10-Q 1 hp-73117x10q.htm 10-Q Document
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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: July 31, 2017
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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post 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
(Do not check if a smaller reporting company)
 
Smaller reporting company o
 
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 July 31, 2017 was 1,670,254,371 shares.
 




HP INC. AND SUBSIDIARIES
Form 10-Q
For the Quarterly Period ended July 31, 2017
Table of Contents
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.


2


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 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 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, 2016, 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.


3


Part I. Financial Information

ITEM 1. Financial Statements and Supplementary Data.
Index
 
Page


4


HP INC. AND SUBSIDIARIES
Consolidated Condensed Statements of Earnings
(Unaudited)
 
Three months ended July 31
 
Nine months ended July 31
 
2017
 
2016
 
2017
 
2016
 
In millions, except per share amounts
Net revenue
$
13,060

 
$
11,892

 
$
38,129

 
$
35,726

Costs and expenses:
 
 
 

 
 

 
 

Cost of revenue
10,633

 
9,720

 
31,071

 
29,019

Research and development
289

 
298

 
899

 
891

Selling, general and administrative
1,096

 
719

 
3,200

 
2,758

Restructuring and other charges
46

 
36

 
249

 
156

Acquisition-related charges
40

 

 
76

 

Amortization of intangible assets

 
2

 
1

 
16

Defined benefit plan settlement charges
1

 

 
4

 

Total costs and expenses
12,105

 
10,775

 
35,500

 
32,840

Earnings from continuing operations
955

 
1,117
 
2,629

 
2,886
Interest and other, net
(56
)
 
(36
)
 
(201
)
 
(135
)
Earnings from continuing operations before taxes
899

 
1,081
 
2,428

 
2,751
Provision for taxes
(203
)
 
(238
)
 
(562
)
 
(598
)
Net earnings from continuing operations
696

 
843
 
1,866

 
2,153
Net loss from discontinued operations, net of taxes

 
(60
)
 

 
(149
)
Net earnings
$
696

 
$
783

 
$
1,866

 
$
2,004

Net earnings (loss) per share:
 
 
 
 
 
 
 
Basic
 
 
 
 
 
 
 
Continuing operations
$
0.41

 
$
0.49

 
$
1.10

 
$
1.24

Discontinued operations

 
(0.03
)
 

 
(0.08
)
Total basic net earnings per share
$
0.41

 
$
0.46

 
$
1.10

 
$
1.16

Diluted
 
 
 
 
 
 
 
Continuing operations
$
0.41

 
$
0.49

 
$
1.09

 
$
1.23

Discontinued operations

 
(0.04
)
 

 
(0.08
)
Total diluted net earnings per share
$
0.41

 
$
0.45

 
$
1.09

 
$
1.15

Cash dividends declared per share
$
0.26

 
$
0.25

 
$
0.53

 
$
0.50

Weighted-average shares used to compute net earnings (loss) per share:
 
 
 
 
 
 
 
Basic
1,681

 
1,711

 
1,694

 
1,735

Diluted
1,695

 
1,725

 
1,705

 
1,747

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


5


HP INC. AND SUBSIDIARIES
Consolidated Condensed Statements of Comprehensive Income
(Unaudited)
 
Three months ended July 31
 
Nine months ended July 31
 
2017
 
2016
 
2017
 
2016
 
In millions
Net earnings
$
696

 
$
783

 
$
1,866

 
$
2,004

Other comprehensive income before taxes:
 

 
 

 
 

 
 

Change in unrealized gains on available-for-sale securities:
 

 
 

 
 

 
 

Gains arising during the period
1

 
1

 
5

 
2

Change in unrealized components of cash flow hedges:
 

 
 

 
 

 
 

(Losses) gains arising during the period
(519)

 
175

 
(758)

 
135

Losses (gains) reclassified into earnings
38

 
159

 
(49)

 
63


(481
)
 
334

 
(807
)
 
198

Change in unrealized components of defined benefit plans:
 

 
 

 
 

 
 

Gains (losses) arising during the period

 

 
13

 
(4)

Amortization of actuarial loss and prior service benefit
19

 
12

 
56

 
36

Settlements and other

 

 
3

 
1


19

 
12

 
72

 
33

Other comprehensive (loss) income before taxes
(461
)
 
347

 
(730
)
 
233

Benefit (provision) for taxes
57

 
(28)

 
50

 
41

Other comprehensive (loss) income, net of taxes
(404
)
 
319

 
(680
)
 
274

Comprehensive income
$
292

 
$
1,102

 
$
1,186

 
$
2,278

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

6


HP INC. AND SUBSIDIARIES
Consolidated Condensed Balance Sheets
(Unaudited)
 
As of
 
July 31, 2017
 
October 31, 2016
 
In millions, except par value 
ASSETS
 

 
 

Current assets:
 

 
 

Cash and cash equivalents
$
6,967

 
$
6,288

Accounts receivable
4,233

 
4,114

Inventory
5,184

 
4,484

Other current assets
5,059

 
3,582

Total current assets
21,443

 
18,468

Property, plant and equipment
1,707

 
1,736

Goodwill
5,622

 
5,622

Other non-current assets
3,162

 
3,161

Total assets
$
31,934

 
$
28,987

LIABILITIES AND STOCKHOLDERS’ DEFICIT
 

 
 

Current liabilities:
 

 
 

Notes payable and short-term borrowings
$
1,062

 
$
78

Accounts payable
12,804

 
11,103

Employee compensation and benefits
766

 
759

Taxes on earnings
199

 
231

Deferred revenue
997

 
919

Other accrued liabilities
6,232

 
5,718

Total current liabilities
22,060

 
18,808

Long-term debt
6,744

 
6,735

Other non-current liabilities
7,469

 
7,333

Commitments and contingencies


 


