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HP INC - Quarter Report: 2017 July (Form 10-Q)

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Part I. Financial Information


 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________________________
FORM 10-Q
(Mark One)
 
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: July 31, 2017
Or
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from            to            
Commission file number 1-4423
_________________________________________
HP INC.
(Exact name of registrant as specified in its charter)
Delaware
 
94-1081436
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. employer
identification no.)
1501 Page Mill Road, Palo Alto, California
 
94304
(Address of principal executive offices)
 
(Zip code)
(650) 857-1501
(Registrant’s telephone number, including area code)
________________________________________

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 (the “Exchange Act”) during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ý
 
Accelerated filer o
 
Non-accelerated filer o
(Do not check if a smaller reporting company)
 
Smaller reporting company o
 
Emerging growth company o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act). Yes o No ý
The number of shares of HP common stock outstanding as of July 31, 2017 was 1,670,254,371 shares.
 




HP INC. AND SUBSIDIARIES
Form 10-Q
For the Quarterly Period ended July 31, 2017
Table of Contents
 
 
Page
 
 
 
 
 
In this report on Form 10-Q, for all periods presented, “we”, “us”, “our”, “company”, “HP” and “HP Inc.” refer to HP Inc. (formerly Hewlett-Packard Company) and its consolidated subsidiaries.


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Forward-Looking Statements
This Quarterly Report on Form 10-Q, including “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 2 of Part I, contains forward-looking statements that involve risks, uncertainties and assumptions. If the risks or uncertainties ever materialize or the assumptions prove incorrect, the results of HP Inc. and its consolidated subsidiaries (“HP”) may differ materially from those expressed or implied by such forward-looking statements and assumptions. All statements other than statements of historical fact are statements that could be deemed forward-looking statements, including, but not limited to, any projections of net revenue, margins, expenses, effective tax rates, net earnings, net earnings per share, cash flows, benefit plan funding, deferred taxes, share repurchases, foreign currency exchange rates or other financial items; any projections of the amount, timing or impact of cost savings or restructuring and other charges; any statements of the plans, strategies and objectives of management for future operations, including the execution of restructuring plans and any resulting cost savings, net revenue or profitability improvements; any statements concerning the expected development, performance, market share or competitive performance relating to products or services; any statements regarding current or future macroeconomic trends or events and the impact of those trends and events on HP and its financial performance; any statements regarding pending investigations, claims or disputes; any statements of expectation or belief, including with respect to the timing and expected benefits of acquisitions and other business combination and investment transactions; and any statements of assumptions underlying any of the foregoing. Risks, uncertainties and assumptions include the need to address the many challenges facing HP’s businesses; the competitive pressures faced by HP’s businesses; risks associated with executing HP’s strategy; the impact of macroeconomic and geopolitical trends and events; the need to manage third-party suppliers and the distribution of HP’s products and the delivery of HP’s services effectively; the protection of HP’s intellectual property assets, including intellectual property licensed from third parties; risks associated with HP’s international operations; the development and transition of new products and services and the enhancement of existing products and services to meet customer needs and respond to emerging technological trends; the execution and performance of contracts by HP and its suppliers, customers, clients and partners; the hiring and retention of key employees; integration and other risks associated with business combination and investment transactions; the results of the restructuring plans, including estimates and assumptions related to the cost (including any possible disruption of HP’s business) and the anticipated benefits of the restructuring plans; the resolution of pending investigations, claims and disputes; and other risks that are described herein, including, but not limited to, those discussed in this Quarterly Report on Form 10-Q, and in particular, the risks discussed in Part I, Item 1A “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended October 31, 2016, and that are otherwise described or updated from time to time in HP’s other filings with the Securities and Exchange Commission (the “SEC”). HP assumes no obligation and does not intend to update these forward-looking statements.


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Part I. Financial Information

ITEM 1. Financial Statements and Supplementary Data.
Index
 
Page


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

 
$
11,892

 
$
38,129

 
$
35,726

Costs and expenses:
 
 
 

 
 

 
 

Cost of revenue
10,633

 
9,720

 
31,071

 
29,019

Research and development
289

 
298

 
899

 
891

Selling, general and administrative
1,096

 
719

 
3,200

 
2,758

Restructuring and other charges
46

 
36

 
249

 
156

Acquisition-related charges
40

 

 
76

 

Amortization of intangible assets

 
2

 
1

 
16

Defined benefit plan settlement charges
1

 

 
4

 

Total costs and expenses
12,105

 
10,775

 
35,500

 
32,840

Earnings from continuing operations
955

 
1,117
 
2,629

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

 
1,081
 
2,428

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

 
843
 
1,866

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

 
(60
)
 

 
(149
)
Net earnings
$
696

 
$
783

 
$
1,866

 
$
2,004

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

 
$
0.49

 
$
1.10

 
$
1.24

Discontinued operations

 
(0.03
)
 

 
(0.08
)
Total basic net earnings per share
$
0.41

 
$
0.46

 
$
1.10

 
$
1.16

Diluted
 
 
 
 
 
 
 
Continuing operations
$
0.41

 
$
0.49

 
$
1.09

 
$
1.23

Discontinued operations

 
(0.04
)
 

 
(0.08
)
Total diluted net earnings per share
$
0.41

 
$
0.45

 
$
1.09

 
$
1.15

Cash dividends declared per share
$
0.26

 
$
0.25

 
$
0.53

 
$
0.50

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

 
1,711

 
1,694

 
1,735

Diluted
1,695

 
1,725

 
1,705

 
1,747

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


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

 
$
783

 
$
1,866

 
$
2,004

Other comprehensive income before taxes:
 

 
 

 
 

 
 

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

 
 

 
 

 
 

Gains arising during the period
1

 
1

 
5

 
2

Change in unrealized components of cash flow hedges:
 

 
 

 
 

 
 

(Losses) gains arising during the period
(519)

 
175

 
(758)

 
135

Losses (gains) reclassified into earnings
38

 
159

 
(49)

 
63


(481
)
 
334

 
(807
)
 
198

Change in unrealized components of defined benefit plans:
 

 
 

 
 

 
 

Gains (losses) arising during the period

 

 
13

 
(4)

Amortization of actuarial loss and prior service benefit
19

 
12

 
56

 
36

Settlements and other

 

 
3

 
1


19

 
12

 
72

 
33

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

 
(730
)
 
233

Benefit (provision) for taxes
57

 
(28)

 
50

 
41

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

 
(680
)
 
274

Comprehensive income
$
292

 
$
1,102

 
$
1,186

 
$
2,278

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

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

 
 

Current assets:
 

 
 

Cash and cash equivalents
$
6,967

 
$
6,288

Accounts receivable
4,233

 
4,114

Inventory
5,184

 
4,484

Other current assets
5,059

 
3,582

Total current assets
21,443

 
18,468

Property, plant and equipment
1,707

 
1,736

Goodwill
5,622

 
5,622

Other non-current assets
3,162

 
3,161

Total assets
$
31,934

 
$
28,987

LIABILITIES AND STOCKHOLDERS’ DEFICIT
 

 
 

Current liabilities:
 

 
 

Notes payable and short-term borrowings
$
1,062

 
$
78

Accounts payable
12,804

 
11,103

Employee compensation and benefits
766

 
759

Taxes on earnings
199

 
231

Deferred revenue
997

 
919

Other accrued liabilities
6,232

 
5,718

Total current liabilities
22,060

 
18,808

Long-term debt
6,744

 
6,735

Other non-current liabilities
7,469

 
7,333

Commitments and contingencies


 


Stockholders’ deficit:
 

 
 

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

 

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

 
17

Additional paid in capital
288

 
1,030

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

 
$
28,987

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

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

 
 

Net earnings
$
1,866

 
$
2,004

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

 
 

Depreciation and amortization
263

 
249

Stock-based compensation expense
169

 
140

Restructuring and other charges
249

 
151

Deferred taxes on earnings
412

 
978

Other, net
69

 
(290
)
Changes in operating assets and liabilities:
 

 
 

Accounts receivable
(215
)
 
728

Inventory
(731
)
 
251

Accounts payable
1,738

 
238

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

 
2,548

Cash flows from investing activities:
 

 
 

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

 

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

 
133

Proceeds from business divestitures

 
160

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

 
 

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

 
72

Proceeds from debt, net of issuance costs
5

 
4

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

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

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

 
29

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

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

 
17,433

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

 
$
5,636

Supplemental schedule of non-cash activities:
 

 
 

Net assets transferred to Hewlett Packard Enterprise Company
$

 
$
22,144

Purchase of assets under capital leases
$
147

 
$
118

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

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HP INC. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements
(Unaudited)
Note 1: Basis of Presentation
Separation Transaction
On November 1, 2015, Hewlett-Packard Company completed the separation of Hewlett Packard Enterprise Company (“Hewlett Packard Enterprise”), Hewlett-Packard Company’s former enterprise technology infrastructure, software, services and financing businesses (the “Separation”). In connection with the Separation, Hewlett-Packard Company changed its name to HP Inc. (“HP”) and entered into a separation and distribution agreement as well as various other agreements with Hewlett Packard Enterprise that provide a framework for the relationships between the parties, including among others a tax matters agreement, an employee matters agreement, a transition service agreement, a real estate matters agreement, a master commercial agreement and an information technology service agreement. For more information on the impacts of these agreements, see Note 6, “Taxes on Earnings”, Note 13, “Litigation and Contingencies” and Note 14, “Guarantees, Indemnifications and Warranties”.
Basis of Presentation
The accompanying Consolidated Condensed Financial Statements of HP and its wholly-owned subsidiaries are prepared in conformity with United States (“U.S.”) generally accepted accounting principles (“GAAP”). The interim financial information is unaudited, but reflects all normal adjustments that are necessary to provide a fair statement of results for the interim periods presented. This interim information should be read in conjunction with the Consolidated Financial Statements for the fiscal year ended October 31, 2016 in the Annual Report on Form 10-K filed on December 15, 2016. The Consolidated Condensed Balance Sheet for October 31, 2016 was derived from audited financial statements.
Principles of Consolidation
The Consolidated Condensed Financial Statements include the accounts of HP and its subsidiaries and affiliates in which HP has a controlling financial interest or is the primary beneficiary. All intercompany balances and transactions have been eliminated.
Reclassifications
HP has made changes to the alignment of its business units in order to align its business unit financial reporting more closely with its current business structure. HP made these changes to its business unit information in prior reporting periods on an as-is basis. The reporting changes had no impact to previously reported segment net revenue, consolidated net revenue, earnings from continuing operations, net earnings or net earnings per share (“EPS”). See Note 2, “Segment Information”, for a further discussion of HP’s business unit realignments.
HP has reclassified certain prior-year amounts to conform to the current-year presentation as a result of the adoption of Accounting Standards Update (“ASU”) 2015-03, “Simplifying the Presentation of Debt Issuance Costs” and ASU 2016-09, “Improvements to Employee Share-Based Payment Accounting”.
Use of Estimates
The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in HP’s Consolidated Condensed Financial Statements and accompanying notes. Actual results could differ materially from those estimates. 
Recently Adopted Accounting Pronouncements
In March 2016, the Financial Accounting Standard Board (“FASB”) issued guidance, which amends the existing accounting standards for share-based payments, including the accounting for income taxes and forfeitures, as well as the classifications on the statements of cash flows. HP early adopted the amendments in the first quarter of fiscal year 2017. Beginning November 1, 2016, stock-based compensation excess tax benefits or tax deficiencies are reflected in the Consolidated Condensed Statements of Earnings as a component of the provision for taxes, whereas they previously were recognized as additional paid in capital in the stockholders’ deficit in the Consolidated Condensed Balance Sheets. HP has elected to continue to estimate forfeitures expected to occur to determine the stock-based compensation expense. Additionally, the Consolidated Condensed Statements of Cash Flows now present excess tax benefits as an operating activity rather than as a financing activity, while the payment of withholding taxes on the settlement of stock-based compensation awards is presented as a financing activity rather than as an operating activity, with prior periods adjusted accordingly. The implementation of this guidance did not have a material impact on the Consolidated Condensed Statements of Cash Flows for the nine months ended July 31, 2016. See Note 6, “Taxes on Earnings”, for additional impact on the Consolidated Condensed Financial Statements.
In May 2015, the FASB issued guidance, which amends the existing disclosures for investments measured at net asset value (“NAV”) per share (or its equivalent), as a practical expedient for fair value. This amendment removes the requirement to categorize these investments within the fair value hierarchy. The amendment also removes the requirement to make certain

