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HP : Management's Discussion and Analysis of Financial Condition and Results of Operations. (form 10-K)

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12/13/2018 | 10:13pm CET
This Management's Discussion and Analysis of Financial Condition and Results of
Operations ("MD&A") is organized as follows:
•            Overview.  A discussion of our business and other highlights
             affecting the company to provide context for the remainder of this
             MD&A.


•            Separation Transaction.  A discussion of the separation of Hewlett
             Packard Enterprise Company, HP Inc.'s former enterprise

technology

             infrastructure, software, services and financing businesses.


•            Critical Accounting Policies and Estimates.  A discussion of
             accounting policies and estimates that we believe are

important to

             understanding the assumptions and judgments incorporated in our
             reported financial results.


•            Results of Operations. An analysis of our continuing

financial

             results comparing fiscal year 2018 to fiscal year 2017 and 

fiscal

             year 2017 to fiscal year 2016. A discussion of the results of
             continuing operations is followed by a more detailed 

discussion of

             the results of operations by segment.


•            Liquidity and Capital Resources.  An analysis of changes in our cash
             flows and a discussion of our liquidity and financial condition.


•            Contractual and Other Obligations.  An overview of contractual
             obligations, retirement and post-retirement benefit plan
             contributions, cost-saving plans, uncertain tax positions and
             off-balance sheet arrangements.



The discussion of financial condition and results of our continuing operations
that follows provides information that will assist the reader in understanding
our Consolidated Financial Statements, the changes in certain key items in those
financial statements from year to year, and the primary factors that accounted
for those changes, as well as how certain accounting principles, policies and
estimates affect our Consolidated Financial Statements. This discussion should
be read in conjunction with our Consolidated Financial Statements and the
related notes that appear elsewhere in this document.



                                       31
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                            HP INC. AND SUBSIDIARIES

                    Management's Discussion and Analysis of
           Financial Condition and Results of Operations (Continued)



OVERVIEW
We are a leading global provider of personal computing and other access devices,
imaging and printing products, and related technologies, solutions, and
services. We sell to individual consumers, SMBs and large enterprises, including
customers in the government, health, and education sectors. We have three
reportable segments: Personal Systems, Printing and Corporate Investments. The
Personal Systems segment offers Commercial and Consumer desktop and notebook
PCs, workstations, thin clients, Commercial mobility devices, retail POS
systems, displays and other related accessories, software, support, and
services. The Printing segment provides Consumer and Commercial printer
hardware, Supplies, solutions and services, as well as scanning devices.
Corporate Investments include HP Labs and certain business incubation projects.
•      In Personal Systems, our strategic focus is on profitable growth through

hyper market segmentation with respect to enhanced innovation in

multi-operating systems, multi-architecture, geography, customer segments

       and other key attributes. Additionally, we are investing in premium form
       factors such as convertible notebooks to meet customer preference for

mobile, thinner and lighter devices. We have increased our focus on Device

as a Service as the market begins to shift to contractual solutions. We

believe that we are well positioned due to our competitive product lineup.

• In Printing, our strategic growth focus is on shifting to contractual

solutions and Graphics, as well as expanding our footprint in the 3D

printing marketplace. Business printing includes delivering solutions to

SMBs and enterprise customers, such as multi-function and PageWide

printers, including our JetIntelligence lineup of LaserJet printers. The

shift to contractual solutions includes an increased focus on Managed

       Print Services and Instant Ink, which presents strong after-market
       supplies opportunities. In the Graphics space, we are focused on
       innovations such as our Indigo and Latex product offerings. We plan to

continue to focus on shifting the mix in the installed base to higher

       value units and expanding our innovative Ink, Laser, Graphics and 3D
       printing programs. We continue to execute on our key initiatives of
       focusing on high-value products targeted at high usage categories and

introducing new revenue delivery models. Our focus is on placing higher

value printer units which offer strong annuity of toner and ink, the

design and deployment of A3 products and solutions, accelerating growth in

Graphic solutions and 3D printing.



We continue to experience challenges that are representative of trends and
uncertainties that may affect our business and results of operations. One set of
challenges relates to dynamic market trends, such as forecasted declining PC
Client markets and flat home printing markets. A second set of challenges
relates to changes in the competitive landscape. Our primary competitors are
exerting competitive pressure in targeted areas and are entering new markets,
our emerging competitors are introducing new technologies and business models,
and our alliance partners in some businesses are increasingly becoming our
competitors in others. A third set of challenges relates to business model
changes and our go-to-market execution.
• In Personal Systems, we face challenges with industry component availability.


• In Printing, we are seeing signs of stabilization of demand in consumer

and commercial markets, but are still experiencing an overall competitive

pricing environment. We obtain many components from single sources due to

technology, availability, price, quality or other considerations. For

instance, we source the majority of our A4 and a portion of our A3

portfolio of laser printer engines and laser toner cartridges from Canon.

Any decision by either party to not renew our agreement with Canon or to

limit or reduce the scope of the agreement could adversely affect our net

revenue from LaserJet products; however, we have a long-standing business

relationship with Canon and anticipate renewal of this agreement. We are

also seeing increases in commodity costs impacting our bill of materials.



Our business and financial performance also depend significantly on worldwide
economic conditions. Accordingly, we face global macroeconomic challenges,
tariff-driven headwinds, uncertainty in the markets, volatility in exchange
rates, weaker macroeconomic conditions and evolving dynamics in the global trade
environment. The impact of these and other global macroeconomic challenges on
our business cannot be known at this time.
To address these challenges, we continue to pursue innovation with a view
towards developing new products and services aligned with generating market
demand and meeting the needs of our customers and partners. In addition, we
continue to work on improving our operations, with a particular focus on
enhancing our end-to-end processes and efficiencies. We also continue to work on
optimizing our sales coverage models, align our sales incentives with our
strategic goals, improve channel execution, strengthen our capabilities in our
areas of strategic focus, and develop and capitalize on market opportunities.
We typically experience higher net revenues in our fourth quarter compared to
other quarters in our fiscal year due in part to seasonal holiday demand.
Historical seasonal patterns should not be considered reliable indicators of our
future net revenues or financial performance.
For a further discussion of trends, uncertainties and other factors that could
impact our continuing operating results, see the section entitled "Risk Factors"
in Item 1A in this Annual Report on Form 10-K.

                                       32
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                            HP INC. AND SUBSIDIARIES

                    Management's Discussion and Analysis of
           Financial Condition and Results of Operations (Continued)



SEPARATION TRANSACTION
On November 1, 2015, we completed the separation of Hewlett Packard Enterprise,
Hewlett-Packard Company's former enterprise technology infrastructure, software,
services and financing businesses and entered into a separation and distribution
agreement as well as various other agreements that provide a framework for the
relationships between HP and Hewlett Packard Enterprise going forward, including
among others a tax matters agreement, an employee matters agreement, a real
estate matters agreement and a master commercial agreement.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

