HP INC.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
This Management's Discussion and Analysis of Financial Condition and Results of
Operations ("MD&A") is organized as follows:
•Overview. A discussion of our business and other highlights affecting the
Company to provide context for the remainder of this MD&A.
•Critical Accounting Policies and Estimates. A discussion of accounting policies
and estimates that we believe are important to understanding the assumptions and
judgments incorporated in our reported financial results.
•Results of Operations. An analysis of our operations financial results
comparing the three and nine months ended July 31, 2021 to the prior-year
period. A discussion of the results of operations is followed by a more detailed
discussion of the results of operations by segment.
•Liquidity and Capital Resources. An analysis of changes in our cash flows and a
discussion of our liquidity and financial condition.
•Contractual and Other Obligations. An overview of contractual obligations,
retirement and post-retirement benefit plan contributions, cost-saving plans,
uncertain tax positions and off-balance sheet arrangements of our operations.
The discussion of financial condition and results of our operations that follows
provides information that will assist the reader in understanding our
Consolidated Condensed Financial Statements, the changes in certain key items in
those financial statements from year to year, and the primary factors that
accounted for those changes, as well as how certain accounting principles,
policies and estimates affect our Consolidated Condensed Financial Statements.
This discussion should be read in conjunction with our Consolidated Condensed
Financial Statements and the related notes that appear elsewhere in this
document.
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HP INC. AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued)
OVERVIEW
We are a leading global provider of personal computing and other access devices, imaging and printing products, and related technologies, solutions, and services. We sell to individual consumers, SMBs and large enterprises, including customers in the government, health, and education sectors. We have three reportable segments: Personal Systems, Printing, and Corporate Investments. The Personal Systems segment offers commercial and consumer desktop and notebook PCs, workstations, thin clients, commercial mobility devices, retail POS systems, displays and peripherals, software, support, and services. The Printing segment provides consumer and commercial printer hardware, supplies, solutions and services. Corporate Investments includeHP Labs and certain business incubation and investment projects. •In Personal Systems, our strategic focus is on profitable growth through innovation and market segmentation. This focus is with respect to enhanced innovation in multi-operating systems, multi-architecture, geography, customer segments and other key attributes. Additionally, we are investing in endpoint services and solutions. We are focused on services, including Device as a Service, as the market begins to shift to contractual solutions, and accelerating in attractive adjacencies such as peripherals. We are driving innovation to enable productivity and collaboration as near-term demand continues with the PC becoming essential for hybrid work, learn and play. We believe that we are well positioned due to our competitive product lineup. •In Printing, our strategic focus is on offering contractual solutions to serve consumers, SMBs and large enterprises through our Instant Ink Services, HP+ and Managed Print Services solutions, providing digital printing solutions for graphics segments and applications including commercial publishing, labels, packaging and textiles; as well as expanding our footprint in 3D printing across digital manufacturing and strategic applications. 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 that may adversely impact our product mix. A second set of challenges relates to changes in the competitive landscape. Our primary competitors are exerting competitive pressure in targeted areas and are entering new markets, our emerging competitors are introducing new technologies and business models, and our alliance partners in some businesses are increasingly becoming our competitors in others. A third set of challenges relates to business model changes and our go-to-market execution in an evolving distribution and reseller landscape, with increasing online and omnichannel presence. Additional challenges we face at the segment level are set forth below. •In Personal Systems, we face challenges with industry component availability which we expect to continue to negatively impact our ability to meet demand, and a competitive environment. •In Printing, we face challenges from a competitive environment, including non-original supplies (which includes imitation, refill, or remanufactured alternatives) and we face component constraints