10-Q 1 hp-13118x10q.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: January 31, 2018
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 January 31, 2018 was 1,641,373,766 shares.
 




HP INC. AND SUBSIDIARIES
Form 10-Q
For the Quarterly Period ended January 31, 2018
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, 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 the interpretation and application of 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, 2017, 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 January 31
 
2018
 
2017
 
In millions, except per share amounts
Net revenue
$
14,517

 
$
12,684

Costs and expenses:
 
 
 

Cost of revenue
11,935

 
10,436

Research and development
347

 
296

Selling, general and administrative
1,169

 
1,017

Restructuring and other charges
31

 
63

Acquisition-related charges
42

 
16

Amortization of intangible assets
20

 

Total costs and expenses
13,544

 
11,828

Earnings from operations
973

 
856
Interest and other, net
(68
)
 
(81
)
Earnings before taxes
905

 
775
Provision for taxes
1,033

 
(164
)
Net earnings
$
1,938

 
$
611

 
 
 
 
Net earnings per share:
 

 
 

Basic
$
1.17

 
$
0.36

Diluted
$
1.16

 
$
0.36

 
 
 
 
Cash dividends declared per share
$
0.28

 
$
0.27

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

 
 

Basic
1,650

 
1,704

Diluted
1,669

 
1,721

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 January 31
 
2018
 
2017
 
In millions
Net earnings
$
1,938

 
$
611

Other comprehensive loss before taxes:
 

 
 

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

 
 

Unrealized (losses) gains arising during the period
(3
)
 
3

Gains reclassified into earnings
(5
)


 
(8
)

3

 
 
 
 
Change in unrealized components of cash flow hedges:
 

 
 

Unrealized losses arising during the period
(551
)
 
(169)

Losses (gains) reclassified into earnings
70

 
(71)


(481
)
 
(240)

Change in unrealized components of defined benefit plans:
 

 
 

Amortization of actuarial loss and prior service benefit
12

 
20

Curtailments, settlements and other
1

 


13

 
20

Other comprehensive loss before taxes
(476
)
 
(217)

Benefit from (provision for) taxes
65

 
(14)

Other comprehensive loss, net of taxes
(411
)
 
(231)

Comprehensive income
$
1,527

 
$
380

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
 
January 31, 2018
 
October 31, 2017
 
In millions, except par value 
ASSETS
 

 
 

Current assets:
 

 
 

Cash and cash equivalents
$
5,475

 
$
6,997

Accounts receivable
4,396

 
4,414

Inventory
5,655

 
5,786

Other current assets
5,691

 
5,121

Total current assets
21,217

 
22,318

Property, plant and equipment
2,026

 
1,878

Goodwill
5,935

 
5,622

Other non-current assets
6,067

 
3,095

Total assets
$
35,245

 
$
32,913

LIABILITIES AND STOCKHOLDERS’ DEFICIT
 

 
 

Current liabilities:
 

 
 

Notes payable and short-term borrowings
$
1,529

 
$
1,072

Accounts payable
12,848

 
13,279

Employee compensation and benefits
706

 
894

Taxes on earnings
213

 
214

Deferred revenue
1,039

 
1,012

Other accrued liabilities
7,014

 
5,941

Total current liabilities
23,349

 
22,412

Long-term debt
6,340

 
6,747

Other non-current liabilities
8,298

 
7,162

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; 1,641 and 1,650 shares issued and outstanding at January 31, 2018 and October 31, 2017, respectively)          
16

 
16

Additional paid in capital
417

 
380

Retained deficit
(1,346
)
 
(2,386
)
Accumulated other comprehensive loss
(1,829
)
 
(1,418
)
Total stockholders’ deficit
(2,742
)
 
(3,408
)
Total liabilities and stockholders’ deficit
$
35,245

 
$
32,913

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)
 
Three months ended January 31
 
2018
 
2017
 
In millions
Cash flows from operating activities:
 

 
 

Net earnings
$
1,938

 
$
611

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

 
 

Depreciation and amortization
129

 
84

Stock-based compensation expense
85

 
75

Restructuring and other charges
31

 
63

Deferred taxes on earnings
(3,713
)
 
67

Other, net
13

 
19

Changes in operating assets and liabilities, net of acquisitions:
 

 
 

Accounts receivable
272

 
614

Inventory
364

 
(69
)
Accounts payable
(478
)
 
