 | % | (24.9) | % | (76.8) | % |
The jurisdictions with favorable tax rates that have the most significant effective tax rate impact in the periods presented include Puerto Rico, Singapore, China, and Malaysia. HP has elected to treat Global Minimum Tax inclusions as period costs.
HP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 6: Taxes on Earnings (Continued)
In fiscal year 2020, HP recorded $244 million of net income tax benefits related to discrete items in the provision for taxes. This amount includes tax benefits related to audit settlements of $124 million in various jurisdictions and $82 million related to restructuring benefits. Additionally, HP recorded benefits of $20 million related to proxy contest costs and $17 million of other net tax benefits. In fiscal year 2020, excess tax benefits associated with stock options, restricted stock units and performance-adjusted restricted stock units were immaterial.
In fiscal year 2019, HP recorded $1.3 billion of net income tax benefits related to discrete items in the provision for taxes. This amount includes tax benefits related to audit settlements of $1.0 billion, $75 million due to ability to utilize tax attributes, $57 million of restructuring benefits and net valuation allowance releases of $94 million. HP also recorded benefits of $78 million related to U.S. tax reform as a result of new guidance issued by the U.S. Internal Revenue Service (“IRS”). These benefits were partially offset by uncertain tax position charges of $51 million. In fiscal year 2019, in addition to the discrete items mentioned above, HP recorded excess tax benefits of $20 million associated with stock options, restricted stock units and performance-adjusted restricted stock units.
In fiscal year 2018, HP recorded $2.8 billion of net income tax benefits related to discrete items in the provision for taxes which include impacts of the TCJA. HP had not yet completed its analysis of the full impact of the TCJA. However, as of October 31, 2018, HP recorded a provisional tax benefit of $760 million related to $5.6 billion net benefit for the decrease in its deferred tax liability on unremitted foreign earnings, partially offset by $3.3 billion net expense for the deemed repatriation tax payable in installments over eight years, a $1.2 billion net expense for the remeasurement of its deferred assets and liabilities to the new U.S. statutory tax rate and a $317 million valuation allowance on net expense related to deferred tax assets that are expected to be realized at a lower rate. HP also recorded tax benefits related to audit settlements of $1.5 billion and valuation allowance releases of $601 million pertaining to a change in our ability to utilize certain foreign and U.S. deferred tax assets due to a change in our geographic earnings mix. These benefits were partially offset by other net tax charges of $34 million. In fiscal year 2018, in addition to the discrete items mentioned above, HP recorded excess tax benefits of $42 million associated with stock options, restricted stock units and performance-adjusted restricted stock units.
As a result of certain employment actions and capital investments HP has undertaken, income from manufacturing and services in certain countries is subject to reduced tax rates, and in some cases is wholly exempt from taxes, through 2029. The gross income tax benefits attributable to these actions and investments were estimated to be $344 million ($0.24 diluted EPS) in fiscal year 2020, $386 million ($0.25 diluted net EPS) in fiscal year 2019 and $578 million ($0.35 diluted net EPS) in fiscal year 2018.
Uncertain Tax Positions
A reconciliation of unrecognized tax benefits is as follows:
| For the fiscal years ended October 31 | |||||||||||||||||
| 2020 | 2019 | 2018 | |||||||||||||||
| In millions | |||||||||||||||||
| Balance at beginning of year | $ | 929 | $ | 7,771 | $ | 10,808 | |||||||||||
| Increases: | |||||||||||||||||
| For current year’s tax positions | 59 | 79 | 66 | ||||||||||||||
| For prior years’ tax positions | 71 | 172 | 101 | ||||||||||||||
| Decreases: | |||||||||||||||||
| For prior years’ tax positions | (89) | (37) | (248) | ||||||||||||||
| Statute of limitations expirations | (2) | (15) | (3) | ||||||||||||||
| Settlements with taxing authorities | (148) | (7,041) | (2,953) | ||||||||||||||
| Balance at end of year | $ | 820 | $ | 929 | $ | 7,771 |
As of October 31, 2020, the amount of unrecognized tax benefits was $820 million, of which up to $657 million would affect HP’s effective tax rate if realized. As of October 31, 2019, the amount of unrecognized tax benefits was $929 million of which up to $803 million would affect HP’s effective tax rate if realized. The amount of unrecognized tax benefits decreased by $109 million 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
HP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 6: Taxes on Earnings (Continued)
Statements of Earnings. As of October 31, 2020, 2019 and 2018, HP had accrued $34 million, $56 million and $160 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 $107 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 60 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 IRS is conducting an audit of HP’s 2018 and 2019 income tax returns.
With respect to major state and foreign tax jurisdictions, HP is no longer subject to tax authority examinations for years prior to 2002. No material tax deficiencies have been assessed in major state or foreign tax jurisdictions related to ongoing audits as of October 31, 2020.
The U.S. Tax Court ruled in May 2012 against HP related to certain tax attributes claimed by HP for the tax years 1999 through 2003. HP appealed the U.S. Tax Court determination by filing a formal Notice of Appeal with the Ninth Circuit Court of Appeals. This case was argued before the Ninth Circuit in November 2016. The Ninth Circuit Court of Appeals issued its opinion in November 2017 affirming the Tax Court determinations. In fiscal year 2018, HP decided against further appeal.
HP believes it has provided adequate reserves for all tax deficiencies or reductions in tax benefits that could result from federal, state and foreign tax audits. HP regularly assesses the likely outcomes of these audits in order to determine the appropriateness of HP’s tax provision. HP adjusts its uncertain tax positions to reflect the impact of negotiations, settlements, rulings, advice of legal counsel, and other information and events pertaining to a particular audit. However, income tax audits are inherently unpredictable and there can be no assurance that HP will accurately predict the outcome of these audits. The amounts ultimately paid on resolution of an audit could be materially different from the amounts previously included in the Provision for taxes and therefore the resolution of one or more of these uncertainties in any particular period could have a material impact on net income or cash flows.
HP has not provided for U.S. federal income and foreign withholding taxes on $5.7 billion of undistributed earnings from non-U.S. operations as of October 31, 2020 because HP intends to reinvest such earnings indefinitely outside of the United States. Determination of the amount of unrecognized deferred tax liability related to these earnings is not practicable. The TCJA taxed HP’s historic earnings and profits of its non-U.S. subsidiaries. HP will remit these taxed reinvested earnings for which deferred U.S. federal and withholding taxes have been provided where excess cash has accumulated and HP determines that it is advantageous for business operations, tax or cash management reasons.
Deferred Income Taxes
The significant components of deferred tax assets and deferred tax liabilities were as follows:
HP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 6: Taxes on Earnings (Continued)
| As of October 31 | |||||||||||
| 2020 | 2019 | ||||||||||
| In millions | |||||||||||
| Deferred tax assets: | |||||||||||
| Loss and credit carryforwards | $ | 7,857 | $ | 7,856 | |||||||
| Intercompany transactions—excluding inventory | 509 | 714 | |||||||||
| Fixed assets | 120 | 115 | |||||||||
| Warranty | 203 | 195 | |||||||||
| Employee and retiree benefits | 411 | 396 | |||||||||
| Deferred revenue | 134 | 135 | |||||||||
| Capitalized research and development | 203 | 193 | |||||||||
| Intangible assets | 467 | 420 | |||||||||
| Operating lease liabilities | 218 | — | |||||||||
| Investment in partnership | 108 | 14 | |||||||||
| Other | 531 | 542 | |||||||||
| Gross deferred tax assets | 10,761 | 10,580 | |||||||||
| Valuation allowances | (7,976) | (7,930) | |||||||||
| Total deferred tax assets | 2,785 | 2,650 | |||||||||
| Deferred tax liabilities: | |||||||||||
| Unremitted earnings of foreign subsidiaries | (60) | (27) | |||||||||
| Right-of-use assets from operating leases | (203) | — | |||||||||
| Other | (32) | (63) | |||||||||
| Total deferred tax liabilities | (295) | (90) | |||||||||
| Net deferred tax assets | $ | 2,490 | $ | 2,560 |
Deferred tax assets and liabilities included in the Consolidated Balance Sheets as follows:
| As of October 31 | |||||||||||
| 2020 | 2019 | ||||||||||
| In millions | |||||||||||
| Deferred tax assets | $ | 2,515 | $ | 2,620 | |||||||
| Deferred tax liabilities | (25) | (60) | |||||||||
| Total | $ | 2,490 | $ | 2,560 |
As of October 31, 2020, HP had recorded deferred tax assets for net operating loss (“NOL”) carryforwards as follows:
| Gross NOLs | Deferred Taxes on NOLs | Valuation allowance | Initial Year of Expiration | |||||||||||||||||
| In millions | ||||||||||||||||||||
| Federal | $ | 291 | $ | 61 | $ | (15) | 2023 | |||||||||||||
| State | 2,737 | 174 | (61) | 2020 | ||||||||||||||||
| Foreign | 26,225 | 7,378 | (7,085) | 2022 | ||||||||||||||||
| Balance at end of year | $ | 29,253 | $ | 7,613 | $ | (7,161) |
HP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 6: Taxes on Earnings (Continued)
As of October 31, 2020, HP had recorded deferred tax assets for various tax credit carryforwards as follows:
| Carryforward | Valuation Allowance | Initial Year of Expiration | |||||||||||||||
| In millions | |||||||||||||||||
| U.S. foreign tax credits | $ | 35 | $ | (35) | 2030 | ||||||||||||
| U.S. R&D and other credits | 14 | — | 2040 | ||||||||||||||
| Tax credits in state and foreign jurisdictions | $ | 321 | $ | (59) | 2022 | ||||||||||||
| Balance at end of year | $ | 370 | $ | (94) |
Deferred Tax Asset Valuation Allowance
The deferred tax asset valuation allowance and changes were as follows:
| For the fiscal years ended October 31 | |||||||||||||||||
| 2020 | 2019 | 2018 | |||||||||||||||
| In millions | |||||||||||||||||
| Balance at beginning of year | $ | 7,930 | $ | 7,906 | $ | 8,807 | |||||||||||
| Income tax (benefit) expense | 74 | (339) | (897) | ||||||||||||||
| Other comprehensive loss (income), currency translation and charges to other accounts | (28) | 363 | (4) | ||||||||||||||
| Balance at end of year | $ | 7,976 | $ | 7,930 | $ | 7,906 |
Gross deferred tax assets as of October 31, 2020, 2019 and 2018 were reduced by valuation allowances of $8.0 billion, $7.9 billion and $7.9 billion, respectively. In fiscal year 2020, the deferred tax asset valuation allowance increased by $46 million primarily associated with foreign net operating losses and U.S. deferred tax assets that are anticipated to be realized at a lower effective rate than the federal statutory tax rate due to certain future U.S. international tax reform implications. In fiscal year 2019, the deferred tax asset valuation allowance increased by $24 million primarily associated with the recognition of the income tax consequences of intra-entity transfers other than inventory. This increase was partially offset by the impact of tax rate changes in foreign jurisdictions and state valuation allowance releases. In fiscal year 2018, the deferred tax asset valuation allowance decreased by $901 million primarily associated with foreign net operating losses and U.S. deferred tax assets that are anticipated to be realized at a lower effective rate than the federal statutory tax rate due to certain future U.S. international tax reform implications.
