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Part I. Financial Information


 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________________________
FORM 10-Q
(Mark One)
 
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: January 31, 2019
Or
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from            to            
Commission file number 1-4423
_________________________________________
HP INC.
(Exact name of registrant as specified in its charter)
Delaware
 
94-1081436
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. employer
identification no.)
1501 Page Mill Road, Palo Alto, California
 
94304
(Address of principal executive offices)
 
(Zip code)
(650) 857-1501
(Registrant’s telephone number, including area code)
________________________________________

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 (the “Exchange Act”) during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ý No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ý Accelerated filer o
Non-accelerated filer  o Smaller reporting company o
(Do not check if a smaller reporting company) Emerging growth company o
                 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act). Yes o No ý
The number of shares of HP common stock outstanding as of January 31, 2019 was 1,539,371,597 shares.
 



HP INC. AND SUBSIDIARIES
Form 10-Q
For the Quarterly Period ended January 31, 2019
Table of Contents
 
 
Page
 
 
 
 
 
In this report on Form 10-Q, for all periods presented, “we”, “us”, “our”, “company”, “HP” and “HP Inc.” refer to HP Inc. (formerly Hewlett-Packard Company) and its consolidated subsidiaries.


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Table of Contents

Forward-Looking Statements
This Quarterly Report on Form 10-Q, including “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 2 of Part I, contains forward-looking statements that involve risks, uncertainties and assumptions. If the risks or uncertainties ever materialize or the assumptions prove incorrect, the results of HP Inc. and its consolidated subsidiaries (“HP”) may differ materially from those expressed or implied by such forward-looking statements and assumptions. All statements other than statements of historical fact are statements that could be deemed forward-looking statements, including, but not limited to, any projections of net revenue, margins, expenses, effective tax rates, net earnings, net earnings per share, cash flows, benefit plan funding, deferred taxes, share repurchases, foreign currency exchange rates or other financial items; any projections of the amount, timing or impact of cost savings or restructuring and other charges; any statements of the plans, strategies and objectives of management for future operations, including, but not limited to, our sustainability goals, the execution of restructuring plans and any resulting cost savings, net revenue or profitability improvements; any statements concerning the expected development, performance, market share or competitive performance relating to products or services; any statements regarding current or future macroeconomic trends or events and the impact of those trends and events on HP and its financial performance; any statements regarding pending investigations, claims or disputes; any statements of expectation or belief, including with respect to the timing and expected benefits of acquisitions and other business combination and investment transactions; and any statements of assumptions underlying any of the foregoing. Risks, uncertainties and assumptions include the need to address the many challenges facing HP’s businesses; the competitive pressures faced by HP’s businesses; risks associated with executing HP’s strategy; the impact of macroeconomic and geopolitical trends and events; the need to manage third-party suppliers and the distribution of HP’s products and the delivery of HP’s services effectively; the protection of HP’s intellectual property assets, including intellectual property licensed from third parties; risks associated with HP’s international operations; the development and transition of new products and services and the enhancement of existing products and services to meet customer needs and respond to emerging technological trends; the execution and performance of contracts by HP and its suppliers, customers, clients and partners; the hiring and retention of key employees; integration and other risks associated with business combination and investment transactions; the results of the restructuring plans, including estimates and assumptions related to the cost (including any possible disruption of HP’s business) and the anticipated benefits of the restructuring plans; the impact of changes in tax laws, including uncertainties related to expected regulations of the U.S. Department of the Treasury implementing the Tax Cuts and Jobs Act of 2017 on HP’s tax obligations and effective tax rate; the resolution of pending investigations, claims and disputes; and other risks that are described herein, including, but not limited to, those discussed in this Quarterly Report on Form 10-Q, and in particular, the risks discussed in Part I, Item 1A “Risk Factors” in our Annual Report on Form 10-K, for the fiscal year ended October 31, 2018, and that are otherwise described or updated from time to time in HP’s other filings with the Securities and Exchange Commission (“the SEC”). HP assumes no obligation and does not intend to update these forward-looking statements.


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Table of Contents

Part I. Financial Information

ITEM 1. Financial Statements and Supplementary Data.
Index
 
Page


4
Table of Contents

HP INC. AND SUBSIDIARIES
Consolidated Condensed Statements of Earnings
(Unaudited)
 
Three months ended January 31
 
2019
 
2018
 
In millions, except per share amounts
Net revenue
$
14,710

 
$
14,517

Costs and expenses:
 
 
 

Cost of revenue
12,098

 
11,935

Research and development
344

 
347

Selling, general and administrative
1,248

 
1,229

Restructuring and other charges
55

 
31

Acquisition-related charges
10

 
42

Amortization of intangible assets
29

 
20

Total costs and expenses
13,784

 
13,604

Earnings from operations
926

 
913
Interest and other, net
(26
)
 
(8
)
Earnings before taxes
900

 
905
Provision for taxes
(97
)
 
1,033

Net earnings
$
803

 
$
1,938

 
 
 
 
Net earnings per share:
 

 
 

Basic
$
0.52

 
$
1.17

Diluted
$
0.51

 
$
1.16

 
 
 
 
Cash dividends declared per share
$
0.32

 
$
0.28

 
 
 
 
Weighted-average shares used to compute net earnings per share:
 

 
 

Basic
1,556

 
1,650

Diluted
1,567

 
1,669

The accompanying notes are an integral part of these Consolidated Condensed Financial Statements.


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HP INC. AND SUBSIDIARIES
Consolidated Condensed Statements of Comprehensive Income
(Unaudited)
 
Three months ended January 31
 
2019
 
2018
 
In millions
Net earnings
$
803

 
$
1,938

Other comprehensive loss before taxes:
 

 
 

Change in unrealized components of available-for-sale debt securities:
 

 
 

Unrealized losses arising during the period
—

 
(3
)
Gains reclassified into earnings
—


(5
)
 
—


(8
)
Change in unrealized components of cash flow hedges:
 

 
 

Unrealized losses arising during the period
(107
)
 
(551
)
(Gains) losses reclassified into earnings
(179
)
 
70


(286
)
 
(481
)
Change in unrealized components of defined benefit plans:
 

 
 

Amortization of actuarial loss and prior service benefit
11

 
12

Settlements and other
(2
)
 
1


9

 
13

Change in cumulative translation adjustment
(5
)

—

Other comprehensive loss before taxes
(282
)
 
(476
)
Benefit from taxes
40

 
65

Other comprehensive loss, net of taxes
(242
)
 
(411
)
Comprehensive income
$
561

 
$
1,527

The accompanying notes are an integral part of these Consolidated Condensed Financial Statements.

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HP INC. AND SUBSIDIARIES
Consolidated Condensed Balance Sheets
(Unaudited)
 
As of
 
January 31, 2019
 
October 31, 2018
 
In millions, except par value 
ASSETS
 

 
 

Current assets:
 

 
 

Cash and cash equivalents
$
3,367

 
$
5,166

Accounts receivable, net
5,113

 
5,113

Inventory
5,649

 
6,062

Other current assets
4,807

 
5,046

Total current assets
18,936

 
21,387

Property, plant and equipment, net
2,312

 
2,198

Goodwill
6,343

 
5,968

Other non-current assets
4,899

 
5,069

Total assets
$
32,490

 
$
34,622

LIABILITIES AND STOCKHOLDERS’ DEFICIT
 

 
 

Current liabilities:
 

 
 

Notes payable and short-term borrowings
$
297

 
$
1,463

Accounts payable
14,572

 
14,816

Employee compensation and benefits
665

 
1,136

Taxes on earnings
268

 
340

Other accrued liabilities
8,397

 
7,376

Total current liabilities
24,199

 
25,131

Long-term debt
4,706

 
4,524

Other non-current liabilities
5,422

 
5,606

Stockholders’ deficit:
 

 
 

Preferred stock, $0.01 par value (300 shares authorized; none issued)
—

 
—

Common stock, $0.01 par value (9,600 shares authorized; 1,539 and 1,560 shares issued and outstanding at January 31, 2019 and October 31, 2018, respectively)          
15

 
16

Additional paid-in capital
666

 
663

Accumulated deficit
(1,431
)
 
(473
)
Accumulated other comprehensive loss
(1,087
)
 
(845
)
Total stockholders’ deficit
(1,837
)
 
(639
)
Total liabilities and stockholders’ deficit
$
32,490

 
$
34,622

The accompanying notes are an integral part of these Consolidated Condensed Financial Statements.

