HP INC.
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.
• Critical Accounting Policies and Estimates. A discussion of
accounting policies and estimates that we believe areimportant to
understanding the assumptions and judgments incorporated in our
reported financial results.
• Results of Operations. An analysis of our financial results
comparing fiscal year 2019 to fiscal year 2018 and fiscal year 2018
to fiscal year 2017. A discussion of the results of operations is
followed by a more detailed discussion of the results ofoperations
by segment.
• Liquidity and Capital Resources. An analysis of changes in our cash
flows and a discussion of our liquidity and financialcondition. • 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 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.
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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 includeHP Labs and certain business incubation and investment projects. • In Personal Systems, our strategic focus is on profitable growth through
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 end point services and
solutions. We are focused on services including DaaS 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 focus is on Contractual solutions and Graphics,
as well as expanding our footprint in the 3D printing and digital
manufacturing marketplace. In Contractual solutions we have a continued
focus on Managed Print Services and Instant Ink. In Graphics, we are
focused on innovations such as our Indigo and Latex product offerings.
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 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 an evolving distribution and reseller
landscape, with increasing online and omnichannel presence. Additional
challenges we face at the segment level are set forth below.
• In Personal Systems, we face challenges with industry component
availability and a competitive pricing environment.
• In Printing, a competitive pricing environment, including fromnon-original supplies (which includes imitation, refill or remanufactured
alternatives), and a weakened market in certain geographies with
associated pricing sensitivity of our customers present challenges. We
also face challenges in Printing due to our multi-tier distribution
network, primarily in EMEA, including limiting grey marketing and the
potential misuse of pricing programs. We also obtain many Printingcomponents 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 theagreement 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.
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 full 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 and adapting our business models,
with a particular focus on enhancing our end-to-end processes, analytics and
efficiencies. We also continue to work on optimizing our sales coverage models,
aligning our sales incentives with our strategic goals, improving channel
execution and inventory management, strengthening our capabilities in our areas
of strategic focus, strengthening our pricing discipline, and developing and
capitalizing on market opportunities.
Specifically, in October 2019 , we announced cost-reduction and operational
efficiency initiatives intended to simplify the way we work, move closer to our
customers and facilitate specific investment in our business. These efforts
include transforming our operating model to integrate our sales force into a
single commercial organization and reducing structural costs across the company
through our restructuring plan approved in September 2019 (the "Fiscal 2020
Plan"). We expect to invest some of the savings from these efforts across our
businesses, including investing to build our digital capabilities. Over time, we
expect these investments will make us more efficient and allow us to advance our
positions in Personal Systems and Printing, while also disrupting new industries
where we see attractive medium to long-term growth opportunities. However, the
rate at which we are able to invest in our business and the returns that we are
able to achieve from these investments will be
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--------------------------------------------------------------------------------HP INC. AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) affected by many factors, including the efforts to address the execution, industry and macroeconomic challenges facing our business as discussed above. As a result, we may experience delays in the anticipated timing of activities related to these efforts, and the anticipated benefits of these efforts may not materialize. 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 operating results, see the section entitled "Risk Factors" in Item 1A in this Annual Report on Form 10-K. CRITICAL ACCOUNTING POLICIES AND ESTIMATES
General
The Consolidated Financial Statements ofHP are prepared in accordance withUnited 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 ofHP '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 depicting the transfer of promised goods or services to customers in an amount that reflects the consideration to which we are expected to be entitled in exchange for those goods or services. We evaluate customers' ability to pay based on various factors like historical payment experience, financial metrics and customer credit scores. We enter into contracts to sell our products and services, and while many of our sales contracts contain standard terms and conditions, there are contracts which contain non-standard terms and conditions. Further, many of our arrangements include multiple performance obligations. As a result, significant contract interpretation may be required to determine the appropriate accounting, including the identification of performance obligations that are distinct, the allocation of the transaction price among performance obligations in the arrangement and the timing of transfer