Notes to Consolidated Condensed Financial Statements
(Unaudited)
Note 1: Overview and Basis of Presentation
Overview
On November 1, 2015 (the "Distribution Date"), 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").
On the Distribution Date, each of HP's 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 HP common stock held as of the Record Date. Hewlett Packard Enterprise is now an independent public company trading on the New York Stock Exchange ("NYSE") under the symbol "HPE". HP distributed a total of approximately
1.8 billion
shares of Hewlett Packard Enterprise common stock to HP's stockholders. After the Separation, HP does not beneficially own any shares of Hewlett Packard Enterprise common stock.
In connection with the Separation, HP and Hewlett Packard Enterprise entered into a separation and distribution agreement as well as various other agreements 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 5, "Retirement and Post-Retirement Benefit Plans", Note 6, "Stock-Based Compensation", Note 7, "Taxes on Earnings", Note 14, "Litigation and Contingencies" and Note 15, "Guarantees, Indemnifications and Warranties".
Basis of Presentation
The accompanying Consolidated Condensed Financial Statements of HP and its wholly-owned subsidiaries are prepared in conformity with United States ("U.S.") generally accepted accounting principles ("GAAP"). The interim financial information is unaudited, but reflects all normal adjustments that are necessary to provide a fair statement of results for the interim periods presented. This interim information should be read in conjunction with the Consolidated Financial Statements for the fiscal year ended October 31, 2015 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. The Consolidated Condensed Balance Sheet for October 31, 2015 was derived from audited financial statements.
After the Separation, HP no longer consolidates the financial results of Hewlett Packard Enterprise within its financial results of continuing operations. For all the periods prior to the Separation, the financial results of Hewlett Packard Enterprise are presented as net earnings from discontinued operations in the Consolidated Condensed Statements of Earnings and assets and liabilities from discontinued operations in the Consolidated Condensed Balance Sheets. Fiscal 2015 information in the accompanying Notes to the Consolidated Condensed Financial Statements have been revised to reflect the effect of the Separation, except for balances related to stockholders' (deficit) equity. The historical statements of comprehensive income and cash flows have not been revised to reflect the effect of the Separation. For further information on discontinued operations, see Note 2, "Discontinued Operations".
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. HP presents non-controlling interests as a separate component within Total stockholders' (deficit) equity in the Consolidated Condensed Balance Sheets. All intercompany balances and transactions have been eliminated.
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.
HP INC. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements
(Unaudited)
Note 1: Overview and Basis of Presentation (Continued)
Accounting Pronouncements
In June 2016, the Financial Accounting Standards Board ("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 2021. Earlier adoption is permitted. HP is currently evaluating the impact of this guidance on its Consolidated Condensed Financial Statements.
In March 2016, the FASB issued guidance which amends the existing accounting standards for share-based payments. The amendment changes the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statements of cash flows. HP is required to adopt the guidance in the first quarter of fiscal 2018. Earlier adoption is permitted. HP is currently evaluating the timing and the impact of this guidance on its 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 2020 using a modified retrospective approach. HP is currently evaluating the timing and the impact of this guidance on its Consolidated Condensed Financial Statements.
In January 2016, the FASB issued guidance which amends the existing accounting standards for the recognition and measurement of financial assets and financial liabilities. The updated guidance primarily addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. HP is required to adopt the guidance in the first quarter of fiscal 2019. The amendments should be applied by means of a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption, with other amendments related specifically to equity securities without readily determinable fair values applied prospectively. HP is currently evaluating the timing and the impact of this guidance on its Consolidated Condensed Financial Statements.
In April 2015, the FASB amended the existing accounting standards for intangible assets. The amendment provides explicit guidance to customers in determining the accounting for fees paid in a cloud computing arrangement, wherein the arrangements that do not convey a software license to the customer are accounted for as service contracts. HP is required to adopt the guidance in the first quarter of fiscal 2017; however early adoption is permitted. The amendment may be adopted either prospectively to all arrangements entered into or materially modified after the effective date or retrospectively. HP is currently evaluating the impact of this guidance on its Consolidated Condensed Financial Statements.
In April 2015, the FASB amended the existing accounting standards for imputation of interest. The amendment requires that debt issuance costs related to a recognized debt liability be presented on the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by this amendment. HP is required to adopt the guidance in the first quarter of fiscal 2017. Early adoption is permitted. The amendment should be applied retrospectively with the adjusted balance sheet of each individual period presented, in order to reflect the period-specific effects of applying the new guidance. HP is currently evaluating the timing and the impact of this guidance on its Consolidated Condensed Financial Statements.
In May 2014, the FASB amended the existing accounting standards for revenue recognition. The amendment is 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. In August 2015, the FASB issued an accounting standard update for a one-year deferral of the effective date, with an option of applying the standard on the original effective date, which for HP is the first quarter of fiscal 2018. In accordance with this deferral, HP is required to adopt these amendments in the first quarter of fiscal 2019. The amendments may be applied retrospectively to each prior period presented or retrospectively with the cumulative effect recognized as of the date of initial application. HP is continuing to evaluate the impact of this guidance and the transition alternatives on its Consolidated Condensed Financial Statements.
HP INC. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements
(Unaudited)
Note 2: Discontinued Operations
On November 1, 2015, HP completed the Separation of Hewlett Packard Enterprise. After the Separation, HP does not beneficially own any shares of Hewlett Packard Enterprise common stock.
In connection with the Separation, HP and Hewlett Packard Enterprise have entered into a separation and distribution agreement as well as various other agreements 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. These agreements provided for the allocation between HP and Hewlett Packard Enterprise of assets, employees, liabilities and obligations (including investments, property, employee benefits and tax-related assets and liabilities) attributable to periods prior to, at and after the Separation and govern certain relationships between HP and Hewlett Packard Enterprise after the Separation.
After the Separation, HP no longer consolidates the financial results of Hewlett Packard Enterprise within its financial results of continuing operations. For all the periods prior to the Separation, the financial results of Hewlett Packard Enterprise are presented as net earnings from discontinued operations in the Consolidated Condensed Statements of Earnings and assets and liabilities from discontinued operations in the Consolidated Condensed Balance Sheets. For all the periods after the Separation, discontinued operations includes separation costs primarily related to third-party consulting, contractor fees and other costs.
The following table presents the financial results of HP's discontinued operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended July 31
|
|
Nine months ended July 31
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
In millions, except per share amounts
|
Net revenue
|
$
|
—
|
|
|
$
|
12,987
|
|
|
$
|
—
|
|
|
$
|
38,444
|
|
Cost of revenue
(1)
|
—
|
|
|
9,281
|
|
|
—
|
|
|
27,609
|
|
Expenses
(2)
|
30
|
|
|
3,501
|
|
|
158
|
|
|
9,394
|
|
Interest and other, net
(3)(4)
|
(174
|
)
|
|
18
|
|
|
(157
|
)
|
|
132
|
|
Earnings (loss) from discontinued operations before taxes
|
144
|
|
|
187
|
|
|
(1
|
)
|
|
1,309
|
|
Provision for taxes
(4)
|
(204
|
)
|
|
(33
|
)
|
|
(148
|
)
|
|
(281
|
)
|
(Loss) earnings from discontinued operations, net of taxes
|
$
|
(60
|
)
|
|
$
|
154
|
|
|
$
|
(149
|
)
|
|
$
|
1,028
|
|
_______________________________________________________________________________
|
|
(1)
|
Cost of products, cost of services and financing interest.
|
|
|
(2)
|
Expenses for the
three and nine
months ended
July 31, 2016
were primarily related to separation costs.
|
|
|
(3)
|
In fiscal 2015, allocation of interest to Hewlett Packard Enterprise was based on the average effective interest rate of the debt assumed by Hewlett Packard Enterprise and the debt repaid as part of the Separation.
|
|
|
(4)
|
In connection with the tax matters agreement (the "TMA"), Interest and other, net for the
three and nine
months ended
July 31, 2016
includes
$174 million
and
$157 million
, respectively, of net tax indemnification amounts and Provision for taxes for the
three and nine
months ended
July 31, 2016
includes
$172 million
and
$156 million
, respectively, of the tax impact relating to the above amounts. For more information on tax indemnifications and the TMA, see Note 7, "Taxes on Earnings".
|
HP INC. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements
(Unaudited)
Note 2: Discontinued Operations (Continued)
There were
no
significant non-cash items or any capital expenditures of discontinued operations for the
three and nine
months ended
July 31, 2016
. For the
three and nine
months ended
July 31, 2015
, significant non-cash items and capital expenditures of discontinued operations are outlined below:
|
|
|
|
|
|
|
|
|
|
Three months ended July 31, 2015
|
|
Nine months ended July 31, 2015
|
|
In millions
|
Depreciation and amortization
|
$
|
925
|
|
|
$
|
2,750
|
|
Purchases of property, plant and equipment
|
$
|
768
|
|
|
$
|
2,215
|
|
The following table presents assets and liabilities that were transferred to Hewlett Packard Enterprise as of November 1, 2015 and presented as discontinued operations in the Consolidated Condensed Balance Sheets as of October 31, 2015:
|
|
|
|
|
|
In millions
|
Cash and cash equivalents
|
$
|
9,849
|
|
Accounts receivable
|
8,538
|
|
Financing receivables
|
2,918
|
|
Inventory
|
2,197
|
|
Other current assets
|
7,090
|
|
Total current assets of discontinued operations
|
$
|
30,592
|
|
Property, plant and equipment
|
$
|
9,598
|
|
Goodwill
|
27,261
|
|
Long-term financing receivables and other non-current assets
|
9,472
|
|
Total non-current assets of discontinued operations
|
$
|
46,331
|
|
Notes payable and short-term borrowings
|
$
|
691
|
|
Accounts payable
|
5,762
|
|
Employee compensation and benefits
|
2,861
|
|
Taxes on earnings
|
587
|
|
Deferred revenue
|
5,148
|
|
Other accrued liabilities
|
6,472
|
|
Total current liabilities of discontinued operations
|
$
|
21,521
|
|
Long-term debt
|
$
|
15,103
|
|
Other non-current liabilities
|
7,346
|
|
Total non-current liabilities of discontinued operations
|
$
|
22,449
|
|
Subsequent to the Separation, HP made a final net cash transfer of
$526 million
to Hewlett Packard Enterprise.
Note 3: 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
HP INC. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements
(Unaudited)
Note 3: Segment Information (Continued)
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 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. HP groups commercial notebooks, commercial desktops, commercial services, commercial tablets, commercial detachables, workstations, retail point-of-sale systems and thin clients into commercial clients and consumer notebooks, consumer desktops, consumer services, consumer tablets and consumer detachables into consumer clients when describing performance in these markets. Described below are HP's global business capabilities within Personal Systems.
|
|
•
|
Commercial PCs
are optimized for enterprise and SMB customers, 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 SMB customers to help them manage the lifecycle of their PC and mobility installed base.
|
|
|
•
|
Consumer PCs
are notebooks, desktops, and hybrids that are optimized for consumer usage, focusing on multi-media consumption, online browsing, and light productivity.
|
Printing
provides consumer and commercial printer hardware, supplies, media, solutions and services, as well as scanning devices. Printing is also focused on imaging solutions in the commercial markets. HP groups LaserJet, graphics and PageWide printers into Commercial Hardware and Inkjet printers into Consumer Hardware when describing performance in these markets. Described below are HP's global business capabilities within Printing.
|
|
•
|
LaserJet and Enterprise Solutions
delivers HP's LaserJet printers, supplies and solutions to SMBs and large enterprises. HP goes to market through its extensive channel network and directly with HP sales. Ongoing key initiatives include design and deployment of A3 products and solutions for the copier and multifunction printer market, printer security solutions, PageWide Enterprise solutions, and award-winning JetIntelligence products.
|
|
|
•
|
Inkjet and Printing Solutions
delivers HP's consumer, SMB, and PageWide Inkjet solutions (hardware, supplies, media, and web-connected hardware and services). Ongoing initiatives and programs such as Instant Ink and newer initiatives such as Continuous Ink Supply System provide innovative printing solutions to consumers and SMBs.
|
|
|
•
|
Graphics Solutions
delivers large format printers (DesignJet, Large Format Production, and Scitex Industrial), specialty printing, digital press solutions (Indigo and PageWide Presses), supplies and services to print service providers and design and rendering customers.
|
|
|
•
|
Print Solutions
provides end-to-end services, as well as core platforms to develop and deploy services across printing systems. HP's focus includes driving customer value through managed print services and providing support solutions for new and existing customers.
|
Corporate Investments
include HP Labs and certain business incubation projects, among others.
The accounting policies used to derive segment results are substantially the same as those used by the Company in preparing the financial statements. HP derives the results of the business segments directly from its internal management reporting system. Segment net revenue includes revenues from sales to external customers and intersegment revenues that reflect transactions between the segments on an arm's-length basis. HP's consolidated net revenue is derived and reported after the elimination of intersegment revenues from such arrangements.
HP does not allocate certain operating expenses, which it manages at the corporate level, to its segments. These unallocated costs include certain corporate costs, stock-based compensation expense, restructuring charges, amortization of intangible assets, defined benefit plan settlement credits, non-operating retirement-related credits and intersegment eliminations.
HP INC. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements
(Unaudited)
Note 3: Segment Information (Continued)
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 ("EPS").