General

The Consolidated Financial Statements of HP are prepared in accordance with
United States ("U.S.") generally accepted accounting principles ("GAAP"), which
require management to make estimates, judgments and assumptions that affect the
reported amounts of assets, liabilities, net revenue and expenses, and the
disclosure of contingent liabilities. Management bases its estimates on
historical experience and on various other assumptions that it believes to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying amount of assets and liabilities that are
not readily apparent from other sources. Management has discussed the
development, selection and disclosure of these estimates with the Audit
Committee of HP's Board of Directors. Management believes that the accounting
estimates employed and the resulting amounts are reasonable; however, actual
results may differ from these estimates. Making estimates and judgments about
future events is inherently unpredictable and is subject to significant
uncertainties, some of which are beyond our control. Should any of these
estimates and assumptions change or prove to have been incorrect, it could have
a material impact on our results of operations, financial position and cash
flows.
A summary of significant accounting policies is included in Note 1, "Overview
and Summary of Significant Accounting Policies" to the Consolidated Financial
Statements in Item 8, which is incorporated herein by reference. An accounting
policy is deemed to be critical if it requires an accounting estimate to be made
based on assumptions about matters that are highly uncertain at the time the
estimate is made, if different estimates reasonably could have been used, or if
changes in the estimate that are reasonably possible could materially impact the
financial statements. Management believes the following critical accounting
policies reflect the significant estimates and assumptions used in the
preparation of the Consolidated Financial Statements.
Revenue Recognition
We recognize revenue when persuasive evidence of an arrangement exists, delivery
has occurred or services are rendered, the sales price or fee is fixed or
determinable and collectability is reasonably assured, as well as when other
revenue recognition principles are met, including industry-specific revenue
recognition guidance.
We enter into contracts to sell our products and services, and while many of our
sales agreements contain standard terms and conditions, there are agreements
which contain non-standard terms and conditions. Further, many of our
arrangements include multiple elements. As a result, significant contract
interpretation may be required to determine the appropriate accounting,
including the identification of deliverables considered to be separate units of
accounting, the allocation of the transaction price among elements in the
arrangement and the timing of revenue recognition for each of those elements.
We recognize revenue for delivered elements as separate units of accounting when
the delivered elements have standalone value to the customer. For elements with
no standalone value, we recognize revenue consistent with the pattern of the
delivery of the final deliverable. If the arrangement includes a
customer-negotiated refund or return right or other contingency relative to the
delivered items and the delivery and performance of the undelivered items is
considered probable and substantially within our control, the delivered element
constitutes a separate unit of accounting. In arrangements with combined units
of accounting, changes in the allocation of the transaction price among elements
may impact the timing of revenue recognition for the contract but will not
change the total revenue recognized for the contract.
We establish the selling prices used for each deliverable based on vendor
specific objective evidence ("VSOE") of selling price, if available, third-party
evidence ("TPE"), if VSOE of selling price is not available, or estimated
selling price ("ESP"), if neither VSOE of selling price nor TPE is available. We
establish VSOE of selling price using the price charged for a deliverable when
sold separately and, in rare instances, using the price established by
management having the relevant authority. We evaluate TPE of selling price by
reviewing largely similar and interchangeable competitor products or services in
standalone sales to similarly situated customers. ESP is established based on
management's 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 industry technology life cycles. We may modify
or

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                            HP INC. AND SUBSIDIARIES

                    Management's Discussion and Analysis of
           Financial Condition and Results of Operations (Continued)



develop new go-to-market practices in the future, which may result in changes in
selling prices, impacting both VSOE of selling price and ESP. In most
arrangements with multiple elements, the transaction price is allocated to the
individual units of accounting at the inception of the arrangement based on
their relative selling price. However, the aforementioned factors may result in
a different allocation of the transaction price to deliverables in multiple
element arrangements entered into in future periods. This may change the pattern
and timing of revenue recognition for identical arrangements executed in future
periods, but will not change the total revenue recognized for any given
arrangement.
We reduce revenue for customer and distributor programs and incentive offerings,
including price protection, rebates, promotions, other volume-based incentives
and expected returns. Future market conditions and product transitions may
require us to take actions to increase customer incentive offerings, possibly
resulting in an incremental reduction of revenue at the time the incentive is
offered. For certain incentive programs, we estimate the number of customers
expected to redeem the incentive based on historical experience and the specific
terms and conditions of the incentive.
For hardware products, we recognize revenue generated from direct sales to end
customers and indirect sales to channel partners (including resellers,
distributors and value-added solution providers) when the revenue recognition
criteria are satisfied. For indirect sales to channel partners, we recognize
revenue at the time of delivery when the channel partner has economic substance
apart from HP and HP has completed its obligations related to the sale.
We recognize revenue from fixed-price support or maintenance contracts ratably
over the contract period.
Warranty
We accrue the estimated cost of product warranties at the time we recognize
revenue. We evaluate our warranty obligations on a product group basis. Our
standard product warranty terms generally include post-sales support and repairs
or replacement of a product at no additional charge for a specified period.
While we engage in extensive product quality programs and processes, including
actively monitoring and evaluating the quality of our component suppliers, we
base our estimated warranty obligation on 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
failure outside of our baseline experience. Warranty terms generally range from
90 days to three years for parts, labor and onsite services, depending upon the
product. Over the last three fiscal years, the annual warranty expense and
actual warranty costs have averaged approximately 1.8% and 2.0% of annual net
revenue, respectively.
Restructuring and Other Charges
We have engaged in restructuring actions which require management to estimate
the timing and amount of severance and other employee separation costs for
workforce reduction programs, fair value of assets made redundant or obsolete,
and the fair value of lease cancellation and other exit costs. We accrue 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 that are distinct from ongoing operational costs such as
information technology costs incurred in connection with the Separation. For a
full description of our restructuring actions, refer to our discussions of
restructuring in "Results of Operations" below and in Note 3, "Restructuring and
Other Charges" to the Consolidated Financial Statements in Item 8, which are
incorporated herein by reference.
Retirement and Post-Retirement Benefits
Our pension and other post-retirement benefit costs and obligations depend on
various assumptions. Our major assumptions relate primarily to discount rates,
mortality rates, expected increases in compensation levels and the expected
long-term return on plan assets. The discount rate assumption is based on
current investment yields of high-quality fixed-income securities with
maturities similar to the expected benefits payment period. Mortality rates help
predict the expected life of plan participants and are based on a historical
demographic study of the plan. The expected increase in the compensation levels
assumption reflects our long-term actual experience and future expectations. The
expected long-term return on plan assets is determined based on asset
allocations, historical portfolio results, historical asset correlations and
management's expected returns for each asset class. We evaluate our expected
return assumptions annually including reviewing current capital market
assumptions to assess the reasonableness of the expected long-term return on
plan assets. We update the expected long-term return on assets when we observe a
sufficient level of evidence that would suggest the long-term expected return
has changed. In any fiscal year, significant differences may arise between the
actual return and the expected long-term return on plan assets. Historically,
differences between the actual return and expected long-term return on plan
assets have resulted from changes in target or actual asset allocation,
short-term performance relative to expected long-term performance, and to a
lesser extent, differences between target and actual investment allocations, the
timing of benefit payments compared to expectations, and the use of derivatives
intended to effect asset allocation changes or hedge certain investment or
liability exposures. For the

                                       34
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                            HP INC. AND SUBSIDIARIES

                    Management's Discussion and Analysis of
           Financial Condition and Results of Operations (Continued)



recognition of net periodic benefit cost, the calculation of the expected
long-term return on plan assets uses the fair value of plan assets as of the
beginning of the fiscal year unless updated as a result of interim
re-measurement.
Our major assumptions vary by plan, and the weighted-average rates used are set
forth in Note 4, "Retirement and Post-Retirement Benefit Plans" to the
Consolidated Financial Statements in Item 8, which is incorporated herein by
reference. The following table provides the impact a change of 25 basis points
in each of the weighted-average assumptions of the discount rate, expected
increase in compensation levels and expected long-term return on plan assets
would have had on our net periodic benefit cost for fiscal year 2018:
                                          Change in Net Periodic
                                               Benefit Cost
                                                in millions
Assumptions:
Discount rate                            $                      8
Expected increase in compensation levels $                      2
Expected long-term return on plan assets $                     30