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

disclosures for all investments that are eligible to be measured at fair value using the NAV as a practical expedient. HP adopted the guidance in the first quarter of fiscal year 2017. Other than the change in presentation of certain pension-related assets that use NAV as a practical expedient, which requires retrospective application, the adoption of this new guidance did not have an impact on the Consolidated Condensed Financial Statements.
In April 2015, the FASB amended the existing accounting standards for intangible assets. The amendments provide explicit guidance to customers in determining the accounting for fees paid in a cloud computing arrangement. HP adopted the guidance prospectively in the first quarter of fiscal year 2017. The implementation of this guidance did not have an impact on the Consolidated Condensed Financial Statements.
In April 2015, the FASB amended the existing accounting standards for the presentation of debt issuance costs. The amendments require that debt issuance costs related to a recognized debt liability be presented on the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by these amendments. HP adopted the guidance in the first quarter of fiscal year 2017. The adoption resulted in the reclassification of unamortized debt issuance costs related to HP’s U.S. Dollar Global Notes from “Other non-current assets” to “Long-term debt” within the Consolidated Condensed Balance Sheets of $23 million as of October 31, 2016.
Recently Issued Accounting Pronouncements Not Yet Adopted
In January 2017, the FASB issued guidance which simplifies the accounting for goodwill impairment. The updated guidance eliminates Step 2 of the impairment test, which requires entities to calculate the implied fair value of goodwill to measure a goodwill impairment charge. Instead, entities will record an impairment charge based on the excess of a reporting unit’s carrying amount over its fair value, determined in Step 1. HP is required to adopt the guidance in the first quarter of fiscal year 2021 using a prospective approach. Earlier adoption is permitted. HP currently expects to early adopt this guidance in the fourth quarter of fiscal year 2017. HP expects that the implementation of this guidance will not have an effect on its Consolidated Condensed Financial Statements.
In January 2017, the FASB amended the existing accounting standards for business combinations. The amendments clarify the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. HP is required to adopt the guidance in the first quarter of fiscal year 2019. Earlier adoption is permitted. HP is currently evaluating the timing and the impact of this guidance on the Consolidated Condensed Financial Statements.
In November 2016, the FASB issued guidance, which addresses the presentation of restricted cash in the statement of cash flows.  The guidance requires entities to show the changes in the total of cash, cash equivalents, restricted cash, and restricted cash equivalents in the statement of cash flows. As a result, entities will no longer present transfers between cash and cash equivalents and restricted cash and restricted cash equivalents in the statement of cash flows.  HP is required to adopt the guidance retrospectively in the first quarter of fiscal year 2019. Earlier adoption is permitted.  HP is currently evaluating the timing and the impact of this guidance on the Consolidated Condensed Financial Statements.
In October 2016, the FASB issued guidance, which amends the existing accounting for Intra-Entity Transfers of Assets Other Than Inventory. The guidance requires an entity to recognize the income tax consequences of intra-entity transfers, other than inventory, when the transfer occurs. It also requires modified retrospective transition with a cumulative catch-up adjustment to opening retained earnings in the period of adoption. Earlier adoption is permitted. HP is required to adopt the guidance in the first quarter of fiscal year 2019. HP is currently evaluating the timing and the impact of this guidance on the Consolidated Condensed Financial Statements.
In August 2016, the FASB issued guidance, which amends the existing accounting standards for the classification of certain cash receipts and cash payments on the statement of cash flows. HP is required to adopt the guidance in the first quarter of fiscal year 2019. Earlier adoption is permitted. HP is currently evaluating the timing and the impact of this guidance on the Consolidated Condensed Financial Statements.    
In June 2016, the FASB issued guidance, which requires credit losses on financial assets measured at amortized cost basis to be presented at the net amount expected to be collected, not based on incurred losses. Further, credit losses on available-for-sale debt securities should be recorded through an allowance for credit losses limited to the amount by which fair value is below amortized cost. HP is required to adopt the guidance in the first quarter of fiscal year 2021. Earlier adoption is permitted. HP is currently evaluating the timing and the impact of this guidance on the Consolidated Condensed Financial Statements.
In February 2016, the FASB issued guidance, which amends the existing accounting standards for leases. Consistent with current guidance, the recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee primarily will depend on its classification. Under the new guidance, a lessee will be required to recognize assets and liabilities

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

for all leases with lease terms of more than twelve months. HP is required to adopt the guidance in the first quarter of fiscal year 2020 using a modified retrospective approach. Earlier adoption is permitted. HP is currently evaluating the timing and the impact of this guidance on the Consolidated Condensed Financial Statements. 
In January 2016, the FASB issued guidance, which amends the existing accounting standards for the recognition and measurement of financial assets and financial liabilities. The updated guidance primarily addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. HP is required to adopt the guidance in the first quarter of fiscal year 2019. The amendments should be applied by means of a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption, with other amendments related specifically to equity securities without readily determinable fair values applied prospectively. HP is currently evaluating the timing and the impact of this guidance on the Consolidated Condensed Financial Statements.
In May 2014, the FASB amended the existing accounting standards for revenue recognition. The amendments (Topic 606) are based on the principle that revenue should be recognized to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The amendments may be applied retrospectively to each prior period presented (“full retrospective method”) or retrospectively with the cumulative effect recognized as of the date of initial application (“modified retrospective method”).
HP will adopt the new revenue standard in the first quarter of fiscal 2019 and intends to apply the modified retrospective method. HP is continuing to evaluate the impact of this guidance on the Consolidated Condensed Financial Statements and disclosures.


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


Note 2. Segment Information
HP is a leading global provider of personal computing and other access devices, imaging and printing products, and related technologies, solutions and services. HP sells to individual consumers, small and medium-sized businesses (“SMBs”) and large enterprises, including customers in the government, health and education sectors.
HP’s operations are organized into three segments for financial reporting purposes: Personal Systems, Printing and Corporate Investments. HP’s organizational structure is based on a number of factors that the chief operating decision maker uses to evaluate, view and run its business operations, which include, but are not limited to, customer base and homogeneity of products and technology. The segments are based on this organizational structure and information reviewed by HP’s chief operating decision maker to evaluate segment results. The chief operating decision maker uses several metrics to evaluate the performance of the overall business, including earnings from operations, and uses these results to allocate resources to each of the segments.
A summary description of each segment is as follows:
Personal Systems provides Commercial and Consumer personal computers (“PCs”), Workstations, thin clients, Commercial tablets and mobility devices, retail point-of-sale systems, displays and other related accessories, software, support and services for the commercial and consumer markets. HP groups Commercial notebooks, Commercial desktops, Commercial services, Commercial tablets and mobility devices, Commercial detachables, Workstations, retail point-of-sale systems and thin clients into commercial clients and Consumer notebooks, Consumer desktops, Consumer services and Consumer detachables into consumer clients when describing performance in these markets. Described below are HP’s global business capabilities within Personal Systems:
Commercial PCs are optimized for use by customers, including enterprise and SMBs, with a focus on robust designs, security, serviceability, connectivity, reliability and manageability in networked environments. Additionally, HP offers a range of services and solutions to enterprise and SMBs to help them manage the lifecycle of their PC and mobility installed base.
Consumer PCs are Notebooks, Desktops and hybrids that are optimized for consumer usage, focusing on multi-media consumption, online browsing, gaming and light productivity.
Printing provides Consumer and Commercial printer hardware, supplies, solutions and services, as well as scanning devices. Printing is also focused on imaging solutions in the commercial markets. Described below are HP’s global business capabilities within Printing:
Office Printing Solutions delivers HP’s office printers, supplies, services, and solutions to SMBs and large enterprises. HP goes to market through its extensive channel network and directly with HP sales. Ongoing key initiatives include design and deployment of A3 products and solutions for the copier and multifunction printer market, printer security solutions, PageWide solutions and award-winning JetIntelligence LaserJet products.
Home Printing Solutions delivers a compelling set of innovative printing products and solutions for the home and home business or small office customers utilizing both HP’s Ink and Laser technologies. Initiatives such as Instant Ink and Continuous Ink Supply System provide business model innovation to benefit and expand HP’s existing customer base, while new innovations like Sprocket drive print relevance for a mobile generation.
Graphics Solutions is reinventing the graphics industry by offering large-format, commercial and industrial solutions to print service providers and packaging converters through the largest portfolio of printers and presses (HP DesignJet, HP Latex Printers, HP Scitex, HP Indigo and HP PageWide Presses).
3D Printing delivers HP’s Multi-Jet Fusion 3D Printing Solution designed for prototyping and production of functional parts and functioning on an open platform facilitating the development of new 3D printing materials.
Printing groups its global business capabilities into the following business units when reporting business performance:
Commercial Hardware consists of Office Printing Solutions, Graphics Solutions and 3D Printing, excluding supplies;
Consumer Hardware includes Home Printing Solutions, excluding supplies; and
Supplies comprises a set of highly innovative consumable products, ranging from Ink and Laser cartridges, media to graphics supplies and 3D supplies, for recurring use in Consumer and Commercial printer hardware and solutions
Corporate Investments include HP Labs and certain business incubation projects.
The accounting policies HP uses to derive segment results are substantially the same as those used by HP in preparing these financial statements. HP derives the results of the business segments directly from its internal management reporting

12

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

system. Segment net revenue includes revenues from sales to external customers and certain revenues related to Managed Print Services arrangements, which are eliminated for the purposes of reporting HP’s consolidated net revenue.
HP does not allocate certain operating expenses, which it manages at the corporate level, to its segments. These unallocated amounts include certain corporate governance costs and market-related retirement credits, stock-based compensation expense, restructuring and other charges, acquisition-related charges, amortization of intangible assets, defined benefit plan settlement charges and net revenue eliminations, primarily related to Managed Print Services.
Business Unit Realignment
Effective at the beginning of its first quarter of fiscal year 2017, HP implemented an organizational change to align its business unit financial reporting more closely with its current business structure. The organizational change resulted in the transfer of a portion of LaserJet printers from Commercial to Consumer within the Printing segment. HP reflected this change to its business unit information in prior reporting periods on an as-is basis that resulted in the reclassification of revenues between the Commercial and Consumer business units of Printing. The reporting change had no impact to previously reported segment net revenue, consolidated net revenue, earnings from continuing operations, net earnings or net earnings per share.
Segment Operating Results from Continuing Operations
 
Personal
Systems
 
Printing
 
Corporate
Investments
 
Total
Segments
 
Eliminations
and Other
 
Total
 
In millions
Three months ended July 31, 2017
 

 
 

 
 

 
 

 
 

 
 
 

Net revenue
$
8,404

 
$
4,698

 
$
2

 
$
13,104

 
$
(44
)
 
 
$
13,060

Earnings (loss) from operations
$
313

 
$
813

 
$
(20
)
 
$
1,106

 
 

 
 
 

Three months ended July 31, 2016
 

 
 

 
 

 
 

 
 

 
 
 

Net revenue
$
7,512

 
$
4,423

 
$

 
$
11,935

 
$
(43
)
 
 
$
11,892

Earnings (loss) from operations
$
333

 
$
903

 
$
(35
)
 
$
1,201

 
 

 
 
 

Nine months ended July 31, 2017
 

 
 

 
 

 
 

 
 

 
 
 

Net revenue
$
24,290

 
$
13,924

 
$
7

 
$
38,221

 
$
(92
)
 
 
$
38,129

Earnings (loss) from operations
$
870

 
$
2,354

 
$
(69
)
 
$
3,155

 
 

 
 
 

Nine months ended July 31, 2016
 

 
 

 
 

 
 

 
 

 
 
 

Net revenue
$
21,969

 
$
13,702

 
$
6

 
$
35,677

 
$
49

(1) 
 
$
35,726

Earnings (loss) from operations
$
804

 
$
2,491

 
$
(66
)
 
$
3,229

 
 

 
 
 


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

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

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

 
$
11,935

 
$
38,221

 
$
35,677

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

Total net revenue
$
13,060

 
$
11,892

 
$
38,129

 
$
35,726

Earnings from continuing operations before taxes:
 

 
 

 
 

 
 

Total segment earnings from operations
$
1,106

 
$
1,201

 
$
3,155

 
$
3,229

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

 
(76
)
 

Amortization of intangible assets

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

 
(4
)
 

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

 
$
1,081

 
$
2,428

 
$
2,751

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

 
$
4,303

 
$
14,391

 
$
12,346

Desktops
2,566

 
2,455

 
7,477

 
7,384

Workstations
530

 
476

 
1,516

 
1,381

Other
300

 
278

 
906

 
858

Personal Systems
8,404

 
7,512

 
24,290

 
21,969

Supplies
3,120

 
2,840

 
9,284

 
9,040

Commercial Hardware
986

 
1,007

 
2,854

 
2,928

Consumer Hardware
592

 
576

 
1,786

 
1,734

Printing
4,698

 
4,423

 
13,924

 
13,702

Corporate Investments
2

 

 
7

 
6

Total segment net revenue
13,104

 
11,935

 
38,221

 
35,677

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

Total net revenue
$
13,060

 
$
11,892

 
$
38,129

 
$
35,726


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

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

 
Fiscal 2017 Plan
 
Fiscal 2015 Plan
 
Fiscal 2012 Plan
 

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

Accrued balance as of October 31, 2016
$
24

 
$

 
$
21

 
$
4

 
$
7

 
$
2

 
$
58

Charges
95

 
60

 
15

 

 
1

 

 
171

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

 
(93
)
Non-cash and other adjustments
4

 
(52
)
 
6

 

 

 

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

 
$
2

 
$
7

 
$
2

 
$
4

 
$
2

 
$
94

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

 
$
60

 
$
171

 
$
27

 
$
1,075

 
$
44

 
$
1,496

Reflected in Consolidated Condensed Balance Sheets

 

 

 

 

 

 

Other accrued liabilities
$
77

 
$
2

 
$
7

 
$
2

 
$
4

 
$
1

 
$
93

Other non-current liabilities

 

 

 

 

 
1

 
1

Accrued balance as of October 31, 2015
$

 
$

 
$
39

 
$

 
$
21

 
$
3

 
$
63

Charges

 

 
107

 
27

 
4

 
1

 
139

Cash payments

 

 
(83
)
 
(3
)
 
(28
)
 

 
(114
)
Non-cash and other adjustments

 

 
(12
)
 
(19
)
 
9

 

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

 
$

 
$
51

 
$
5

 
$
6

 
$
4

 
$
66

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

 
$
2

 
$
5

 
$

 
$

 
$

 
$
21

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

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

Other charges include non-recurring costs, including those as a result of Separation, and are distinct from ongoing operational costs. These costs primarily relate to information technology costs such as advisory, consulting and non-recurring labor costs. For the three months and nine months ended July 31, 2017, HP incurred $25 million and $78 million of other charges, respectively. For the three and nine months ended July 31, 2016, HP incurred $5 million and $17 million of other charges, respectively.
Note 4: Retirement and Post-Retirement Benefit Plans
The components of HP’s pension and post-retirement benefit (credit) cost recognized in the Consolidated Condensed Statements of Earnings were as follows:
 
Three months ended July 31
 
U.S. Defined Benefit Plans
 
Non-U.S. Defined Benefit Plans
 
Post-Retirement Benefit Plans
 
2017
 
2016
 
2017
 
2016
 
2017
 
2016
 
In millions
Service cost
$

 
$

 
$
12

 
$
12

 
$
1

 
$

Interest cost
117

 
136

 
4

 
6

 
4

 
5

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

 
 

 
 

 
 

 
 

 
 

Actuarial loss (gain)
19

 
14

 
10

 
6

 
(5
)
 
(3
)
Prior service benefit

 

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

 
11

 
(11
)
 
(10
)
Settlement loss

 

 
1

 

 

 

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

 
$
11

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

 
$

 
$
36

 
$
35

 
$
1

 
$

Interest cost
351

 
408

 
12

 
18

 
13

 
15

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

 
42

 
30

 
18

 
(12
)
 
(9
)
Prior service benefit

 

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

 
32

 
(31
)
 
(30
)
Settlement loss
3

 
1

 
1

 
1

 

 

Special termination benefits

 

 

 

 

 
9

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

 
$
33

 
$
(31
)
 
$
(21
)
Employer Contributions and Funding Policy
HP’s policy is to fund its pension plans so that it makes at least the minimum contribution required by local government, funding and taxing authorities.
During fiscal year 2017, HP anticipates making contributions of approximately $26 million to its non-U.S. pension plans, approximately $33 million to its U.S. non-qualified plan participants and approximately $9 million to cover benefit claims under HP’s post-retirement benefit plans. During the nine months ended July 31, 2017, HP contributed $21 million to its non-U.S. pension plans, paid $27 million to cover benefit payments to U.S. non-qualified plan participants, and paid $7 million to cover benefit claims under HP’s post-retirement benefit plans.