particularly in printer hardware which we expect to continue to negatively impact our ability to meet demand. We also obtain many Printing components from single sources due to technology, availability, price, quality, or other considerations. For instance, we source the majority of our A4 and a portion of our A3 portfolio of laser printer engines and laser toner cartridges fromCanon . Any decision by either party to not renew our agreement withCanon 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 withCanon and anticipate renewal of this agreement. In the fourth quarter of fiscal 2021, we expect continued strong demand in both Personal Systems and Printing. However, we expect that component shortages, manufacturing disruptions and logistics challenges will continue to constrain revenue due to the impacts of the COVID-19 pandemic. Our business and financial performance also depend significantly on worldwide economic conditions. Accordingly, we face global macroeconomic challenges, particularly in light of the effects of the COVID-19 pandemic as discussed below, tariff-driven headwinds, uncertainty in the markets, volatility in exchange rates and evolving dynamics in the global trade environment. The full impact of these and other global macroeconomic challenges on our business cannot be known at this time. To address these challenges, we continue to pursue innovation with a view towards developing new products and services aligned with generating market demand and meeting the needs of our customers and partners. In addition, we continue to work on improving our operations and adapting our business models, with a particular focus on enhancing our end-to-end processes, analytics and efficiencies. We also continue to work on optimizing our sales coverage models, aligning our sales incentives with our strategic goals, improving channel execution and inventory management, strengthening our capabilities in our areas of strategic focus, strengthening our pricing discipline and developing and capitalizing on market opportunities. 47
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HP INC. AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) InOctober 2019 , we announced cost-reduction and operational efficiency initiatives intended to simplify the way we work, move closer to our customers and facilitate specific investment in our business. These were further updated inFebruary 2020 . These efforts included transforming our operating model to integrate our sales force into a single commercial organization and reducing structural costs across the Company through our restructuring plan approved inSeptember 2019 (the "Fiscal 2020 Plan"). We have invested and expect to invest some of the savings from these efforts across our businesses, including investing to build our digital capabilities. Over time, we expect these investments will make us more efficient and allow us to advance our positions in Personal Systems and Printing, while also disrupting new industries where we see attractive medium to long-term growth opportunities. However, the rate at which we are able to invest in our business and the returns that we are able to achieve from these investments will be affected by many factors, including the efforts to address the execution, industry and macroeconomic challenges facing our business as discussed above. As a result, we may experience delays in the anticipated timing of activities related to these efforts, and the anticipated benefits of these efforts may not materialize. In the second year of our program, we continue to look at new cost savings opportunities and remain ahead of our$1.2 billion gross run rate structural cost reduction plan. In the third quarter of fiscal 2021, we completed the initial deployment of our SAP S/4 HANA system, one of the largest ERP implementations. Also, as part of our end-to-end business planning and forecasting efforts, we went live with our new cloud-based platform which we believe will improve our forecasting agility as part of our digital transformation. Further, our hybrid work strategy has enabled us to accelerate our location strategy while providing a more flexible workspace. Going forward we are enablingHP 's hybrid work strategy by modernizing our sites to be critical hubs for collaboration and innovation. This will also deliver savings in our real estate portfolio. For more information on our Fiscal 2020 Plan, 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. We typically experience higher net revenues in our fourth quarter compared to other quarters in our fiscal year due in part to seasonal holiday demand. Historical seasonal patterns may not continue in the future and have been impacted by increasing supply constraints, shifts in customer behavior and the evolving impacts of the COVID-19 pandemic. Our COVID-19 Response We continue to closely monitor the COVID-19 pandemic, including its resurgence in key markets. We will continue promoting the health, safety, and well-being of workers and their