Taxes on Earnings
The Tax Cuts and Jobs Act ("the TCJA") made significant changes to the U.S. tax
law. The TCJA lowered our U.S. statutory federal income tax rate from 35% to 21%
effective January 1, 2018, while also imposing a one-time transition tax on
accumulated foreign earnings. In fiscal year 2018, we recorded a provisional tax
benefit of $760 million as a provisional estimate under the SEC Staff Accounting
Bulletin ("SAB") No. 118.
In December 2017, the SEC staff issued SAB No. 118, which addresses how a
company recognizes provisional estimates when a company does not have the
necessary information available, prepared or analyzed (including computations)
in reasonable detail to complete its accounting for the effect of the changes in
the TCJA. The measurement period ends when a company has obtained, prepared, and
analyzed the information necessary to finalize its accounting, but cannot extend
beyond one year. The final impact of the TCJA may differ from the provisional
estimates due to changes in interpretations of the TCJA, legislative action to
address questions that arise because of the TCJA, changes in accounting standard
for income taxes and related interpretations in response to the TCJA, and
updates or changes to estimates used in the provisional amounts. In fiscal year
2018, we recorded a provisional tax benefit of $760 million related to the $5.6
billion net benefit for the decrease in our deferred tax liability on unremitted
foreign earnings, partially offset by a $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 our deferred tax assets and liabilities to the
new U.S. statutory tax rate and a $317 million net expense related to
realization on U.S. deferred taxes that are expected to be realized at a lower
rate. Resolution of the provisional estimates of the TCJA effects that are
different from the assumptions made by us could have a material impact on our
financial condition and operating results.
Prior to the enactment of the TCJA, our effective tax rate included the impact
of certain undistributed foreign earnings for which we have not provided U.S.
federal taxes because we had planned to reinvest such earnings indefinitely
outside the United States. We plan distributions of foreign earnings based on
projected cash flow needs as well as the working capital and long-term
investment requirements of our foreign subsidiaries and our domestic operations.
Based on these assumptions, we estimate the amount we expect to indefinitely
invest outside the United States and the amounts we expect to distribute to the
United States and provide the U.S. federal taxes due on amounts expected to be
distributed to the United States. Further, as a result of certain employment
actions and capital investments we have undertaken, income from manufacturing
activities in certain jurisdictions is subject to reduced tax rates and, in some
cases, is wholly exempt from taxes for fiscal years through 2027.
Material changes in our estimates of cash, working capital and long-term
investment requirements in the various jurisdictions in which we do business
could impact how future earnings are repatriated to the United States, and our
related future effective tax rate. The effects of the TCJA related to these
policies are referenced and discussed in detail in Note 6, "Taxes on Earnings"
to the Consolidated Financial Statements in Item 8, which is incorporated herein
by reference.
We calculate our current and deferred tax provisions based on estimates and
assumptions that could differ from the final positions reflected in our income
tax returns. We adjust our current and deferred tax provisions based on income
tax returns which are generally filed in the third or fourth quarters of the
subsequent fiscal year.
We recognize 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 in which we expect the differences to reverse.

                                       35
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                            HP INC. AND SUBSIDIARIES

                    Management's Discussion and Analysis of
           Financial Condition and Results of Operations (Continued)



We record a valuation allowance to reduce deferred tax assets to the amount that
we are more likely than not to realize. In determining the need for a valuation
allowance, we consider future market growth, forecasted earnings, future taxable
income, the mix of earnings in the jurisdictions in which we operate and prudent
and feasible tax planning strategies. In the event we were to determine that it
is more likely than not that we will be unable to realize all or part of our
deferred tax assets in the future, we would increase the valuation allowance and
recognize a corresponding charge to earnings or other comprehensive income in
the period in which we make such a determination. Likewise, if we later
determine that we are more likely than not to realize the deferred tax assets,
we would reverse the applicable portion of the previously recognized valuation
allowance. In order for us to realize our deferred tax assets, we must be able
to generate sufficient taxable income in the jurisdictions in which the deferred
tax assets are located.
We are subject to income taxes in the United States and approximately 60 other
countries, and we are subject to routine corporate income tax audits in many of
these jurisdictions. We believe that positions taken on our tax returns are
fully supported, but tax authorities may challenge these positions, which may
not be fully sustained on examination by the relevant tax authorities.
Accordingly, our income tax provision includes amounts intended to satisfy
assessments that may result from these challenges. Determining the income tax
provision for these potential assessments and recording the related effects
requires management judgments and estimates. The amounts ultimately paid on
resolution of an audit could be materially different from the amounts previously
included in our income tax provision and, therefore, could have a material
impact on our income tax provision, net income and cash flows. Our accrual for
uncertain tax positions is attributable primarily to uncertainties concerning
the tax treatment of our international operations, including the allocation of
income among different jurisdictions, intercompany transactions, pension and
related interest. For a further discussion on taxes on earnings, refer to Note
6, "Taxes on Earnings" to the Consolidated Financial Statements in Item 8, which
is incorporated herein by reference.
Inventory
We state our inventory at the lower of cost or market on a first-in, first-out
basis. We make adjustments to reduce the cost of inventory to its net realizable
value at the product group level for estimated excess or obsolescence. Factors
influencing these adjustments include changes in demand, technological changes,
product life cycle and development plans, component cost trends, product
pricing, physical deterioration and quality issues.
Business Combinations
We allocate the fair value of purchase consideration to the assets acquired,
liabilities assumed, and non-controlling interests in the acquiree 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 acquiree is recorded as
goodwill and may involve engaging independent third-parties to perform an
appraisal. When determining the fair values of assets acquired, liabilities
assumed, and non-controlling interests in the acquiree, management makes
significant estimates and assumptions, especially with respect to intangible
assets.
Critical estimates in valuing intangible assets include, but are not limited to,
expected future cash flows, which includes consideration of future growth rates
and margins, attrition rates, future changes in technology and brand awareness,
loyalty and position, and discount rates. Fair value estimates are based on the
assumptions management believes a market participant would use in pricing the
asset or liability. Amounts recorded in a business combination may change during
the measurement period, which is a period not to exceed one year from the date
of acquisition, as additional information about conditions existing at the
acquisition date becomes available.
Goodwill
We review goodwill for impairment annually during our fourth quarter and
whenever events or changes in circumstances indicate the carrying amount of
goodwill may not be recoverable. We can elect to perform a qualitative
assessment to test a reporting unit's goodwill for impairment or perform a
quantitative impairment test. Based on a qualitative assessment, if we determine
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, the
quantitative impairment test will be performed.
In the quantitative impairment test, we compare 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, we estimate the fair value of a reporting unit based on the
present value of estimated future cash flows. We base cash flow projections on
management's estimates of revenue growth rates and operating margins, taking
into consideration industry and market conditions. We base 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, we estimate 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. We weight the
fair value derived from the market approach depending on the level of
comparability of these publicly-traded

                                       36
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                            HP INC. AND SUBSIDIARIES

                    Management's Discussion and Analysis of
           Financial Condition and Results of Operations (Continued)



companies to the reporting unit. When market comparables are not meaningful or
not available, we estimate the fair value of a reporting unit using only the
income approach.
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.
Our annual goodwill impairment analysis, performed using the qualitative
assessment option as of the first day of the fourth quarter of fiscal year 2018,
resulted in a conclusion that it was more likely than not that the fair value of
our reporting units exceeded their respective carrying values. As a result, we
concluded that a quantitative impairment test was not necessary.
Fair Value of Derivative Instruments
We use derivative instruments to manage a variety of risks, including risks
related to foreign currency exchange rates and interest rates. We use forwards,
swaps and at times, options to hedge certain foreign currency and interest rate
exposures. We do not use derivative instruments for speculative purposes. As of
October 31, 2018, the gross notional value of our derivative portfolio was $24
billion. Assets and liabilities related to derivative instruments are measured
at fair value and were $515 million and $195 million, respectively, as of
October 31, 2018.
Fair value is the price we would receive to sell an asset or pay to transfer a
liability in an orderly transaction between market participants at the
measurement date. In the absence of active markets for the identical assets or
liabilities, such measurements involve developing assumptions based on market
observable data and, in the absence of such data, internal information that is
consistent with what market participants would use in a hypothetical transaction
that occurs at the measurement date. The determination of fair value often
involves significant judgments about assumptions such as determining an
appropriate discount rate that factors in both risk and liquidity premiums,
identifying the similarities and differences in market transactions, weighting
those differences accordingly and then making the appropriate adjustments to
those market transactions to reflect the risks specific to the asset or
liability being valued. We generally use industry standard valuation models to
measure the fair value of our derivative positions. When prices in active
markets are not available for the identical asset or liability, we use 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 currency exchange rates, and forward and spot
prices.
For a further discussion on fair value measurements and derivative instruments,
refer to Note 9, "Fair Value" and Note 10, "Financial Instruments",
respectively, to the Consolidated Financial Statements in Item 8, which are
incorporated herein by reference.
Loss Contingencies
We are involved in various lawsuits, claims, investigations and proceedings
including those consisting of intellectual property ("IP"), commercial,
securities, employment, employee benefits and environmental matters that arise
in the ordinary course of business. We record a liability when we believe that
it is both probable that a liability has been incurred and the amount of loss
can be reasonably estimated. Significant judgment is required to determine both
the probability of having incurred a liability and the estimated amount of the
liability. We review these matters at least quarterly and adjust these
liabilities to reflect the impact of negotiations, settlements, rulings, advice
of legal counsel and other updated information and events, pertaining to a
particular case. Pursuant to the separation and distribution agreement, we share
responsibility with Hewlett Packard Enterprise for certain matters, as discussed
in Note 14, "Litigation and Contingencies" to the Consolidated Financial
Statements in Item 8, which is incorporated herein by reference, and Hewlett
Packard Enterprise has agreed to indemnify us in whole or in part with respect
to certain matters. Based on our experience, we believe that any damage amounts
claimed in the specific litigation and contingencies matters further discussed
in Note 14, "Litigation and Contingencies", are not a meaningful indicator of
HP's potential liability. Litigation is inherently unpredictable. However, we
believe we have valid defenses with respect to legal matters pending against us.
Nevertheless, cash flows or results of operations could be materially affected
in any particular period by the resolution of one or more of these
contingencies. We believe we have recorded adequate provisions for any such
matters and, as of October 31, 2018, it was not reasonably possible that a
material loss had been incurred in excess of the amounts recognized in our
financial statements.