(116
)
Taxes on earnings
2,463

 
(75
)
Restructuring and other
(133
)
 
(51
)
Other assets and liabilities
25

 
(455
)
Net cash provided by operating activities
996

 
767

Cash flows from investing activities:
 

 
 

Investment in property, plant and equipment
(129
)
 
(101
)
Proceeds from sale of property, plant and equipment
110

 
69

Purchases of available-for-sale securities and other investments
(268
)
 
(2
)
Maturities and sales of available-for-sale securities and other investments
139

 
2

Collateral posted for derivative instruments
(608
)
 
(54
)
Collateral returned for derivative instruments
53

 

Payment made in connection with business acquisition, net of cash acquired
(1,020
)
 

Net cash used in investing activities
(1,723
)
 
(86
)
Cash flows from financing activities:
 

 
 

(Payments of) Proceeds from short-term borrowings with original maturities less than 90 days, net
(106
)
 
35

Proceeds from short-term borrowings with original maturities greater than 90 days
200

 

Proceeds from debt, net of issuance costs

 
5

Payment of short-term borrowings with original maturities greater than 90 days
(118
)
 
(3
)
Payment of debt
(41
)
 
(24
)
Settlement of cash flow hedges

 
(4
)
Net payments related to stock-based award activities
(38
)
 
(34
)
Repurchase of common stock
(462
)
 
(386
)
Cash dividends paid
(230
)
 
(227
)
Net cash used in financing activities
(795
)
 
(638
)
(Decrease) Increase in cash and cash equivalents
(1,522
)
 
43

Cash and cash equivalents at beginning of period
6,997

 
6,288

Cash and cash equivalents at end of period
$
5,475

 
$
6,331

Supplemental schedule of non-cash activities:
 

 
 

Purchase of assets under capital leases
$
90

 
$
40

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 7, “Supplementary Financial Information”, 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 Condensed Financial Statements for the fiscal year ended October 31, 2017 in the Annual Report on Form 10-K, filed on December 14, 2017. The Consolidated Condensed Balance Sheet for October 31, 2017 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 implemented an organizational change to align its segment and business unit financial reporting more closely with its current business structure. HP reflected this change to its segment and business unit information in prior reporting periods on an as-if basis. The reporting changes had no impact on previously reported consolidated net revenue, earnings from operations, net earnings or net earnings per share (“EPS”). See Note 2, “Segment Information”, for a further discussion of HP’s segment and business unit realignments.
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 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 continuing 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 impact of this guidance on the Consolidated Condensed Financial Statements.
In January 2017, the FASB issued guidance, which amends 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.

9

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

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 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. 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 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 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 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. Earlier adoption is permitted. HP is currently evaluating the timing and the impact of this guidance on the 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. 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. Based on the initial assessment, it is not anticipated that the adoption will have a material impact on the amount or timing of revenue recognized in the Consolidated Condensed Financial Statements. We continue to make progress on assessing the overall impact of adoption of the standard on our business processes, systems and controls.

10

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 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 desktop and notebook 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 and convertibles, Workstations, retail point-of-sale 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 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 optimized for consumer usage, focusing on multi-media consumption, online browsing, gaming and light productivity.
Personal Systems groups its global business capabilities into Notebooks, Desktops, Workstations and Other when reporting business performance.
Notebooks consists of Consumer notebooks, Commercial notebooks, Mobile workstations and Commercial tablets and mobility devices;
Desktops includes Consumer desktops, Commercial desktops, thin clients, and retail point-of-sale 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 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. It also includes Samsung Electronics Co., Ltd (“Samsung”)-branded and Original Equipment Manufacturer (“OEM”) hardware, supplies and solutions. 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 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 delivers 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, HP Scitex, HP Indigo and HP PageWide Web 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:

11

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

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 to media, graphics supplies, 3D Printing supplies and Samsung-branded A4 and A3 supplies and OEM 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 market-related retirement credits, stock-based compensation expense, restructuring and other charges, acquisition-related charges, amortization of intangible assets, defined benefit plan settlement charges.
Realignment
Effective at the beginning of its first quarter of fiscal year 2018, HP implemented an organizational change to align its segment and business unit financial reporting more closely with its current business structure. The organizational change resulted in the transfer of long life consumables from Commercial to Supplies within the Printing segment. Certain revenues related to service arrangements, which are being eliminated for the purposes of reporting HP’s consolidated net revenue, have now been reclassified from Other to segments. HP has reflected this change to its segment and business unit information in prior reporting periods on an as-if basis. The reporting change had no impact on previously reported consolidated net revenue, earnings from operations, net earnings or net earnings per share.
Segment Operating Results from Operations
 