loved ones. In response to the COVID-19 pandemic, we have established a cross-functional COVID-19 program management office that meets regularly to review the latest data from our business and site leaders, identify and address emerging risks, and formulate response to actions taken by governments and public policy organizations. We have put in place global policies and protocols based on guidance from healthcare experts and public health leaders, and we regularly review and update them to reflect current information and the requirements and recommendations of national, federal, state, and local authorities. We balance our company-wide approach by assessing risk and adjusting our response at the site level, taking into consideration each country's or area's COVID-19 case trends and related measures. The business impact of the COVID-19 pandemic has created new and different demand dynamics in the market. We have seen a higher mix of Consumer PCs and shift from Desktops to Notebooks. Our Personal Systems business benefited from the remote working and learning environment, including growth in gaming. In Printing, we have seen ongoing demand for Consumer print, and some improvement in Commercial print as the demand in the SMBs and enterprise segments continue to improve. Ongoing consumer demand may be impacted as we slowly start to see commercial recovery. However, the recovery in Commercial print may be uneven given the varying pace of economic recovery and the resurgence of COVID-19 case rates largely driven by the newer variants in some countries. Also, favorable pricing including historically lower promotions and incentives has contributed positively towards average selling prices ("ASPs") and gross margin in both Personal Systems and Printing. We estimate sales and marketing program incentives based on a number of factors like historical experience, expected customer behavior and market conditions. These estimates have been and may continue to be impacted by lower-than-expected incentives due to increased supply constraints, shifts in customer behavior and the evolving impact of the COVID-19 pandemic. Demand fulfillment has been and is expected to continue to be impacted by industry wide commodity constraints primarily integrated circuits and panels, and manufacturing disruptions inAsia . Also, we continue to see logistics challenges globally. As the COVID-19 pandemic continues and new variants of the virus, including the Delta and Lambda variants, emerge, we are seeing a resurgence of the pandemic in key markets. We have and may experience future disruptions in supply, manufacturing and logistics, including inAsia , and with our suppliers and outsourcing partners. The full extent of the impact of the COVID-19 pandemic on our business, results of operations, cash flows and financial position will depend on many factors that are not within our control, including, but not limited to: the severity, duration and scope of the pandemic, including the impact of coronavirus mutations and resurgences; the effectiveness of actions taken to contain or mitigate the pandemic and 48
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HP INC. AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) prevent or limit any reoccurrence; the development, availability and public acceptance of effective treatments or vaccines; governmental, business and individuals' actions that have been and continue to be taken in response to the pandemic; general economic uncertainty in key global markets and financial market volatility; global economic conditions and levels of economic growth; and the pace of recovery when the COVID-19 pandemic subsides. Unsolicited Exchange Offer in Fiscal Year 2020 OnMarch 2, 2020 , Xerox Holdings Corporation ("Xerox") commenced an unsolicited exchange offer for all outstanding shares ofHP 's common stock (the "Offer"). Xerox had also previously nominated candidates for election toHP 's Board of Directors atHP 's 2020 annual meeting of stockholders. OnMarch 31, 2020 , Xerox announced that the Offer had been terminated and subsequently withdrew its slate of director nominees. In order to respond to Xerox's actions,HP incurred certain costs during the three and nine months endedJuly 31, 2020 . For a further discussion of trends, uncertainties and other factors that could impact our operating results, see the section entitled "Risk Factors" in Item 1A of Part I in our Annual Report on Form 10-K for the fiscal year endedOctober 31, 2020 . CRITICAL ACCOUNTING POLICIES AND ESTIMATES MD&A is based on our Consolidated Condensed Financial Statements, which have been prepared in accordance withU.S. GAAP. The preparation of these financial statements requires management to make estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, net revenues and expenses, and the disclosure of contingent liabilities. As ofJuly 31, 2021 , the impact of COVID-19 on our business continued to unfold. As a result, many of our estimates and assumptions required increased judgment and may carry a higher degree of variability and volatility. As events continue to evolve and additional information becomes available, our estimates may change in future periods. Our management believes that there have been no significant changes during the nine months endedJuly 31, 2021 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 endedOctober 31, 2020 , except as mentioned in Note 1, "Basis of Presentation". ACCOUNTING PRONOUNCEMENTS For a summary of recent accounting pronouncements applicable to our Consolidated Condensed Financial Statements see Note 1, "Basis of Presentation", to the Consolidated Condensed Financial Statements in Item 1 of Part I of this report, which is incorporated herein by reference. 49
