Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.
HP INC. AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations
This Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") is organized as follows:
-
-
HP Inc. Separation Transaction.
A discussion of
the separation of Hewlett Packard Enterprise Company, HP Inc.'s former enterprise technology infrastructure, software, services and financing businesses.
-
-
Overview.
A discussion of our business and other
highlights affecting the company to provide context for the remainder of this MD&A.
-
-
Critical Accounting Policies and Estimates.
A discussion
of accounting policies and estimates that we believe are important to understanding the assumptions and judgments incorporated in our reported financial results.
-
-
Results of Operations.
An analysis of our continuing
financial results comparing the three and six months ended April 30, 2016 to the prior-year periods. A discussion of the results of continuing operations is followed by a more detailed
discussion of the results of operations by segment.
-
-
Liquidity and Capital Resources.
An analysis of changes
in our cash flows and a discussion of our liquidity and continuing financial condition.
-
-
Contractual and Other Obligations.
An overview of
contractual obligations, retirement and post-retirement benefit plan contributions, cost saving plan, uncertain tax positions and off-balance sheet arrangements of our continuing operations and
separation costs.
We
intend the discussion of our continuing financial condition and results of continuing operations that follows to provide information that will assist the reader in understanding our
Consolidated Condensed Financial Statements, the changes in certain key items in those financial statements from year to year, and the primary factors that accounted for those changes, as well as how
certain accounting principles, policies and estimates affect our Consolidated Condensed Financial Statements. This discussion should be read in conjunction with our Consolidated Condensed Financial
Statements and the related notes that appear elsewhere in this document.
HP Inc. Separation Transaction
On November 1, 2015 (the "Distribution Date"), we completed the separation of Hewlett Packard Enterprise Company ("Hewlett
Packard Enterprise"), HP Inc.'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").
On
the Distribution Date, each of our stockholders of record as of the close of business on October 21, 2015 (the "Record Date") received one share of Hewlett Packard Enterprise
common stock for every one share of our common stock held as of the Record Date. We distributed a total of approximately 1.8 billion shares of Hewlett Packard Enterprise common stock to our
stockholders. Hewlett Packard
Enterprise is now an independent public company, trading on the New York Stock Exchange ("NYSE") under the symbol "HPE". After the Separation, we do not beneficially own any shares of Hewlett Packard
Enterprise common stock.
The
historical results of operations and financial positions of Hewlett Packard Enterprise are reported as discontinued operations in our Consolidated Condensed Financial Statements. For
further
55
Table of Contents
HP INC. AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
information
on discontinued operations, see Note 2, "Discontinued Operations", to the Consolidated Condensed Financial Statements in Item 1 of Part I, which is incorporated herein
by reference.
OVERVIEW
We are a leading global provider of personal computing and other access devices, imaging and printing products, and related
technologies, solutions, and services. We sell to individual consumers, small- and medium-sized businesses ("SMBs") and large enterprises, including customers in the government, health, and education
sectors. We have three segments for financial reporting purposes: Personal Systems, Printing and Corporate Investments. The Personal Systems segment offers commercial personal computers ("PCs"),
consumer PCs, workstations, thin clients, tablets, retail point-of-sale systems, calculators and other related accessories, software, support, and services for the commercial and consumer markets. The
Printing segment provides consumer and commercial printer hardware, supplies, media, solutions and services, as well as scanning devices. Corporate Investments include HP Labs and certain business
incubation projects, among others.
-
-
In Personal Systems, our strategic focus is on profitable growth through improved market segmentation with respect to enhanced
innovation in multi-operating systems, multi-architecture, geography, customer segments and other key attributes. Additionally, HP is investing in premium and mobility form factors such as convertible
notebooks, detachable notebooks, and commercial phablets in order to meet customer preference for mobile, thinner and lighter devices. We anticipate gradual improvement in the market long-term given
our product lineup and roadmap, broadly combined with our strength in commercial markets.
-
-
In Printing, our strategic focus is in areas such as business printing which includes delivering solutions to SMB and Enterprise
customers such as multi-function and PageWide printers, including our JetIntelligence lineup of LaserJet printers; shift to contractual solutions that include Managed Print Services and Instant Ink
which presents strong aftermarket supplies opportunities; and graphics, with innovation such as our Indigo and Latex product offerings. We plan to continue to focus on shifting the mix in the
installed base to higher value units and expanding our innovative ink, laser and graphics programs. We continue to execute on our key initiatives of focusing on products targeted at high usage
categories and introducing new revenue delivery models. In the consumer market, our Ink in the Office initiative is continuing to shift the installed base to more valuable units. In the commercial
market, our focus is on placing higher value printer units which offer positive annuity of toner and ink as well as accelerating growth in graphic solutions products.
We
continue to experience challenges that are representative of trends and uncertainties that may affect our business and results of operations. One set of challenges relates to dynamic
and accelerating market trends such as the decline in the PC market. A second set of challenges relates to changes in the competitive landscape. Our primary competitors are exerting increased
competitive pressure in targeted areas and are entering new markets, our emerging competitors are introducing new technologies and business models, and our alliance partners in some businesses are
increasingly becoming our competitors in others. A third set of challenges relates to business model changes and our go-to-market execution.
