HP : Management’s Discussion and Analysis of Financial Condition and Results of Operations. (form 10-Q) – marketscreener.com

HP INC. AND SUBSIDIARIES

 Management's Discussion and Analysis of Financial Condition and Results of Operations This Management's Discussion and Analysis of Financial Condition and Results of
Operations ("MD&A") is organized as follows:
•Overview. A discussion of our business and other highlights affecting the
Company to provide context for the remainder of this MD&A.
•Critical Accounting Policies and Estimates. A discussion of accounting policies
and estimates that we believe are important to understanding the assumptions and
judgments incorporated in our reported financial results.
•Results of Operations. An analysis of our operations financial results
comparing the three and nine months ended July 31, 2020 to the prior-year
period. A discussion of the results of operations is followed by a more detailed
discussion of the results of operations by segment.
•Liquidity and Capital Resources. An analysis of changes in our cash flows and a
discussion of our liquidity and financial condition.
•Contractual and Other Obligations. An overview of contractual obligations,
retirement and post-retirement benefit plan contributions, cost-saving plans,
uncertain tax positions and off-balance sheet arrangements of our operations.
The discussion of financial condition and results of our operations that follows
provides information that will assist the reader in understanding our
Consolidated Condensed Financial Statements, the changes in certain key items in
those financial statements from year to year, and the primary factors that
accounted for those changes, as well as how certain accounting principles,
policies and estimates affect our Consolidated Condensed Financial Statements.
This discussion should be read in conjunction with our Consolidated Condensed
Financial Statements and the related notes that appear elsewhere in this
document. 46

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OVERVIEW

We are a leading global provider of personal computing and other access devices,
imaging and printing products, and related technologies, solutions, and
services. We sell to individual consumers, SMBs and large enterprises, including
customers in the government, health, and education sectors. We have three
reportable segments: Personal Systems, Printing and Corporate Investments. The
Personal Systems segment offers commercial and consumer desktop and notebook
PCs, workstations, thin clients, commercial mobility devices, retail POS
systems, displays and other related accessories, software, support, and
services. The Printing segment provides consumer and commercial printer
hardware, supplies, solutions and services, as well as scanning devices.
Corporate Investments include HP Labs and certain business incubation and
investment projects.
•In Personal Systems, our strategic focus is on profitable growth through market
segmentation. This focus is with respect to enhanced innovation in
multi-operating systems, multi-architecture, geography, customer segments and
other key attributes. Additionally, we are investing in endpoint services and
solutions. We are focused on services, including Device as a Service, as the
market begins to shift to contractual solutions. We believe that we are well
positioned due to our competitive product lineup.
•In Printing, our strategic focus is on contractual solutions to serve
consumers, SMBs and large enterprises through our Instant Ink Services and
Managed Print Services ("MPS") offerings, providing digital printing solutions
for graphics segments and applications including commercial publishing, labels,
packaging and textiles; as well as expanding our footprint in the 3D printing
and digital manufacturing marketplace.
We continue to experience challenges that are representative of trends and
uncertainties that may affect our business and results of operations. One set of
challenges relates to dynamic market trends, such as forecasted declining PC
Client markets and home printing markets. A second set of challenges relates to
changes in the competitive landscape. Our primary competitors are exerting
competitive pressure in targeted areas and are entering new markets, our
emerging competitors are introducing new technologies and business models, and
our alliance partners in some businesses are increasingly becoming our
competitors in others. A third set of challenges relates to business model
changes and our go-to-market execution in an evolving distribution and reseller
landscape, with increasing online and omnichannel presence. Additional
challenges we face at the segment level are set forth below.
•In Personal Systems, we face challenges with industry component availability
and a competitive pricing environment.
•In Printing, a competitive pricing environment, including from non-original
supplies (which includes imitation, refill or remanufactured alternatives), and
a weakened market in certain geographies with associated pricing sensitivity of
our customers present challenges. We also obtain many Printing components from
single sources due to technology, availability, price, quality or other
considerations. For instance, we source the majority of our A4 and a portion of
our A3 portfolio of laser printer engines and laser toner cartridges from Canon.
Any decision by either party to not renew our agreement with Canon or to limit
or reduce the scope of the agreement could adversely affect our net revenue from
LaserJet products; however, we have a long-standing business relationship with
Canon and anticipate renewal of this agreement.
Our business and financial performance also depend significantly on worldwide
economic conditions. Accordingly, we face global macroeconomic challenges,
tariff-driven headwinds, uncertainty in the markets, volatility in exchange
rates, weaker macroeconomic conditions and evolving dynamics in the global trade
environment. The full impact of these and other global macroeconomic challenges
on our business cannot be known at this time.
To address these challenges, we continue to pursue innovation with a view
towards developing new products and services aligned with generating market
demand and meeting the needs of our customers and partners. In addition, we
continue to work on improving our operations and adapting our business models,
with a particular focus on enhancing our end-to-end processes, analytics and
efficiencies. We also continue to work on optimizing our sales coverage models,
aligning our sales incentives with our strategic goals, improving channel
execution and inventory management, strengthening our capabilities in our areas
of strategic focus, strengthening our pricing discipline and developing and
capitalizing on market opportunities.
Specifically, in October 2019, we announced cost-reduction and operational
efficiency initiatives intended to simplify the way we work, move closer to our
customers and facilitate specific investment in our business. These were further
updated in February 2020. These efforts include transforming our operating model
to integrate our sales force into a single commercial organization and reducing
structural costs across the Company through our restructuring plan approved in
September 2019 (the "Fiscal 2020 Plan"). We expect to invest some of the savings
from these efforts across our businesses, including investing to build our
digital capabilities. Over time, we expect these investments will make us more
efficient and allow us to advance our positions in Personal Systems and
Printing, while also disrupting new industries where we see attractive medium to
long-term growth opportunities. However, the rate at which we are able to invest
in our business and the returns that we are able to 47