Segment Operating Results from Continuing Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Personal
Systems
|
|
Printing
|
|
Corporate
Investments
|
|
Total
Segments
|
|
Intersegment
Eliminations
and
Other
(1)
|
|
Total
|
|
In millions
|
Three months ended July 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
$
|
7,512
|
|
|
$
|
4,423
|
|
|
$
|
—
|
|
|
$
|
11,935
|
|
|
$
|
(43
|
)
|
|
$
|
11,892
|
|
Earnings (loss) from operations
|
$
|
333
|
|
|
$
|
903
|
|
|
$
|
(35
|
)
|
|
$
|
1,201
|
|
|
|
|
|
|
|
Three months ended July 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
$
|
7,505
|
|
|
$
|
5,163
|
|
|
$
|
2
|
|
|
$
|
12,670
|
|
|
$
|
(308
|
)
|
|
$
|
12,362
|
|
Earnings (loss) from operations
|
$
|
211
|
|
|
$
|
896
|
|
|
$
|
(12
|
)
|
|
$
|
1,095
|
|
|
|
|
|
|
|
Nine months ended July 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
$
|
21,969
|
|
|
$
|
13,702
|
|
|
$
|
6
|
|
|
$
|
35,677
|
|
|
$
|
49
|
|
|
$
|
35,726
|
|
Earnings (loss) from operations
|
$
|
804
|
|
|
$
|
2,491
|
|
|
$
|
(66
|
)
|
|
$
|
3,229
|
|
|
|
|
|
|
|
Nine months ended July 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
$
|
23,826
|
|
|
$
|
16,267
|
|
|
$
|
16
|
|
|
$
|
40,109
|
|
|
$
|
(912
|
)
|
|
$
|
39,197
|
|
Earnings (loss) from operations
|
$
|
741
|
|
|
$
|
2,928
|
|
|
$
|
(32
|
)
|
|
$
|
3,637
|
|
|
|
|
|
|
|
_______________________________________________________________________________
|
|
(1)
|
Other includes adjustments for sales to entities which, prior to the Separation, were included in intersegment eliminations. For the
nine
months ended
July 31, 2016
, the amount also includes the recognition of revenue previously deferred in relation to sales to the pre-Separation finance entity. For the
nine
months ended
July 31, 2015
, the amount also includes the elimination of intercompany sales to the pre-Separation finance entity, which is included in discontinued operations. The related cost adjustments are reflected in the reconciliation of the segment earnings to HP's consolidated earnings as included below.
|
HP INC. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements
(Unaudited)
Note 3: Segment Information (Continued)
The reconciliation of segment operating results to HP consolidated results was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended July 31
|
|
Nine months ended July 31
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
In millions
|
Net Revenue:
|
Total segments
|
$
|
11,935
|
|
|
$
|
12,670
|
|
|
$
|
35,677
|
|
|
$
|
40,109
|
|
Intersegment net revenue eliminations and other
|
(43
|
)
|
|
(308
|
)
|
|
49
|
|
|
(912
|
)
|
Total net revenue
|
$
|
11,892
|
|
|
$
|
12,362
|
|
|
$
|
35,726
|
|
|
$
|
39,197
|
|
Earnings from continuing operations before taxes:
|
|
|
|
|
|
|
|
|
|
|
|
Total segment earnings from operations
|
$
|
1,201
|
|
|
$
|
1,095
|
|
|
$
|
3,229
|
|
|
$
|
3,637
|
|
Corporate costs and eliminations
|
(45
|
)
|
|
(126
|
)
|
|
(149
|
)
|
|
(486
|
)
|
Stock-based compensation expense
|
(39
|
)
|
|
(58
|
)
|
|
(140
|
)
|
|
(168
|
)
|
Restructuring and other charges
|
(36
|
)
|
|
(1
|
)
|
|
(156
|
)
|
|
(22
|
)
|
Amortization of intangible assets
|
(2
|
)
|
|
(24
|
)
|
|
(16
|
)
|
|
(76
|
)
|
Acquisition-related charges
|
—
|
|
|
(1
|
)
|
|
—
|
|
|
(1
|
)
|
Defined benefit plan settlement credits
|
—
|
|
|
64
|
|
|
—
|
|
|
64
|
|
Non-operating retirement-related credits
|
38
|
|
|
58
|
|
|
118
|
|
|
174
|
|
Interest and other, net
|
(36
|
)
|
|
(90
|
)
|
|
(135
|
)
|
|
(289
|
)
|
Total earnings from continuing operations before taxes
|
$
|
1,081
|
|
|
$
|
917
|
|
|
$
|
2,751
|
|
|
$
|
2,833
|
|
Net revenue by segment and business unit was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended July 31
|
|
Nine months ended July 31
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
In millions
|
Notebooks
|
$
|
4,303
|
|
|
$
|
3,993
|
|
|
$
|
12,346
|
|
|
$
|
12,887
|
|
Desktops
|
2,455
|
|
|
2,700
|
|
|
7,384
|
|
|
8,411
|
|
Workstations
|
476
|
|
|
507
|
|
|
1,381
|
|
|
1,546
|
|
Other
|
278
|
|
|
305
|
|
|
858
|
|
|
982
|
|
Personal Systems
|
7,512
|
|
|
7,505
|
|
|
21,969
|
|
|
23,826
|
|
Supplies
|
2,840
|
|
|
3,455
|
|
|
9,040
|
|
|
10,740
|
|
Commercial Hardware
|
1,290
|
|
|
1,330
|
|
|
3,736
|
|
|
4,100
|
|
Consumer Hardware
|
293
|
|
|
378
|
|
|
926
|
|
|
1,427
|
|
Printing
|
4,423
|
|
|
5,163
|
|
|
13,702
|
|
|
16,267
|
|
Corporate Investments
|
—
|
|
|
2
|
|
|
6
|
|
|
16
|
|
Total segment net revenue
|
11,935
|
|
|
12,670
|
|
|
35,677
|
|
|
40,109
|
|
Intersegment net revenue eliminations and other
|
(43
|
)
|
|
(308
|
)
|
|
49
|
|
|
(912
|
)
|
Total net revenue
|
$
|
11,892
|
|
|
$
|
12,362
|
|
|
$
|
35,726
|
|
|
$
|
39,197
|
|
There have been no material changes to the total assets of HP's individual segments since October 31, 2015.
HP INC. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements
(Unaudited)
Note 4: Restructuring and Other Charges
Fiscal 2015 Plan
In connection with the Separation, on September 14, 2015, HP's Board of Directors approved a cost savings plan which includes labor and non-labor actions which will be implemented through fiscal
2016
. HP estimates that it will incur aggregate pre-tax charges up to
$300 million
which relate to workforce reductions, real estate consolidation and other non-labor charges. HP expects approximately
3,000
employees will exit by the end of fiscal 2016.
During the nine months ended July 31, 2016, HP announced a voluntary phased retirement program ("PRP") for certain qualified employees. Qualified employees will retire gradually over a defined period of time and at the end of which they will receive severance and certain benefits. HP recognized charges aggregating
$29 million
during the nine months ended July 31, 2016 related to the PRP.
The following table summarizes the cost saving plan activities in the
three and nine
months ended
July 31, 2016
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended July 31, 2016
|
|
|
|
As of July 31, 2016
|
|
|
|
|
|
|
Accrued
Balance,
October 31,
2015
|
|
Three
months
ended
July 31,
2016
Charges
|
|
Charges
|
|
Cash
Payments
|
|
Non-Cash
and Other
Adjustments
|
|
Accrued
Balance
(1)
,
July 31,
2016
|
|
Total
Costs
Incurred
to Date
|
|
Total
Expected
Costs to
Be Incurred
|
In millions
|
Fiscal 2015 Plan
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance and PRP
|
$
|
39
|
|
|
$
|
20
|
|
|
$
|
107
|
|
|
$
|
(83
|
)
|
|
$
|
(12
|
)
|
|
$
|
51
|
|
|
$
|
145
|
|
|
$
|
240
|
|
Infrastructure and other
(1)
|
—
|
|
|
8
|
|
|
27
|
|
|
(3
|
)
|
|
(19
|
)
|
|
5
|
|
|
27
|
|
|
60
|
|
Total
|
$
|
39
|
|
|
$
|
28
|
|
|
$
|
134
|
|
|
$
|
(86
|
)
|
|
$
|
(31
|
)
|
|
$
|
56
|
|
|
$
|
172
|
|
|
$
|
300
|
|
_______________________________________________________________________________
|
|
(1)
|
Accrued expenses related to the Fiscal 2015 Plan are included in Other accrued liabilities on the Consolidated Condensed Balance Sheets.
|
Fiscal 2012 Plan
The severance and infrastructure cash payments associated with the restructuring plan (the "2012 Plan") initiated by HP in fiscal 2012 are expected to be paid through fiscal
2021
. For the
three and nine
months ended
July 31, 2016
, HP recognized
$3 million
and
$5 million
, respectively, in total severance charges in connection with the 2012 Plan. Accrued expenses related to the 2012 Plan, which were included in Other accrued liabilities and Other non-current liabilities on the Consolidated Condensed Balance Sheets, totaled
$10 million
as of
July 31, 2016
.
Other charges
Other charges include non-recurring costs that are distinct from ongoing operational costs. The charges include information technology costs incurred in connection with the Separation. HP incurred
$5 million
and
$17 million
of other charges for the three and nine months ended July 31, 2016, respectively.
HP INC. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements
(Unaudited)
Note 5: Retirement and Post-Retirement Benefit Plans
The components of HP's pension and post-retirement benefit (credit) cost recognized in the Consolidated Condensed Statements of Earnings were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended July 31
|
|
U.S.
Defined
Benefit Plans
|
|
Non-U.S.
Defined
Benefit Plans
|
|
Post-
Retirement
Benefit Plans
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
In millions
|
Service cost
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
12
|
|
|
$
|
64
|
|
|
$
|
—
|
|
|
$
|
1
|
|
Interest cost
|
136
|
|
|
140
|
|
|
6
|
|
|
92
|
|
|
5
|
|
|
7
|
|
Expected return on plan assets
|
(183
|
)
|
|
(210
|
)
|
|
(12
|
)
|
|
(195
|
)
|
|
(8
|
)
|
|
(10
|
)
|
Amortization and deferrals:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actuarial loss (gain)
|
14
|
|
|
12
|
|
|
6
|
|
|
73
|
|
|
(3
|
)
|
|
(2
|
)
|
Prior service benefit
|
—
|
|
|
—
|
|
|
(1
|
)
|
|
(4
|
)
|
|
(4
|
)
|
|
(5
|
)
|
Net periodic benefit (credit) cost
|
(33
|
)
|
|
(58
|
)
|
|
11
|
|
|
30
|
|
|
(10
|
)
|
|
(9
|
)
|
Settlement gain
|
—
|
|
|
(72
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Special termination benefits
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1
|
|
Plan credit allocation
(1)
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(8
|
)
|
Total periodic benefit (credit) cost from continuing operations
|
(33
|
)
|
|
(130
|
)
|
|
11
|
|
|
30
|
|
|
(10
|
)
|
|
(16
|
)
|
Summary of total periodic benefit (credit) cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
(33
|
)
|
|
(130
|
)
|
|
11
|
|
|
30
|
|
|
(10
|
)
|
|
(16
|
)
|
Discontinued operations
|
—
|
|
|
183
|
|
|
—
|
|
|
26
|
|
|
—
|
|
|
8
|
|
Total periodic benefit (credit) cost
|
$
|
(33
|
)
|
|
$
|
53
|
|
|
$
|
11
|
|
|
$
|
56
|
|
|
$
|
(10
|
)
|
|
$
|
(8
|
)
|
HP INC. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements
(Unaudited)
Note 5: Retirement and Post-Retirement Benefit Plans (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended July 31
|
|
U.S.
Defined
Benefit Plans
|
|
Non-U.S.
Defined
Benefit Plans
|
|
Post-
Retirement
Benefit Plans
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
In millions
|
Service cost
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
35
|
|
|
$
|
195
|
|
|
$
|
—
|
|
|
$
|
3
|
|
Interest cost
|
408
|
|
|
418
|
|
|
18
|
|
|
280
|
|
|
15
|
|
|
21
|
|
Expected return on plan assets
|
(549
|
)
|
|
(644
|
)
|
|
(36
|
)
|
|
(590
|
)
|
|
(24
|
)
|
|
(28
|
)
|
Amortization and deferrals:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actuarial loss (gain)
|
42
|
|
|
37
|
|
|
18
|
|
|
220
|
|
|
(9
|
)
|
|
(8
|
)
|
Prior service benefit
|
—
|
|
|
—
|
|
|
(3
|
)
|
|
(14
|
)
|
|
(12
|
)
|
|
(15
|
)
|
Net periodic benefit (credit) cost
|
(99
|
)
|
|
(189
|
)
|
|
32
|
|
|
91
|
|
|
(30
|
)
|
|
(27
|
)
|
Settlement loss (gain)
|
1
|
|
|
(72
|
)
|
|
1
|
|
|
2
|
|
|
—
|
|
|
—
|
|
Special termination benefits
|
—
|
|
|
—
|
|
|
—
|
|
|
8
|
|
|
9
|
|
|
1
|
|
Plan credit allocation
(1)
|
—
|
|
|
—
|
|
|
—
|
|
|
(11
|
)
|
|
—
|
|
|
(24
|
)
|
Total periodic benefit (credit) cost from continuing operations
|
(98
|
)
|
|
(261
|
)
|
|
33
|
|
|
90
|
|
|
(21
|
)
|
|
(50
|
)
|
Summary of total periodic benefit (credit) cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
(98
|
)
|
|
(261
|
)
|
|
33
|
|
|
90
|
|
|
(21
|
)
|
|
(50
|
)
|
Discontinued operations
|
—
|
|
|
193
|
|
|
—
|
|
|
79
|
|
|
—
|
|
|
24
|
|
Total periodic benefit (credit) cost
|
$
|
(98
|
)
|
|
$
|
(68
|
)
|
|
$
|
33
|
|
|
$
|
169
|
|
|
$
|
(21
|
)
|
|
$
|
(26
|
)
|
_______________________________________________________________________________
|
|
(1)
|
Plan credit allocation relates to the employees of HP covered under Hewlett Packard Enterprise plans or employees of Hewlett Packard Enterprise covered under HP plans.
|
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 the
nine
months ended
July 31, 2016
, HP contributed
$15 million
to its non-U.S. pension plans, paid
$24 million
to cover benefit payments to U.S. non-qualified plan participants, and paid
$24 million
to cover benefit claims under HP's post-retirement benefit plans. During the remainder of fiscal
2016
, HP anticipates making additional contributions of approximately
$3 million
to its non-U.S. pension plans and approximately
$9 million
to its U.S. non-qualified plan participants and expects to pay approximately
$11 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.