RECENT ACCOUNTING PRONOUNCEMENTS


For a summary of recent accounting pronouncements applicable to our consolidated
financial statements see Note 1, "Overview and Summary of Significant Accounting
Policies" to the Consolidated Financial Statements in Item 8, which is
incorporated herein by reference.

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                            HP INC. AND SUBSIDIARIES

                    Management's Discussion and Analysis of
           Financial Condition and Results of Operations (Continued)




RESULTS OF OPERATIONS
Revenue from our international operations has historically represented, and we
expect will continue to represent, a majority of our overall net revenue. As a
result, our net revenue growth has been impacted, and we expect it will continue
to be impacted, by fluctuations in foreign currency exchange rates. In order to
provide a framework for assessing performance excluding the impact of foreign
currency fluctuations, we supplement the year-over-year percentage change in net
revenue with the year-over-year percentage change in net revenue on a constant
currency basis, which excludes the effect of foreign currency exchange
fluctuations calculated by translating current period revenues using monthly
average exchange rates from the comparative period and hedging activities from
the prior-year period and does not adjust for any repricing or demand impacts
from changes in foreign currency exchange rates. This information is provided so
that net revenue can be viewed with and without the effect of fluctuations in
foreign currency exchange rates, which is consistent with how management
evaluates our net revenue results and trends, as management does not believe
that the excluded items are reflective of ongoing operating results. The
constant currency measures are provided in addition to, and not as a substitute
for, the year-over-year percentage change in net revenue on a GAAP basis. Other
companies may calculate and define similarly labeled items differently, which
may limit the usefulness of this measure for comparative purposes.
Results of operations in dollars and as a percentage of net revenue were as
follows:
                                                     For the fiscal years ended October 31
                                             2018                     2017                     2016
                                                              Dollars in millions
Net revenue                         $ 58,472      100.0  %   $ 52,056      100.0  %   $ 48,238      100.0  %
Cost of revenue                       47,803       81.8  %     42,478       81.6  %     39,240       81.3  %
Gross profit                          10,669       18.2  %      9,578       18.4  %      8,998       18.7  %
Research and development               1,404        2.4  %      1,190        2.3  %      1,209        2.5  %
Selling, general and administrative    4,859        8.3  %      4,376        8.4  %      3,833        8.0  %
Restructuring and other charges          132        0.2  %        362        0.7  %        205        0.4  %
Acquisition-related charges              123        0.2  %        125       

0.2 % 7 0.0% Amortization of intangible assets 80 0.1 % 1 0.0%

            16       0.0%
Defined benefit plan settlement
charges                                    7       0.0%             5       0.0%           179        0.4  %

Earnings from continuing operations 4,064 7.0 % 3,519

  6.8  %      3,549        7.4  %
Interest and other, net               (1,051 )     (1.8 )%       (243 )     (0.5 )%        212        0.4  %
Earnings from continuing operations
before taxes                           3,013        5.2  %      3,276        6.3  %      3,761        7.8  %
Benefit from (provision for) taxes     2,314        3.9  %       (750 )     (1.4 )%     (1,095 )     (2.3 )%
Net earnings from continuing
operations                             5,327        9.1  %      2,526        4.9  %      2,666        5.5  %
Net loss from discontinued
operations, net of taxes                   -                        -                     (170 )
Net earnings                        $  5,327                 $  2,526                 $  2,496



Net Revenue
In fiscal year 2018, total net revenue increased 12.3% (increased 10.1% on a
constant currency basis) as compared with fiscal year 2017. Net revenue from the
United States increased 6.6% to $20.6 billion and net revenue from outside of
the United States increased 15.7% to $37.9 billion.
The increase in net revenue was primarily driven by growth in Notebooks,
Desktops, Supplies, Commercial Printing Hardware revenue and
favorable foreign currency impacts.
In fiscal year 2017, total net revenue increased 7.9% (increased 8.7% on a
constant currency basis) as compared with fiscal year 2016. Net revenue from the
United States increased 7.1% to $19.3 billion and net revenue from outside of
the United States increased 8.4% to $32.8 billion.
The increase in net revenue was primarily driven by growth in Notebooks,
Desktops and
Supplies revenue, partially offset by unfavorable foreign currency impacts.
A detailed discussion of the factors contributing to the changes in segment net
revenue is included under "Segment Information" below.
Gross Margin

                                       38
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                            HP INC. AND SUBSIDIARIES

                    Management's Discussion and Analysis of
           Financial Condition and Results of Operations (Continued)



Our gross margin was 18.2% for fiscal year 2018 compared with 18.4% for fiscal
year 2017. The decrease was primarily due to higher Commercial Hardware unit
placements in Printing and an increase in commodity and logistics costs in
Personal Systems, partially offset by higher pricing in Personal Systems and
favorable foreign currency impacts.
Our gross margin was 18.4% for fiscal year 2017 compared with 18.7% for fiscal
year 2016. The primary factors impacting the gross margin decrease were lower
Personal System gross margin driven by higher commodity costs, unfavorable
foreign currency impacts and a higher mix of Personal Systems revenue, partially
offset by productivity improvements in Printing.
A detailed discussion of the factors contributing to the changes in segment
gross margins is included under "Segment Information" below.
Operating Expenses
Research and Development ("R&D")
R&D expense increased 18% in fiscal year 2018 compared to fiscal year
2017, primarily due to continuing investment in Printing, including the
acquisition of Samsung's printer business.
R&D expense decreased 2% in fiscal year 2017 compared to fiscal year
2016, primarily due to lower spend as a result of the launch of A3 products in
fiscal year 2016, partially offset by continuing investment in Printing.
Selling, General and Administrative ("SG&A")
SG&A expense increased 11% in fiscal year 2018 as compared to fiscal year 2017,
primarily driven by incremental go-to-market investments to support revenue
growth, including the acquisition of Samsung's printer business.
SG&A expense increased 14% in fiscal year 2017 as compared to fiscal year 2016,
primarily due to a gain from the divestiture of marketing optimization assets in
fiscal year 2016 and an increase in field selling costs.
Restructuring and other Charges
Restructuring and other charges decreased by $230 million in fiscal year 2018
compared to the prior-year period, primarily due to lower charges from our
restructuring plan announced in October 2016 (the "Fiscal 2017 Plan") and
amended in May 2018.
Restructuring and other charges increased by $157 million in fiscal year 2017
compared to the prior-year period, primarily due to the Fiscal 2017 Plan and
certain non-recurring costs, including those as a result of the Separation.
Acquisition-related Charges
Acquisition-related charges for the fiscal years 2018, 2017 and 2016 relate
primarily to third-party professional and legal fees, and integration-related
costs, as well as fair value adjustments of certain acquired assets such as
inventory.
Amortization of Intangible Assets
Amortization expense increased by $79 million in fiscal year 2018 compared to
the prior-year period, due to intangible assets resulting primarily from the
acquisition of Samsung's printer business.
Amortization expense decreased by $15 million in fiscal year 2017 compared to
the prior-year period, primarily due to assets from prior acquisitions reaching
the end of their respective amortization periods.
Interest and Other, Net
Interest and other, net expense increased by $808 million in fiscal year 2018
compared to the prior-year period, primarily due to the reversal of
indemnification receivables from Hewlett Packard Enterprise pertaining to
various income tax audit settlements, and loss on extinguishment of debt.
Interest and other, net expense increased by $455 million in fiscal year 2017
compared to the prior-year period, primarily due to lower tax indemnification
income in fiscal year 2017 from Hewlett Packard Enterprise for certain 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.
Benefit from (Provision for) Taxes
As a result of U.S. tax reform, a blended U.S. federal statutory rate of 23% was
computed for the fiscal year ending October 31, 2018. Our effective tax rates
were (76.8%), 22.9% and 29.1% in fiscal years 2018, 2017 and 2016, respectively.
In fiscal year 2018, our effective tax rate generally differs from the U.S.
federal statutory rate of 23.3% primarily due to transitional impacts of U.S.
tax reform and resolution of various audits and tax litigation. In fiscal years
2017 and 2016, our effective tax rate generally differs from the U.S. federal
statutory rate of 35% due to favorable tax rates associated with certain
earnings from our operations in lower-tax jurisdictions throughout the world.
The jurisdictions with favorable tax rates that had the most significant impact
on our effective tax rate in the periods presented were Puerto Rico, Singapore,
China, Malaysia and