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 HP INC. AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued)
achieve from these investments will be affected by many factors, including the
efforts to address the execution, industry and macroeconomic challenges facing
our business as discussed above. As a result, we may experience delays in the
anticipated timing of activities related to these efforts, and the anticipated
benefits of these efforts may not materialize.
We typically experience higher net revenues in our fourth quarter compared to
other quarters in our fiscal year due in part to seasonal holiday demand.
Historical seasonal patterns should not be considered reliable indicators of our
future net revenues or financial performance. Our COVID-19 Response
In late 2019, COVID-19 was first identified, and in March 2020, the World Health
Organization declared the outbreak of COVID-19 to be a pandemic. The rapid
spread of COVID-19 prompted governments and businesses to take unprecedented
measures in response, including restrictions on travel and business operations,
temporary closures of businesses, and quarantines and shelter-in-place orders. As reflected in the discussions that follow, the COVID-19 pandemic and the
actions taken by governments, businesses and individuals in response to the
pandemic have had a variety of impacts on our results of operations for the
three and nine months ended July 31, 2020, some of which have been significant.
This section summarizes our response to the significant impacts that we have
experienced to date, and we have also included additional details as applicable
throughout other sections of this report. We continue to actively monitor the
situation and review our plans based on the requirements and recommendations of
federal, state, and local authorities. •Our employees. We have been focused on protecting the health and safety of our
employees during the COVID-19 pandemic, and we quickly pivoted the vast majority
of our employees to work from home as a safety measure in the second quarter of
fiscal year 2020. These arrangements have been designed to allow for continued
operation of non-production business-critical functions, including financial
reporting systems and internal controls. In the third quarter of fiscal year
2020, we implemented a one-time work-from-home reimbursement program for
employees to improve their workspaces. For those in manufacturing and other
critical functions that could not transition to a remote model, we quickly
implemented safety and hygiene protocols, such as physical distancing, safety
gear mandates, site visitor restrictions, alternate staffing shifts, and
enhanced cleaning and sanitization practices, to protect the employees in our
labs or manufacturing and production facilities. We have also implemented
contact tracing initiatives. •Our community. We are committed to taking actions to protect the communities we
serve. We are also putting our resources behind efforts to support local
communities and to assist in the public health response. We have donated
millions of dollars in technology and support across Personal Systems and
Printing to help students, families, and communities, including hospitals in
affected areas.
•The HP 3D Printing team and Digital Manufacturing team is working with its
global digital manufacturing community to mobilize 3D printing teams,
technology, experience and production capacity to help deliver critical parts in
the effort to battle the COVID-19 pandemic. Along with our partners and
customers, we have produced more than 4 million 3D printed parts for face
shields, respirators, nasal swabs, and other items for distribution to
hospitals.
•We have donated HP BioPrinters and associated supply cassettes, free of charge,
to research laboratories in the US and Europe to help accelerate drug and
vaccine research to combat COVID-19.
•In April 2020, HP Puerto Rico kicked off large-scale manufacturing of
much-needed hand sanitizer and has since delivered about 55,000 liters to local
hospitals, police stations, nursing homes, fire stations, medical and wellness
service providers and HP's Customer Service facilities, as well as to select
sites in the US.
•We made HP Sure Click Pro security software freely available through September
2020 to help protect against cyber threats for both HP and non-HP Windows 10 PCs
as a large portion of the population is currently working from home.
•We have committed to donating millions of dollars in products and grants to
support blended learning in local communities impacted by COVID-19 around the
globe as a large portion of the world's students are currently learning from
home. 48