of control of promised goods or services for each of those performance obligations. We evaluate each performance obligation in an arrangement to determine whether it represents a distinct good or services. A performance obligation constitutes distinct goods or services when the customer can benefit from the 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. Transaction price is the amount of consideration to which we expect to be entitled in exchange for transferring goods or services to the customer. If the transaction price includes a variable amount, we estimate the amount using either the expected value or most likely amount method. We reduce 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. We use estimates to determine the expected variable consideration for such programs based on historical experience, expected consumer behavior and market conditions. When a sales arrangement contains multiple performance obligations, such as hardware and/or services, we allocate 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"). We establish SSP using the price charged for a performance obligation when sold 34 --------------------------------------------------------------------------------
HP INC. AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) separately ("observable price") and, in some instances, using the price established by management having the relevant authority. When observable price is not available, we establish SSP 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 technology industry life cycles. We may modify or develop new go-to-market practices in the future, which may result in changes in selling prices, impacting standalone selling price determination applying the aforementioned management judgments and estimates. 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. In most arrangements with multiple performance obligations, the transaction price is allocated to each performance obligation at the inception of the arrangement based on their relative selling price. Revenue is recognized when, or as, a performance obligation is satisfied by transferring control of a promised good or service to a customer. We generally invoice the customer upon delivery of the goods or services and the payments are due as per contract terms. For fixed price support or maintenance and other service 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. In instances when revenue is derived from sales of third-party vendor products or services, we record revenue on a gross basis when we are a principal in the transaction and on a net basis when we are acting as an agent between the customer and the vendor. We consider several factors to determine whether we are acting as a principal or an agent, most notably whether we are the primary obligor to the customer, have established our own pricing and have inventory and credit risks. 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% of annual net revenue. 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 and enhanced early retirement 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 incurred in connection with the Separation or information technology rationalization efforts. 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 35 --------------------------------------------------------------------------------
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 2019: Change in Net Periodic Benefit Cost in millions Assumptions: Discount rate $ 9 Expected increase in compensation levels $ 2 Expected long-term return on plan assets $ 28 Taxes on Earnings The Tax Cuts and Jobs Act ("TCJA") made significant changes to theU.S. tax law. The TCJA lowered ourU.S. statutory federal income tax rate from 35% to 21% effectiveJanuary 1, 2018 , while also imposing a one-time transition tax on accumulated foreign earnings. InDecember 2017 , theSEC staff issued SAB No. 118, which allows registrants to record provisional amounts during a one year "measurement period". InJanuary 2019 , we completed our accounting for the tax effects of the TCJA with no material changes to the provisional amounts recorded during the measurement period. InJanuary 2018 , the FASB released guidance on the accounting for tax on the Global Minimum Tax provisions of TCJA. The Global Minimum Tax provisions impose a tax on foreign income in excess of a deemed return on tangible assets of foreign corporations. We have elected to treat the Global Minimum Tax inclusions as period costs. 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 tothe 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. 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 inthe United States and approximately 58 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 36 --------------------------------------------------------------------------------
HP INC. AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) 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 domestic 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 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 2019, 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, interest rates and existing assets and liabilities. We use forwards, swaps and at times, options to hedge certain foreign currency, interest rate and, return on certain investments exposures. We do not use derivative instruments for speculative purposes. As ofOctober 31, 2019 , 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$392 million and$166 million , respectively, as ofOctober 31, 2019 . 37 --------------------------------------------------------------------------------
HP INC. AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) 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 ofHP '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 ofOctober 31, 2019 , 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. 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. 38 --------------------------------------------------------------------------------