Lump Sum Program
During the third quarter of fiscal 2016, HP offered a program whereby certain terminated vested participants of the HP Inc. Pension Plan ("Pension Plan") could elect to take a one-time voluntary lump sum payment equal to the present value of future benefits. This program closed on July 29, 2016. Approximately
17,000
plan participants elected to receive lump sum
HP INC. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements
(Unaudited)
Note 5: Retirement and Post-Retirement Benefit Plans (Continued)
payments which they will receive from plan assets in the fourth quarter of fiscal 2016. Settlement expense will be recorded in the fourth quarter of fiscal 2016.
In January 2015, HP offered certain terminated vested participants of the Pension Plan the option of receiving their pension benefit in a one-time voluntary lump sum during a specified window. As a result of the lump sum program, HP recognized a settlement credit of approximately
$72 million
in the third quarter of fiscal 2015. As a result of the settlement, additional net periodic benefit cost of
$8 million
was recorded in the third quarter of fiscal 2015, which offset the actuarial gain from the settlement and was recognized in the Consolidated Condensed Statements of Earnings as Defined benefit plan settlement credits.
Note 6: 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 from continuing operations were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended July 31
|
|
Nine months ended July 31
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
In millions
|
Stock-based compensation expense
(1)
|
$
|
39
|
|
|
$
|
58
|
|
|
$
|
140
|
|
|
$
|
168
|
|
Income tax benefit
|
(13
|
)
|
|
(17
|
)
|
|
(48
|
)
|
|
(49
|
)
|
Stock-based compensation expense, net of tax
|
$
|
26
|
|
|
$
|
41
|
|
|
$
|
92
|
|
|
$
|
119
|
|
_______________________________________________________________________________
|
|
(1)
|
In connection with the Separation and in accordance with the employee matters agreement, HP has made certain adjustments to the exercise price and number of stock-based compensation awards with the intention of preserving the intrinsic value of the awards prior to the Separation. The pre-tax stock-based compensation expense due to the adjustments was
$2 million
and was recorded during the three months ended January 31, 2016. All outstanding restricted stock awards and stock options for employees transferred to Hewlett Packard Enterprise were cancelled (the "Cancelled Awards") in connection with the Separation.
|
Restricted Stock Awards
Restricted stock awards are non-vested stock awards that may include grants of restricted stock or restricted stock units. For the three and
nine
months ended
July 31, 2016
and 2015, HP granted only restricted stock units. HP uses the closing stock price on the grant date to estimate the fair value of service-based restricted stock units. HP estimates the fair value of restricted stock units subject to performance-adjusted vesting conditions using a combination of the closing stock price on the grant date and the Monte Carlo simulation model. For the three months ended
July 31, 2016
and
2015
, HP did
no
t grant any restricted stock units subject to performance-adjusted vesting conditions. The weighted-average fair value and the assumptions used to measure fair value of restricted stock units subject to performance-adjusted vesting conditions in the Monte Carlo simulation model were as follows:
|
|
|
|
|
|
|
|
|
|
Nine months ended July 31
|
|
2016
|
|
2015
|
Weighted-average fair value
(1)
|
$
|
13
|
|
|
$
|
47
|
|
Expected volatility
(2)
|
32.5
|
%
|
|
33.6
|
%
|
Risk-free interest rate
(3)
|
1.2
|
%
|
|
1.0
|
%
|
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.
|
HP INC. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements
(Unaudited)
Note 6: Stock Based Compensation (Continued)
|
|
(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 award activity was as follows:
|
|
|
|
|
|
|
|
|
Nine months ended July 31, 2016
|
|
Shares
|
|
Weighted-Average
Grant Date Fair Value
Per Share
|
|
In thousands
|
|
|
Outstanding at beginning of period
|
29,717
|
|
|
$
|
32
|
|
Granted
|
27,968
|
|
|
$
|
9
|
|
Vested
|
(3,219
|
)
|
|
$
|
13
|
|
Cancelled Awards
|
(23,926
|
)
|
|
$
|
32
|
|
Forfeited
|
(1,751
|
)
|
|
$
|
13
|
|
Outstanding at end of period
|
28,789
|
|
|
$
|
13
|
|
At
July 31, 2016
, there was
$201 million
of unrecognized pre-tax stock-based compensation expense related to non-vested restricted stock awards, which HP expects to recognize over the remaining weighted-average vesting period of
1.4
years.
Stock Options
HP utilizes the Black-Scholes-Merton option pricing formula to estimate the fair value of stock options subject to service-based vesting conditions. HP estimates the fair value of stock options subject to performance-contingent vesting conditions using a combination of a Monte Carlo simulation model and a lattice model, as these awards contain market conditions. The weighted-average fair value and the assumptions used to measure fair value were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended July 31
|
|
Nine months ended July 31
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Weighted-average fair value
(1)
|
$
|
2
|
|
|
$
|
6
|
|
|
$
|
4
|
|
|
$
|
8
|
|
Expected volatility
(2)
|
31.6
|
%
|
|
26.7
|
%
|
|
36.2
|
%
|
|
26.3
|
%
|
Risk-free interest rate
(3)
|
1.3
|
%
|
|
1.6
|
%
|
|
1.8
|
%
|
|
1.7
|
%
|
Expected dividend yield
(4)
|
4.3
|
%
|
|
2.3
|
%
|
|
3.5
|
%
|
|
1.8
|
%
|
Expected term in years
(5)
|
5.5
|
|
|
5.2
|
|
|
6.0
|
|
|
5.8
|
|
_______________________________________________________________________________
|
|
(1)
|
The weighted-average fair value was based on stock options granted during the period.
|
|
|
(2)
|
For all awards granted in fiscal 2016, expected volatility was estimated using the leverage-adjusted average of the term-matching volatilities of peer companies due to the lack of volume of forward traded options, which precluded the use of implied volatility. For all awards granted in fiscal 2015, expected volatility was estimated using the implied volatility derived from options traded on 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 dividend yield represents a constant dividend yield applied for the duration of the expected term of the award.
|
HP INC. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements
(Unaudited)
Note 6: Stock Based Compensation (Continued)
|
|
(5)
|
For awards subject to service-based vesting, due to the lack of historical exercise and post-vesting termination patterns of the post-Separation employee base, the expected term was estimated using a simplified method for all awards granted in fiscal 2016 and the expected term was estimated using historical exercise and post-vesting termination patterns for all awards granted in fiscal 2015; and for performance-contingent awards, the expected term represents an output from the lattice model.
|
A summary of stock option activity was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended July 31, 2016
|
|
Shares
|
|
Weighted-
Average
Exercise Price
|
|
Weighted-
Average
Remaining
Contractual
Term
|
|
Aggregate
Intrinsic Value
|
|
In thousands
|
|
|
|
In years
|
|
In millions
|
Outstanding at beginning of period
|
36,278
|
|
|
$
|
26
|
|
|
|
|
|
|
Granted
|
25,424
|
|
|
$
|
6
|
|
|
|
|
|
|
Exercised
|
(3,901
|
)
|
|
$
|
8
|
|
|
|
|
|
|
Cancelled Awards
|
(26,252
|
)
|
|
$
|
26
|
|
|
|
|
|
|
Forfeited and expired
|
(2,173
|
)
|
|
$
|
16
|
|
|
|
|
|
|
Outstanding at end of period
|
29,376
|
|
|
$
|
12
|
|
|
5.2
|
|
$
|
66
|
|
Vested and expected to vest at end of period
|
27,680
|
|
|
$
|
12
|
|
|
5.1
|
|
$
|
65
|
|
Exercisable at end of period
|
15,461
|
|
|
$
|
11
|
|
|
3.7
|
|
$
|
58
|
|
The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value that option holders would have realized had all option holders exercised their options on the last trading day of the
third
quarter of fiscal
2016
. The aggregate intrinsic value is the difference between HP's closing stock price on the last trading day of the
third
quarter of fiscal
2016
and the exercise price, multiplied by the number of in-the-money options. The total intrinsic value of options exercised for the
three and nine
months ended
July 31, 2016
was
$14 million
and
$21 million
, respectively.
At
July 31, 2016
, there was
$22 million
of unrecognized pre-tax, stock-based compensation expense related to unvested stock options, which HP expects to recognize over the remaining weighted-average vesting period of
1.9
years.
Note 7: Taxes on Earnings
Tax Matters Agreement and Other Income Tax Matters
In connection with the Separation, HP entered into the 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 upon the outcome of certain unresolved tax matters, which may not be resolved for several years. The net receivable as of
July 31, 2016
was
$1.1 billion
.
HP INC. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements
(Unaudited)
Note 7: Taxes on Earnings (Continued)
Provision for Taxes
HP's effective tax rate for continuing operations was
22.0%
and
23.7%
for the three months ended
July 31, 2016
and
2015
, respectively, and
21.7%
and
22.2%
for the
nine
months ended
July 31, 2016
and
2015
, respectively. HP's effective tax rate generally differs from the U.S. federal statutory rate of
35%
due to favorable tax rates associated with certain earnings from HP's operations in lower-tax jurisdictions throughout the world. HP has not provided U.S. taxes for all foreign earnings because HP plans to reinvest some of those earnings indefinitely outside the U.S.
In the three and
nine
months ended
July 31, 2016
, HP recorded discrete items resulting in net tax expense of
$14 million
and net tax benefit of
$72 million
, respectively, for continuing operations. These amounts included a tax benefit of
$8 million
and
$46 million
, for the three and nine months ended
July 31, 2016
, respectively, on restructuring and other charges. The
nine
months ended
July 31, 2016
also included a tax benefit of
$41 million
arising from the retroactive research and development credit provided by the Consolidated Appropriations Act of 2016 signed into law in December 2015.
In the three and
nine
months ended
July 31, 2015
, HP recorded discrete items resulting in net tax expense of
$28 million
and
$12 million
, respectively. These amounts included a tax benefit of
$1 million
and
$8 million
for the three and
nine
months ended
July 31, 2015
, respectively, on restructuring and other charges, and tax expense of
$7 million
and
$36 million
for the three and
nine
months ended
July 31, 2015
, respectively, related to provision to return adjustments and other tax expense of
$22 million
and
$12 million
for the three and
nine
months ended
July 31, 2015
, respectively. The
nine
months ended
July 31, 2015
also included a tax benefit of
$28 million
arising from the retroactive research and development credit provided by the Tax Increase Prevention Act of 2014 signed into law in December 2014.
Uncertain Tax Positions
As of
July 31, 2016
, the amount of unrecognized tax benefits was
$9.6 billion
, of which up to
$3.4 billion
would affect HP's effective tax rate if realized. The amount of unrecognized tax benefits increased by
$385 million
for the
nine
months ended
July 31, 2016
, primarily related to advanced royalty payments, the majority of which are indemnified by Hewlett Packard Enterprise. 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. During the nine months ended July 31, 2016, as part of the Separation, HP distributed liabilities related solely to uncertain tax positions associated with Hewlett Packard Enterprise aggregating
$732 million
. HP and Hewlett Packard Enterprise have contractually agreed to share the responsibility of certain tax exposures, and as such have recorded indemnification assets and liabilities pursuant to the TMA. HP recognizes interest income from favorable settlements and interest expense and penalties accrued on unrecognized tax benefits in the provision for taxes in the Consolidated Condensed Statements of Earnings. As of
July 31, 2016
, HP had accrued
$153 million
for interest and penalties.
HP engages in continuous discussion and negotiation with taxing authorities regarding tax matters in various jurisdictions. HP does not expect complete resolution of any IRS audit cycle within the next
12 months
. However, it is reasonably possible that certain federal, foreign and state tax issues may be concluded in the next
12 months
, including issues involving transfer pricing and other matters. Accordingly, HP believes it is reasonably possible that its existing unrecognized tax benefits may be reduced by an amount up to
$5 million
within the next
12 months
.
Deferred Tax Assets and Liabilities
In 2015, the FASB issued Accounting Standards Update ("ASU") 2015
-17
, "Balance Sheet Classification of Deferred Taxes", which simplifies the presentation of deferred income taxes. This guidance requires that deferred tax liabilities and assets be classified as non-current in a classified statement of financial position. HP early adopted the FASB's new accounting guidance prospectively for the interim period beginning November 1, 2015; thus, the prior reporting period was not retrospectively adjusted.