Stockholders’ deficit:
 

 
 

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

 

Common stock, $0.01 par value (9,600 shares authorized; 1,670 and 1,712 shares issued and outstanding at July 31, 2017 and October 31, 2016, respectively)          
17

 
17

Additional paid in capital
288

 
1,030

Retained deficit
(2,526
)
 
(3,498
)
Accumulated other comprehensive loss
(2,118
)
 
(1,438
)
Total stockholders’ deficit
(4,339
)
 
(3,889
)
Total liabilities and stockholders’ deficit
$
31,934

 
$
28,987

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

7


HP INC. AND SUBSIDIARIES
Consolidated Condensed Statements of Cash Flows
(Unaudited)
 
Nine months ended July 31
 
2017
 
2016
 
In millions
Cash flows from operating activities:
 

 
 

Net earnings
$
1,866

 
$
2,004

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

 
 

Depreciation and amortization
263

 
249

Stock-based compensation expense
169

 
140

Restructuring and other charges
249

 
151

Deferred taxes on earnings
412

 
978

Other, net
69

 
(290
)
Changes in operating assets and liabilities:
 

 
 

Accounts receivable
(215
)
 
728

Inventory
(731
)
 
251

Accounts payable
1,738

 
238

Taxes on earnings
(245
)
 
(877
)
Restructuring and other
(155
)
 
(114
)
Other assets and liabilities
(423
)
 
(910
)
Net cash provided by operating activities
2,997

 
2,548

Cash flows from investing activities:
 

 
 

Investment in property, plant and equipment
(237
)
 
(287
)
Proceeds from sale of property, plant and equipment
69

 

Purchases of available-for-sale securities and other investments
(1,557
)
 
(122
)
Maturities and sales of available-for-sale securities and other investments
2

 
133

Proceeds from business divestitures

 
160

Net cash used in investing activities
(1,723
)
 
(116
)
Cash flows from financing activities:
 

 
 

Short-term borrowings with original maturities less than 90 days, net
1,046

 
72

Proceeds from debt, net of issuance costs
5

 
4

Payment of debt
(65
)
 
(2,158
)
Settlement of cash flow hedges
(9
)
 
4

Net transfer of cash and cash equivalents to Hewlett Packard Enterprise Company

 
(10,375
)
Net proceeds related to stock-based award activities
12

 
29

Repurchase of common stock
(911
)
 
(1,159
)
Cash dividends paid
(673
)
 
(646
)
Net cash used in financing activities
(595
)
 
(14,229
)
Increase (decrease) in cash and cash equivalents
679

 
(11,797
)
Cash and cash equivalents at beginning of period
6,288

 
17,433

Cash and cash equivalents at end of period
$
6,967

 
$
5,636

Supplemental schedule of non-cash activities:
 

 
 

Net assets transferred to Hewlett Packard Enterprise Company
$

 
$
22,144

Purchase of assets under capital leases
$
147

 
$
118

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

8


HP INC. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements
(Unaudited)
Note 1: Basis of Presentation
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, Hewlett-Packard Company changed its name to HP Inc. (“HP”) and entered into a separation and distribution agreement as well as various other agreements with Hewlett Packard Enterprise that provide a framework for the relationships between the parties, including among others a tax matters agreement, an employee matters agreement, a transition service agreement, a real estate matters agreement, a master commercial agreement and an information technology service agreement. For more information on the impacts of these agreements, see Note 6, “Taxes on Earnings”, Note 13, “Litigation and Contingencies” and Note 14, “Guarantees, Indemnifications and Warranties”.
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, 2016 in the Annual Report on Form 10-K filed on December 15, 2016. The Consolidated Condensed Balance Sheet for October 31, 2016 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
HP has made changes to the alignment of its business units in order to align its business unit financial reporting more closely with its current business structure. HP made these changes to its business unit information in prior reporting periods on an as-is basis. The reporting changes had no impact to previously reported segment net revenue, consolidated net revenue, earnings from continuing operations, net earnings or net earnings per share (“EPS”). See Note 2, “Segment Information”, for a further discussion of HP’s business unit realignments.
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”) 2015-03, “Simplifying the Presentation of Debt Issuance Costs” and ASU 2016-09, “Improvements to Employee Share-Based Payment Accounting”.
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. 
Recently Adopted Accounting Pronouncements
In March 2016, the Financial Accounting Standard Board (“FASB”) issued guidance, which amends the existing accounting standards for share-based payments, including the accounting for income taxes and forfeitures, as well as the classifications on the statements of cash flows. HP early adopted the amendments in the first quarter of fiscal year 2017. Beginning November 1, 2016, stock-based compensation excess tax benefits or tax deficiencies are reflected in the Consolidated Condensed Statements of Earnings as a component of the provision for taxes, whereas they previously were recognized as additional paid in capital in the stockholders’ deficit in the Consolidated Condensed Balance Sheets. HP has elected to continue to estimate forfeitures expected to occur to determine the stock-based compensation expense. Additionally, the Consolidated Condensed Statements of Cash Flows now present excess tax benefits as an operating activity rather than as a financing activity, while the payment of withholding taxes on the settlement of stock-based compensation awards is presented as a financing activity rather than as an operating activity, with prior periods adjusted accordingly. The implementation of this guidance did not have a material impact on the Consolidated Condensed Statements of Cash Flows for the nine months ended July 31, 2016. See Note 6, “Taxes on Earnings”, for additional impact on the Consolidated Condensed Financial Statements.
In May 2015, the FASB issued guidance, which amends the existing disclosures for investments measured at net asset value (“NAV”) per share (or its equivalent), as a practical expedient for fair value. This amendment removes the requirement to categorize these investments within the fair value hierarchy. The amendment also removes the requirement to make certain