Personal
Systems
 
Printing
 
Corporate
Investments
 
Total
Segments
 
Other
 
Total
 
In millions
Three months ended January 31, 2018
 

 
 

 
 

 
 

 
 

 
 
 

Net revenue
$
9,440

 
$
5,076

 
$
1

 
$
14,517

 
$

 
 
$
14,517

Earnings (loss) from operations
$
337

 
$
801

 
$
(19
)
 
$
1,119

 
 

 
 
 

Three months ended January 31, 2017
 

 
 

 
 

 
 

 
 

 
 
 

Net revenue
$
8,216

 
$
4,464

 
$
2

 
$
12,682

 
$
2

 
 
$
12,684

Earnings (loss) from operations
$
312

 
$
714

 
$
(23
)
 
$
1,003

 
 

 
 
 

The reconciliation of segment operating results to HP consolidated results was as follows:

12

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

 
Three months ended January 31
 
2018
 
2017
 
In millions
Net Revenue:
Total segments
$
14,517

 
$
12,682

Other

 
2

Total net revenue
$
14,517

 
$
12,684

Earnings before taxes:
 

 
 

Total segment earnings from operations
$
1,119

 
$
1,003

Corporate and unallocated costs and other
33

 
7

Stock-based compensation expense
(85
)
 
(75
)
Restructuring and other charges
(31
)
 
(63
)
Acquisition-related charges
(42
)
 
(16
)
Amortization of intangible assets
(20
)
 

Defined benefit plan settlement charges
(1
)
 

Interest and other, net
(68
)
 
(81
)
Total earnings before taxes          
$
905

 
$
775

Net revenue by segment and business unit was as follows:
 
Three months ended January 31
 
2018
 
2017
 
In millions
Notebooks
$
5,595

 
$
4,890

Desktops
2,955

 
2,534

Workstations
543

 
491

Other
347

 
301

Personal Systems
9,440

 
8,216

Supplies
3,351

 
3,035

Commercial Hardware
1,070

 
839

Consumer Hardware
655

 
590

Printing
5,076

 
4,464

Corporate Investments
1

 
2

Total segment net revenue
14,517

 
12,682

Other

 
2

Total net revenue
$
14,517

 
$
12,684


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

13

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

Accrued balance as of October 31, 2017
$
76

 
$
19

 
$
6

 
$
2

 
$
3

 
$
2

 
$
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

 
$

 
$
6

 
$

 
$
3

 
$
2

 
$
41

Total costs incurred to date as of January 31, 2018
$
153

 
$
100

 
$
171

 
$
27

 
$
1,075

 
$
44

 
$
1,570

Reflected in Consolidated Condensed Balance Sheets

 

 

 

 

 

 

Other accrued liabilities
$
30

 
$

 
$
6

 
$

 
$
3

 
$
1

 
$
40

Other non-current liabilities

 

 

 

 

 
1

 
1

Accrued balance as of October 31, 2016
$
24

 
$

 
$
21

 
$
4

 
$
7

 
$
2

 
$
58

Charges
24

 
1

 
6

 

 
1

 

 
32

Cash payments
(8
)
 
(1
)
 
(24
)
 
(2
)
 
(2
)
 

 
(37
)
Non-cash and other adjustments

 

 
1

 

 

 

 
1

Accrued balance as of January 31, 2017
$
40

 
$

 
$
4

 
$
2

 
$
6

 
$
2

 
$
54

(1) 
PRP represents Phased Retirement Program.
(2) 
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 of approximately $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 around 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.
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
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, 2018 and 2017, HP incurred $13 million and $31 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:

14

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

 
Three months ended January 31
 
U.S. Defined Benefit Plans
 
Non-U.S. Defined Benefit Plans
 
Post-Retirement Benefit Plans
 
2018
 
2017
 
2018
 
2017
 
2018
 
2017
 
In millions
Service cost
$

 
$

 
$
14

 
$
12

 
$

 
$

Interest cost
113

 
117

 
6

 
4

 
4

 
4

Expected return on plan assets
(181
)
 
(169
)
 
(10
)
 