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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 it will continue to be impacted, by fluctuations in foreign currency exchange rates. In order to provide a framework for assessing performance excluding the impact of foreign currency fluctuations, we supplement the year-over-year percentage change in net revenue with the year-over-year percentage change in net revenue on a constant currency basis, which excludes the effect of foreign currency exchange fluctuations calculated by translating current period revenues using monthly average exchange rates from the comparative period and excluding any hedging impact recognized in the current period, and does not adjust for any repricing or demand impacts from changes in foreign currency exchange rates. This information is provided so that net revenue can be viewed with and without the effect of fluctuations in foreign currency exchange rates, which is consistent with how management evaluates our net revenue results and trends, as management does not believe that the excluded items are reflective of ongoing operating results. The constant currency measures are provided in addition to, and not as a substitute for, the year-over-year percentage change in net revenue on a GAAP basis. Other companies may calculate and define similarly labeled items differently, which may limit the usefulness of this measure for comparative purposes. Results of operations in dollars and as a percentage of net revenue were as follows: Three months ended July 31 Nine months ended July 31 2021 2020 2021 2020 Dollars % of Net Dollars % of Net Dollars % of Net Dollars % of Net Revenue Revenue Revenue Revenue Dollars in millions Net revenue$ 15,289 100.0 %$ 14,294 100.0 %$ 46,812 100.0 %$ 41,381 100.0 % Cost of revenue 11,901 77.8 % 11,901 83.3 % 36,660 78.3 % 33,623 81.3 % Gross profit 3,388 22.2 % 2,393 16.7 % 10,152 21.7 % 7,758 18.7 % Research and development 477 3.1 % 359 2.5 % 1,462 3.1 % 1,097 2.7 % Selling, general and administrative 1,408 9.3 % 1,156 8.1 % 4,267 9.2 % 3,662 8.8 % Restructuring and other charges 56 0.3 % 59 0.4 % 216 0.4 % 431 1.0 % Acquisition-related charges 24 0.2 % 11 0.1 % 40 0.1 % 14 - % Amortization of intangible assets 42 0.3 % 29 0.2 % 103 0.2 % 84 0.2 % Earnings from operations 1,381 9.0 % 779 5.4 % 4,064 8.7 % 2,470 6.0 % Interest and other, net (55) (0.3) % (28) (0.1) % (106) (0.2) % (15) (0.1) % Earnings before taxes 1,326 8.7 % 751 5.3 % 3,958 8.5 % 2,455 5.9 % Provision for taxes (218) (1.5) % (17) (0.2) % (554) (1.2) % (279) (0.6) % Net earnings$ 1,108 7.2 %$ 734 5.1 %$ 3,404 7.3 %$ 2,176 5.3 % Net Revenue For the three months endedJuly 31, 2021 , net revenue increased 7.0% (increased 4.1% on a constant currency basis) as compared to the prior-year period.U.S. net revenue increased 11.4% to$5.8 billion , while net revenue from international operations increased 4.4% to$9.5 billion . The increase in net revenue was primarily driven by growth in Supplies, favorable foreign currency impacts, a reduction to previously estimated sales and marketing program incentives and growth in Commercial Printing, partially offset by decline in Notebooks. The increase in Supplies and Commercial Printing was primarily driven by improvement in enterprise and SMBs. Supply chain constraints impacted both Printing and Personal Systems revenue growth. For more information on the reduction to previously estimated sales and marketing program incentives, see the "Changes in Variable Consideration" section in Note 6, "Supplementary Financial Information", to the Consolidated Condensed Financial Statements in Item 1 of Part I of this report, which is incorporated herein by reference. 50