9

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

disclosures for all investments that are eligible to be measured at fair value using the NAV as a practical expedient. HP adopted the guidance in the first quarter of fiscal year 2017. Other than the change in presentation of certain pension-related assets that use NAV as a practical expedient, which requires retrospective application, the adoption of this new guidance did not have an impact on the Consolidated Condensed Financial Statements.
In April 2015, the FASB amended the existing accounting standards for intangible assets. The amendments provide explicit guidance to customers in determining the accounting for fees paid in a cloud computing arrangement. HP adopted the guidance prospectively in the first quarter of fiscal year 2017. The implementation of this guidance did not have an impact on the Consolidated Condensed Financial Statements.
In April 2015, the FASB amended the existing accounting standards for the presentation of debt issuance costs. The amendments require that debt issuance costs related to a recognized debt liability be presented on the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by these amendments. HP adopted the guidance in the first quarter of fiscal year 2017. The adoption resulted in the reclassification of unamortized debt issuance costs related to HP’s U.S. Dollar Global Notes from “Other non-current assets” to “Long-term debt” within the Consolidated Condensed Balance Sheets of $23 million as of October 31, 2016.
Recently Issued Accounting Pronouncements Not Yet Adopted
In January 2017, the FASB issued guidance which simplifies the accounting for goodwill impairment. The updated guidance eliminates Step 2 of the impairment test, which requires entities to calculate the implied fair value of goodwill to measure a goodwill impairment charge. Instead, entities will record an impairment charge based on the excess of a reporting unit’s carrying amount over its fair value, determined in Step 1. HP is required to adopt the guidance in the first quarter of fiscal year 2021 using a prospective approach. Earlier adoption is permitted. HP currently expects to early adopt this guidance in the fourth quarter of fiscal year 2017. HP expects that the implementation of this guidance will not have an effect on its Consolidated Condensed Financial Statements.
In January 2017, the FASB amended the existing accounting standards for business combinations. The amendments clarify the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. HP is required to adopt the guidance in the first quarter of fiscal year 2019. Earlier adoption is permitted. HP is currently evaluating the timing and the impact of this guidance on the Consolidated Condensed Financial Statements.
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 show 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 is required to adopt the guidance retrospectively in the first quarter of fiscal year 2019. Earlier adoption is permitted.  HP is currently evaluating the timing and the impact of this guidance on the 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 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. Earlier adoption is permitted. HP is required to adopt the guidance in the first quarter of fiscal year 2019. HP is currently evaluating the timing and the impact of this guidance on the Consolidated Condensed Financial Statements.
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 is required to adopt the guidance in the first quarter of fiscal year 2019. 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

10

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

for all leases with lease terms of more than twelve months. HP is required to adopt the guidance in the first quarter of fiscal year 2020 using a modified retrospective approach. Earlier adoption is permitted. HP is currently evaluating the timing and the impact of this guidance on the 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 updated guidance primarily addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. HP is required to adopt the guidance in the first quarter of fiscal year 2019. 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 is currently evaluating the timing and the impact of this guidance on the Consolidated Condensed Financial Statements.
In May 2014, the FASB amended 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. The amendments may be applied retrospectively to each prior period presented (“full retrospective method”) or retrospectively with the cumulative effect recognized as of the date of initial application (“modified retrospective method”).
HP will adopt the new revenue standard in the first quarter of fiscal 2019 and intends to apply the modified retrospective method. HP is continuing to evaluate the impact of this guidance on the Consolidated Condensed Financial Statements and disclosures.


11

HP INC. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements
(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 segments for financial reporting purposes: Personal Systems, Printing and Corporate Investments. HP’s organizational structure is based on a number of 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 provides Commercial and Consumer personal computers (“PCs”), Workstations, thin clients, Commercial tablets and mobility devices, retail point-of-sale systems, displays and other related accessories, software, support and services for the commercial and consumer markets. HP groups Commercial notebooks, Commercial desktops, Commercial services, Commercial tablets and mobility devices, Commercial detachables, Workstations, retail point-of-sale systems and thin clients into commercial clients and Consumer notebooks, Consumer desktops, Consumer services and Consumer detachables into consumer clients 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 and SMBs, with a focus on robust designs, security, serviceability, connectivity, reliability and manageability in networked environments. Additionally, HP offers a range of services and solutions to enterprise and SMBs to help them manage the lifecycle of their PC and mobility installed base.
Consumer PCs are Notebooks, Desktops and hybrids that are optimized for consumer usage, focusing on multi-media consumption, online browsing, gaming and light productivity.
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 markets. Described below are HP’s global business capabilities within Printing:
Office Printing Solutions delivers HP’s office printers, supplies, services, and solutions to SMBs and large enterprises. HP goes to market through its extensive channel network and directly with HP sales. Ongoing key initiatives include design and deployment of A3 products and solutions for the copier and multifunction printer market, printer security solutions, PageWide solutions and award-winning JetIntelligence LaserJet products.
Home Printing Solutions delivers a compelling set of innovative printing products and solutions for the home and home business or small office customers utilizing both HP’s Ink and Laser technologies. 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 innovations like Sprocket drive print relevance for a mobile generation.
Graphics Solutions is reinventing the graphics industry by offering large-format, commercial and industrial solutions to print service providers and packaging converters through the largest portfolio of printers and presses (HP DesignJet, HP Latex Printers, HP Scitex, HP Indigo and HP PageWide Presses).
3D Printing delivers HP’s 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.
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 includes Home Printing Solutions, excluding supplies; and
Supplies comprises a set of highly innovative consumable products, ranging from Ink and Laser cartridges, media to graphics supplies and 3D supplies, for recurring use in Consumer and Commercial printer hardware and solutions
Corporate Investments include 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