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HP INC. AND SUBSIDIARIES
Consolidated Condensed Statements of Cash Flows
(Unaudited)
 
Three months ended January 31
 
2019
 
2018
 
In millions
Cash flows from operating activities:
 

 
 

Net earnings
$
803

 
$
1,938

Adjustments to reconcile net earnings to net cash provided by operating activities:
 

 
 

Depreciation and amortization
168

 
129

Stock-based compensation expense
107

 
85

Restructuring and other charges
55

 
31

Deferred taxes on earnings
103

 
(3,713
)
Other, net
(5
)
 
13

Changes in operating assets and liabilities, net of acquisitions:
 

 
 

Accounts receivable
211

 
272

Inventory
191

 
364

Accounts payable
(184
)
 
(478
)
Taxes on earnings
11

 
2,463

Restructuring and other
(46
)
 
(133
)
Other assets and liabilities
(552
)
 
25

Net cash provided by operating activities
862

 
996

Cash flows from investing activities:
 

 
 

Investment in property, plant and equipment
(189
)
 
(129
)
Proceeds from sale of property, plant and equipment
—

 
110

Purchases of available-for-sale securities and other investments
(69
)
 
(268
)
Maturities and sales of available-for-sale securities and other investments
344

 
139

Collateral posted for derivative instruments
(30
)
 
(608
)
Collateral returned for derivative instruments
30

 
53

Payment made in connection with business acquisitions, net of cash acquired
(404
)
 
(1,020
)
Net cash used in investing activities
(318
)
 
(1,723
)
Cash flows from financing activities:
 

 
 

Payments of short-term borrowings with original maturities less than 90 days, net
(855
)
 
(106
)
Proceeds from short-term borrowings with original maturities greater than 90 days
—

 
200

Proceeds from debt, net of issuance costs
40

 
—

Payment of short-term borrowings with original maturities greater than 90 days
—

 
(118
)
Payment of debt
(476
)
 
(41
)
Net payments related to stock-based award activities
(83
)
 
(38
)
Repurchase of common stock
(720
)
 
(462
)
Cash dividends paid
(249
)
 
(230
)
Net cash used in financing activities
(2,343
)
 
(795
)
Decrease in cash and cash equivalents
(1,799
)
 
(1,522
)
Cash and cash equivalents at beginning of period
5,166

 
6,997

Cash and cash equivalents at end of period
$
3,367

 
$
5,475

Supplemental schedule of non-cash activities:
 

 
 

Purchase of assets under capital leases
$
75

 
$
90

The accompanying notes are an integral part of these Consolidated Condensed Financial Statements.

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HP INC. AND SUBSIDIARIES
Consolidated Condensed Statements of Stockholders’ Deficit
(Unaudited)
 
Common Stock
 
Additional
Paid-in Capital
 
 
 
Accumulated
Other
Comprehensive Loss
 
 Total Stockholders' Deficit
 
Number of Shares
 
Par Value
 
 
Accumulated Deficit
 
 
 
In millions, except number of shares in thousands
Balance October 31, 2017
1,649,580


$
16


$
380


$
(2,386
)

$
(1,418
)

$
(3,408
)
Net earnings









1,938





1,938

Other comprehensive loss, net of taxes












(411
)

(411
)
Comprehensive income















1,527

Issuance of common stock in connection with employee stock plans and other
12,154





(43
)







(43
)
Repurchases of common stock
(20,360
)




(5
)

(439
)




(444
)
Cash dividends declared









(459
)




(459
)
Stock-based compensation expense






85








85

Balance January 31, 2018
1,641,374


$
16


$
417


$
(1,346
)

$
(1,829
)

$
(2,742
)
 

















Balance October 31, 2018
$
1,560,270


$
16


$
663


$
(473
)

$
(845
)

$
(639
)
Net earnings









803





803

Other comprehensive loss, net of taxes












(242
)

(242
)
Comprehensive income















561

Issuance of common stock in connection with employee stock plans and other
11,379





(91
)







(91
)
Repurchases of common stock
(32,277
)

(1
)

(13
)

(702
)




(716
)
Cash dividends declared









(496
)




(496
)
Stock-based compensation expense






107








107

Adjustment for adoption of accounting standards (Note 1)









(563
)




(563
)
Balance January 31, 2019
1,539,372


$
15


$
666


$
(1,431
)

$
(1,087
)

$
(1,837
)
The accompanying notes are an integral part of these Consolidated Condensed Financial Statements.


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HP INC. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements
(Unaudited)
Note 1: Basis of Presentation
Basis of Presentation
The accompanying Consolidated Condensed Financial Statements of HP and its wholly-owned subsidiaries are prepared in conformity with United States (“U.S.”) generally accepted accounting principles (“GAAP”). The interim financial information is unaudited but reflects all normal adjustments that are necessary to provide a fair statement of results for the interim periods presented. This interim information should be read in conjunction with the Consolidated Financial Statements for the fiscal year ended October 31, 2018 in the Annual Report on Form 10-K, filed on December 13, 2018. The Consolidated Condensed Balance Sheet for October 31, 2018 was derived from audited financial statements.
Principles of Consolidation
The Consolidated Condensed Financial Statements include the accounts of HP and its subsidiaries and affiliates in which HP has a controlling financial interest or is the primary beneficiary. All intercompany balances and transactions have been eliminated.
Reclassifications
Effective at the beginning of its first quarter of fiscal year 2019, HP implemented an organizational change to align its business unit financial reporting more closely with its current business structure. HP reflected this change to its business unit information in prior reporting periods on an as-if basis. The reporting change had no impact to previously reported segment net revenue, consolidated net revenue, earnings from operations, net earnings or net earnings per share (“EPS”).
HP has reclassified certain prior-year amounts to conform to the current-year presentation as a result of the adoption of Accounting Standards Update (“ASU”) 2017-07, “Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Post-retirement Benefit Cost”. This adoption had no impact on previously reported consolidated net revenue, net earnings or net EPS.
For detailed discussion, see Note 2, “Segment Information”.
Use of Estimates
The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in HP’s Consolidated Condensed Financial Statements and accompanying notes. Actual results could differ materially from those estimates. 
Separation Transaction
On November 1, 2015, Hewlett-Packard Company completed the separation of Hewlett Packard Enterprise Company (“Hewlett Packard Enterprise”), Hewlett-Packard Company’s former enterprise technology infrastructure, software, services and financing businesses (the “Separation”). In connection with the Separation, HP entered into a separation and distribution agreement, a tax matters agreement, an employee matters agreement and various other agreements with Hewlett Packard Enterprise that provide a framework for the relationships between the parties. For more information on the impacts of these agreements, see Note 6, “Supplementary Financial Information”, Note 12, “Litigation and Contingencies” and Note 13, “Guarantees, Indemnifications and Warranties”.
Recently Adopted Accounting Pronouncements
In March 2017, the Financial Accounting Standards Board (“FASB”) issued guidance, which addresses the improvement of the presentation of net periodic pension and net periodic post-retirement benefit cost. The guidance requires entities to present the service cost component of net periodic benefit cost in the same income statement line item as other compensation costs arising from services rendered during the period. Additionally, the guidance requires that companies present the other components of the net periodic benefit cost separately from the line item that includes service cost and any other subtotal of income from operations. The amendments in this guidance are to be applied retrospectively for presentation in the Consolidated Condensed Statements of Earnings. A practical expedient allows companies to use the amount disclosed in its pension and other post-retirement plan note for the prior comparative periods as the estimation basis for applying the retrospective presentation requirements. HP adopted this guidance in the first quarter of fiscal year 2019 and elected to use the practical expedient. The adoption of this guidance has no impact on net earnings. The reclassification resulted in an increase in Selling, general and administrative expenses and a reduction in interest and other, net of $60 million for the three months ended January 31, 2018.
In November 2016, the FASB issued guidance, which addresses the presentation of restricted cash in the statement of cash flows.  The guidance requires entities to present the changes in the total of cash, cash equivalents, restricted cash, and restricted cash equivalents in the statement of cash flows. As a result, entities will no longer present transfers between cash and cash equivalents and restricted cash and restricted cash equivalents in the statement of cash flows. HP adopted this guidance in the