HP periodically engages in intercompany advanced royalty payment arrangements that may result in advance payments between subsidiaries in different tax jurisdictions. When the local tax treatment of the intercompany licensing arrangements differs from U.S. GAAP treatment, deferred taxes are recognized. During the nine months ended July 31, 2016, HP executed intercompany advanced royalty payment arrangements resulting in advanced payments of
$1.1 billion
. During fiscal 2015, HP executed an intercompany advanced royalty payment arrangement which resulted in advanced payments of
$3.8 billion
, with a deferral of intercompany revenues over the term of the arrangements, which is approximately
5 years
. There was no recognition of any net U.S. deferred tax assets as a result of this transaction. In these transactions, the payments were received in the U.S.
HP INC. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements
(Unaudited)
Note 7: Taxes on Earnings (Continued)
from a foreign consolidated affiliate, with a deferral of intercompany revenues over the term of the arrangement, which is approximately
5 years
. Intercompany royalty revenue is eliminated in consolidation.
Note 8: Balance Sheet Details
Balance sheet details were as follows:
Accounts Receivable
|
|
|
|
|
|
|
|
|
|
As of
|
|
July 31, 2016
|
|
October 31, 2015
|
|
In millions
|
Accounts receivable
|
$
|
4,092
|
|
|
$
|
4,905
|
|
Allowance for doubtful accounts
|
(84
|
)
|
|
(80
|
)
|
|
$
|
4,008
|
|
|
$
|
4,825
|
|
The allowance for doubtful accounts related to accounts receivable and changes were as follows:
|
|
|
|
|
|
Nine months ended July 31, 2016
|
|
In millions
|
Balance at beginning of period
|
$
|
80
|
|
Provision for doubtful accounts
|
37
|
|
Deductions, net of recoveries
|
(33
|
)
|
Balance at end of period
|
$
|
84
|
|
HP has third-party arrangements, consisting of revolving short-term financing, which provide liquidity to certain partners in order to facilitate their working capital requirements. These financing arrangements, which in certain circumstances may contain partial recourse, result in a transfer of HP's receivables and risk to the third party. As these transfers qualify as true sales under the applicable accounting guidance, the receivables are derecognized from the Consolidated Condensed Balance Sheets upon transfer, and HP receives a payment for the receivables from the third party within a mutually agreed upon time period. For arrangements involving an element of recourse, the recourse obligation is measured using market data from the similar transactions and reported as a current liability in the Consolidated Condensed Balance Sheets. The recourse obligations as of
July 31, 2016
and October 31, 2015 were not material. As of July 31, 2016 and October 31, 2015, HP had
$114 million
and
$93 million
, respectively, outstanding from the third parties, which is reported in Accounts receivable in the Consolidated Condensed Balance Sheets. The costs associated with the sales of trade receivables for the three and nine months ended July 31, 2016 and July 31, 2015 were not material.
The following is a summary of the activity under these arrangements:
|
|
|
|
|
|
Nine months ended July 31, 2016
|
|
In millions
|
Balance at beginning of period
|
$
|
93
|
|
Trade receivables sold
|
5,896
|
|
Cash receipts
|
(5,873
|
)
|
Foreign currency and other
|
(2
|
)
|
Balance at end of period
|
$
|
114
|
|
HP INC. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements
(Unaudited)
Note 8: Balance Sheet Details (Continued)
Inventory
|
|
|
|
|
|
|
|
|
|
As of
|
|
July 31, 2016
|
|
October 31, 2015
|
|
In millions
|
Finished goods
|
$
|
2,665
|
|
|
$
|
2,820
|
|
Purchased parts and fabricated assemblies
|
1,296
|
|
|
1,468
|
|
|
$
|
3,961
|
|
|
$
|
4,288
|
|
Other Current Assets
|
|
|
|
|
|
|
|
|
|
As of
|
|
July 31, 2016
|
|
October 31, 2015
|
|
In millions
|
Value-added taxes receivable
|
$
|
728
|
|
|
$
|
942
|
|
Supplier and other receivables
|
1,799
|
|
|
1,316
|
|
Prepaid and other current assets
|
1,270
|
|
|
1,193
|
|
Deferred tax assets
(1)
|
—
|
|
|
1,047
|
|
|
$
|
3,797
|
|
|
$
|
4,498
|
|
_______________________________________________________________________________
|
|
(1)
|
Effective November 1, 2015, HP prospectively adopted ASU 2015-17, "Balance Sheet Classification of Deferred Taxes" and as a result classified all deferred tax assets and liabilities as non-current.
|
Property, Plant and Equipment
|
|
|
|
|
|
|
|
|
|
As of
|
|
July 31, 2016
|
|
October 31, 2015
|
|
In millions
|
Land, buildings and leasehold improvements
|
$
|
2,384
|
|
|
$
|
2,272
|
|
Machinery and equipment, including equipment held for lease
|
3,628
|
|
|
3,459
|
|
|
6,012
|
|
|
5,731
|
|
Accumulated depreciation
|
(4,405
|
)
|
|
(4,239
|
)
|
|
$
|
1,607
|
|
|
$
|
1,492
|
|
Other Non-Current Assets
|
|
|
|
|
|
|
|
|
|
As of
|
|
July 31, 2016
|
|
October 31, 2015
|
|
In millions
|
Tax indemnifications receivable
(1)
|
$
|
1,155
|
|
|
$
|
—
|
|
Deferred tax assets
(2)
|
166
|
|
|
216
|
|
Other
|
1,276
|
|
|
1,376
|
|
|
$
|
2,597
|
|
|
$
|
1,592
|
|
_______________________________________________________________________________
|
|
(1)
|
In connection with the TMA discussed under Note 7, "Taxes on Earnings".
|
|
|
(2)
|
Effective November 1, 2015, HP prospectively adopted ASU 2015-17, "Balance Sheet Classification of Deferred Taxes" and as a result classified all deferred tax assets and liabilities as non-current.
|
HP INC. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements
(Unaudited)
Note 8: Balance Sheet Details (Continued)
Other Accrued Liabilities
|
|
|
|
|
|
|
|
|
|
As of
|
|
July 31, 2016
|
|
October 31, 2015
|
|
In millions
|
Other accrued taxes
|
$
|
714
|
|
|
$
|
1,007
|
|
Warranty
|
759
|
|
|
871
|
|
Sales and marketing programs
|
2,177
|
|
|
2,181
|
|
Other
|
2,236
|
|
|
2,182
|
|
|
$
|
5,886
|
|
|
$
|
6,241
|
|
Other Non-Current Liabilities
|
|
|
|
|
|
|
|
|
|
As of
|
|
July 31, 2016
|
|
October 31, 2015
|
|
In millions
|
Pension, post-retirement, and post-employment liabilities
|
$
|
2,002
|
|
|
$
|
2,203
|
|
Deferred tax liability
|
1,594
|
|
|
1,813
|
|
Tax liability
|
1,050
|
|
|
1,803
|
|
Deferred revenue
|
830
|
|
|
812
|
|
Tax indemnifications payable
(1)
|
70
|
|
|
—
|
|
Other
|
730
|
|
|
783
|
|
|
$
|
6,276
|
|
|
$
|
7,414
|
|
_______________________________________________________________________________
|
|
(1)
|
In connection with the TMA discussed under Note 7, "Taxes on Earnings".
|
Note 9: 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.
HP INC. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements
(Unaudited)
Note 9: Fair Value (Continued)
Assets and Liabilities Measured and Recorded at Fair Value on a Recurring Basis
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of July 31, 2016
|
|
As of October 31, 2015
|
|
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 and Investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Time deposits
|
$
|
—
|
|
|
$
|
1,915
|
|
|
$
|
—
|
|
|
$
|
1,915
|
|
|
$
|
—
|
|
|
$
|
1,111
|
|
|
$
|
—
|
|
|
$
|
1,111
|
|
Money market funds
|
2,527
|
|
|
—
|
|
|
—
|
|
|
2,527
|
|
|
4,303
|
|
|
—
|
|
|
—
|
|
|
4,303
|
|
Marketable equity securities
|
5
|
|
|
4
|
|
|
—
|
|
|
9
|
|
|
6
|
|
|
3
|
|
|
—
|
|
|
9
|
|
Foreign bonds
|
—
|
|
|
47
|
|
|
—
|
|
|
47
|
|
|
—
|
|
|
42
|
|
|
—
|
|
|
42
|
|
Other debt securities
|
—
|
|
|
2
|
|
|
—
|
|
|
2
|
|
|
—
|
|
|
2
|
|
|
—
|
|
|
2
|
|
Derivative Instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate contracts
|
—
|
|
|
76
|
|
|
—
|
|
|
76
|
|
|
—
|
|
|
38
|
|
|
—
|
|
|
38
|
|
Foreign currency contracts
|
—
|
|
|
269
|
|
|
1
|
|
|
270
|
|
|
—
|
|
|
213
|
|
|
2
|
|
|
215
|
|
Other derivatives
|
—
|
|
|
5
|
|
|
—
|
|
|
5
|
|
|
—
|
|
|
5
|
|
|
—
|
|
|
5
|
|
Total Assets
|
$
|
2,532
|
|
|
$
|
2,318
|
|
|
$
|
1
|
|
|
$
|
4,851
|
|
|
$
|
4,309
|
|
|
$
|
1,414
|
|
|
$
|
2
|
|
|
$
|
5,725
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative Instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency contracts
|
$
|
—
|
|
|
$
|
150
|
|
|
$
|
10
|
|
|
$
|
160
|
|
|
$
|
—
|
|
|
$
|
302
|
|
|
$
|
2
|
|
|
$
|
304
|
|
Total Liabilities
|
$
|
—
|
|
|
$
|
150
|
|
|
$
|
10
|
|
|
$
|
160
|
|
|
$
|
—
|
|
|
$
|
302
|
|
|
$
|
2
|
|
|
$
|
304
|
|
There were
no
transfers between levels within the fair value hierarchy during the
nine
months ended
July 31, 2016
.
Valuation Techniques
Cash Equivalents and Investments: HP holds time deposits, money market funds, mutual funds, other debt securities primarily consisting of corporate and foreign 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 currency rates, and forward and spot prices for currencies and interest rates. See Note 10, "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 estimated fair value of HP's short- and long-term debt was
$7.1 billion
as of
July 31, 2016
, compared to its carrying amount of
HP INC. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements
(Unaudited)
Note 9: Fair Value (Continued)
$6.8 billion
at that date. The estimated fair value of HP's short- and long-term debt approximated its carrying value of
$8.9 billion
as of October 31, 2015. 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, 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 an 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 in Level 3 of the fair value hierarchy.
Note 10: Financial Instruments
Cash Equivalents and Available-for-Sale Investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of July 31, 2016
|
|
As of October 31, 2015
|
|
Cost
|
|
Gross
Unrealized
Gain
|
|
Gross
Unrealized
Loss
|
|
Fair
Value
|
|
Cost
|
|
Gross
Unrealized
Gain
|
|
Gross
Unrealized
Loss
|
|
Fair
Value
|
|
In millions
|
Cash Equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Time deposits
|
$
|
1,915
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,915
|
|
|
$
|
1,111
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,111
|
|
Money market funds
|
2,527
|
|
|
—
|
|
|
—
|
|
|
2,527
|
|
|
4,303
|
|
|
—
|
|
|
—
|
|
|
4,303
|
|
Total cash equivalents
|
4,442
|
|
|
—
|
|
|
—
|
|
|
4,442
|
|
|
5,414
|
|
|
—
|
|
|
—
|
|
|
5,414
|
|
Available-for-Sale Investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities in public companies
|
1
|
|
|
5
|
|
|
—
|
|
|
6
|
|
|
1
|
|
|
4
|
|
|
—
|
|
|
5
|
|
Foreign bonds
|
36
|
|
|
11
|
|
|
—
|
|
|
47
|
|
|
32
|
|
|
10
|
|
|
—
|
|
|
42
|
|
Other debt securities
|
2
|
|
|
—
|
|
|
—
|
|
|
2
|
|
|
2
|
|
|
—
|
|
|
—
|
|
|
2
|
|
Total available-for-sale investments
|
39
|
|
|
16
|
|
|
—
|
|
|
55
|
|
|
35
|
|
|
14
|
|
|
—
|
|
|
49
|
|
Total cash equivalents and available-for-sale investments
|
$
|
4,481
|
|
|
$
|
16
|
|
|
$
|
—
|
|
|
$
|
4,497
|
|
|
$
|
5,449
|
|
|
$
|
14
|
|
|
$
|
—
|
|
|
$
|
5,463
|
|
All highly liquid investments with original maturities of three months or less at the date of acquisition are considered cash equivalents. As of
July 31, 2016
and
October 31, 2015
, the carrying amount of cash equivalents approximated fair value due to the short period of time to maturity. Time deposits were primarily issued by institutions outside the U.S. as of
July 31, 2016
and
October 31, 2015
. The estimated fair value of the available-for-sale investments may not be representative of values that will be realized in the future.
HP INC. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements
(Unaudited)
Note 10: Financial Instruments (Continued)
Contractual maturities of investments in available-for-sale debt securities were as follows:
|
|
|
|
|
|
|
|
|
|
As of July 31, 2016
|
|
Amortized
Cost
|
|
Fair Value
|
|
In millions
|
Due in one year
|
$
|
2
|
|
|
$
|
2
|
|
Due in one to five years
|
$
|
—
|
|
|
$
|
—
|
|
Due in more than five years
|
$
|
36
|
|
|
$
|
47
|
|
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
$12 million
and
$13 million
as of
July 31, 2016
and October 31, 2015, respectively.