Note 7: Supplementary Financial Information
Accounts Receivable, net
| As of October 31 | |||||||||||
| 2020 | 2019 | ||||||||||
| In millions | |||||||||||
| Accounts receivable | $ | 5,503 | $ | 6,142 | |||||||
| Allowance for doubtful accounts | (122) | (111) | |||||||||
| $ | 5,381 | $ | 6,031 |
HP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 7: Supplementary Financial Information (Continued)
The allowance for doubtful accounts related to accounts receivable and changes were as follows:
| For the fiscal years ended October 31 | |||||||||||||||||
| 2020 | 2019 | 2018 | |||||||||||||||
| In millions | |||||||||||||||||
| Balance at beginning of period | $ | 111 | $ | 129 | $ | 101 | |||||||||||
| Provision for doubtful accounts | 62 | 60 | 57 | ||||||||||||||
| Deductions, net of recoveries | (51) | (78) | (29) | ||||||||||||||
| Balance at end of period | $ | 122 | $ | 111 | $ | 129 |
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 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 on the Consolidated Balance Sheets. The recourse obligations as of October 31, 2020 and 2019 were not material. The costs associated with the sales of trade receivables for fiscal year 2020, 2019 and 2018 were not material.
The following is a summary of the activity under these arrangements:
| For the fiscal years ended October 31 | |||||||||||||||||
| 2020 | 2019 | 2018 | |||||||||||||||
| In millions | |||||||||||||||||
| Balance at beginning of year (1) | $ | 235 | $ | 165 | $ | 147 | |||||||||||
| Trade receivables sold | 10,474 | 10,257 | 10,224 | ||||||||||||||
| Cash receipts | (10,526) | (10,186) | (10,202) | ||||||||||||||
| Foreign currency and other | 5 | (1) | (4) | ||||||||||||||
| Balance at end of year (1) | $ | 188 | $ | 235 | $ | 165 |
(1) Amounts outstanding from third parties reported in Accounts Receivable in the Consolidated Balance Sheets.
Inventory
| As of October 31 | |||||||||||
| 2020 | 2019 | ||||||||||
| In millions | |||||||||||
| Finished goods | $ | 3,662 | $ | 3,855 | |||||||
| Purchased parts and fabricated assemblies | 2,301 | 1,879 | |||||||||
| $ | 5,963 | $ | 5,734 |
HP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 7: Supplementary Financial Information (Continued)
Other Current Assets
| As of October 31 | |||||||||||
| 2020 | 2019 | ||||||||||
| In millions | |||||||||||
| Supplier and other receivables | $ | 2,092 | $ | 1,951 | |||||||
| Prepaid and other current assets | 1,104 | 967 | |||||||||
| Value-added taxes receivable | 970 | 957 | |||||||||
| Available-for-sale investments(1) | 274 | — | |||||||||
| $ | 4,440 | $ | 3,875 |
(1)See Note 9 “Fair Value” and Note 10, “Financial Instruments” for detailed information.
Property, Plant and Equipment, Net
| As of October 31 | |||||||||||
| 2020 | 2019 | ||||||||||
| In millions | |||||||||||
| Land, buildings and leasehold improvements | $ | 2,066 | $ | 1,977 | |||||||
| Machinery and equipment, including equipment held for lease | 5,275 | 5,060 | |||||||||
| 7,341 | 7,037 | ||||||||||
| Accumulated depreciation | (4,714) | (4,243) | |||||||||
| $ | 2,627 | $ | 2,794 |
Depreciation expense was $673 million, $623 million and $448 million in fiscal years 2020, 2019 and 2018, respectively.
Other Non-Current Assets
| As of October 31 | |||||||||||
| 2020 | 2019 | ||||||||||
| In millions | |||||||||||
| Deferred tax assets(1) | $ | 2,515 | $ | 2,620 | |||||||
| Right-of-use assets from operating leases(2) | 1,107 | — | |||||||||
| Intangible assets(3) | 540 | 661 | |||||||||
| Other(4) | 864 | 843 | |||||||||
| $ | 5,026 | $ | 4,124 |
(1)See Note 6, “Taxes on Earnings” for detailed information.
(2)See Note 1, “Summary of Significant Accounting Policies” and Note 17, “Leases” for detailed information.
(3)See Note 8, “Goodwill and Intangible Assets” for detailed information.
(4)Includes marketable equity securities and mutual funds classified as available-for-sale investments of $58 million and $56 million at October 31, 2020 and 2019, respectively. See Note 10, “Financial Instruments” for detailed information
HP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 7: Supplementary Financial Information (Continued)
Other Current Liabilities
| As of October 31 | |||||||||||
| 2020 | 2019 | ||||||||||
| In millions | |||||||||||
| Sales and marketing programs | $ | 3,185 | $ | 3,361 | |||||||
| Deferred revenue | 1,208 | 1,178 | |||||||||
| Employee compensation and benefit | 1,194 | 1,103 | |||||||||
| Other accrued taxes | 1,051 | 1,060 | |||||||||
| Warranty | 746 | 663 | |||||||||
| Operating lease liabilities(1) | 275 | — | |||||||||
| Tax liability | 223 | 237 | |||||||||
| Other | 2,960 | 2,541 | |||||||||
| $ | 10,842 | $ | 10,143 |
(1)See Note 1, “Summary of Significant Accounting Policies” and Note 17, “Leases” for detailed information.
Other Non-Current Liabilities
| As of October 31 | |||||||||||
| 2020 | 2019 | ||||||||||
| In millions | |||||||||||
| Pension, post-retirement, and post-employment liabilities | $ | 1,576 | $ | 1,762 | |||||||
| Deferred revenue | 1,072 | 1,069 | |||||||||
| Operating lease liabilities(1) | 904 | — | |||||||||
| Tax liability | 746 | 848 | |||||||||
| Deferred tax liability(2) | 25 | 60 | |||||||||
| Other | 823 | 848 | |||||||||
| $ | 5,146 | $ | 4,587 |
(1)See Note 1, “Summary of Significant Accounting Policies” and Note 17, “Leases” for detailed information.
(2)See Note 6, “Taxes on Earnings” for detailed information.
Interest and other, net
| For the fiscal years ended October 31 | |||||||||||||||||
| 2020 | 2019 | 2018 | |||||||||||||||
| In millions | |||||||||||||||||
| Tax indemnifications(1) | $ | 1 | $ | (1,186) | $ | (662) | |||||||||||
| Interest expense on borrowings | (239) | (242) | (312) | ||||||||||||||
| Non-operating retirement- related credits | 240 | 85 | 233 | ||||||||||||||
| Defined benefit plan settlement charges | (214) | — | — | ||||||||||||||
| Loss on extinguishment of debt | (40) | — | (126) | ||||||||||||||
| Other, net | 21 | (11) | 49 | ||||||||||||||
| $ | (231) | $ | (1,354) | $ | (818) |
HP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 7: Supplementary Financial Information (Continued)
(1)Fiscal year ended October 31, 2019 and 2018, includes an adjustment of $764 million and $676 million respectively, of indemnification receivables, primarily related to resolution of various income tax audits settlements. Fiscal year ended October 31, 2019, also includes an adjustment of $417 million pursuant to the termination of the TMA with Hewlett Packard Enterprise.
Net Revenue by Region
| For the fiscal years ended October 31 | |||||||||||||||||
| 2020 | 2019 | 2018 | |||||||||||||||
| In millions | |||||||||||||||||
| Americas | $ | 24,414 | $ | 25,244 | $ | 25,644 | |||||||||||
| Europe, Middle East and Africa | 19,624 | 20,275 | 20,470 | ||||||||||||||
| Asia-Pacific and Japan | 12,601 | 13,237 | 12,358 | ||||||||||||||
| Total net revenue | $ | 56,639 | $ | 58,756 | $ | 58,472 |
Value of Remaining Performance Obligations
As of October 31, 2020, the estimated value of transaction price allocated to remaining performance obligations was $4.1 billion. HP expects to recognize approximately $1.8 billion of the unearned amount in next 12 months and $2.3 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.
Costs of Obtaining Contracts and Fulfillment Cost
As of October 31, 2020, deferred contract fulfillment and acquisition costs balances were $65 million and $34 million, respectively, included in Other Current Assets and Other Non-Current Assets in the Consolidated Balance Sheet. During the fiscal year ended October 31, 2020, the Company amortized $98 million of these costs.
As of October 31, 2019, deferred contract fulfillment and acquisition costs balances were $47 million and $30 million, respectively, included in Other Current Assets and Other Non-Current Assets in the Consolidated Balance Sheet. During the twelve months ended October 31, 2019, the Company amortized $108 million of these costs.