12

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

system. Segment net revenue includes revenues from sales to external customers and certain revenues related to Managed Print Services arrangements, which are eliminated for the purposes of reporting HP’s consolidated net revenue.
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 market-related retirement credits, stock-based compensation expense, restructuring and other charges, acquisition-related charges, amortization of intangible assets, defined benefit plan settlement charges and net revenue eliminations, primarily related to Managed Print Services.
Business Unit Realignment
Effective at the beginning of its first quarter of fiscal year 2017, 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 a portion of LaserJet printers from Commercial to Consumer within the Printing segment. HP reflected this change to its business unit information in prior reporting periods on an as-is basis that resulted in the reclassification of revenues between the Commercial and Consumer business units of Printing. The reporting change had no impact to previously reported segment net revenue, consolidated net revenue, earnings from continuing operations, net earnings or net earnings per share.
Segment Operating Results from Continuing Operations
 
Personal
Systems
 
Printing
 
Corporate
Investments
 
Total
Segments
 
Eliminations
and Other
 
Total
 
In millions
Three months ended July 31, 2017
 

 
 

 
 

 
 

 
 

 
 
 

Net revenue
$
8,404

 
$
4,698

 
$
2

 
$
13,104

 
$
(44
)
 
 
$
13,060

Earnings (loss) from operations
$
313

 
$
813

 
$
(20
)
 
$
1,106

 
 

 
 
 

Three months ended July 31, 2016
 

 
 

 
 

 
 

 
 

 
 
 

Net revenue
$
7,512

 
$
4,423

 
$

 
$
11,935

 
$
(43
)
 
 
$
11,892

Earnings (loss) from operations
$
333

 
$
903

 
$
(35
)
 
$
1,201

 
 

 
 
 

Nine months ended July 31, 2017
 

 
 

 
 

 
 

 
 

 
 
 

Net revenue
$
24,290

 
$
13,924

 
$
7

 
$
38,221

 
$
(92
)
 
 
$
38,129

Earnings (loss) from operations
$
870

 
$
2,354

 
$
(69
)
 
$
3,155

 
 

 
 
 

Nine months ended July 31, 2016
 

 
 

 
 

 
 

 
 

 
 
 

Net revenue
$
21,969

 
$
13,702

 
$
6

 
$
35,677

 
$
49

(1) 
 
$
35,726

Earnings (loss) from operations
$
804

 
$
2,491

 
$
(66
)
 
$
3,229

 
 

 
 
 


(1) 
For the nine months ended July 31, 2016, the amount includes the recognition of revenue previously deferred in relation to sales to the pre-Separation finance entity.
The reconciliation of segment operating results to HP consolidated results was as follows:

13

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

 
Three months ended July 31
 
Nine months ended July 31
 
2017
 
2016
 
2017
 
2016
 
In millions
Net Revenue:
Total segments
$
13,104

 
$
11,935

 
$
38,221

 
$
35,677

Net revenue eliminations and other
(44
)
 
(43
)
 
(92
)
 
49

Total net revenue
$
13,060

 
$
11,892

 
$
38,129

 
$
35,726

Earnings from continuing operations before taxes:
 

 
 

 
 

 
 

Total segment earnings from operations
$
1,106

 
$
1,201

 
$
3,155

 
$
3,229

Corporate and unallocated costs and eliminations
(18
)
 
(7
)
 
(27
)
 
(31
)
Stock-based compensation expense
(46
)
 
(39
)
 
(169
)
 
(140
)
Restructuring and other charges
(46
)
 
(36
)
 
(249
)
 
(156
)
Acquisition-related charges
(40
)
 

 
(76
)
 

Amortization of intangible assets

 
(2
)
 
(1
)
 
(16
)
Defined benefit plan settlement charges
(1
)
 

 
(4
)
 

Interest and other, net
(56
)
 
(36
)
 
(201
)
 
(135
)
Total earnings from continuing operations before taxes          
$
899

 
$
1,081

 
$
2,428

 
$
2,751

Net revenue by segment and business unit was as follows:
 
Three months ended July 31
 
Nine months ended July 31
 
2017
 
2016
 
2017
 
2016
 
In millions
Notebooks
$
5,008

 
$
4,303

 
$
14,391

 
$
12,346

Desktops
2,566

 
2,455

 
7,477

 
7,384

Workstations
530

 
476

 
1,516

 
1,381

Other
300

 
278

 
906

 
858

Personal Systems
8,404

 
7,512

 
24,290

 
21,969

Supplies
3,120

 
2,840

 
9,284

 
9,040

Commercial Hardware
986

 
1,007

 
2,854

 
2,928

Consumer Hardware
592

 
576

 
1,786

 
1,734

Printing
4,698

 
4,423

 
13,924

 
13,702

Corporate Investments
2

 

 
7

 
6

Total segment net revenue
13,104

 
11,935

 
38,221

 
35,677

Net revenue eliminations and other
(44
)
 
(43
)
 
(92
)
 
49

Total net revenue
$
13,060

 
$
11,892

 
$
38,129

 
$
35,726


Note 3: Restructuring and Other Charges
Summary of Restructuring Plans
HP’s restructuring activities for the nine months ended July 31, 2017 and 2016 summarized by plan were as follows:

14

HP INC. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements (Continued)
(Unaudited)
Note 3: Restructuring and Other Charges (Continued)

 
Fiscal 2017 Plan
 
Fiscal 2015 Plan
 
Fiscal 2012 Plan
 

 
Severance
 
Infrastructure and other(1)
 
Severance and PRP(2)
 