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

HP’s pension and other post-retirement benefit costs and obligations depend on various assumptions. Differences between expected and actual returns on investments and changes in discount rates and other actuarial assumptions are reflected as unrecognized gains or losses, and such gains or losses are amortized to earnings in future periods. A deterioration in the funded status of a plan could result in a need for additional company contributions or an increase in net pension and post-retirement benefit costs in future periods. Actuarial gains or losses are determined at the measurement date and amortized over the remaining service life for active plans or the life expectancy of plan participants for frozen plans.

Note 5: Stock-Based Compensation
HP’s stock-based compensation plans permit the issuance of restricted stock awards, stock options and performance-based awards.
Stock-based compensation expense and the resulting tax benefits were as follows:
 
Three months ended July 31
 
Nine months ended July 31
 
2017
 
2016
 
2017
 
2016
 
In millions
Stock-based compensation expense
$
46

 
$
39

 
$
169

 
$
140

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

 
$
26

 
$
115

 
$
92

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

 
$
13

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

 
2.9

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

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

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

 
$
13

Granted
14,618

 
$
16

Vested
(11,114
)
 
$
14

Forfeited
(624
)
 
$
14

Outstanding at end of period
31,590

 
$
14

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

 
$
2

 
$
4

 
$
4

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

 
5.5

 
5.5

 
6

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

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

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

 
$
12

 
 
 
 

Granted
104

 
$
19

 
 
 
 

Exercised
(4,863
)
 
$
10

 
 
 
 

Forfeited and expired
(766
)
 
$
17

 
 
 
 

Outstanding at end of period
22,693

 
$
13

 
4.2
 
$
145

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

 
$
13

 
4.2
 
$
142

Exercisable at end of period
14,923

 
$
12

 
3.3
 
$
108

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

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

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

20

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

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

 
$
4,221

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

 
$
4,114

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

Provision for doubtful accounts
7

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

HP has third-party arrangements, consisting of revolving short-term financing, which provide liquidity to certain partners in order to facilitate their working capital requirements. These financing arrangements, which in certain circumstances may contain partial recourse, result in a transfer of HP’s receivables and risk to the third party. As these transfers qualify as true sales under the applicable accounting guidance, the receivables are derecognized from the Consolidated Condensed Balance Sheets upon transfer, and HP receives a payment for the receivables from the third party within a mutually agreed upon time period. For arrangements involving an element of recourse, the recourse obligation is measured using market data from the similar transactions and reported as a current liability in the Consolidated Condensed Balance Sheets. The recourse obligations as of July 31, 2017 and October 31, 2016 were not material. As of July 31, 2017 and October 31, 2016, HP had $130 million and $149 million, respectively, outstanding from the third parties, which is reported in accounts receivable in the Consolidated Condensed Balance Sheets. The costs associated with the sales of trade receivables for the three months and nine months ended July 31, 2017 and 2016 were not material.
The following is a summary of the activity under these arrangements:
 
Three months ended July 31
 
Nine months ended July 31
 
2017
 
2016
 
2017
 
2016
 
In millions
Balance at beginning of period
$
123

 
$
71

 
$
149

 
$
93

Trade receivables sold
2,268

 
2,126

 
6,969

 
5,896

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

 
(3
)
 
9

 
(2
)
Balance at end of period
$
130

 
$
114

 
$
130

 
$
114


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

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

 
$
3,103

Purchased parts and fabricated assemblies
1,800

 
1,381

 
$
5,184

 
$
4,484

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

 
$
795

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

 

Supplier and other receivables
1,940

 
1,700

Prepaid and other current assets
1,327

 
1,087

 
$
5,059

 
$
3,582

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

 
$
2,421

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

 
3,663

 
5,979

 
6,084

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

 
$
1,736


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

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

 
$
1,591

Deferred tax assets
372

 
254

Other
1,128

 
1,316

 
$
3,162

 
$
3,161

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

 
$
755

Warranty
658

 
729

Sales and marketing programs
2,341

 
2,312

Other
2,418

 
1,922

 
$
6,232

 
$
5,718

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

 
$
2,705

Deferred tax liability
1,586

 
1,116

Tax liability
1,649

 
1,910

Deferred revenue
894

 
865

Other
834

 
737

 
$
7,469

 
$
7,333

Note 8: Fair Value
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the measurement date.
Fair Value Hierarchy
HP uses valuation techniques that are based upon observable and unobservable inputs. Observable inputs are developed using market data such as publicly available information and reflect the assumptions market participants would use, while unobservable inputs are developed using the best information available about the assumptions market participants would use. Assets and liabilities are classified in the fair value hierarchy based on the lowest level input that is significant to the fair value measurement:
Level 1—Quoted prices (unadjusted) in active markets for identical assets or liabilities.
Level 2—Quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability and market-corroborated inputs.
Level 3—Unobservable inputs for the asset or liability.
The fair value hierarchy gives the highest priority to observable inputs and lowest priority to unobservable inputs.
The following table presents HP’s assets and liabilities that are measured at fair value on a recurring basis:

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

 
As of July 31, 2017
 
As of October 31, 2016
 
Fair Value Measured Using
 
 
 
Fair Value Measured Using
 
 
 
Level 1
 
Level 2
 
Level 3
 
Total
 
Level 1
 
Level 2
 
Level 3
 
Total
 
In millions
Assets:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Cash Equivalents:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Corporate debt
$

 
$
1,929

 
$

 
$
1,929

 
$

 
$
2,092

 
$

 
$
2,092

Financial institution instruments

 
5

 

 
5

 

 

 

 

Government debt(1)
3,436

 
46

 

 
3,482

 
2,568

 

 

 
2,568

Available-for-Sale Investments:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Corporate debt

 
506

 

 
506

 

 

 

 

Financial institution instruments

 
50

 

 
50

 

 
2

 

 
2

Government debt(1)
224

 
240

 

 
464

 

 

 

 

Mutual funds
49

 

 

 
49

 
44

 

 

 
44

Marketable equity securities
6

 
6

 

 
12

 
5

 
4

 

 
9

Derivative Instruments:
 
 
 
 
 
 
 

 
 

 
 

 
 

 
 

Interest rate contracts

 
5

 

 
5

 

 
48

 

 
48

Foreign currency contracts

 
56

 
2

 
58

 

 
266

 
11

 
277

Other derivatives

 
3

 

 
3

 

 

 

 

Total Assets
$
3,715

 
$
2,846

 
$
2

 
$
6,563

 
$
2,617

 
$
2,412

 
$
11

 
$
5,040

Liabilities:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Derivative Instruments:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Foreign currency contracts
$

 
$
657

 
$
1

 
$
658

 
$

 
$
94

 
$
1

 
$
95

Other derivatives

 

 

 

 

 
2

 

 
2

Total Liabilities
$

 
$
657

 
$
1

 
$
658

 
$

 
$
96

 
$
1

 
$
97

__________________
(1)Government debt includes instruments such as U.S. treasury notes, U.S agency securities and non-U.S. government bonds.
There were no transfers between levels within the fair value hierarchy during the nine months ended July 31, 2017.
Valuation Techniques
Cash Equivalents and Investments: HP holds time deposits, money market funds, mutual funds, other debt securities primarily consisting of corporate and government notes and bonds, and common stock and equivalents. HP values cash equivalents and equity investments using quoted market prices, alternative pricing sources, including net asset value, or models utilizing market observable inputs. The fair value of debt investments was based on quoted market prices or model-driven valuations using inputs primarily derived from or corroborated by observable market data, and, in certain instances, valuation models that utilize assumptions which cannot be corroborated with observable market data.
Derivative Instruments: From time to time, HP uses forward contracts, interest rate and total return swaps and option contracts to hedge certain foreign currency and interest rate exposures. HP uses 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 9, “Financial Instruments” for a further discussion of HP’s use of derivative instruments.
Other Fair Value Disclosures
Short- and Long-Term Debt: HP estimates the fair value of its debt primarily using an expected present value technique, which is based on observable market inputs using interest rates currently available to companies of similar credit standing for similar terms and remaining maturities, and considering its own credit risk. The portion of HP’s debt that is hedged is reflected

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

in the Consolidated Condensed Balance Sheets as an amount equal to the debt’s carrying amount and a fair value adjustment representing changes in the fair value of the hedged debt obligations arising from movements in benchmark interest rates. The fair value of HP’s short- and long-term debt was $8.1 billion as of July 31, 2017, compared to its carrying amount of $7.8 billion at that date. The fair value of HP’s short- and long-term debt was $7.1 billion as of October 31, 2016, compared to its carrying value of $6.8 billion at that date. If measured at fair value in the Consolidated Condensed Balance Sheets, short- and long-term debt would be classified in Level 2 of the fair value hierarchy.
Other Financial Instruments: For the balance of HP’s financial instruments, primarily accounts receivable, accounts payable and financial liabilities included in Other accrued liabilities on the Consolidated Condensed Balance Sheets, the carrying amounts approximate fair value due to their short maturities. If measured at fair value in the Consolidated Condensed Balance Sheets, other financial instruments would be classified in Level 2 or Level 3 of the fair value hierarchy.
Non-Marketable Equity Investments and Non-Financial Assets: HP’s non-marketable equity investments and non-financial assets, such as goodwill, intangible assets and property, plant and equipment, are recorded at fair value in the period of acquisition and a subsequent impairment charge is recognized. If measured at fair value in the Consolidated Condensed Balance Sheets, non-marketable equity investments and non-financial assets would generally be classified within Level 3 of the fair value hierarchy.

Note 9: Financial Instruments
Cash Equivalents and Available-for-Sale Investments
 
As of July 31, 2017
 
As of October 31, 2016
 
Cost
 
Gross Unrealized Gain
 
Gross Unrealized Loss
 
Fair Value
 
Cost
 
Gross Unrealized Gain
 
Gross Unrealized Loss
 
Fair Value
 
In millions
Cash Equivalents:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Corporate debt
$
1,929

 
$

 
$

 
$
1,929

 
$
2,092

 
$

 
$

 
$
2,092

Financial institution instruments
5

 

 

 
5

 

 

 

 

Government debt
3,482

 

 

 
3,482

 
2,568

 

 

 
2,568

Total cash equivalents
5,416

 

 

 
5,416

 
4,660

 

 

 
4,660

Available-for-Sale Investments:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Corporate debt
506

 

 

 
506

 

 

 

 

Financial institution instruments
50

 

 

 
50

 
2

 

 

 
2

Government debt
464

 

 

 
464

 

 

 

 

Marketable equity securities
1

 
7

 

 
8

 
1

 
3

 

 
4

Mutual funds
39

 
10

 

 
49

 
35

 
9

 

 
44

Total available-for-sale investments
1,060

 
17

 

 
1,077

 
38

 
12

 

 
50

Total cash equivalents and available-for-sale investments
$
6,476

 
$
17

 
$

 
$
6,493

 
$
4,698

 
$
12

 
$

 
$
4,710

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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, 2017 and October 31, 2016, the carrying amount of cash equivalents approximated fair value due to the short period of time to maturity. The estimated fair value of the available-for-sale investments may not be representative of values that will be realized in the future.


25

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

HP classifies its marketable debt securities as available-for-sale investments within Other current assets on the Consolidated Condensed Balance Sheets, including those with maturity dates beyond one year, based on their highly liquid nature and availability for use in current operations.
Contractual maturities of investments in available-for-sale debt securities were as follows:
 
As of July 31, 2017
 
Amortized
Cost
 
Fair Value
 
In millions
Due in one year
$
414

 
$
414

Due in one to five years
$
606

 
$
606

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 $34 million and $16 million as of July 31, 2017 and October 31, 2016, 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. HP classifies cash flows from its designated derivative contracts with the activities that correspond to the underlying hedged items on the Consolidated Condensed Statements of Cash Flows. For derivatives not designated as hedging instruments, HP categorizes those economic hedges as other derivatives. HP recognizes all derivative instruments at fair value in the Consolidated Condensed Balance Sheets.
As a result of its use of derivative instruments, HP is exposed to the risk that its counterparties will fail to meet their contractual obligations. Master netting agreements mitigate credit exposure to counterparties by permitting HP to net amounts due from HP to counterparty against amounts due to HP from the same counterparty under certain conditions. To further limit credit risk, HP has collateral security agreements that allow HP to hold collateral from, or require HP to post collateral to, counterparties when aggregate derivative fair values exceed contractually established thresholds which are generally based on the credit ratings of HP and its counterparties. If HP’s or the counterparty’s credit rating falls below a specified credit rating, either party has the right to request full collateralization of the derivatives’ net liability position. The fair value of derivatives with credit contingent features in a net liability position was $583 million and $2 million as of July 31, 2017 and October 31, 2016, 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, 2017 and October 31, 2016.
Fair Value Hedges
HP enters into fair value hedges, such as interest rate swaps, to reduce the exposure of its debt portfolio to changes in fair value resulting from changes in interest rates by achieving a primarily U.S. dollar London Interbank Offered Rate (“LIBOR”)-based floating interest expense.
For derivative instruments that are designated and qualify as fair value hedges, HP recognizes the change in fair value of the derivative instrument, as well as the offsetting change in the fair value of the hedged item, in Interest and other, net on the Consolidated Condensed Statements of Earnings in the period of change.
Cash Flow Hedges
HP uses forward contracts and at times, option contracts designated as cash flow hedges to protect against the foreign currency exchange rate risks inherent in its forecasted net revenue and, to a lesser extent, cost of revenue, operating expenses, and intercompany loans denominated in currencies other than the U.S. dollar. HP’s foreign currency cash flow hedges mature generally within twelve months. However, hedges related to longer term procurement arrangements extend several years and forward contracts associated with intercompany loans extend for the duration of the loan term, which typically range from two to five years.