-
-
In Personal Systems, we are witnessing soft demand in the Personal Computer ("PC") market as customers hold onto their PCs longer,
thereby extending PC refresh cycles. Demand for PCs is being impacted by weaker macroeconomic conditions and currency depreciation in Latin
56
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HP INC. AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
To
address these challenges, we continue to pursue innovation with a view towards developing new products and services aligned with market demand, industry trends and the needs of our
customers and partners. In addition, we need to continue to improve our operations, with a particular focus on enhancing our end-to-end processes and efficiencies. We also need to continue to optimize
our sales coverage models, align our sales incentives with our strategic goals, improve channel execution, strengthen our capabilities in our areas of strategic focus, and develop and capitalize on
market opportunities.
For
a further discussion of trends, uncertainties and other factors that could impact our continuing operating results, see the section entitled "Risk Factors" in Item 1A in our
Annual Report on Form 10-K for the fiscal year ended October 31, 2015.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Management's Discussion and Analysis of Financial Condition and Results of Operations is based on our Consolidated Condensed Financial
Statements, which have been prepared in accordance with United States ("U.S.") generally accepted accounting principles ("GAAP"). The preparation of these financial statements requires management to
make estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, net revenues and expenses, and disclosure of contingent liabilities. Our management believes that
there have been no significant changes during the six months ended April 30, 2016 to the items that we disclosed as our critical accounting policies and estimates in Management's Discussion and
Analysis of Financial Condition and Results of Operations for the fiscal year ended October 31, 2015 included in the Annual Report on Form 10-K filed on December 16, 2015 and in
the Current Report on Form 8-K filed on April 27, 2016.
ACCOUNTING PRONOUNCEMENTS
For a summary of recent accounting pronouncements applicable to our consolidated condensed financial statements see Note 1,
"Overview and Basis of Presentation", to the Consolidated Condensed Financial Statements in Item 1 of Part I, which is incorporated herein by reference.
RESULTS OF OPERATIONS
Revenue from our international operations has historically represented, and we expect will continue to represent, a majority of our
overall net revenue. As a result, our net revenue growth has been impacted, and we expect will continue to be impacted, by fluctuations in foreign currency exchange rates. In order to provide a
framework for assessing performance excluding the impact of foreign currency fluctuations, we present the year-over-year percentage change in net revenue on a constant currency basis, which assumes no
change in foreign currency exchange rates from the prior-year period and does not adjust for any repricing or demand impacts from changes in foreign currency exchange rates. This information is
provided so that net revenue can be viewed without the effect of fluctuations in foreign currency exchange rates, which is consistent with how management evaluates our net revenue results and trends.
This constant currency disclosure is provided in addition
57
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HP INC. AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
to,
and not as a substitute for, the year-over-year percentage change in net revenue on a GAAP basis. Other companies may calculate and define similarly labeled items differently, which may limit the
usefulness of this measure for comparative purposes.
Results
of operations in dollars and as a percentage of net revenue were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended April 30
|
|
Six months ended April 30
|
|
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
|
|
Dollars
|
|
% of
Net Revenue
|
|
Dollars
|
|
% of
Net Revenue
|
|
Dollars
|
|
% of
Net Revenue
|
|
Dollars
|
|
% of
Net Revenue
|
|
|
|
Dollars in millions
|
|
Net revenue
|
|
$
|
11,588
|
|
|
100.0
|
%
|
$
|
12,977
|
|
|
100.0
|
%
|
$
|
23,834
|
|
|
100.0
|
%
|
$
|
26,835
|
|
|
100.0
|
%
|
Cost of revenue
|
|
|
9,338
|
|
|
80.6
|
%
|
|
10,415
|
|
|
80.3
|
%
|
|
19,299
|
|
|
81.0
|
%
|
|
21,588
|
|
|
80.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
2,250
|
|
|
19.4
|
%
|
|
2,562
|
|
|
19.7
|
%
|
|
4,535
|
|
|
19.0
|
%
|
|
5,247
|
|
|
19.6
|
%
|
Research and development
|
|
|
301
|
|
|
2.6
|
%
|
|
305
|
|
|
2.4
|
%
|
|
593
|
|
|
2.5
|
%
|
|
609
|
|
|
2.3
|
%
|
Selling, general and administrative
|
|
|
1,002
|
|
|
8.6
|
%
|
|
1,228
|
|
|
9.4
|
%
|
|
2,039
|
|
|
8.5
|
%
|
|
2,450
|
|
|
9.1
|
%
|
Restructuring charges
|
|
|
100
|
|
|
0.9
|
%
|
|
7
|
|
|
0.0
|
%
|
|
120
|
|
|
0.5
|
%
|
|
21
|
|
|
0.1
|
%
|
Amortization of intangible assets
|
|
|
6
|
|
|
0.0
|
%
|
|
25
|
|
|
0.2
|
%
|
|
14
|
|
|
0.1
|
%
|
|
52
|
|
|
0.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings from continuing operations
|
|
|
841
|
|
|
7.3
|
%
|
|
997
|
|
|
7.7
|
%
|
|
1,769
|
|
|
7.4
|
%
|
|
2,115
|
|
|
7.9
|
%
|
Interest and other, net
|
|
|
(5
|
)
|
|
(0.1
|
)%
|
|
(78
|
)
|
|
(0.6
|
)%
|
|
(99
|
)
|
|