Infrastructure and other
 
Severance and EER(3)
 
Infrastructure and other
 
Total
 
In millions
 

Accrued balance as of October 31, 2016
$
24

 
$

 
$
21

 
$
4

 
$
7

 
$
2

 
$
58

Charges
95

 
60

 
15

 

 
1

 

 
171

Cash payments
(46
)
 
(6
)
 
(35
)
 
(2
)
 
(4
)
 

 
(93
)
Non-cash and other adjustments
4

 
(52
)
 
6

 

 

 

 
(42
)
Accrued balance as of July 31, 2017
$
77

 
$
2

 
$
7

 
$
2

 
$
4

 
$
2

 
$
94

Total costs incurred to date as of July 31, 2017
$
119

 
$
60

 
$
171

 
$
27

 
$
1,075

 
$
44

 
$
1,496

Reflected in Consolidated Condensed Balance Sheets

 

 

 

 

 

 

Other accrued liabilities
$
77

 
$
2

 
$
7

 
$
2

 
$
4

 
$
1

 
$
93

Other non-current liabilities

 

 

 

 

 
1

 
1

Accrued balance as of October 31, 2015
$

 
$

 
$
39

 
$

 
$
21

 
$
3

 
$
63

Charges

 

 
107

 
27

 
4

 
1

 
139

Cash payments

 

 
(83
)
 
(3
)
 
(28
)
 

 
(114
)
Non-cash and other adjustments

 

 
(12
)
 
(19
)
 
9

 

 
(22
)
Accrued balance as of July 31, 2016
$

 
$

 
$
51

 
$
5

 
$
6

 
$
4

 
$
66

HP’s restructuring charges for the three months ended July 31, 2017 summarized by plan were as follows:
 
Fiscal 2017 Plan
 
Fiscal 2015 Plan
 
Fiscal 2012 Plan
 
 
 
Severance
 
Infrastructure and other
 
Severance and PRP(2)
 
Infrastructure and other
 
Severance and EER(3)
 
Infrastructure and other
 
Total
 
In millions
 
 
For the three months ended July 31, 2017
$
14

 
$
2

 
$
5

 
$

 
$

 
$

 
$
21

(1) 
Infrastructure and other includes asset impairment charges of $52 million for the nine months ended July 31, 2017 associated with the consolidation of manufacturing into global hubs.
(2) 
PRP represents Phased Retirement Program.
(3) 
EER represents Enhanced Early Retirement.
Fiscal 2017 Plan
On October 10, 2016, HP’s Board of Directors approved a restructuring plan (the “Fiscal 2017 Plan”), which it expects will be implemented through fiscal year 2019. HP estimates that it will incur aggregate pre-tax charges between $350 million and $500 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 will relate to infrastructure, non-labor actions and other charges, as described below. HP expects between 3,000 and 4,000 employees to exit by the end of fiscal year 2019.
Fiscal 2015 Plan
In connection with the Separation, on September 14, 2015, HP’s Board of Directors approved a cost savings plan (the “Fiscal 2015 Plan”), which includes labor and non-labor actions. The Fiscal 2015 Plan was considered substantially complete as of October 31, 2016 and HP does not expect any further activity associated with this plan. Approximately 3,000 employees exited by the end of fiscal year 2016.
Fiscal 2012 Plan 
HP initiated a restructuring plan in fiscal year 2012 (the “Fiscal 2012 Plan”), which includes severance and infrastructure costs. The Fiscal 2012 Plan is considered substantially complete as of October 31, 2016 and HP does not expect any further activity associated with this plan.
Other Charges

15

HP INC. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements (Continued)
(Unaudited)
Note 3: Restructuring and Other Charges (Continued)

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 and nine months ended July 31, 2017, HP incurred $25 million and $78 million of other charges, respectively. For the three and nine months ended July 31, 2016, HP incurred $5 million and $17 million of other charges, respectively.
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 July 31
 
U.S. Defined Benefit Plans
 
Non-U.S. Defined Benefit Plans
 
Post-Retirement Benefit Plans
 
2017
 
2016
 
2017
 
2016
 
2017
 
2016
 
In millions
Service cost
$

 
$

 
$
12

 
$
12

 
$
1

 
$

Interest cost
117

 
136

 
4

 
6

 
4

 
5

Expected return on plan assets
(168
)
 
(183
)
 
(8
)
 
(12
)
 
(7
)
 
(8
)
Amortization and deferrals:
 

 
 

 
 

 
 

 
 

 
 

Actuarial loss (gain)
19

 
14

 
10

 
6

 
(5
)
 
(3
)
Prior service benefit

 

 
(1
)
 
(1
)
 
(4
)
 
(4
)
Net periodic benefit (credit) cost
(32
)
 
(33
)
 
17

 
11

 
(11
)
 
(10
)
Settlement loss

 

 
1

 

 

 

Total periodic benefit (credit) cost
$
(32
)
 
$
(33
)
 
$
18

 
$
11

 
$
(11
)
 
$
(10
)
 
Nine months ended July 31
 
U.S. Defined Benefit Plans
 
Non-U.S. Defined Benefit Plans
 
Post- Retirement Benefit Plans
 
2017
 
2016
 
2017
 
2016
 
2017
 
2016
 
In millions
Service cost
$

 
$

 
$
36

 
$
35

 
$
1

 
$

Interest cost
351

 
408

 
12

 
18

 
13

 
15

Expected return on plan assets
(507
)
 
(549
)
 
(24
)
 
(36
)
 
(19
)
 
(24
)
Amortization and deferrals:
 
 
 
 
 
 
 
 
 
 
 
Actuarial loss (gain)
55

 
42

 
30

 
18

 
(12
)
 
(9
)
Prior service benefit

 