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HP INC. AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) For the nine months endedJuly 31, 2021 , total net revenue increased 13.1% (increased 11.4% on a constant currency basis) as compared to the prior-year period.U.S. net revenue increased 18.3% to$17.0 billion , while net revenue from international operations increased 10.4% to$29.8 billion . The increase in net revenue was primarily driven by growth in Notebooks, Supplies, favorable foreign currency impacts, and growth in Consumer and Commercial Printing, partially offset by decline in Desktops. The increase in net revenue was driven by strong demand from work from home and remote learning. Also, net revenue for the prior-year period, was negatively impacted by supply chain constraints and demand weakness resulting from COVID-19. 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 endedJuly 31, 2021 , gross margin increased by 5.5 percentage points, primarily driven by continued favorable pricing including lower promotions as well as a reduction to previously estimated sales and marketing program incentives and favorable currency impacts, partially offset by higher costs. For more information on the reduction to previously estimated sales and marketing program incentives, see the "Changes in Variable Consideration" section in Note 6, "Supplementary Financial Information", to the Consolidated Condensed Financial Statements in Item 1 of Part I of this report, which is incorporated herein by reference. For the nine months endedJuly 31, 2021 , gross margin increased by 3.0 percentage points, primarily driven by favorable pricing including lower promotions and favorable currency impacts, partially offset by higher costs. A detailed discussion of the factors contributing to the changes in segment gross margins is included under "Segment Information" below. Operating Expenses Research and Development ("R&D") R&D expense increased 32.9% and 33.3% for the three and nine months endedJuly 31, 2021 , respectively, primarily due to continuing investments in innovation and key growth initiatives and higher variable compensation. Selling, General and Administrative ("SG&A") SG&A expense increased 21.8% for the three months endedJuly 31, 2021 , primarily due to go-to-market initiatives and higher variable compensation. SG&A expense increased 16.5% for the nine months endedJuly 31, 2021 , primarily due to higher variable compensation and go-to-market initiatives. Restructuring and Other Charges Restructuring and other charges for the three and nine months endedJuly 31, 2021 relate primarily to the Fiscal 2020 Plan. For more information, 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. Amortization of Intangible Assets Amortization of intangible assets for the three and nine months endedJuly 31, 2021 relates primarily to intangible assets resulting from acquisitions. Interest and Other, Net Interest and other, net expense increased$27 million and$91 million for the three and nine months endedJuly 31, 2021 , respectively, primarily due to lowerNet Periodic Post -retirement Benefit Credit and higher interest expenses on debt, partially offset by lower debt extinguishment costs. Provision for taxes Our effective tax rate was 16.5% and 2.2% for the three months endedJuly 31, 2021 and 2020, respectively, and 14.0% and 11.4% for the nine months endedJuly 31, 2021 and 2020, respectively. The difference between theU.S. federal statutory tax rate of 21% and our effective tax rate for the three and nine months endedJuly 31, 2021 was primarily due to tax effects of internal reorganization and by favorable tax rates associated with certain earnings from our operations in lower-tax jurisdictions throughout the world. For the three and nine months endedJuly 31, 2020 , our effective tax rate differed from theU.S. federal statutory rate of 21% primarily due to audit settlements in various jurisdictions and favorable tax rates associated with certain earnings from our operations in lower-tax jurisdictions throughout the world. During the three and nine months endedJuly 31, 2021 , we recorded$21 million and$150 million , respectively, of net income tax benefits related to discrete items in the provision for taxes. These amounts included income tax benefits of$9 million and$45 million related to restructuring charges and$23 million and$30 million related to the filing of tax returns in 51
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HP INC. AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) various jurisdictions for the three and nine months endedJuly 31, 2021 , respectively. The nine months endedJuly 31, 2021 also included a tax benefit of$89 million related to tax effects of internal reorganization and a tax benefit of$10 million related to audit settlements in various jurisdictions. These benefits were partially offset by uncertain tax position charges of$13 million and$25 million for the three and nine months endedJuly 31, 2021 , respectively. For the three and nine months endedJuly 31, 2021 , excess tax benefits associated with stock options, restricted stock units and performance-adjusted restricted stock units were immaterial. During the three and nine months endedJuly 31, 2020 , we recorded$116 million and$182 million respectively, of net tax benefits related to discrete items in the provision for taxes. These amounts included tax benefits of$102 million and$143 million related to audit settlements in various jurisdictions,$20 million and$75 million related to restructuring charges, and$4 