(8
)
 
(6
)
 
(6
)
Amortization and deferrals:
 

 
 

 
 

 
 

 
 

 
 

Actuarial loss (gain)
15

 
18

 
7

 
10

 
(4
)
 
(2
)
Prior service benefit

 

 
(1
)
 
(1
)
 
(5
)
 
(5
)
Net periodic (credit) benefit cost
(53
)
 
(34
)
 
16

 
17

 
(11
)
 
(9
)
Settlement loss
1

 

 

 

 

 

Total periodic (credit) benefit cost
$
(52
)
 
$
(34
)
 
$
16

 
$
17

 
$
(11
)
 
$
(9
)
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 2018, HP anticipates making contributions of approximately $24 million to its non-U.S. pension plans, approximately $33 million to its U.S. non-qualified plan participants and approximately $7 million to cover benefit claims under HP’s post-retirement benefit plans. During the three months ended January 31, 2018, HP contributed $11 million to its non-U.S. pension plans, paid $10 million to cover benefit payments to U.S. non-qualified plan participants, and paid $1 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: 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 January 31
 
2018
 
2017
 
In millions
Stock-based compensation expense
$
85

 
$
75

Income tax benefit
(19
)
 
(24
)
Stock-based compensation expense, net of tax
$
66

 
$
51

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 months ended January 31, 2018 and 2017, 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. 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:

15

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

 
Three months ended January 31
 
2018
 
2017
Weighted-average fair value(1)
$
24

 
$
20

Expected volatility(2)
29.8
%
 
30.5
%
Risk-free interest rate(3)
1.9
%
 
1.4
%
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.
A summary of restricted stock unit activity was as follows:
 
Three months ended January 31, 2018
 
Shares
 
Weighted-Average
Grant Date Fair Value
Per Share
 
In thousands
 
 
Outstanding at beginning of period
31,822

 
$
14

Granted
13,428

 
$
21

Vested
(12,670
)
 
$
14

Forfeited
(216
)
 
$
16

Outstanding at end of period
32,364

 
$
17

As of January 31, 2018, there was $350 million of unrecognized pre-tax stock-based compensation expense related to non-vested restricted stock units, which HP expects to recognize over the remaining weighted-average vesting period of 1.5 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. HP did not grant any stock options for the three months ended January 31, 2018 and 2017. A summary of stock option activity was as follows:
 
Three months ended January 31, 2018
 
Shares
 
Weighted-
Average
Exercise Price
 
Weighted-
Average
Remaining
Contractual
Term
 
Aggregate
Intrinsic Value
 
In thousands
 
 
 
In years
 
In millions
Outstanding at beginning of period
18,067

 
$
13

 
 
 
 

Exercised
(3,277
)
 
$
13

 
 
 
 

Forfeited and expired
(10
)
 
$
14

 
 
 
 

Outstanding at end of period
14,780

 
$
13

 
3.9
 
$
123

Vested and expected to vest
14,628

 
$
13

 
3.8
 
$
122

Exercisable
11,156

 
$
13

 
3.3
 
$
96

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 first quarter of fiscal year 2018. The aggregate intrinsic value is the difference between HP’s closing stock price on the last trading day of the first quarter of fiscal

16

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

year 2018 and the exercise price, multiplied by the number of in-the-money options. The total intrinsic value of options exercised for the three months ended January 31, 2018 was $30 million.
As of January 31, 2018, there was $4 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 0.6 years.
In January 2018, the Board approved an amendment and restatement of the HP’s 2004 Stock Incentive Plan, which included retiring 80 million shares from the plan’s share reserves.

