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 endedApril 30, 2021 to the prior-year 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. 42
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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 peripherals, software, support, and services. The Printing segment provides consumer and commercial printer hardware, supplies, solutions and services. Corporate Investments includeHP Labs and certain business incubation and investment projects. •In Personal Systems, our strategic focus is on profitable growth through innovation and 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, and accelerating in attractive adjacencies such as peripherals. We are driving innovation to enable productivity and collaboration as near-term demand continues for work from home and remote learning as the PC has become an essential tool to create, consume and collaborate. We believe that we are well positioned due to our competitive product lineup. •In Printing, our strategic focus is on offering contractual solutions to serve consumers, SMBs and large enterprises through our Instant Ink Services and Managed Print Services ("MPS") solutions, providing digital printing solutions for graphics segments and applications including commercial publishing, labels, packaging and textiles; as well as expanding our footprint in 3D printing across digital manufacturing and strategic applications. 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 that may adversely impact our product mix. 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 which may negatively impact our ability to meet demand, and a competitive environment. •In Printing, we face challenges from a competitive environment, including non-original supplies (which includes imitation, refill, or remanufactured alternatives) and in the short-term we face component constraints particularly in printer hardware which may negatively impact our ability to meet demand. 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 fromCanon . Any decision by either party to not renew our agreement withCanon or to limit or reduce the scope of the agreement could adversely affect our net revenue from LaserJet products; however, we have a long-standing business relationship withCanon and anticipate renewal of this agreement. Our business and financial performance also depend significantly on worldwide economic conditions. Accordingly, we face global macroeconomic challenges, particularly in light of the effects of the COVID-19 pandemic as discussed below, tariff-driven headwinds, uncertainty in the markets, volatility in exchange rates 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 included 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 43
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HP INC. AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) "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 We continue to closely monitor the COVID-19 pandemic, including its resurgence in key markets. We will continue promoting the health, safety, and well-being of workers and their loved ones. In response to the COVID-19 pandemic, we have established a cross-functional COVID-19 program management office that meets regularly to review the latest data from our business and site leaders, identify and address emerging risks, and formulate response to actions taken by governments and public policy organizations. We have put in place global policies and protocols based on guidance from healthcare experts and public health leaders, and we regularly review and update them to reflect current information and the requirements and recommendations of national, federal, state, and local authorities. We balance our company-wide approach by assessing risk and adjusting our response at the site level, taking into consideration each country's or area's COVID-19 case trends and related measures. The business impact of the COVID-19 pandemic has created new and different demand dynamics in the market. We have seen a higher mix of Consumer PCs and shift from Desktops to Notebooks including Chromebooks. Our Personal Systems business benefited from the remote working and learning environment, including growth in gaming. In Printing, we have seen strong demand for Consumer print, Supplies and solutions, and some improvement in Commercial print as the demand in the SMBs continues to improve. However, the recovery in Commercial print may be uneven given the varying pace of economic recovery and the resurgence of COVID-19 cases in some countries. Except inSoutheast Asia , manufacturing capacity has operated at normal levels, although we continue to see logistics challenges globally. The COVID-19 pandemic continues and we are seeing a resurgence of the pandemic in key markets likeIndia andSoutheast Asia . We have and may experience future disruptions in supply and manufacturing, including those inSoutheast Asia , and with our suppliers and outsourcing partners. The full extent of the impact of the COVID-19 pandemic on our business, results of operations, cash flows and financial position will depend on many factors that are not within our control, including, but not limited to: the severity, duration and scope of the pandemic, including the impact of coronavirus mutations and resurgences; the effectiveness of actions taken to contain or mitigate the pandemic and prevent or limit any reoccurrence; the development, availability and public acceptance of effective treatments or vaccines; governmental, business and individuals' actions that have been and continue to be taken in response 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. Unsolicited Exchange Offer in Fiscal Year 2020 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 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 certain 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 I in our Annual Report on Form 10-K for the fiscal year endedOctober 31, 2020 . 44