Contract Liabilities
As of October 31, 2020 and 2019, HP’s contract liabilities balances were $2.2 billion and $2.1 billion, respectively, included in Other Current Liabilities and Other Non-Current Liabilities in the Consolidated Balance Sheet.
The increase in the contract liabilities balance for fiscal year 2020 was primarily driven by sales of fixed-price support and maintenance services, partially offset by $1.1 billion of revenue recognized that were included in the opening contract liabilities balance as of October 31, 2019.
As of October 31, 2019 and 2018, HP’s contract liabilities balances were $2.1 billion and $1.9 billion, respectively, included in Other Current Liabilities and Other Non-Current Liabilities in the Consolidated Balance Sheet.
The increase in the contract liabilities balance for fiscal year 2019 was primarily driven by sales of fixed-price support and maintenance services, partially offset by $0.9 billion of revenue recognized that were included in the opening contract liabilities balance as of October 31, 2018.
HP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 8: Goodwill and Intangible Assets
Goodwill
Goodwill allocated to HP’s reportable segments and changes in the carrying amount of goodwill were as follows:
| Personal Systems | Printing | Total | |||||||||||||||||||||
| In millions | |||||||||||||||||||||||
| Balance at October 31, 2018(1) | $ | 2,600 | $ | 3,368 | $ | 5,968 | |||||||||||||||||
| Acquisitions/adjustments | 13 | 386 | 399 | ||||||||||||||||||||
| Foreign currency translation | — | 5 | 5 | ||||||||||||||||||||
| Balance at October 31, 2019(1) | 2,613 | 3,759 | 6,372 | ||||||||||||||||||||
| Acquisitions/adjustments | 8 | — | 8 | ||||||||||||||||||||
| Foreign currency translation | — | — | — | ||||||||||||||||||||
| Balance at October 31, 2020(1) | $ | 2,621 | $ | 3,759 | $ | 6,380 |
(1)Goodwill is net of accumulated impairment losses of $0.8 billion related to Corporate Investments.
Goodwill is tested for impairment at the reporting unit level. As of October 31, 2020, our reporting units are consistent with the reportable segments identified in Note 2, “Segment Information”. There were no goodwill impairments in fiscal years 2020, 2019 and 2018. Personal Systems had a negative carrying amount of net assets as of October 31, 2020 and 2019, primarily as a result of a favorable cash conversion cycle.
Intangible Assets
HP’s acquired intangible assets were composed of:
| As of October 31, 2020 | As of October 31, 2019 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Gross | Accumulated Amortization | Net | Gross | Accumulated Amortization | Net | |||||||||||||||||||||||||||||||||||||||||||||
| In millions | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Customer contracts, customer lists and distribution agreements | $ | 382 | $ | 149 | $ | 233 | $ | 385 | $ | 122 | $ | 263 | ||||||||||||||||||||||||||||||||||||||
| Technology, patents and trade name | 647 | 340 | 307 | 652 | 254 | 398 | ||||||||||||||||||||||||||||||||||||||||||||
| Total intangible assets | $ | 1,029 | $ | 489 | $ | 540 | $ | 1,037 | $ | 376 | $ | 661 |
As of October 31, 2020, estimated future amortization expense related to intangible assets was as follows:
| Fiscal year | In millions | ||||
| 2021 | $ | 115 | |||
| 2022 | 115 | ||||
| 2023 | 113 | ||||
| 2024 | 79 | ||||
| 2025 | 36 | ||||
| Thereafter | 82 | ||||
| Total | $ | 540 |
HP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 9: 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 October 31, 2020 | As of October 31, 2019 | ||||||||||||||||||||||||||||||||||||||||||||||
| 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 | $ | — | $ | 1,700 | $ | — | $ | 1,700 | $ | — | $ | 1,283 | $ | — | $ | 1,283 | |||||||||||||||||||||||||||||||
| Financial institution instruments | — | 59 | — | 59 | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
| Government debt(1) | 1,992 | 181 | — | 2,173 | 2,422 | — | — | 2,422 | |||||||||||||||||||||||||||||||||||||||
| Available-for-Sale Investments | |||||||||||||||||||||||||||||||||||||||||||||||
| Corporate debt | — | 169 | — | 169 | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
| Financial institution instruments | — | 32 | — | 32 | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
| Government debt(1) | — | 73 | — | 73 | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
| Marketable equity securities and Mutual funds | 5 | 53 | — | 58 | 6 | 50 | — | 56 | |||||||||||||||||||||||||||||||||||||||
| Derivative Instruments | |||||||||||||||||||||||||||||||||||||||||||||||
| Interest rate contracts | — | 4 | — | 4 | — | 4 | — | 4 | |||||||||||||||||||||||||||||||||||||||
| Foreign currency contracts | — | 191 | — | 191 | — | 381 | — | 381 | |||||||||||||||||||||||||||||||||||||||
| Other derivatives | — | — | — | — | — | 7 | — | 7 | |||||||||||||||||||||||||||||||||||||||
| Total Assets | $ | 1,997 | $ | 2,462 | $ | — | $ | 4,459 | $ | 2,428 | $ | 1,725 | $ | — | $ | 4,153 | |||||||||||||||||||||||||||||||
| Liabilities: | |||||||||||||||||||||||||||||||||||||||||||||||
| Derivative Instruments | |||||||||||||||||||||||||||||||||||||||||||||||
| Interest rate contracts | $ | — | $ | 3 | $ | — | $ | 3 | $ | — | $ | — | $ | — | $ | — | |||||||||||||||||||||||||||||||
| Foreign currency contracts | — | 256 | — | 256 | — | 165 | — | 165 | |||||||||||||||||||||||||||||||||||||||
| Other derivatives | — | 3 | — | 3 | — | 1 | — | 1 | |||||||||||||||||||||||||||||||||||||||
| Total Liabilities | $ | — | $ | 262 | $ | — | $ | 262 | $ | — | $ | 166 | $ | — | $ | 166 |
(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.
HP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 9: 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 foreign 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 was 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, treasury rate locks and, at times, option contracts to hedge certain foreign currency, interest rate and return on certain investment 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 10, “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 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 $6.7 billion at October 31, 2020 compared to its carrying amount of $6.2 billion at that date. The fair value of HP’s short- and long-term debt was $5.4 billion as compared to its carrying value of $5.1 billion at October 31, 2019. If measured at fair value in the Consolidated 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 current liabilities on the Consolidated Balance Sheets, the carrying amounts approximate fair value due to their short maturities. If measured at fair value in the Consolidated 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 are measured at cost less impairment, adjusted for observable price changes. HP’s non-financial assets, such as intangible assets, goodwill and property, plant and equipment, are recorded at fair value in the period an impairment charge is recognized. If measured at fair value in the Consolidated Balance Sheets these would generally be classified within Level 3 of the fair value hierarchy.
HP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 10: Financial Instruments
Cash Equivalents and Available-for-Sale Investments
| As of October 31, 2020 | As of October 31, 2019 | ||||||||||||||||||||||||||||||||||||||||||||||
| Cost | Gross Unrealized Gain | Gross Unrealized Loss | Fair Value | Cost | Gross Unrealized Gain | Gross Unrealized Loss | Fair Value | ||||||||||||||||||||||||||||||||||||||||
| In millions | |||||||||||||||||||||||||||||||||||||||||||||||
| Cash Equivalents: | |||||||||||||||||||||||||||||||||||||||||||||||
| Corporate debt | $ | 1,700 | $ | — | $ | — | $ | 1,700 | $ | 1,283 | $ | — | $ | — | $ | 1,283 | |||||||||||||||||||||||||||||||
| Financial institution instruments | 59 | — | — | 59 | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
| Government debt | 2,173 | — | — | 2,173 | 2,422 | — | — | 2,422 | |||||||||||||||||||||||||||||||||||||||
| Total cash equivalents | 3,932 | — | — | 3,932 | 3,705 | — | — | 3,705 | |||||||||||||||||||||||||||||||||||||||
| Available-for-Sale Investments: | |||||||||||||||||||||||||||||||||||||||||||||||
| Corporate debt(1) | 169 | — | — | 169 | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
| Financial institution instruments(1) | 32 | — | — | 32 | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
| Government debt(1) | 73 | — | — | 73 | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
| Marketable equity securities and Mutual funds | 42 | 16 | — | 58 | 40 | 16 | — | 56 | |||||||||||||||||||||||||||||||||||||||
| Total available-for-sale investments | 316 | 16 | — | 332 | 40 | 16 | — | 56 | |||||||||||||||||||||||||||||||||||||||
| Total cash equivalents and available-for-sale investments | $ | 4,248 | $ | 16 | $ | — | $ | 4,264 | $ | 3,745 | $ | 16 | $ | — | $ | 3,761 |
(1)HP classifies its marketable debt securities as available-for-sale investments within Other current assets on the Consolidated 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 October 31, 2020 and 2019, the carrying amount of cash equivalents approximated fair value due to the short period of time to maturity. Interest income related to cash, cash equivalents and debt securities was approximately $40 million in fiscal year 2020, $80 million in fiscal year 2019, and $116 million in fiscal year 2018. 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 October 31, 2020 | |||||||||||
| Amortized Cost | Fair Value | ||||||||||
| In millions | |||||||||||
| Due in one year | $ | 274 | $ | 274 | |||||||
Non-marketable equity investments in privately held companies are included in Other non-current assets in the Consolidated Balance Sheets. These amounted to $44 million and $46 million as of October 31, 2020 and 2019, respectively.
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, treasury rate locks and, at times, option contracts to hedge certain foreign currency, interest rate and, return on certain investment 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 Balance Sheets.
HP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 10: Financial Instruments (Continued)
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’s custodian 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 $90 million and $45 million as of October 31, 2020 and 2019, 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 October 31, 2020 and 2019.
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 benchmark interest rates on HP’s future interest rate payments.