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•Our customers and partners. We are committed to our customers and partners and
to meeting their needs. We have taken meaningful actions to remain close to our
customers and partners, including implementing a variety of relief initiatives
to help them navigate their operational and financial challenges. We have
provided a variety of financing and leasing options for end customers. We have
provided short-term market and country-specific incentives for partners. In
addition, HP has implemented a more predictable, flat-rate incentive program and
relaxed compensation models, and has also expanded its virtual engagement
options, including free access to cybersecurity support and on-demand training.
Partners can opt in for customized online digital learning paths designed to
meet their specific priorities. We are also introducing programs, designed to
enable our customers and partners to adapt to the current work environment, such
as the HP Managed Print Cloud Services and the HP Flexworker Solutions program. •Supply chain. In the nine months ended July 31, 2020, we experienced
disruptions in our manufacturing and supply chain. This included temporary
factory closures in China and Southeast Asia that impacted our own factories as
well as those of our suppliers and outsourcing partners, resulting in temporary
supply shortages. Manufacturing capacity returned largely to normalized levels
in April through early May 2020 except for factories in Southeast Asia,
primarily due to certain local regulations, which recovered by the end of June
2020. These disruptions resulted in temporary supply shortages. Additionally, we
also experienced logistics challenges, including delays in delivering to our
channels and end-customers. This affected our ability to fulfill demand for
Personal Systems and Printing worldwide. •Demand. COVID-19 has created new and different demand dynamics in the market.
This is creating both challenges and opportunities across our businesses and
geographies. In Personal Systems, we saw increased demand globally as the focus
moved to keeping people connected, productive and secure and it reemphasized the
essential role that the PC plays in everyday life. We also saw a mix shift in
demand from Commercial to Consumer, Desktops to Notebooks driven by strength in
Chromebooks particularly in Education. In Printing, we saw a slowdown in Office
and Graphics as offices remain closed and large events continue to be canceled.
There are early indications of recovery; there was some improvement in
Commercial Printing toward the end of the third quarter of fiscal year 2020.
However, there remains uncertainty about the phasing and pace of recovery. We
also continue to see increased demand for hardware and ink supplies on the
Consumer Printing side as customers set up home office for remote working and
school environment for remote learning. •Liquidity. The extent and duration of the disruption from the COVID-19 pandemic
remain uncertain. As a result, our liquidity and working capital needs may be
impacted in future periods. We believe that our businesses are strong cash flow
generators and we maintain a strong balance sheet to meet our liquidity needs.
We believe our current cash and cash equivalents, cash flow from operating
activities, available commercial paper authorization, new borrowings, and our
credit facilities will be sufficient to meet our operating cash requirements,
planned capital expenditures, interest and principal payments on all borrowings,
pension and post-retirement funding requirements, authorized share repurchases
and annual dividend payments for the foreseeable future. The full extent of the impact of the COVID-19 pandemic on our business, results
of operations and financial position is currently uncertain and will depend on
many factors that are not within our control, including, but not limited to: the
duration and scope of the pandemic; the effectiveness of actions taken to
contain or mitigate the pandemic and prevent or limit any reoccurrence;
governmental, business and individuals' actions that have been and continue to
be taken in response to the pandemic; general economic uncertainty in key global
markets and financial market volatility; global economic conditions and levels
of economic growth; and the pace of recovery when the COVID-19 pandemic
subsides. See the section entitled "Risk Factors" in Item 1A of Part II of this
report for further information about related risks and uncertainties. Unsolicited Exchange Offer
On March 2, 2020, Xerox Holdings Corporation ("Xerox") commenced an unsolicited
exchange offer for all outstanding shares of HP's common stock (the "Offer").
Xerox had also previously nominated candidates for election to HP's Board of
Directors at HP's 2020 annual meeting of stockholders. On March 31, 2020, Xerox
announced that the Offer had been terminated and subsequently withdrew its slate
of director nominees. In order to respond to Xerox's actions, HP incurred
significant costs during the three and nine months ended July 31, 2020. 49

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For a further discussion of trends, uncertainties and other factors that could
impact our operating results, see the section entitled "Risk Factors" in Item 1A
of Part II of this report as well as in Item 1A of Part I in our Annual Report
on Form 10-K for the fiscal year ended October 31, 2019. CRITICAL ACCOUNTING POLICIES AND ESTIMATES
MD&A is based on our Consolidated Condensed Financial Statements, which have
been prepared in accordance with U.S. GAAP. The preparation of these financial
statements requires management to make estimates, judgments and assumptions that
affect the reported amounts of assets, liabilities, net revenues and expenses,
and disclosure of contingent liabilities. As of July 31, 2020, the impact of
COVID-19 on our business continued to unfold. As a result, many of our estimates
and assumptions required increased judgment and carry a higher degree of
variability and volatility. As events continue to evolve and additional
information becomes available, our estimates may change in future periods. Our
management believes that there have been no significant changes during the nine
months ended July 31, 2020 to the items that we disclosed as our critical
accounting policies and estimates in MD&A in our Annual Report on Form 10-K for
the fiscal year ended October 31, 2019, except as mentioned previously in Note
1, "Basis of Presentation".
ACCOUNTING PRONOUNCEMENTS
For a summary of recent accounting pronouncements applicable to our Consolidated
Condensed Financial Statements see Note 1, "Basis of Presentation", to the
Consolidated Condensed Financial Statements in Item 1 of Part I of this report,
which is incorporated herein by reference. RESULTS OF OPERATIONS
Revenue from our international operations has historically represented, and we
expect will continue to represent, a majority of our overall net revenue. As a
result, our net revenue growth has been impacted, and we expect it will continue
to be impacted, by fluctuations in foreign currency exchange rates. In order to
provide a framework for assessing performance excluding the impact of foreign
currency fluctuations, we supplement the year-over-year percentage change in net
revenue with the year-over-year percentage change in net revenue on a constant
currency basis, which excludes the effect of foreign currency exchange
fluctuations calculated by translating current period revenues using monthly
average exchange rates from the comparative period and hedging activities from
the prior-year period and does not adjust for any repricing or demand impacts
from changes in foreign currency exchange rates. This information is provided so
that net revenue can be viewed with and without the effect of fluctuations in
foreign currency exchange rates, which is consistent with how management
evaluates our net revenue results and trends, as management does not believe
that the excluded items are reflective of ongoing operating results. The
constant currency measures are provided in addition to, and not as a substitute
for, the year-over-year percentage change in net revenue on a GAAP basis. Other
companies may calculate and define similarly labeled items differently, which
may limit the usefulness of this measure for comparative purposes. 50