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HP INC. AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) 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 the disclosure of contingent liabilities. As ofApril 30, 2021 , the impact of COVID-19 on our business continued to unfold. As a result, many of our estimates and assumptions required increased judgment and may 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, 2021 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, 2020 , 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 excluding any hedging impact recognized in the current 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. 45
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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: Three months ended April 30 Six months ended April 30 2021 2020 2021 2020 % of Net % of Net % of Net % of Net Dollars Revenue Dollars Revenue Dollars Revenue Dollars Revenue Dollars in millions Net revenue$ 15,877 100.0 %$ 12,469 100.0 %$ 31,523 100.0 %$ 27,087 100.0 % Cost of revenue 12,437 78.3 % 9,976 80.0 % 24,759 78.5 % 21,722 80.2 % Gross profit 3,440 21.7 % 2,493 20.0 % 6,764 21.5 % 5,365 19.8 % Research and development 514 3.2 % 338 2.7 % 985 3.1 % 738 2.7 % Selling, general and administrative 1,483 9.4 % 1,216 9.8 % 2,859 9.1 % 2,506 9.3 % Restructuring and other charges 39 0.2 % 81 0.7 % 160 0.5 % 372 1.4 % Acquisition-related charges 10 0.1 % 3 - % 16 0.1 % 3 - % Amortization of intangible assets 32 0.2 % 29 0.2 % 61 0.2 % 55 0.2 % Earnings from operations 1,362 8.6 % 826 6.6 % 2,683 8.5 % 1,691 6.2 % Interest and other, net (26) (0.2) % - - % (51) (0.2) % 13 0.1 % Earnings before taxes 1,336 8.4 % 826 6.6 % 2,632 8.3 % 1,704 6.3 % Provision for taxes (108) (0.7) % (62) (0.5) % (336) (1.0) % (262) (1.0) % Net earnings$ 1,228 7.7 %$ 764 6.1 %$ 2,296 7.3 %$ 1,442 5.3 % Net Revenue For the three months endedApril 30, 2021 , net revenue increased 27.3% (increased 25.4% on a constant currency basis) as compared to the prior-year period.U.S. net revenue increased 30.0% to$5.5 billion , while net revenue from international operations increased 26.0% to$10.4 billion . The increase in net revenue was primarily driven by growth in Notebooks, Supplies, Consumer Printing and Commercial Printing, partially offset by decline in Desktops. The increase in net revenue was driven by strong demand from work from home and remote learning, and some improvement in Commercial Printing. Also, net revenue, for the three months endedApril 30, 2020 , was negatively impacted by supply chain disruptions and demand weakness resulting from COVID-19. For the six months endedApril 30, 2021 , total net revenue increased 16.4% (increased 15.3% on a constant currency basis) as compared to the prior-year period.U.S. net revenue increased 22.3% to$11.2 billion , while net revenue from international operations increased 13.4% to$20.3 billion . The increase in net revenue was primarily driven by growth in Notebooks, Supplies, and Consumer Printing, partially offset by decline in Desktops. The increase in net revenue was driven by strong demand from work from home and remote learning. Also, net revenue for the six months endedApril 30, 2020 , was negatively impacted by supply chain disruptions and demand weakness resulting from COVID-19. 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 and six endedApril 30, 2021 , gross margin increased by 1.7 percentage points, primarily driven by favorable pricing including lower promotions, and favorable foreign currency impacts, partially offset by higher costs. 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 52.0% and 33.5% for the three and six months endedApril 30, 2021 , respectively, primarily due to continuing investments in innovation and key growth initiatives and higher variable compensation. 46