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 in the Consolidated Statements of Earnings in the period of change.
During the fiscal year 2020, HP terminated interest rate swaps with a notional amount of $0.5 billion that were de-designated as fair value hedges of certain fixed rate debt securities that were extinguished. HP also entered into $0.6 billion notional amount interest rate swaps designated as fair value hedges to convert a portion of newly issued $1.15 billion fixed-rate debt to floating.
Cash Flow Hedges
HP uses forward contracts, treasury rate locks, and at times, option contracts designated as cash flow hedges to protect against the foreign currency exchange and interest rate risks inherent in its forecasted net revenue, cost of revenue, operating expenses and debt issuance. HP’s foreign currency cash flow hedges mature predominantly within twelve months; however, hedges related to long-term procurement arrangements extend several years.
For derivative instruments that are designated and qualify as cash flow hedges, HP initially records changes in fair value of the derivative instrument in Accumulated other comprehensive loss as a separate component of stockholders’ deficit in the Consolidated Balance Sheets and subsequently reclassifies these amounts into earnings in the period during which the hedged transaction is recognized in earnings. HP reports the changes in the fair value of the derivative instrument in the same financial statement line item as changes in the fair value of the hedged item.
In March 2020, HP entered into a series of treasury rate lock agreements with notional amounts totaling $750 million to hedge the exposure to variability in future cash flows resulting from changes in interest rate related to an anticipated issuance of long-term debt. These agreements were designated as cash flow hedges and were settled upon issuance of the senior notes in June 2020 resulting in an immaterial loss recognized in Other Comprehensive Income (Loss). The loss will be reclassified to Interest and other, net over the life of the related debt.
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, as well as the offsetting change in the fair value of the hedged item, in Interest and other, net in the Consolidated 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.
As of October 31, 2020 and 2019, no portion of the hedging instruments’ gain or loss was excluded from the assessment of effectiveness for fair value and cash flow hedges.
HP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 10: Financial Instruments (Continued)
Fair Value of Derivative Instruments in the Consolidated Balance Sheets
The gross notional and fair value of derivative instruments in the Consolidated Balance Sheets were as follows:
| As of October 31, 2020 | As of October 31, 2019 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Outstanding Gross Notional | Other Current Assets | Other Non-Current Assets | Other Current Liabilities | Other Non-Current Liabilities | Outstanding Gross Notional | Other Current Assets | Other Non-Current Assets | Other Current Liabilities | Other Non-Current Liabilities | ||||||||||||||||||||||||||||||||||||||||||||||||||
| In millions | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Derivatives designated as hedging instruments | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Fair value hedges: | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Interest rate contracts | $ | 875 | $ | 4 | $ | — | $ | — | $ | 3 | $ | 750 | $ | — | $ | 4 | $ | — | $ | — | |||||||||||||||||||||||||||||||||||||||
| Cash flow hedges: | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Foreign currency contracts | 15,661 | 148 | 30 | 199 | 37 | 15,639 | 260 | 111 | 123 | 28 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Total derivatives designated as hedging instruments | 16,536 | 152 | 30 | 199 | 40 | 16,389 | 260 | 115 | 123 | 28 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Derivatives not designated as hedging instruments | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Foreign currency contracts | 5,319 | 13 | — | 20 | — | 7,146 | 10 | — | 14 | — | |||||||||||||||||||||||||||||||||||||||||||||||||
| Other derivatives | 142 | — | — | 3 | — | 134 | 7 | — | 1 | — | |||||||||||||||||||||||||||||||||||||||||||||||||
| Total derivatives not designated as hedging instruments | 5,461 | 13 | — | 23 | — | 7,280 | 17 | — | 15 | — | |||||||||||||||||||||||||||||||||||||||||||||||||
| Total derivatives | $ | 21,997 | $ | 165 | $ | 30 | $ | 222 | $ | 40 | $ | 23,669 | $ | 277 | $ | 115 | $ | 138 | $ | 28 |
Offsetting of Derivative Instruments
HP recognizes all derivative instruments on a gross basis in the Consolidated 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 October 31, 2020 and 2019, information related to the potential effect of HP’s master netting agreements and collateral security agreements was as follows:
| In the Consolidated Balance Sheets | |||||||||||||||||||||||||||||||||||||||||
| (i) | (ii) | (iii) = (i)–(ii) | (iv) | (v) | (vi) = (iii)–(iv)–(v) | ||||||||||||||||||||||||||||||||||||
| Gross Amount Recognized | Gross Amount Offset | Net Amount Presented | Gross Amounts Not Offset | ||||||||||||||||||||||||||||||||||||||
| Derivatives | Financial Collateral | Net Amount | |||||||||||||||||||||||||||||||||||||||
| In millions | |||||||||||||||||||||||||||||||||||||||||
| As of October 31, 2020 | |||||||||||||||||||||||||||||||||||||||||
| Derivative assets | $ | 195 | $ | — | $ | 195 | $ | 156 | $ | 4 | (1) | $ | 35 | ||||||||||||||||||||||||||||
| Derivative liabilities | $ | 262 | $ | — | $ | 262 | $ | 156 | $ | 130 | (2) | $ | (24) | ||||||||||||||||||||||||||||
| As of October 31, 2019 | |||||||||||||||||||||||||||||||||||||||||
| Derivative assets | $ | 392 | $ | — | $ | 392 | $ | 113 | $ | 259 | (1) | $ | 20 | ||||||||||||||||||||||||||||
| Derivative liabilities | $ | 166 | $ | — | $ | 166 | $ | 113 | $ | 43 | (2) | $ | 10 |
(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.
HP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 10: Financial Instruments (Continued)
(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.
Effect of Derivative Instruments in the Consolidated Statements of Earnings
The pre-tax effect of derivative instruments and related hedged items in a fair value hedging relationship was as follows:
| Derivative Instrument | Hedged Item | Location | For the fiscal years ended October 31 | Total amounts of income/ (expense) line items in the statement of financial performance in which the effects of fair value hedges are recorded | Gain/ (loss) recognized in earnings on derivative instrument | (Loss)/ gain recognized in earnings on hedged item | ||||||||||||||||||||||||||||||||
| In millions | ||||||||||||||||||||||||||||||||||||||
| Interest rate contracts | Fixed-rate debt | Interest and other, net | 2020 | $ | (231) | $ | 6 | $ | (6) | |||||||||||||||||||||||||||||
| 2019 | (1,354) | 27 | (27) | |||||||||||||||||||||||||||||||||||
| 2018 | (818) | (11) | 11 |
The pre-tax effect of derivative instruments in cash flow hedging relationships included in Accumulated other comprehensive loss was as follows:
| For the fiscal years ended October 31 | |||||||||||||||||
| 2020 | 2019 | 2018 | |||||||||||||||
| In millions | |||||||||||||||||
| (Loss)/ gain recognized in Accumulated other comprehensive loss on derivatives: | |||||||||||||||||
| Foreign currency contracts | $ | (197) | $ | 252 | $ | 341 | |||||||||||
| Interest rate contracts | $ | (4) | $ | — | $ | — |
The pre-tax effect of derivative instruments in cash flow hedging relationships included in earnings were as follows:
| Total amounts of income/ (expense) line items in the statement of financial performance in which the effects of cash flow hedges are recorded | Gain/ (loss) reclassified from Accumulated other comprehensive loss into earnings | ||||||||||||||||||||||||||||||||||
| For the fiscal years ended October 31 | For the fiscal years ended October 31 | ||||||||||||||||||||||||||||||||||
| 2020 | 2019 | 2018 | 2020 | 2019 | 2018 | ||||||||||||||||||||||||||||||
| In millions | In millions | ||||||||||||||||||||||||||||||||||
| Net revenue | $ | 56,639 | $ | 58,756 | $ | 58,472 | $ | 108 | $ | 425 | $ | (239) | |||||||||||||||||||||||
| Cost of revenue | (46,202) | (47,586) | (47,803) | (25) | (43) | (18) | |||||||||||||||||||||||||||||
| Operating expenses | (6,975) | (7,293) | (6,838) | 2 | (2) | (1) | |||||||||||||||||||||||||||||
| Total | $ | 3,462 | $ | 3,877 | $ | 3,831 | $ | 85 | $ | 380 | $ | (258) |
As of October 31, 2020, HP expects to reclassify an estimated Accumulated other comprehensive loss of approximately $57 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 Accumulated other comprehensive loss based on the change of market rate, and therefore could have different impact on earnings.