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HP INC. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements (Continued)
(Unaudited)
Note 1: Basis of Presentation (Continued)

first quarter of fiscal year 2019. The implementation of this guidance did not have any impact on its Consolidated Condensed Financial Statements.
In October 2016, the FASB issued guidance, which amends the existing accounting for Intra-Entity Transfers of Assets Other Than Inventory. The guidance (Topic 740) requires an entity to recognize the income tax consequences of intra-entity transfers, other than inventory, when the transfer occurs. It also requires modified retrospective transition with a cumulative catch-up adjustment to opening retained earnings in the period of adoption. HP adopted the guidance in the first quarter of fiscal year 2019. The implementation of this guidance resulted in $353 million of net reduction to its prepaid tax asset adjusted through accumulated deficit.
In August 2016, the FASB issued guidance, which amends the existing accounting standards for the classification of certain cash receipts and cash payments on the statement of cash flows. HP adopted this guidance in the first quarter of fiscal year 2019. The implementation of this guidance did not have any impact on its Consolidated Condensed Financial Statements.
In January 2016, the FASB issued guidance, which amends the existing accounting standards for the recognition and measurement of financial assets and financial liabilities. The guidance (Topic 825-10) primarily addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. The amendments should be applied by means of a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption, with other amendments related specifically to equity securities without readily determinable fair values applied prospectively. HP adopted this guidance in the first quarter of fiscal year 2019. The implementation of this guidance did not have a material impact on its Consolidated Condensed Financial Statements.
In May 2014, the FASB issued guidance, which amends the existing accounting standards for revenue recognition. The amendments (Topic 606) are based on the principle that revenue should be recognized to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. HP adopted the new revenue standard in the first quarter of fiscal year 2019 using the modified retrospective method applied to contracts that were not completed as of November 1, 2018. HP has recognized the net impact of adoption as an increase to accumulated deficit by $212 million, net of tax.
The primary changes that impact the Consolidated Condensed Financial Statements are as below:
Variable consideration - HP estimates the transaction price for elements of consideration which are variable in nature. Certain distributor programs and incentive offerings which were recorded at the date the sales incentives were offered, will now be recorded at the time of revenue recognition based on estimates.
Costs to obtain a contract - The incremental costs to obtain a contract are primarily comprised of eligible sales commissions which were previously expensed as incurred. HP will capitalize the eligible sales commission costs for contracts with terms of more than one year and will amortize these costs over the expected period of the benefit.
The adoption has led to certain balance sheet reclassifications pertaining to return asset and liability and repurchase reserves which impacts accounts receivable, net, inventory, other current assets and other accrued liabilities balances.
Revenue Recognition
General
HP recognizes revenues at a point in time or over time depicting the transfer of promised goods or services to customers in an amount that reflects the consideration to which HP expects to be entitled in exchange for those goods or services. HP follows the five-step model for revenue recognition as summarized below:
1.
Identify the contract with a customer - A contract with customer exists when (i) it is approved and signed by all parties, (ii) each party’s rights and obligations can be identified, (iii) payment terms are defined, (iv) it has commercial substance and (v) the customer has the ability and intent to pay. HP evaluates customers’ ability to pay based on various factors like historical payment experience, financial metrics and customer credit scores.
2.
Identify the performance obligations in the contract - HP evaluates each performance obligation in an arrangement to determine whether it represents a separate unit of accounting, such as hardware and/or service. A performance obligation constitutes a separate unit of accounting when the customer can benefit from the goods or services either on its own or together with other resources that are readily available to the customer and the performance obligation is distinct within the context of the contract.
3.
Determine the transaction price - Transaction price is the amount of consideration to which HP expects to be entitled in exchange for transferring goods or services to the customer. If the transaction price includes a variable amount, HP estimates the amount it expects to be entitled to using either the expected value or most likely amount method.

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HP INC. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements (Continued)
(Unaudited)
Note 1: Basis of Presentation (Continued)

HP reduces the transaction price at the time of revenue recognition for customer and distributor programs and incentive offerings, rebates, promotions, other volume-based incentives and expected returns. HP uses estimates to determine the expected variable consideration for such programs based on factors like historical experience, expected consumer behavior and market conditions.
HP has elected the practical expedient of not accounting for significant financing components if the period between revenue recognition and when the customer pays for the product or service is one year or less.
4.
Allocate the transaction price to performance obligations in the contract - When a sales arrangement contains multiple performance obligations, such as hardware and/or services, HP allocates revenue to each performance obligation in proportion to their selling price. The selling price for each performance obligation is based on its standalone selling price (“SSP”). HP establishes SSP using the price charged for a performance obligation when sold separately (“observable price”) and, in some instances, using the price established by management having the relevant authority. When observable price is not available, HP establishes SSP based on management judgment considering internal factors such as margin objectives, pricing practices and controls, customer segment pricing strategies and the product life-cycle. Consideration is also given to market conditions such as competitor pricing strategies and technology industry life cycles.
5.
Recognize revenue when (or as) the performance obligation is satisfied - Revenue is recognized when, or as, a performance obligation is satisfied by transferring control of a promised good or service to a customer. HP generally invoices the customer upon delivery of the goods or services and the payments are due as per contract terms. For fixed price support or maintenance contracts that are in the nature of stand-ready obligations, payments are generally received in advance from customers and revenue is recognized on a straight-line basis over time for the duration of the contract.
HP reports revenue net of any taxes collected from customers and remitted to government authorities, and the collected taxes are recorded as other accrued liabilities until remitted to the relevant government authority. HP includes costs related to shipping and handling in cost of revenue.
HP records revenue on a gross basis when HP is a principal in the transaction and on a net basis when HP is acting as an agent between the customer and the vendor. HP considers several factors to determine whether it is acting as a principal or an agent, most notably whether HP is the primary obligor to the customer, has established its own pricing and has inventory and credit risks.
Hardware
HP transfers control of the products to the customer at the time the product is delivered to the customer and recognizes revenue accordingly, unless customer acceptance is uncertain or significant obligations to the customer remain unfulfilled.
Services
HP recognizes revenue from fixed-price support, maintenance and other service contracts over time depicting the pattern of service delivery and recognizes the costs associated with these contracts as incurred.
Contract Assets and Liabilities
Contract assets are rights to consideration in exchange for goods or services that HP has transferred to a customer when such right is conditional on something other than the passage of time. Such contract assets are insignificant to HP’s Consolidated Condensed Financial Statements.
Contract liabilities are recorded as deferred revenues when amounts invoiced to customers are more than the revenues recognized or when payments are received in advance for fixed price support or maintenance contracts. The short-term and long-term deferred revenues are reported within the other accrued liabilities and other non-current liabilities respectively.
Cost to obtain a contract and fulfillment cost
Incremental direct costs of obtaining a contract primarily consist of sales commissions. HP has elected the practical expedient to expense as incurred the costs to obtain a contract with a benefit period equal to or less than one year. For contracts with a period of benefit greater than one year, HP capitalizes incremental costs of obtaining a contract with a customer and amortizes these costs over their expected period of benefit provided such costs are recoverable.
Fulfillment costs consists of set-up and transition costs related to other service contracts. These costs generate or enhance resources of HP that will be used in satisfying the performance obligation in the future and are capitalized and amortized over the expected period of the benefit, provided such costs are recoverable.
See Note 6, “Supplementary Financial Information” for details on cost to obtain a contract and fulfillment cost, contract liabilities and value of remaining performance obligations.


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Table of Contents
HP INC. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements (Continued)
(Unaudited)
Note 1: Basis of Presentation (Continued)

Transition disclosure
In accordance with the modified retrospective method transition requirements, HP has presented the financial statement line items impacted and adjusted to compare to presentation under the prior GAAP for the three months ended January 31, 2019.
 