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. 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. HP classifies cash flows from its derivative programs with the activities that correspond to the underlying hedged items on the Consolidated Condensed Statements of Cash Flows.
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
$7 million
and
$138 million
as of
July 31, 2016
and October 31, 2015, respectively, all of which were fully collateralized within
two
business days of the related request.
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
July 31, 2016
and October 31, 2015.
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
HP INC. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements
(Unaudited)
Note 10: Financial Instruments (Continued)
forward contracts associated with intercompany loans extend for the duration of the lease or 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) equity 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.
Net Investment Hedges
HP used forward contracts designated as net investment hedges to hedge net investments in certain foreign subsidiaries whose functional currency was the local currency. As part of the Separation, HP disposed of all these foreign subsidiaries and no longer utilizes net investment hedges. HP recorded the effective portion of such derivative instruments together with changes in the fair value of the hedged items in Cumulative translation adjustment as a separate component of stockholders' (deficit) equity in the Consolidated Condensed Balance Sheets.
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 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.
The hedge ineffectiveness recognized in earnings for fair value, cash flow and net investment hedges was not material in the
three and nine
months ended
July 31, 2016
and 2015.
HP INC. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements
(Unaudited)
Note 10: Financial Instruments (Continued)
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 July 31, 2016
|
|
As of October 31, 2015
|
|
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
|
$
|
2,000
|
|
|
$
|
—
|
|
|
$
|
76
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
3,175
|
|
|
$
|
1
|
|
|
$
|
37
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Cash flow hedges:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency contracts
|
12,137
|
|
|
147
|
|
|
100
|
|
|
112
|
|
|
5
|
|
|
10,859
|
|
|
171
|
|
|
10
|
|
|
165
|
|
|
79
|
|
Total derivatives designated as hedging instruments
|
14,137
|
|
|
147
|
|
|
176
|
|
|
112
|
|
|
5
|
|
|
14,034
|
|
|
172
|
|
|
47
|
|
|
165
|
|
|
79
|
|
Derivatives not designated as hedging instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency contracts
|
3,956
|
|
|
23
|
|
|
—
|
|
|
43
|
|
|
—
|
|
|
8,955
|
|
|
33
|
|
|
1
|
|
|
37
|
|
|
23
|
|
Other derivatives
|
144
|
|
|
5
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
173
|
|
|
5
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total derivatives not designated as hedging instruments
|
4,100
|
|
|
28
|
|
|
—
|
|
|
43
|
|
|
—
|
|
|
9,128
|
|
|
38
|
|
|
1
|
|
|
37
|
|
|
23
|
|
Total derivatives
|
$
|
18,237
|
|
|
$
|
175
|
|
|
$
|
176
|
|
|
$
|
155
|
|
|
$
|
5
|
|
|
$
|
23,162
|
|
|
$
|
210
|
|
|
$
|
48
|
|
|
$
|
202
|
|
|
$
|
102
|
|
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
July 31, 2016
and October 31, 2015, information related to the potential effect of HP's master netting agreements and collateral security agreements was as follows:
HP INC. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements
(Unaudited)
Note 10: 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 July 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative assets
|
$
|
351
|
|
|
$
|
—
|
|
|
$
|
351
|
|
|
$
|
135
|
|
|
$
|
201
|
|
|
(1)
|
|
$
|
15
|
|
Derivative liabilities
|
$
|
160
|
|
|
$
|
—
|
|
|
$
|
160
|
|
|
$
|
135
|
|
|
$
|
10
|
|
|
(2)
|
|
$
|
15
|
|
As of October 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative assets
|
$
|
258
|
|
|
$
|
—
|
|
|
$
|
258
|
|
|
$
|
162
|
|
|
$
|
9
|
|
|
(1)
|
|
$
|
87
|
|
Derivative liabilities
|
$
|
304
|
|
|
$
|
—
|
|
|
$
|
304
|
|
|
$
|
162
|
|
|
$
|
—
|
|
|
|
|
$
|
142
|
|
_______________________________________________________________________________
|
|
(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.
|
Effect of Derivative Instruments in the Consolidated Condensed Statements of Earnings
The pre-tax effect of derivative instruments and related hedged items in a fair value hedging relationship for the
three and nine
months ended
July 31, 2016
and 2015 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (Loss) Recognized in Earnings on Derivative and Related Hedged Item
|
Derivative Instrument
|
|
Location
|
|
Three months ended July 31, 2016
|
|
Nine months ended July 31, 2016
|
|
Hedged Item
|
|
Location
|
|
Three months ended July 31, 2016
|
|
Nine months ended July 31, 2016
|
|
|
|
|
In millions
|
|
|
|
|
|
In millions
|
Interest rate contracts
|
|
Interest and other, net
|
|
$
|
20
|
|
|
$
|
38
|
|
|
Fixed-rate debt
|
|
Interest and other, net
|
|
$
|
(20
|
)
|
|
$
|
(38
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (Loss) Recognized in Earnings on Derivative and Related Hedged Item
|
Derivative Instrument
|
|
Location
|
|
Three months ended July 31, 2015
|
|
Nine months ended July 31, 2015
|
|
Hedged Item
|
|
Location
|
|
Three months ended July 31, 2015
|
|
Nine months ended July 31, 2015
|
|
|
|
|
In millions
|
|
|
|
|
|
In millions
|
Interest rate contracts
|
|
Interest and other, net
|
|
$
|
(26
|
)
|
|
$
|
35
|
|
|
Fixed-rate debt
|
|
Interest and other, net
|
|
$
|
26
|
|
|
$
|
(35
|
)
|
HP INC. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements
(Unaudited)
Note 10: Financial Instruments (Continued)
The pre-tax effect of derivative instruments in cash flow hedging relationships for the
three and nine
months ended
July 31, 2016
was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (Loss) Recognized in
Other Comprehensive
Income ("OCI") on Derivatives (Effective Portion)
|
|
Gain (Loss) Reclassified from Accumulated OCI Into
Earnings (Effective Portion)
|
|
Three months ended July 31, 2016
|
|
Nine months ended July 31, 2016
|
|
Location
|
|
Three months ended July 31, 2016
|
|
Nine months ended July 31, 2016
|
|
In millions
|
|
|
|
In millions
|
Cash flow hedges:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency contracts
|
$
|
175
|
|
|
$
|
135
|
|
|
Net revenue
|
|
$
|
(140
|
)
|
|
$
|
26
|
|
|
|
|
|
|
|
|
Cost of revenue
|
|
(18
|
)
|
|
(90
|
)
|
|
|
|
|
|
|
|
Operating expenses
|
|
1
|
|
|
1
|
|
|
|
|
|
|
|
|
Interest and other, net
|
|
(2
|
)
|
|
—
|
|
Total
|
$
|
175
|
|
|
$
|
135
|
|
|
|
|
$
|
(159
|
)
|
|
$
|
(63
|
)
|
The pre-tax effect of derivative instruments in cash flow and net investment hedging relationships for the
three and nine
months ended
July 31, 2015
was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (Loss) Recognized in
Other Comprehensive
Income ("OCI") on Derivatives (Effective Portion)
|
|
Gain (Loss) Reclassified from Accumulated OCI Into
Earnings (Effective Portion)
|
|
Three months ended July 31, 2015
|
|
Nine months ended July 31, 2015
|
|
Location
|
|
Three months ended July 31, 2015
|
|
Nine months ended July 31, 2015
|
|
In millions
|
|
|
|
In millions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flow hedges:
Foreign currency contracts
|
$
|
109
|
|
|
$
|
490
|
|
|
Net revenue
|
|
$
|
160
|
|
|
$
|
825
|
|
|
|
|
|
|
|
|
Cost of revenue
|
|
(46
|
)
|
|
(118
|
)
|
|
|
|
|
|
|
|
Operating expenses
|
|
(1
|
)
|
|
(3
|
)
|
|
|
|
|
|
|
|
Interest and other, net
|
|
(25
|
)
|
|
(25
|
)
|
Continuing Operations
|
$
|
109
|
|
|
$
|
490
|
|
|
Continuing Operations
|
|
$
|
88
|
|
|
$
|
679
|
|
Discontinued Operations
|
183
|
|
|
415
|
|
|
Discontinued Operations
|
|
71
|
|
|
370
|
|
Total
|
$
|
292
|
|
|
$
|
905
|
|
|
Total
|
|
$
|
159
|
|
|
$
|
1,049
|
|
Net investment hedges:
Foreign currency contracts
|
$
|
—
|
|
|
—
|
|
|
Interest and other, net
|
|
—
|
|
|
—
|
|
Continuing Operations
|
—
|
|
|
—
|
|
|
Continuing Operations
|
|
—
|
|
|
—
|
|
Discontinued Operations
|
85
|
|
|
208
|
|
|
Discontinued Operations
|
|
—
|
|
|
—
|
|
Total
|
$
|
85
|
|
|
$
|
208
|
|
|
Total
|
|
$
|
—
|
|
|
$
|
—
|
|
As of
July 31, 2016
, HP expects to reclassify an estimated accumulated other comprehensive income ("AOCI") of
$49 million
, net of taxes, to earnings within the next twelve months associated with cash flow hedges along with the earnings effects of the related forecasted transactions. The amounts ultimately reclassified into earnings could be different from the amounts previously included in AOCI based on the change of market rate, and therefore could have a different impact on earnings.
HP INC. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements
(Unaudited)
Note 10: Financial Instruments (Continued)
The pre-tax effect of derivative instruments not designated as hedging instruments in the Consolidated Condensed Statements of Earnings for the
three and nine
months ended
July 31, 2016
and 2015 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (Loss) Recognized in Earnings on Derivatives
|
|
Location
|
|
Three months ended July 31, 2016
|
|
Three months ended July 31, 2015
|
|
Nine months ended July 31, 2016
|
|
Nine months ended July 31, 2015
|
|
|
|
In millions
|
Foreign currency contracts
|
Interest and other, net
|
|
$
|
(12
|
)
|
|
$
|
159
|
|
|
$
|
(20
|
)
|
|
$
|
222
|
|
Other derivatives
|
Interest and other, net
|
|
2
|
|
|
—
|
|
|
1
|
|
|
(3
|
)
|
Total
|
|
|
$
|
(10
|
)
|
|
$
|
159
|
|
|
$
|
(19
|
)
|
|
$
|
219
|
|
Note 11: Borrowings
Notes Payable and Short-Term Borrowings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of July 31, 2016
|
|
As of October 31, 2015
|
|
Amount
Outstanding
|
|
Weighted-Average
Interest Rate
|
|
Amount
Outstanding
|
|
Weighted-Average
Interest Rate
|
|
In millions
|
|
|
|
In millions
|
|
|
Current portion of long-term debt
(1)
|
$
|
41
|
|
|
4.3
|
%
|
|
$
|
2,160
|
|
|
3.3
|
%
|
Notes payable to banks, lines of credit and other
|
34
|
|
|
4.0
|
%
|
|
34
|
|
|
4.7
|
%
|
|
$
|
75
|
|
|
|
|
|
$
|
2,194
|
|
|
|
|
_______________________________________________________________________________
|
|
(1)
|
During the month of November 2015, HP redeemed and repaid
$2.1 billion
aggregate principal amount of its U.S. Dollar Global Notes.
|
HP INC. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements
(Unaudited)
Note 11: Borrowings (Continued)
Long-Term Debt
|
|
|
|
|
|
|
|
|
|
As of
|
|
July 31, 2016
|
|
October 31, 2015
|
|
In millions
|
U.S. Dollar Global Notes
(1) (2)
|
|
|
|
|
|
2006 Shelf Registration Statement:
|
|
|
|
|
|
$500 issued at discount to par at a price of 99.694% in February 2007 at 5.4%, paid November 2015
|
$
|
—
|
|
|
$
|
162
|
|
$750 issued at discount to par at a price of 99.932% in March 2008 at 5.5%, paid November 2015
|
—
|
|
|
283
|
|
2009 Shelf Registration Statement:
|
|
|
|
|
|
$1,350 issued at discount to par at a price of 99.827% in December 2010 at 3.75%, due December 2020
|
648
|
|
|
648
|
|
$1,250 issued at discount to par at a price of 99.799% in May 2011 at 4.3%, due June 2021
|
1,248
|
|
|
1,248
|
|
$1,000 issued at discount to par at a price of 99.816% in September 2011 at 4.375%, due September 2021
|
999
|
|
|
999
|
|
$1,500 issued at discount to par at a price of 99.707% in December 2011 at 4.65%, due December 2021
|
1,498
|
|
|
1,497
|
|
$500 issued at discount to par at a price of 99.771% in March 2012 at 4.05%, due September 2022
|
499
|
|
|
499
|
|
$1,200 issued at discount to par at a price of 99.863% in September 2011 at 6.0%, due September 2041
|
1,199
|
|
|
1,199
|
|
$650 issued at discount to par at a price of 99.911% in December 2010 at 2.2%, paid November 2015
|
—
|
|
|
309
|
|
$1,000 issued at discount to par at a price of 99.958% in May 2011 at 2.65%, paid November 2015
|
—
|
|
|
346
|
|
$1,300 issued at discount to par at a price of 99.784% in September 2011 at 3.0%, paid November 2015
|
—
|
|
|
390
|
|
$850 issued at discount to par at a price of 99.790% in December 2011 at 3.3%, paid November 2015
|
—
|
|
|
220
|
|
$1,500 issued at discount to par at a price of 99.985% in March 2012 at 2.6%, paid November 2015
|
—
|
|
|
436
|
|
2012 Shelf Registration Statement:
|
|
|
|
|
|
$750 issued at par in January 2014 at three-month USD LIBOR plus 0.94%, due January 2019
|
102
|
|
|
102
|
|
$1,250 issued at discount to par at a price of 99.954% in January 2014 at 2.75%, due January 2019
|
300
|
|
|
300
|
|
|
6,493
|
|
|
8,638
|
|
Other, including capital lease obligations, at 0.51%-8.30%, due in calendar years 2016-2024
|
207
|
|
|
96
|
|
Fair value adjustment related to hedged debt
|
101
|
|
|
103
|
|
Less: current portion of long-term debt
|
(41
|
)
|
|
(2,160
|
)
|
Total long-term debt
|
$
|
6,760
|
|
|
$
|
6,677
|
|
_______________________________________________________________________________
|
|
(1)
|
HP may redeem some or all of the fixed-rate U.S. Dollar Global Notes at any time in accordance with the terms thereof. The U.S. Dollar Global Notes are senior unsecured debt.
|
|
|
(2)
|
HP redeemed and repaid
$2.1 billion
aggregate principal amount outstanding of its U.S. Dollar Global Notes during the month of November 2015.
|
As disclosed in Note 10, "Financial Instruments", HP uses interest rate swaps to mitigate some of the exposure of its debt portfolio to changes in fair value resulting from changes in interest rates by achieving a primarily U.S. dollar LIBOR-based floating interest expense. Interest rates shown in the table of long-term debt have not been adjusted to reflect the impact of any interest rate swaps.