(0.4
|
)%
|
|
(199
|
)
|
|
(0.8
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings from continuing operations before taxes
|
|
|
836
|
|
|
7.2
|
%
|
|
919
|
|
|
7.1
|
%
|
|
1,670
|
|
|
7.0
|
%
|
|
1,916
|
|
|
7.1
|
%
|
Provision for taxes
|
|
|
(176
|
)
|
|
(1.5
|
)%
|
|
(186
|
)
|
|
(1.5
|
)%
|
|
(360
|
)
|
|
(1.5
|
)%
|
|
(413
|
)
|
|
(1.5
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings from continuing operations
|
|
|
660
|
|
|
5.7
|
%
|
|
733
|
|
|
5.6
|
%
|
|
1,310
|
|
|
5.5
|
%
|
|
1,503
|
|
|
5.6
|
%
|
Net (loss) earnings from discontinued operations
|
|
|
(31
|
)
|
|
(0.3
|
)%
|
|
278
|
|
|
2.1
|
%
|
|
(89
|
)
|
|
(0.4
|
)%
|
|
874
|
|
|
3.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings
|
|
$
|
629
|
|
|
5.4
|
%
|
$
|
1,011
|
|
|
7.7
|
%
|
$
|
1,221
|
|
|
5.1
|
%
|
$
|
2,377
|
|
|
8.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Revenue
For the three months ended April 30, 2016, total net revenue decreased 10.7% (decreased 5.4% on a constant currency basis) as
compared to the prior-year period. U.S. net revenue decreased 1.3% to $4.2 billion, while net revenue from international operations decreased
15.3% to $7.4 billion. For the six months ended April 30, 2016, total net revenue decreased 11.2% (decreased 5.1% on a constant currency basis) as compared to the prior-year period. U.S.
net revenue decreased 3.1% to $8.5 billion, while net revenue from international operations decreased 15.1% to $15.3 billion.
For
the three and six months ended April 30, 2016, we experienced a net revenue decline across all regions. The primary factors contributing to the net revenue decline were
unfavorable currency impacts, weak market demand and an overall competitive pricing environment. The net revenue decline for the six months ended April 30, 2016 was partially offset by the
recognition of revenue, which was previously deferred in relation to sales to the pre-Separation finance entity. These effects were in
58
Table of Contents
HP INC. AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
addition
to elimination of intercompany sales to the pre-Separation finance entity during the prior-year period, which is included in discontinued operations.
A
detailed discussion of the factors contributing to the changes in segment net revenue is included under "Segment Information" below.
Gross Margin
For the three and six months ended April 30, 2016, our gross margin decreased 0.3 percentage points and
0.6 percentage points, respectively as compared to the prior-year periods. The primary factors impacting gross margin performance were unfavorable currency impacts and a competitive pricing
environment in Printing, the effects of which were partially offset by favorable commodity costs, product mix and pricing in Personal Systems. We also had favorable impacts from a higher proportion of
graphics supplies and a favorable mix of Inkjet printers for the three months ended April 30, 2016. For the six months ended April 30, 2016, gross margin performance had favorable
impacts from a higher proportion of graphics and ink supplies in Printing.
A
detailed discussion of the factors contributing to the changes in segment gross margins is included under "Segment Information" below.
Operating Expenses
R&D
expense decreased 1.3% and 2.6% for the three and six months ended April 30, 2016, respectively as compared to the prior-year periods, due primarily
to favorable currency impacts.
Selling, General and Administrative
SG&A
expense decreased 18.4% and 16.8% for the three and six months ended April 30, 2016, respectively as compared to the prior-year periods, due
primarily to lower corporate governance and other overhead costs which were related to the pre-Separation combined entity, the impact of the divestiture of certain software assets of the Marketing
Optimization business to Open Text Corporation, our cost saving initiatives and favorable currency impacts.
Restructuring
charges increased by $93 million for the three months ended April 30, 2016 and increased $99 million for the six months ended
April 30, 2016, as compared to the prior-year periods, due primarily to charges in connection with the restructuring plan announced in September 2015 (the "Fiscal 2015 Plan") in connection with
the Separation.
Interest and Other, Net
Interest and other, net expense decreased by $73 million for the three months ended April 30, 2016 and decreased by
$100 million for the six months ended April 30, 2016, as compared to the prior-year periods. The decrease for both periods was due primarily to a lower interest expense driven by the
reversal of interest previously accrued for a legal contingency and lower foreign currency transaction losses, partially offset by lower other miscellaneous income and interest income.
59
Table of Contents
HP INC. AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
Provision for Taxes
Our effective tax rate for continuing operations was 21.1% and 20.2% for the three months ended April 30, 2016 and 2015,
respectively, and 21.6% for the six months ended April 30, 2016 and 2015. Our effective tax rate generally differs from the U.S. federal statutory rate of 35% due to favorable tax rates
associated with certain earnings from our operations in lower tax jurisdictions throughout the world. We have not provided U.S. taxes for all foreign earnings because we plan to reinvest some of those
earnings indefinitely outside the U.S.