HP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 10: Financial Instruments (Continued)
The pre-tax effect of derivative instruments not designated as hedging instruments recognized in Interest and other, net in the Consolidated Statements of Earnings for fiscal years 2020, 2019 and 2018 was as follows:
| Gain/ (loss) recognized in earnings on derivative instrument | |||||||||||||||||||||||
| Location | 2020 | 2019 | 2018 | ||||||||||||||||||||
| In millions | |||||||||||||||||||||||
| Foreign currency contracts | Interest and other, net | $ | 40 | $ | (119) | $ | 35 | ||||||||||||||||
| Other derivatives | Interest and other, net | (9) | 14 | (9) | |||||||||||||||||||
| Total | $ | 31 | $ | (105) | $ | 26 |
HP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 11: Borrowings
Notes Payable and Short-Term Borrowings
| As of October 31 | |||||||||||||||||||||||
| 2020 | 2019 | ||||||||||||||||||||||
| Amount Outstanding | Weighted-Average Interest Rate | Amount Outstanding | Weighted-Average Interest Rate | ||||||||||||||||||||
| In millions | |||||||||||||||||||||||
| Current portion of long-term debt | $ | 633 | 4.0 | % | $ | 307 | 3.6 | % | |||||||||||||||
| Notes payable to banks, lines of credit and other | 41 | 1.6 | % | 50 | 2.0 | % | |||||||||||||||||
| $ | 674 | $ | 357 |
Long-Term Debt
| As of October 31 | |||||||||||
| 2020 | 2019 | ||||||||||
| 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 | |||||||
| $1,250 issued at discount to par at a price of 99.799% in May 2011 at 4.3%, due June 2021 | — | 667 | |||||||||
| $1,000 issued at discount to par at a price of 99.816% in September 2011 at 4.375%, due September 2021 | 412 | 538 | |||||||||
| $1,500 issued at discount to par at a price of 99.707% in December 2011 at 4.65%, due December 2021 | 586 | 695 | |||||||||
| $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 | |||||||||
| 2019 Shelf Registration Statement: | |||||||||||
| $1,150 issued at discount to par at a price of 99.769% in June 2020 at 2.2%, due June 2025 | 1,148 | — | |||||||||
| $1,000 issued at discount to par at a price of 99.718% in June 2020 at 3.0%, due June 2027 | 997 | — | |||||||||
| $850 issued at discount to par at a price of 99.790% in June 2020 at 3.4%, due June 2030 | 848 | — | |||||||||
| 5,689 | 4,246 | ||||||||||
| Other borrowings at 0.51%-9.00%, due in fiscal years 2021-2027 | 522 | 853 | |||||||||
| Fair value adjustment related to hedged debt | 2 | 4 | |||||||||
| Unamortized debt issuance cost | (37) | (16) | |||||||||
| Current portion of long-term debt | (633) | (307) | |||||||||
| Total long-term debt | $ | 5,543 | $ | 4,780 |
(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 June 2020, HP completed its public offering of $3.0 billion aggregate principal amount of senior unsecured notes, consisting of $1.15 billion of 2.2% notes due June 2025, $1.0 billion of 3.0% notes due June 2027, and $850 million of 3.4% notes due June 2030. HP incurred $26 million towards issuance costs. HP will pay interest semi-annually on the notes on June 17 and December 17, beginning December 17, 2020. HP had entered into treasury rate lock agreements with notional amounts totaling $750 million to hedge exposure to variability in future cash flows resulting from changes in interest rates related to the forecasted issuance of long-term debt. These agreements were settled upon issuance of the senior notes in June 2020. The net proceeds from this offering were used to fund approximately $0.7 billion and $0.9 billion for the cash tender offer (“Tender Offer”) and the redemption, respectively, of certain existing notes, as described below. Net proceeds from this offering in excess of the amounts used to repurchase the notes were used for general corporate purposes.
As disclosed in Note 10, “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 benchmark interest rates. Interest rates shown in the table of long-term debt have not been adjusted to reflect the impact of any interest rate swaps.
HP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 11: Borrowings (Continued)
As of October 31, 2020, aggregate future maturities of debt at face value (excluding unamortized debt issuance cost of $37 million and discounts on debt issuance of $9 million less fair value adjustment related to hedged debt of $2 million), including other financing obligations were as follows:
| Fiscal year | In millions | ||||
| 2021 | $ | 679 | |||
| 2022 | 1,230 | ||||
| 2023 | 95 | ||||
| 2024 | 45 | ||||
| 2025 | 1,161 | ||||
| Thereafter | 3,051 | ||||
| Total | $ | 6,261 |
Extinguishment of Debt
In June 2020, HP commenced and completed the Tender Offer to purchase approximately $0.7 billion in aggregate
principal amount of its outstanding US Dollar 3.750% Global Notes due December 1,2020, 4.300% Global Notes due June 1, 2021, 4.375% Global Notes due September 15, 2021 and 4.650% Global Notes due December 9, 2021. This extinguishment of debt resulted in a net loss of $23 million, which was recorded as Interest and other, net on the Consolidated Statements of Earnings.
On July 22, 2020, HP redeemed the remaining aggregate principal amounts of $0.5 billion in outstanding U.S. Dollar 3.750% Global Notes due December 1, 2020 and $0.4 billion in outstanding U.S. Dollar 4.300% Global Notes due June 1, 2021. This extinguishment of debt resulted in a net loss of $17 million, which was recorded as Interest and other, net on the Consolidated Statements of Earnings.
As part of the above transactions, HP terminated and settled interest rate swaps with a notional of $0.5 billion that were de-designated as fair value hedges.
Commercial Paper
As of October 31, 2020, 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 commercial paper 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 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 Facilities
As of October 31, 2020, HP maintained 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.
On May 29, 2020, we entered into a 364-day revolving credit facility providing for a senior unsecured revolving credit facility with aggregate lending commitments of $1.0 billion. Commitments under the 364-day revolving credit facility will be available until May 28, 2021. Funds borrowed under this revolving credit facility may be used for general corporate purposes.
As of October 31, 2020, HP was in compliance with the financial covenants in the credit agreements governing the revolving credit facilities.
Available Borrowing Resources
As of October 31, 2020, HP had available borrowing resources of $725 million from uncommitted lines of credit in addition to the senior unsecured committed revolving credit facilities.
HP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 12: Stockholders’ Deficit
Share Repurchase Program
HP’s share repurchase program authorizes both open market and private repurchase transactions. In fiscal year 2020, HP executed share repurchases of 168 million shares and settled total shares for $3.1 billion. In fiscal year 2019, HP executed share repurchases of 118 million shares and settled total shares for $2.4 billion. In fiscal year 2018, HP executed share repurchases of 111 million shares and settled total shares for $2.6 billion. Share repurchases executed during fiscal years 2020, 2019, and 2018 included 2.3 million shares, 0.9 million shares, and 1.0 million shares settled in November 2020, November 2019, and November 2018, respectively.
The shares repurchased in fiscal years 2020, 2019 and 2018 were all open market repurchase transactions. On February 22, 2020, HP’s Board of Directors increased HP’s share repurchase authorization to $15.0 billion in total. As of October 31, 2020, HP had approximately $12.7 billion remaining under the share repurchase authorizations approved by HP’s Board of Directors.
Shareholder Rights Plan
On February 20, 2020, HP’s Board of Directors adopted a shareholder rights plan and declared a dividend of one preferred share purchase right for each outstanding share of HP’s common stock to shareholders of record on March 2, 2020. The dividend distribution was made on March 2, 2020. The rights were set to expire on February 20, 2021, unless terminated earlier by HP’s Board of Directors. The Board of Directors terminated the shareholder rights plan, effective June 25, 2020, and at the time of the termination, all rights distributed to holders of HP’s common stock under the shareholder rights plan expired.
Taxes related to Other Comprehensive (Loss) Income
| For the fiscal years ended October 31 | |||||||||||||||||
| 2020 | 2019 | 2018 | |||||||||||||||
| In millions | |||||||||||||||||
| Tax effect on change in unrealized components of available-for-sale debt securities: | |||||||||||||||||
| Tax benefit on unrealized losses arising during the period | $ | — | $ | — | $ | 1 | |||||||||||
| Tax effect on change in unrealized components of cash flow hedges: | |||||||||||||||||
| Tax benefit (provision) on unrealized (losses) gains arising during the period | 20 | (37) | (42) | ||||||||||||||
| Tax provision (benefit) on (gains) losses reclassified into earnings | 28 | 46 | (26) | ||||||||||||||
| 48 | 9 | (68) | |||||||||||||||
| Tax effect on change in unrealized components of defined benefit plans: | |||||||||||||||||
| Tax benefit on losses arising during the period | 11 | 64 | — | ||||||||||||||
| Tax provision on amortization of actuarial loss and prior service benefit | (19) | (11) | (11) | ||||||||||||||
| Tax provision on curtailments, settlements and other | (41) | (104) | (2) | ||||||||||||||
| (49) | (51) | (13) | |||||||||||||||
| Tax effect on change in cumulative translation adjustment | 2 | — | — | ||||||||||||||
| Tax benefit (provision) on other comprehensive (loss) income | $ | 1 | $ | (42) | $ | (80) |
HP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 12: Stockholders’ Deficit (Continued)
Changes and reclassifications related to Other Comprehensive (Loss) Income, net of taxes
| For the year ended October 31 | |||||||||||||||||
| 2020 | 2019 | 2018 | |||||||||||||||
| In millions | |||||||||||||||||
| Other comprehensive (loss) income, net of taxes: | |||||||||||||||||
| Change in unrealized components of available-for-sale debt securities: | |||||||||||||||||
| Unrealized gains (losses) arising during the period | $ | 2 | $ | 1 | $ | (2) | |||||||||||
| Losses (gains) reclassified into earnings | — | 3 | (5) | ||||||||||||||
| 2 | 4 | (7) | |||||||||||||||
| Change in unrealized components of cash flow hedges: | |||||||||||||||||
| Unrealized (losses) gains arising during the period | (181) | 215 | 299 | ||||||||||||||
| (Gains) losses reclassified into earnings | (57) | (334) | 232 | ||||||||||||||
| (238) | (119) | 531 | |||||||||||||||
| Change in unrealized components of defined benefit plans: | |||||||||||||||||
| (Losses) gains arising during the period | (18) | (239) | 11 | ||||||||||||||
| Amortization of actuarial loss and prior service benefit(1) | 64 | 32 | 37 | ||||||||||||||
| Curtailments, settlements and other | 174 | (62) | 1 | ||||||||||||||
| 220 | (269) | 49 | |||||||||||||||
| Change in cumulative translation adjustment: | (2) | 4 | — | ||||||||||||||
| Other comprehensive (loss) income, net of taxes | $ | (18) | $ | (380) | $ | 573 |
(1)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 as of October 31, 2020 and changes during fiscal year 2020 were as follows:
| Net unrealized gains on available-for-sale securities | Net unrealized gains (losses) on cash flow hedges | Unrealized components of defined benefit plans | Change in cumulative translation adjustment | Accumulated other comprehensive loss | |||||||||||||||||||||||||
| In millions | |||||||||||||||||||||||||||||
| Balance at beginning of period | $ | 9 | $ | 172 | $ | (1,410) | $ | 4 | $ | (1,225) | |||||||||||||||||||
| Other comprehensive loss before reclassifications | 2 | (181) | (18) | (2) | (199) | ||||||||||||||||||||||||
| Reclassifications of (gains) losses into earnings | — | (57) | 64 | — | 7 | ||||||||||||||||||||||||
| Reclassifications of curtailments, settlements and other into earnings | — | — | 174 | — | 174 | ||||||||||||||||||||||||
| Balance at end of period | $ | 11 | $ | (66) | $ | (1,190) | $ | 2 | $ | (1,243) |
HP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 13: 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 units, stock options, performance-based awards and shares purchased under the 2011 employee stock purchase plan.