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HP INC. AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) Selling, General and Administrative ("SG&A") SG&A expense increased 22.0% and 14.1% for the three and six months endedApril 30, 2021 , respectively, primarily due to higher variable compensation and go-to-market initiatives. Restructuring and Other Charges Restructuring and other charges for the three and six months endedApril 30, 2021 relate primarily to the Fiscal 2020 Plan. For more information, 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. Amortization of Intangible Assets Amortization of intangible assets for the three and six months endedApril 30, 2021 relates primarily to intangible assets resulting from prior acquisitions. Interest and Other, Net Interest and other, net expense increased$26 million and$64 million for the three and six months endedApril 30, 2021 , respectively, primarily due to lowerNet Periodic Post -retirement Benefit Credit and lower interest income on investment and deposits. Provision for taxes Our effective tax rate was 8.1% and 7.6% for the three months endedApril 30, 2021 and 2020, respectively, and 12.7% and 15.4% for the six months endedApril 30, 2021 and 2020, 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, 2021 was primarily due to tax effects of internal reorganization and by 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, 2020 , our effective tax rate differed from theU.S. federal statutory rate of 21% 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. During the three and six months endedApril 30, 2021 , we recorded$128 million and$129 million , respectively, of net income tax benefits related to discrete items in the provision for taxes. These amounts included tax benefits of$89 million related to tax effects of internal reorganization,$8 million and$36 million related to restructuring charges,$23 million and$11 million related to audit settlements in various jurisdictions, and$12 million and$5 million related to other tax benefits for the three and six months endedApril 30, 2021 , respectively. These benefits were partially offset by$4 million and$12 million of uncertain tax position charges for the three and six months endedApril 30, 2021 , respectively. For the three and six months endedApril 30, 2021 , 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, 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$51 million for the three and six months endedApril 30, 2020 , respectively. For the three and six months endedApril 30, 2020 , excess tax benefits associated with stock options, restricted stock units and performance-adjusted restricted stock units were immaterial. Segment Information A description of the products and services for each segment can be found in Note 2, "Segment Information" to the Consolidated Condensed Financial Statements in Item 1 of Part I of this report, which is incorporated herein by reference. Future changes to this organizational structure may result in changes to the segments disclosed. 47
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HP INC. AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued)
Personal Systems Three months ended April 30 Six months ended April 30 2021 2020 % Change 2021 2020 % Change Dollars in millions Net revenue$ 10,555 $ 8,313 27.0 %$ 21,158 $ 18,205 16.2 % Earnings from operations $ 710$ 552 28.6 %$ 1,468 $ 1,214 20.9 % Earnings from operations as a % of net 6.7 % 6.6 % 6.9 % 6.7 %
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 2021 2020 Revenue Change(1) 2021 2020 Revenue Change(1) Dollars in millions Percentage Points Dollars in millions Percentage Points Notebooks$ 7,489 $ 5,083 28.9$ 14,855 $ 11,057 20.9 Desktops 2,225 2,409 (2.2) 4,625 5,332 (3.9) Workstations 407 439 (0.4) 789 1,033 (1.3) Other 434 382 0.7 889 783 0.5 Total Personal Systems$ 10,555 $ 8,313 27.0$ 21,158 $ 18,205 16.2 (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 ended
Personal Systems net revenue increased 27.0% (increased 24.6% on a constant currency basis) for the three months endedApril 30, 2021 as compared to the prior-year period. The net revenue increase was primarily due to growth in Notebooks and favorable foreign currency impacts, partially offset by decline in Desktops. The net revenue increase was driven by a 43.7% growth in unit volume, partially offset by a 11.7% decline in average selling prices ("ASPs"). The increase in unit volume was driven by an increase in Notebooks due to strong demand driven by work from home, remote learning and gaming, partially offset by decline is Desktops. Also, for the three months endedApril 30, 2020 , unit shipments were negatively impacted by supply chain disruptions resulting from COVID-19. The decrease in ASPs was primarily due to mix shifts across Personal Systems, partially offset by favorable pricing including lower promotions, and favorable foreign currency impacts. Consumer PCs revenue increased 71.8%, driven by unit growth in Notebooks and Desktops and higher ASPs. Commercial PCs revenue increased 9.8% primarily driven by unit growth in Notebooks, partially offset by lower ASPs and decline in Desktops. Net revenue increased 47.3% in Notebooks and decreased 7.6% in Desktops and 7.3% in Workstations as compared to the prior-year period. Personal Systems earnings from operations as a percentage of net revenue increased by 0.1 percentage points. 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 pricing including lower promotions, and foreign currency impacts, partially offset by mix shifts. Operating expenses as a percentage of revenue increased by 0.5 percentage points as compared to prior-year period primarily due to higher variable compensation and R&D spend in innovation and key growth initiatives, partially offset by less variability in expenses as some expenses are fixed or semi-variable. 48