In
the three and six months ended April 30, 2016, we recorded discrete items resulting in net tax benefits of $33 million and $86 million, respectively, for
continuing operations. These amounts included a tax benefit of $32 million and $38 million for the three and six months ended April 30, 2016, respectively, on restructuring
charges. The six months ended April 30, 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.
In
the three and six months ended April 30, 2015, we recorded discrete items resulting in net tax expense of $2 million and tax benefit of $15 million, respectively.
These amounts included a tax benefit of $4 million and $7 million for the three and six months ended April 30, 2015, respectively, on restructuring charges. The six months ended
April 30, 2015 also included a tax benefit of $26 million arising from the retroactive research and development credit provided by the Tax Increase Prevention
Act of 2014 signed into law in December 2014 and tax expense of $29 million related to provision to return adjustments.
Segment Information
A description of the products and services for each segment can be found in Note 3, "Segment Information" to the Consolidated
Condensed Financial Statements in Item 1 of Part I, which is incorporated herein by reference. Future changes to this organizational structure may result in changes to the segments
disclosed.
Segment Reporting Changes
Effective at the beginning of its first quarter of fiscal 2016, HP implemented a reporting change to provide better transparency to its
segment operating results. This reporting change resulted in the exclusion of certain market-related factors such as interest cost, expected return on plan assets, amortized actuarial gains or losses,
and impacts from other market-related factors related to its defined benefit pension and post-retirement benefit plans from its segment operating results ("Non-operating retirement-related
credits/(charges)"). This change also resulted in the exclusion of certain plan curtailments, settlements and special termination benefits related to its defined benefit pension and post-retirement
benefit plans from HP's segment operating results. Segment operating results will continue to include service costs and amortization of prior service costs associated with HP's defined benefit pension
and post-retirement benefit plans. The reporting change had an immaterial impact to previously reported segment net revenue and earnings from operations and had no impact on HP's previously reported
consolidated net revenue, earnings from operations, net earnings or net earnings per share.
60
Table of Contents
HP INC. AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
Personal Systems
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended April 30
|
|
Six months ended April 30
|
|
|
|
2016
|
|
2015
|
|
% Change
|
|
2016
|
|
2015
|
|
% Change
|
|
|
|
Dollars in millions
|
|
Net revenue
|
|
$
|
6,990
|
|
$
|
7,759
|
|
|
(9.9
|
)%
|
$
|
14,457
|
|
$
|
16,321
|
|
|
(11.4
|
)%
|
Earnings from operations
|
|
$
|
242
|
|
$
|
227
|
|
|
6.6
|
%
|
$
|
471
|
|
$
|
530
|
|
|
(11.1
|
)%
|
Earnings from operations as a % of net revenue
|
|
|
3.5
|
%
|
|
2.9
|
%
|
|
|
|
|
3.3
|
%
|
|
3.2
|
%
|
|
|
|
The
components of net revenue and the weighted net revenue change by business unit were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended April 30
|
|
Six months ended April 30
|
|
|
|
Net Revenue
|
|
|
|
Net Revenue
|
|
|
|
|
|
Weighted Net
Revenue Change
|
|
Weighted Net
Revenue Change
|
|
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
|
|
Dollars in millions
|
|
Percentage Points
|
|
Dollars in millions
|
|
Percentage Points
|
|
Notebooks
|
|
$
|
3,838
|
|
$
|
4,170
|
|
|
(4.3
|
)
|
$
|
8,043
|
|
$
|
8,894
|
|
|
(5.2
|
)
|
Desktops
|
|
|
2,402
|
|
|
2,762
|
|
|
(4.6
|
)
|
|
4,929
|
|
|
5,711
|
|
|
(4.8
|
)
|
Workstations
|
|
|
461
|
|
|
513
|
|
|
(0.7
|
)
|
|
905
|
|
|
1,039
|
|
|
(0.8
|
)
|
Other
|
|
|
289
|
|
|
314
|
|
|
(0.3
|
)
|
|
580
|
|
|
677
|
|
|
(0.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Personal Systems
|
|
$
|
6,990
|
|
$
|
7,759
|
|
|
(9.9
|
)
|
$
|
14,457
|
|
$
|
16,321
|
|
|
(11.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Personal
Systems net revenue decreased 9.9% (decreased 5.0% on a constant currency basis) for the three months ended April 30, 2016, and decreased 11.4% (decreased 5.5% on a
constant currency basis) for the six months ended April 30, 2016 as compared to the prior-year periods. The net revenue decline in Personal Systems during these periods was due primarily to
weak market demand and unfavorable currency impacts. Personal Systems net revenue decreased as a result of a 9% decline in unit volume along with a 1% decline in average selling prices ("ASPs") for
the three months ended April 30, 2016 and decreased as a result of an 11% decline in unit volume along with flat ASPs for the six months ended April 30, 2016. The unit volume decline
during these periods was due primarily to an overall decline in desktops and consumer notebooks, partially offset by a unit volume growth in commercial notebooks. The ASPs declined for the three
months ended April 30, 2016 and were stable for the six months ended April 30, 2016, due primarily to unfavorable currency impacts offset by the favorable mix shift to commercial
products.