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

For derivative instruments that are designated and qualify as cash flow hedges, HP initially records changes in fair value for the effective portion of the derivative instrument in accumulated other comprehensive loss as a separate component of stockholders’ deficit on the Consolidated Condensed Balance Sheets and subsequently reclassifies these amounts into earnings in the period during which the hedged transaction is recognized in earnings. HP reports the effective portion of its cash flow hedges in the same financial statement line item as changes in the fair value of the hedged item.
Other Derivatives
Other derivatives not designated as hedging instruments consist primarily of forward contracts used to hedge foreign currency-denominated balance sheet exposures. HP uses total return swaps to hedge its executive deferred compensation plan liability. For derivative instruments not designated as hedging instruments, HP recognizes changes in fair value of the derivative instrument, as well as the offsetting change in the fair value of the hedged item, in Interest and other, net in the Consolidated Condensed Statements of Earnings in the period of change.
Hedge Effectiveness
For interest rate swaps designated as fair value hedges, HP measures hedge effectiveness by offsetting the change in fair value of the hedged item with the change in fair value of the derivative. For foreign currency options and forward contracts designated as cash flow hedges, HP measures hedge effectiveness by comparing the cumulative change in fair value of the hedge contract with the cumulative change in fair value of the hedged item, both of which are based on forward rates. HP 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 of fair value and cash flow hedges recognized in earnings were not material for the three and nine months ended July 31, 2017 and 2016.
Fair Value of Derivative Instruments
The gross notional and fair value of derivative instruments in the Consolidated Condensed Balance Sheets were as follows:
 
As of July 31, 2017
 
As of October 31, 2016
 
Outstanding
Gross
Notional
 
Other Current Assets
 
Other
Non-Current
Assets
 
Other
Accrued
Liabilities
 
Other
Non-Current
Liabilities
 
Outstanding
Gross
Notional
 
Other
Current
Assets
 
Other
Non-Current
Assets
 
Other
Accrued
Liabilities
 
Other
Non-Current
Liabilities
 
In millions
Derivatives designated as hedging instruments
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Fair value hedges:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Interest rate contracts
$
2,500

 
$

 
$
5

 
$

 
$

 
$
2,000

 
$

 
$
48

 
$

 
$

Cash flow hedges:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Foreign currency contracts
16,127

 
33

 
9

 
522

 
122

 
11,852

 
203

 
63

 
52

 
12

Total derivatives designated as hedging instruments
18,627

 
33

 
14

 
522

 
122

 
13,852

 
203

 
111

 
52

 
12

Derivatives not designated as hedging instruments
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Foreign currency contracts
4,572

 
16

 

 
14

 

 
3,934

 
11

 

 
31

 

Other derivatives
119

 
3

 

 

 

 
150

 

 

 
2

 

Total derivatives not designated as hedging instruments
4,691

 
19

 

 
14

 

 
4,084

 
11

 

 
33

 

Total derivatives
$
23,318

 
$
52

 
$
14

 
$
536

 
$
122

 
$
17,936

 
$
214

 
$
111

 
$
85

 
$
12

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

27

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

agreements. As of July 31, 2017 and October 31, 2016, information related to the potential effect of HP’s master netting agreements and collateral security agreements was as follows:
 
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, 2017
 

 
 

 
 

 
 

 
 

 
 
 
 

Derivative assets
$
66

 
$

 
$
66

 
$
63

 
$

(1) 
 
$
3

Derivative liabilities
$
658

 
$

 
$
658

 
$
63

 
$
519

(2) 
 
$
76

As of October 31, 2016
 

 
 

 
 

 
 

 
 

 
 
 
 

Derivative assets
$
325

 
$

 
$
325

 
$
88

 
$
189

(1) 
 
$
48

Derivative liabilities
$
97

 
$

 
$
97

 
$
88

 
$
2

(2) 
 
$
7

_______________________________________________________________________________
(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.

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

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, 2017 and 2016 were as follows:
 
 
 Gain (Loss) Recognized in Earnings on Derivative and Related Hedged Item
Derivative Instrument
 
Location
 
Three months ended July 31, 2017
 
Nine months ended July 31, 2017
 
Hedged Item
 
Location
 
Three months ended July 31, 2017
 
Nine months ended July 31, 2017
 
 
 
 
In millions
 
 
 
 
 
In millions
Interest rate contracts
 
Interest and other, net
 
$
5

 
$
(43
)
 
Fixed-rate debt
 
Interest and other, net
 
$
(5
)
 
$
43

 
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
)
The pre-tax effect of derivative instruments in cash flow hedging relationships for the three and nine months ended July 31, 2017 was as follows:
 
Loss Recognized in
Other Comprehensive
Income (“OCI”) on Derivatives (Effective Portion)
 
(Loss) Gain Reclassified from Accumulated OCI Into
Earnings (Effective Portion)
 
Three months ended July 31, 2017
 
Nine months ended July 31, 2017
 
Location
 
Three months ended July 31, 2017
 
Nine months ended July 31, 2017
 
In millions
 
 
 
In millions
  Cash flow hedges:
 

 
 

 
 
 
 

 
 

Foreign currency contracts
$
(519
)
 
$
(758
)
 
Net revenue
 
$
(26
)
 
$
89

 
 

 
 

 
Cost of revenue
 
(13
)
 
(32
)
 
 
 
 
 
Operating expenses
 
1

 
1

 
 

 
 

 
Interest and other, net
 

 
(9
)
Total
$
(519
)
 
$
(758
)
 
 
 
$
(38
)
 
$
49

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:

29

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

 
Gain Recognized in Other Comprehensive Income ("OCI") on Derivatives (Effective Portion)
 
(Loss) Gain 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

 
Total
 
$
(159
)
 
$
(63
)
As of July 31, 2017, HP expects to reclassify an estimated accumulated other comprehensive loss (“AOCI”) of $442 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.
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, 2017 and 2016 was as follows:
 
Gain (Loss) Recognized in Earnings on Derivatives
 
Location
 
Three months ended July 31, 2017
 
Three months ended July 31, 2016
 
Nine months ended July 31, 2017
 
Nine months ended July 31, 2016
 
 
 
In millions
Foreign currency contracts
Interest and other, net
 
$
16

 
$
(12
)
 
$
(33
)
 
$
(20
)
Other derivatives
Interest and other, net
 
1

 
2

 
5

 
1

Total
 
 
$
17

 
$
(10
)
 
$
(28
)
 
$
(19
)


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

Note 10: Borrowings
Notes Payable and Short-Term Borrowings
 
As of July 31, 2017
 
As of October 31, 2016
 
Amount
Outstanding
 
Weighted-Average
Interest Rate
 
Amount
Outstanding
 
Weighted-Average
Interest Rate
 
In millions
 
 
 
In millions
 
 
Commercial paper
$
936

 
1.6
%
 
$

 

Current portion of long-term debt
92

 
3.5
%
 
51

 
4.1
%
Notes payable to banks, lines of credit and other
34

 
1.4
%
 
27

 
2.0
%
 
$
1,062

 
 

 
$
78

 
 

Long-Term Debt
 
As of
 
July 31, 2017
 
October 31, 2016
 
In millions
U.S. Dollar Global Notes(1)
 

 
 

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
1,249

 
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

 
1,498

$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

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

 
6,494

 
6,493

Other, including capital lease obligations, at 0.51%-8.50%, due in calendar years 2017-2025
336

 
244

Fair value adjustment related to hedged debt
26

 
72

Less: unamortized debt issuance cost(2)
(20
)
 
(23
)
Less: current portion of long-term debt
(92
)
 
(51
)
Total long-term debt
$
6,744

 
$
6,735

(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) 
Effective November 1, 2016, HP adopted ASU 2015-03, “Simplifying the Presentation of Debt Issuance Costs”, which amended the presentation of debt issuance costs as a direct deduction from the carrying amount of debt liability.
In December 2016, HP filed a shelf registration statement (the “2016 Shelf Registration Statement”) with the SEC to enable the company to offer for sale, from time to time, in one or more offerings, an unspecified amount of debt securities, common stock, preferred stock, depositary shares and warrants.
As disclosed in Note 9, “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, 2017 and 2016 was $79 million and $71 million, respectively, and during the nine months ended July 31, 2017 and 2016 was $225 million and $203 million, respectively.



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HP INC. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements (Continued)
(Unaudited)
Note 10: Borrowings (continued)

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.
Credit Facility
As of July 31, 2017, 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, 2017, HP was in compliance with the financial covenants in the credit agreement governing the revolving credit facility.
Available Borrowing Resources
As of July 31, 2017, HP and HP’s subsidiaries had available borrowing resources of $832 million from uncommitted lines of credit in addition to the senior unsecured committed revolving credit facility discussed above.
Note 11: Stockholders’ Deficit
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, 2017, HP executed share repurchases of 16 million shares and 55 million shares, respectively. Share repurchases executed during the three months ended July 31, 2017 included 0.4 million shares settled in August 2017. During the three and nine months ended July 31, 2017, HP settled total shares for $0.3 billion and $0.9 billion, respectively. During the three and nine months ended July 31, 2016, HP executed share repurchases of 4 million shares and 100 million shares and settled total shares for $0.1 billion and for $1.2 billion, respectively.
The shares repurchased during the nine months ended July 31, 2017 and 2016 were all open market repurchase transactions. As of July 31, 2017, HP had approximately $3.0 billion remaining under the share repurchase authorizations approved by HP’s Board of Directors.

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HP INC. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements (Continued)
(Unaudited)
Note 11: Stockholder’s Deficit (Continued)

Tax effects related to Other Comprehensive (Loss) Income
 
Three months ended July 31
 
Nine months ended July 31
 
2017
 
2016
 
2017
 
2016
 
In millions
Tax effects on change in unrealized gains on available-for-sale securities:
 

 
 

 
 

 
 

Tax provision on gains arising during the period
$

 
$

 
$
(1
)
 
$

 

 

 
(1
)


Tax effects on change in unrealized components of cash flow hedges:
 
 
 

 
 

 
 

Tax benefit (provision) on (losses) gains arising during the period
63

 
(5
)
 
70

 
46

Tax (benefit) provision on losses (gains) reclassified into earnings
(2
)
 
(20
)
 
9

 
3

 
61

 
(25
)
 
79

 
49

Tax effects on change in unrealized components of defined benefit plans:
 

 
 

 
 

 
 

Tax (provision) benefit on gains (losses) arising during the period

 

 
(4
)
 
2

Tax provision on amortization of actuarial loss and prior service benefit
(5
)
 
(3
)
 
(16
)
 
(9
)
Tax benefit (provision) on settlements and other
1

 

 
(8
)
 
(1
)
 
(4
)
 
(3
)
 
(28
)
 
(8
)
Tax benefit (provision) on other comprehensive (loss) income
$
57

 
$
(28
)
 
$
50


$
41

Changes and reclassifications related to Other Comprehensive (Loss) Income, net of taxes
 
Three months ended July 31
 
Nine months ended July 31
 
2017
 
2016
 
2017
 
2016
 
In millions
Other comprehensive (loss) income, net of taxes:
 

 
 

 
 

 
 

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

 
 

 
 

 
 

Gains arising during the period
$
1

 
$
1

 
$
4

 
$
2

 
1

 
1

 
4

 
2

Change in unrealized components of cash flow hedges:
 
 
 

 
 

 
 

(Losses) gains arising during the period
(456
)
 
170

 
(688
)
 
181

Gains (losses) reclassified into earnings(1)
36

 
139

 
(40
)
 
66

 
(420
)
 
309

 
(728
)
 
247

Change in unrealized components of defined benefit plans:
 

 
 

 
 

 
 

Gains (losses) arising during the period

 

 
9

 
(2
)
Amortization of actuarial loss and prior service benefit(2)
14

 
9

 
40

 
27

Settlements and other
1

 

 
(5
)
 

 
15

 
9

 
44

 
25

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

 
$
(680
)
 
$
274

(1) 
Reclassification of pre-tax gains on cash flow hedges into the Consolidated Condensed Statements of Earnings was as follows:

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HP INC. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements (Continued)
(Unaudited)
Note 11: Stockholder’s Deficit (Continued)

 
Three months ended July 31
 
Nine months ended July 31
 
2017
 
2016
 
2017
 
2016
 
In millions
Net revenue
$
26

 
$
140

 
$
(89
)
 
$
(26
)
Cost of revenue
13

 
18

 
32

 
90

Operating expenses
(1
)
 
(1
)
 
(1
)
 
(1
)
Interest and other, net

 
2

 
9

 

Total
$
38

 
$
159

 
$
(49
)
 
$
63

(2) 
These components are included in the computation of net pension and post-retirement benefit (credit) charges in Note 4, “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, 2017
 
Net unrealized
gains on
available-for-sale
securities
 
Net unrealized
gains (losses) on cash
flow hedges
 
Unrealized
components
of defined
benefit plans
 
Accumulated
other
comprehensive
loss
 
In millions
Balance at beginning of period
$
9

 
$
186

 
$
(1,633
)
 
$
(1,438
)
Other comprehensive income (loss) before reclassifications
4

 
(688
)
 
4

 
(680
)
Reclassifications of (income) loss into earnings

 
(40
)
 
40

 

Balance at end of period
$
13

 
$
(542
)
 
$
(1,589
)
 
$
(2,118
)


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

Note 12: 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 was as follows:
 
Three months ended July 31
 
Nine months ended July 31
 
2017
 
2016
 
2017
 
2016
 
In millions, except per share amounts
Numerator:
 

 
 

 
 
 
 
Net earnings from continuing operations
$
696

 
$
843

 
$
1,866

 
$
2,153

Net loss from discontinued operations

 
(60
)
 

 
(149
)
Net earnings
$
696

 
$
783

 
$
1,866

 
$
2,004

Denominator:
 

 
 

 
 

 
 

Weighted-average shares used to compute basic net EPS
1,681

 
1,711

 
1,694

 
1,735

Dilutive effect of employee stock plans
14

 
14

 
11

 
12

Weighted-average shares used to compute diluted net EPS
1,695

 
1,725

 
1,705

 
1,747

Basic net earnings (loss) per share:
 

 
 

 
 

 
 

Continuing operations
$
0.41

 
$
0.49

 
$
1.10

 
$
1.24

Discontinued operations

 
(0.03
)
 

 
(0.08
)
Basic net earnings per share
$
0.41

 
$
0.46

 
$
1.10

 
$
1.16

Diluted net earnings (loss) per share:
 

 
 

 
 

 
 

Continuing operations
$
0.41

 
$
0.49

 
$
1.09

 
$
1.23

Discontinued operations

 
(0.04
)
 

 
(0.08
)
Diluted net earnings per share
$
0.41

 
$
0.45

 
$
1.09

 
$
1.15

Anti-dilutive weighted average stock-based compensation awards(1)
1

 
13

 
3

 
26

(1) 
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 and average unrecognized compensation cost. The assumed proceeds of a restricted stock unit represents average unrecognized compensation.