million and$20 million related to acquisition charges for the three and nine months endedJuly 31, 2020 , respectively. These benefits were partially offset by uncertain tax position charges of$3 million and$54 million for the three and nine months endedJuly 31, 2020 , respectively. For the nine months endedJuly 31, 2020 , excess tax benefits associated with stock options, restricted stock units and performance-adjusted restricted stock units were immaterial. Segment Information A description of the products and services for each segment can be found in Note 2, "Segment Information" to the Consolidated Condensed Financial Statements in Item 1 of Part I of this report, which is incorporated herein by reference. Future changes to this organizational structure may result in changes to the segments disclosed. 52
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HP INC. AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued)
Personal Systems
Three months ended July 31 Nine months ended July 31
2021 2020 % Change 2021 2020 % Change
Dollars in millions
Net revenue $ 10,406 $ 10,360 0.4 % $ 31,564 $ 28,565 10.5 %
Earnings from operations $ 869$ 570 52.5 %$ 2,337 $ 1,784 31.0
%
Earnings from operations as a % of net 8.4 % 5.5 % 7.4 % 6.2 %
revenue
The components of net revenue and the weighted net revenue change by business
unit were as follows:
Three months ended July 31 Nine months ended July 31
Net Revenue Weighted Net Net Revenue Weighted Net
2021 2020 Revenue Change(1) 2021 2020 Revenue Change(1)
Dollars in millions Percentage Points Dollars in millions Percentage Points
Notebooks $ 7,328 $ 7,304 0.2 $ 22,183 $ 18,361 13.4
Desktops 2,246 2,221 0.2 6,871 7,553 (2.4)
Workstations 388 428 (0.4) 1,177 1,461 (1.0)
Other 444 407 0.4 1,333 1,190 0.5
Total Personal Systems $ 10,406 $ 10,360 0.4 $ 31,564 $ 28,565 10.5
(1)Weighted Net Revenue Change Percentage Points measures contribution of each
business unit towards overall segment revenue growth. It is calculated by
dividing the change in revenue of each business unit from the prior-year period
by total segment revenue for the prior-year period.
Three months ended
Personal Systems net revenue increased 0.4% (decreased 2.8% on a constant currency basis) for the three months endedJuly 31, 2021 as compared to the prior-year period. The net revenue increase was primarily due to favorable foreign currency impacts and a reduction to previously estimated sales and marketing program incentives, partially offset by decline in Notebooks, Desktops and Workstations. Unit volumes were flat and ASPs increased by 0.3%. The unit volumes were flat driven by an increase in Notebooks, offset by decline in Desktops and Workstations. Also, industry-wide supply chain constraints limited unit growth during the three months endedJuly 31,2021 . The increase in ASPs was primarily due to favorable pricing including lower promotions as well as a reduction to previously estimated sales and marketing program incentives, and favorable foreign currency impacts, partially offset by mix shifts towards low-end products. Consumer PCs net revenue increased 3.5%, primarily driven by higher ASPs, partially offset by unit decline in Notebooks. Commercial PCs net revenue decreased 1.3% primarily driven by lower ASPs and unit decline in Desktops, partially offset by unit growth in Notebooks. The lower ASPs in Commercial PCs was primarily due to mix shifts, partially offset by favorable foreign currency impacts and pricing. Consequently, net revenue increased 0.3% in Notebooks and 1.1% in Desktops, and decreased 9.3% in Workstations. Personal Systems earnings from operations as a percentage of net revenue increased by 2.9 percentage points. The increase was primarily due to an increase in gross margin, partially offset by an increase in operating expenses as a percentage of net revenue. The increase in gross margin was primarily due to favorable pricing including lower promotions as well as a reduction to previously estimated sales and marketing program incentives and favorable foreign currency impacts, partially offset by higher commodity costs. Operating expenses as a percentage of revenue increased by 1.8 percentage points as compared to prior-year period primarily due to increased spend on go-to-market initiatives, R&D investments in innovation and higher variable compensation. 53
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HP INC. AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued)
Nine months ended