Interest expense on borrowings recognized as "Interest and other, net" in the Consolidated Condensed Statements of Earnings during the three months ended
July 31, 2016
and 2015 was
$71 million
and
$53 million
, respectively, and during the nine months ended
July 31, 2016
and 2015 was
$203 million
and
$109 million
, respectively.
Commercial Paper
On November 1, 2015, HP's Board of Directors authorized HP to borrow up to a total outstanding principal balance of
$4.0 billion
, or the equivalent in foreign currencies, for the use and benefit of HP and HP's subsidiaries, by the issuance of commercial paper or through the execution of promissory notes, loan agreements, letters of credit, agreements for lines of credit or overdraft facilities.
HP INC. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements
(Unaudited)
Note 11: Borrowings (Continued)
Credit Facility
As of
July 31, 2016
, HP maintains a
$4.0 billion
, senior unsecured committed revolving credit facility to support the issuance of commercial paper or for general corporate purposes. Commitments under the revolving credit facility will be available until April 2, 2019. Commitment fees, interest rates and other terms of borrowing under the credit facility vary based on HP's external credit ratings. As of
July 31, 2016
, HP was in compliance with the financial covenants in the credit agreement governing the revolving credit facility.
Available Borrowing Resources
As of
July 31, 2016
, HP and HP's subsidiaries had available borrowing resources of
$833 million
from uncommitted lines of credit in addition to the senior unsecured committed revolving credit facility discussed above.
Note 12: Stockholders' Equity
Share Repurchase Program
HP's share repurchase program authorizes both open market and private repurchase transactions. During the
three and nine
months ended
July 31, 2016
, HP executed share repurchases of
4 million
shares and
100 million
shares, respectively. Share repurchases executed during the three months ended
July 31, 2016
included
0.2 million
shares settled in August 2016. During the
three and nine
months ended
July 31, 2016
, HP settled total shares for
$0.1 billion
and
$1.2 billion
, respectively. During the
three and nine
months ended
July 31, 2015
, HP executed share repurchases of
11 million
shares and
65 million
shares and settled total shares for
$0.4 billion
and for
$2.6 billion
, respectively.
The shares repurchased in the
nine
months ended
July 31, 2016
and 2015 were all open market repurchase transactions. As of
July 31, 2016
, HP had remaining authorization of
$0.8 billion
for future share repurchases under the
$10.0 billion
repurchase authorization approved by HP's Board of Directors on July 21, 2011.
HP INC. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements
(Unaudited)
Note 12: Stockholder's Equity (Continued)
Tax effects related to Other Comprehensive Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended July 31
|
|
Nine months ended July 31
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
In millions
|
Tax effects on change in unrealized gains (losses) on available-for-sale securities:
|
|
|
|
|
|
|
|
|
|
|
|
Tax provision on unrealized gains (losses) arising during the period
|
$
|
—
|
|
|
$
|
(3
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
Tax effects on change in unrealized components of cash flow hedges:
|
|
|
|
|
|
|
|
|
|
|
|
Tax (provision) benefit on unrealized gains arising during the period
|
(5
|
)
|
|
(89
|
)
|
|
46
|
|
|
(270
|
)
|
Tax (benefit) provision on losses (gains) reclassified into earnings
|
(20
|
)
|
|
48
|
|
|
3
|
|
|
303
|
|
|
(25
|
)
|
|
(41
|
)
|
|
49
|
|
|
33
|
|
Tax effects on change in unrealized components of defined benefit plans:
|
|
|
|
|
|
|
|
|
|
|
|
Tax (provision) benefit on losses arising during the period
|
—
|
|
|
(65
|
)
|
|
2
|
|
|
(65
|
)
|
Tax benefit on amortization of actuarial loss and prior service benefit
|
(3
|
)
|
|
(8
|
)
|
|
(9
|
)
|
|
(21
|
)
|
Tax benefit (provision) on settlements and other
|
—
|
|
|
30
|
|
|
(1
|
)
|
|
29
|
|
|
(3
|
)
|
|
(43
|
)
|
|
(8
|
)
|
|
(57
|
)
|
Tax benefit (provision) on change in cumulative translation adjustment
|
—
|
|
|
18
|
|
|
—
|
|
|
(26
|
)
|
Tax (provision) benefit on other comprehensive income
|
$
|
(28
|
)
|
|
$
|
(69
|
)
|
|
$
|
41
|
|
|
$
|
(50
|
)
|
Changes and reclassifications related to Other Comprehensive Income, net of taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended July 31
|
|
Nine months ended July 31
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
In millions
|
Other comprehensive income, net of taxes:
|
|
|
|
|
|
|
|
|
|
|
|
Change in unrealized gains (losses) on available-for-sale securities:
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gains (losses) arising during the period
|
$
|
1
|
|
|
$
|
1
|
|
|
$
|
2
|
|
|
$
|
(9
|
)
|
Change in unrealized components of cash flow hedges:
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gains arising during the period
|
170
|
|
|
203
|
|
|
181
|
|
|
635
|
|
Losses (Gains) reclassified into earnings
(1)
|
139
|
|
|
(111
|
)
|
|
66
|
|
|
(746
|
)
|
|
309
|
|
|
92
|
|
|
247
|
|
|
(111
|
)
|
Change in unrealized components of defined benefit plans:
|
|
|
|
|
|
|
|
|
|
|
|
Losses arising during the period
|
—
|
|
|
(140
|
)
|
|
(2
|
)
|
|
(140
|
)
|
Amortization of actuarial loss and prior service benefit
(2)
|
9
|
|
|
100
|
|
|
27
|
|
|
303
|
|
Settlements and other
|
—
|
|
|
127
|
|
|
—
|
|
|
128
|
|
|
9
|
|
|
87
|
|
|
25
|
|
|
291
|
|
Change in cumulative translation adjustment
|
—
|
|
|
(26
|
)
|
|
—
|
|
|
(138
|
)
|
Other comprehensive income, net of taxes
|
$
|
319
|
|
|
$
|
154
|
|
|
$
|
274
|
|
|
$
|
33
|
|
______________________________________________________________________________
|
|
(1)
|
Reclassification of pre-tax losses (gains) on cash flow hedges into the Consolidated Condensed Statements of Earnings was as follows:
|
HP INC. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements
(Unaudited)
Note 12: Stockholder's Equity (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended July 31
|
|
Nine months ended July 31
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
In millions
|
Net revenue
|
$
|
140
|
|
|
$
|
(160
|
)
|
|
$
|
(26
|
)
|
|
$
|
(825
|
)
|
Cost of revenue
|
18
|
|
|
46
|
|
|
90
|
|
|
118
|
|
Operating expenses
|
(1
|
)
|
|
1
|
|
|
(1
|
)
|
|
3
|
|
Interest and other, net
|
2
|
|
|
25
|
|
|
—
|
|
|
25
|
|
Continuing Operations
|
159
|
|
|
(88
|
)
|
|
63
|
|
|
(679
|
)
|
Discontinued Operations
|
—
|
|
|
(71
|
)
|
|
—
|
|
|
(370
|
)
|
Total
|
$
|
159
|
|
|
$
|
(159
|
)
|
|
$
|
63
|
|
|
$
|
(1,049
|
)
|
|
|
(2)
|
These components are included in the computation of net pension and post-retirement benefit (credit) cost in Note 5, "Retirement and Post-Retirement Benefit Plans".
|
The components of accumulated other comprehensive loss, net of taxes and changes were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended July 31, 2016
|
|
Net unrealized
gains (losses) on
available-for-sale
securities
|
|
Net unrealized
(losses) gains on cash
flow hedges
|
|
Unrealized
components
of defined
benefit plans
|
|
Cumulative
translation
adjustment
|
|
Accumulated
other
comprehensive
(loss) income
|
|
In millions
|
Balance at beginning of period
|
$
|
66
|
|
|
$
|
(39
|
)
|
|
$
|
(5,355
|
)
|
|
$
|
(974
|
)
|
|
$
|
(6,302
|
)
|
Separation of Hewlett Packard Enterprise
|
(55
|
)
|
|
(68
|
)
|
|
4,230
|
|
|
974
|
|
|
5,081
|
|
Other comprehensive income (loss) before reclassifications
|
2
|
|
|
181
|
|
|
(2
|
)
|
|
—
|
|
|
181
|
|
Reclassifications of losses into earnings
|
—
|
|
|
66
|
|
|
27
|
|
|
—
|
|
|
93
|
|
Balance at end of period
|
$
|
13
|
|
|
$
|
140
|
|
|
$
|
(1,100
|
)
|
|
$
|
—
|
|
|
$
|
(947
|
)
|
HP INC. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements
(Unaudited)
Note 13: Net Earnings Per Share
HP calculates basic net EPS using net earnings and the weighted-average number of shares outstanding during the reporting period. Diluted net EPS includes any dilutive effect of restricted stock awards, stock options, performance-based awards and shares purchased under the employee stock purchase plan.
A reconciliation of the number of shares used for basic and diluted net EPS calculations were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended July 31
|
|
Nine months ended July 31
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
In millions, except per share amounts
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings from continuing operations
|
$
|
843
|
|
|
$
|
700
|
|
|
$
|
2,153
|
|
|
$
|
2,203
|
|
Net (loss) earnings from discontinued operations
|
(60
|
)
|
|
154
|
|
|
(149
|
)
|
|
1,028
|
|
Net earnings
(1)
|
$
|
783
|
|
|
$
|
854
|
|
|
$
|
2,004
|
|
|
$
|
3,231
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares used to compute basic net EPS
|
1,711
|
|
|
1,805
|
|
|
1,735
|
|
|
1,817
|
|
Dilutive effect of employee stock plans
|
14
|
|
|
23
|
|
|
12
|
|
|
25
|
|
Weighted-average shares used to compute diluted net EPS
|
1,725
|
|
|
1,828
|
|
|
1,747
|
|
|
1,842
|
|
Basic net earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
$
|
0.49
|
|
|
$
|
0.39
|
|
|
$
|
1.24
|
|
|
$
|
1.21
|
|
Discontinued operations
|
(0.03
|
)
|
|
0.08
|
|
|
(0.08
|
)
|
|
0.57
|
|
Basic net earnings per share
|
$
|
0.46
|
|
|
$
|
0.47
|
|
|
$
|
1.16
|
|
|
$
|
1.78
|
|
Diluted net earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
$
|
0.49
|
|
|
$
|
0.39
|
|
|
$
|
1.23
|
|
|
$
|
1.20
|
|
Discontinued operations
|
(0.04
|
)
|
|
0.08
|
|
|
(0.08
|
)
|
|
0.55
|
|
Diluted net earnings per share
|
$
|
0.45
|
|
|
$
|
0.47
|
|
|
$
|
1.15
|
|
|
$
|
1.75
|
|
Anti-dilutive weighted average stock-based compensation awards
(2)
|
13
|
|
|
10
|
|
|
26
|
|
|
12
|
|
_______________________________________________________________________________
|
|
(1)
|
HP considers restricted stock that provides the holder a non-forfeitable right to receive dividends to be participating securities. There were
no
participating securities for net earnings allocation in any period presented.
|
|
|
(2)
|
HP excludes stock options and restricted stock units where the assumed proceeds exceed the average market price from the calculation of diluted net EPS, because their effect would be anti-dilutive. The assumed proceeds of a stock option include the sum of its exercise price, average unrecognized compensation cost and excess tax benefits. The assumed proceeds of a restricted stock unit include the sum of its average unrecognized compensation cost and excess tax benefits.
|
Note 14: Litigation and Contingencies
HP is involved in lawsuits, claims, investigations and proceedings, including those identified below, consisting of intellectual property, commercial, securities, employment, employee benefits, regulatory and environmental matters that arise in the ordinary course of business. These litigations or proceedings may be against HP and/or current and former HP executive officers or current and former members of HP's Board of Directors. HP accrues a liability when management believes that it is both probable that a liability has been incurred and the amount of loss can be reasonably estimated. HP believes it has recorded adequate provisions for any such matters and, as of July 31, 2016, it was not reasonably possible that a material loss had been incurred in excess of the amounts recognized in HP's financial statements. HP reviews these matters at least quarterly and
HP INC. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements
(Unaudited)
Note 14: Litigation and Contingencies (Continued)
adjusts its accruals to reflect the impact of negotiations, settlements, rulings, advice of legal counsel, and other information and events pertaining to a particular case. Pursuant to the separation and distribution agreement, HP shares responsibility with Hewlett Packard Enterprise for certain matters, as indicated below, and Hewlett Packard Enterprise has agreed to indemnify HP in whole or in part with respect to certain matters. Based on its experience, HP believes that any damage amounts claimed in the specific matters discussed below are not a meaningful indicator of HP's potential liability. Litigation is inherently unpredictable. However, HP believes it has valid defenses with respect to legal matters pending against it. Nevertheless, cash flows or results of operations could be materially affected in any particular period by the resolution of one or more of these contingencies.