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 January 31, 2018 was $1.7 billion.
Provision for Taxes
On December 22, 2017, the TCJA was signed by the President of the United States and enacted into law. The law includes significant changes to the U.S. corporate income tax system, including a Federal corporate rate reduction from 35% to 21%, limitations on the deductibility of interest expense and executive compensation, and the transition of U.S. international taxation from a worldwide tax system to a territorial tax system. ASC 740, Accounting for Income Taxes, requires companies to recognize the effect of tax law changes in the period of enactment even though the effective date for most provisions is for tax years beginning after December 31, 2017 (the “Effective Date”), or in the case of certain other provisions, January 1, 2018.
When a U.S federal tax rate change occurs during a fiscal year, taxpayers are required to compute a weighted daily average rate for the fiscal year of enactment. As a result of the TCJA, HP has calculated a U.S. federal statutory corporate income tax rate of 23% for the fiscal year ending October 31, 2018 and applied this rate in computing the first quarter of fiscal year 2018 income tax provision. The U.S. federal statutory corporate income tax rate of 23% is the weighted daily average rate between the pre-enactment U.S. federal statutory tax rate of 35% applicable to HP’s 2018 fiscal year prior to the Effective Date and the post-enactment U.S. federal statutory tax rate of 21% applicable to the 2018 fiscal year thereafter. HP expects the U.S. federal statutory rate to be 21% for fiscal years beginning after October 31, 2018.
Given the significance of the legislation, the SEC staff issued Staff Accounting Bulletin No. 118 (SAB 118), which allows registrants to record provisional amounts during a one year “measurement period”. During the measurement period, impacts of the TCJA are expected to be recorded at the time a reasonable estimate for all or a portion of the effects can be made, and provisional amounts can be recognized and adjusted as information becomes available, prepared or analyzed.
SAB 118 summarizes a three-step process to be applied at each reporting period to account for and qualitatively disclose: (1) the effects of the change in tax law for which accounting is complete; (2) provisional amounts (or adjustments to provisional amounts) for the effects of the tax law where accounting is not complete, but that a reasonable estimate has been determined; and (3) a reasonable estimate cannot yet be made and therefore taxes are reflected in accordance with law prior to the enactment of the TCJA.

17

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

As of January 31, 2018, HP has not completed its accounting for the tax effects of the TCJA, however, in certain cases HP has made a reasonable estimate of the effects for remeasurement on its existing deferred tax balances and the one-time transition tax. With respect to the Global Intangible Low Taxed Income (“Global Minimum Tax”) provisions and realizability of our deferred tax assets, further discussed below, HP has not been able to make a reasonable estimate and continue to account for those items based on its existing accounting under ASC 740, Income Taxes, and the provisions of the tax laws that were in effect immediately prior to enactment. The impact of the TCJA may differ materially from this estimate due to changes in interpretations and assumptions HP has made, additional guidance that may be issued and actions HP may take as a result of the TCJA. The impacts of HP's estimates are described further below.
While HP has not yet completed its analysis to the impact on its deferred tax balances, HP recorded provisional income tax expense of $1.2 billion related to the remeasurement of its deferred tax assets and liabilities that will reverse at the new 21% rate. However, HP is still analyzing certain aspects of the TCJA and refining its calculations, which could potentially affect the measurement of these balances or potentially give rise to new deferred tax amounts.
The TCJA also includes a one-time mandatory deemed repatriation transition tax on the net accumulated post-1986 earnings and profits (“E&P”) of a U.S. taxpayer’s foreign subsidiaries. HP has computed a provisional deemed repatriation tax of approximately $3.2 billion of which more than half is expected to be offset with existing and future tax attributes reducing HP’s cash outlay. Companies may elect to pay this tax over 8 years and HP intends to make this election. HP has not yet completed its calculation of the total post-1986 E&P for these foreign subsidiaries. Further, the transition tax is based, in part, on the amount of those earnings held in cash and other specified assets. This amount may change when HP finalizes the calculation of post-1986 E&P previously deferred from U.S. federal taxation and finalize the amounts held in cash or other specified assets. No additional income taxes have been provided for any remaining undistributed foreign earnings not subject to the transition tax, or any additional outside basis difference inherent in these entities, as these amounts continue to be indefinitely reinvested in foreign operations.
As a result of the deemed repatriation tax noted above, which is based on HP’s total post-1986 deferred foreign income, HP redetermined $5.5 billion of its U.S. deferred tax liability on those unremitted earnings with a provisional tax payable of $3.2 billion, as noted above. This resulted in a net benefit. This tax benefit is provisional as HP is still analyzing certain aspects of the legislation and refining calculations, which could potentially materially affect the measurement of these amounts.
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 is still evaluating whether to make a policy election to treat the Global Minimum Tax as a period cost or to provide U.S. deferred taxes on foreign temporary differences that are expected to generate Global Minimum Tax income when they reverse in future years. In addition HP is still evaluating the realizability of certain deferred tax assets. There could be additional changes including a further write down, an increase in the valuation allowance and/or other changes to HP's deferred taxes once it completes these evaluations.
As a result of U.S. tax reform, HP revised its estimated annual effective tax rate to reflect the change in the U.S. federal statutory tax rate from 35% to 23%. HP’s effective tax rate was (114.1%) and 21.2% for the three months ended January 31, 2018 and 2017, respectively. The difference between the U.S. federal statutory tax rate of 23% and HP’s effective tax rate for the three months ended January 31, 2018 is primarily 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. For the three months ended January 31, 2017 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 months ended January 31, 2018, HP recorded $1.1 billion of net tax benefits related to discrete items in the provision for taxes. As noted above, HP has 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.
During the three months ended January 31, 2017, HP recorded $1 million of net tax benefit related to discrete items in the provision for taxes. This amount included a tax benefit of $17 million related to uncertain tax positions and a tax benefit of $19

