Management's Discussion and Analysis of Financial Condition and Results of Operations 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 are important to understanding the
assumptions and judgments incorporated in our reported financial results.
• Results of Operations. An analysis of our operations financial results
comparing the three and six months ended
period. A discussion of the results of 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 of our operations. The discussion of financial condition and results of our operations that follows provides information that will assist the reader in understanding our Consolidated Condensed 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 Condensed Financial Statements. This discussion should be read in conjunction with our Consolidated Condensed Financial Statements and the related notes that appear elsewhere in this document.
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. This focus is with respect to enhanced innovation in
multi-operating systems, multi-architecture, geography, customer segments
and other key attributes. Additionally, we are investing in endpoint services and solutions. We are focused on services, including 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 focus is on contractual solutions to serve
consumers, SMBs and large enterprises through our Instant Ink Services and
Managed Print Services ("MPS") offerings, providing digital printing
solutions for graphics segments and applications including commercial
publishing, labels, packaging and textiles; as well as expanding our
footprint in the 3D printing and digital manufacturing marketplace.
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. 46
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Table of ContentsHP INC. AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) • In Printing, a competitive pricing environment, including from
non-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 obtain many Printing 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
Any decision by either party to not renew our agreement with
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
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, inOctober 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 were further updated inFebruary 2020 . 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 inSeptember 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 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. Our COVID-19 Response In late 2019, COVID-19 was first identified, and inMarch 2020 , theWorld Health Organization declared the outbreak of COVID-19 to be a pandemic. As part of efforts to control and mitigate the spread of COVID-19, governmental authorities around the world have imposed a variety of restrictions such as travel bans, stay-at-home orders, quarantines, social distancing measures and temporary business closures. This section summarizes our response to the significant impacts related to the COVID-19 pandemic that we have experienced to date, and we have included additional details as applicable throughout other sections of this report. As reflected in the discussions that follow, the impact of the pandemic and actions taken in response to it have had a variety of impacts on our results of operations for the second quarter of 2020. Through the date of this report, these impacts have continued. • Our employees. We have been focused on protecting the health and safety of our employees during the COVID-19 pandemic, and we quickly pivoted the vast majority of our employees to work from home in response to
this. These arrangements have been designed to allow for continued
operation of non-production business-critical functions, including
financial reporting systems and internal controls. For those in
manufacturing and other critical functions that could not transition to
a remote model, we quickly implemented social distancing and additional
safety and hygiene protocols, to protect the employees in our labs or manufacturing and production facilities. • Our community. We are committed to taking actions to protect the communities we serve. We are also putting our resources behind efforts to support local communities and to assist in the public health response. We have 47
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Table of ContentsHP INC. AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) donated millions of dollars in technology and support across Personal Systems and Printing to help students, families, and communities, including hospitals in affected areas. • We have mobilized our 3D Printing team and Digital Manufacturing Partner Network to design, validate, and produce essential parts, such as face shields, respirators and other items. Along with our partners we have produced millions of essential parts. We are also ramping up production of 3D printed nasal swabs to help widespread testing. • We are deployingHP BioPrinters and associated supply cassettes, free of charge, to NGOs, state and local government agencies, and pharmaceutical companies to accelerate drug and vaccine research to combat COVID-19. • We madeHP SureClick Pro security software freely available throughSeptember 2020 to help protect against cyber threats for bothHP and non-HP Windows 10 PCs as a large portion of the population is currently working from home. • We have committed to donating millions of dollars in products and grants to support blended learning in local communities impacted by COVID-19 around the globe as a large portion of the world's students are currently learning from home. • Our customers and partners. We are committed to our customers and
partners and to meeting their needs. We have taken meaningful actions
to remain close to our customers and partners, including implementing a
variety of relief initiatives to help them navigate their operational
and financial challenges. We have provided a variety of financing and leasing options for end customers. We have provided short-term market
and country-specific incentives for partners. Offers vary by geography
and are dependent on partner and customer eligibility. We are also offering online, on-demand learning options across a variety of topics
including sales skills education, product training and industry-leading
certifications, through
skills and knowledge required to optimize revenue and future-proof
their business. Partners can opt in for customized online digital learning paths designed to meet their specific priorities.