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Results of operations in dollars and as a percentage of net revenue were as
follows: Three months ended July 31 Nine months ended July 31 2020 2019 2020 2019 % of Net % of Net % of Net % of Net Dollars Revenue Dollars Revenue Dollars Revenue Dollars Revenue Dollars in millions
Net revenue $ 14,294 100.0 % $ 14,603 100.0 % $ 41,381 100.0 % $ 43,349 100.0 %
Cost of revenue (11,901) (83.3) % (11,698) (80.1) % (33,623) (81.3) % (35,103) (81.0) %
Gross profit 2,393 16.7 % 2,905 19.9 % 7,758 18.7 % 8,246 19.0 %
Research and development (359) (2.5) % (413) (2.8) % (1,097) (2.7) % (1,110) (2.6) %
Selling, general and administrative (1,156) (8.1) % (1,376) (9.5) % (3,662) (8.8) % (3,963) (9.1) %
Restructuring and other charges (59) (0.4) % (17) (0.1) % (431) (1.0) % (141) (0.3) %
Acquisition-related (charges) credits (11) (0.1) % 9 0.1 % (14) - % (12) - %
Amortization of intangible assets (29) (0.2) % (29) (0.2) % (84) (0.2) % (87) (0.2) %
Earnings from operations 779 5.4 % 1,079 7.4 % 2,470 6.0 % 2,933 6.8 %
Interest and other, net (28) (0.1) % (831) (5.7) % (15) (0.1) % (902) (2.1) %
Earnings before taxes 751 5.3 % 248 1.7 % 2,455 5.9 % 2,031 4.7 %
(Provision for) benefit from taxes (17) (0.2) % 931 6.4 % (279) (0.6) % 733 1.7 %
Net earnings $ 734 5.1 % $ 1,179 8.1 % $ 2,176 5.3 % $ 2,764 6.4 % Net Revenue
For the three months ended July 31, 2020, total net revenue decreased 2.1%
(decreased 0.2% on a constant currency basis) as compared to the prior-year
period. U.S. net revenue decreased 4.3% to $5.2 billion, while net revenue from
international operations decreased 0.8% to $9.1 billion. The decrease in total
net revenue was primarily driven by decline in Desktops, Supplies, Commercial
Printing Hardware and unfavorable foreign currency impacts partially offset by
Notebooks. The decline is driven by demand weakness as businesses remained
closed and office workers continued to work from home, partially offset by
strong demand in Notebooks and Consumer Printing.
For the nine months ended July 31, 2020, total net revenue decreased 4.5%
(decreased 3.2% on a constant currency basis) as compared to the prior-year
period. U.S. net revenue decreased 4.2% to $14.3 billion, while net revenue from
international operations decreased 4.7% to $27.0 billion. The decrease in total
net revenue was primarily driven by decline in Supplies, Desktops, Commercial
Printing Hardware and unfavorable foreign currency impacts partially offset by
Notebooks. The decline is driven by demand weakness as businesses remained
closed and office workers continued to work from home, partially offset by
strong demand in Notebooks.
A detailed discussion of the factors contributing to the changes in segment net
revenue is included in "Segment Information" below.
Gross Margin
For the three months ended July 31, 2020, gross margin decreased by 3.2
percentage points, as compared to the prior-year period. The decrease is
primarily driven by lower rate and unfavorable segment mix.
For the nine months ended July 31, 2020, gross margin decreased by 0.3
percentage point as compared to the prior-year period. The decrease is primarily
driven by unfavorable segment mix partially offset by higher rate in Personal
Systems due to favorable commodity costs.
A detailed discussion of the factors contributing to the changes in segment
gross margins is included under "Segment Information" below.
Operating Expenses
Research and Development ("R&D")
R&D expense decreased 13.1% for the three months ended July 31, 2020, as
compared to the prior-year period, primarily due to improved efficiency and
expense management. R&D expenses decreased 1.2% for the nine months ended
July 31, 2020 51

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as compared to the prior-year period, primarily due to improved efficiency and
expense management partially offset by continuing investments
in innovation and key growth initiatives.
Selling, General and Administrative ("SG&A")
SG&A expense decreased 16.0% and 7.6% for the three and nine months ended
July 31, 2020, respectively, as compared to the prior-year period, driven by
structural cost savings from transformation program and the benefits of
temporary discretionary cost actions.
Restructuring and Other Charges
Restructuring and other charges for the three and nine months ended July 31,
2020 relate primarily to the Fiscal 2020 Plan.
Amortization of Intangible Assets
Amortization of intangible assets for the three and nine months ended July 31,
2020 relates primarily to intangible assets resulting from prior acquisitions.
Interest and Other, Net
Interest and other, net expense decreased by $0.8 billion and $0.9 billion for
the three months and nine months ended July 31, 2020, respectively, as compared
to the prior-year period, primarily due to reversal of indemnification
receivables
from Hewlett Packard Enterprise pertaining to various audit settlements in the
prior- year period.
Provision for Taxes
Our effective tax rate was 2.2% and (375.4)% for the three months ended July 31,
2020 and 2019, respectively, and 11.4% and (36.1)% for the nine months ended
July 31, 2020 and 2019, respectively. The difference between the U.S. federal
statutory tax rate of 21% and our effective tax rate for the three and nine
months ended July 31, 2020 is primarily due to audit settlements in various
jurisdictions and favorable tax rates associated with certain earnings from our
operations in lower-tax jurisdictions throughout the world. For the three and
nine months ended July 31, 2019, our effective tax rate generally differs from
the U.S. federal statutory rate of 21% primarily due to the resolution of
various audits, transitional impacts of U.S. tax reform, and favorable tax rates
associated with certain earnings from our operations in lower-tax jurisdictions
throughout the world.
During the three and nine months ended July 31, 2020, we recorded $116 million
and $182 million respectively, of net tax benefits related to discrete items in
the provision for taxes. These amounts included tax benefits of $102 million and
$143 million related to audit settlements in various jurisdictions, $20 million
and $75 million related to restructuring charges, and $4 million and $20 million
related to acquisition charges for the three and nine months ended July 31,
2020, respectively. These benefits were partially offset by uncertain tax
position charges of $3 million and $54 million for the three and nine months
ended July 31, 2020, respectively. For the nine months ended July 31, 2020,
excess tax benefits associated with stock options, restricted stock units and
performance-adjusted restricted stock units were immaterial.
During the three and nine months ended July 31, 2019, we recorded $1.1 billion
of net income tax benefits related to discrete items in the provision for taxes.
This amount included tax benefits of $1.0 billion related to various audit
settlements, $75 million due to the ability to utilize tax attributes, along
with $57 million and $78 million for the three and nine months ended July 31,
2019, respectively, related to U.S. tax reform as a result of new guidance
issued by the IRS. These benefits were partially offset by valuation allowance
charges of $98 million for the three and nine months ended July 31, 2019. In
addition to the discrete items mentioned above, we recorded $21 million of
excess tax benefits associated with stock options, restricted stock units and
performance-adjusted restricted stock units for the nine months ended July 31,
2019.
We record a valuation allowance to reduce deferred tax assets to the amount that
we are more likely than not to realize. During the three and nine months ended
July 31, 2020, we determined that no material adjustments were required to our
valuation allowances due to the COVID-19 pandemic and its resulting impact to
our business. We will continue to monitor projections and their potential impact
on our assessment regarding the realizability of our deferred tax asset
balances. Segment Information
A description of the products and services for each segment can be found in
Note 2, "Segment Information" to the Consolidated Condensed Financial Statements
in Item 1 of Part I of this report, which is incorporated herein by reference.
Future changes to this organizational structure may result in changes to the
segments disclosed. 52