A reconciliation of the number of shares used for basic and diluted net EPS calculations is as follows:
| For the fiscal years ended October 31 | |||||||||||||||||
| 2020 | 2019 | 2018 | |||||||||||||||
| In millions, except per share amounts | |||||||||||||||||
| Numerator: | |||||||||||||||||
| Net earnings | $ | 2,844 | $ | 3,152 | $ | 5,327 | |||||||||||
| Denominator: | |||||||||||||||||
| Weighted-average shares used to compute basic net EPS | 1,413 | 1,515 | 1,615 | ||||||||||||||
| Dilutive effect of employee stock plans | 7 | 9 | 19 | ||||||||||||||
| Weighted-average shares used to compute diluted net EPS | 1,420 | 1,524 | 1,634 | ||||||||||||||
| Net earnings per share: | |||||||||||||||||
| Basic | $ | 2.01 | $ | 2.08 | $ | 3.30 | |||||||||||
| Diluted | $ | 2.00 | $ | 2.07 | $ | 3.26 | |||||||||||
| Anti-dilutive weighted-average stock-based compensation awards(1) | 13 | 7 | — |
(1)HP excludes from the calculation of diluted net EPS stock options and restricted stock units where the assumed proceeds exceed the average market price, 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.
HP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 14: Litigation and Contingencies
HP is involved in lawsuits, claims, investigations and proceedings, including those identified below, consisting of IP, 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 October 31, 2020, 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 SCRL (“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 Brussels Court of First Instance in Belgium, seeking a declaratory judgment that no copyright levies are payable on sales of MFDs in Belgium or, alternatively, that payments already made by HP are sufficient to comply with its obligations. The Brussels Court of Appeal (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. The Belgian Supreme Court rejected HP’s appeal on September 24, 2020 and the matter has been remitted to the Court of Appeal, where the expert will give an opinion on the objective speed and amount of compensation due.
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
HP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 14: Litigation and Contingencies (Continued)
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 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 case is fully briefed and awaiting the Court of Appeals to schedule oral argument. 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. The operative complaint is the Fourth Amended Complaint, filed on July 9, 2020. Thirty-five named and opt-in plaintiffs remain. By their complaint, plaintiffs seek to represent (1) a putative nationwide ADEA collective comprised of all individuals 40 years of age and older who had their employment terminated pursuant to a WFR plan on or after December 9, 2014 or April 8, 2015, depending on state law; and (2) a putative Rule 23 class under California law comprised of all individuals 40 years of age and older who had their employment terminated in California pursuant to a WFR plan on or after August 18, 2012. Excluded from the putative collective and class are employees who (a) signed a Waiver and General Release Agreement at termination, or (b) signed an Agreement to Arbitrate Claims. A similar purported collective and class are proposed for Hewlett Packard Enterprise, but the time periods start on November 1, 2015. Plaintiffs seek monetary damages in the form of back and front pay and benefits, liquidated damages under the ADEA, punitive damages under the state law claims, an award of attorneys’ fees, and other relief. On August 24, 2020, defendants filed a motion to dismiss or strike allegations from the operative complaint, which the court denied on October 15, 2020. Defendants filed their answers on October 29, 2020.
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, Excise and Service Tax Appellate Tribunal (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
HP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 14: Litigation and Contingencies (Continued)
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. A hearing on the merits of the appeal scheduled for January 15, 2019 has been cancelled. 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.
Neodron Patent Litigation*.* United States. On May 21, 2019, Neodron Ltd. (“Neodron”) filed a patent infringement lawsuit against Hewlett Packard Enterprise in U.S. District Court for the Western District of Texas. On the same day, Neodron filed a companion complaint with the U.S. International Trade Commission (“ITC”) pursuant to Section 337 of the Tariff Act of 1930 against seven sets of respondents, including Hewlett Packard Enterprise. On May 23 and June 14, 2019, Neodron filed amended complaints in the ITC and the Western District of Texas, respectively, to replace Hewlett Packard Enterprise with HP. Both complaints alleged that certain touch-controlled devices infringe four patents owned by Neodron. On June 19, 2019, the ITC instituted an investigation. In the ITC proceeding, Neodron sought an order enjoining HP from importing, selling for importation, or selling after importation certain touch-controlled notebook computers and tablets. On June 28, 2019, Neodron filed a second lawsuit in the Western District of Texas, asserting four additional patents against HP touch-controlled devices. Neodron amended its complaint in the second lawsuit to assert a total of eight patents against HP touch-controlled devices. Neodron sought unspecified damages and a permanent injunction, among other remedies.
Germany. On October 29, 2019, Neodron served HP with a claim of patent infringement at the Munich State Court in Germany. The patent asserted in the German case is related to a patent asserted in the ITC. The initial hearing was held on July 29, 2020. If the German court had found infringement of a valid patent, the court may have issued an injunction as part of any remedy.
Settlement of Litigation. On July 31, 2020, HP and Neodron entered into an agreement to settle all pending litigation between them on a worldwide basis, and all pending legal actions against one another have been dismissed.
Slingshot Printing LLC Litigation*.* On June 11, 2019, Slingshot Printing LLC (“Slingshot”) filed three complaints in U.S. District Court in the Western District of Texas alleging HP infringes or has infringed sixteen patents. On September 20, 2019, Slingshot filed a fourth complaint and amended the three earlier complaints, alleging that HP infringes or has infringed thirty-two patents. On December 12, 2019, Slingshot voluntarily dismissed its allegations as to one patent because it did not own a related patent. On January 23, 2020, Slingshot filed a fifth complaint, re-asserting the dismissed patent as well as the related patent. On February 13, 2020, Slingshot voluntarily dismissed its allegations as to another patent, which was asserted in its third complaint. On March 25, 2020, Slingshot voluntarily dismissed its allegations as to an additional patent, which was also asserted in its third complaint. Slingshot is currently asserting a total of 31 patents. The accused products include inkjet printers, cartridges, and printheads. The complaints seek monetary damages.
Philips Patent Litigation. On September 17, 2020, Koninklijke Philips N.V. and Philips North America LLC (collectively, “Philips”) filed a complaint against HP for patent infringement in federal court for the District of Delaware. On September 18, 2020, Philips filed a companion complaint with the U.S. International Trade Commission (“ITC”) pursuant to Section 337 of the Tariff Act of 1930 against HP and 8 other sets of respondents. Both the district court complaint and the ITC complaint allege that certain digital video-capable devices and components thereof infringe four of Philips owned patents. On October 16, 2020, the ITC instituted an investigation. The investigation is in its early stages, and the ITC’s final decision is due by February 22, 2022. In the ITC proceeding, Philips seeks an order enjoining respondents from importing, or selling after importation, certain digital video-capable devices and components thereof, including certain PCs, display devices, and components thereof. In the district court action, Philips seeks unspecified damages and an injunction against HP, among other remedies.
Caltech Patent Litigation. On November 11, 2020, the California Institute of Technology (“Caltech”) filed a complaint against HP for patent infringement in the federal court for the Western District of Texas. The complaint alleges infringement of three of Caltech’s patents, U.S. Patent Nos. 7,116,710, 7,421,032 and 7,916,781. The accused products are HP commercial and consumer PCs that comply with the IEEE 802.11n, 802.11ac, and/or 802.11ax standards. Caltech seeks unspecified damages and other relief.
In re HP Inc. Securities Litigation (Electrical Workers Pension Fund, Local 103, I.B.E.W. v. HP Inc., et al.). On February 19, 2020, Electrical Workers Pension Fund, Local 103, I.B.E.W. filed a putative class action complaint against HP, Dion Weisler, Catherine Lesjak, and Steven Fieler in U.S. District Court in the Northern District of California. On May 20,
HP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 14: Litigation and Contingencies (Continued)
2020, the court appointed the State of Rhode Island, Office of the General Treasurer, on behalf of the Employees’ Retirement System of Rhode Island and Iron Workers Local 580 Joint Funds as Lead Plaintiffs. On July 20, 2020, Lead Plaintiffs filed an amended complaint, which additionally names as defendants Enrique Lores and Christoph Schell. The amended complaint alleges, among other things, that from February 23, 2017 to October 3, 2019, HP and the named officers violated Sections 10(b) and 20(a) of the Exchange Act by making false or misleading statements about HP’s printing supplies business, including HP’s use of its four-box model to predict the demand for supplies. It further alleges that Dion Weisler and Enrique Lores violated Sections 10(b) and 20A of the Exchange Act by allegedly selling shares of HP common stock during this period while in possession of material, non-public adverse information about HP’s print business. Plaintiffs seek compensatory damages and other relief. On October 2, 2020, HP and the named officers filed a motion to dismiss the complaint for failure to state a claim upon which relief can be granted. That motion is due to be fully briefed in early 2021.
York County on behalf of the County of York Retirement Fund v. HP Inc., et al. On November 5, 2020, York County, on behalf of the County of York Retirement Fund, filed a putative class action complaint against HP, Dion Weisler, and Catherine Lesjak in federal court in the Northern District of California. The complaint alleges, among other things, that from November 6, 2015 to June 21, 2016, HP and the named former officers violated Sections 10(b) and 20(a) of the Exchange Act by concealing material information and making false statements about HP’s printing supplies business, including information about HP’s channel inventory management and sales practices. Plaintiff seeks compensatory damages and other relief.