• Supply chain. In the three months ended
disruptions in our manufacturing and supply chain. This included
temporary factory closures in
our own factories as well as those of our suppliers and outsourcing
partners, resulting in temporary supply shortages. Additionally, we
also experienced logistics challenges, including delays in delivering
to our channels and end-customers as countries went into lockdown. This
affected our ability to fulfill demand for Personal Systems and Printing worldwide. Manufacturing capacity returned to normalized levels in April through earlyMay 2020 . • Demand. COVID-19 has created new and different demand dynamics in the market. This is creating both challenges and opportunities across our businesses and geographies. In Personal Systems, we saw increased demand globally as the focus moved to keeping people connected, productive and secure and it reemphasized the essential role that PC
plays in everyday life. In Printing, we saw a significant slowdown in
Office and Graphics as offices closed and large events were canceled.
During this same time, we also saw increased demand for hardware and ink supplies on the Consumer Printing side as countries went into lockdown and customers set up home office for remote working and school environments for remote learning.
• Liquidity. The global disruptions caused by the COVID-19 pandemic have
negatively impacted our cash flow from operations in the three months
endedApril 30, 2020 . While the impacts from COVID-19 pandemic are currently expected to be temporary, there is uncertainty around the extent and duration of the disruption. As a result, our liquidity and
working capital needs may be impacted in future periods. We believe
that our businesses are strong cash flow generators and we maintain a
strong balance sheet to meet our liquidity needs. Our current cash and
cash equivalents, cash flow from operating activities, available
commercial paper authorization, new borrowings, and our credit
facilities will be sufficient to meet our operating cash requirements,
planned capital expenditures, interest and principal payments on all borrowings, pension and post-retirement funding requirements, authorized share repurchases and annual dividend payments. The full extent of the impact of the COVID-19 pandemic on our business, results of operations and financial position is currently uncertain and will depend on many factors that are not within our control, including, but not limited to: the duration and scope of the pandemic; governmental, business and individuals' actions that have been and continue to be taken in response 48
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Table of ContentsHP INC. AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) to the pandemic; general economic uncertainty in key global markets and financial market volatility; global economic conditions and levels of economic growth; and the pace of recovery when the COVID-19 pandemic subsides. See the section entitled "Risk Factors" in Item 1A of Part II of this report for further information about related risks and uncertainties. Unsolicited Exchange Offer OnMarch 2, 2020 , Xerox Holdings Corporation ("Xerox") commenced an unsolicited exchange offer for all outstanding shares ofHP 's common stock (the "Offer"). Xerox had also previously nominated candidates for election toHP 's Board of Directors (the "Board") atHP 's 2020 annual meeting of stockholders. OnMarch 31, 2020 , Xerox announced that the Offer had been terminated and subsequently withdrew its slate of director nominees. In order to respond to Xerox's actions,HP incurred significant costs during the three and six months endedApril 30, 2020 . 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 of Part II of this report as well as in Item 1A of Part I in our Annual Report on Form 10-K for the fiscal year endedOctober 31, 2019 . CRITICAL ACCOUNTING POLICIES AND ESTIMATES MD&A is based on our Consolidated Condensed Financial Statements, which have been prepared in accordance withU.S. GAAP. The preparation of these financial statements requires management to make estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, net revenues and expenses, and disclosure of contingent liabilities. As ofApril 30, 2020 , the impact of COVID-19 on our business continued to unfold. As a result, many of our estimates and assumptions required increased judgment and carry a higher degree of variability and volatility. As events continue to evolve and additional information becomes available, our estimates may change in future periods. Our management believes that