As of January 31, 2019

In millions
CONSOLIDATED CONDENSED BALANCE SHEET ITEMS
As Reported

Effect of Adoption

Balances Without Adoption of Topic 606
ASSETS








Accounts receivable, net
$
5,113


$
(196
)

$
4,917

Inventory
5,649


198


5,847

Other current assets
4,807


(198
)

4,609

Other non-current assets
$
4,899


$
(31
)

$
4,868

LIABILITIES AND STOCKHOLDERS' DEFICIT





Taxes on earnings
268


34


302

Other accrued liabilities
8,397


(444
)

7,953

Accumulated deficit
$
(1,431
)

$
183


$
(1,248
)

 
Three months ended January 31, 2019

In millions
CONSOLIDATED CONDENSED STATEMENT OF EARNINGS ITEMS
As Reported

Effect of Adoption

Balances Without Adoption of Topic 606
Net revenue
$
14,710


$
(36
)

$
14,674

Earnings from operations
926


(36
)

890

Earnings before taxes
900


(36
)

864

Provision for taxes
(97
)

7


(90
)
Net earnings
$
803


$
(29
)

$
774

















13
Table of Contents
HP INC. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements (Continued)
(Unaudited)
Note 1: Basis of Presentation (Continued)

Opening Balance Sheet Adjustments:
The following table presents the impact of the new accounting standards to HP’s previously reported financial statements:

In millions
 
As Reported on
October 31, 2018

Adjustments under Topic 606

Other (1)

As Restated on
November 1, 2018
ASSETS










Accounts receivable, net
$
5,113


$
213


$
—


$
5,326

Inventory
6,062


(203
)

—


5,859

Other current assets
5,046


203


(90
)

5,159

Other non-current assets
5,069


33


(263
)

4,839

LIABILITIES AND STOCKHOLDERS' DEFICIT







Taxes on earnings
340


(39
)

—


301

Other accrued liabilities
7,376


497


—


7,873

Accumulated other comprehensive loss
(845
)

—


(2
)

(847
)
Accumulated deficit
$
(473
)

$
(212
)

$
(351
)

$
(1,036
)
(1)  
Other includes $353 million adjustment related to Topic 740.
Recently Issued Accounting Pronouncements Not Yet Adopted
In February 2018, the FASB issued guidance, which eliminates the stranded tax effects in other comprehensive income resulting from the Tax Cuts and Jobs Act (the “TCJA”). Because the amendments only relate to the reclassification of the income tax effects of the TCJA, the underlying guidance that requires that the effect of a change in tax laws or rates be included in income from operations is not affected. HP is required to adopt the guidance in the first quarter of fiscal year 2020. Earlier adoption is permitted. HP is currently evaluating the timing and the impact of this guidance on the Consolidated Condensed Financial Statements.
In August 2017, the FASB issued guidance, which amends the existing accounting standards for derivatives and hedging. The amendment improves the financial reporting of hedging relationships to better represent the economic results of an entity’s risk management activities in its financial statements and made certain targeted improvements to simplify the application of the hedge accounting guidance in current U.S. GAAP. HP is required to adopt the guidance in the first quarter of fiscal year 2020. Earlier adoption is permitted. HP is currently evaluating the timing and the impact of this guidance on the Consolidated Condensed Financial Statements.
In June 2016, the FASB issued guidance, which requires credit losses on financial assets measured at amortized cost basis to be presented at the net amount expected to be collected, not based on incurred losses. Further, credit losses on available-for-sale debt securities should be recorded through an allowance for credit losses limited to the amount by which fair value is below amortized cost. HP is required to adopt the guidance in the first quarter of fiscal year 2021. Earlier adoption is permitted. HP is currently evaluating the timing and the impact of this guidance on the Consolidated Condensed Financial Statements.
In February 2016, the FASB issued guidance, which amends the existing accounting standards for leases. Consistent with current guidance, the recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee primarily will depend on its classification. Under the new guidance, a lessee will be required to recognize assets and liabilities for all leases with lease terms of more than twelve months. HP will adopt the guidance in the first quarter of fiscal year 2020 using a modified retrospective transition approach. HP is in the process of completing the evaluation of the impacts from the new lease accounting standard. Based on the current assessment, HP expects the adoption of this standard to have a material impact on the Consolidated Condensed Balance Sheet.


14
Table of Contents
HP INC. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements (Continued)
(Unaudited)


Note 2. Segment Information
HP is a leading global provider of personal computing and other access devices, imaging and printing products, and related technologies, solutions and services. HP sells to individual consumers, small- and medium-sized businesses (“SMBs”) and large enterprises, including customers in the government, health and education sectors.
HP’s operations are organized into three reportable segments: Personal Systems, Printing and Corporate Investments. HP’s organizational structure is based on many factors that the chief operating decision maker uses to evaluate, view and run its business operations, which include, but are not limited to, customer base and homogeneity of products and technology. The segments are based on this organizational structure and information reviewed by HP’s chief operating decision maker to evaluate segment results. The chief operating decision maker uses several metrics to evaluate the performance of the overall business, including earnings from operations, and uses these results to allocate resources to each of the segments.
A summary description of each segment is as follows:
Personal Systems offers Commercial and Consumer desktop and notebook personal computers (“PCs”), Workstations, thin clients, Commercial mobility devices, retail point-of-sale (“POS”) systems, displays and other related accessories, software, support and services. HP groups Commercial notebooks, Commercial desktops, Commercial services, Commercial mobility devices, Commercial detachables and convertibles, Workstations, retail POS systems and thin clients into Commercial PCs and Consumer notebooks, Consumer desktops, Consumer services and Consumer detachables into Consumer PCs when describing performance in these markets. Described below are HP’s global business capabilities within Personal Systems:
•
Commercial PCs are optimized for use by customers, including enterprise, public sector and SMB customers, with a focus on robust designs, security, serviceability, connectivity, reliability and manageability in networked and cloud-based environments. Additionally, HP offers a range of services and solutions to enterprise, public sector and SMB customers to help them manage the lifecycle of their PC and mobility installed base. 
•
Consumer PCs are optimized for consumer usage, focusing on gaming, consuming multi-media for entertainment, personal life activities, staying connected, sharing information, getting things done for work including creating content, staying informed and security.
Personal Systems groups its global business capabilities into the following business units when reporting business performance:
•
Notebooks consists of Consumer notebooks, Commercial notebooks, Mobile workstations and Commercial mobility devices;
• Desktops includes Consumer desktops, Commercial desktops, thin clients, and retail POS systems;
•
Workstations consists of desktop, workstations and accessories; and
•
Other consists of Consumer and Commercial services as well as other Personal Systems capabilities.
Printing provides Consumer and Commercial printer hardware, Supplies, solutions and services, as well as scanning devices. Printing is also focused on imaging solutions in the commercial and industrial markets. Described below are HP’s global business capabilities within Printing.
•
Office Printing Solutions delivers HP’s office printers, services and solutions to SMBs and large enterprises. It also includes some Samsung-branded and OEM hardware, and solutions. HP goes to market through its extensive channel network and directly with HP sales. Ongoing key initiatives include the shift to contractual through our Managed Print Service (“MPS”) and solutions offerings for the A3 copier and multifunction printer market, printer security solutions, PageWide solutions and award-winning JetIntelligence LaserJet products.
•
Home Printing Solutions delivers innovative printing products and solutions for the home, home business and micro business customers utilizing both HP’s Ink and Laser technologies (including laser technology from some Samsung-branded products). Initiatives such as Instant Ink and Continuous Ink Supply System provide business model innovation to benefit and expand HP’s existing customer base, while new technologies like Photo Lifestyle and HP Smart App drive print relevance for a mobile generation.
•
Graphics Solutions delivers large-format, commercial and industrial solutions to print service providers and packaging converters through a wide portfolio of printers and presses (HP DesignJet, HP Latex, HP Scitex, HP Indigo and HP PageWide Web Presses).
•
3D Printing delivers the HP Multi-Jet Fusion 3D Printing Solution designed for prototyping and production of functional parts and functioning on an open platform facilitating the development of new 3D printing materials.