Note 13: 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, 2017, 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 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.

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Notes to Consolidated Condensed Financial Statements (Continued)
(Unaudited)
Note 13: Litigation and Contingencies (Continued)

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 European Union (“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 Court of Justice of the European Union (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 issued an appealable decision on May 12, 2017 providing that Belgian reprographic copyright levies are due notwithstanding the lack of conformity of the system with EU law in certain aspects. Applicable levies are to be calculated based on the objective speed of each MFD as established by an expert appointed by the Court of Appeal.
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 California Superior Court in Santa Clara County 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 future lost profits. On October 20, 2016, the court entered judgment for HP for this amount with interest accruing until the judgment is paid. Oracle’s motion for a new trial was denied on December 19, 2016, and Oracle filed its notice of appeal from the trial court’s judgment on January 17, 2017. On February 2, 2017, HP filed a notice of cross-appeal challenging the trial court’s denial of prejudgment interest. The schedule for appellate briefing and argument has not yet been established. HP expects that the appeals process could take several years to complete. Litigation is unpredictable, and there can be no assurance that HP will recover damages, or that any award of damages will be for the amount awarded by the jury’s verdict. The amount ultimately awarded, if any, would be recorded in the period received. No adjustment has been recorded in the financial statements in relation to this potential award. Pursuant to the terms of the separation and distribution agreement, HP and

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HP INC. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements (Continued)
(Unaudited)
Note 13: Litigation and Contingencies (Continued)

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 the 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. Following a partial motion to dismiss, a motion to strike and a motion to compel arbitration that the defendants filed in November 2016, the plaintiffs amended their complaint.  New plaintiffs were added, but the plaintiffs agreed that the class period for the nationwide collective action should be shortened and now starts on December 9, 2014. On January 30, 2017, the defendants filed another partial motion to dismiss and motions to compel arbitration as to several of the plaintiffs. On March 20, 2017, the defendants filed additional motions to compel arbitration as to a number of the opt-in plaintiffs.
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 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 canceled 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 Anti-Corruption Investigation.  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

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Notes to Consolidated Condensed Financial Statements (Continued)
(Unaudited)
Note 13: Litigation and Contingencies (Continued)

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.
Class Actions re Authentication of Supplies
Five purported consumer class actions were filed against HP, arising out of the supplies authentication protocol in certain OfficeJet printers.  This authentication protocol rejects some third-party ink cartridges that use non-HP security chips.  Two of the cases were dismissed, and the remaining cases have been consolidated in the United States District Court for the Northern District of California, captioned In re HP Printer Firmware Update Litigation. The remaining plaintiffs’ operative consolidated complaint was filed on March 22, 2017, alleging eleven causes of action: (1) unfair and unlawful business practices in violation of the Unfair Competition Law, Cal. Bus. & Prof. Code § 17200, et seq.; (2) fraudulent business practices in violation of the Unfair Competition Law, Cal. Bus. & Prof. Code § 17200, et seq.; (3) violations of the False Advertising Law, Cal. Bus. & Prof. Code § 17500, et seq.; (4) violations of the Consumer Legal Remedies Act, Cal. Civ. Code § 1750, et seq.; (5) violations of the Texas Deceptive Trade Practices ‒ Consumer Protection Act, Tex. Bus. & Com. Code Ann. § 17.01, et seq.; (6) violations of the Washington Consumer Protection Act, Wash. Rev. Code Ann. § 19.86.010, et seq.; (7) violations of the New Jersey Consumer Fraud Act, New Jersey Statutes Ann. 56:8-1, et seq.; (8) violations of the Computer Fraud and Abuse Act, 18 U.S.C. § 1030, et seq.; (9) violations of the California Computer Data Access and Fraud Act, Cal. Penal Code § 502; (10) Trespass to Chattels; and (11) Tortious Interference with Contractual Relations and/or Prospective Economic Advantage. The plaintiffs seek to certify a primary class of all persons in the United States who purchased or owned the OfficeJet printers in question, and they alternatively seek to certify subclasses of all such printer purchasers or owners in California, Texas, Washington, and/or New Jersey. On April 21, 2017, HP filed a motion to dismiss the consolidated complaint. The court held a hearing on July 14, 2017. HP’s motion to dismiss remains pending.
Autonomy-Related Legal Matters
Investigations.  As a result of the findings of an ongoing investigation, HP has provided information to the United Kingdom (“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 January 19, 2015, the U.K. Serious Fraud Office notified HP that it was closing its investigation and had decided to cede jurisdiction of the investigation to the U.S. authorities. On November 14, 2016, the DOJ announced that a federal grand jury indicted Sushovan Hussain, the former CFO of Autonomy, on charges of conspiracy to commit wire fraud and multiple counts of wire fraud.  The indictment alleges that Hussain engaged in a scheme to defraud purchasers and sellers of securities of Autonomy and HP about the true performance of Autonomy’s business, its financial condition, and its prospects for growth.  Trial in this matter is scheduled to begin on February 26, 2018. On November 15, 2016, the SEC announced that Stouffer Egan, the former CEO of Autonomy’s U.S.-based operations, settled charges relating to his participation in an accounting scheme to meet internal sales targets and analyst revenue expectations.  HP is continuing to cooperate with the ongoing enforcement actions.
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:

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HP INC. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements (Continued)
(Unaudited)
Note 13: Litigation and Contingencies (Continued)

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. Oral argument occurred on May 15, 2017.
Autonomy Corporation Limited v. Michael Lynch and Sushovan Hussain. On April 17, 2015, four former-HP subsidiaries that became subsidiaries of Hewlett Packard Enterprise at the time of the Separation (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 Hewlett Packard Enterprise subsidiary claimants filed their replies to the defenses and the asserted counter-claim on March 11, 2016. The parties are actively engaged in the disclosure process. A six-month trial is scheduled to begin on January 28, 2019. 
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 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. Oral argument occurred on May 15, 2017.
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

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HP INC. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements (Continued)
(Unaudited)
Note 13: Litigation and Contingencies (Continued)

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 14: 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
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 6, “Taxes on Earnings”, and Note 13, “Litigation and Contingencies”, respectively.
Warranty

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HP INC. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements (Continued)
(Unaudited)
Note 14: Guarantees, Indemnifications and Warranties (Continued)

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, 2017
 
In millions
Balance at beginning of period
$
980

Accruals for warranties issued
678

Adjustments related to pre-existing warranties (including changes in estimates)
(16
)
Settlements made (in cash or in kind)
(749
)
Balance at end of period
$
893


Note 15: 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.
The following table presents the financial results of HP’s discontinued operations:
 
Three months ended July 31
 
Nine months ended July 31
 
2017
 
2016
 
2017
 
2016
 
In millions
Expenses(1)
$

 
$
30

 
$

 
$
158

Interest and other, net(2)
(9
)
 
(174
)
 
(38
)
 
(157
)
Earnings (Loss) from discontinued operations before taxes
9

 
144

 
38

 
(1
)
(Provision for) Benefit from taxes(2)
(9
)
 
(204
)
 
(38
)
 
(148
)
Loss from discontinued operations, net of taxes
$

 
$
(60
)
 
$

 
$
(149
)
(1) 
Expenses for the three and nine months ended July 31, 2016 were primarily related to separation costs.
(2) 
In connection with the TMA, Interest and other, net for the three and nine months ended July 31, 2017 includes $9 million and $38 million, respectively, of net tax indemnification amounts and Provision for taxes for the three and nine months ended July 31, 2017 includes $9 million and $38 million, respectively, of the tax impact relating to the above amounts. For more information on tax indemnifications and the TMA, see Note 6, “Taxes on Earnings”.

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


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. The technology assets sold were previously reported within the Commercial Hardware business unit within the Printing segment. The gain recognized from the divestiture was $336 million and $383 million for the three and nine months ended July 31, 2016, respectively. The gains associated with these divestitures were included in Selling, general and administrative expenses in the Consolidated Condensed Statements of Earnings.


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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
HP INC. AND SUBSIDIARIES
Management’s Discussion and Analysis of
Financial Condition and Results of Operations

This Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is organized as follows:
HP Inc. Separation Transaction.  A discussion of the separation of Hewlett Packard Enterprise Company, HP Inc.’s former enterprise technology infrastructure, software, services and financing businesses.
Overview.  A discussion of our business and other highlights affecting the company to provide context for the remainder of this MD&A.
Critical Accounting Policies and Estimates.  A discussion of accounting policies and estimates that we believe are important to understanding the assumptions and judgments incorporated in our reported financial results.
Results of Operations.  An analysis of our continuing operations financial results comparing the three and nine months ended July 31, 2017 to the prior-year period. A discussion of the results of continuing operations is followed by a more detailed discussion of the results of operations by segment.
Liquidity and Capital Resources.  An analysis of changes in our cash flows and a discussion of our liquidity and continuing financial condition.
Contractual and Other Obligations.  An overview of contractual obligations, retirement and post-retirement benefit plan contributions, cost saving plan, uncertain tax positions and off-balance sheet arrangements of our continuing operations.
The discussion of financial condition and results of our continuing 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.

HP INC. SEPARATION TRANSACTION
On November 1, 2015, we completed the separation of Hewlett Packard Enterprise Company (“Hewlett Packard Enterprise”), HP Inc.’s former enterprise technology infrastructure, software, services and financing businesses (the “Separation”). In connection with the Separation, Hewlett-Packard Company changed its name to HP Inc. (“HP”). The historical results of operations and financial positions of Hewlett Packard Enterprise are reported as discontinued operations in our Consolidated Condensed Financial Statements. For further information on discontinued operations, see Note 15, “Discontinued Operations”, to the Consolidated Condensed Financial Statements in Item 1 of Part I, which is incorporated herein by reference.
OVERVIEW
We are a leading global provider of personal computing and other access devices, imaging and printing products, and related technologies, solutions, and services. We sell to individual consumers, small- and medium-sized businesses (“SMBs”) and large enterprises, including customers in the government, health, and education sectors. We have three segments for financial reporting purposes: Personal Systems, Printing and Corporate Investments. The Personal Systems segment offers Commercial and Consumer personal computers (“PCs”), Workstations, thin clients, Commercial tablets and mobility devices, retail point-of-sale systems, displays and other related accessories, support, and services for the commercial and consumer markets. The Printing segment provides Consumer and Commercial printer hardware, supplies, media, solutions and services, as well as scanning devices. Corporate Investments include HP Labs and certain business incubation projects.
In Personal Systems, our strategic focus is on profitable growth through improved market segmentation with respect to enhanced innovation in multi-operating systems, multi-architecture, geography, customer segments and other key attributes. Additionally, we are investing in premium and mobility form factors such as convertible notebooks, detachable notebooks, and mobility devices to meet customer preference for mobile, thinner and lighter devices. The beginning of a market shift to contractual solutions includes an increased focus on Device as a Service. We believe that we are well positioned due to our competitive product lineup.
In Printing, our strategic focus is on business printing, a shift to contractual solutions and graphics, as well as expanding our footprint in the 3D printing marketplace. Business printing includes delivering solutions to SMBs and

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HP INC. AND SUBSIDIARIES
Management’s Discussion and Analysis of
Financial Condition and Results of Operations (Continued)

enterprise customers, such as multi-function and PageWide printers, including our JetIntelligence lineup of LaserJet printers. The shift to contractual solutions includes an increased focus on Managed Print Services and Instant Ink, which presents strong after-market supplies opportunities. In the graphics space, we are focused on innovations such as our Indigo and Latex product offerings. We plan to continue to focus on shifting the mix in the installed base to higher value units and expanding our innovative Ink, Laser, Graphics and 3D printing programs. We continue to execute on our key initiatives of focusing on high-value products targeted at high usage categories and introducing new revenue delivery models. Our focus is on placing higher value printer units which offer strong annuity of toner and ink, the design and deployment of A3 products and solutions, accelerating growth in graphic solutions products and 3D printers.
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 from flat to slight declines in the PC device 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 Personal Systems, demand for PCs is being impacted by currency depreciation in Latin America and certain European and Asian markets. As such, we anticipate continued market headwinds. In addition, we face challenges with increasing commodity costs, especially in memory, and the uncertainty of the PC market’s ability to absorb price increases driven by higher commodity costs.
In Printing, we are seeing signs of stabilization of demand in consumer and commercial markets, but are still experiencing an overall competitive pricing environment. We obtain a number of components from single sources due to technology, availability, price, quality or other considerations. For instance, we source 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.
We are also facing challenges as a result of the June 23, 2016 referendum by British voters to exit the European Union (commonly known as “Brexit”). The outcome of Brexit and its impact on our business cannot be known until the terms and timing of the United Kingdom’s exit are clearer. Until that time, the Brexit-related challenges that we may face include uncertainty in the markets, volatility in exchange rates and weaker macroeconomic conditions.
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 need to continue to improve our operations, with a particular focus on enhancing our end-to-end processes and efficiencies. We also need to continue to optimize our sales coverage models, align our sales incentives with our strategic goals, improve channel execution, strengthen our capabilities in our areas of strategic focus, and develop and capitalize on market opportunities.
We typically experience higher net revenues in our first and fourth quarters 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.
For a further discussion of trends, uncertainties and other factors that could impact our continuing operating results, see the section entitled “Risk Factors” in Item 1A of Part I in our Annual Report on Form 10-K for the fiscal year ended October 31, 2016.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
MD&A is based on our Consolidated Condensed Financial Statements, which have been prepared in accordance with United States (“U.S.”) generally accepted accounting principles (“GAAP”). The preparation of these financial statements requires management to make estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, net revenues and expenses, and disclosure of contingent liabilities. Our management believes that there have been no significant changes during the nine months ended July 31, 2017 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, 2016.
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.