there have been no significant changes during the six months endedApril 30, 2020 to the items that we disclosed as our critical accounting policies and estimates in MD&A in our Annual Report on Form 10-K for the fiscal year endedOctober 31, 2019 , except as mentioned previously in "Note 1: Basis of Presentation". ACCOUNTING PRONOUNCEMENTS For a summary of recent accounting pronouncements applicable to our Consolidated Condensed Financial Statements see Note 1, "Basis of Presentation", to the Consolidated Condensed Financial Statements in Item 1 of Part I of this report, 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. Results of operations in dollars and as a percentage of net revenue were as follows: 49
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Table of ContentsHP INC. AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) Three months ended April 30 Six months ended April 30 2020 2019 2020 2019 % of Net % of Net % of Net % of Net Dollars Revenue Dollars Revenue Dollars Revenue Dollars Revenue Dollars in millions Net revenue$ 12,469 100.0 %$ 14,036 100.0 %$ 27,087 100.0 %$ 28,746 100.0 % Cost of revenue (9,976 ) (80.0 )% (11,307 ) (80.6 )% (21,722 ) (80.2 )% (23,405 ) (81.4 )% Gross profit 2,493 20.0 % 2,729 19.4 %
5,365 19.8 % 5,341 18.6 % Research and development (338 ) (2.7 )% (353 ) (2.5 )%
(738 ) (2.7 )% (697 ) (2.4 )% Selling, general and administrative
(1,216 ) (9.8 )% (1,339 ) (9.5 )% (2,506 ) (9.3 )% (2,587 ) (9.0 )% Restructuring and other charges (81 ) (0.7 )% (69 ) (0.5 )% (372 ) (1.4 )% (124 ) (0.5 )% Acquisition-related charges (3 ) - % (11 ) (0.1 )% (3 ) - % (21 ) (0.1 )% Amortization of intangible assets (29 ) (0.2 )% (29 ) (0.2 )% (55 ) (0.2 )% (58 ) (0.2 )% Earnings from operations 826 6.6 % 928 6.6 % 1,691 6.2 % 1,854 6.4 % Interest and other, net - - % (45 ) (0.3 )% 13 0.1 % (71 ) (0.2 )% Earnings before taxes 826 6.6 % 883 6.3 % 1,704 6.3 % 1,783 6.2 % Provision for taxes (62 ) (0.5 )% (101 ) (0.7 )% (262 ) (1.0 )% (198 ) (0.7 )% Net earnings$ 764 6.1 %$ 782 5.6 %$ 1,442 5.3 %$ 1,585 5.5 % Net Revenue For the three months endedApril 30, 2020 , total net revenue decreased 11.2% (decreased 10.1% on a constant currency basis) as compared to the prior-year period.U.S. net revenue decreased 7.7% to$4.3 billion , while net revenue from international operations decreased 12.9% at$8.2 billion . The decrease in total net revenue was primarily driven by decline in Desktops, Supplies, Commercial Printing Hardware and unfavorable foreign currency impacts. The decline is driven by lower demand in Printing, as businesses have temporarily closed and office workers transitioned to working from home, as well as manufacturing and supply chain disruptions. For the six months endedApril 30, 2020 , total net revenue decreased 5.8% (decreased 4.7% on a constant currency basis) as compared to the prior-year period.U.S. net revenue decreased 4.2% to$9.1 billion , while net revenue from international operations decreased 6.6% to$17.9 billion . The decrease in total net revenue was primarily driven by decline in Supplies, Desktops, Commercial Printing Hardware and unfavorable foreign currency impacts partially offset by Notebooks. The decline is driven by lower demand in Printing, as businesses have temporarily closed and office workers transitioned to working from home, as well as manufacturing and supply chain disruptions. A detailed discussion of the factors contributing to the changes in segment net revenue is included in "Segment Information" below. Gross Margin For the three months endedApril 30, 2020 , our gross margin increased by 0.6 percentage points, as compared to the prior-year period. The increase is primarily driven by higher rate in Personal Systems due to favorable commodity costs, partially offset by unfavorable segment mix and unfavorable rate in Printing. For the six months endedApril 30, 2020 , our gross margin increased by 1.2 percentage point as compared to the prior-year period. The increase is primarily driven by higher rate in Personal Systems due to favorable commodity costs, partially offset by unfavorable segment mix. 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 decreased 4.2% for the three months endedApril 30, 2020 , as compared to the prior-year period, primarily due to structural savings and expense management partially offset by continuing investments in innovation and key growth initiatives. R&D expenses increased 5.9% for the six months endedApril 30, 2020 as compared to the prior-year period, 50