15
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HP INC. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements (Continued)
(Unaudited)
Note 2: Segment Information (Continued)

Printing groups its global business capabilities into the following business units when reporting business performance:
•
Commercial Hardware consists of Office Printing Solutions, Graphics Solutions and 3D Printing, excluding Supplies;
•
Consumer Hardware consists of Home Printing Solutions, excluding Supplies; and
•
Supplies comprises a set of highly innovative consumable products, ranging from Ink and Laser cartridges to media, graphics supplies and 3D printing supplies, for recurring use in Consumer and Commercial Hardware.
Corporate Investments includes HP Labs and certain business incubation projects.
The accounting policies HP uses to derive segment results are substantially the same as those used by HP in preparing these financial statements. HP derives the results of the business segments directly from its internal management reporting system.
HP does not allocate certain operating expenses, which it manages at the corporate level, to its segments. These unallocated amounts include certain corporate governance costs and infrastructure investments, stock-based compensation expense, restructuring and other charges, acquisition-related charges and amortization of intangible assets. Pursuant to the adoption of ASU 2017-07 in the first quarter of fiscal year 2019, HP now reclassifies market-related retirement credits and all other components (excluding the service cost component) of net periodic benefit cost to Interest and other, net in Consolidated Condensed Statement of Earnings. HP reflected this change in prior reporting periods on an as-if basis. This adoption did not have a material impact to previously reported segment earnings from operations.
Realignment
Effective at the beginning of its first quarter of fiscal year 2019, HP implemented an organizational change to align its business unit financial reporting more closely with its current business structure. The organizational change resulted in the transfer of certain Samsung-branded product categories from Commercial to Consumer within the Printing segment. HP reflected this change to its business unit information in prior reporting periods on an as-if basis. The reporting change had no impact to previously reported segment net revenue, consolidated net revenue, earnings from operations, net earnings or net EPS.
Segment Operating Results from Operations and the reconciliation to HP consolidated results were as follows:
 
Three months ended January 31
 
2019
 
2018
 
In millions
Net Revenue:
Personal Systems
$
9,657

 
$
9,440

Printing
5,056

 
5,076

Corporate Investments
1

 
1

Total segments
$
14,714

 
$
14,517

Other
(4
)
 
—

Total net revenue
$
14,710

 
$
14,517

Earnings from operations before taxes:
 

 
 

Personal Systems
$
410

 
$
335

Printing
821

 
799

Corporate Investments
(24
)
 
(19
)
Total segment earnings from operations
$
1,207

 
$
1,115

Corporate and unallocated costs and other
(80
)
 
(24
)
Stock-based compensation expense
(107
)
 
(85
)
Restructuring and other charges
(55
)
 
(31
)
Acquisition-related charges
(10
)
 
(42
)
Amortization of intangible assets
(29
)
 
(20
)
Interest and other, net
(26
)
 
(8
)
Total earnings from operations before taxes          
$
900

 
$
905


16
Table of Contents
HP INC. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements (Continued)
(Unaudited)
Note 2: Segment Information (Continued)

Net revenue by segment and business unit was as follows:
 
Three months ended January 31
 
2019
 
2018
 
In millions
Notebooks
$
5,919

 
$
5,595

Desktops
2,857

 
2,955

Workstations
562

 
543

Other
319

 
347

Personal Systems
9,657

 
9,440

Supplies
3,267

 
3,351

Commercial Hardware
1,090

 
1,037

Consumer Hardware
699

 
688

Printing
5,056

 
5,076

Corporate Investments
1

 
1

Total segment net revenue
14,714

 
14,517

Other
(4
)
 
—

Total net revenue
$
14,710

 
$
14,517



17
Table of Contents
HP INC. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements
(Unaudited)

Note 3: Restructuring and Other Charges
Summary of Restructuring Plans
HP’s restructuring activities for the three months ended January 31, 2019 and 2018 summarized by plan were as follows:
 
Fiscal 2017 Plan
 
 

 
Severance
 
Infrastructure and other
 
Other prior-year plans(1)
 
Total
 
 

Accrued balance as of October 31, 2018
$
50

 
$
—

 
$
9

 
$
59

Charges
47

 
6

 
—

 
53

Cash payments
(35
)
 
(6
)
 
(3
)
 
(44
)
Non-cash and other adjustments
(3
)
 
—

 
—

 
(3
)
Accrued balance as of January 31, 2019
$
59

 
$
—

 
$
6

 
$
65

Total costs incurred to date as of January 31, 2019
$
300

 
$
87

 
$
1,317

 
$
1,704

 
 
 
 
 
 
 
 
Reflected in Consolidated Condensed Balance Sheets

 

 
 
 

Other accrued liabilities
59


—


5


64

Other non-current liabilities
—


—


1


1

 
 
 
 
 
 
 
 
Accrued balance as of October 31, 2017
76


19


13


108

Charges
12


6


—


18

Cash payments
(60
)

(25
)

(2
)

(87
)
Non-cash and other adjustments
2


—


—


2

Accrued balance as of January 31, 2018
$
30


$
—


$
11


$
41

    
(1) 
Includes prior-year plans which are considered substantially complete. HP does not expect any further material activity associated with these plans.
Fiscal 2017 Plan
On October 10, 2016, HP’s Board of Directors approved a restructuring plan (the “Fiscal 2017 Plan”), which HP expected would be implemented through fiscal year 2019.
On May 26, 2018, HP’s Board of Directors approved amending the Fiscal 2017 Plan. HP expects approximately 4,500 to 5,000 employees to exit by the end of fiscal year 2019. HP estimates that it will incur aggregate pre-tax charges of approximately $700 million relating to labor and non-labor actions. HP estimates that approximately half of the expected cumulative pre-tax costs will relate to severance and the remaining costs will relate to infrastructure, non-labor actions and other charges.
Other Charges
Other charges include non-recurring costs, including those as a result of Separation, and are distinct from ongoing operational costs. These costs primarily relate to information technology costs such as advisory, consulting and non-recurring labor costs. For the three months ended January 31, 2019 and 2018, HP incurred $2 million and $13 million of other charges, respectively.

18
Table of Contents
HP INC. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements
(Unaudited)

Note 4: Retirement and Post-Retirement Benefit Plans
The components of HP’s pension and post-retirement benefit (credit) cost recognized in the Consolidated Condensed Statements of Earnings were as follows:
 
Three months ended January 31
 
U.S. Defined Benefit Plans
 
Non-U.S. Defined Benefit Plans
 
Post-Retirement Benefit Plans
 
2019
 
2018
 
2019
 
2018
 
2019
 
2018
 
In millions
Service cost
$
—

 
$
—

 
$
14

 
$
14

 
$
—

 
$
—

Interest cost
123

 
113

 
6

 
6

 
4

 
4

Expected return on plan assets
(145
)
 
(181
)
 
(10
)
 
(10
)
 
(5
)
 
(6
)
Amortization and deferrals:
 

 
 

 
 

 
 

 
 

 
 

Actuarial loss (gain)
15

 
15

 
8

 
7

 
(8
)
 
(4
)
Prior service benefit
—

 
—

 
(1
)
 
(1
)
 
(3
)
 
(5
)
Net periodic (credit) benefit cost
(7
)
 
(53
)
 
17

 
16

 
(12
)
 
(11
)
Settlement loss
—

 
1

 
—

 
—

 
—

 
—

Total periodic (credit) benefit cost
$
(7
)
 
$
(52
)
 
$
17

 
$
16

 
$
(12
)
 
$
(11
)
Employer Contributions and Funding Policy
HP’s policy is to fund its pension plans so that it makes at least the minimum contribution required by local government, funding and taxing authorities.
During fiscal year 2019, HP anticipates making contributions of approximately $46 million to its non-U.S. pension plans, approximately $32 million to its U.S. non-qualified plan participants and approximately $6 million to cover benefit claims under HP’s post-retirement benefit plans. During the three months ended January 31, 2019, HP contributed $11 million to its non-U.S. pension plans, paid $6 million to cover benefit payments to U.S. non-qualified plan participants, and paid $2 million to cover benefit claims under HP’s post-retirement benefit plans.
HP’s pension and other post-retirement benefit costs and obligations depend on various assumptions. Differences between expected and actual returns on investments and changes in discount rates and other actuarial assumptions are reflected as unrecognized gains or losses, and such gains or losses are amortized to earnings in future periods. A deterioration in the funded status of a plan could result in a need for additional company contributions or an increase in net pension and post-retirement benefit costs in future periods. Actuarial gains or losses are determined at the measurement date and amortized over the remaining service life for active plans or the life expectancy of plan participants for frozen plans.

Note 5: Taxes on Earnings
Provision for Taxes
On December 22, 2017, the TCJA was enacted into law. Given the significance of the legislation, the SEC staff issued Staff Accounting Bulletin No. 118 (SAB 118) in December 2017, which allows registrants to record provisional amounts during a one year “measurement period”.
As of January 31, 2019, HP has completed its accounting for the tax effects of the TCJA with no material changes to the provisional amounts recorded during the measurement period.
In January 2018, the FASB released guidance on the accounting for tax on the Global Minimum Tax provisions of TCJA. The Global Minimum Tax provisions impose a tax on foreign income in excess of a deemed return on tangible assets of foreign corporations. The guidance indicates that either accounting for deferred taxes related to Global Minimum Tax inclusions or to treat any taxes on Global Minimum Tax inclusions as period cost are both acceptable methods subject to an accounting policy election. HP has elected to treat the Global Minimum Tax inclusions as period costs.