18

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

million related to restructuring and other charges. These tax benefits were offset by $26 million related to the state tax provision to return adjustments and $9 million related to various other items.
During the three months ended January 31, 2018, in addition to the discrete items mentioned above, HP recorded excess tax benefits of $28.0 million, on stock options, restricted stock units and performance adjusted restricted stock 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 in fiscal 2017 of ASU 2016-09 -“Improvements to Employee Share- Based Payment Accounting”. See Note 1, “Basis of Presentation”, for more details regarding the adoption.
Uncertain Tax Positions
As of January 31, 2018, the amount of unrecognized tax benefits was $9.8 billion, of which up to $3.4 billion would affect HP’s effective tax rate if realized. The amount of unrecognized tax benefits decreased by $1.0 billion for the three months ended January 31, 2018. 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 January 31, 2018, HP had accrued $278 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. HP believes it is reasonably possible that its existing unrecognized tax benefits may be reduced by up to $1.5 billion within the next 12 months.

Note 7: Supplementary Financial Information
Accounts Receivable
 
As of
 
January 31, 2018
 
October 31, 2017
 
In millions
Accounts receivable
$
4,504

 
$
4,515

Allowance for doubtful accounts
(108
)
 
(101
)
 
$
4,396

 
$
4,414

The allowance for doubtful accounts related to accounts receivable and changes were as follows:
 
Three months ended January 31, 2018
 
In millions
Balance at beginning of period
$
101

Provision for doubtful accounts
7

Balance at end of period
$
108

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, 2018 and October 31, 2017 were not material. The costs associated with the sales of trade receivables for the three months ended January 31, 2018 and 2017 were not material.
The following is a summary of the activity under these arrangements:

19

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

 
Three months ended January 31
 
2018
 
2017
 
In millions
Balance at beginning of period(1)
$
147

 
$
149

Trade receivables sold
2,936

 
2,449

Cash receipts
(2,921
)
 
(2,493
)
Foreign currency and other
10

 
(1
)
Balance at end of period(1)
$
172

 
$
104

(1) Amounts outstanding from third parties reported in Accounts Receivable in the Consolidated Condensed Balance Sheets.
Inventory
 
As of
 
January 31, 2018
 
October 31, 2017
 
In millions
Finished goods
$
3,768

 
$
3,857

Purchased parts and fabricated assemblies
1,887

 
1,929

 
$
5,655

 
$
5,786

Other Current Assets
 
As of
 
January 31, 2018
 
October 31, 2017
 
In millions
Value-added taxes receivable
$
867

 
$
857

Available-for-sale investments(1)
1,266

 
1,149

Supplier and other receivables
2,445

 
1,891

Prepaid and other current assets
1,113

 
1,224

 
$
5,691

 
$
5,121

_________________________
(1)See Note 8, “Fair Value” and Note 9, “Financial Instruments” for detailed information.
Property, Plant and Equipment
 
As of
 
January 31, 2018
 
October 31, 2017
 
In millions
Land, buildings and leasehold improvements
$
1,894

 
$
2,082

Machinery and equipment, including equipment held for lease
4,040

 
3,876

 
5,934

 
5,958

Accumulated depreciation
(3,908
)
 
(4,080
)
 
$
2,026

 
$
1,878

Other Non-Current Assets
 
As of
 
January 31, 2018
 
October 31, 2017
 
In millions
Income tax indemnifications receivable
$
1,713

 
$
1,695

Deferred tax assets
2,648

 
342

Other(1)
1,706

 
1,058

 
$
6,067

 
$
3,095


20

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

(1)    Includes available-for-sale investments of $58 million and $61 million as of January 31, 2018 and October 31, 2017, respectively.
Other Accrued Liabilities
 