                                       39
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                            HP INC. AND SUBSIDIARIES

                    Management's Discussion and Analysis of
           Financial Condition and Results of Operations (Continued)



Ireland. The gross income tax benefits related to these favorable tax rates are
in addition to transitional impacts of U.S. tax reform and resolution of various
audits and tax litigation. Additionally, the overall effective tax rate in
fiscal year 2017 was impacted by adjustments to valuation allowances and state
income taxes, and the overall effective tax rate in fiscal year 2016 was
impacted by adjustments to valuation allowances and uncertain tax positions.
For a reconciliation of our effective tax rate to the U.S. federal statutory
rate of 23.3% in fiscal year 2018 and 35% in fiscal years 2017 and 2016 and
further explanation of our provision for taxes, see Note 6, "Taxes on Earnings"
to the Consolidated Financial Statements in Item 8, which is incorporated herein
by reference.
In fiscal year 2018, we recorded $2.8 billion of net income tax benefit related
to discrete items in the provision for taxes which include impacts of the TCJA.
As discussed in the Note 6 "Taxes on Earnings" to the Consolidated Financial
Statements in Item 8 of this report, we have not yet completed our analysis of
the full impact of the TCJA. However, as of October 31, 2018, we recorded a
provisional tax benefit of $760 million related to $5.6 billion net benefit for
the decrease in our 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 our deferred assets and liabilities to the new U.S. statutory
tax rate and a $317 million net expense related to realization on U.S. deferred
taxes that are expected to be realized at a lower rate. Fiscal year 2018 also
included 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, we recorded excess tax benefits of $42 million on stock
options, restricted stock units and performance-adjusted restricted stock units.
In fiscal year 2017, we recorded $72 million of net income tax benefit related
to discrete items in the provision for taxes. These amounts primarily include
tax benefits of $84 million related to restructuring and other charges, $12
million related to U.S. federal provision to return adjustments, $45 million
related to Samsung acquisition-related charges, and $13 million of other net tax
benefits. In addition, we recorded tax charges of $11 million related to changes
in state valuation allowances, $22 million of state provision to return
adjustments, and $49 million related to uncertain tax positions.
In fiscal year 2016, we recorded $301 million of net income tax charges related
to discrete items in the provision for taxes for continuing operations. These
amounts primarily include uncertain tax position charges of $525 million related
to pre-Separation tax matters. In addition, we recorded $62 million of net tax
benefits on restructuring charges, $52 million of net tax benefits related to
the release of foreign valuation allowances and $41 million of net tax benefits
arising from the retroactive research and development credit provided by the
Consolidated Appropriations Act of 2016 signed into law in December 2015 and $70
million of other tax benefit.
Segment Information
A description of the products and services for each segment can be found in
Note 2, "Segment Information," to the Consolidated Financial Statements in Item
8, which is incorporated herein by reference. Future changes to this
organizational structure may result in changes to the segments disclosed.
Realignment
Effective at the beginning of its first quarter of fiscal year 2018, HP
implemented an organizational change to align its segment and business unit
financial reporting more closely with its current business structure. The
organizational change resulted in the transfer of long-life consumables from
Commercial to Supplies within the Printing segment. Certain revenues related to
service arrangements, which are being eliminated for the purposes of reporting
HP's consolidated net revenue, have now been reclassified from Other to
segments. HP has reflected this change to its segment and business unit
information in prior reporting periods on an as-if basis. The reporting change
had no impact on previously reported consolidated net revenue, earnings from
operations, net earnings or net EPS.


Personal Systems
                                                         For the fiscal years ended October 31
                                                         2018               2017            2016
                                                                  Dollars in millions
Net revenue                                         $     37,661       $     33,321      $  29,946
Earnings from operations                            $      1,411       $      1,210      $   1,150
Earnings from operations as a % of net revenue               3.7 %              3.6 %          3.8 %



                                       40
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                            HP INC. AND SUBSIDIARIES

                    Management's Discussion and Analysis of
           Financial Condition and Results of Operations (Continued)


The components of net revenue and the weighted net revenue change by business unit were as follows:

                                                              For the 

fiscal years ended October 31


                                                                                                        Weighted
                                                                   Net Revenue                         Net Revenue
                                                                                                         Change
                                                                                                       Percentage
                                                               2018                        2017          Points
                                                                   In millions
Notebooks                                      $          22,547                       $   19,782             8.3
Desktops                                                  11,567                           10,298             3.8
Workstations                                               2,246                            2,042             0.6
Other                                                      1,301                            1,199             0.3
Total Personal Systems                         $          37,661                       $   33,321            13.0


                                     For the fiscal years ended October 31
                                                                            Weighted
                                        Net Revenue                       Net Revenue
                                                                             Change
                                     2017                    2016      Percentage Points
                                        In millions
Notebooks              $        19,782                     $ 16,982                  9.4
Desktops                        10,298                        9,956                  1.1
Workstations                     2,042                        1,870                  0.6
Other                            1,199                        1,138                  0.2
Total Personal Systems $        33,321                     $ 29,946                 11.3