Legal Proceedings re Authentication of Supplies. Civil litigation or government investigations are pending in the United States, Italy, Israel, and the Netherlands involving supplies authentication protocols used in certain HP printers. These protocols are often referred to as Dynamic Security. The core allegations in these proceedings claim misleading or inadequate consumer notifications and permissions pertaining to the use of Dynamic Security, the impact of firmware updates, or the potential inability of cartridges with clone chips or circuitry to work in HP printers with Dynamic Security.
123Inkt Foundation litigation (Netherlands). On November 23, 2016, a foundation known as Stichting 123Inkt-Huismerk Klanten (the “Foundation”) filed a complaint in district court in Amsterdam against HP Nederland B.V. and HP Inc. arising out of the use of Dynamic Security in certain OfficeJet printers. Digital Revolution B.V. (a.k.a. 123Inkt) established the Foundation to pursue the interests of approximately 960 of its customers who transferred their claims to it. The complaint alleges: (1) violation of right of ownership; (2) destruction and damage to property; (3) computer vandalism; (4) unlawful act; (5) non-compliance; (6) unfair commercial practices; (7) misleading commercial practices; and (8) misleading advertising. The complaint seeks injunctive relief to prohibit use of Dynamic Security, damages, and attorneys’ fees. On December 27, 2017, the District Court dismissed the case and awarded fees to HP. On January 25, 2018, the Foundation filed a summons with the Amsterdam Court of Appeal to appeal. On December 17, 2019, the Court of Appeal set aside the judgment of the District Court, adopted a new decision declaring that HP provided inadequate and partially incorrect information to the Foundation members around September 13, 2016, awarded damages to them in an amount to be later determined, but denied all other claims, including injunctive relief, holding that the use of Dynamic Security is not inherently impermissible and the Foundation lacks legal interest to pursue such action. On March 19, 2020, the Foundation filed a cassation writ of summons with the Supreme Court of the Netherlands (Hoge Raad der Nederlanden) appealing the decision of the Court of Appeal. On May 29, 2020, HP filed its statement of defense and incidental appeal in cassation with the Supreme Court appealing the decision of the Court of Appeal. On October 30, 2020, the parties filed their opening briefs with the Supreme Court.
Gensin v. HP Inc. (Israel). On October 25, 2017, a purported consumer class action, captioned Gensin v. HP Inc., was filed in the District Court in Jerusalem against HP arising out of the use of Dynamic Security in certain OfficeJet printers. The petition and motion for certification as a class action alleges: (1) tortious wrongdoing in violation of the Computers Law, 5755-1995; (2) breach of Contracts Law, 5731-1970; (3) breach of the Consumer Protection Law, 5741-1981; (4) negligence; and (5) improper enrichment. The named petitioner initially sought to represent nationwide classes comprised of anyone who “owns an HP printer that has been blocked, disrupted, or interfered with by HP in the use of ink cartridges not manufactured by HP” or who “purchased ink cartridges not manufactured by HP for use in the blocked printers.” Plaintiff seeks class relief, injunctive relief, damages, and attorneys’ fees. On November 16, 2017, a second purported consumer class action was filed against HP in the Central District Court, captioned Dror v. HP, Inc., also arising out of the use of Dynamic Security in certain OfficeJet printers. The petition and motion allege similar causes of action on behalf of similar nationwide classes. After the Dror case was consolidated with the Gensin case in Jerusalem, the District Court on June 24, 2018 dismissed the Dror case and designated Gensin as the lead matter. On March 9, 2020, the petitioner moved to modify the proposed nationwide class to be comprised of “[a]ll persons who have an HP printer and whose printer was blocked or rendered unusable by HP with any ink cartridge that is not made by HP” and “[a]ll persons who purchased ink cartridges that are not made by HP, for use in the Blocked Printers.” On July 2, 2020, HP filed its response to the amended petition.
HP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 14: Litigation and Contingencies (Continued)
Parziale v. HP Inc. (United States). On August 27, 2019, a purported consumer class action was filed against HP in federal court in the Northern District of California arising out of the use of Dynamic Security in certain OfficeJet printers. The complaint alleges two causes of action under Florida Consumer Protection statutes: (1) violation of the Florida Deceptive and Unfair Trade Practices Act, F.S.A. §§ 501.201 et seq., and (2) violation of the Florida Misleading Advertisement Law, F.S.A. §§ 817.41 et seq. The named plaintiff seeks to represent a nationwide class of “[a]ll United States Citizens who, between the applicable statute of limitations and the present, had an HP Printer that was modified to reject third party ink cartridges or refilled HP ink cartridges.” On November 13, 2019, plaintiff filed an amended complaint, adding three causes of action to the case: (1) violation of the Computer Fraud and Abuse Act, 18 U.S.C. § 1030 et seq., (2) trespass to chattels, and (3) tortious interference with business relations. Plaintiff seeks class relief, injunctive relief, damages, including punitive damages, and attorneys’ fees. On December 30, 2019, HP moved to dismiss plaintiff’s amended complaint. On April 24, 2020, the Court granted in part and denied in part HP’s motion to dismiss. The Court dismissed plaintiff’s causes of action under the Florida Consumer Protection statutes, as well as the tortious interference with business relations claim and four of the five claims under the Computer Fraud and Abuse Act. The Court denied HP’s motion to dismiss on the remaining claims and on the request for injunctive relief and granted plaintiff leave to file an amended complaint. On June 5, 2020, plaintiff filed a second amended complaint on behalf of both a nationwide class and a Florida subclass alleging violation of the Florida Deceptive and Unfair Trade Practices Act, violation of the Computer Fraud and Abuse Act, and trespass to chattels. Plaintiff sought class relief, injunctive relief, damages, including punitive damages, and attorneys’ fees. On September 29, 2020, the Court granted HP’s motion to dismiss, dismissing the case in full with prejudice. Plaintiff filed notice of appeal, and its opening brief is due in early 2021.
Consumer Protection Investigation (Italy). On September 26, 2019, the Italian Competition Authority (Autorità Garante della Concorrenza e del Mercato) (“AGCM”) served a Notice of Initiation of Proceedings on HP concerning the investigation of alleged aggressive practices involving undue influence on consumers and alleged misleading actions and omissions regarding the restriction or prevention of the use of third-party ink cartridges in HP printers, accompanied by a request for information. HP submitted its reply to the AGCM’s request for information on November 15, 2019 and has addressed subsequent requests for information. On May 22, 2020, the AGCM gave notice that it intended to expand its investigation into certain alleged warranty practices regarding the use of third-party cartridges. On June 26, 2020, HP submitted its response to the warranty allegations. On December 7, 2020, the AGCM notified HP of the AGCM’s final decision finding that HP engaged in two unfair commercial practices as follows: (a) the information HP provided to consumers about limitations on the use of certain third-party cartridges in HP printers was allegedly misleading pursuant to Articles 20, 21 and 22 of the Italian Consumer Code, and (b) the alleged use of data to deny warranty coverage and certain alleged data collection practices were aggressive pursuant to Articles 20, 24 and 25 of the Italian Consumer Code. The final decision (i) orders HP to end the allegedly unfair commercial practices; (ii) fines HP €5 million for each alleged unfair practice (total €10 million); (iii) requires HP to file a compliance report within 60 days; (iv) orders HP to publicly publish a corrective statement within 120 days; and (v) orders HP to amend the packaging of its printers within 120 days. The fines are payable within 30 days. HP has 60 days to appeal and intends to appeal.
Digital Revolution B.V. v. HP Nederland B.V., et al. (Netherlands). On March 30, 2020, Digital Revolution B.V. (a.k.a. 123Inkt) served a complaint filed in Amsterdam District Court arising out of the use of Dynamic Security in certain HP printers. The complaint alleges several causes of action: (1) abuse of dominant position; (2) misleading advertising; (3) unfair and misleading commercial practice; and (4) misleading comparative advertising. The complaint seeks injunctive relief, including prohibition of Dynamic Security and disclosure of cartridge authentication protocols, damages, and attorneys’ fees. The parties’ initial appearance in front of the Court took place on July 8, 2020. On September 9, 2020, HP filed its defense and a counterclaim for unfair commercial practices and misleading and unlawful comparative advertising against Digital Revolution B.V.
SEC Investigation. In 2017, the Company received a subpoena from the SEC requesting documents regarding HP’s printing supplies business for the time period before June 2016, with a primary focus on the APJ region. HP fully cooperated with the SEC in connection with its investigation. On September 30, 2020, HP settled with the SEC and entered into an administrative resolution that included findings by the SEC that HP violated Sections 17(a)(2) and 17(a)(3) of the Securities Act of 1933 and Section 13(a) of the Securities Exchange Act of 1934 and the rules thereunder, by failing to disclose certain known trends and uncertainties regarding supplies sales practices and their impact on margin and supplies channel inventory, and that it provided incomplete disclosures regarding supplies channel inventory in its SEC filings and related earnings calls from November 2015 through June 2016. The SEC order imposed a civil penalty of $6 million. HP neither admitted nor denied the SEC’s findings.
HP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 14: Litigation and Contingencies (Continued)
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 August 26, 2020, the U.S. Court of Appeals for the Ninth Circuit affirmed the judgment of conviction against Mr. Hussain. 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. On November 29, 2018, the DOJ announced that a federal grand jury indicted Michael Lynch, former CEO of Autonomy, and Stephen Chamberlain, former VP of Finance of Autonomy. Dr. Lynch and Mr. Chamberlain were charged with conspiracy to commit wire fraud and multiple counts of wire fraud. 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. Trial began on March 25, 2019 and was completed in January 2020. The parties are awaiting a ruling from the Court.
Environmental
HP’s business is subject to various federal, state, local and foreign laws and regulations that could result in costs or other sanctions that adversely affect our business and results of operations. For example, HP is subject to 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 clean-up of contaminated sites, the content of HP’s products and the recycling, treatment and disposal of those products, including batteries. 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, the energy consumption associated with those products, climate change laws and regulations, and product repairability, reuse and 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 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 between HP and Hewlett Packard Enterprise includes provisions that provide for the allocation of environmental liabilities 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
HP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 14: Litigation and Contingencies (Continued)
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 15: 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.