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HP INC. AND SUBSIDIARIES
Management’s Discussion and Analysis of
Financial Condition and Results of Operations (Continued)

RESULTS OF OPERATIONS
Revenue from our international operations has historically represented, and we expect will continue to represent, a majority of our overall net revenue. As a result, our net revenue growth has been impacted, and we expect will continue to be impacted, by fluctuations in foreign currency exchange rates. In order to provide a framework for assessing performance excluding the impact of foreign currency fluctuations, we present the year-over-year percentage change in net revenue on a constant currency basis, which assumes no change in foreign currency exchange rates from the prior-year period and does not adjust for any repricing or demand impacts from changes in foreign currency exchange rates. This information is provided so that net revenue can be viewed 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. This constant currency disclosure is 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.
Results of operations in U.S. dollars and as a percentage of net revenue were as follows:
 
Three months ended July 31
 
Nine months ended July 31
 
2017
 
2016
 
2017
 
2016
 
Dollars
 
% of Net Revenue
 
Dollars
 
% of Net Revenue
 
Dollars
 
% of Net Revenue
 
Dollars
 
% of Net Revenue
 
Dollars in millions
Net revenue
$
13,060

 
100.0
 %
 
$
11,892

 
100.0
 %
 
$
38,129

 
100.0
 %
 
$
35,726

 
100.0
 %
Cost of revenue
(10,633
)
 
(81.4
)%
 
(9,720
)
 
(81.7
)%
 
(31,071
)
 
(81.5
)%
 
(29,019
)
 
(81.2
)%
Gross profit
2,427

 
18.6
 %
 
2,172

 
18.3
 %
 
7,058

 
18.5
 %
 
6,707

 
18.8
 %
Research and development
(289
)
 
(2.2
)%
 
(298
)
 
(2.5
)%
 
(899
)
 
(2.4
)%
 
(891
)
 
(2.5
)%
Selling, general and administrative
(1,096
)
 
(8.4
)%
 
(719
)
 
(6.1
)%
 
(3,200
)
 
(8.3
)%
 
(2,758
)
 
(7.8
)%
Restructuring and other charges
(46
)
 
(0.4
)%
 
(36
)
 
(0.3
)%
 
(249
)
 
(0.7
)%
 
(156
)
 
(0.4
)%
Acquisition-related charges
(40
)
 
(0.3
)%
 

 
 %
 
(76
)
 
(0.2
)%
 

 
 %
Amortization of intangible assets

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

 
 %
 
(4
)
 
 %
 

 
 %
Earnings from continuing operations before interest and taxes
955

 
7.3
 %
 
1,117

 
9.4
 %
 
2,629

 
6.9
 %
 
2,886

 
8.1
 %
Interest and other, net
(56
)
 
(0.4
)%
 
(36
)
 
(0.3
)%
 
(201
)
 
(0.5
)%
 
(135
)
 
(0.4
)%
Earnings from continuing operations before taxes
899

 
6.9
 %
 
1,081

 
9.1
 %
 
2,428

 
6.4
 %
 
2,751

 
7.7
 %
Provision for taxes
(203
)
 
(1.6
)%
 
(238
)
 
(2.0
)%
 
(562
)
 
(1.5
)%
 
(598
)
 
(1.7
)%
Net earnings from continuing operations
696

 
5.3
 %
 
843

 
7.1
 %
 
1,866

 
4.9
 %
 
2,153

 
6.0
 %
Net loss from discontinued operations, net of taxes

 
 %
 
(60
)
 
(0.5
)%
 

 
 %
 
(149
)
 
(0.4
)%
Net earnings
$
696

 
5.3
 %
 
$
783

 
6.6
 %
 
$
1,866

 
4.9
 %
 
$
2,004

 
5.6
 %
Net Revenue
For the three months ended July 31, 2017, total net revenue increased 9.8% (increased 10.9% on a constant currency basis) as compared to the prior-year period. U.S. net revenue increased 7.4% to $5.1 billion, while net revenue from international operations increased 11.5% to $8.0 billion. For the nine months ended July 31, 2017, total net revenue increased 6.7% (increased 7.6% on a constant currency basis) as compared to the prior-year period. U.S. net revenue increased 6.7% to $14.1 billion, while net revenue from international operations increased 6.7% to $24.0 billion. The increase in net revenue was primarily driven by growth in Notebooks, Desktops and Supplies revenue, partially offset by unfavorable foreign currency impacts.

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HP INC. AND SUBSIDIARIES
Management’s Discussion and Analysis of
Financial Condition and Results of Operations (Continued)

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, 2017, our gross margin increased 0.3 percentage points, as compared to the prior-year period, primarily driven by higher Printing margins due to productivity improvements and higher Supplies mix, partially offset by higher commodity costs in Personal Systems. For the nine months ended July 31, 2017, our gross margin decreased 0.3 percentage points, as compared to the prior-year period, primarily due to unfavorable segment mix and lower Personal System gross margin driven by higher commodity costs, partially offset by productivity improvements in Printing.
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
Research and development (“R&D”) expense decreased 3.0% for the three months ended July 31, 2017, as compared to the prior-year periods, primarily due to expense management and savings from the divestiture of marketing optimization assets, partially offset by continuing investment in Printing. R&D expense increased 0.9% for the nine months ended July 31, 2017, as compared to the prior-year periods, primarily due to continuing investment in Printing.
Selling, General and Administrative
Selling, general and administrative expense increased 52.4% and 16.0% for the three and nine months ended July 31, 2017, respectively, as compared to the prior-year periods, primarily due to a gain from the divestiture of marketing optimization assets in the prior-year period and an increase in field selling costs.
Restructuring and Other Charges
Restructuring and other charges for the three and nine months ended July 31, 2017 relate primarily to the restructuring plan announced in October 2016 (the “Fiscal 2017 Plan”) and certain non-recurring costs, including those as a result of the Separation.
Interest and Other, Net
Interest and other, net expense increased by $20 million for the three months ended July 31, 2017, as compared to the prior-year period, partially due to lower tax indemnification amounts. For the nine months ended July 31, 2017, Interest and other, net expense increased by $66 million, as compared to the prior-year period, primarily due to the reversal of interest previously accrued for a legal contingency in the prior-year period.
Provision for Taxes
Our effective tax rate for continuing operations was 22.5% and 22.0% for the three months ended July 31, 2017 and 2016, respectively, and 23.1% and 21.7% for the nine months ended July 31, 2017 and 2016, respectively. Our effective tax rate generally differs from the U.S. federal statutory rate of 35% due to favorable tax rates associated with certain earnings from our operations in lower-tax jurisdictions throughout the world. We have not provided U.S. taxes for all foreign earnings because we plan to reinvest some of those earnings indefinitely outside the United States.
During the three and nine months ended July 31, 2017, we recorded $27 million and $31 million, respectively, of net tax benefits related to discrete items in the provision for taxes for continuing operations. These amounts included a tax benefit of $14 million and $45 million related to restructuring and other charges, and a tax benefit of $15 million and $28 million related to acquisition-related charges, offset by uncertain tax position charges of $19 million and $25 million, for the three and nine months ended July 31, 2017, respectively. The three and nine months ended July 31, 2017 also included a tax benefit of $12 million related to provision to return adjustments due to filing of the U.S. Federal tax return. The nine months ended July 31, 2017 also included a tax charge of $26 million related to state provision to return adjustments.
During the three and nine months ended July 31, 2016, we recorded discrete items resulting in net tax expense of $14 million and net tax benefit of $72 million, respectively, for continuing operations. These amounts included a tax benefit of $8 million and $46 million for the three and nine months ended July 31, 2016, respectively, related to restructuring and other charges. The nine months ended July 31, 2016 also included a tax benefit of $41 million arising from the retroactive research and development credit provided by the Consolidated Appropriations Act of 2016 signed into law in December 2015.

Segment Information

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HP INC. AND SUBSIDIARIES
Management’s Discussion and Analysis of
Financial Condition and Results of Operations (Continued)

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.
Business Unit Realignment
Effective at the beginning of its first quarter of fiscal year 2017, HP implemented an organizational change to align its business unit financial reporting more closely with its current business structure. The organizational change resulted in the transfer of a portion of LaserJet printers from Commercial to Consumer within the Printing segment. HP reflected this change to its business unit information in prior reporting periods on an as-is basis which resulted in the reclassification of revenues between the Commercial and Consumer business units of Printing. The reporting change had no impact to previously reported segment net revenue, consolidated net revenue, earnings from continuing operations, net earnings or net earnings per share.
Personal Systems
 
Three months ended July 31
 
Nine months ended July 31
 
2017
 
2016
 
% Change
 
2017
 
2016
 
% Change
 
Dollars in millions
Net revenue
$
8,404

 
$
7,512

 
11.9
 %
 
$
24,290

 
$
21,969

 
10.6
%
Earnings from operations
$
313

 
$
333

 
(6.0
)%
 
$
870

 
$
804

 
8.2
%
Earnings from operations as a % of net revenue
3.7
%
 
4.4
%
 
 

 
3.6
%
 
3.7
%
 
 

The components of net revenue and the weighted net revenue change by business unit were as follows:
 
Three months ended July 31, 2017
 
Nine months ended July 31, 2017
 
Net Revenue
 
Weighted Net Revenue Change
 
Net Revenue
 
Weighted Net Revenue Change
 
2017
 
2016
 
 
2017
 
2016
 
 
Dollars in millions
 
Percentage Points
 
Dollars in millions
 
Percentage Points
Notebooks
$
5,008

 
$
4,303

 
9.4

 
$
14,391

 
$
12,346

 
9.3

Desktops
2,566

 
2,455

 
1.5

 
7,477

 
7,384

 
0.4

Workstations
530

 
476

 
0.7

 
1,516

 
1,381

 
0.7

Other
300

 
278

 
0.3

 
906

 
858

 
0.2

Total Personal Systems
$
8,404

 
$
7,512

 
11.9

 
$
24,290

 
$
21,969

 
10.6

Three months ended July 31, 2017 compared with three months ended July 31, 2016
Personal Systems net revenue increased 11.9% (increased 13.3% on a constant currency basis) for the three months ended July 31, 2017 as compared to the prior-year period. The net revenue increase was primarily due to growth in Notebooks and Desktops partially offset by unfavorable foreign currency impacts. The net revenue increase was driven by a 7.2% increase in unit volume combined with a 4.4% increase in average selling prices (“ASPs”) as compared to the prior-year period. The increase in unit volume was primarily due to growth in Notebooks and Workstations. The increase in ASPs was primarily due to favorable pricing rate and favorable premium mix partially offset by unfavorable foreign currency impacts.
Consumer revenue increased 13.9% for the three months ended July 31, 2017 as compared to the prior-year period, driven by growth in Notebooks as a result of higher unit volume combined with higher ASPs. Commercial revenue increased 10.9% as compared to the prior-year period, driven by growth in Notebooks, Workstations and Desktops. Net revenue increased 16.4% in Notebooks, 11.3% in Workstations and 4.5% in Desktops as compared to the prior-year period.
Personal Systems earnings from operations as a percentage of net revenue decreased by 0.7 percentage points for the three months ended July 31, 2017 as compared to the prior-year period. The decrease was primarily due to decline in gross margin partially offset by a decrease in operating expenses. The decrease in gross margin was primarily due to an increase in commodity cost and unfavorable foreign currency impacts partially offset by higher ASPs. Operating expenses as a percentage of net revenue decreased primarily due to operating expense management.
Nine months ended July 31, 2017 compared with nine months ended July 31, 2016

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Table of Contents
HP INC. AND SUBSIDIARIES
Management’s Discussion and Analysis of
Financial Condition and Results of Operations (Continued)

Personal Systems net revenue increased 10.6% (increased 11.7% on a constant currency basis) for the nine months ended July 31, 2017 as compared to the prior-year period. The net revenue increase was primarily due to growth in Notebooks partially offset by unfavorable foreign currency impacts. The net revenue increase in Personal Systems was driven by a 6.9% increase in unit volume combined with a 3.4% increase in ASPs as compared to the prior-year period. The increase in unit volume was primarily due to growth in Notebooks and Workstations. The increase in ASPs was primarily due to favorable pricing rate offset by unfavorable foreign currency impacts.
Consumer revenue increased 15.2% for the nine months ended July 31, 2017 as compared to the prior-year period, driven by growth in Notebooks and Desktops volume combined with higher ASPs. Commercial revenue increased 8.3% as compared to the prior-year period, driven by growth in Notebooks and Workstations. Net revenue increased 16.6% in Notebooks, 9.8% in Workstations and 1.3% in Desktops 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 nine months ended July 31, 2017 as compared to the prior-year period. The decrease was primarily due to a decrease in gross margin partially offset by a decrease in operating expenses. The decrease in gross margin was primarily due to an increase in commodity cost and unfavorable foreign currency impacts partially offset by higher ASPs. Operating expenses as a percentage of net revenue decreased primarily due to operating expense management.