Fiscal Year 2018 compared with Fiscal Year 2017
Personal Systems net revenue increased 13.0% (increased 10.5% on a constant
currency basis) in fiscal year 2018 as compared to the prior-year period. The
net revenue increase was primarily due to growth in Notebooks and Desktops and
favorable foreign currency impacts. The net revenue increase was driven by a
6.6% and 6.0% increase in unit volume and average selling prices ("ASPs"),
respectively, as compared to the prior-year period. The increase in unit volume
was primarily due to growth in Notebooks and Desktops. The increase in ASPs was
primarily due to higher pricing driven by increased commodity and logistics
costs, favorable foreign currency impacts and positive mix shifts.
Consumer and Commercial revenue increased 11% and 14%, respectively, in fiscal
year 2018 as compared to the prior-year period, driven by growth in Notebooks,
Desktops and Workstations as a result of higher unit volume combined with higher
ASPs.
Net revenue increased 14% in Notebooks, 12% in Desktops and 10% in Workstations
in fiscal year 2018.
Personal Systems earnings from operations as a percentage of net revenue
increased by 0.1 percentage points in fiscal year 2018. The increase was
primarily due to higher ASPs, partially offset by an increase in commodity and
logistics costs.
Fiscal Year 2017 compared with Fiscal Year 2016
Personal Systems net revenue increased 11.3% (increased 12.2% on a constant
currency basis) in fiscal year 2017. The net revenue increase was primarily due
to growth in Notebooks, Desktops and Workstations partially offset by
unfavorable foreign currency impacts. The net revenue increase was driven by a
6.7% and 4.3% increase in unit volume and ASPs, respectively, as compared to
fiscal year 2016. The increase in unit volume was primarily due to growth in
Notebooks and Workstations. The increase in ASPs was primarily due to favorable
pricing partially offset by unfavorable foreign currency impacts.
Consumer revenue increased 16% in fiscal year 2017, driven by growth in
Notebooks and Desktops as a result of higher unit volume combined with higher
ASPs. Commercial revenue increased 9% in fiscal year 2017, driven by growth in
Notebooks and Workstations.
Net revenue increased 16% in Notebooks, 9% in Workstations and 3% in Desktops in
fiscal year 2017.
Personal Systems earnings from operations as a percentage of net revenue
decreased by 0.2 percentage points in fiscal year 2017. The decrease was
primarily due to a decline in gross margin partially offset by a decrease in
operating expenses. The decrease in gross margin was primarily due to an
increase in commodity cost and unfavorable foreign currency impacts

                                       41
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                            HP INC. AND SUBSIDIARIES

                    Management's Discussion and Analysis of
           Financial Condition and Results of Operations (Continued)


partially offset by higher ASPs. Operating expenses as a percentage of net revenue decreased primarily due to operating expense management.

Printing
                                                         For the fiscal years ended October 31
                                                         2018               2017            2016
                                                                  Dollars in millions
Net revenue                                         $     20,805       $     18,728      $  18,123
Earnings from operations                            $      3,323       $      3,146      $   3,114
Earnings from operations as a % of net revenue              16.0 %          

16.8 % 17.2 %




The components of the net revenue and weighted net revenue change by business
unit were as follows:
                                  For the fiscal years ended October 31
                                                                         Weighted
                                     Net Revenue                       Net Revenue
                                                                          Change
                                  2018                    2017      Percentage Points
                                     In millions
Supplies            $        13,575                     $ 12,524                  5.6
Commercial Hardware           4,674                        3,792                  4.7
Consumer Hardware             2,556                        2,412                  0.8
Total Printing      $        20,805                     $ 18,728                 11.1


                                   For the fiscal years ended October 31
                                                                          Weighted
                                     Net Revenue                        Net Revenue
                                                                           Change
                                   2017                    2016      Percentage Points
                                     In millions
Supplies            $        12,524                      $ 11,981                  3.0
Commercial Hardware           3,792                         3,792                    -
Consumer Hardware             2,412                         2,350                  0.3
Total Printing      $        18,728                      $ 18,123                  3.3


Fiscal Year 2018 compared with Fiscal Year 2017


Printing net revenue increased 11.1% (increased 9.5% on a constant currency
basis) for fiscal year 2018. The increase in net revenue was primarily driven by
the increase in Supplies and Hardware revenue and favorable foreign currency
impacts. Net revenue for Supplies increased 8.4% as compared to the prior-year
period, including the acquisition of Samsung's printer business. Printer unit
volume increased 12.7% while ASPs increased 1.6% as compared to the prior-year
period. The increase in Printer unit volume was primarily driven by unit
increases in Commercial and Consumer Hardware, including the Samsung-branded
printers. Printer ASPs increased primarily due to favorable foreign currency
impacts, partially offset by the dilution impact from Samsung-branded low-end A4
products.
Net revenue for Commercial Hardware increased 23.3% as compared to the
prior-year period, including revenue from Samsung branded printers, LaserJet and
PageWide printers. The unit volume increased by 84.5% while the ASPs decreased
by 34.2%. The unit volume increased primarily due to Samsung-branded printers.
The decrease in ASPs was primarily due to the dilution impact from
Samsung-branded low-end A4 products.
Net revenue for Consumer Hardware increased 6.0% as compared to the prior-year
period due to a 3.8% increase in printer unit volume and a 2.4% increase in
ASPs. The unit volume increase was driven by InkJet and LaserJet Home business.
The increase in ASPs was primarily due to favorable foreign currency impacts.
Printing earnings from operations as a percentage of net revenue decreased by
0.8 percentage points for the fiscal year 2018 as compared to the prior-year
period, primarily due to an increase in operating expenses and lower gross
margin. The

                                       42
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                            HP INC. AND SUBSIDIARIES

                    Management's Discussion and Analysis of
           Financial Condition and Results of Operations (Continued)



gross margin decreased primarily due to lower Supplies mix and the dilution
impact of Samsung-branded low-end products, partially offset by favorable
foreign currency impacts and operational improvements. Operating expenses
increased primarily driven by the acquisition of Samsung's printer business and
increases in investments in key growth initiatives and go-to-market.
Fiscal Year 2017 compared with Fiscal Year 2016
Printing net revenue increased 3.3% (increased 3.9% on a constant currency
basis) for fiscal year 2017. The increase in net revenue was primarily driven by
the increase in Supplies revenue. Net revenue for Supplies increased 4.5% as
compared to the prior-year period, primarily due to the change in the Supplies
sales model in the prior-year period and better discount management, partially
offset by unfavorable foreign currency impacts. Printer unit volume increased
3.4% while ASPs decreased 0.9% as compared to the prior-year period. The
increase in Printer unit volume was primarily driven by unit increases in
Consumer Hardware and larger opportunity to place incremental units with
positive net present value. Printer ASPs decreased primarily due to unfavorable
foreign currency impacts.
Net revenue for Commercial Hardware is flat as compared to the prior-year
period, driven by a decline in other printing solutions largely due to the
divestiture of marketing optimization assets in the prior-year period, offset by
revenue from Managed Print Services and 3D Printing in fiscal year 2017. ASPs
decreased by 0.1% while unit volume increased by 2.0%. The unit volume increased
primarily due to a larger opportunity to place incremental units with positive
net present value. The decrease in ASPs was primarily due to unfavorable foreign
currency impacts, partially offset by a mix shift to higher-end printers.
Net revenue for Consumer Hardware increased 2.6% as compared to the prior-year
period due to a 3.5% increase in printer unit volume, partially offset by a 0.4%
decrease in ASPs. The unit volume increase was driven by the Home business. The
decrease in ASPs was primarily due to unfavorable foreign currency impacts,
partially offset by better discount management.
Printing earnings from operations as a percentage of net revenue decreased by
0.4 percentage points for the fiscal year 2017 as compared to the prior-year
period, primarily due to an increase in operating expenses, partially offset by
an improved gross margin. The gross margin increased due to operational
improvements, partially offset by unfavorable foreign currency impacts.
Operating expenses increased primarily due to a gain from the divestiture of
marketing optimization assets in the prior-year period and an increase in
marketing investments.