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Personal Systems Three months ended July 31 Nine months ended July 31 2020 2019 % Change 2020 2019 % Change Dollars in millions
Net revenue $ 10,360$ 9,690 6.9 % $ 28,565$ 28,268 1.1 %
Earnings from operations $ 570 $ 547 4.2 % $ 1,784$ 1,342 32.9 %
Earnings from operations as a % of net
revenue 5.5 % 5.6 % 6.2 % 4.7 % The components of net revenue and the weighted net revenue change by business
unit were as follows: Three months ended July 31 Nine months ended July 31 Weighted Net Weighted Net Net Revenue Revenue Net Revenue Revenue Change(1) Change(1) 2020 2019 2020 2019 Percentage Percentage Dollars in millions Points Dollars in millions Points
Notebooks $ 7,304$ 5,630 17.3 $ 18,361$ 16,648 6.1
Desktops 2,221 3,111 (9.2) 7,553 8,908 (4.8)
Workstations 428 609 (1.9) 1,461 1,740 (1.0)
Other 407 340 0.7 1,190 972 0.8
Total Personal Systems $ 10,360$ 9,690 6.9 $ 28,565$ 28,268 1.1 (1) Weighted Net Revenue Change Percentage Points measures contribution of each
business unit towards overall segment revenue growth. It is calculated by
dividing the change in revenue of each business unit from the prior-year period
by total segment revenue for the prior-year period. 

Three months ended July 31, 2020 compared with three months ended July 31, 2019

 Personal Systems net revenue increased 6.9% (increased 9.2% on a constant
currency basis) for the three months ended July 31, 2020 as compared to the
prior-year period. The net revenue increase was primarily due to growth in
Notebooks partially offset by Desktops, unfavorable foreign currency impacts and
Workstations. The net revenue increase was driven by a 11.3% growth in unit
volume, partially offset by a 4.0% decline in average selling prices ("ASPs"),
as compared to the prior-year period. The increase in unit volume was driven by
an increase in Notebooks due to strong consumer demand from work from home,
distance learning and gaming, partially offset by Desktops and Workstations. The
decrease in ASPs was due to mix shifts and foreign currency impacts. Consumer
revenue increased 41.9% as compared to the prior-year period, driven by growth
in units and ASPs. Commercial revenue decreased 6.2% as compared to the
prior-year period, driven by decline in Desktops and lower ASPs.
Net revenue increased 29.7% in Notebooks and, decreased 28.6% in Desktops and
29.7% in Workstations as compared to the prior-year period. Personal Systems earnings from operations as a percentage of net revenue
decreased by 0.1 percentage points for the three months ended July 31, 2020 as
compared to the prior-year period, due to decrease in gross margin partially
offset by lower operating expenses as percentage of revenue. The decrease in
gross margin is due to mix shifts from Commercial to Consumer. The decrease in
operating expenses as percentage of revenue is primarily due to reduction in
discretionary costs and our ongoing structural cost savings plan. 

Nine months ended July 31, 2020 compared with nine months ended July 31, 2019

 Personal Systems net revenue increased 1.1% (increased 2.7% on a constant
currency basis) for the nine months ended July 31, 2020 as compared to the
prior-year period. The net revenue increase was primarily due to growth in
Notebooks partially offset by Desktops and unfavorable foreign currency impacts.
The net revenue increase was driven by a 3.8% growth in unit volume, partially
offset by a 2.6% decline in ASPs, as compared to the prior-year period. The
increase in unit volume was primarily due to growth in Notebooks resulting from
strong consumer demand from work from home, distance learning and gaming,
partially offset by Desktops. The decrease in ASPs was due to unfavorable
currency impacts and lower rate. 53