Printing
 
Three months ended July 31
 
Nine months ended July 31
 
2017
 
2016
 
% Change
 
2017
 
2016
 
% Change
 
Dollars in millions
Net revenue
$
4,698

 
$
4,423

 
6.2
 %
 
$
13,924

 
$
13,702

 
1.6
 %
Earnings from operations
$
813

 
$
903

 
(10.0
)%
 
$
2,354

 
$
2,491

 
(5.5
)%
Earnings from operations as a % of net revenue
17.3
%
 
20.4
%
 
 

 
16.9
%
 
18.2
%
 
 

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 Revenue Change
 
Net Revenue
 
Weighted
Net Revenue
Change
 
2017
 
2016
 
 
2017
 
2016
 
 
Dollars in millions
 
Percentage Points
 
Dollars in millions
 
Percentage Points
Supplies
$
3,120

 
$
2,840

 
6.3

 
$
9,284

 
$
9,040

 
1.7

Commercial Hardware
986

 
1,007

 
(0.5
)
 
2,854

 
2,928

 
(0.5
)
Consumer Hardware
592

 
576

 
0.4

 
1,786

 
1,734

 
0.4

Total Printing
$
4,698

 
$
4,423

 
6.2

 
$
13,924

 
$
13,702

 
1.6

Three months ended July 31, 2017 compared with three months ended July 31, 2016
Printing net revenue increased 6.2% (increased 6.8% on a constant currency basis) for the three months ended July 31, 2017 as compared to the prior-year period. The increase in net revenue was primarily driven by the increase in Supplies revenue. Net revenue for Supplies increased 9.9% as compared to the prior-year period, primarily due to the impact from the change in the Supplies sales model in the prior-year period, partially offset by unfavorable foreign currency impacts. Printer unit volume increased 1.3% while ASPs increased 0.9% as compared to the prior-year period. The increase in Printer unit volume was primarily driven by unit increases in Consumer Hardware. Printer ASPs increased primarily due to introduction of higher-end printers.
Net revenue for Commercial Hardware decreased by 2.1% as compared to the prior-year period, primarily driven by a decline in other printing solutions due to the divestiture of marketing optimization assets in the second half of fiscal year 2016, partially offset by a 1.1% increase in ASPs and a 0.3% increase in printer unit volume. The increases in unit volume and ASPs were mainly due to the introduction of higher-end printers.

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HP INC. AND SUBSIDIARIES
Management’s Discussion and Analysis of
Financial Condition and Results of Operations (Continued)

Net revenue for Consumer Hardware increased 2.8% as compared to the prior-year period, primarily due to a 1.4% increase in printer unit volume and a 1.8% increase in ASPs. The unit volume increase was driven by Home business. The increase in ASPs was primarily driven by better discount management.
Printing earnings from operations as a percentage of net revenue decreased by 3.1 percentage points for the three months ended July 31, 2017 as compared to the prior-year period, primarily due to an increase in operating expenses, partially offset by improved gross margin. The gross margin increase was driven by productivity improvements and higher Supplies mix. Operating expenses increased primarily due to a gain from the divestiture of marketing optimization assets in the prior-year period and an increase in marketing spend and investments in key growth initiatives.
Nine months ended July 31, 2017 compared with nine months ended July 31, 2016
Printing net revenue increased 1.6% (increased 2.3% on a constant currency basis) for the nine months ended July 31, 2017 as compared to the prior-year period. The increase in net revenue was primarily driven by the increase in Supplies revenue. Net revenue for Supplies increased 2.7% as compared to the prior-year period, primarily due to the change in the Supplies sales model in the prior-year period, partially offset by unfavorable foreign currency impacts. Printer unit volume increased 3.6% while ASPs decreased 0.7% as compared to the prior-year period. The increase in Printer unit volume was primarily driven by unit increases in Consumer Hardware and larger opportunity to place incremental units with positive net present value. Printer ASPs decreased primarily due to unfavorable foreign currency impacts, partially offset by a mix shift to higher-end printers.
Net revenue for Commercial Hardware decreased 2.5% as compared to the prior-year period, driven by a decline in other printing solutions largely due to the divestiture of marketing optimization assets in the prior-year period and a 0.3% decrease in ASPs, partially offset by a 2.6% improvement in unit volume. The unit volume increased primarily due to share gains. The decrease in ASPs was primarily due to unfavorable currency impacts, partially offset by a mix shift to higher-end printers.
Net revenue for Consumer Hardware increased 3.0% as compared to the prior-year period due to a 3.7% increase in printer unit volume, partially offset by 0.1% decrease in ASPs. The unit volume increase was driven by Home business. The decrease in ASPs was primarily due to unfavorable foreign currency impacts.
Printing earnings from operations as a percentage of net revenue decreased by 1.3 percentage points for the nine months ended July 31, 2017 as compared to the prior-year period, primarily due to an increase in operating expenses, partially offset by improved gross margin. The gross margin increased due to operational improvements, partially offset by unfavorable foreign currency impacts. Operating expenses increased primarily due to a gain from the divestiture of marketing optimization assets in the prior-year period and an increase in marketing spend and investments in key growth initiatives.
Corporate Investments
The loss from operations in Corporate Investments for the three and nine months ended July 31, 2017 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. We believe that internally generated cash flows are generally sufficient to support our operating businesses, capital expenditures, restructuring activities, maturing debt, income tax payments and the payment of stockholder dividends, in addition to investments and share repurchases. We are able to supplement this short-term liquidity, if necessary, with broad access to capital markets and credit facilities made available by various domestic and foreign financial institutions. While our access to capital markets may be constrained and our cost of borrowing may increase under certain business, market and economic conditions, our access to a variety of funding sources to meet our liquidity needs is designed to facilitate continued access to capital resources under all such conditions. Our liquidity is subject to various risks including the risks identified in the section entitled “Risk Factors” in Item 1A of Part I in our Annual Report on Form 10-K for the fiscal year ended October 31, 2016 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, which are incorporated herein by reference.
Our cash balances are held in numerous locations throughout the world, with the majority of those amounts held outside of the United States. We utilize a variety of planning and financing strategies in an effort to ensure that our worldwide cash is available when and where it is needed. Our cash position remains strong, and we expect that our cash balances, anticipated cash flow generated from operations and access to capital markets will be sufficient to cover our expected near-term cash outlays.
In September 2016, HP entered into a definitive agreement to acquire Samsung Electronics Co., Ltd.’s printer business for $1.05 billion. The transaction is expected to close during the fourth quarter of calendar year 2017, pending regulatory approval and other customary closing conditions.

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HP INC. AND SUBSIDIARIES
Management’s Discussion and Analysis of
Financial Condition and Results of Operations (Continued)

Amounts held outside of the United States are generally utilized to support non-U.S. liquidity needs, although a portion of those amounts may from time to time be subject to short-term intercompany loans into the United States. Most of the amounts held outside of the United States could be repatriated to the United States, but under current law, some would be subject to U.S. federal income taxes, less applicable foreign tax credits. Repatriation of some foreign earnings is restricted by local law. Except for foreign earnings that are considered indefinitely reinvested outside of the United States, we have provided for the U.S. federal tax liability on these earnings for financial statement purposes. Repatriation could result in additional income tax payments in future years. Where local restrictions prevent an efficient intercompany transfer of funds, our intent is that cash balances would remain outside of the United States and we would meet liquidity needs through ongoing cash flows, external borrowings or both. We do not expect restrictions or potential taxes incurred on amounts repatriated to the United States to have a material effect on our overall liquidity, financial condition or results of operations.
Liquidity
Our key cash flow metrics were as follows:
 
Nine months ended July 31
 
2017
 
2016
 
In millions
Net cash provided by operating activities
$
2,997

 
$
2,548

Net cash used in investing activities
(1,723
)
 
(116
)
Net cash used in financing activities
(595
)
 
(14,229
)
Net increase (decrease) in cash and cash equivalents
$
679

 
$
(11,797
)
Operating Activities
Compared to the corresponding period in fiscal year 2016, net cash provided by operating activities increased by $449 million for the nine months ended July 31, 2017. The increase was primarily due to higher cash generated from working capital management activities.
Working Capital Metrics
Management utilizes current cash conversion cycle information to manage HP’s working capital levels. Our working capital metrics and cash conversion cycle impacts were as follows:
 
As of
 
As of
 
 
 
July 31, 2017
 
October 31, 2016
 
Change
 
July 31, 2016
 
October 31, 2015
 
Change
 
Y/Y Change
Days of sales outstanding in accounts receivable (“DSO”)
29

 
30

 
(1
)
 
30

 
35

 
(5
)
 
(1
)
Days of supply in inventory (“DOS”)
44

 
39

 
5

 
37

 
39

 
(2
)
 
7

Days of purchases outstanding in accounts payable (“DPO”)
(108
)
 
(98
)
 
(10
)
 
(96
)
 
(93
)
 
(3
)
 
(12
)
Cash conversion cycle
(35
)
 
(29
)
 
(6
)
 
(29
)
 
(19
)
 
(10
)
 
(6
)
July 31, 2017 as compared to July 31, 2016
The cash conversion cycle is the sum of DSO and DOS less DPO. Items which may cause the cash conversion cycle in a particular period to differ from a long-term sustainable rate include, but are not limited to, changes in business mix, changes in payment terms, extent of receivables factoring, seasonal trends and the timing of revenue recognition and inventory purchases within the period.
DSO measures the average number of days our receivables are outstanding. DSO is calculated by dividing ending accounts receivable, net of allowance for doubtful accounts, by a 90-day average net revenue. The decrease in DSO was primarily due to favorable customer mix and revenue linearity.
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 leveraging our balance sheet, particularly through higher strategic buys to better assure supply of commodities in short supply.
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 increase in DPO was primarily due to increased inventory purchases and an extension of payment terms with our product suppliers.

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HP INC. AND SUBSIDIARIES
Management’s Discussion and Analysis of
Financial Condition and Results of Operations (Continued)

Investing Activities
Compared to the corresponding period in fiscal year 2016, net cash used in investing activities increased by $1.6 billion for the nine months ended July 31, 2017, primarily due to investments of $1.0 billion, classified as available-for-sale investments within Other current assets, including those with maturity dates beyond one year, based on their highly liquid nature and availability for use in current operations, and collateral related to our derivatives of $0.5 billion.
Financing Activities
Compared to the corresponding period in fiscal year 2016, net cash used in financing activities decreased by $13.6 billion for the nine months ended July 31, 2017, as the net cash used in financing activities for the nine months ended July 31, 2016 included the cash transfer of $10.4 billion to Hewlett Packard Enterprise in connection with the Separation and the redemption of $2.1 billion of U.S. Dollar Global Notes, and the nine months ended July 31, 2017 included the issuance of commercial paper of $0.9 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. Outstanding borrowings increased to $7.8 billion as of July 31, 2017 as compared to $6.8 billion as of October 31, 2016, bearing weighted-average interest rates of 3.9% and 4.2% for July 31, 2017 and October 31, 2016, respectively.
Our weighted-average interest rate reflects the average effective rate on our borrowings prevailing during the period and reflects the impact of interest rate swaps. For more information on our interest rate swaps, see Note 9, “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, 2017, we maintain a senior unsecured committed revolving credit facility with aggregate lending commitments of $4.0 billion, which will be available until April 2, 2019 and is primarily to support the issuance of commercial paper. Funds borrowed under this revolving credit facility may also be used for general corporate purposes. As of July 31, 2017 we had $0.9 billion of commercial paper outstanding.
Available Borrowing Resources
We had the following resources available to obtain short or long-term financing:
 
As of July 31, 2017
 
In millions
2016 Shelf Registration Statement
Unspecified

Uncommitted lines of credit
$
832

For more information on our borrowings, see Note 10, “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.

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HP INC. AND SUBSIDIARIES
Management’s Discussion and Analysis of
Financial Condition and Results of Operations (Continued)

CONTRACTUAL AND OTHER OBLIGATIONS
Contractual Obligations
Purchase obligations include agreements to purchase goods or services that are enforceable and legally binding on us and that specify all significant terms, including fixed or minimum quantities to be purchased; fixed, minimum or variable price provisions; and the approximate timing of the transaction. These purchase obligations are primarily related to a portion of our requirements for inventory and other items in the normal course of business. Purchase obligations exclude agreements that are cancelable without penalty. Purchase obligations also exclude open purchase orders that are routine arrangements entered into in the ordinary course of business as they are difficult to quantify in a meaningful way. Even though open purchase orders are considered enforceable and legally binding, the terms generally allow us the option to cancel, reschedule, and adjust terms based on our business needs prior to the delivery of goods or performance of services. In May 2017, we executed an agreement resulting in purchase obligations of $770 million, and the payments are due within two years.
Retirement and Post-Retirement Benefit Plan Contributions
As of July 31, 2017, we anticipate making contributions for the remainder of fiscal year 2017 of approximately $5 million to our non-U.S. pension plans, $6 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 requirements, as established 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
We expect to make future cash payments of between $235 million and $385 million in connection with our cost savings plans through fiscal year 2021. 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, 2017, we had approximately $1.7 billion of recorded liabilities and related interest and penalties pertaining to uncertain tax positions. We are unable to make a reasonable estimate as to when cash settlement with the tax authorities might occur due to the uncertainties related to these tax matters. Payments of these obligations would result from settlements with taxing authorities. For more information on our uncertain tax positions, see Note 6, “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 7, “Supplementary Financial Information”, to the Consolidated Condensed Financial Statements in Item 1 of Part I of this report, which is incorporated herein by reference.