As of
 
January 31, 2018
 
October 31, 2017
 
In millions
Other accrued taxes
$
960

 
$
895

Warranty
677

 
660

Sales and marketing programs
2,725

 
2,441

Other
2,652

 
1,945

 
$
7,014

 
$
5,941

Other Non-Current Liabilities
 
As of
 
January 31, 2018
 
October 31, 2017
 
In millions
Pension, post-retirement, and post-employment liabilities
$
1,930

 
$
1,999

Deferred tax liability
100

 
1,410

Tax liability
4,254

 
2,005

Deferred revenue
945

 
921

Other
1,069

 
827

 
$
8,298

 
$
7,162

Interest and other, net
 
Three months ended January 31
 
2018
 
2017
 
In millions
Interest expense on borrowings
$
(87
)
 
$
(73
)
Foreign exchange loss
(13
)
 
(29
)
Other, net
32

 
21

 
$
(68
)
 
$
(81
)


21

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


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:
 
As of January 31, 2018
 
As of October 31, 2017
 
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
$

 
$
1,180

 
$

 
$
1,180

 
$

 
$
1,390

 
$

 
$
1,390

Financial institution instruments

 

 

 

 

 
6

 

 
6

Government debt(1)
2,833

 

 

 
2,833

 
3,902

 
100

 

 
4,002

Available-for-Sale Investments:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Corporate debt

 
667

 

 
667

 

 
629

 

 
629

Financial institution instruments

 
77

 

 
77

 

 
78

 

 
78

Government debt(1)

 
522

 

 
522

 

 
442

 

 
442

Mutual funds
52

 

 

 
52

 
49

 

 

 
49

Marketable equity securities
6

 

 

 
6

 
6

 
6

 

 
12

Derivative Instruments:
 
 
 
 
 
 
 

 
 

 
 

 
 

 
 

Foreign currency contracts

 
51

 

 
51

 

 
110

 
10

 
120

Other derivatives

 
4

 

 
4

 

 
1

 

 
1

Total Assets
$
2,891

 
$
2,501

 
$

 
$
5,392

 
$
3,957

 
$
2,762

 
$
10

 
$
6,729

Liabilities:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Derivative Instruments:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Interest rate contracts
$

 
$
52

 
$

 
$
52

 
$

 
$
12

 
$

 
$
12

Foreign currency contracts

 
782

 
5

 
787

 

 
358

 
2

 
360

Total Liabilities
$

 
$
834

 
$
5

 
$
839

 
$

 
$
370

 
$
2

 
$
372

__________________
(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, 2018.

22

HP INC. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements (Continued)
(Unaudited)
Note 8: 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 and interest rate 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 9, “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 $8.1 billion as of January 31, 2018, compared to its carrying amount of $7.9 billion at that date. The fair value of HP’s short- and long-term debt was $8.1 billion as of October 31, 2017, compared to its carrying value of $7.8 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 and non-financial assets, such as goodwill, intangible assets and property, plant and equipment, are recorded at fair value in the period of acquisition and a subsequent impairment charge is recognized. If measured at fair value in the Consolidated Condensed Balance Sheets, non-marketable equity investments and non-financial assets would generally be classified within Level 3 of the fair value hierarchy.


23

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


Note 9: Financial Instruments
Cash Equivalents and Available-for-Sale Investments
 
As of January 31, 2018
 
As of October 31, 2017
 
Cost
 
Gross Unrealized Gain
 
Gross Unrealized Loss
 
Fair Value
 
Cost
 
Gross Unrealized Gain
 
Gross Unrealized Loss
 
Fair Value
 
In millions
Cash Equivalents:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Corporate debt
$
1,180

 
$

 
$

 
$
1,180

 
$
1,390

 
$

 
$

 
$
1,390

Financial institution instruments

 

 

 

 
6

 

 

 
6

Government debt
2,833

 

 

 
2,833

 
4,002

 

 

 
4,002

Total cash equivalents
4,013

 

 

 
4,013

 
5,398

 

 

 
5,398

Available-for-Sale Investments:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Corporate debt (1)
669

 

 
(2
)
 
667

 
629

 

 

 
629

Financial institution instruments (1)
77

 

 

 
77

 
78

 

 

 
78

Government debt (1)
524

 

 
(2
)
 