HP INC. AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) Results of operations in dollars and as a percentage of net revenue were as follows: For the fiscal years ended October 31 2019 2018 2017 Dollars % of Net Dollars % of Net Dollars % of Net Revenue Revenue Revenue Dollars in millions Net revenue$ 58,756 100.0 %$ 58,472 100.0 %$ 52,056 100.0 % Cost of revenue 47,586 81.0 % 47,803 81.8 % 42,478 81.6 % Gross profit 11,170 19.0 % 10,669 18.2 % 9,578 18.4 % Research and development 1,499 2.6 % 1,404 2.4 % 1,190 2.3 % Selling, general and administrative 5,368 9.1 % 5,099 8.7 % 4,532 8.7 % Restructuring and other charges 275 0.4 % 132 0.2 % 362 0.7 % Acquisition-related charges 35 0.1 % 123 0.2 % 125 0.2 % Amortization of intangible assets 116 0.2 % 80 0.1 % 1 - % Earnings from operations 3,877 6.6 % 3,831 6.6 % 3,368 6.5 % Interest and other, net (1,354 ) (2.3 )% (818 ) (1.4 )% (92 ) (0.2 )% Earnings before taxes 2,523 4.3 % 3,013 5.2 % 3,276 6.3 % Benefit from (provision for) taxes 629 1.1 % 2,314 3.9 % (750 ) (1.4 )% Net earnings$ 3,152 5.4 %$ 5,327 9.1 %$ 2,526 4.9 % Net Revenue In fiscal year 2019, total net revenue increased 0.5% (increased 2.0% on a constant currency basis) as compared to the prior-year period. Net revenue fromthe United States remained flat at$20.6 billion and net revenue from outside ofthe United States increased 0.7% to$38.2 billion . The increase in net revenue was primarily driven by growth in Notebooks, Desktops and Workstations in Personal Systems, partially offset by unfavorable foreign currency impacts and a decline inPrinting Supplies . In fiscal year 2018, total net revenue increased 12.3% (increased 10.1% on a constant currency basis) as compared to the prior-year period. Net revenue fromthe United States increased 6.6% to$20.6 billion and net revenue from outside ofthe 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. A detailed discussion of the factors contributing to the changes in segment net revenue is included under "Segment Information" below. Gross Margin Our gross margin was 19.0% for fiscal year 2019 compared with 18.2% for fiscal year 2018. The increase was primarily due to higher rate in Personal Systems driven by lower supply chain costs. 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. 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 7% in fiscal year 2019 compared to the prior-year period, primarily due to continuing investments in innovation and key growth initiatives. R&D expense increased 18% in fiscal year 2018 compared to the prior-year period, primarily due to continuing investment in Printing, including the acquisition of Samsung's printer business. Selling, General and Administrative ("SG&A") 39 --------------------------------------------------------------------------------
HP INC. AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) SG&A expense increased 5% in fiscal year 2019 as compared to the prior-year period, primarily driven by increased investments in key growth initiatives and go-to-market in Personal Systems and investment in digital infrastructure. SG&A expense increased 13% in fiscal year 2018 as compared to the prior-year period, primarily driven by incremental go-to-market investments to support revenue growth, including the acquisition of Samsung's printer business. Restructuring and other Charges Restructuring and other charges increased by$143 million in fiscal year 2019 compared to the prior-year period, primarily due to charges from the Fiscal 2020 Plan and the restructuring plan approved inOctober 2016 (the "Fiscal 2017 Plan"), which was later amended inMay 2018 . Restructuring and other charges decreased by$230 million in fiscal year 2018 compared to the prior-year period, primarily due to lower charges from the Fiscal 2017 Plan. Acquisition-related Charges Acquisition-related charges for the fiscal years 2019, 2018 and 2017 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$36 million in fiscal year 2019 compared to the prior-year period, due to intangible assets resulting primarily from the acquisition of the Apogee group. 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. Interest and Other, Net Interest and other, net expense increased by$536 million in fiscal year 2019 compared to the prior-year period, primarily due to tax indemnifications related to the termination of the tax matters agreement ("TMA") with Hewlett Packard Enterprise during the fourth quarter of fiscal year 2019. Interest and other, net expense increased by$726 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. Benefit from (Provision for) Taxes Our effective tax rates were (24.9%), (76.8%) and 22.9% in fiscal years 2019, 2018 and 2017, respectively. In fiscal year 2019, our effective tax rate generally differs from theU.S. federal statutory rate of 21% primarily due to the resolution of various audits, changes in valuation allowances, and impacts ofU.S. tax reform. In fiscal year 2018, our effective tax rate generally differs from theU.S. federal statutory rate of 23.3% primarily due to transitional impacts ofU.S. tax reform and resolution of various audits and tax litigation. In fiscal year 2017, our effective tax rate generally differs from theU.S. federal statutory rate of 35% due to favorable tax rates associated with certain earnings 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 werePuerto Rico ,Singapore ,China ,Malaysia andIreland . Additionally, the overall effective tax rate in fiscal year 2017 was impacted by adjustments to valuation allowances and state income taxes. For a reconciliation of our effective tax rate to theU.S. federal statutory rate of 21%, 23.3% and 35% in fiscal years 2019, 2018 and 2017, respectively, and further explanation of our provision for income taxes, see Note 6, "Taxes on Earnings" to the Consolidated Financial Statements in Item 8, which is incorporated herein by reference. In fiscal year 2019, we recorded$1.3 billion of net income tax benefit 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 . We also recorded benefits of$78 million related toU.S. tax reform as a result of new guidance issued by theU.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, we recorded excess tax benefits of$20 million associated with stock options, restricted stock units and performance-adjusted restricted stock units. 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 had not yet completed our analysis of the full impact of the TCJA. However, as ofOctober 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 newU.S. statutory tax rate and a$317 million net expense related to realization onU.S. deferred taxes that are expected to be 40 --------------------------------------------------------------------------------