Personal Systems net revenue increased 10.5% (increased 8.4% on a constant currency basis) for the nine months endedJuly 31, 2021 as compared to the prior-year period. The net revenue increase was primarily due to growth in Notebooks and favorable foreign currency impacts, partially offset by decline in Desktops and Workstations. The net revenue increase was driven by a 17.4% growth in unit volume, partially offset by a 5.9% decline in ASPs. The increase in unit volume was driven by an increase in Notebooks due to strong demand driven by work from home, remote learning and gaming, partially offset by decline is Desktops and Workstations. Also, industry-wide supply chain constraints limited unit growth during the nine months endedJuly 31, 2021 . Further, for the prior-year period, unit shipments were negatively impacted by supply chain constraints resulting from COVID-19. The decrease in ASPs was primarily due to mix shifts towards low-end products, partially offset by favorable foreign currency impacts and favorable pricing including lower promotions. Consumer PCs revenue increased 31.1% driven by unit growth in Notebooks and Desktops and higher ASPs. Commercial PCs revenue increased 0.5%, primarily driven by unit growth in Notebooks, partially offset by lower ASPs and decline in unit volumes of Desktops and Workstations. The lower ASPs in Commercial PCs was primarily due to mix shifts, partially offset by favorable foreign currency impacts. Consequently, net revenue increased 20.8% in Notebooks, and decreased 9.0% in Desktops and 19.4% in Workstations. Personal Systems earnings from operations as a percentage of net revenue increased by 1.2 percentage points. The increase was primarily due to an increase in gross margin, partially offset by an increase in operating expenses as a percentage of net revenue. The increase in gross margin was primarily due to favorable pricing including lower promotions and favorable foreign currency impacts, partially offset by higher costs including commodity costs and unfavorable mix shifts. Operating expenses as a percentage of revenue increased by 0.8 percentage points primarily due to R&D investments in innovation, higher variable compensation and go-to-market initiatives. Printing Three months ended July 31 Nine months ended July 31 2021 2020 % Change 2021 2020 % Change Dollars in millions Net revenue$ 4,882 $ 3,933 24.1 %$ 15,249 $ 12,815 19.0 % Earnings from operations $ 857$ 480 78.5 %$ 2,806 $ 1,782 57.5 %
Earnings from operations as a % of net 17.6 % 12.2 %
18.4 % 13.9 %
revenue
The components of net revenue and the weighted net revenue change by business
unit were as follows:
Three Months Ended July 31 Nine months ended July 31
Net Revenue Weighted Net Net Revenue Weighted Net
2021 2020 Revenue Change(1) 2021 2020 Revenue Change(1)
Dollars in millions Percentage Points Dollars in millions Percentage Points
Supplies $ 3,092 $ 2,573 13.2 $ 9,575 $ 8,455 8.7
Commercial Hardware 1,070 732 8.6 3,112 2,616 3.9
Consumer Hardware 720 628 2.3 2,562 1,744 6.4
Total Printing $ 4,882 $ 3,933 24.1 $ 15,249 $ 12,815 19.0
(1)Weighted Net Revenue Change Percentage Points measures contribution of each
business unit towards overall segment revenue growth. It is calculated by
dividing the change in revenue of each business unit from the prior-year period
by total segment revenue for the prior-year period.
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HP INC. AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) Three months endedJuly 31, 2021 compared with three months endedJuly 31, 2020 Printing net revenue increased 24.1% (increased 22.2% on a constant currency basis) for the three months endedJuly 31, 2021 . The increase in net revenue was driven by growth in Supplies, Commercial, a reduction to previously estimated sales and marketing program incentives, Consumer and favorable foreign currency impact. Net revenue for Supplies increased 20.2%, primarily driven by inventory replenishment, improved demand in commercial, and favorable pricing including lower promotion. Also, Supplies net revenue was impacted by COVID-19 in the prior-year period. Printer ASPs increased 43.8% and unit volume decreased 4.2%. Printer ASPs increased primarily due to favorable pricing including lower promotion as well as a reduction to previously estimated sales and marketing program incentives and favorable mix shifts. The decrease in printer unit volume was primarily driven by unit decrease in Consumer partially offset by increase in Commercial. Further, component availability and supply chain disruptions continued to impact unit growth for both Commercial and Consumer, during the three months endedJuly 31, 2021 . Net revenue for Commercial increased by 46.2%, primarily due to 28.8% increase in printer unit volume and 35.6% increase in ASPs. The printer unit volume increased due to improved demand as compared to prior-year period which was impacted by COVID-19. The increase in ASPs was primarily driven by favorable pricing and mix shift. Net revenue for Consumer increased 14.6%, primarily due to a 24.2% increase in ASPs, partially offset by 8.1% decrease in printer unit volume. The increase in ASPs was primarily driven by favorable pricing. The printer unit volume decreased due to supply chain constraints. Printing earnings from operations as a percentage of net revenue increased by 5.4 percentage points for the three months endedJuly 31, 2021 , primarily due to increase in gross margin and lower operating expense as a percentage of revenue. The increase in gross