 
(3
)
 
(3
)
 
(14
)
 
(12
)
Net periodic benefit (credit) cost
(101
)
 
(99
)
 
51

 
32

 
(31
)
 
(30
)
Settlement loss
3

 
1

 
1

 
1

 

 

Special termination benefits

 

 

 

 

 
9

Total periodic benefit (credit) cost
$
(98
)
 
$
(98
)
 
$
52

 
$
33

 
$
(31
)
 
$
(21
)
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 2017, HP anticipates making contributions of approximately $26 million to its non-U.S. pension plans, approximately $33 million to its U.S. non-qualified plan participants and approximately $9 million to cover benefit claims under HP’s post-retirement benefit plans. During the nine months ended July 31, 2017, HP contributed $21 million to its non-U.S. pension plans, paid $27 million to cover benefit payments to U.S. non-qualified plan participants, and paid $7 million to cover benefit claims under HP’s post-retirement benefit plans.

16

HP INC. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements
(Unaudited)
Note 4: Retirement and Post-Retirement Benefit Plans (Continued)

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: Stock-Based Compensation
HP’s stock-based compensation plans permit the issuance of restricted stock awards, stock options and performance-based awards.
Stock-based compensation expense and the resulting tax benefits were as follows:
 
Three months ended July 31
 
Nine months ended July 31
 
2017
 
2016
 
2017
 
2016
 
In millions
Stock-based compensation expense
$
46

 
$
39

 
$
169

 
$
140

Income tax benefit
(15
)
 
(13
)
 
(54
)
 
(48
)
Stock-based compensation expense, net of tax
$
31

 
$
26

 
$
115

 
$
92

Restricted Stock Awards
Restricted stock awards are non-vested stock awards that may include grants of restricted stock or restricted stock units. For the three and nine months ended July 31, 2017 and 2016, HP granted only restricted stock units. HP uses the closing stock price on the grant date to estimate the fair value of service-based restricted stock units. HP estimates the fair value of restricted stock units subject to performance-adjusted vesting conditions using a combination of the closing stock price on the grant date and the Monte Carlo simulation model. For the three months ended July 31, 2017 and 2016, HP did not grant any restricted stock units subject to performance-adjusted vesting conditions. The weighted-average fair value and the assumptions used to measure the fair value of restricted stock units subject to performance-adjusted vesting conditions in the Monte Carlo simulation model were as follows:
 
Nine months ended July 31
 
2017
 
2016
Weighted-average fair value(1)
$
20

 
$
13

Expected volatility(2)
30.5
%
 
32.5
%
Risk-free interest rate(3)
1.4
%
 
1.2
%
Expected performance period in years(4)
2.9

 
2.9

(1) 
The weighted-average fair value was based on performance-adjusted restricted stock units granted during the period.
(2) 
The expected volatility was estimated using the historical volatility derived from HP’s common stock.
(3) 
The risk-free interest rate was estimated based on the yield on U.S. Treasury zero-coupon issues.
(4) 
The expected performance period was estimated based on the length of the remaining performance period from the grant date.

17

HP INC. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements (Continued)
(Unaudited)
Note 5: Stock-Based Compensation (Continued)

A summary of restricted stock award activity was as follows:
 
Nine months ended July 31, 2017
 
Shares
 
Weighted-Average
Grant Date Fair Value
Per Share
 
In thousands
 
 
Outstanding at beginning of period
28,710

 
$
13

Granted
14,618

 
$
16

Vested
(11,114
)
 
$
14

Forfeited
(624
)
 
$
14

Outstanding at end of period
31,590

 
$
14

As at July 31, 2017, there was $227 million of unrecognized pre-tax stock-based compensation expense related to non-vested restricted stock awards, which HP expects to recognize over the remaining weighted-average vesting period of 1.4 years.
Stock Options
HP utilizes the Black-Scholes-Merton option pricing formula to estimate the fair value of stock options subject to service-based vesting conditions. HP estimates the fair value of stock options subject to performance-contingent vesting conditions using a combination of the Monte Carlo simulation model and a lattice model, as these awards contain market conditions. The weighted-average fair value and the assumptions used to measure fair value for the three and nine months ended July 31, 2017 and 2016 were as follows:
 
Three months ended July 31
 
Nine months ended July 31
 
2017
 
2016
 
2017
 
2016
Weighted-average fair value(1)
$
4

 
$
2

 
$
4

 
$
4

Expected volatility(2)
28.0
%
 
31.6
%
 
28.0
%
 
36.2
%
Risk-free interest rate(3)
1.9
%
 
1.3
%
 
1.9
%
 
1.8
%
Expected dividend yield(4)
2.8
%
 
4.3
%
 
2.8
%
 
3.5
%
Expected term in years(5)
5.5

 
5.5

 
5.5

 
6

(1) 
The weighted-average fair value was based on stock options granted during the period.
(2) 
The expected volatility was estimated using the leverage-adjusted average of the term-matching volatilities of peer companies due to the lack of volume of forward traded options, which precluded the use of implied volatility.
(3) 
The risk-free interest rate was estimated based on the yield on U.S. Treasury zero-coupon issues.
(4) 
The expected dividend yield represents a constant dividend yield applied for the duration of the expected term of the award.
(5) 
Due to the lack of historical exercise and post-vesting termination patterns of the post-Separation employee base, the expected term was estimated using the simplified method; and for performance-contingent awards, the expected term represents an output from the lattice model.