Net
revenue for commercial clients and consumer clients decreased 7% and 16%, respectively for the three months ended April 30, 2016, and decreased 9% and 16%, respectively for
the six months ended April 30, 2016, as compared to the prior-year periods due primarily to unfavorable currency impacts and weak market demand, partially offset by an increase in commercial
notebooks. Net revenue declined 8% in Notebooks, 13% in Desktops, 10% in Workstations and 8% in Other for the three months ended April 30, 2016 and declined 10% in Notebooks, 14% in Desktops,
13% in Workstations and 14% in Other for the six months ended April 30, 2016. The net revenue decline in Other during the three and six months ended April 30, 2016 was due primarily to a
decline in the sales of consumer tablets, partially offset by a revenue growth in consumer PC services.
Personal
Systems earnings from operations as a percentage of net revenue increased by 0.6 percentage points and 0.1 percentage points for the three and six months ended
April 30, 2016,
61
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HP INC. AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
respectively,
as compared to the prior-year periods. The increases during these periods were a result of an increase in gross margin partially offset by an increase in operating expenses as a
percentage of net revenue. The increase in gross margin was due primarily to favorable commodity costs combined with favorable product mix and pricing, the effects of which were offset by net
unfavorable currency impacts. Operating expenses as a percentage of net revenue increased due to the size of the decline in net revenue.
Printing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended April 30
|
|
Six months ended April 30
|
|
|
|
2016
|
|
2015
|
|
% Change
|
|
2016
|
|
2015
|
|
% Change
|
|
|
|
Dollars in millions
|
|
Net revenue
|
|
$
|
4,637
|
|
$
|
5,508
|
|
|
(15.8
|
)%
|
$
|
9,279
|
|
$
|
11,104
|
|
|
(16.4
|
)%
|
Earnings from operations
|
|
$
|
801
|
|
$
|
982
|
|
|
(18.4
|
)%
|
$
|
1,588
|
|
$
|
2,032
|
|
|
(21.9
|
)%
|
Earnings from operations as a % of net revenue
|
|
|
17.3
|
%
|
|
17.8
|
%
|
|
|
|
|
17.1
|
%
|
|
18.3
|
%
|
|
|
|
The
components of net revenue and the weighted net revenue change by business unit were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended April 30
|
|
Six months ended April 30
|
|
|
|
Net Revenue
|
|
|
|
Net Revenue
|
|
|
|
|
|
Weighted
Net Revenue
Change
|
|
Weighted
Net Revenue
Change
|
|
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
|
|
Dollars in millions
|
|
Percentage Points
|
|
Dollars in millions
|
|
Percentage Points
|
|
Supplies
|
|
$
|
3,099
|
|
$
|
3,684
|
|
|
(10.6
|
)
|
$
|
6,200
|
|
$
|
7,285
|
|
|
(9.8
|
)
|
Commercial Hardware
|
|
|
1,227
|
|
|
1,376
|
|
|
(2.7
|
)
|
|
2,446
|
|
|
2,770
|
|
|
(2.9
|
)
|
Consumer Hardware
|
|
|
311
|
|
|
448
|
|
|
(2.5
|
)
|
|
633
|
|
|
1,049
|
|
|
(3.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Printing
|
|
$
|
4,637
|
|
$
|
5,508
|
|
|
(15.8
|
)
|
$
|
9,279
|
|
$
|
11,104
|
|
|
(16.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended April 30, 2016 compared with three months ended
April 30, 2015
Printing net revenue decreased 15.8% (decreased 10.3% on a constant currency basis) for the three months ended April 30, 2016 as
compared to the prior-year period. The decline in net revenue was primarily driven by weak demand, unfavorable currency impacts and competitive pricing pressures. These factors resulted in a net
revenue decline across Supplies and Commercial and Consumer printers. Net revenue for Supplies decreased 16% due primarily to reduction in channel inventory, unfavorable currency impacts combined with
weak market demand and a competitive pricing environment. Printer unit volume decreased 16% while the average revenue per unit ("ARU") remained approximately flat. Printer unit volume decreased due
primarily to weak market demand, our pricing discipline and focus on placing positive net present value ("NPV") units. Printer ARU remained approximately flat due primarily to favorable mix and
improving ARU's on home and personal laser products, partially offset by competitive pricing in Ink in the Office and value laser products.