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Table of ContentsHP INC. AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) primarily due to continuing investments in innovation and key growth initiatives partially offset by structural savings and expense management. Selling, General and Administrative ("SG&A") SG&A expense decreased 9.2% and 3.1% for the three and six months endedApril 30, 2020 , respectively, as compared to the prior-year period, driven by structural cost savings from transformation program and the benefits of temporary discretionary cost actions. Restructuring and Other Charges Restructuring and other charges for the three and six months endedApril 30, 2020 relate primarily to the Fiscal 2020 Plan. Amortization of Intangible Assets Amortization of intangible assets for the three and six months endedApril 30, 2020 relates primarily to intangible assets resulting from prior acquisitions. Interest and Other, Net Interest and other, net expense decreased by$45 million and$84 million for the three months and six months endedApril 30, 2020 , respectively, as compared to the prior-year period, primarily driven byNet Periodic Post -retirement Benefit Cost. Provision for Taxes Our effective tax rate was 7.6% and 11.4% for the three months endedApril 30, 2020 and 2019, respectively, and 15.4% and 11.1% for the six months endedApril 30, 2020 and 2019, respectively. The difference between theU.S. federal statutory tax rate of 21% and our effective tax rate for the three and six months endedApril 30, 2020 is primarily due to audit settlements in various jurisdictions and favorable tax rates associated with certain earnings from our operations in lower-tax jurisdictions throughout the world. For the three and six months endedApril 30, 2019 , our effective tax rate generally differs from theU.S. federal statutory rate of 21%, primarily due to favorable tax rates associated with certain earnings from our operations in lower-tax jurisdictions throughout the world. During the three and six months endedApril 30, 2020 , we recorded$59 million and$66 million respectively, of net tax benefits related to discrete items in the provision for taxes. These amounts included tax benefits of$42 million and$40 million related to audit settlements in various jurisdictions,$11 million and$17 million related to acquisition charges, and$7 million and$55 million related to restructuring charges for the three and six months endedApril 30, 2020 , respectively. These benefits were partially offset by uncertain tax position charges of$3 million and$51 million for the three and six months endedApril 30, 2020 , respectively. For the three and six months endedApril 30, 2020 , excess tax benefits associated with stock options, restricted stock units and performance-adjusted restricted stock units were immaterial. During the three and six months endedApril 30, 2019 , we recorded$40 million and$49 million , respectively, of net income tax benefits related to discrete items in the provision for taxes. These amounts included tax benefits of$42 million and$48 million related to one-time items for the three and six months endedApril 30, 2019 , respectively, and$14 million and$26 million related to restructuring charges for the three and six months endedApril 30, 2019 , respectively. These benefits were partially offset by uncertain tax position charges of$12 million and$32 million for the three and six months endedApril 30, 2019 , respectively and other charges of$4 million and$14 million for the three and six months endedApril 30, 2019 , respectively. The six months endedApril 30, 2019 also included a tax benefit of$21 million related to final tax reform adjustments. In addition to the discrete items mentioned above, we recorded$20 million of excess tax benefits associated with stock options, restricted stock units and performance-adjusted restricted stock units for the six months endedApril 30, 2019 . We record a valuation allowance to reduce deferred tax assets to the amount that we are more likely than not to realize. During the three and six months endedApril 30, 2020 , we determined that no material adjustments were required to our valuation allowances due to the COVID-19 pandemic and its resulting impact to our business. We will continue to monitor projections and their potential impact on our assessment regarding the realizability of our deferred tax asset balances. Segment Information A description of the products and services for each segment can be found in Note 2, "Segment Information" to the Consolidated Condensed Financial Statements in Item 1 of Part I of this report, which is incorporated herein by reference. Future changes to this organizational structure may result in changes to the segments disclosed. 51