19
Table of Contents
HP INC. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements (Continued)
(Unaudited)
Note 5: Taxes on Earnings (Continued)

HP’s effective tax rate was 10.8% and (114.1)% for the three months ended January 31, 2019 and 2018, respectively. The difference between the U.S. federal statutory tax rate of 21% and HP’s effective tax rate for the three months ended January 31, 2019 is primarily due to favorable tax rates associated with certain earnings from HP’s operations in lower-tax jurisdictions throughout the world. For the three months ended January 31, 2018 HP’s effective tax rate generally differs from the U.S. federal statutory rate of 23% due to the impact of U.S. tax reform, and favorable tax rates associated with certain earnings from HP’s operations in lower-tax jurisdictions throughout the world.
During the three months ended January 31, 2019, HP recorded $9 million of net tax benefits related to discrete items in the provision for taxes. As noted above, HP has completed its analysis of the full impact of TCJA. As of January 31, 2019, HP recorded tax benefit of $21 million related to final tax reform adjustments and recorded a tax benefit of $12 million related to restructuring. These benefits were partially offset by uncertain tax position charges of $20 million and other tax charges of $4 million. In addition to the discrete items mentioned above, HP recorded excess tax benefits of $27 million on stock options, restricted stock units and performance-adjusted restricted stock units.
During the three months ended January 31, 2018, HP recorded $1.1 billion of net tax benefits related to discrete items in the provision for taxes. As of January 31, 2018, HP had not yet completed its analysis of the full impact of TCJA however HP recorded a provisional tax benefit of $1.1 billion related to $5.5 billion net benefit for the decrease in our deferred tax liability on unremitted foreign earnings, partially offset by $3.2 billion net expense for the repatriation tax payable in installments over eight years and $1.2 billion net expense for remeasurement of our deferred tax assets and liabilities for the revaluation of our deferred assets and liabilities to the new U.S. tax rate of 21%. This amount also included tax benefits related to audit settlements, acquisition charges and other tax benefits of $32 million, $18 million and $12 million, respectively, offset by uncertain tax position charges of $43 million.
Uncertain Tax Positions
As of January 31, 2019, the amount of unrecognized tax benefits was $7.8 billion, of which up to $1.5 billion would affect HP’s effective tax rate if realized. The amount of unrecognized tax benefits increased by $39 million for the three months ended January 31, 2019. HP recognizes interest income from favorable settlements and interest expense and penalties accrued on unrecognized tax benefits in the provision for taxes in the Consolidated Condensed Statements of Earnings. As of January 31, 2019 and 2018, HP had accrued $181 million and $278 million, respectively, for interest and penalties.
HP engages in continuous discussions and negotiations with taxing authorities regarding tax matters in various jurisdictions. HP expects to complete resolution of certain tax years with various tax authorities within the next 12 months. It is also possible that other federal, foreign and state tax issues may be concluded within the next 12 months. HP believes it is reasonably possible that its existing unrecognized tax benefits may be reduced by up to $6.4 billion within the next 12 months of which up to $743 million would affect HP’s effective tax rate if realized.
HP is subject to income tax in the United States and approximately 60 other countries and is subject to routine corporate income tax audits in many of these jurisdictions. In addition, HP is subject to numerous ongoing audits by federal, state and foreign tax authorities. The U.S. Internal Revenue Service is conducting an audit of HP’s 2013, 2014, and 2015 income tax returns.


20
Table of Contents
HP INC. AND SUBSIDIARIES
Consolidated Condensed Statements of Earnings (Continued)
(Unaudited)


Note 6: Supplementary Financial Information
Accounts Receivable, net
 
As of
 
January 31, 2019
 
October 31, 2018
 
In millions
Accounts receivable
$
5,222

 
$
5,242

Allowance for doubtful accounts
(109
)
 
(129
)
 
$
5,113

 
$
5,113

The allowance for doubtful accounts related to accounts receivable and changes were as follows:
 
Three months ended January 31, 2019
 
In millions
Balance at beginning of period
$
129

Provision for doubtful accounts
8

Deductions, net of recoveries
(28
)
Balance at end of period
$
109

HP has third-party arrangements, consisting of revolving short-term financing, which provide liquidity to certain partners in order to facilitate their working capital requirements. These financing arrangements, which in certain circumstances may contain partial recourse, result in a transfer of HP’s receivables and risk to the third party. As these transfers qualify as true sales under the applicable accounting guidance, the receivables are derecognized from the Consolidated Condensed Balance Sheets upon transfer, and HP receives a payment for the receivables from the third party within a mutually agreed upon time period. For arrangements involving an element of recourse, the recourse obligation is measured using market data from the similar transactions and reported as a current liability in the Consolidated Condensed Balance Sheets. The recourse obligations as of January 31, 2019 and October 31, 2018 were not material. The costs associated with the sales of trade receivables for the three months ended January 31, 2019 and 2018 were not material.
The following is a summary of the activity under these arrangements:
 
Three months ended January 31
 
2019
 
2018
 
In millions
Balance at beginning of period(1)
$
165

 
$
147

Trade receivables sold
3,036

 
2,936

Cash receipts
(3,010
)
 
(2,921
)
Foreign currency and other
3

 
10

Balance at end of period(1)
$
194

 
$
172

(1) 
Amounts outstanding from third parties reported in Accounts Receivable in the Consolidated Condensed Balance Sheets.
Inventory
 
As of
 
January 31, 2019
 
October 31, 2018
 
In millions
Finished goods
$
3,797

 
$
4,019

Purchased parts and fabricated assemblies
1,852

 
2,043

 
$
5,649

 
$
6,062


21
Table of Contents
HP INC. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements (Continued)
(Unaudited)
Note 6: Supplementary Financial Information (Continued)

Other Current Assets
 
As of
 
January 31, 2019
 
October 31, 2018
 
In millions
Value-added taxes receivable
$
881

 
$
865

Available-for-sale investments(1)
425

 
711

Supplier and other receivables
2,217

 
2,025

Prepaid and other current assets(2)
1,284

 
1,445

 
$
4,807

 
$
5,046

(1) 
See Note 8, “Financial Instruments” for detailed information.
(2) 
As of January 31, 2019, deferred contract fulfillment and acquisition costs balances were $38 million and $36 million, respectively. For the three months ended January 31, 2019, HP amortized $21 million of these costs.
See note below “Other Non-Current Assets” for deferred contract fulfillment and acquisition costs.
Property, Plant and Equipment, net
 
As of
 
January 31, 2019
 
October 31, 2018
 
In millions
Land, buildings and leasehold improvements
$
1,888

 
$
1,893

Machinery and equipment, including equipment held for lease
4,402

 
4,216

 
6,290

 
6,109

Accumulated depreciation
(3,978
)
 
(3,911
)
 
$
2,312

 
$
2,198

Other Non-Current Assets
 
As of
 
January 31, 2019
 
October 31, 2018
 
In millions
Tax indemnifications receivable
$
866

 
$
953

Deferred tax assets
2,329

 
2,431

Intangible assets(1)
724

 
453

Other(2)(3)
980

 
1,232

 
$
4,899

 
$
5,069

(1) 
See Note 15, “Intangible Assets” for detailed information.
(2)  
Includes marketable equity securities and mutual funds classified as available-for-sale investments of $54 million and $53 million as of January 31, 2019 and October 31, 2018, respectively.
(3) 
See note (2) on deferred contract fulfillment and acquisition costs under “Other Current Assets” table above.