Net
revenue for Commercial Hardware decreased 11% as compared to the prior-year period driven by a 12% decline in unit volume and 1% decline in ARU, partially offset by an increase in
other peripheral printing solutions. The unit volume in Commercial Hardware declined due to a decline in
62
Table of Contents
HP INC. AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
LaserJet
printer unit volume. The decline in ARU in Commercial Hardware was driven by an ARU decline in graphics and Value Laser printers, the effects of which were partially offset by a mix shift to
high-value printer sales and an ARU improvement in Personal Laser printers. Net revenue for Consumer Hardware decreased 31% as compared to the prior-year period due to an 18% decline in printer unit
volume, 9% decline in ARU and a decline in other printing solutions which was largely driven by the divestiture of Snapfish in the prior-year period. The unit volume decline in Consumer Hardware was
due primarily to weakness in demand, our pricing discipline and continued efforts to place profitable units. The ARU decline in Consumer Hardware was due primarily to increased discounting in SMB
printers, partially offset by an ARU improvement in home printers.
Printing
earnings from operations as a percentage of net revenue decreased by 0.5 percentage points for the three months ended April 30, 2016 as compared to the prior-year
period due to a decline in gross margin and an increase in operating expenses as a percentage of net revenue. The gross margin decline was due primarily to net unfavorable currency impacts and a
competitive pricing environment, the effects of which were partially offset by operational improvements, higher proportion of graphics supplies and favorable mix of Inkjet printers. Operating expenses
as a percentage of net revenue increased due to the decline in net revenue. Printing operating expenses declined due primarily to the impact from the divestiture of certain software assets to Open
Text Corporation and cost-saving initiatives.
Six months ended April 30, 2016 compared with six months ended
April 30, 2015
Printing net revenue decreased 16.4% (decreased 10.5% on a constant currency basis) for the six months ended April 30, 2016 as
compared to the prior-year period. The decline in net revenue was primarily driven by unfavorable currency impacts and weak market demand and competitive pricing pressures. These factors resulted in a
net revenue decline across Supplies and Commercial and Consumer printers. Net revenue for Supplies decreased 15% due primarily to demand weakness combined with a competitive pricing environment,
unfavorable currency impacts and reduction in channel inventory. Printer unit volume decreased 18% and ARU decreased 1%. Printer unit volume decreased due to weak market demand, our pricing discipline
and focus on placing positive NPV units. Printer ARU decreased due primarily to unfavorable currency impacts and competitive pricing, partially offset by favorable mix.
Net
revenue for Commercial Hardware decreased 12% as compared to the prior-year period primarily driven by a 14% decline in unit volume while the ARU remained flat. The unit volume in
Commercial Hardware declined due primarily to a unit volume decline in LaserJet printers. The ARU in Commercial Hardware remained flat due primarily to unfavorable currency impacts offset by ARU
improvements in Personal Laser printers. Printer unit volume in Consumer Hardware declined 20% combined with a decline in other printing solutions largely driven by the divestiture of Snapfish in the
prior-year period and a 12% decline in ARU which resulted in a 40% decline in Consumer Hardware net revenue as compared to the prior-year period. The unit volume decline in Consumer Hardware was due
primarily to our pricing discipline, weakness in demand and our continued efforts to place positive NPV units. The ARU in Consumer Hardware decreased due primarily to unfavorable currency impacts and
competitive pricing.
Printing
earnings from operations as a percentage of net revenue decreased by 1.2 percentage points for the six months ended April 30, 2016 as compared to the prior-year
period due to a decline in gross margin and an increase in operating expenses as a percentage of net revenue. The gross margin decline was due primarily to net unfavorable currency impacts and
competitive pricing pressure,
63
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HP INC. AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
partially
offset by operational improvements, favorable mix of Inkjet printers and a higher proportion of graphics and ink supplies. Operating expenses as a percentage of net revenue increased due to
the decline in net revenue. Printing operating expenses declined as a result of cost-saving initiatives and the impact of the divestiture of certain software assets to Open Text Corporation during the
second quarter of fiscal 2016.
Corporate Investments
The loss from operations in Corporate Investments for the three and six months ended April 30, 2016 was due primarily to
expenses associated with our incubation projects.
LIQUIDITY AND CAPITAL RESOURCES
We use cash generated by operations as our primary source of liquidity. We believe that internally generated cash flows are generally
sufficient to support our operating businesses, capital expenditures, restructuring activities, separation activities, principal and interest payments on debt, income tax payments and the payment of
stockholder dividends, in addition to investments and share repurchases. We are able to supplement this short-term liquidity, if necessary, with broad access to capital markets and credit facilities
made available by various domestic and foreign financial institutions. While our access to capital markets may be constrained and our cost of borrowing may increase under certain business, market and
economic conditions, our access to a variety of funding sources to meet our liquidity needs is designed to facilitate continued access to capital resources under all such conditions. Our liquidity is
subject to various risks including the risks identified in the section entitled "Risk Factors" in Item 1A of Part II in our Annual Report on Form 10-K for the fiscal year ended
October 31, 2015 and the market risks identified in the section entitled "Quantitative and Qualitative Disclosures about Market Risk" in Item 3 of Part I, which are incorporated
herein by reference.
Our
cash balances are held in numerous locations throughout the world, with the vast majority of those amounts held outside of the U.S. We utilize a variety of planning and financing
strategies in an effort to ensure that our worldwide cash is available when and where it is needed. Our cash position remains strong, and we expect that our cash balances, anticipated cash flow
generated from operations and access to capital markets will be sufficient to cover our expected near-term cash outlays.