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HP INC. AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued)
Six months ended
Personal Systems net revenue increased 16.2% (increased 14.7% on a constant currency basis) for the six months endedApril 30, 2021 as compared to the prior-year period. The net revenue increase was primarily due to growth in Notebooks and favorable foreign currency impacts, partially offset by decline in Desktops and Workstations. The net revenue increase was driven by a 28.1% growth in unit volume, partially offset by a 9.2% decline in ASPs. The increase in unit volume was driven by an increase in Notebooks due to strong demand driven by work from home, remote learning and gaming, partially offset by decline is Desktops and Workstations. Also, for the six months endedApril 30, 2020 , unit shipments were negatively impacted by supply chain disruptions resulting from COVID-19. The decrease in ASPs was primarily due to mix shifts across Personal Systems, partially offset by favorable pricing including lower promotions, and favorable foreign currency impacts. Consumer PCs revenue increased 49.7% driven by unit growth in Notebooks and Desktops and higher ASPs. Commercial PCs revenue increased 1.5%, primarily driven by unit growth in Notebooks, partially offset by lower ASPs and decline in unit volumes of Desktops and Workstations. Net revenue increased 34.3% in Notebooks and decreased 13.3% in Desktops and 23.6% in Workstations as compared to the prior-year period. Personal Systems earnings from operations as a percentage of net revenue increased by 0.2 percentage points. 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 pricing including lower promotions, and foreign currency impacts, partially offset by mix shifts. Operating expenses as a percentage of revenue increased by 0.4 percentage points as compared to prior-year period primarily due to higher variable compensation and R&D spend in innovation and key growth initiatives, partially offset by less variability in expenses as some expenses are fixed or semi-variable. Printing Three months ended April 30 Six months ended April 30 2021 2020 % Change 2021 2020 % Change Dollars in millions Net revenue$ 5,323 $ 4,158 28.0 %$ 10,367 $ 8,882 16.7 % Earnings from operations $ 951$ 548 73.5 %$ 1,949 $ 1,302 49.7 %
Earnings from operations as a % of net 17.9 % 13.2 %
18.8 % 14.7 %
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 2021 2020 Revenue Change(1) 2021 2020 Revenue Change(1) Dollars in millions Percentage Points Dollars in millions Percentage Points Supplies$ 3,337 $ 2,841 11.9$ 6,483 $ 5,882 6.8 Commercial 1,085 808 6.7 2,042 1,884 1.8 Consumer 901 509 9.4 1,842 1,116 8.1 Total Printing$ 5,323 $ 4,158 28.0$ 10,367 $ 8,882 16.7 (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. 49
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HP INC. AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) Three months endedApril 30, 2021 compared with three months endedApril 30, 2020 Printing net revenue increased 28.0% (increased 26.9% on a constant currency basis) for the three months endedApril 30, 2021 . The increase in net revenue was driven by growth in Supplies, Consumer and Commercial. Net revenue for Supplies increased 17.5%, primarily driven by favorable pricing including lower promotions and improved demand. Also, for the three months endedApril 30, 2020 , Supplies net revenue was impacted by COVID-19. Printer unit volume increased 41.8% and ASPs increased 20.2%. The increase in printer unit volume was primarily driven by unit increase in both Consumer and Commercial. Printer ASPs increased primarily due to favorable pricing including lower promotions, partially offset by mix shifts. Net revenue for Commercial increased by 34.3%, primarily due to 33.3% increase in ASPs and a 21.8% increase in printer unit volume. The increase in ASPs was primarily driven by favorable mix shift and pricing including lower promotions. The printer unit volume increased due to improved demand as compared to prior-year period which was impacted by COVID-19. Net revenue for Consumer increased 77.0%, primarily due to a 45.1% increase in printer unit volume and 22.3% increase in ASPs. The printer unit volume increased due to strong demand from remote working and learning and supply chain disruption in prior-year period due to COVID-19. The increase in ASPs was primarily driven by favorable pricing including lower promotions, partially offset by mix shifts. Printing earnings from operations as a percentage of net revenue increased by 4.7 percentage points for the three months endedApril 30, 2021 , primarily due to increase in gross margin and lower operating expense as a percentage of revenue. The increase in gross margin is primarily due to favorable pricing including lower promotions, partially offset by unfavorable mix shifts. Operating expenses as a percentage of revenue decreased primarily due to less variability in expenses as some expenses are fixed or semi-variable, partially offset by higher variable compensation. Six months endedApril 30, 2021 compared with six months endedApril 30, 2020 Printing net revenue increased 16.7% (increased 