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Table of ContentsHP INC. AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) Personal Systems Three months ended April 30 Six months ended April 30 2020 2019 % Change 2020 2019 % Change Dollars in millions Net revenue$ 8,313 $ 8,921 (6.8 )%$ 18,205 $ 18,578 (2.0 )% Earnings from operations$ 552 $ 385 43.4 %$ 1,214 $ 795 52.7 % Earnings from operations as a % of net revenue 6.6 % 4.3 % 6.7 % 4.3 %
The components of net revenue and the weighted net revenue change by business unit were as follows:
Three months ended April 30 Six months ended April 30 Weighted Net Weighted Net Net Revenue Revenue Net Revenue Revenue Change(1) Change(1) 2020 2019 2020 2019 Percentage Percentage Dollars in millions Points Dollars in millions Points
Notebooks$ 5,083 $ 5,099 (0.2 )$ 11,057 $ 11,018 0.2 Desktops 2,409 2,940 (5.9 ) 5,332 5,797 (2.5 ) Workstations 439 569 (1.5 ) 1,033 1,131 (0.5 ) Other 382 313 0.8 783 632 0.8 Total Personal Systems$ 8,313 $ 8,921 (6.8 )
(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. Three months endedApril 30, 2020 compared with three months endedApril 30, 2019 Personal Systems net revenue decreased 6.8% (decreased 5.6% on a constant currency basis) for the three months endedApril 30, 2020 as compared to the prior-year period. The net revenue decrease was primarily due to decline in Desktops and Workstations, and unfavorable foreign currency impacts, partially offset by Notebooks. The net revenue decrease was driven by a 5.0% decline in unit volume and 1.9% decline in average selling prices ("ASPs"), as compared to the prior-year period. The decrease in unit volume was driven by decline in Desktops and Workstations, partially offset by growth in Notebooks. Units shipments were impacted by demand dynamics as well as supply chain disruptions resulting from COVID-19. The decrease in ASPs was due to lower rate and unfavorable foreign currency impacts, partially offset by positive mix shifts. Consequently, Consumer revenue decreased 6.9% and Commercial revenue decreased 6.8% for the three months endedApril 30, 2020 as compared to the prior-year period. Net revenue decreased 18.1% in Desktops and 22.8% in Workstations and 0.3% in Notebooks as compared to the prior-year period. Personal Systems earnings from operations as a percentage of net revenue increased by 2.3 percentage points for the three months endedApril 30, 2020 as compared to the prior-year period, driven by increase in gross margin due to favorable commodity costs partially offset by lower ASPs and increase in logistics costs. Six months endedApril 30, 2020 compared with six months endedApril 30, 2019 Personal Systems net revenue decreased 2.0% (decreased 0.7% on a constant currency basis) for the six months endedApril 30, 2020 as compared to the prior-year period. The net revenue decrease was primarily due to decline in Desktops and unfavorable foreign currency impacts, partially offset by Notebooks. The net revenue decrease was driven by a 1.6% decrease in ASPs and unit volume decreased by 0.4%, as compared to the prior-year period. The decrease in ASPs was due to lower rate and unfavorable currency impacts partially offset by positive mix shifts. The decrease in unit volume was primarily due to decline in Desktops, partially offset by growth in Notebooks. Consumer revenue decreased 6.7% as compared to prior-year 52
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Table of ContentsHP INC. AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) period, driven by units decline in Desktops and lower ASPs. Commercial revenue increased 0.2% as compared to the prior-year period, driven by growth in Notebooks. Net revenue decreased 8.0% in Desktops and 8.7% in Workstations and increased 0.4% in Notebooks, as compared to the prior-year period. Personal Systems earnings from operations as a percentage of net revenue increased 2.4 percentage points for the six months endedApril 30, 2020 as compared to the prior-year period. The increase was primarily due to an increase in gross margin partially offset by an increase in operating expenses as a percentage of net revenue. The increase in gross margin was primarily due to favorable commodity costs, partially offset by lower ASPs. Operating expenses as a percentage of net revenue increased primarily due to increased investments in key growth initiatives. Printing Three months ended April 30 Six months ended April 30 2020 2019 % Change 2020 2019 % Change Dollars in millions Net revenue$ 4,158 $ 5,116 (18.7 )%$ 8,882 $ 10,172 (12.7 )% Earnings from operations$ 548 $ 839 (34.7 )%$ 1,302 $ 1,660 (21.6 )% Earnings from operations as 13.2 % 16.4 % 14.7 % 16.3 % a % of net revenue