 



22
Table of Contents
HP INC. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements (Continued)
(Unaudited)
Note 6: Supplementary Financial Information (Continued)


Other Accrued Liabilities
 
As of
 
January 31, 2019
 
October 31, 2018
 
In millions
Other accrued taxes
$
919

 
$
982

Warranty
675

 
673

Deferred revenue(1)
1,180

 
1,095

Sales and marketing programs
3,020

 
2,758

Other
2,603

 
1,868

 
$
8,397

 
$
7,376

(1) 
As of January 31, 2019 and October 31, 2018, HP’s contract liabilities balances were $2.0 billion and $1.9 billion, respectively. The increase in the contract liabilities balance for the three months ended January 31, 2019 is primarily driven by sales of fixed price support and maintenance services, partially offset by $308 million of revenue recognized that were included in the opening contract liabilities balance as of November 1, 2018.
Other Non-Current Liabilities
 
As of
 
January 31, 2019
 
October 31, 2018
 
In millions
Pension, post-retirement, and post-employment liabilities
$
1,619

 
$
1,645

Deferred tax liability
64

 
100

Tax liability
1,977

 
2,063

Deferred revenue(1)
986

 
1,005

Other
776

 
793

 
$
5,422

 
$
5,606

(1) 
See note (1) on contract liabilities under “Other Accrued Liabilities” table above.
Interest and Other, net
 
Three months ended January 31
 
2019
 
2018
 
In millions
Interest expense on borrowings
$
(64
)
 
$
(87
)
Other, net
38

 
79

 
$
(26
)
 
$
(8
)

Net revenue by region
 
Three months ended January 31
 
2019

2018
 
In millions
Americas
$
6,032


$
6,235

Europe, Middle East and Africa
5,358


5,221

Asia-Pacific and Japan
3,320


3,061

Total net revenue
$
14,710


$
14,517







23
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HP INC. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements (Continued)
(Unaudited)
Note 6: Supplementary Financial Information (Continued)

Value of Remaining Performance Obligations
As of January 31, 2019, the estimated value of transaction price allocated to remaining performance obligations was $4.5 billion. HP expects to recognize approximately $1.8 billion of the unearned amount in next 12 months and $2.7 billion thereafter.
HP has elected the practical expedients and accordingly does not disclose the aggregate amount of the transaction price allocated to remaining performance obligations if:
•
the contract has an original expected duration of one year or less; or
•
the revenue from the performance obligation is recognized over time on an as-invoiced basis when the amount corresponds directly with the value to the customer; or
•
the portion of the transaction price that is variable in nature is allocated entirely to a wholly unsatisfied performance obligation.
The remaining performance obligations are subject to change and may be affected by various factors, such as termination of contracts, contract modifications and adjustment for currency.




24
Table of Contents
HP INC. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements (Continued)
(Unaudited)


Note 7: Fair Value
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the measurement date.
Fair Value Hierarchy
HP uses valuation techniques that are based upon observable and unobservable inputs. Observable inputs are developed using market data such as publicly available information and reflect the assumptions market participants would use, while unobservable inputs are developed using the best information available about the assumptions market participants would use.
Assets and liabilities are classified in the fair value hierarchy based on the lowest level input that is significant to the fair value measurement:
Level 1—Quoted prices (unadjusted) in active markets for identical assets or liabilities.
Level 2—Quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability and market-corroborated inputs.
Level 3—Unobservable inputs for the asset or liability.
The fair value hierarchy gives the highest priority to observable inputs and lowest priority to unobservable inputs.
The following table presents HP’s assets and liabilities that are measured at fair value on a recurring basis:
 
As of January 31, 2019
 
As of October 31, 2018
 
Fair Value Measured Using
 
 
 
Fair Value Measured Using
 
 
 
Level 1
 
Level 2
 
Level 3
 
Total
 
Level 1
 
Level 2
 
Level 3
 
Total
 
In millions
Assets:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Cash Equivalents:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Corporate debt
$
—

 
$
937

 
$
—

 
$
937

 
$
—

 
$
1,620

 
$
—

 
$
1,620

Financial institution instruments
—

 
—

 
—

 
—

 
—

 
9

 
—

 
9

Government debt(1)
1,451

 
9

 
—

 
1,460

 
2,217

 
150

 
—

 
2,367

Available-for-Sale Investments:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Corporate debt
—

 
184

 
—

 
184

 
—

 
366

 
—

 
366

Financial institution instruments
—

 
10

 
—

 
10

 
—

 
32

 
—

 
32

Government debt(1)
—

 
231

 
—

 
231

 
—

 
313

 
—

 
313

Mutual funds
48

 
—

 
—

 
48

 
47

 
—

 
—

 
47

Marketable equity securities
6

 
—

 
—

 
6

 
6

 
—

 
—

 
6

Derivative Instruments:
 
 
 
 
 
 
 

 
 

 
 

 
 

 
 

Foreign currency contracts
—

 
271

 
—

 
271

 
—

 
508

 
7

 
515

Other derivatives
—

 
7

 
—

 
7

 
—

 
—

 
—

 
—

Total Assets
$
1,505

 
$
1,649

 
$
—

 
$
3,154

 
$
2,270

 
$
2,998

 
$
7

 
$
5,275

Liabilities:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Derivative Instruments:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Interest rate contracts
$
—

 
$
12

 
$
—

 
$
12

 
$
—

 
$
23

 
$
—

 
$
23

Foreign currency contracts
—

 
208

 
—

 
208

 
—

 
164

 
—

 
164

Other derivatives
—

 
—

 
—

 
—

 
—

 
8

 
—

 
8

Total Liabilities
$
—

 
$
220

 
$
—

 
$
220

 
$
—

 
$
195

 
$
—

 
$
195

(1) 
Government debt includes instruments such as U.S. treasury notes, U.S agency securities and non-U.S. government bonds. Money market funds invested in government debt and traded in active markets are included in Level 1.
There were no transfers between levels within the fair value hierarchy during the three months ended January 31, 2019.

25
Table of Contents
HP INC. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements (Continued)
(Unaudited)
Note 7: Fair Value (Continued)


Valuation Techniques
Cash Equivalents and Investments: HP holds time deposits, money market funds, mutual funds, other debt securities primarily consisting of corporate and government notes and bonds, and common stock and equivalents. HP values cash equivalents and equity investments using quoted market prices, alternative pricing sources, including net asset value, or models utilizing market observable inputs. The fair value of debt investments was based on quoted market prices or model-driven valuations using inputs primarily derived from or corroborated by observable market data, and, in certain instances, valuation models that utilize assumptions which cannot be corroborated with observable market data.
Derivative Instruments: From time to time, HP uses forward contracts, interest rate and total return swaps and option contracts to hedge certain foreign currency interest rate and return on certain investment exposures. HP uses industry standard valuation models to measure fair value. Where applicable, these models project future cash flows and discount the future amounts to present value using market-based observable inputs, including interest rate curves, HP and counterparty credit risk, foreign exchange rates, and forward and spot prices for currencies and interest rates. See Note 8, “Financial Instruments” for a further discussion of HP’s use of derivative instruments.
Other Fair Value Disclosures
Short- and Long-Term Debt: HP estimates the fair value of its debt primarily using an expected present value technique, which is based on observable market inputs using interest rates currently available to companies of similar credit standing for similar terms and remaining maturities and considering its own credit risk. The portion of HP’s debt that is hedged is reflected in the Consolidated Condensed Balance Sheets as an amount equal to the debt’s carrying amount and a fair value adjustment representing changes in the fair value of the hedged debt obligations arising from movements in benchmark interest rates. The fair value of HP’s short- and long-term debt was $5.1 billion as of January 31, 2019, compared to its carrying amount of $5.0 billion at that date. The fair value of HP’s short- and long-term debt was $6.0 billion as of October 31, 2018, compared to its carrying value of $6.0 billion at that date. If measured at fair value in the Consolidated Condensed Balance Sheets, short- and long-term debt would be classified in Level 2 of the fair value hierarchy.
Other Financial Instruments: For the balance of HP’s financial instruments, primarily accounts receivable, accounts payable and financial liabilities included in Other accrued liabilities on the Consolidated Condensed Balance Sheets, the carrying amounts approximate fair value due to their short maturities. If measured at fair value in the Consolidated Condensed Balance Sheets, these other financial instruments would be classified in Level 2 or Level 3 of the fair value hierarchy.
Non-Marketable Equity Investments and Non-Financial Assets: HP’s non-marketable equity investments are measured and recorded using a measurement alternative resulting from qualifying observable adjustments or impairment. HP’s non-financial assets, such as intangible assets, goodwill and property, plant and equipment, are recorded at fair value in the period an impairment charge is recognized. If measured at fair value in the Consolidated Condensed Balance Sheets these would generally be classified within Level 3 of the fair value hierarchy.