16.4% on a constant currency basis) for the six months endedApril 30, 2021 . The increase in net revenue was driven by growth in Consumer, Supplies and Commercial. Net revenue for Supplies increased 10.2%, primarily driven by favorable pricing including lower promotions and improved demand. Also, for the six months endedApril 30, 2020 , Supplies net revenue was impacted by COVID-19. Printer unit volume increased 27.1% and ASPs increased 9.8%. The increase in printer unit volume was primarily driven by unit increase in both Consumer and Commercial. Printer ASPs increased primarily due to favorable pricing including lower promotions, partially offset by mix shifts. Net revenue for Commercial increased by 8.4%, primarily due to a 9.9% increase in printer unit volume and 4.2% increase in ASPs. The printer unit volume increased due to improved demand as compared to prior-year period which was impacted by COVID-19. The increase in ASPs was primarily driven by favorable pricing including lower promotions and mix shifts. Net revenue for Consumer increased 65.1%, primarily due to a 29.8% increase in printer unit volume and 27.5% increase in ASPs. The printer unit volume increased due to strong demand from remote working and learning and supply chain disruption in prior-year period due to COVID-19. The increase in ASPs was primarily driven by favorable pricing including lower promotions. Printing earnings from operations as a percentage of net revenue increased by 4.1 percentage points for the six months endedApril 30, 2021 , primarily due to increase in gross margin and lower operating expense as a percentage of revenue. The increase in gross margin is primarily due to favorable pricing including lower promotions, partially offset by mix shifts. Operating expenses as a percentage of revenue decreased primarily due to less variability in expenses as some expenses are fixed or semi-variable, partially offset by higher variable compensation. Corporate Investments The loss from operations in Corporate Investments for the three and six months endedApril 30, 2021 , was primarily due to expenses associated with our incubation projects and investments in digital enablement. 50
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Table of ContentsHP INC. AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) LIQUIDITY AND CAPITAL RESOURCES We use cash generated by operations as our primary source of liquidity. 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 for the foreseeable future. Additionally, if suitable acquisition opportunities arise, the Company may obtain all or a portion of the required financing 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 I in our Annual Report on Form 10-K for the fiscal year endedOctober 31, 2020 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. During the three months endedApril 30, 2021 ,HP completed two acquisitions with a combined purchase price of$170 million , net of cash acquired, of which$117 million was recorded as goodwill and$78 million as intangible assets related to these acquisitions. OnJune 1, 2021 ,HP made a cash payment of$411 million in connection with the acquisition of HyperX, the gaming division ofKingston Technology Company . The cash payment is subject to customary closing and other adjustments and will be finalized in future periods. 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. Liquidity Our key cash flow metrics were as follows: Six months ended April 30 2021 2020 In millions Net cash provided by operating activities $ 2,468$ 775 Net cash used in investing activities (315)
(380)
Net cash used in financing activities (3,593)
(878)
Net decrease in cash and cash equivalents$ (1,440)
Operating Activities Compared to the corresponding period in fiscal year 2020, net cash provided by operating activities increased by$1.7 billion for the six months endedApril 30, 2021 , primarily due to higher earnings from operations and favorable working capital changes. 51
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HP INC. AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) 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, 2021 October 31, 2020 Change April 30, 2020 October 31, 2019 Change Y/Y Change Days of sales outstanding in 28 32 (4) 37 35 2 (9) accounts receivable ("DSO") Days of supply in inventory ("DOS") 54 43 11 57 41 16 (3) Days of purchases outstanding in (110) (105) (5) (128) (107) (21) 18 accounts payable ("DPO") Cash conversion cycle (28) (30) 2 (34) (31) (3) 6April 30, 2021 as compared toApril 30, 2020 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 credit losses, by a 90-day average net revenue. The decrease in DSO was primarily due to favorable revenue linearity and strong collections. DOS measures the average number of days from procurement to sale of our product. DOS is calculated by dividing ending inventory by a 90-day average cost of revenue. The decrease in DOS was primarily due to higher cost of revenue driven by strong demand, as compared to prior-year period, partially offset by strategic buys in Personal Systems. 