HP INC. AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) 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 andU.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 associated with 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 toU.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$49 million related to uncertain tax positions. Segment Information A description of the products and services for each segment can be found in Note 2, "Segment Information," to the Consolidated Financial Statements in Item 8, which is incorporated herein by reference. Future changes to this organizational structure may result in changes to the segments disclosed. Realignment Effective at the beginning of its first quarter of fiscal year 2019, we implemented an organizational change to align our business unit financial reporting more closely with our current business structure. The organizational change resulted in the transfer of certain Samsung-branded product categories from Commercial to Consumer within the Printing segment. We reflected this change to our business unit information in prior reporting periods on an as-if basis. The reporting change had no impact to previously reported segment net revenue, consolidated net revenue, earnings from operations, net earnings or net earnings per share ("EPS"). Personal Systems For the fiscal years ended October 31 2019 2018 2017 Dollars in millions Net revenue$ 38,694 $ 37,661 $ 33,321 Earnings from operations$ 1,898 $ 1,402 $ 1,206 Earnings from operations as a % of net revenue 4.9 %
3.7 % 3.6 %
The components of net revenue and the weighted net revenue change by business
unit were as follows:
For the fiscal years ended October 31
Net Revenue Weighted Net Revenue Change
Percentage Points (1)
2019 2018 2017 2019 2018
In millions
Notebooks $ 22,928 $ 22,547 $ 19,782 1.0 8.3
Desktops 12,046 11,567 10,298 1.3 3.8
Workstations 2,389 2,246 2,042 0.4 0.6
Other 1,331 1,301 1,199 - 0.3
Total Personal Systems $ 38,694 $ 37,661 $ 33,321 2.7 13.0
(1) Weighted Net Revenue Change Percentage Points measures contribution of each
business unit towards overall segment revenue growth. It is calculated by
dividing the change in revenue of each business unit from the prior-year period
by total segment revenue for the prior-year period.
Fiscal Year 2019 compared with Fiscal Year 2018
Personal Systems net revenue increased 2.7% (increased 4.9% on a constant
currency basis) in fiscal year 2019 as compared to the prior-year period. 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 2.2% increase in unit volume and 0.5% increase
in average selling prices ("ASPs") 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 positive mix shifts and higher
pricing, partially offset by unfavorable foreign currency impacts. Commercial
revenue increased 7.0% primarily
41
--------------------------------------------------------------------------------HP INC. AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) driven by higher unit volume partially offset by unfavorable foreign currency impacts, and consumer revenue decreased by 5.5% primarily driven by lower unit volume, respectively, in fiscal year 2019 as compared to the prior-year period. Net revenue increased 1.7% in Notebooks, 4.1% in Desktops and 6.4% in Workstations in fiscal year 2019 as compared to the prior-year period. Personal Systems earnings from operations as a percentage of net revenue increased by 1.2 percentage points in fiscal year 2019 as compared to the prior-year period, primarily due to in an increase in gross margin, partially offset by an increase in operating expenses. The increase in gross margin was primarily due to lower supply chain costs and higher ASPs. The increase in operating expenses was primarily due to increased investments in key growth initiatives and go-to-market. 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% increase in unit volume and 6.0% increase in ASPs 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 as compared to the prior-year period. Personal Systems earnings from operations as a percentage of net revenue increased by 0.1 percentage points in fiscal year 2018 as compared to the prior-year period. The increase was primarily due to higher ASPs, partially offset by an increase in commodity and logistics costs. Printing For the fiscal years ended October 31 2019 2018 2017 Dollars in millions Net revenue$ 20,066 $ 20,805 $ 18,728 Earnings from operations$ 3,202 $ 3,314 $ 3,142 Earnings from operations as a % of net revenue 16.0 %
15.9 % 16.8 %
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 Change
Net Revenue Percentage Points(1)
2019 2018 2017 2019 2018
In millions
Supplies $ 12,921 $ 13,575 $ 12,524 (3.2 ) 5.6
Commercial Hardware 4,612 4,514 3,792 0.5 3.9
Consumer Hardware 2,533 2,716 2,412 (0.9 ) 1.6
Total Printing $ 20,066 $ 20,805 $ 18,728 (3.6 ) 11.1
(1) Weighted Net Revenue Change Percentage Points measures the contribution of
each business unit towards overall segment revenue growth. It is calculated by
dividing the change in revenue of each business unit from the prior period by
total segment revenue for the prior-year period.