18

HP INC. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements (Continued)
(Unaudited)
Note 5: Stock-Based Compensation (Continued)

A summary of stock option activity was as follows:
    
 
Nine months ended July 31, 2017
 
Shares
 
Weighted-
Average
Exercise Price
 
Weighted-
Average
Remaining
Contractual
Term
 
Aggregate
Intrinsic Value
 
In thousands
 
 
 
In years
 
In millions
Outstanding at beginning of period
28,218

 
$
12

 
 
 
 

Granted
104

 
$
19

 
 
 
 

Exercised
(4,863
)
 
$
10

 
 
 
 

Forfeited and expired
(766
)
 
$
17

 
 
 
 

Outstanding at end of period
22,693

 
$
13

 
4.2
 
$
145

Vested and expected to vest at end of period
22,152

 
$
13

 
4.2
 
$
142

Exercisable at end of period
14,923

 
$
12

 
3.3
 
$
108

The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value that option holders would have realized had all option holders exercised their options on the last trading day of the third quarter of fiscal year 2017. The aggregate intrinsic value is the difference between HP’s closing stock price on the last trading day of the third quarter of fiscal year 2017 and the exercise price, multiplied by the number of in-the-money options. The total intrinsic value of options exercised for the three and nine months ended July 31, 2017 was $20 million and $37 million, respectively.
As at July 31, 2017, there was $9 million of unrecognized pre-tax, stock-based compensation expense related to unvested stock options, which HP expects to recognize over the remaining weighted-average vesting period of 1.1 years.

19

HP INC. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements (Continued)
(Unaudited)

Note 6: Taxes on Earnings
Tax Matters Agreement and Other Income Tax Matters
In connection with the Separation, HP entered into the tax matters agreement (“TMA”) with Hewlett Packard Enterprise, effective on November 1, 2015, that governs the rights and obligations of HP and Hewlett Packard Enterprise for certain pre-Separation tax liabilities. The TMA provides that HP and Hewlett Packard Enterprise will share certain pre-Separation income tax liabilities. In certain jurisdictions, HP and Hewlett Packard Enterprise have joint and several liability for past income tax liabilities and accordingly, HP could be legally liable under applicable tax law for such liabilities and required to make additional tax payments.
In addition, if the distribution of Hewlett Packard Enterprise’s common shares to the HP stockholders is determined to be taxable, Hewlett Packard Enterprise and HP would share the tax liability equally, unless the taxability of the distribution is the direct result of action taken by either Hewlett Packard Enterprise or HP subsequent to the distribution, in which case the party causing the distribution to be taxable would be responsible for any taxes imposed on the distribution.
Upon completion of the Separation on November 1, 2015, HP recorded income tax indemnification receivables from Hewlett Packard Enterprise for certain income tax liabilities that HP is jointly and severally liable for, but for which it is indemnified by Hewlett Packard Enterprise under the TMA. The actual amount that Hewlett Packard Enterprise may be obligated to pay HP could vary depending on the outcome of certain unresolved tax matters, which may not be resolved for several years. The net receivable as of July 31, 2017 was $1.6 billion. In connection with the TMA, Interest and other, net for the nine months ended July 31, 2017 includes income of $24 million for changes in the tax indemnifications amounts.
Provision for Taxes
HP’s effective tax rate for continuing operations was 22.5% and 22.0% for the three months ended July 31, 2017 and 2016, respectively and 23.1% and 21.7% for the nine months ended July 31, 2017 and 2016, respectively. HP’s effective tax rate generally differs from the U.S. federal statutory rate of 35% due to favorable tax rates associated with certain earnings from HP’s operations in lower-tax jurisdictions throughout the world. HP has not provided U.S. taxes for all foreign earnings because HP plans to reinvest some of those earnings indefinitely outside the United States.
During the three and nine months ended July 31, 2017, HP recorded $27 million and $31 million, respectively, of net tax benefits related to discrete items in the provision for income taxes for continuing operations. These amounts included a tax benefit of $14 million and $45 million related to restructuring and other charges, and a tax benefit of $15 million and $28 million related to acquisition-related charges, offset by uncertain tax position charges of $19 million and $25 million, for the three and nine months ended July 31, 2017 , respectively. The three months and nine months ended July 31, 2017 included a net tax benefit of $12 million related to provision to return adjustments due to the filing of the U.S. Federal tax return. The nine months ended July 31, 2017 also included a tax charge of $26 million related to state provision to return adjustments.
During the three and nine months ended July 31, 2016, HP recorded discrete items resulting in net tax expense of $14 million and net tax benefit of $72 million, respectively, for continuing operations. These amounts included a tax benefit of $8 million and $46 million for the three and nine months ended July 31, 2016, respectively, related to restructuring and other charges. The nine months ended July 31, 2016 also included a tax benefit of $41 million arising from the retroactive research and development credit provided by the Consolidated Appropriations Act of 2016 signed into law in December 2015.
During the three and nine months ended July 31, 2017, HP recorded excess tax benefits of $2 million and $14 million, respectively, on stock options, restricted stock and performance share units, which are reflected in the Consolidated Condensed Statements of Earnings as a component of the provision for income taxes as a result of the early adoption of ASU 2016-09 -“Improvements to Employee Share- Based Payment Accounting”. See Note 1, “Basis of Presentation”, for more details regarding the guidance.
Uncertain Tax Positions
As of July 31, 2017, the amount of unrecognized tax benefits was $10.9 billion, of which up to $3.9 billion would affect HP’s effective tax rate if realized. The amount of unrecognized tax benefits did not significantly change for the nine months ended July 31, 2017. HP continues to record its tax liabilities related to uncertain tax positions and certain liabilities for which it has joint and several liability with Hewlett Packard Enterprise. 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 July 31, 2017, HP had accrued $239 million 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.