Litigation, Proceedings and Investigations
Copyright Levies
.
Proceedings are ongoing or have been concluded involving HP in certain European countries, including litigation in Belgium and other countries, seeking to impose or modify levies upon equipment (such as multifunction devices ("MFDs") and PCs), alleging that these devices enable the production of private copies of copyrighted materials. The levies are generally based upon the number of products sold and the per-product amounts of the levies, which vary. Some European countries that do not yet have levies on digital devices are expected to implement similar legislation to enable them to extend existing levy schemes, while other European countries have phased out levies or are expected to limit the scope of levy schemes and applicability in the digital hardware environment, particularly with respect to sales to business users. HP, other companies and various industry associations have opposed the extension of levies to the digital environment and have advocated alternative models of compensation to rights holders.
Reprobel, a cooperative society with the authority to collect and distribute the remuneration for reprography to Belgian copyright holders, requested by extrajudicial means that HP amend certain copyright levy declarations submitted for inkjet MFDs sold in Belgium from January 2005 to December 2009 to enable it to collect copyright levies calculated based on the generally higher copying speed when the MFDs are operated in draft print mode rather than when operated in normal print mode. In March 2010, HP filed a lawsuit against Reprobel in the French-speaking chambers of the Court of First Instance of Brussels seeking a declaratory judgment that
no
copyright levies are payable on sales of MFDs in Belgium or, alternatively, that copyright levies payable on such MFDs must be assessed based on the copying speed when operated in the normal print mode set by default in the device. On November 16, 2012, the court issued a decision holding that Belgium law is not in conformity with EU law in a number of respects and ordered that, by November 2013, Reprobel substantiate that the amounts claimed by Reprobel are commensurate with the harm resulting from legitimate copying under the reprographic exception. HP subsequently appealed that court decision to the Courts of Appeal in Brussels seeking to confirm that the Belgian law is not in conformity with EU law and that, if Belgian law is interpreted in a manner consistent with EU law, no payments by HP are required or, alternatively, the payments already made by HP are sufficient to comply with its obligations under Belgian law. On October 23, 2013, the Court of Appeal in Brussels stayed the proceedings and referred several questions to the CJEU relating to whether the Belgian reprographic copyright levies system is in conformity with EU law. The case was heard by the CJEU on January 29, 2015 and on November 12, 2015, the CJEU published its judgment providing that a national legislation such as the Belgian one at issue in the main proceedings is incompatible with EU law on multiple legal points, as argued by HP. The Court of Appeal in Brussels now has to rule on the litigation between HP and Reprobel following the answers provided by the CJEU.
Based on industry opposition to the extension of levies to digital products, HP's assessments of the merits of various proceedings and HP's estimates of the number of units impacted and the amounts of the levies, HP has accrued amounts that it believes are adequate to address the ongoing disputes.
Hewlett-Packard Company v. Oracle Corporation
.
On June 15, 2011, HP filed suit against Oracle Corporation (“Oracle”) in Santa Clara Superior Court in Santa Clara, California in connection with Oracle’s March 2011 announcement that it was discontinuing software support for HP’s Itanium-based line of mission critical servers. HP asserted, among other things, that Oracle’s actions breached the contract that was signed by the parties as part of the settlement of the litigation relating to Oracle’s hiring of Mark Hurd. The matter eventually progressed to trial, which was bifurcated into two phases. HP prevailed in the first phase of the trial, in which the court ruled that the contract at issue required Oracle to continue to offer its software products on HP’s Itanium-based servers for as long as HP decided to sell such servers. The second phase of the trial was then postponed by Oracle’s appeal of the trial court’s denial of Oracle’s “anti-SLAPP” motion, in which Oracle argued that HP’s damages claim infringed on Oracle’s First Amendment rights. On August 27, 2015, the California Court of Appeals rejected Oracle’s appeal. The matter was remanded to the trial court for the second phase of the trial, which began on May 23, 2016 and was submitted to the jury on June 29, 2016. On June 30, 2016, the jury returned a verdict in favor of HP, awarding HP approximately
$3.0 billion
in damages, which included approximately
$1.7 billion
for past lost profits and
$1.3 billion
for
HP INC. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements
(Unaudited)
Note 14: Litigation and Contingencies (Continued)
future lost profits. The court has not yet entered a judgment. Oracle has publicly stated that it will appeal the jury's verdict once a final judgment is entered. Pursuant to the terms of separation and distribution agreement, HP and Hewlett Packard Enterprise will share equally in any recovery from Oracle once Hewlett Packard Enterprise has been reimbursed for all costs incurred in the prosecution of the action prior to the Separation.
Forsyth, et al. vs. HP Inc. and Hewlett Packard Enterprise
.
This is a purported class and collective action filed on August 18, 2016 in the United States District Court, Northern District of California, against HP and Hewlett Packard Enterprise alleging defendants violated the Federal Age Discrimination in Employment Act ("ADEA"), the California Fair Employment and Housing Act, California public policy and the California Business and Professions Code by terminating older workers and replacing them with younger workers. Plaintiffs seek to certify a nationwide collective class action under the ADEA comprised of all U.S. residents employed by defendants who had their employment terminated pursuant to a workforce reduction ("WFR") plan on or after May 23, 2012 and who were
40
years of age or older. Plaintiffs also seek to represent a Rule 23 class under California law comprised of all persons
40
years or older employed by defendants in the state of California and terminated pursuant to a WFR plan on or after May 23, 2012.
Memjet Technology Ltd. v. HP
.
On August 11, 2015, Memjet Technology Ltd. ("Memjet") filed a lawsuit against HP in U.S. District Court in the Southern District of California. The complaint alleged that HP infringed
eight
Memjet patents. The products accused of infringement were those that use the HP PageWide Technology, including the OfficeJet Pro X series, OfficeJet Enterprise X series, HP PageWide XL, wide scan printers, and printers using
4.25
-inch thermal inkjet printheads, such as HP Web Presses and Photo Kiosks. HP answered Memjet's complaint and asserted counter-claims against Memjet for infringement of
seven
HP patents. The products accused of infringement included various Memjet OEM printers that incorporate Memjet's printheads and print engines. The patents asserted by both parties generally relate to inkjet printhead and print system technology. Both Memjet's and HP's respective complaints sought injunctive relief and monetary damages from the other party for alleged patent infringement. HP also filed a number of petitions at the U.S. Patent and Trademark Office seeking review of the validity of Memjet's asserted patents. On November 16, 2015, Memjet was granted an
ex parte
preliminary injunction in Germany (Regional Court Munich), against HP Deutschland GmbH's sale and offers for sale of HP PageWide XL printers and printheads. Memjet's injunction request alleged that HP infringed
one
European patent. On January 29, 2016, the Regional Court Munich lifted the preliminary injunction. In its written judgment dated February 2, 2016, the court ruled that Memjet had not satisfied the requirements for an injunction, as the HP PageWide XL printers do not appear to infringe the Memjet patent at issue and there was a lack of urgency for a preliminary injunction. Memjet appealed to the Appeal Court Munich. On January 28, 2016, HP filed a claim in Ireland for declaratory relief that HP does not infringe the Irish, German and French counterparts of the same patent and for revocation of the patent's Irish counterpart, and HP also filed a claim in the UK for declaratory relief and revocation of the patent's UK counterpart. On February 5, 2016, Memjet filed main proceedings in Düsseldorf, Germany and in Mannheim, Germany claiming infringement of the same European patent. On May 27, 2016, HP filed a complaint at the International Trade Commission ("ITC"), which instituted an investigation on June 28, 2016 for infringement of
six
HP patents by Memjet and certain of its OEMs and distributors. The complaint seeks a general exclusion order banning certain Memjet ink supplies and printers that use Memjet print engines from importation into the United States. HP also filed a parallel complaint in federal district court in Oregon that sought damages and other relief. The parties have since resolved their disputes by agreement. All proceedings have been dismissed or terminated.
India Directorate of Revenue Intelligence Proceedings
.
On April 30 and May 10, 2010, the India Directorate of Revenue Intelligence (the "DRI") issued show cause notices to Hewlett-Packard India Sales Private Limited ("HP India"), a subsidiary of HP,
seven
HP India employees and
one
former HP India employee alleging that HP India underpaid customs duties while importing products and spare parts into India and seeking to recover an aggregate of approximately
$370 million
, plus penalties. Prior to the issuance of the show cause notices, HP India deposited approximately
$16 million
with the DRI and agreed to post a provisional bond in exchange for the DRI's agreement to not seize HP India products and spare parts and to not interrupt the transaction of business by HP India.
On April 11, 2012, the Bangalore Commissioner of Customs issued an order on the products-related show cause notice affirming certain duties and penalties against HP India and the named individuals of approximately
$386 million
, of which HP India had already deposited
$9 million
. On December 11, 2012, HP India voluntarily deposited an additional
$10 million
in connection with the products-related show cause notice. The differential duty demand is subject to interest. On April 20, 2012, the Commissioner issued an order on the parts-related show cause notice affirming certain duties and penalties against HP India and certain of the named individuals of approximately
$17 million
, of which HP India had already deposited
$7 million
. After
HP INC. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements
(Unaudited)
Note 14: Litigation and Contingencies (Continued)
the order, HP India deposited an additional
$3 million
in connection with the parts-related show cause notice so as to avoid certain penalties.
HP India filed appeals of the Commissioner's orders before the Customs Tribunal along with applications for waiver of the pre-deposit of remaining demand amounts as a condition for hearing the appeals. The Customs Department has also filed cross-appeals before the Customs Tribunal. On January 24, 2013, the Customs Tribunal ordered HP India to deposit an additional
$24 million
against the products order, which HP India deposited in March 2013. The Customs Tribunal did not order any additional deposit to be made under the parts order. In December 2013, HP India filed applications before the Customs Tribunal seeking early hearing of the appeals as well as an extension of the stay of deposit as to HP India and the individuals already granted until final disposition of the appeals. On February 7, 2014, the application for extension of the stay of deposit was granted by the Customs Tribunal until disposal of the appeals. On October 27, 2014, the Customs Tribunal commenced hearings on the cross-appeals of the Commissioner's orders. The Customs Tribunal rejected HP India's request to remand the matter to the Commissioner on procedural grounds. The hearings scheduled to reconvene on April 6, 2015 and again on November 3, 2015 and April 11, 2016 were cancelled at the request of the Customs Tribunal. Pursuant to the separation and distribution agreement, Hewlett Packard Enterprise has agreed to indemnify HP in part, based on the extent to which any liability arises from the products and spare parts of Hewlett Packard Enterprise's businesses.
Russia GPO and Other Anti-Corruption Investigations
.
The German Public Prosecutor's Office ("German PPO") has been conducting an investigation into allegations that current and former employees of HP engaged in bribery, embezzlement and tax evasion relating to a transaction between Hewlett-Packard ISE GmbH in Germany, a former subsidiary of HP, and the General Prosecutor's Office of the Russian Federation. The approximately
$35 million
transaction, which was referred to as the Russia GPO deal, spanned the years 2001 to 2006 and was for the delivery and installation of an IT network. The German PPO issued an indictment of
four
individuals, including
one
current and
two
former HP employees, on charges including bribery, breach of trust and tax evasion. The German PPO also requested that HP be made an associated party to the case, and, if that request is granted, HP would participate in any portion of the court proceedings that could ultimately bear on the question of whether HP should be subject to potential disgorgement of profits based on the conduct of the indicted current and former employees. The Regional Court of Leipzig will determine whether the matter should be admitted to trial. The Polish Central Anti-Corruption Bureau is also investigating potential corrupt actions by a former employee of Hewlett-Packard Polska Sp. z o.o., a former indirect subsidiary of HP, in connection with certain public-sector transactions in Poland. Criminal proceedings are pending before the Regional Court in Warsaw against a number of individuals, including the former employee of Hewlett-Packard Polska Sp. z o.o, on charges of bribery and bid-rigging. HP is cooperating with these investigating agencies.