Fiscal Year 2019 compared with Fiscal Year 2018
Printing net revenue decreased 3.6% (decreased 3.0% on a constant currency
basis) for fiscal year 2019 as compared to prior-year period. The decline in net
revenue was primarily driven by a decline in Supplies, Consumer Hardware revenue
and unfavorable foreign currency impacts, partially offset by an increase in
Commercial Hardware revenue. Net revenue for Supplies decreased 4.8% as compared
to the prior-year period, primarily due to demand weakness. Printer unit volume
42
--------------------------------------------------------------------------------HP INC. AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) decreased 4.8% compared to the prior-year period. The decrease in printer unit volume was driven by unit decrease in Consumer Hardware. Net revenue for Commercial Hardware increased 2.2% as compared to the prior-year period, primarily due to the acquisition of the Apogee group. Net revenue for Consumer Hardware decreased 6.7% as compared to the prior-year period due to a 5.4% decrease in printer unit volume and 1.7% decrease in ASPs. The unit volume decrease was driven by InkJet Home Consumer business and LaserJet Home business. The decrease in ASPs was primarily due to unfavorable foreign currency impacts. Printing earnings from operations as a percentage of net revenue increased by 0.1 percentage points for the fiscal year 2019 as compared to the prior-year period, primarily due to higher gross margin. The gross margin increased primarily due to rate improvement in Commercial Hardware partially offset by lower Supplies revenue. 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 as compared to prior-year period. 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 1.7% 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 19.0% as compared to the prior-year period, including revenue from Samsung-branded printers, LaserJet and PageWide printers. The unit volume increased by 39.6% while the ASPs decreased by 17.0%. 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 12.6% as compared to the prior-year period due to a 9.3% increase in printer unit volume and a 3.4% increase in ASPs. The unit volume increase was driven by Samsung-branded printers, 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 0.9 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 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. Corporate Investments The loss from operations in Corporate Investments for the fiscal years 2019, 2018 and 2017 was primarily due to expenses associated withHP Labs and our incubation and investment 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 and cash equivalents balances are held in numerous locations throughout the world, with the majority of those amounts held outside ofthe 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. Amounts held outside ofthe United States are generally utilized to support non-U.S. liquidity needs and may from time to time be distributed tothe United States . The TCJA made significant changes to theU.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 and began in fiscal year 2019. We expect a significant portion of the cash and cash equivalents held by our foreign subsidiaries 43 --------------------------------------------------------------------------------
HP INC. AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) will no longer be subject toU.S. income tax consequences upon a subsequent repatriation tothe United States as a result of the 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 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 2019 2018 2017 In billions
Cash and cash equivalents
$ 5.1 $ 6.0 $ 7.8
(1) Includes highly liquid
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
2019 2018 2017
In millions
Net cash provided by operating activities $ 4,654 $ 4,528 $ 3,677
Net cash used in investing activities (438 ) (716 ) (1,717 )
Net cash used in financing activities (4,845 ) (5,643 ) (1,251 )
Net (decrease) increase in cash and cash equivalents $ (629 ) $
(1,831 )
Operating Activities Net cash provided by operating activities increased marginally by$0.1 billion for fiscal year 2019 as compared to fiscal year 2018. 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. 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
2019 2018 2017
Days of sales outstanding in accounts receivable ("DSO") 35 30
29
Days of supply in inventory ("DOS") 41 43 46
Days of purchases outstanding in accounts payable ("DPO") (107 ) (105 ) (105 ) Cash conversion cycle
(31 ) (32 ) (30 )
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 years 2019 and
44
--------------------------------------------------------------------------------HP INC. AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) 2018, the increase in DSO compared to fiscal years 2018 and 2017, respectively, was primarily due to unfavorable revenue linearity. 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 2019, the decrease in DOS compared to fiscal year 2018 was primarily due to reduction in inventory driven by reclassification of certain balances to other current assets pursuant to adoption of the new revenue standard in the first quarter of fiscal 2019. For fiscal year 2018, the DOS was lower primarily due to a focus on inventory management. 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 2019, the increase in DPO compared to fiscal year 2018 was higher primarily due to working capital management activities, partially offset by lower inventory purchasing volume. For fiscal year 2018, the DPO remained flat compared to fiscal year 2017. Investing Activities Net cash used in investing activities decreased by$0.3 billion for fiscal year 2019 as compared to fiscal year 2018, primarily due to lower net payments for acquisitions. 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. Financing Activities Net cash used in financing activities decreased by$0.8 billion in fiscal year 2019 compared to fiscal year 2018, primarily due to lower payment of debt of$1.5 billion , partially offset by a decrease in outstanding commercial paper amounts of$0.7 billion . 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$0.9 billion in fiscal year 2017. Capital Resources Debt Levels As of October 31 2019 2018 2017 Dollars in millions Short-term debt$ 357 $ 1,463 $ 1,072 Long-term debt$ 4,780 $ 4,524 $ 6,747 Debt-to-equity ratio (4.3)x (9.4)x (2.3)x