20

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

Note 7: Supplementary Financial Information
Accounts Receivable
 
As of
 
July 31, 2017
 
October 31, 2016
 
In millions
Accounts receivable
$
4,317

 
$
4,221

Allowance for doubtful accounts
(84
)
 
(107
)
 
$
4,233

 
$
4,114

The allowance for doubtful accounts related to accounts receivable and changes were as follows:
 
Nine months ended July 31, 2017
 
In millions
Balance at beginning of period
$
107

Provision for doubtful accounts
7

Deductions, net of recoveries
(30
)
Balance at end of period
$
84

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 July 31, 2017 and October 31, 2016 were not material. As of July 31, 2017 and October 31, 2016, HP had $130 million and $149 million, respectively, outstanding from the third parties, which is reported in accounts receivable in the Consolidated Condensed Balance Sheets. The costs associated with the sales of trade receivables for the three months and nine months ended July 31, 2017 and 2016 were not material.
The following is a summary of the activity under these arrangements:
 
Three months ended July 31
 
Nine months ended July 31
 
2017
 
2016
 
2017
 
2016
 
In millions
Balance at beginning of period
$
123

 
$
71

 
$
149

 
$
93

Trade receivables sold
2,268

 
2,126

 
6,969

 
5,896

Cash receipts
(2,269
)
 
(2,080
)
 
(6,997
)
 
(5,873
)
Foreign currency and other
8

 
(3
)
 
9

 
(2
)
Balance at end of period
$
130

 
$
114

 
$
130

 
$
114


21

HP INC. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements (Continued)
(Unaudited)
Note 7: Supplementary Financial Information (Continued)

Inventory
 
As of
 
July 31, 2017
 
October 31, 2016
 
In millions
Finished goods
$
3,384

 
$
3,103

Purchased parts and fabricated assemblies
1,800

 
1,381

 
$
5,184

 
$
4,484

Other Current Assets
 
As of
 
July 31, 2017
 
October 31, 2016
 
In millions
Value-added taxes receivable
$
772

 
$
795

Available-for-sale investments(1)
1,020

 

Supplier and other receivables
1,940

 
1,700

Prepaid and other current assets
1,327

 
1,087

 
$
5,059

 
$
3,582

_________________________
(1)See Note 8, “Fair Value” and Note 9, “Financial Instruments” for detailed information.
Property, Plant and Equipment
 
As of
 
July 31, 2017
 
October 31, 2016
 
In millions
Land, buildings and leasehold improvements
$
2,065

 
$
2,421

Machinery and equipment, including equipment held for lease
3,914

 
3,663

 
5,979

 
6,084

Accumulated depreciation
(4,272
)
 
(4,348
)
 
$
1,707

 
$
1,736


22

HP INC. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements (Continued)
(Unaudited)
Note 7: Supplementary Financial Information (Continued)

Other Non-Current Assets
 
As of
 
July 31, 2017
 
October 31, 2016
 
In millions
Tax indemnifications receivable(1)
$
1,662

 
$
1,591

Deferred tax assets
372

 
254

Other
1,128

 
1,316

 
$
3,162

 
$
3,161

_________________________
(1)In connection with the TMA discussed in Note 6, “Taxes on Earnings”.
Other Accrued Liabilities
 
As of
 
July 31, 2017
 
October 31, 2016
 
In millions
Other accrued taxes
$
815

 
$
755

Warranty
658

 
729

Sales and marketing programs
2,341

 
2,312

Other
2,418

 
1,922

 
$
6,232

 
$
5,718

Other Non-Current Liabilities
 
As of
 
July 31, 2017
 
October 31, 2016
 
In millions
Pension, post-retirement, and post-employment liabilities
$
2,506

 
$
2,705

Deferred tax liability
1,586

 
1,116

Tax liability
1,649

 
1,910

Deferred revenue
894

 
865

Other
834

 
737

 
$
7,469

 
$
7,333

Note 8: 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:

23

HP INC. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements (Continued)
(Unaudited)
Note 8: Fair Value (Continued)

 
As of July 31, 2017
 
As of October 31, 2016
 
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
$

 
$
1,929

 
$

 
$
1,929

 
$

 
$
2,092

 
$

 
$
2,092

Financial institution instruments

 
5

 

 
5

 

 

 

 

Government debt(1)
3,436

 
46

 

 
3,482

 
2,568

 

 

 
2,568

Available-for-Sale Investments:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Corporate debt

 
506

 

 
506

 

 

 

 

Financial institution instruments

 
50

 

 
50

 

 
2

 

 
2

Government debt(1)
224

 
240

 

 
464

 

 

 

 

Mutual funds
49

 

 

 
49

 
44

 

 

 
44

Marketable equity securities
6

 
6

 

 
12

 
5

 
4

 

 
9

Derivative Instruments:
 
 
 
 
 
 
 

 
 

 
 

 
 

 
 

Interest rate contracts

 
5

 

 
5

 

 
48

 

 
48

Foreign currency contracts

 
56

 
2

 
58

 

 
266

 
11

 
277

Other derivatives

 
3

 

 
3

 

 

 

 

Total Assets
$
3,715

 
$
2,846

 
$
2

 
$
6,563

 
$
2,617

 
$
2,412

 
$
11

 
$
5,040

Liabilities:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Derivative Instruments:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Foreign currency contracts
$

 
$
657

 
$
1

 
$
658

 
$

 
$
94

 
$
1

 
$
95

Other derivatives

 

 

 

 

 
2

 

 
2

Total Liabilities
$

 
$
657

 
$
1

 
$
658

 
$

 
$
96

 
$
1

 
$
97

__________________
(1)Government debt includes instruments such as U.S. treasury notes, U.S agency securities and non-U.S. government bonds.
There were no transfers between levels within the fair value hierarchy during the nine months ended July 31, 2017.
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 and interest rate exposures. HP uses indu