Corporate Investments
The loss from operations in Corporate Investments for the fiscal years 2018,
2017 and 2016 was primarily due to expenses associated with HP Labs and our
incubation projects.
LIQUIDITY AND CAPITAL RESOURCES
We use cash generated by operations as our primary source of liquidity. We
believe that internally generated cash flows are generally sufficient to support
our operating businesses, capital expenditures, acquisitions, restructuring
activities, maturing debt, income tax payments and the payment of stockholder
dividends, in addition to investments and share repurchases. We are able to
supplement this short-term liquidity, if necessary, with broad access to capital
markets and credit facilities made available by various domestic and foreign
financial institutions. While our access to capital markets may be constrained
and our cost of borrowing may increase under certain business, market and
economic conditions, our access to a variety of funding sources to meet our
liquidity needs is designed to facilitate continued access to capital resources
under all such conditions. Our liquidity is subject to various risks including
the risks identified in the section entitled "Risk Factors" in Item 1A and
market risks identified in the section entitled "Quantitative and Qualitative
Disclosures about Market Risk" in Item 7A, which are incorporated herein by
reference.
Our cash balances are held in numerous locations throughout the world, with the
majority of those amounts held outside of the United States. We utilize a
variety of planning and financing strategies in an effort to ensure that our
worldwide cash is available when and where it is needed. Our cash position
remains strong, and we expect that our cash balances, anticipated cash flow
generated from operations and access to capital markets will be sufficient to
cover our expected near-term cash outlays.
On November 1, 2018, we made a cash payment of $422 million in connection with
the acquisition of the Apogee group, a U.K. based office equipment dealer
("OED") and provider of print, outsourced services, and document and process
technology. The cash payment is subject to customary closing and other
adjustments and would be finalized in future periods.
Amounts held outside of the United States are generally utilized to support
non-U.S. liquidity needs, and may from time to time be distributed to the United
States. The TCJA made significant changes to the U.S. tax law, including a
one-time transition tax on accumulated foreign earnings. The payments associated
with this one-time transition tax will be paid over eight years beginning 2019.
We expect a significant portion of the cash and cash equivalents held by our
foreign subsidiaries will no longer be subject to U.S. income tax consequences
upon a subsequent repatriation to the United States as a result of the

                                       43
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                            HP INC. AND SUBSIDIARIES

                    Management's Discussion and Analysis of
           Financial Condition and Results of Operations (Continued)



transition tax on accumulated foreign earnings. However, a portion of this cash
may still be subject to foreign income tax or withholding tax consequences upon
repatriation. As we evaluate the impact of the TCJA and the future cash needs of
our operations, we may revise the amount of foreign earnings considered to be
permanently reinvested in our foreign subsidiaries and how to utilize such
funds, including reducing our gross debt level, or other uses.
Liquidity
 Our cash and cash equivalents, marketable debt securities and total debt were
as follows:
                                   As of October 31
                                2018      2017     2016
                                     In billions

Cash and cash equivalents $ 5.2 $ 7.0 $ 6.3 Marketable debt securities(1) $ 0.7 $ 1.1 $ - Total debt

                    $   6.0    $ 7.8    $ 6.8


(1) Includes highly liquid U.S. treasury notes, U.S. agency securities, non-U.S.

government bonds, corporate debt securities, money market and other funds.

We classify these investments within Other current assets in Consolidated

Balance Sheets, including those with maturity dates beyond one year, based

on their highly liquid nature and availability for use in current

operations.

Our key cash flow metrics were as follows:

                                                          For the fiscal years ended October 31
                                                          2018               2017            2016
                                                                         In millions
Net cash provided by operating activities            $      4,528       $     3,677      $    3,252
Net cash (used in) provided by investing activities          (716 )          (1,717 )            48
Net cash used in financing activities                      (5,643 )          (1,251 )       (14,445 )
Net (decrease) increase in cash and cash equivalents $     (1,831 )     $   

709 $ (11,145 )



Operating Activities
Net cash provided by operating activities increased by $0.9 billion for fiscal
year 2018 as compared to fiscal year 2017. The increase was primarily due to
higher earnings from operations and cash generated from working capital
management activities.
Net cash provided by operating activities increased by $0.4 billion for fiscal
year 2017 as compared to fiscal year 2016. The increase was primarily due to
higher cash generated from working capital management activities.
Working Capital Metrics
Management utilizes current cash conversion cycle information to manage our
working capital level. The table below presents the cash conversion cycle:
                                                             As of October 

31

                                                            2018     2017   

2016

Days of sales outstanding in accounts receivable ("DSO") 30 29

30

Days of supply in inventory ("DOS")                          43       46    

39

Days of purchases outstanding in accounts payable ("DPO") (105 ) (105 ) (98 ) Cash conversion cycle

                                       (32 )    (30 )  (29 )


The cash conversion cycle is the sum of days of DSO and DOS less DPO. Items
which may cause the cash conversion cycle in a particular period to differ from
a long-term sustainable rate include, but are not limited to, changes in
business mix, changes in payment terms, extent of receivables factoring,
seasonal trends and the timing of revenue recognition and inventory purchases
within the period.
DSO measures the average number of days our receivables are outstanding. DSO is
calculated by dividing ending accounts receivable, net of allowance for doubtful
accounts, by a 90-day average of net revenue. For fiscal year 2018, the

                                       44
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                            HP INC. AND SUBSIDIARIES

                    Management's Discussion and Analysis of
           Financial Condition and Results of Operations (Continued)



increase in DSO compared to fiscal year 2017 was primarily due to unfavorable
revenue linearity. For fiscal year 2017, the decrease in DSO compared to fiscal
year 2016 was primarily due to strong collections.
DOS measures the average number of days from procurement to sale of our product.
DOS is calculated by dividing ending inventory by a 90-day average of cost of
goods sold. For fiscal year 2018, the DOS was lower primarily due to a focus on
inventory management. For fiscal year 2017, the DOS was higher primarily due to
leveraging our balance sheet, particularly through higher strategic buys and sea
shipments to better assure supply of commodities in short supply.
DPO measures the average number of days our accounts payable balances are
outstanding. DPO is calculated by dividing ending accounts payable by a 90-day
average of cost of goods sold. For fiscal year 2018, the DPO remained flat
compared to fiscal year 2017. For fiscal year 2017, the DPO was higher primarily
due to increased inventory purchases and an extension of payment terms with our
product suppliers.
Investing Activities
Net cash used in investing activities decreased by $1.0 billion for fiscal year
2018 as compared to fiscal year 2017, primarily due to a decrease in investments
classified as available-for-sale investments within Other current assets by $1.6
billion and collateral related to our derivatives of $0.4 billion, partially
offset by the payment of $1.0 billion for the acquisition of Samsung's printer
business.
Net cash used in investing activities increased by $1.8 billion for fiscal year
2017 as compared to fiscal year 2016, primarily due to net investment activity
of $1.1 billion, classified as available-for-sale investments within Other
current assets, collateral of $0.2 billion related to our derivatives and
proceeds from a business divestiture of $0.5 billion in fiscal year 2016.
Financing Activities
Net cash used in financing activities increased by $4.4 billion in fiscal year
2018 compared to fiscal year 2017, primarily due to the payment to repurchase
approximately $1.85 billion of debt, higher share repurchase amount of $1.1
billion and higher outstanding commercial paper of $0.9 billion in fiscal year
2017.
Net cash used in financing activities decreased by $13.2 billion in fiscal year
2017 compared to fiscal year 2016, as the net cash used in financing activities
for the fiscal year 2016 included the cash transfer of $10.4 billion to Hewlett
Packard Enterprise in connection with the Separation and the redemption of $2.1
billion of U.S. Dollar Global Notes, and fiscal year 2017 included a higher
outstanding commercial paper of $0.9 billion.
Capital Resources
Debt Levels
                                         As of October 31
                                  2018         2017         2016
                                       Dollars in millions
Short-term debt                $  1,463     $  1,072     $     78
Long-term debt                 $  4,524     $  6,747     $  6,735
Debt-to-equity ratio            (9.36)x      (2.29)x      (1.75)x

Weighted-average interest rate 4.3 % 4.0 % 4.2 %



We maintain debt levels that we establish through consideration of a number of
factors, including cash flow expectations, cash requirements for operations,
investment plans (including acquisitions), share repurchase activities, our cost
of capital and targeted capital structure.
Short-term debt increased by $0.4 billion and long-term debt decreased by $2.2
billion for fiscal year 2018 as compared to fiscal year 2017. The net decrease
in total debt was primarily due to the payment to repurchase approximately $1.85
billion in aggregate principal amount of U.S. Dollar Global Notes.
Short-term debt increased by $1.0 billion for fiscal year 2017 as compared to
fiscal year 2016. The net increase in total debt was primarily due to a higher
outstanding of commercial paper of $0.9 billion.
Our debt-to-equity ratio is calculated as the carrying amount of debt divided by
total stockholders' deficit. Our debt-to-equity ratio changed by 7.07x in fiscal
year 2018 compared to fiscal year 2017, primarily due to a decrease in
stockholders' deficit balance of $2.8 billion.
Our debt-to-equity ratio changed by 0.54x in fiscal year 2017 compared to fiscal
year 2016, due to an increase in total debt balances of $1.0 billion.