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Consumer revenue increased 8.3% as compared to prior-year period, driven by
units growth in Notebooks, partially offset by lower ASPs. Commercial revenue
decreased 2.1% as compared to the prior-year period, driven by decline in
Desktops and lower ASPs.
Net revenue increased 10.3% in Notebooks and, decreased 15.2% in Desktops and
16.0% in Workstations, as compared to the prior-year period. Personal Systems earnings from operations as a percentage of net revenue
increased 1.5 percentage points for the nine months ended July 31, 2020 as
compared to the prior-year period, driven by an increase in gross margin due to
favorable commodity costs, partially offset by mix shifts.
Printing Three months ended July 31 Nine months ended July 31 2020 2019 % Change 2020 2019 % Change Dollars in millions
Net revenue $ 3,933$ 4,912 (19.9) % $ 12,815$ 15,084 (15.0) %
Earnings from operations $ 480$ 765 (37.3) % $ 1,782$ 2,425 (26.5) %
Earnings from operations as a % of 12.2 % 15.6 % 13.9 % 16.1 %

net revenue

 The components of net revenue and the weighted net revenue change by business
unit were as follows: Three months ended July 31 Nine months ended July 31 Net Revenue Weighted Net Net Revenue Weighted Net Revenue Revenue 2020 2019 Change(1) 2020 2019 Change(1) Percentage Percentage Dollars in millions Points Dollars in millions Points
Supplies $ 2,573$ 3,164 (12.0) $ 8,455$ 9,762 (8.7)
Commercial Hardware 732 1,160 (8.7) 2,616 3,429 (5.3)
Consumer Hardware 628 588 0.8 1,744 1,893 (1.0) Total Printing $ 3,933$ 4,912 (19.9) $ 12,815$ 15,084 (15.0) (1) Weighted Net Revenue Change Percentage Points measures contribution of each
business unit towards overall segment revenue growth. It is calculated by
dividing the change in revenue of each business unit from the prior-year period
by total segment revenue for the prior-year period. Three months ended July 31, 2020 compared with three months ended July 31, 2019
Printing net revenue decreased 19.9% (decreased 18.8% on a constant currency
basis) for the three months ended July 31, 2020 as compared to the prior-year
period. The decline in net revenue was driven by declines in Supplies,
Commercial Hardware and unfavorable foreign currency impacts partially offset by
growth in Consumer Hardware. Net revenue for Supplies decreased 18.7% as
compared to the prior-year period, primarily driven by demand weakness as
businesses continue to operate with reduced onsite capacity and a majority of
office workers continue to work from home. Printer unit volume decreased 2.2%
and ASPs decreased 24.8% as compared to the prior-year period. The decrease in
printer unit volume was primarily driven by unit decrease in Commercial Hardware
partially offset by Consumer Hardware. Printer ASPs decreased primarily due to
lower rate in Commercial Hardware.
Net revenue for Commercial Hardware decreased by 36.9% as compared to the
prior-year period, primarily due to a 31.7% decrease in printer unit volume and
a 27.7% decrease in ASPs. The printer unit volume decline was due to lower
demand for Commercial Hardware as businesses continue to operate with reduced
onsite capacity. The decrease in ASPs was primarily driven by lower rate,
unfavorable mix shifts and foreign currency impact.
Net revenue for Consumer Hardware increased 6.8% as compared to the prior-year
period, primarily due to a 3.8% increase in ASPs and a 3.1% increase in printer
unit volume. The increase in ASPs was primarily driven by higher rate partially
offset by unfavorable mix shifts and foreign currency impact. The printer unit
volume increased as consumers set up work from home as well as distance
learning. 54

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 HP INC. AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued)
Printing earnings from operations as a percentage of net revenue decreased by
3.4 percentage points for the three months ended July 31, 2020 as compared to
the prior-year period, primarily due to lower net revenue in Commercial Hardware
and Supplies. Nine months ended July 31, 2020 compared with nine months ended July 31, 2019
Printing net revenue decreased 15.0% (decreased 14.1% on a constant currency
basis) for the nine months ended July 31, 2020 as compared to the prior-year
period. The decline in net revenue was primarily driven by a decline in
Supplies, Commercial Hardware, Consumer Hardware and unfavorable foreign
currency impacts. Net revenue for Supplies decreased 13.4% as compared to the
prior-year period, due to demand weakness as businesses continue to operate with
reduced onsite capacity and a majority of office workers continue to work from
home. ASPs decreased 13.2% and Printer unit volume decreased 11.7% as compared
to the prior-year period. Printer ASPs decreased primarily due to lower rate,
unfavorable mix shifts and foreign currency impact. The decrease in printer unit
volume was primarily driven by unit decreases in both Commercial and Consumer
Hardware.
Net revenue for Commercial Hardware decreased by 23.7% as compared to the
prior-year period, primarily due to a 22.6% decrease in printer volume and a
decrease in ASPs by 16.7%. The printer unit volume decline was due to lower
demand in Commercial Hardware as businesses continue to operate with reduced
onsite capacity. The decrease in ASPs was driven by lower rate, unfavorable mix
shifts and foreign currency impacts.
Net revenue for Consumer Hardware decreased 7.9% as compared to the prior-year
period due to a decrease in printer unit volume by 9.9% and, partially offset by
increase in ASPs by 2.2%. The printer unit volume decrease was driven by lower
demand in first quarter and supply chain disruptions due to COVID-19. The
increase in ASPs was primarily due to higher rate, partially offset by
unfavorable foreign currency impacts.
Printing earnings from operations as a percentage of net revenue decreased by
2.2 percentage points for the nine months ended July 31, 2020 as compared to the
prior-year period, primarily due to lower net revenue in Hardware and Supplies.
Corporate Investments
The loss from operations in Corporate Investments for the three and nine months
ended July 31, 2020 was primarily due to expenses associated with our incubation
projects.
LIQUIDITY AND CAPITAL RESOURCES
We use cash generated by operations as our primary source of liquidity. While
the impacts from the COVID-19 pandemic are currently expected to be temporary,
there is uncertainty around its extent and duration and our liquidity and
working capital needs may be impacted in the future periods. We believe that
current cash, cash flow from operating activities, new borrowings, available
commercial paper authorization and the credit facilities will be sufficient to
meet HP's operating cash requirements, planned capital expenditures, interest
and principal payments on all borrowings, pension and post-retirement funding
requirements, authorized share repurchases and annual dividend payments for the
foreseeable future. Additionally, in the event that suitable businesses are
available for acquisition that offer good return opportunities, the Company may
obtain all or a portion of the financing for these acquisitions through
additional borrowings. While our access to capital markets may be constrained
and our cost of borrowing may increase under certain business, market and
economic conditions, our access to a variety of funding sources to meet our
liquidity needs is designed to facilitate continued access to capital resources
under all such conditions. Our liquidity is subject to various risks including
the risks identified in the section entitled "Risk Factors" in Item 1A of
Part II of this report as well as Item 1A of Part I in our Annual Report on
Form 10-K for the fiscal year ended October 31, 2019 and the market risks
identified in the section entitled "Quantitative and Qualitative Disclosures
about Market Risk" in Item 3 of Part I of this report.
On February 22, 2020, HP's Board of Directors increased HP's share repurchase
authorization to $15.0 billion.
Our cash and cash equivalents balances are held in numerous locations throughout
the world. We utilize a variety of planning and financing strategies in an
effort to ensure that our worldwide cash is available when and where it is
needed. Amounts held outside of the United States are generally utilized to
support non-U.S. liquidity needs and may from time to time be distributed to the
United States. The Tax Cuts and Jobs Act ("TCJA") made significant changes to
the U.S. tax law, including a one-time transition tax on accumulated foreign
earnings. The payments associated with this one-time transition tax will be paid
over eight years and began in fiscal year 2019. We expect a significant portion
of the cash and cash equivalents held by our foreign subsidiaries will no longer
be subject to U.S. income tax consequences upon a subsequent repatriation to the
United States as a result of the transition tax on accumulated foreign earnings.
However, a portion of this cash may still be subject to foreign income tax or
withholding tax consequences upon repatriation. As we evaluate the future cash
needs of our 55