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 cross-indemnifications with Hewlett Packard Enterprise for litigation matters, see Note 14, “Litigation and Contingencies”.
In connection with the Separation, HP entered into the Tax Matters Agreement (“TMA”) with Hewlett Packard Enterprise, effective on November 1, 2015. The TMA provided that HP and Hewlett Packard Enterprise will share certain pre-Separation income tax liabilities. The TMA was terminated during the fourth quarter of fiscal year 2019.
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.
HP records tax indemnification receivables from various third parties for certain 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. HP records a tax indemnification payable to various third parties under these agreements when management believes that it is both probable that a liability has been incurred and the amount can be reasonably estimated. The actual amount that the third parties pay or 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.
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 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:
HP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 15: Guarantees, Indemnifications and Warranties (Continued)
| For the fiscal years ended October 31 | |||||||||||
| 2020 | 2019 | ||||||||||
| In millions | |||||||||||
| Balance at beginning of year | $ | 922 | $ | 915 | |||||||
| Accruals for warranties issued | 977 | 1,051 | |||||||||
| Adjustments related to pre-existing warranties (including changes in estimates) | 38 | (3) | |||||||||
| Settlements made (in cash or in kind) | (944) | (1,041) | |||||||||
| Balance at end of year | $ | 993 | $ | 922 |
Note 16: Commitments
Unconditional Purchase Obligations
As of October 31, 2020, HP had unconditional purchase obligations of $499 million. These unconditional purchase obligations include agreements to purchase goods or services that are enforceable and legally binding on HP and that specify all significant terms, including fixed or minimum quantities to be purchased, fixed, minimum or variable price provisions and the approximate timing of the transaction. These unconditional purchase obligations are primarily related to inventory and service support. Unconditional purchase obligations exclude agreements that are cancelable without penalty.
As of October 31, 2020, unconditional purchase obligations were as follows:
| Fiscal year | In millions | ||||
| 2021 | $ | 290 | |||
| 2022 | 116 | ||||
| 2023 | 47 | ||||
| 2024 | 35 | ||||
| 2025 | 5 | ||||
| Thereafter | 6 | ||||
| Total | $ | 499 |
HP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 17: Leases
HP determines, at lease inception, whether or not an arrangement contains a lease. A significant portion of the operating lease portfolio includes real estate leases. Additionally, HP has identified embedded operating leases within certain outsourced supply chain contracts. Leasing arrangements typically range in terms from 1 to 13 years with varying renewal and termination options. Substantially all of HP’s leases are considered operating leases. Finance leases, short-term leases and sub-lease income were not material as of October 31, 2020 or for the fiscal year ended October 31, 2020.
Lease terms include options to extend or terminate the lease when it is reasonably certain that HP will exercise such options. HP generally considers the economic life of the ROU assets to be comparable to the useful life of similar owned assets. HP’s leases generally do not provide a residual guarantee.
Operating leases are included in Other non-current assets, Other current liabilities and Other non-current liabilities. Finance leases are included in Property, plant and equipment, net, Notes payable and short-term borrowings and Long-term debt in the Consolidated Balance Sheets.
As most of the leases do not provide an implicit interest rate, HP uses the incremental borrowing rate based on the information available at the commencement date of a lease in determining the present value of lease payments. The incremental borrowing rate is determined based on the rate of interest that HP would have to pay to borrow an amount equal to the lease payments on a collateralized basis over a similar term. HP uses the unsecured borrowing rate and risk-adjusts that rate to approximate a collateralized rate.
HP has elected the practical expedient to combine lease and non-lease components as a single lease element for its real estate leases and certain outsourced supply chain contracts in calculating the ROU assets and lease liabilities. Where HP chooses not to combine the lease and non-lease components, HP allocates contract consideration to the lease and non-lease components based on relative standalone prices.
HP reviews the impairment of the ROU assets consistent with the approach applied for other long-lived assets.
The components of lease expense are as follows:
| For the fiscal year ended October 31, 2020 | |||||
| In millions | |||||
| Operating lease cost | $ | 236 | |||
| Variable cost | 108 | ||||
| Total lease expense | $ | 344 |
All lease expenses, including variable lease costs, are primarily included in Cost of revenue and Selling, general and administrative expenses in the Consolidated Statements of Earnings based on the use of the facilities.
Variable lease expense relates primarily to leased real estate utilized for office space and outsourced warehousing. These costs primarily include adjustments for inflation, payments dependent on a rate or index or usage of asset and common area maintenance charges. These costs are not included in the lease liability and are recognized in the period in which they are incurred.
The following table presents supplemental information relating to the cash flows arising from lease transactions. Cash payments made from variable lease costs and short-term leases are not included in the measurement of operating lease liabilities, and, as such, are excluded from the amounts below:
| For the fiscal year ended October 31, 2020 | |||||
| In millions | |||||
| Cash paid for amount included in the measurement of lease liabilities | $ | 236 | |||
| Right-of-use assets obtained in exchange of lease liabilities(1) | $ | 226 |
(1) Includes the impact of new leases as well as remeasurements and modifications to existing leases.
HP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 17: Leases (Continued)
Weighted-average information associated with the measurement of our remaining operating lease liabilities is as follows:
| As of October 31, 2020 | |||||
| Weighted-average remaining lease term in years | 6 | ||||
| Weighted-average discount rate | 3.1 | % |
The following maturity analysis presents expected undiscounted cash outflows for operating leases on an annual basis for the next five years:
| Fiscal year | In millions | ||||
| 2021 | $ | 303 | |||
| 2022 | 247 | ||||
| 2023 | 191 | ||||
| 2024 | 131 | ||||
| 2025 | 110 | ||||
| Thereafter | 297 | ||||
| Total lease payments | $ | 1,279 | |||
| Less: Imputed interest | (100) | ||||
| Total lease liabilities | $ | 1,179 |
The following table, which was included in our Annual Report on Form 10-K for the fiscal year ended October 31, 2019, depicts gross minimum rental commitments under non-cancelable leases for real estate, personal property leases, sublease income commitments and operating lease commitments at October 31, 2019:
| Fiscal year | In millions | ||||
| Less than 1 year | $ | 284 | |||
| 1-3 years | 399 | ||||
| 3-5 years | 262 | ||||
| More than 5 years | 395 | ||||
| Total (1) | $ | 1,340 |
(1) Amounts represent the operating lease obligations, net of total sublease income of $130 million.
There were no material operating leases that HP had entered into and that were yet to commence as of October 31, 2020.
HP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 18: Acquisitions
Acquisitions in Fiscal Year 2019
On November 1, 2018, HP completed the acquisition of the Apogee group. This acquisition furthers HP’s plan to disrupt the A3 copier market and builds on its printing strategy to enhance its A3 and A4 product portfolio; build differentiated solutions and tools to expand its MPS, and invest in its direct and indirect go-to-market capabilities. Apogee augments HP’s services portfolio in contractual office printing and MPS, where solutions are increasingly important for SMBs. HP reports the financial results of the above business in the Printing segment.
The table below presents the purchase price allocation.
| In millions | |||||
| Goodwill | $ | 382 | |||
| Amortizable intangible assets | 292 | ||||
| Net liabilities assumed | (196) | ||||
| Total fair value of consideration | $ | 478 |
HP INC. AND SUBSIDIARIES
Quarterly Summary
(Unaudited)
(In millions, except per share amounts)
| For the three-month fiscal periods ended in fiscal year 2020 | |||||||||||||||||||||||
| January 31 | April 30 | July 31 | October 31 | ||||||||||||||||||||
| Net revenue | $ | 14,618 | $ | 12,469 | $ | 14,294 | $ | 15,258 | |||||||||||||||
| Cost of revenue | 11,746 | 9,976 | 11,901 | 12,579 | |||||||||||||||||||
| Earnings from operations | 865 | 826 | 779 | 992 | |||||||||||||||||||
| Net earnings | $ | 678 | $ | 764 | $ | 734 | $ | 668 | |||||||||||||||
| Net earnings per share:(1) | |||||||||||||||||||||||
| Basic | $ | 0.47 | $ | 0.53 | $ | 0.52 | $ | 0.50 | |||||||||||||||
| Diluted | $ | 0.46 | $ | 0.53 | $ | 0.52 | $ | 0.49 | |||||||||||||||
| Cash dividends paid per share | $ | 0.18 | $ | 0.17 | $ | 0.18 | $ | 0.17 |
| For the three-month fiscal periods ended in fiscal year 2019 | |||||||||||||||||||||||
| January 31 | April 30 | July 31 | October 31 | ||||||||||||||||||||
| Net revenue | $ | 14,710 | $ | 14,036 | $ | 14,603 | $ | 15,407 | |||||||||||||||
| Cost of revenue | 12,098 | 11,307 | 11,698 | 12,483 | |||||||||||||||||||
| Earnings from operations | 926 | 928 | 1,079 | 944 | |||||||||||||||||||
| Net earnings | $ | 803 | $ | 782 | $ | 1,179 | $ | 388 | |||||||||||||||
| Net earnings per share:(1) | |||||||||||||||||||||||
| Basic | $ | 0.52 | $ | 0.51 | $ | 0.79 | $ | 0.26 | |||||||||||||||
| Diluted | $ | 0.51 | $ | 0.51 | $ | 0.78 | $ | 0.26 | |||||||||||||||
| Cash dividends paid per share | $ | 0.16 | $ | 0.16 | $ | 0.16 | $ | 0.16 |
(1) Net EPS for each quarter is computed using the weighted-average number of shares outstanding during that quarter, while EPS for the fiscal year is computed using the weighted-average number of shares outstanding during the year. Hence, the sum of the EPS for each of the four quarters may not equal the EPS for the fiscal year.
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