Amounts
held outside of the U.S. are generally utilized to support non U.S. liquidity needs, although a portion of those amounts may from time to time be subject to short-term
intercompany loans into the U.S. Most of the amounts held outside of the U.S. could be repatriated to the U.S., but under current law, some would be subject to U.S. federal income taxes, less
applicable foreign tax credits. Repatriation of some foreign earnings is restricted by local law. Except for foreign earnings that are considered indefinitely reinvested outside of the U.S., we have
provided for the U.S. federal tax liability on these earnings for financial statement purposes. Repatriation could result in additional income tax payments in future years. Where local restrictions
prevent an efficient intercompany transfer of funds, our intent is that cash balances would remain outside of the U.S. and we would meet liquidity needs through ongoing cash flows, external borrowings
or both. We do not expect restrictions or potential taxes incurred on repatriation of amounts held outside of the U.S. to have a material effect on our overall liquidity, financial condition or
results of operations.
64
Table of Contents
HP INC. AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
Liquidity
On November 1, 2015, we completed the separation of Hewlett Packard Enterprise and the distribution to our shareholders who
received one share of Hewlett Packard Enterprise common stock for every one share of HP common stock held as of the Record Date. During the first quarter of fiscal 2016, we made a final net cash
transfer of $526 million to Hewlett Packard Enterprise.
|
|
|
|
|
|
|
|
|
|
Six months ended
April 30
|
|
|
|
2016
|
|
2015
(1)
|
|
|
|
In millions
|
|
Net cash provided by operating activities
|
|
$
|
1,467
|
|
$
|
2,208
|
|
Net cash used in investing activities
|
|
|
(255
|
)
|
|
(1,639
|
)
|
Net cash used in financing activities
|
|
|
(14,009
|
)
|
|
(934
|
)
|
|
|
|
|
|
|
|
|
Net decrease in cash and cash equivalents
|
|
$
|
(12,797
|
)
|
$
|
(365
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
(1)
-
The
consolidated condensed statement of cash flows for the six months ended April 30, 2015 represents the combined cash flows of HP
prior to the Separation, as previously filed, and has not been adjusted to reflect the effect of the separation of Hewlett Packard Enterprise.
Operating Activities
Compared to the corresponding period in fiscal 2015, net cash provided by operating activities decreased by $741 million for the
six months ended April 30, 2016, due primarily to the loss of earnings from the discontinued operations.
Working Capital Metrics
Management utilizes current cash conversion cycle information to manage HP's working capital levels. The table below presents the cash
conversion cycle information as of April 30, 2016 and October 31, 2015.
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
|
|
|
April 30,
2016
|
|
October 31,
2015
|
|
Change
|
|
Days of sales outstanding in accounts receivable ("DSO")
|
|
|
30
|
|
|
35
|
|
|
(5
|
)
|
Days of supply in inventory ("DOS")
|
|
|
34
|
|
|
39
|
|
|
(5
|
)
|
Days of purchases outstanding in accounts payable ("DPO")
|
|
|
(88
|
)
|
|
(93
|
)
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash conversion cycle
|
|
|
(24
|
)
|
|
(19
|
)
|
|
(5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
cash conversion cycle is the sum of DSO and DOS less DPO. Items which may cause the cash conversion cycle in a particular period to differ from a long-term sustainable rate include,
but are not limited to, changes in business mix, changes in payment terms, extent of receivables factoring, seasonal trends and the timing of revenue recognition and inventory purchases within the
period.
DSO
measures the average number of days our receivables are outstanding. DSO is calculated by dividing ending accounts receivable, net of allowance for doubtful accounts, by a 90-day
average net revenue. The decrease in DSO was due primarily to favorable revenue linearity and reduction of aged
65
Table of Contents
HP INC. AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
accounts
receivable partially offset by the impact of the deferred revenue reversal related to our pre-Separation finance entity.
DOS
measures the average number of days from procurement to sale of our product. DOS is calculated by dividing ending inventory by a 90-day average cost of revenue. The decrease in DOS
was primarily due to strong inventory management.
DPO
measures the average number of days our accounts payable balances are outstanding. DPO is calculated by dividing ending accounts payable by a 90-day average cost of revenue. The
decrease in DPO was the result of lower volume partially offset by the impact of extension in contractual payment terms.
Investing Activities
Compared to the corresponding period in fiscal 2015, net cash used in investing activities decreased by $1.4 billion for the six
months ended April 30, 2016, due primarily to lower capital expenditures as a result of the discontinued operations.
Financing Activities
Compared to the corresponding period in fiscal 2015, net cash used in financing activities increased by $13.1 billion for the
six months ended April 30, 2016, due primarily to the Separation which included a cash transfer of $10.4 billion to Hewlett Packard Enterprise and the early repayment of
$2.1 billion of U.S. Dollar Global Notes.
Capital Resources
Debt Levels
We maintain debt levels that we establish through consideration of a number of factors, including cash flow expectations, cash
requirements for operations, investment plans (including acquisitions), share repurchase activities, our cost of capital and targeted capital structure.