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operations, we may revise the amount of foreign earnings considered to be
permanently reinvested in our foreign subsidiaries and how to utilize such
funds, including reducing our gross debt level, or other uses.

Liquidity

Our key cash flow metrics were as follows:

 Nine months ended July 31 2020 2019 In millions
Net cash provided by operating activities $ 2,442$ 4,066
Net cash used in investing activities (931) (211)
Net cash used in financing activities (1,369) (4,102)
Net increase (decrease) in cash and cash equivalents $ 

142 $ (247)

 Operating Activities
Compared to the corresponding period in fiscal year 2019, net cash provided by
operating activities decreased by $1.6 billion for the nine months ended
July 31, 2020, primarily due to lower cash generated from working capital
activities as a result of changes in demand dynamics due to COVID-19 and lower
earnings from operation.
Key Working Capital Metrics
Management utilizes current cash conversion cycle information to manage our
working capital level. Our working capital metrics and cash conversion cycle
impacts were as follows: As of As of July 31, 2020 October 31, 2019 Change July 31, 2019 October 31, 2018 Change Y/Y Change
Days of sales outstanding in 33 35 (2) 33 30 3 -
accounts receivable ("DSO")
Days of supply in inventory ("DOS") 45 41 4 44 43 1 1
Days of purchases outstanding in (108) (107) (1) (113) (105) (8) 5
accounts payable ("DPO")
Cash conversion cycle (30) (31) 1 (36) (32) (4) 6 July 31, 2020 as compared to July 31, 2019
The cash conversion cycle is the sum of days of DSO and DOS less DPO. Items
which may cause the cash conversion cycle in a particular period to differ from
a long-term sustainable rate include, but are not limited to, changes in
business mix, changes in payment terms, extent of receivables factoring,
seasonal trends and the timing of revenue recognition and inventory purchases
within the period.
DSO measures the average number of days our receivables are outstanding. DSO is
calculated by dividing ending accounts receivable, net of allowance for doubtful
accounts, by a 90-day average net revenue. The DSO remained flat as of July 31,
2020, as compared to prior-year period.
DOS measures the average number of days from procurement to sale of our product.
DOS is calculated by dividing ending inventory by a 90-day average cost of
revenue. The increase in DOS was primarily due to demand weakness in Commercial
Printing.
DPO measures the average number of days our accounts payable balances are
outstanding. DPO is calculated by dividing ending accounts payable by a 90-day
average cost of revenue. The decrease in DPO was primarily due to working
capital management activities.
Investing Activities
Compared to the corresponding period in fiscal year 2019, net cash used in
investing activities increased by $0.7 billion for the nine months ended
July 31, 2020, primarily due to increase in investments classified as
available-for-sale investments within Other current assets of $0.9 billion,
collateral related to our derivative instruments of $0.2 billion partially
offset by lower net payments for acquisitions of $0.4 billion. 56