The components of net revenue and the weighted net revenue change by business unit were as follows:
Three months ended April 30 Six months ended April 30 Net Revenue Weighted Net Net Revenue Weighted Net Revenue Revenue 2020 2019 Change(1) 2020 2019 Change(1) Percentage Percentage Dollars in millions Points Dollars in millions Points Supplies$ 2,841 $ 3,331 (9.6 )$ 5,882 $ 6,598 (7.0 ) Commercial Hardware 808 1,179 (7.2 ) 1,884 2,269 (3.8 ) Consumer Hardware 509 606 (1.9 ) 1,116 1,305 (1.9 ) Total Printing$ 4,158 $ 5,116 (18.7 )$ 8,882 $ 10,172 (12.7 ) (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. Three months endedApril 30, 2020 compared with three months endedApril 30, 2019 Printing net revenue decreased 18.7% (decreased 17.9% on a constant currency basis) for the three months endedApril 30, 2020 as compared to the prior-year period. The decline in net revenue was driven by declines in Supplies, Commercial Hardware and Consumer Hardware. Net revenue for Supplies decreased 14.7% as compared to the prior-year period, primarily driven by demand weakness as businesses have temporarily closed and office workers transitioned to working from home. Printer unit volume decreased 22.5% and ASPs decreased 14.0% as compared to the prior-year period. The decrease in printer unit volume was driven by unit decreases in both Commercial and Consumer Hardware. Printer ASPs decreased primarily due to lower rate in Commercial Hardware. Net revenue for Commercial Hardware decreased by 31.5% as compared to the prior-year period, primarily due to a 28.2% decrease in ASPs and a 24.7% decrease in printer unit volume. The decrease in ASPs was driven by lower rate. The printer unit volume decline was due to lower demand for Commercial Hardware as businesses have temporarily closed and office workers transitioned to working from home. Net revenue for Consumer Hardware decreased 16.0% as compared to the prior-year period, primarily due to a 22.1% decrease in printer unit volume partially offset by 7.8% increase in ASPs. The printer unit volume decrease was primarily due to supply chain disruptions due to COVID-19. The increase in ASPs was primarily driven by higher rate, positive mix shifts partially offset by unfavorable foreign currency impact. 53
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Table of ContentsHP INC. AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) Printing earnings from operations as a percentage of net revenue decreased by 3.2 percentage points for the three months endedApril 30, 2020 as compared to the prior-year period, primarily due to lower Hardware and Supplies net revenue. Six months endedApril 30, 2020 compared with six months endedApril 30, 2019 Printing net revenue decreased 12.7% (decreased 11.9% on a constant currency basis) for the six months endedApril 30, 2020 as compared to the prior-year period. The decline in net revenue was primarily driven by a decline in Supplies, Commercial Hardware, Consumer Hardware and unfavorable foreign currency impacts. Net revenue for Supplies decreased 10.9% as compared to the prior-year period, due to lower demand and COVID-19 related impacts. Printer unit volume decreased 16.1% and ASPs decreased 6.9% as compared to the prior-year period. The decrease in printer unit volume was primarily driven by unit decreases in both Commercial and Consumer Hardware. Printer ASPs decreased primarily due to lower rate and unfavorable foreign currency impact. Net revenue for Commercial Hardware decreased by 17.0% as compared to the prior-year period, primarily due to a 18.1% decrease in printer volume and a decrease in ASPs by 11.8%. The printer unit volume decline was due to lower demand in Commercial Hardware as businesses have temporarily closed and office workers transitioned to working from home. The decrease in ASPs was driven by lower rate, mix shifts and unfavorable foreign currency impacts. Net revenue for Consumer Hardware decreased 14.5% as compared to the prior-year period due to a decrease in printer unit volume by 15.8% partially offset by 1.4% increase in ASPs. The printer unit volume decrease was driven by supply chain disruptions due to COVID-19 and lower demand in the first quarter. The increase in ASPs was primarily due to higher rate, partially offset by unfavorable foreign currency impacts. Printing earnings from operations as a percentage of net revenue decreased by 1.6 percentage points for the six months