Outstanding borrowings decreased to $6.8 billion as of April 30, 2016, as compared to $8.9 billion as of October 31, 2015, bearing weighted-average interest rates of 4.1%
for April 30, 2016 and 3.7% for October 31, 2015. During the first six months of fiscal 2016, we repaid $2.1 billion of U.S. Dollar Global Notes.
Our
weighted-average interest rate reflects the average effective rate on our borrowings prevailing during the period and reflects the impact of interest rate swaps. For more information
on our interest rate swaps, see Note 10, "Financial Instruments", to the Consolidated Condensed Financial Statements in Item 1 of Part I, which is incorporated herein by
reference.
As
of April 30, 2016, we maintain a senior unsecured committed revolving credit facility, which will be available until April 2, 2019, primarily to support the issuance of
commercial paper with aggregate lending commitments of $4.0 billion. Funds to be borrowed under this revolving credit facility may also be used for general corporate purposes.
Available Borrowing Resources
As of April 30, 2016, we had available borrowing resources of $843 million from uncommitted lines of credit in addition
to our $4.0 billion senior unsecured committed revolving credit facility discussed
66
Table of Contents
HP INC. AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
above.
For more information on our borrowings, see Note 11, "Borrowings", to the Consolidated Condensed Financial Statements in Item 1 of Part I, which is incorporated herein by
reference.
Credit Ratings
Our credit risk is evaluated by major independent rating agencies based upon publicly available information as well as information
obtained in our ongoing discussions with
them. While we do not have any rating downgrade triggers that would accelerate the maturity of a material amount of our debt, previous downgrades have increased the cost of borrowing under our credit
facilities, have reduced market capacity for our commercial paper and have required the posting of additional collateral under some of our derivative contracts. In addition, any further downgrade to
our credit ratings by any rating agencies may further impact us in a similar manner, and, depending on the extent of any such downgrade, could have a negative impact on our liquidity and capital
position. We can access alternative sources of funding, including drawdowns under our credit facilities, if necessary, to offset potential reductions in the market capacity for our commercial paper.
CONTRACTUAL AND OTHER OBLIGATIONS
Contractual Obligations
As of April 30, 2016, our contractual obligations from continuing operations have not changed significantly since
October 31, 2015. After the Separation, we have additional contractual obligations related to lease transactions with Hewlett Packard Enterprise's Financial Services. As of April 30,
2016, the total future lease obligations are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
|
|
|
Total
|
|
1 Year or
Less
|
|
1-3 Years
|
|
3-5 Years
|
|
More than
5 Years
|
|
|
|
In millions
|
|
Operating lease obligations
|
|
$
|
346
|
|
$
|
155
|
|
$
|
166
|
|
$
|
25
|
|
$
|
|
|
Capital lease obligations
|
|
$
|
82
|
|
$
|
10
|
|
$
|
40
|
|
$
|
30
|
|
$
|
2
|
|
Retirement and Post-Retirement Benefit Plan Contributions
As of April 30, 2016, we anticipate making contributions for the remainder of fiscal 2016 of approximately $8 million to
our non-U.S. pension plans, $16 million to cover benefit payments to U.S. non-qualified pension plan participants and $17 million to cover benefit claims for our post-retirement benefit
plans. Our policy is to fund our pension plans so that we meet at least the minimum contribution requirements, as established by local government, funding and taxing authorities. For more information
on our retirement and post-retirement benefit plans, see Note 5, "Retirement and Post-Retirement Benefit Plans", to the Consolidated Condensed Financial Statements in Item 1 of
Part I, which is incorporated herein by reference.
Cost Saving Plan
We expect future cash payments up to $250 million through fiscal 2016, in connection with the acceleration of our existing
Fiscal 2015 Plan. For more information on our restructuring activities that are part of our cost improvements, see Note 4, "Restructuring", to the Consolidated Condensed Financial Statements in
Item 1 of Part I, which is incorporated herein by reference.
67
Table of Contents
HP INC. AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
Uncertain Tax Positions
As of April 30, 2016, we had approximately $2.2 billion of recorded liabilities and related interest and penalties
pertaining to uncertain tax positions. We are unable to make a reasonable estimate as to when cash settlement with the tax authorities might occur due to the uncertainties related to these tax
matters. Payments of these obligations would result from settlements with taxing authorities. For more information on our uncertain tax positions, see Note 7, "Taxes on Earnings", to the
Consolidated Condensed Financial Statements in Item 1 of Part I, which is incorporated herein by reference.
Separation Costs
As of April 30, 2016, we expect future cash payments of approximately $150 million in connection with separation costs,
which are expected to be paid in the remainder of fiscal 2016, with subsequent tax credit amounts expected over later years.
OFF-BALANCE SHEET ARRANGEMENTS
As part of our ongoing business, we have not participated in transactions that generate material relationships with unconsolidated
entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance
sheet arrangements or other contractually narrow or limited purposes.
We
have third-party short-term financing arrangements intended to facilitate the working capital requirements of certain customers. For more information on our third-party short-term
financing arrangements, see Note 8, "Balance Sheet Details", to the Consolidated Condensed Financial Statements in Item 1 of Part I, which is incorporated herein by reference.
68
Table of Contents