                                       45
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                            HP INC. AND SUBSIDIARIES

                    Management's Discussion and Analysis of
           Financial Condition and Results of Operations (Continued)



Our weighted-average interest rate reflects the effective interest rate on our
borrowings prevailing during the period and reflects the effect of interest rate
swaps. For more information on our interest rate swaps, see Note 10, "Financial
Instruments" in the Consolidated Financial Statements and notes thereto in Item
8, "Financial Statements and Supplementary Data".
Available Borrowing Resources
We had the following resources available to obtain short or long-term financing:
                                   As of October 31, 2018
                                         In millions
2016 Shelf Registration Statement              Unspecified
Uncommitted lines of credit       $                    667


As of October 31, 2018, we maintain a senior unsecured committed revolving
credit facility with aggregate lending commitments of $4.0 billion, which will
be available until March 30, 2023 and is primarily to support the issuance of
commercial paper. Funds borrowed under this revolving credit facility may also
be used for general corporate purposes. As of October 31, 2018, we had $0.9
billion of commercial paper outstanding.
We increased our issuance authorization under our commercial paper program from
$4.0 billion to $6.0 billion in November 2017. In December 2017, we also entered
into an additional revolving credit facility with certain institutional lenders
that provided us with $1.5 billion of available borrowings until November 30,
2018. We elected to terminate this $1.5 billion revolving credit facility early,
effective August 17, 2018.
For more information on our borrowings, see Note 11, "Borrowings", to the
Consolidated Financial Statements in Item 8, which is incorporated herein by
reference.
Credit Ratings
Our credit risk is evaluated by major independent rating agencies based on
publicly available information as well as information obtained in our ongoing
discussions with them. While we do not have any rating downgrade triggers that
would accelerate the maturity of a material amount of our debt, previous
downgrades have increased the cost of borrowing under our credit facilities,
have reduced market capacity for our commercial paper and have required the
posting of additional collateral under some of our derivative contracts. In
addition, any further downgrade to our credit ratings by any rating agencies may
further impact us in a similar manner, and, depending on the extent of any such
downgrade, could have a negative impact on our liquidity and capital position.
We can access alternative sources of funding, including drawdowns under our
credit facilities, if necessary, to offset potential reductions in the market
capacity for our commercial paper.

                                       46
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                            HP INC. AND SUBSIDIARIES

                    Management's Discussion and Analysis of
           Financial Condition and Results of Operations (Continued)



CONTRACTUAL AND OTHER OBLIGATIONS
Our contractual and other obligations as of October 31, 2018, were as follows:
                                                            Payments Due by Period
                                          1 Year or                                      More than 5
                            Total           Less          1-3 Years       3-5 Years         Years
                                                          In millions
Principal payments on
debt(1)                  $    5,573     $     1,308     $     1,860     $     1,205     $      1,200
Interest payments on
debt(2)                       2,034             208             372             166            1,288
Purchase obligations(3)         704             434             244              26                -
Operating lease
obligations(4)                1,358             294             423             279              362
Capital lease
obligations(5)                  520             173             272              69                6
Total(6)(7)(8)(9)        $   10,189     $     2,417     $     3,171     $     1,745     $      2,856

(1) Amounts represent the principal cash payments relating to our short-term and

long-term debt and do not include any fair value adjustments, discounts or

premiums.

(2) Amounts represent the expected interest payments relating to our short-term

and long-term debt. We have outstanding interest rate swap agreements

accounted for as fair value hedges that have the economic effect of changing

fixed interest rates associated with some of our U.S. Dollar Global Notes to

variable interest rates. The impact of our outstanding interest rate swaps

at October 31, 2018 was factored into the calculation of the future interest

payments on debt.

(3) Purchase obligations include agreements to purchase goods or services that

are enforceable and legally binding on us and that specify all significant

terms, including fixed or minimum quantities to be purchased; fixed, minimum

or variable price provisions; and the approximate timing of the transaction.

These purchase obligations are related principally to inventory and other

items. Purchase obligations exclude agreements that are cancelable without

penalty. Purchase obligations also exclude open purchase orders that are

routine arrangements entered into in the ordinary course of business as they

are difficult to quantify in a meaningful way. Even though open purchase

orders are considered enforceable and legally binding, the terms generally

allow us the option to cancel, reschedule, and adjust terms based on our

business needs prior to the delivery of goods or performance of services.

(4) Amounts represent the operating lease obligations, net of total sublease

income of $129 million.

(5) Amounts represent the capital lease obligations, including total capital

lease interest obligations of $58 million.

(6) Retirement and Post-Retirement Benefit Plan Contributions. In fiscal year

2019, we anticipate making contributions of approximately $46 million to

non-U.S. pension plans, $32 million to cover benefit payments to U.S.

non-qualified pension plan participants and $6 million to cover benefit

     claims for our post-retirement benefit plans. Our policy is to fund our
     pension plans so that we meet at least the minimum contribution
     requirements, as established by local government, funding and taxing
     authorities. Expected contributions and payments to our pension and

post-retirement benefit plans are excluded from the contractual obligations

table because they do not represent contractual cash outflows as they are

dependent on numerous factors which may result in a wide range of outcomes.

For more information on our retirement and post-retirement benefit plans,

see Note 4, "Retirement and Post-Retirement Benefit Plans", to the

Consolidated Financial Statements in Item 8, which is incorporated herein by

reference.

(7) Cost Savings Plans. We expect to make future cash payments of approximately

$286 million in connection with our cost savings plans through fiscal year

2019. These payments have been excluded from the contractual obligations

table because they do not represent contractual cash outflows and there is

uncertainty as to the timing of these payments. For more information on our

restructuring activities that are part of our cost improvements, see Note 3,

"Restructuring and Other Charges", to the Consolidated Financial Statements

in Item 8, which is incorporated herein by reference.

(8) Uncertain Tax Positions. As of October 31, 2018, we had approximately $1.3

billion of recorded liabilities and related interest and penalties

pertaining to uncertain tax positions. We are unable to make a reasonable

estimate as to when cash settlement with the tax authorities might occur due

to the uncertainties related to these tax matters. Payments of these

obligations would result from settlements with taxing authorities. For more

information on our uncertain tax positions, see Note 6, "Taxes on Earnings",

to the Consolidated Financial Statements in Item 8, which is incorporated

     herein by reference.


(9)  Payment of one-time transition taxes under the TCJA. The TCJA made
     significant changes to U.S. tax law resulting in a one-time deemed

repatriation transition tax on accumulated foreign earnings of approximately

     $3.3 billion. We expect the



                                       47
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                            HP INC. AND SUBSIDIARIES

                    Management's Discussion and Analysis of
           Financial Condition and Results of Operations (Continued)



actual cash payments for the tax to be much lower as we expect to reduce the
overall liability by more than half once tax credits and other balance sheet tax
attributes are used.
OFF-BALANCE SHEET ARRANGEMENTS
As part of our ongoing business, we have not participated in transactions that
generate material relationships with unconsolidated entities or financial
partnerships, such as entities often referred to as structured finance or
special purpose entities, which would have been established for the purpose of
facilitating off-balance sheet arrangements or other contractually narrow or
limited purposes.
We have third-party short-term financing arrangements intended to facilitate the
working capital requirements of certain customers. For more information on our
third-party short-term financing arrangements, see Note 7 "Supplementary
Financial Information" to the Consolidated Financial Statements in Item 8, which
is incorporated herein by reference.

                                       48

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Sales 2019 59 634 M
EBIT 2019 4 291 M
Net income 2019 3 262 M
Finance 2019 588 M
Yield 2019 2,88%
P/E ratio 2019 10,39
P/E ratio 2020 9,83
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Charles Victor Bergh Independent Director
Catherine A. Lesjak Chief Operating Officer
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