522

 
443

 

 
(1
)
 
442

Marketable equity securities
4

 
2

 

 
6

 
5

 
7

 

 
12

Mutual funds
42

 
10

 

 
52

 
39

 
10

 

 
49

Total available-for-sale investments
1,316

 
12

 
(4
)
 
1,324

 
1,194

 
17

 
(1
)
 
1,210

Total cash equivalents and available-for-sale investments
$
5,329

 
$
12

 
$
(4
)
 
$
5,337

 
$
6,592

 
$
17

 
$
(1
)
 
$
6,608

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(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, 2018 and October 31, 2017, 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, 2018
 
Amortized
Cost
 
Fair Value
 
In millions
Due in one year or less
$
761

 
$
759

Due in one to five years
$
509

 
$
507

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 $39 million and $37 million as of January 31, 2018 and October 31, 2017, respectively.

24

HP INC. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements (Continued)
(Unaudited)
Note 9: 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, to a lesser extent, equity 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 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 $765 million and $258 million as of January 31, 2018 and as of October 31, 2017, 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, 2018 and October 31, 2017.
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. HP

25

HP INC. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements (Continued)
(Unaudited)
Note 9: Financial Instruments (Continued)

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, 2018 and 2017, 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, 2018 and 2017.
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, 2018
 
As of October 31, 2017
 
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
$
2,500

 
$

 
$

 
$
1

 
$
51

 
$
2,500

 
$

 
$

 
$

 
$
12

Cash flow hedges:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Foreign currency contracts
15,901

 
29

 
4

 
589

 
176

 
16,149

 
92

 
12

 
245

 
100

Total derivatives designated as hedging instruments
18,401

 
29

 
4

 
590

 
227

 
18,649

 
92

 
12

 
245

 
112

Derivatives not designated as hedging instruments
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Foreign currency contracts
4,515

 
18

 

 
22

 

 
5,801

 
16

 

 
15

 

Other derivatives
142

 
4

 

 

 

 
123

 
1

 

 

 

Total derivatives not designated as hedging instruments
4,657

 
22

 

 
22

 

 
5,924

 
17

 

 
15

 

Total derivatives
$
23,058

 
$
51

 
$
4

 
$
612

 
$
227

 
$
24,573

 
$
109

 
$
12

 
$
260

 
$
112

Offsetting of Derivative Instruments
HP recognizes all derivative instruments on a gross basis in the Consolidated Condensed Balance Sheets. HP does not offset the fair value of its derivative instruments against the fair value of cash collateral posted under its collateral security agreements. As of January 31, 2018 and October 31, 2017, information related to the potential effect of HP’s master netting agreements and collateral security agreements was as follows:

26

HP INC. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements (Continued)
(Unaudited)
Note 9: Financial Instruments (Continued)

 
In the Consolidated Condensed Balance Sheets
 
 
 
 
 
 
 
 
 
 
 
Gross Amounts Not Offset
 
 
 
 
 
Gross Amount
Recognized
(i)
Gross Amount
Offset
(ii)
Net Amount
Presented
(iii) = (i)–(ii)
 
Derivatives
(iv)
 
Financial
Collateral
(v)
 
 
 
Net Amount
(vi) = (iii)–(iv)–(v)
 
In millions
As of January 31, 2018
 

 
 

 
 

 
 

 
 

 
 
 
 

Derivative assets
$
55

 
$

 
$
55

 
$
51

 
$

(1) 
 
$
4

Derivative liabilities
$
839

 
$

 
$
839

 
$
51

 
$
770

(2) 
 
$
18

As of October 31, 2017
 

 
 

 
 

 
 

 
 

 
 
 
 

Derivative assets
$
121

 
$

 
$
121

 
$
108

 
$
4

(1) 
 
$
9

Derivative liabilities
$
372

 
$

 
$
372

 
$
108

 
$
219

(2) 
 
$
45

_______________________________________________________________________________
(1) 
Represents the cash collateral posted by counterparties as of the respective reporting date for HP’s asset position, net of derivative amounts that could be offset, as of, generally, two business days prior to the respective reporting date.
(2) 
Represents the collateral posted by HP through re-use of counterparty cash collateral as of the respective reporting date for HP’s liability position, net of derivative amounts that could be offset, as of, generally, two business days prior to the respective reporting date.

27

HP INC. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements (Continued)
(Unaudited)
Not