endedApril 30, 2020 as compared to the prior-year period, primarily due to lower Hardware and Supplies net revenue. Corporate Investments The loss from operations in Corporate Investments for the three and six months endedApril 30, 2020 was primarily due to expenses associated with our incubation projects. LIQUIDITY AND CAPITAL RESOURCES We use cash generated by operations as our primary source of liquidity. The global disruptions caused by the COVID-19 pandemic have negatively impacted our cash flow from operations in the three months endedApril 30, 2020 . While the impacts from the COVID-19 pandemic are currently expected to be temporary, there is uncertainty around its extent and duration and our liquidity and working capital needs may be impacted in the future periods. We believe that current cash, cash flow from operating activities, new borrowings, available commercial paper authorization and the credit facilities will be sufficient to meetHP 's operating cash requirements, planned capital expenditures, interest and principal payments on all borrowings, pension and post-retirement funding requirements, authorized share repurchases and annual dividend payments. Additionally, in the event that suitable businesses are available for acquisition that offer good return opportunities, the Company may obtain all or a portion of the financing for these acquisitions through additional borrowings. 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 of Part II of this report as well as in Item 1A of Part I in our Annual Report on Form 10-K for the fiscal year endedOctober 31, 2019 and the market risks identified in the section entitled "Quantitative and Qualitative Disclosures about Market Risk" in Item 3 of Part I of this report, which are incorporated herein by reference. OnFebruary 22, 2020 ,HP 's Board of Directors increasedHP 's share repurchase authorization to$15.0 billion . Our cash and cash equivalents balances are held in numerous locations throughout the world. 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. 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 Tax Cuts and Jobs Act ("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 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. 54
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Table of ContentsHP INC. AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued)
Liquidity
Our key cash flow metrics were as follows:
Six months endedApril 30 2020 2019 In millions
Net cash provided by operating activities
(380 ) (22 ) Net cash used in financing activities (878 ) (3,311 )
Net decrease in cash and cash equivalents
Operating Activities Compared to the corresponding period in fiscal year 2019, net cash provided by operating activities decreased by$0.9 billion for the six months endedApril 30, 2020 , primarily due to back-end loaded manufacturing activities impacted by the COVID-19 pandemic. Key Working Capital Metrics Management utilizes current cash conversion cycle information to manage our working capital level. Our working capital metrics and cash conversion cycle impacts were as follows: As of As of April 30, October 31, April 30, October 31, 2020 2019 Change 2019 2018 Change Y/Y Change Days of sales outstanding in 37 35 2 35 30 5 2 accounts receivable ("DSO") Days of supply in inventory 57 41 16 43 43 - 14 ("DOS") Days of purchases outstanding in accounts (128 ) (107 ) (21 ) (110 ) (105 ) (5 ) (18 ) payable ("DPO") Cash conversion cycle (34 ) (31 ) (3 ) (32 ) (32 ) - (2 )April 30, 2020 as compared toApril 30, 2019 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 net revenue. The increase in DSO was primarily due to unfavorable revenue linearity due to the impact of COVID-19. 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 cost of revenue. The increase in DOS was primarily due to increased strategic buys in Personal Systems and lower cost of revenue primarily due to the impact of COVID-19. 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 cost of revenue. The increase in DPO was primarily due to increased strategic inventory purchases and lower cost of revenue primarily due to the impact of COVID-19. Investing Activities Compared to the corresponding period in fiscal year 2019, net cash used in investing activities increased by$0.4 billion for the six months endedApril 30, 2020 , primarily due to a decrease in sale of investments classified as available-for-sale investments within Other current assets of$0.7 billion , partially offset by lower net payments for acquisitions of$0.4 billion . 55