Weighted-average interest rate 4.6 % 4.3 % 4.0 %
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 decreased by$1.1 billion for fiscal year 2019 as compared to fiscal year 2018, primarily due to a decrease in outstanding commercial paper amounts of$0.9 billion . Long-term debt decreased by$2.2 billion for fiscal year 2018 as compared to fiscal year 2017 primarily due to the payment to repurchase approximately$1.85 billion in aggregate principal amount ofU.S. Dollar Global Notes. 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 5.1x in fiscal year 2019 compared to fiscal year 2018, primarily due to an increase in stockholders' deficit balance of$0.6 billion . Our debt-to-equity ratio changed by 7.1x in fiscal year 2018 compared to fiscal year 2017, primarily due to a decrease in stockholders' deficit balance of$2.8 billion . 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". 45 --------------------------------------------------------------------------------
HP INC. AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued)
Available Borrowing Resources We had the following resources available to obtain short or long-term financing:
As of October 31, 2019
In millions
2016 Shelf Registration Statement Unspecified
Uncommitted lines of credit $ 724
The 2016 Shelf Registration Statement will expire in December 2019 , around which
time we expect to file a new shelf registration statement.
As of October 31, 2019 , we maintain a senior unsecured committed revolving
credit facility with aggregate lending commitments of $4.0 billion , that will be
available until March 30, 2023 and is primarily to support the issuance of
commercial paper. Funds borrowed under this revolving credit facility may also
be used for general corporate purposes.
For more information on our borrowings, see Note 11, "Borrowings", to the
Consolidated Financial Statements in Item 8, which is incorporated herein by
reference.
Credit Ratings
Our credit risk is evaluated by major independent rating agencies based upon
publicly available information as well as information obtained in our ongoing
discussions with them. While we do not have any rating downgrade triggers that
would accelerate the maturity of a material amount of our debt, previous
downgrades have increased the cost of borrowing under our credit facility, have
reduced market capacity for our commercial paper and have required the posting
of additional collateral under some of our derivative contracts. In addition,
any further downgrade to our credit ratings by any rating agencies may further
impact us in a similar manner, and, depending on the extent of any such
downgrade, could have a negative impact on our liquidity and capital position.
We can access alternative sources of funding, including drawdowns under our
credit facility, if necessary, to offset potential reductions in the market
capacity for our commercial paper.
46
--------------------------------------------------------------------------------HP INC. AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) CONTRACTUAL AND OTHER OBLIGATIONS Our contractual and other obligations as ofOctober 31, 2019 , were as follows: Payments Due by Period 1 Year or More than 5 Total Less 1-3 Years 3-5 Years Years In millions Principal payments on debt(1)$ 4,539 $ 129 $ 1,955 $ 1,245 $ 1,210 Interest payments on debt(2) 1,890 214 273 157 1,246 Purchase obligations(3) 372 176 178 18 - Operating lease obligations(4) 1,340 284 399 262 395 Capital lease obligations(5) 676 249 344 80 3 Total(6)(7)(8)(9)$ 8,817 $ 1,052 $ 3,149 $ 1,762 $ 2,854
(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
variable interest rates. The impact of our outstanding interest rate swaps
at
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
(5) Amounts represent the capital lease obligations, including total capital
lease interest obligations of
(6) Retirement and Post-Retirement Benefit Plan Contributions. In fiscal year
2020, we expect to contribute approximately
plans,
participants and
benefit plans. Our policy is to fund our pension plans so that we meet at
least the minimum contribution required by local government, funding and
taxing authorities. Expected contributions and payments to our pension andpost-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. As a result of our approved restructuring plans,
including the Fiscal 2020 plan, we expect to make future cash payments of
approximately
million in fiscal year 2020 with remaining cash payments through fiscal year
2023. 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
million 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.
47--------------------------------------------------------------------------------
HP INC. AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) (9) Payment of one-time transition taxes under the TCJA. The TCJA made
significant changes to
tax of
cash payments for the tax to be much lower as we expect to reduce the
overall liability by more than half once existing and future credits and
other balance sheet tax attributes are used. The payments associated with
this one-time transition tax will be paid over eight years and began in
fiscal year 2019.
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.
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