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Table of Contents

Item 3. Quantitative and Qualitative Disclosures About Market Risk.
For quantitative and qualitative disclosures about market risk affecting HP, see “Quantitative and Qualitative Disclosures About Market Risk” in Item 7A of Part II of our Annual Report on Form 10-K for the fiscal year ended October 31, 2016, which is incorporated herein by reference. Our exposure to market risk has not changed materially since October 31, 2016.
Item 4. Controls and Procedures.
Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act as of the end of the period covered by this report (the “Evaluation Date”). Based on this evaluation, our principal executive officer and principal financial officer concluded as of the Evaluation Date that our disclosure controls and procedures were effective such that the information relating to HP, including our consolidated subsidiaries, required to be disclosed in our SEC reports (i) is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and (ii) is accumulated and communicated to HP’s management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.
Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of any changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during our most recently completed fiscal quarter. Based on that evaluation, our principal executive officer and principal financial officer concluded that there has not been any change in our internal control over financial reporting during that quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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Table of Contents

PART II. OTHER INFORMATION

Item 1. Legal Proceedings.
Information with respect to this item may be found in Note 13, “Litigation and Contingencies” to the Consolidated Condensed Financial Statements in Item 1 of Part I of this report, which is incorporated herein by reference.
Item 1A. Risk Factors.
Our operations and financial results are subject to various risks and uncertainties, including those described in Part I, Item 1A, “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended October 31, 2016, which could adversely affect our business, financial condition, results of operations, cash flows, and the trading price of our common and capital stock. There have been no material changes in our risk factors since our Annual Report on Form 10-K for the fiscal year ended October 31, 2016.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Recent Sales of Unregistered Securities
There were no unregistered sales of equity securities during the period covered by this report.
Issuer Purchases of Equity Securities
Period
Total
Number
of Shares
Purchased
 
Average
Price Paid
per Share
 
Total Number of
Shares Purchased as
Part of Publicly
Announced Plans
or Programs
 
Approximate Dollar
Value of Shares
that May Yet Be
Purchased under the
Plans or Programs
 
In thousands, except per share amounts
May 2017
3,253

 
$
18.99

 
3,253

 
$
3,201,286

June 2017
9,969

 
$
18.58

 
9,969

 
$
3,016,100

July 2017
3,003

 
$
18.21

 
3,003

 
$
2,961,416

Total
16,225

 
 

 
16,225

 
 

On July 21, 2011, HP’s Board of Directors authorized a $10.0 billion share repurchase program. This program, which does not have a specific expiration date, authorizes repurchases in the open market or in private transactions. On October 10, 2016, HP’s Board of Directors authorized an additional $3.0 billion for future repurchases of its outstanding shares of common stock. HP intends to use repurchases to offset the dilution created by shares issued under employee stock plans and to repurchase shares opportunistically. HP expects to repurchase shares from time to time during fiscal year 2017 as part of returning 50% to 75% of annual free cash flow to stockholders. Free cash flow equals cash flow from operations less net capital expenditures, which equals investments in property, plant and equipment, less proceeds from the sale of property, plant and equipment. All share repurchases settled in the third quarter of fiscal year 2017 were open market transactions. As of July 31, 2017, HP had approximately $3.0 billion remaining under the share repurchase authorizations.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Mine Safety Disclosures.
Not applicable.
Item 5. Other Information.
Not applicable.
Item 6. Exhibits.
The Exhibit Index beginning on page 52 of this report sets forth a list of exhibits.

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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
HP INC.
 
/s/ Catherine A. Lesjak
 
Catherine A. Lesjak
Chief Financial Officer
(Principal Financial Officer and
Authorized Signatory)
Date: August 31, 2017


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HP INC. AND SUBSIDIARIES
EXHIBIT INDEX
Exhibit
Number
 
 
 
Incorporated by Reference
Exhibit Description
 
Form
 
File No.
 
Exhibit(s)
 
Filing Date
2(a)
 
 
8-K
 
001-04423
 
2.1
 
November 5, 2015
2(b)
 
 
8-K
 
001-04423
 
2.2
 
November 5, 2015
2(c)
 
 
8-K
 
001-04423
 
2.3
 
November 5, 2015
2(d)
 
 
8-K
 
001-04423
 
2.4
 
November 5, 2015
2(e)
 
 
8-K
 
001-04423
 
2.5
 
November 5, 2015
2(f)
 
 
8-K
 
001-04423
 
2.6
 
November 5, 2015
2(g)
 
 
8-K
 
001-04423
 
2.7
 
November 5, 2015
3(a)
 
 
10-Q
 
001-04423
 
3(a)
 
June 12, 1998
3(b)
 
 
10-Q
 
001-04423
 
3(b)
 
March 16, 2001

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Table of Contents

Exhibit
Number
 
 
 
Incorporated by Reference
Exhibit Description
 
Form
 
File No.
 
Exhibit(s)
 
Filing Date
3(c)
 
 
8-K
 
001-04423
 
3.2
 
October 22, 2015
3(d)
 
 
8-K
 
001-04423
 
3.1
 
April 7, 2016
3(e)
 
 
8-K
 
001-04423
 
3.1
 
July 26, 2017
4(a)
 
 
S-3
 
333-215116
 
4.1
 
December 15, 2016
4(b)
 
 
S-3
 
333-21516
 
4.2
 
December 15, 2016
4(c)
 
 
8-K
 
001-04423
 
4.2 and 4.3
 
December 2, 2010
4(d)
 
Form of Registrant’s 4.300% Global Note due June 1, 2021 and form of related Officers’ Certificate.
 
8-K
 
001-04423
 
4.5 and 4.6
 
June 1, 2011
4(e)
 
Form of Registrant’s 4.375% Global Note due September 15, 2021 and 6.000% Global Note due September 15, 2041 and form of related Officers’ Certificate.
 
8-K
 
001-04423
 
4.4, 4.5 and 4.6
 
September 19, 2011
4(f)
 
Form of Registrant’s 4.650% Global Note due December 9, 2021 and related Officers’ Certificate.
 
8-K
 
001-04423
 
4.3 and 4.4
 
December 12, 2011
4(g)
 
Form of Registrant’s 4.050% Global Note due September 15, 2022 and related Officers’ Certificate.
 
8-K
 
001-04423
 
 
March 12, 2012

57

Table of Contents

Exhibit
Number
 
 
 
Incorporated by Reference
Exhibit Description
 
Form
 
File No.
 
Exhibit(s)
 
Filing Date
4(h)
 
Form of Registrant’s 2.750% Global Note due January 14, 2019 and Floating Rate Global Note due January 14, 2019 and related Officers’ Certificate.
 
8-K
 
001-04423
 
4.1, 4.2 and 4.3
 
January 14, 2014
4(i)
 
 
8-K/A
 
001-04423
 
4.1
 
June 23, 2006
10(a)
 
 
S-8
 
333-114253
 
4.1
 
April 7, 2004
10(b)
 
 
8-K
 
001-04423
 
10.2
 
September 21, 2006
10(c)
 
 
8-K
 
001-04423
 
99.3
 
November 23, 2005
10(d)
 
 
10-K
 
001-04423
 
10(h)
 
December 14, 2011
10(e)
 
 
10-Q
 
001-04423
 
10(u)(u)
 
June 13, 2002
10(f)
 
 
10-Q
 
001-04423
 
10(v)(v)
 
June 13, 2002
10(g)
 
 
8-K
 
001-04423
 
10.2
 
March 22, 2005
10(h)
 
 
8-K
 
001-04423
 
10.2
 
January 24, 2008
10(i)
 
 
10-Q
 
001-04423
 
10(o)(o)
 
March 10, 2008
10(j)
 
 
10-Q
 
001-04423
 
10(p)(p)
 
March 10, 2008
10(k)
 
 
10-Q
 
001-04423
 
10(t)(t)
 
June 6, 2008
10(1)
 
 
10-Q
 
001-04423
 
10(u)(u)
 
June 6, 2008
10(m)
 
 
10-K
 
001-04423
 
10(y)(y)
 
December 18, 2008

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Table of Contents

Exhibit
Number
 
 
 
Incorporated by Reference
Exhibit Description
 
Form
 
File No.
 
Exhibit(s)
 
Filing Date
10(n)
 
 
10-Q
 
001-04423
 
10(b)(b)(b)
 
March 10, 2009
10(o)
 
 
10-K
 
001-04423
 
10(i)(i)(i)
 
December 15, 2010
10(p)
 
 
10-K
 
001-04423
 
10(j)(j)(j)
 
December 15, 2010
10(q)
 
 
10-K
 
001-04423
 
10(k)(k)(k)
 
December 15, 2010
10(r)
 
 
8-K
 
001-04423
 
10.2
 
March 21, 2013
10(s)
 
 
10-Q
 
001-04423
 
10(u)(u)
 
March 11, 2014
10(t)
 
 
10-Q
 
001-04423
 
10(v)(v)
 
March 11, 2014
10(u)
 
 
10-Q
 
001-04423
 
10(w)(w)
 
March 11, 2014
10(v)
 
 
10-Q
 
001-04423
 
10(x)(x)
 
March 11, 2014
10(w)
 
 
10-Q
 
001-04423
 
10(y)(y)
 
March 11, 2014
10(x)
 
 
10-Q
 
001-04423
 
10(z)(z)
 
March 11, 2014
10(y)
 
 
10-Q
 
001-04423
 
10(a)(a)(a)
 
March 11, 2014

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Table of Contents

Exhibit
Number
 
 
 
Incorporated by Reference
Exhibit Description
 
Form
 
File No.
 
Exhibit(s)
 
Filing Date
10(z)
 
 
10-Q
 
001-04423
 
10(b)(b)(b)
 
March 11, 2014
10(a)(a)
 
 
10-Q
 
001-04423
 
10(c)(c)(c)
 
March 11, 2015
10(b)(b)
 
 
10-Q
 
001-04423
 
10(d)(d)(d)
 
March 11, 2015
10(c)(c)
 
 
10-Q
 
001-04423
 
10(e)(e)(e)
 
March 11, 2015
10(d)(d)
 
 
10-Q
 
001-04423
 
10(f)(f)(f)
 
March 11, 2015
10(e)(e)
 
 
10-Q
 
001-04423
 
10(g)(g)(g)
 
March 11, 2015
10(f)(f)
 
 
10-Q
 
001-04423
 
10(h)(h)(h)
 
March 11, 2015
10(g)(g)
 
 
10-Q
 
001-04423
 
10(i)(i)(i)
 
March 11, 2015
10(h)(h)
 
 
10-Q
 
001-04423
 
10(b)(b)(b)
 
June 8, 2015
10(i)(i)
 
 
10-Q
 
001-04423
 
10(c)(c)(c)
 
June 8, 2015
10(j)(j)
 
 
8-K
 
001-04423
 
10.1
 
November 5, 2015

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Table of Contents

Exhibit
Number
 
 
 
Incorporated by Reference
 
Exhibit Description
 
Form
 
File No.
 
Exhibit(s)
 
Filing Date
10(k)(k)

 
 
10-K
 
001-04423
 
10(e)(e)(e)
 
December 16, 2015
10(l)(l)

 
 
10-K
 
001-04423
 
10(f)(f)(f)
 
December 16, 2015
10(m)(m)

 
 
10-K
 
001-04423
 
10(g)(g)(g)
 
December 16, 2015

10(n)(n)

 
 
10-Q
 
001-04423
 
10(n)(n)
 
March 3, 2016
10(o)(o)

 
 
10-Q
 
001-04423
 
10(o)(o)
 
March 3, 2016
10(p)(p)

 
 
10-Q
 
001-04423
 
10(p)(p)
 
March 3, 2016
10(q)(q)

 
 
10-Q
 
001-04423
 
10(q)(q)
 
March 3, 2016
10(r)(r)

 
 
10-Q
 
001-04423
 
10(r)(r)
 
March 3, 2016
10(s)(s)

 
 
10-Q
 
001-04423
 
10(s)(s)
 
March 3, 2016
10(t)(t)

 
 
10-Q
 
001-04423
 
10(t)(t)
 
March 3, 2016
10(u)(u)

 
 
10-K
 
001-04423
 
10(u)(u)
 
December 15, 2016
10(v)(v)

 
 
10-Q
 
001-04423
 
10(v)(v)
 
March 2, 2017
10(w)(w)

 
 
10-Q
 
001-04423
 
10(w)(w)
 
March 2, 2017
10(x)(x)

 
 
10-Q
 
001-04423
 
10(x)(x)

 
March 2, 2017
10(y)(y)

 
 
10-Q
 
001-04423
 
10(y)(y)

 
March 2, 2017
10(z)(z)

 
 
10-Q
 
001-04423
 
10(z)(z)

 
March 2, 2017
10(a)(a)(a)

 
 
10-Q
 
001-04423
 
10(a)(a)(a)

 
March 2, 2017
31.1

 
 
 
 
 
 
 
 
 

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Table of Contents

Exhibit
Number
 
 
 
Incorporated by Reference
 
Exhibit Description
 
Form
 
File No.
 
Exhibit(s)
 
Filing Date
31.2

 
 
 
 
 
 
 
 
 
32

 
 
 
 
 
 
 
 
 
101.INS

 
XBRL Instance Document.‡
 
 
 
 
 
 
 
 
101.SCH

 
XBRL Taxonomy Extension Schema Document.‡
 
 
 
 
 
 
 
 
101.CAL

 
XBRL Taxonomy Extension Calculation Linkbase Document.‡
 
 
 
 
 
 
 
 
101.DEF

 
XBRL Taxonomy Extension Definition Linkbase Document.‡
 
 
 
 
 
 
 
 
101.LAB

 
XBRL Taxonomy Extension Label Linkbase Document.‡
 
 
 
 
 
 
 
 
101.PRE

 
XBRL Taxonomy Extension Presentation Linkbase Document.‡
 
 
 
 
 
 
 
 
_______________________________________________________________________________
*    Indicates management contract or compensatory plan, contract or arrangement.
**    Certain schedules and exhibits to this agreement have been omitted pursuant to Item 601(b)(2) of Registration S-K. A copy of any omitted schedule and/or exhibit will be furnished supplementally to the SEC upon request.
‡    Filed herewith.
†    Furnished herewith.
The registrant agrees to furnish to the Commission supplementally upon request a copy of (1) any instrument with respect to long-term debt not filed herewith as to which the total amount of securities authorized thereunder does not exceed 10% of the total assets of the registrant and its subsidiaries on a consolidated basis and (2) any omitted schedules to any material plan of acquisition, disposition or reorganization set forth above.

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