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Table of ContentsHP INC. AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) Financing Activities Compared to the corresponding period in fiscal year 2019, net cash used in financing activities decreased by$2.4 billion for the six months endedApril 30, 2020 , primarily due to an increase in commercial paper amount of$1.5 billion , lower payment of debt of$0.4 billion and lower share repurchases amount of$0.6 billion . Capital Resources Debt Levels 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. Depending on these factors, we may, from time to time, incur additional indebtedness or refinance existing indebtedness. Outstanding borrowings increased to$5.5 billion as ofApril 30, 2020 as compared to$5.1 billion as ofOctober 31, 2019 , bearing weighted-average interest rates of 4.3% and 4.6% forApril 30, 2020 andOctober 31, 2019 , respectively. Our weighted-average interest rate reflects the effective 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 8, "Financial Instruments", to the Consolidated Condensed Financial Statements in Item 1 of Part I of this report, which is incorporated herein by reference. As ofApril 30, 2020 , we maintain a senior unsecured committed revolving credit facility with aggregate lending commitments of$4.0 billion , which will be available untilMarch 30, 2023 and is primarily to support the issuance of commercial paper. OnMay 29, 2020 , we entered into a 364-day revolving credit facility providing for a senior unsecured revolving credit facility with aggregate lending commitments of$1.0 billion , which will be available untilMay 28, 2021 . Funds borrowed under these revolving credit facilities may be used for general corporate purposes. Available Borrowing Resources We had the following resources available to obtain short or long-term financing in addition to the commercial paper and revolving credit facilities discussed above: As of April 30, 2020 In millions 2019 Shelf Registration Statement Unspecified Uncommitted lines of credit $ 725 For more information on our borrowings, see Note 9, "Borrowings", to the Consolidated Condensed Financial Statements in Item 1 of Part I of this report, 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 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. CONTRACTUAL AND OTHER OBLIGATIONS Retirement and Post-Retirement Benefit Plan Contributions As ofApril 30, 2020 , we anticipate making contributions for the remainder of fiscal year 2020 of approximately$52 million to our non-U.S. pension plans,$21 million to cover benefit payments toU.S. non-qualified pension plan participants and$3 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 required by local government, funding and taxing authorities. For more information on our retirement and post-retirement benefit plans, see Note 4, "Retirement and Post-Retirement Benefit Plans", to the Consolidated Condensed Financial Statements in Item 1 of Part I of this report, which is incorporated herein by reference. 56
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Table of ContentsHP INC. AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) Cost Savings Plan As a result of our approved restructuring plans, including the Fiscal 2020 Plan, we expect to make future cash payments of approximately$0.7 billion . We expect to make future cash payments of$0.2 billion in fiscal year 2020 with remaining cash payments through fiscal year 2023. For more information on our restructuring activities that are part of our cost improvements, see Note 3, "Restructuring and Other Charges", to the Consolidated Condensed Financial Statements in Item 1 of Part I of this report, which is incorporated herein by reference. Uncertain Tax Positions As ofApril 30, 2020 , we had approximately$585 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 5, "Taxes on Earnings", to the Consolidated Condensed Financial Statements in Item 1 of Part I of this report, which is incorporated herein by reference. Payment of one-time transition taxes under the TCJA The TCJA made significant changes toU.S. tax law resulting in a one-time gross transition tax of$3.0 billion on accumulated foreign earnings. We expect the actual 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 attributes are used. The payments associated with this one-time transition tax will be paid over eight years which began 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 6, "Supplementary Financial Information", to the Consolidated Condensed Financial Statements in Item 1 of Part I of this report, which is incorporated herein by reference. 57
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