26
Table of Contents
HP INC. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements (Continued)
(Unaudited)


Note 8: Financial Instruments
Cash Equivalents and Available-for-Sale Investments
 
As of January 31, 2019

As of October 31, 2018
 
Cost

Gross Unrealized Gain

Gross Unrealized Loss

Fair Value

Cost

Gross Unrealized Gain

Gross Unrealized Loss

Fair Value
 
In millions
Cash Equivalents:
 


 


 


 


 


 


 


 

Corporate debt
$
937


$
—


$
—


$
937


$
1,620


$
—


$
—


$
1,620

Financial institution instruments
—


—


—


—


9


—


—


$
9

Government debt
1,460


—


—


1,460


2,367


—


—


2,367

Total cash equivalents
2,397


—


—


2,397


3,996


—


—


3,996

Available-for-Sale Investments:
 


 


 


 


 


 


 


 

Corporate debt (1)
185


—


(1
)

184


368


—


(2
)

366

Financial institution instruments (1)
10


—


—


10


32


—


—


32

Government debt (1)
232


—


(1
)

231


314


—


(1
)

313

Marketable equity securities
4


2


—


6


4


2


—


6

Mutual funds
39


9


—


48


38


9


—


47

Total available-for-sale investments
470


11


(2
)

479


756


11


(3
)

764

Total cash equivalents and available-for-sale investments
$
2,867


$
11


$
(2
)

$
2,876


$
4,752


$
11


$
(3
)

$
4,760

(1) 
HP classifies its marketable debt securities as available-for-sale investments within Other current assets on the Consolidated Condensed Balance Sheets, including those with maturity dates beyond one year, based on their highly liquid nature and availability for use in current operations.
All highly liquid investments with original maturities of three months or less at the date of acquisition are considered cash equivalents. As of January 31, 2019 and October 31, 2018, the carrying amount of cash equivalents approximated fair value due to the short period of time to maturity. The estimated fair value of the available-for-sale investments may not be representative of values that will be realized in the future.
Contractual maturities of investments in available-for-sale debt securities were as follows:
 
As of January 31, 2019
 
Amortized
Cost
 
Fair Value
 
In millions
Due in one year or less
$
427

 
$
425

Equity securities in privately held companies include cost basis and equity method investments and are included in Other non-current assets on the Consolidated Condensed Balance Sheets. These amounted to $49 million and $36 million as of January 31, 2019 and October 31, 2018, respectively.

27
Table of Contents
HP INC. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements (Continued)
(Unaudited)
Note 8: Financial Instruments (Continued)

Derivative Instruments
HP uses derivatives to offset business exposure to foreign currency and interest rate risk on expected future cash flows and on certain existing assets and liabilities. As part of its risk management strategy, HP uses derivative instruments, primarily forward contracts, interest rate swaps, total return swaps and, at times, option contracts to hedge certain foreign currency, interest rate and, return on certain investment exposures. HP may designate its derivative contracts as fair value hedges or cash flow hedges and classifies the cash flows with the activities that correspond to the underlying hedged items. Additionally, for derivatives not designated as hedging instruments, HP categorizes those economic hedges as other derivatives. HP recognizes all derivative instruments at fair value in the Consolidated Condensed Balance Sheets.
As a result of its use of derivative instruments, HP is exposed to the risk that its counterparties will fail to meet their contractual obligations. Master netting agreements mitigate credit exposure to counterparties by permitting HP to net amounts due from HP to counterparty against amounts due to HP from the same counterparty under certain conditions. To further limit credit risk, HP has collateral security agreements that allow HP’s custodian to hold collateral from, or require HP to post collateral to, counterparties when aggregate derivative fair values exceed contractually established thresholds which are generally based on the credit ratings of HP and its counterparties. If HP’s or the counterparty’s credit rating falls below a specified credit rating, either party has the right to request full collateralization of the derivatives’ net liability position. The fair value of derivatives with credit contingent features in a net liability position was $85 million and $68 million as of January 31, 2019 and as of October 31, 2018, respectively, all of which were fully collateralized within two business days.
Under HP’s derivative contracts, the counterparty can terminate all outstanding trades following a covered change of control event affecting HP that results in the surviving entity being rated below a specified credit rating. This credit contingent provision did not affect HP’s financial position or cash flows as of January 31, 2019 and October 31, 2018.
Fair Value Hedges
HP enters into fair value hedges, such as interest rate swaps, to reduce the exposure of its debt portfolio to changes in fair value resulting from changes in interest rates by achieving a primarily U.S. dollar London Interbank Offered Rate (“LIBOR”)-based floating interest expense.
For derivative instruments that are designated and qualify as fair value hedges, HP recognizes the change in fair value of the derivative instrument, as well as the offsetting change in the fair value of the hedged item, in Interest and other, net on the Consolidated Condensed Statements of Earnings in the period of change.
Cash Flow Hedges
HP uses forward contracts and at times, option contracts designated as cash flow hedges to protect against the foreign currency exchange rate risks inherent in its forecasted net revenue and, to a lesser extent, cost of revenue, operating expenses, and intercompany loans denominated in currencies other than the U.S. dollar. HP’s foreign currency cash flow hedges mature generally within twelve months. However, hedges related to longer-term procurement arrangements extend several years and forward contracts associated with intercompany loans extend for the duration of the loan term, which typically range from two to five years.
For derivative instruments that are designated and qualify as cash flow hedges, HP initially records changes in fair value for the effective portion of the derivative instrument in accumulated other comprehensive loss as a separate component of stockholders’ deficit on the Consolidated Condensed Balance Sheets and subsequently reclassifies these amounts into earnings in the period during which the hedged transaction is recognized in earnings. HP reports the effective portion of its cash flow hedges in the same financial statement line item as changes in the fair value of the hedged item.
Other Derivatives
Other derivatives not designated as hedging instruments consist primarily of forward contracts used to hedge foreign currency-denominated balance sheet exposures. HP uses total return swaps to hedge its executive deferred compensation plan liability.
For derivative instruments not designated as hedging instruments, HP recognizes changes in fair value of the derivative instrument, as well as the offsetting change in the fair value of the hedged item, in Interest and other, net in the Consolidated Condensed Statements of Earnings in the period of change.
Hedge Effectiveness
For interest rate swaps designated as fair value hedges, HP measures hedge effectiveness by offsetting the change in fair value of the hedged item with the change in fair value of the derivative. For foreign currency options and forward contracts designated as cash flow hedges, HP measures hedge effectiveness by comparing the cumulative change in fair value of the hedge contract with the cumulative change in fair value of the hedged item, both of which are based on forward rates.

28
Table of Contents
HP INC. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements (Continued)
(Unaudited)
Note 8: Financial Instruments (Continued)

HP recognizes any ineffective portion of the hedge in the Consolidated Condensed Statements of Earnings in the same period in which ineffectiveness occurs. Amounts excluded from the assessment of effectiveness are recognized in the Consolidated Condensed Statements of Earnings in the period they arise.
As of January 31, 2019 and 2018, no portion of the hedging instruments’ gain or loss was excluded from the assessment of effectiveness for fair value and cash flow hedges. Hedge ineffectiveness for fair value and cash flow hedges recognized in earnings were not material for the three months ended January 31, 2019 and 2018.
Fair Value of Derivative Instruments in the Consolidated Condensed Balance Sheets
The gross notional and fair value of derivative instruments in the Consolidated Condensed Balance Sheets were as follows:
 
As of January 31, 2019

As of October 31, 2018
 
Outstanding Gross Notional

Other Current Assets

Other Non-Current Assets

Other Accrued Liabilities

Other Non-Current Liabilities

Outstanding Gross Notional

Other Current Assets

Other Non-Current Assets

Other Accrued Liabilities

Other Non-Current Liabilities
 
In millions
Derivatives designated as hedging instruments
 


 


 


 


 


 


 


 


 


 

Fair value hedges:
 


 


 


 


 


 


 


 


 


 

Interest rate contracts
$
750


$
—


$
—


$
—


$
12


$
1,000


$
—


$
—


$
—


$
23































Cash flow hedges:















 


 


 


 


 

Foreign currency contracts
16,382


161


88


157


29


17,147


386


107


86


52

Total derivatives designated as hedging instruments
17,132


161


88


157


41


18,147


386


107


86


75

Derivatives not designated as hedging instruments