Cement & Concrete Workers District Council Pension Fund v. Hewlett-Packard Company, et al
. is a putative securities class action filed on August 3, 2012 in the United States District Court for the Northern District of California alleging, among other things, that from November 13, 2007 to August 6, 2010 the defendants violated Sections
10
(b) and
20
(a) of the Exchange Act by making statements regarding HP's Standards of Business Conduct ("SBC") that were false and misleading because Mr. Hurd, who was serving as HP's Chairman and Chief Executive Officer during that period, had been violating the SBC and concealing his misbehavior in a manner that jeopardized his continued employment with HP. On February 7, 2013, the defendants moved to dismiss the amended complaint. On August 9, 2013, the court granted the defendants' motion to dismiss with leave to amend the complaint by September 9, 2013. The plaintiff filed an amended complaint on September 9, 2013, and the defendants moved to dismiss that complaint on October 24, 2013. On June 25, 2014, the court issued an order granting the defendants' motions to dismiss and on July 25, 2014, plaintiff filed a notice of appeal to the United States Court of Appeals for the Ninth Circuit. On November 4, 2014, the plaintiff-appellant filed its opening brief in the United States Court of Appeals for the Ninth Circuit. HP filed its answering brief on January 16, 2015 and the plaintiff-appellant's reply brief was filed on March 2, 2015. The appellate court heard oral argument on July 7, 2016.
Autonomy-Related Legal Matters
|
|
•
|
Investigations
.
As a result of the findings of an ongoing investigation, HP has provided information to the U.K. Serious Fraud Office, the U.S. Department of Justice ("DOJ") and the SEC related to the accounting improprieties, disclosure failures and misrepresentations at Autonomy that occurred prior to and in connection with HP's acquisition of Autonomy. On November 21, 2012, DOJ representatives advised HP that they had opened an investigation relating to Autonomy. On February 6, 2013, representatives of the U.K. Serious Fraud Office advised HP that they had also opened an investigation relating to Autonomy. On January 19, 2015, the U.K. Serious Fraud Office notified HP that it
|
HP INC. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements
(Unaudited)
Note 14: Litigation and Contingencies (Continued)
was closing its investigation and had decided to cede jurisdiction of the investigation to the U.S. authorities. HP is cooperating with the DOJ and the SEC, whose investigations are ongoing.
|
|
•
|
Litigation
.
As described below, HP is involved in various stockholder litigation relating to, among other things, its October 2011 acquisition of Autonomy and its November 20, 2012 announcement that it recorded a non-cash charge for the impairment of goodwill and intangible assets within Hewlett Packard Enterprise's software segment of approximately
$8.8 billion
in the fourth quarter of its 2012 fiscal year and HP's statements that, based on HP's findings from an ongoing investigation, the majority of this impairment charge related to accounting improprieties, misrepresentations to the market and disclosure failures at Autonomy that occurred prior to and in connection with HP's acquisition of Autonomy and the impact of those improprieties, failures and misrepresentations on the expected future financial performance of the Autonomy business over the long term. This stockholder litigation was commenced against, among others, certain current and former HP executive officers, certain current and former members of HP's Board of Directors and certain advisors to HP. The plaintiffs in these litigation matters are seeking to recover certain compensation paid by HP to the defendants and/or other damages. Pursuant to the separation and distribution agreement, HP and Hewlett Packard Enterprise share equally the cost and any damages arising from these litigation matters. These matters include the following:
|
|
|
•
|
In re Hewlett-Packard Shareholder Derivative Litigation
(the "Federal Court Derivative Action") consists of
seven
consolidated lawsuits filed beginning on November 26, 2012 in the United States District Court for the Northern District of California alleging, among other things, that the defendants violated Sections
10
(b) and
20
(a) of the Exchange Act by concealing material information and making false statements related to HP's acquisition of Autonomy and the financial performance of HP's enterprise services business. The lawsuits also allege that the defendants breached their fiduciary duties, wasted corporate assets and were unjustly enriched in connection with HP's acquisition of Autonomy and by causing HP to repurchase its own stock at allegedly inflated prices between August 2011 and October 2012.
One
lawsuit further alleges that certain individual defendants engaged in or assisted insider trading and thereby breached their fiduciary duties, were unjustly enriched and violated Sections
25402
and
25403
of the California Corporations Code. On May 3, 2013, the lead plaintiff filed a consolidated complaint alleging, among other things, that the defendants concealed material information and made false statements related to HP's acquisition of Autonomy and Autonomy's Intelligent Data Operating Layer technology and thereby violated Sections
10
(b) and
20
(a) of the Exchange Act, breached their fiduciary duties, engaged in "abuse of control" over HP, corporate waste and were unjustly enriched. The litigation was stayed until June 2014. The lead plaintiff filed a stipulation of proposed settlement on June 30, 2014. The court declined to grant preliminary approval to this settlement, and, on December 19, 2014, also declined to grant preliminary approval to a revised version of the settlement. On January 22, 2015, the lead plaintiff moved for preliminary approval of a further revised version of the settlement. On March 13, 2015, the court issued an order granting preliminary approval to the settlement. On July 24, 2015, the court held a hearing to entertain any remaining objections to the settlement and decide whether to grant final approval of the settlement. On July 30, 2015, the court granted final approval to the settlement and denied all remaining objections to the settlement.
Three
objectors to the settlement appealed the court's final approval order to United States Court of Appeals for the Ninth Circuit. Plaintiffs-appellants filed their opening briefs on December 30, 2015. HP's response brief was filed on February 29, 2016, and the reply briefs were filed on May 12, 2016.
|
|
|
•
|
Autonomy Corporation Limited v. Michael Lynch and Sushovan Hussain
.
On April 17, 2015,
four
HP subsidiaries (Autonomy Corporation Limited, Hewlett Packard Vision BV, Autonomy Systems, Limited, and Autonomy, Inc.) initiated civil proceedings in the U.K. High Court of Justice against
two
members of Autonomy's former management, Michael Lynch and Sushovan Hussain. The Particulars of Claim seek damages in excess of
$5 billion
from Messrs. Lynch and Hussain for breach of their fiduciary duties by causing Autonomy group companies to engage in improper transactions and accounting practices. On October 1, 2015, Messrs. Lynch and Hussain filed their defenses. Mr. Lynch also filed a counterclaim against Autonomy Corporation Limited seeking
$160 million
in damages, among other things, for alleged misstatements regarding Lynch. The HP subsidiary claimants filed their replies to the defenses and the asserted counter-claim on March 11, 2016.
|
|
|
•
|
In re HP ERISA Litigation
consists of
three
consolidated putative class actions filed beginning on December 6, 2012 in the United States District Court for the Northern District of California alleging, among other things, that from August 18, 2011 to November 22, 2012, the defendants breached their fiduciary obligations to HP's
401
(k) Plan and its participants and thereby violated Sections
404
(a)
(1)
and
405
(a) of the Employee Retirement Income Security Act of
|
HP INC. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements
(Unaudited)
Note 14: Litigation and Contingencies (Continued)
1974, as amended, by concealing negative information regarding the financial performance of Autonomy and HP's enterprise services business and by failing to restrict participants from investing in HP stock. On August 16, 2013, HP filed a motion to dismiss the lawsuit. On March 31, 2014, the court granted HP's motion to dismiss this action with leave to amend. On July 16, 2014, the plaintiffs filed a second amended complaint containing substantially similar allegations and seeking substantially similar relief as the first amended complaint. On June 15, 2015, the court granted HP's motion to dismiss the second amended complaint in its entirety and denied plaintiffs leave to file another amended complaint. On July 2, 2015, plaintiffs appealed the court's order to the United States Court of Appeals for the Ninth Circuit.
Environmental
HP's operations and products are subject to various federal, state, local and foreign laws and regulations concerning environmental protection, including laws addressing the discharge of pollutants into the air and water, the management and disposal of hazardous substances and wastes, the cleanup of contaminated sites, the content of HP's products and the recycling, treatment and disposal of those products. In particular, HP faces increasing complexity in its product design and procurement operations as it adjusts to new and future requirements relating to the chemical and materials composition of its products, their safe use, and the energy consumption associated with those products, including requirements relating to climate change. HP is also subject to legislation in an increasing number of jurisdictions that makes producers of electrical goods, including computers and printers, financially responsible for specified collection, recycling, treatment and disposal of past and future covered products (sometimes referred to as "product take-back legislation"). HP could incur substantial costs, its products could be restricted from entering certain jurisdictions, and it could face other sanctions, if it were to violate or become liable under environmental laws or if its products become noncompliant with environmental laws. HP's potential exposure includes fines and civil or criminal sanctions, third-party property damage or personal injury claims and clean-up costs. The amount and timing of costs to comply with environmental laws are difficult to predict.
HP is party to, or otherwise involved in, proceedings brought by U.S. or state environmental agencies under the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA"), known as "Superfund," or state laws similar to CERCLA, and may become a party to, or otherwise involved in, proceedings brought by private parties for contribution towards clean-up costs. HP is also conducting environmental investigations or remediations at several current or former operating sites pursuant to administrative orders or consent agreements with state environmental agencies.
The separation and distribution agreement includes provisions that provide for the allocation of environmental liabilities between HP and Hewlett Packard Enterprise including certain remediation obligations; responsibilities arising from the chemical and materials composition of their respective products, their safe use and their energy consumption; obligations under product take back legislation that addresses the collection, recycling, treatment and disposal of products; and other environmental matters. HP will generally be responsible for environmental liabilities related to the properties and other assets, including products, allocated to HP under the separation and distribution agreement and other ancillary agreements. Under these agreements, HP will indemnify Hewlett Packard Enterprise for liabilities for specified ongoing remediation projects, subject to certain limitations, and Hewlett Packard Enterprise has a payment obligation for a specified portion of the cost of those remediation projects. In addition, HP will share with Hewlett Packard Enterprise other environmental liabilities as set forth in the separation and distribution agreement. HP is indemnified in whole or in part by Hewlett Packard Enterprise for liabilities arising from the assets assigned to Hewlett Packard Enterprise and for certain environmental matters as detailed in the separation and distribution agreement.
Note 15: Guarantees, Indemnifications and Warranties
Guarantees
In the ordinary course of business, HP may issue performance guarantees to certain of its clients, customers and other parties pursuant to which HP has guaranteed the performance obligations of third parties. Some of those guarantees may be backed by standby letters of credit or surety bonds. In general, HP would be obligated to perform over the term of the guarantee in the event a specified triggering event occurs as defined by the guarantee. HP believes the likelihood of having to perform under a material guarantee is remote.
Indemnifications
HP INC. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements
(Unaudited)
Note 15: Guarantees, Indemnifications and Warranties (Continued)
In the ordinary course of business, HP enters into contractual arrangements under which HP may agree to indemnify a third party to such arrangement from any losses incurred relating to the services they perform on behalf of HP or for losses arising from certain events as defined within the particular contract, which may include, for example, litigation or claims relating to past performance. HP also provides indemnifications to certain vendors and customers against claims of IP infringement made by third parties arising from the vendors' and customers' use of HP's software products and services and certain other matters. Some indemnifications may not be subject to maximum loss clauses. Historically, payments made related to these indemnifications have been immaterial.
Cross-Indemnifications with Hewlett Packard Enterprise
Under the separation and distribution agreement, HP agreed to indemnify Hewlett Packard Enterprise, each of its subsidiaries and each of their respective directors, officers and employees from and against all liabilities relating to, arising out of or resulting from, among other matters, the liabilities allocated to HP as part of the Separation. Hewlett Packard Enterprise similarly agreed to indemnify HP, each of its subsidiaries and each of their respective directors, officers and employees from and against all liabilities relating to, arising out of or resulting from, among other matters, the liabilities allocated to Hewlett Packard Enterprise as part of the Separation. HP expects Hewlett Packard Enterprise to fully perform under the terms of the separation and distribution agreement.
For information on the cross-indemnifications related to the tax matter agreements and litigations effective upon the Separation on November 1, 2015, see Note 7, "Taxes on Earnings" and Note 14, "Litigation and Contingencies", respectively.
Warranty
HP accrues the estimated cost of product warranties at the time it recognizes revenue. HP engages in extensive product quality programs and processes, including actively monitoring and evaluating the quality of its component suppliers; however, contractual warranty terms, repair costs, product call rates, average cost per call, current period product shipments and ongoing product failure rates, as well as specific product class failures outside of HP's baseline experience, affect the estimated warranty obligation.
HP's aggregate product warranty liabilities and changes were as follows:
|
|
|
|
|
|
Nine months ended July 31, 2016
|
|
In millions
|
Balance at beginning of period
|
$
|
1,184
|
|
Accruals for warranties issued
|
726
|
|
Adjustments related to pre-existing warranties (including changes in estimates)
|
(24
|
)
|
Settlements made (in cash or in kind)
|
(863
|
)
|
Balance at end of period
|
$
|
1,023
|
|
Note 16: Divestitures
During fiscal 2016, HP entered into agreements to divest certain technology assets, including licensing and distribution rights, for certain software offerings to Open Text Corporation, an enterprise information management company for
$475 million
. These divestitures were completed in most countries by the end of the third quarter of fiscal 2016 with the remaining jurisdictions anticipated to be completed during the fourth quarter of fiscal 2016, subject to customary closing conditions. The technology assets sold were previously reported within the Commercial Hardware business unit within the Printing segment. The gain recognized from the divestiture announced in the second quarter was
$56 million
and
$103 million
for the three and nine months ended July 31, 2016, respectively. The gain recognized from the divestiture announced in the third quarter was
$280 million
for the three and nine months ended July 31, 2016. The gains associated with these divestitures were included in Selling, general and administrative expenses in the Consolidated Condensed Statements of Earnings.