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 decrease in DPO was primarily due to working capital management activities. Investing Activities Compared to the corresponding period in fiscal year 2020, net cash used in investing activities decreased by$0.1 billion for the six months endedApril 30, 2021 , primarily due to decrease in investments of$0.3 billion , partially offset by collateral posted for derivative instruments of$0.2 billion and higher net payments for acquisitions of$0.1 billion . Financing Activities Compared to the corresponding period in fiscal year 2020, net cash used in financing activities increased by$2.8 billion for the six months endedApril 30, 2021 , primarily due to higher share repurchases of$2.2 billion and lower commercial paper activity of$0.6 billion . Share Repurchases and Dividends During the six months endedApril 30, 2021 ,HP returned$3.5 billion to the shareholders in the form of share repurchases of$3.0 billion and cash dividends of$0.5 billion . As ofApril 30, 2021 ,HP had approximately$9.7 billion remaining under the share repurchase authorizations approved byHP 's Board of Directors. For more information on our share repurchases, see Note 10, "Stockholders' Deficit", to the Consolidated Condensed Financial Statements in Item 1 of Part I of this report, which is incorporated herein by reference. 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 decreased to$6.1 billion as ofApril 30, 2021 as compared to$6.2 billion as ofOctober 31, 2020 , bearing weighted-average interest rates of 3.9% forApril 30, 2021 andOctober 31, 2020 . 52
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HP INC. AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) Our weighted-average interest rate reflects the effective 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, 2021 , we maintained a 5-year senior unsecured committed revolving credit facility and a 364-day revolving credit facility with aggregate lending commitments of$4.0 billion and$1.0 billion , respectively. Commitments under the$4.0 billion and$1.0 billion revolving credit facilities would have been available untilMarch 30, 2023 , andMay 28, 2021 , respectively. OnMay 26, 2021 , we entered into a new$5.0 billion 5-year sustainability-linked senior unsecured committed revolving credit facility (the 'New Revolving Facility"). Commitment fees, interest rates and other terms of borrowing under the New Revolving Facility vary based onHP 's external credit ratings and certain sustainability metrics. Funds borrowed under the New Revolving Facility may be used for general corporate purposes. Commitments under the$4.0 billion revolving credit facility and the$1.0 billion revolving credit facility were terminated concurrently with the execution of the New Revolving Facility. Available Borrowing Resources As ofApril 30, 2021 , we had available borrowing resources of$634 million from uncommitted lines of credit in addition to the senior unsecured committed revolving credit facilities. InDecember 2020 , we filed a post-effective amendment to convert the shelf registration statement we initially filed inDecember 2019 (the "2019 Shelf Registration Statement") to a non-automatic shelf registration statement because we are no longer a "well-known seasoned issuer". The 2019 Shelf Registration Statement was declared effective by theSEC onFebruary 25, 2021 and enables us to offer for sale, from time to time, in one or more offerings,$5.0 billion , in the aggregate, of debt securities, common stock, preferred stock, depository shares and warrants. 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 Unconditional Purchase Obligation Purchase obligations include agreements to purchase goods or services that are enforceable and legally binding onHP and that specify all significant terms, including fixed or minimum quantities to be purchased; fixed, minimum or variable price provisions; and the approximate timing of the transaction. These unconditional purchase obligations are primarily related to inventory and service support. Unconditional purchase obligations exclude agreements that are cancellable without penalty. As ofApril 30, 2021 , the Company had outstanding purchase commitments of$6.5 billion . The majority of these commitments are due within five years, see Note 14, "Commitments", to the Consolidated Condensed Financial Statements in Item 1 of Part I of this report, which is incorporated herein by reference. Retirement and Post-Retirement Benefit Plan Contributions As ofApril 30, 2021 , we anticipate making contributions for the remainder of fiscal year 2021 of approximately$34 million to our non-U.S. pension plans,$19 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. Cost Savings Plan As a result of our approved restructuring plans, we expect to make future cash payments of approximately$0.4 billion . We expect to make future cash payments of$0.1 billion in fiscal year 2021 with remaining cash payments through fiscal year 53
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HP INC. AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) 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, 2021 , we had approximately$553 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. 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. 54
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