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 HP INC. AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued)
Financing Activities
Compared to the corresponding period in fiscal year 2019, net cash used in
financing activities decreased by $2.7 billion for the nine months ended
July 31, 2020, primarily due to an increase in issuance of senior notes amount
of $3.0 billion, lower share repurchases amount of $0.2 billion partially offset
by higher payment of debt of $0.3 billion.
Capital Resources
Debt Levels
We maintain debt levels that we establish through consideration of a number of
factors, including cash flow expectations, cash requirements for operations,
investment plans (including acquisitions), share repurchase activities, our cost
of capital and targeted capital structure. Depending on these factors, we may,
from time to time, incur additional indebtedness or refinance existing
indebtedness. Outstanding borrowings increased to $6.3 billion as of July 31,
2020 as compared to $5.1 billion as of October 31, 2019, bearing
weighted-average interest rates of 3.8% and 4.6% for July 31, 2020 and
October 31, 2019, respectively.
Our weighted-average interest rate reflects the effective rate on our borrowings
prevailing during the period and reflects the effect of interest rate swaps. For
more information on our interest rate swaps, see Note 8, "Financial
Instruments", to the Consolidated Condensed Financial Statements in Item 1 of
Part I of this report, which is incorporated herein by reference.
As of July 31, 2020, we maintain a senior unsecured committed revolving credit
facility with aggregate lending commitments of $4.0 billion, which will be
available until March 30, 2023 and is primarily to support the issuance of
commercial paper. On May 29, 2020, we entered into a 364-day revolving credit
facility providing for a senior unsecured revolving credit facility with
aggregate lending commitments of $1.0 billion, which will be available until May
28, 2021. Funds borrowed under these revolving credit facilities may be used for
general corporate purposes.
On June 17, 2020, we issued $3.0 billion aggregate principal amount of senior
notes across various maturities. We used approximately $0.7 billion and $0.9
billion of the proceeds from such issuance to fund the Tender Offer and the
redemption, respectively, of existing notes maturing in 2020 and 2021. For more
information on the new notes and the repurchase and redemption of existing
notes, see Note 9, "Borrowings", to the Consolidated Condensed Financial
Statements in Item 1 of Part I of this report, which is incorporated herein by
reference. Available Borrowing Resources
We had the following resources available to obtain short or long-term financing
in addition to the commercial paper and revolving credit facilities discussed
above: As of July 31, 2020 In millions 2019 Shelf Registration Statement Unspecified Uncommitted lines of credit $ 725 For more information on our borrowings, see Note 9, "Borrowings", to the
Consolidated Condensed Financial Statements in Item 1 of Part I of this report,
which is incorporated herein by reference.
Credit Ratings
Our credit risk is evaluated by major independent rating agencies based upon
publicly available information as well as information obtained in our ongoing
discussions with them. While we do not have any rating downgrade triggers that
would accelerate the maturity of a material amount of our debt, previous
downgrades have increased the cost of borrowing under our credit facilities,
have reduced market capacity for our commercial paper and have required the
posting of additional collateral under some of our derivative contracts. In
addition, any further downgrade to our credit ratings by any rating agencies may
further impact us in a similar manner, and, depending on the extent of any such
downgrade, could have a negative impact on our liquidity and capital position.
We can access alternative sources of funding, including drawdowns under our
credit facilities, if necessary, to offset potential reductions in the market
capacity for our commercial paper. CONTRACTUAL AND OTHER OBLIGATIONS
Principal and Interest payments on debt
In June 2020 we issued $3.0 billion aggregate principal amount of senior notes
across various maturities. We used approximately $0.7 billion and $0.9 billion
of the proceeds from such issuance to fund the Tender Offer and the redemption, 57

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respectively, of existing notes. Pursuant to which our future principal payments
on debt increased from $4.5 billion as at October 31, 2019 to $5.8 billion as at
July 31, 2020 and interest payment on debt increased from $1.9 billion as at
October 31, 2019 to $2.2 billion as at July 31, 2020. For more information on
the new notes and the repurchase and redemption of existing notes, see Note 9, "Borrowings", to the Consolidated Condensed Financial Statements in Item 1 of
Part I of this report, which is incorporated herein by reference.
Retirement and Post-Retirement Benefit Plan Contributions
As of July 31, 2020, we anticipate making contributions for the remainder of
fiscal year 2020 of approximately $46 million to our non-U.S. pension plans,
$9 million to cover benefit payments to U.S. non-qualified pension plan
participants and $2 million to cover benefit claims for our post-retirement
benefit plans. Our policy is to fund our pension plans so that we meet at least
the minimum contribution required by local government, funding and taxing
authorities. For more information on our retirement and post-retirement benefit
plans, see Note 4, "Retirement and Post-Retirement Benefit Plans", to the
Consolidated Condensed Financial Statements in Item 1 of Part I of this report,
which is incorporated herein by reference.
Cost Savings Plan
As a result of our approved restructuring plans, we expect to make future cash
payments of approximately $0.6 billion. We expect to make future cash payments
of $0.1 billion in fiscal year 2020 with remaining cash payments through fiscal
year 2023. For more information on our restructuring activities that are part of
our cost improvements, see Note 3, "Restructuring and Other Charges", to the
Consolidated Condensed Financial Statements in Item 1 of Part I of this report,
which is incorporated herein by reference.
Uncertain Tax Positions
As of July 31, 2020, we had approximately $489 million of recorded liabilities
and related interest and penalties pertaining to uncertain tax positions. We are
unable to make a reasonable estimate as to when cash settlement with the tax
authorities might occur due to the uncertainties related to these tax matters.
Payments of these obligations would result from settlements with taxing
authorities. For more information on our uncertain tax positions, see Note 5, "Taxes on Earnings", to the Consolidated Condensed Financial Statements in
Item 1 of Part I of this report, which is incorporated herein by reference. OFF-BALANCE SHEET ARRANGEMENTS
As part of our ongoing business, we have not participated in transactions that
generate material relationships with unconsolidated entities or financial
partnerships, such as entities often referred to as structured finance or
special purpose entities, which would have been established for the purpose of
facilitating off-balance sheet arrangements or other contractually narrow or
limited purposes.
We have third-party short-term financing arrangements intended to facilitate the
working capital requirements of certain customers. For more information on our
third-party short-term financing arrangements, see Note 6, "Supplementary
Financial Information", to the Consolidated Condensed Financial Statements in
Item 1 of Part I of this report, which is incorporated herein by reference. 58

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