margin is primarily due to favorable pricing including lower promotions as well as a reduction to previously estimated sales and marketing program incentives, partially offset by unfavorable mix shifts and higher costs including commodity costs. Operating expenses as a percentage of revenue decreased primarily due to less variability in expenses as some expenses are fixed or semi-variable, partially offset by increase spend on go-to-market initiatives, R&D investments in innovation, and higher variable compensation. Nine months endedJuly 31, 2021 compared with Nine months endedJuly 31, 2020 Printing net revenue increased 19.0% (increased 18.2% on a constant currency basis) for the nine months endedJuly 31, 2021 . The increase in net revenue was driven by growth in Supplies, Consumer and Commercial. Net revenue for Supplies increased 13.2%, primarily driven by favorable pricing including lower promotions and improvement in enterprise and SMB demand, and continued consumer demand. Also, for the prior-year period, Supplies net revenue was impacted by COVID-19. Printer ASPs increased 19.6% and unit volume increased 16.2%. Printer ASPs increased primarily due to favorable pricing including lower promotions. The increase in printer unit volume was primarily driven by unit increase in both Consumer and Commercial. Further, component availability and supply chain disruptions continued to impact unit growth for both Commercial and Consumer, during the nine months endedJuly 31, 2021 . Net revenue for Commercial increased by 19.0%, primarily due to 15.4% increase in printer unit volume and 12.7% increase in ASPs. The printer unit volume increased due to improved demand as compared to prior-year period which was impacted by COVID-19. The increase in ASPs was primarily driven by favorable pricing and mix shifts. Net revenue for Consumer increased 46.9%, primarily due to 26.4% increase in ASPs and 16.3% increase in printer unit volume. The printer unit volume increased due to strong demand from remote working and learning and supply chain disruption in prior-year period due to COVID-19. The increase in ASPs was primarily driven by favorable pricing. Printing earnings from operations as a percentage of net revenue increased by 4.5 percentage points for the nine months endedJuly 31, 2021 , primarily due to increase in gross margin and lower operating expense as a percentage of revenue. The increase in gross margin is primarily due to favorable pricing including lower promotions, partially offset by mix shifts. Operating expenses as a percentage of revenue decreased primarily due to less variability in expenses as some expenses are fixed or semi-variable, partially offset by higher variable compensation and go-to-market initiatives. Corporate Investments The loss from operations in Corporate Investments for the three and nine months endedJuly 31, 2021 , was primarily due to expenses associated with our incubation projects and investments in digital enablement. 55
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HP INC. AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
LIQUIDITY AND CAPITAL RESOURCES
We use cash generated by operations as our primary source of liquidity. While
the impacts from the COVID-19 pandemic were originally expected to be temporary,
the duration and impact of the pandemic remains unclear. With the emergence of
variants, there remains uncertainty around the extent and duration of the
pandemic and how our liquidity and working capital needs may be impacted in the
future periods as a result. We believe that current cash, cash flow from
operating activities, new borrowings, available commercial paper authorization
and the credit facilities will be sufficient to meet HP 's operating cash
requirements, planned capital expenditures, interest and principal payments on
all borrowings, pension and post-retirement funding requirements, authorized
share repurchases and annual dividend payments for the foreseeable future.
Additionally, if suitable acquisition opportunities arise, the Company may
obtain all or a portion of the required financing through additional borrowings.
While our access to capital markets may be constrained and our cost of borrowing
may increase under certain business, market and economic conditions, our access
to a variety of funding sources to meet our liquidity needs is designed to
facilitate continued access to capital resources under all such conditions. Our
liquidity is subject to various risks including the risks identified in the
section entitled "Risk Factors" in Item 1A of Part I in our Annual Report on
Form 10-K for the fiscal year ended October 31, 2020 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.
During the nine months ended July 31, 2021 , HP completed three acquisitions with
a combined purchase price of $582 million , net of cash acquired, of which $217
million was recorded as goodwill and $288 million as intangible assets related
to these acquisitions.
On July 27, 2021 , we announced a definitive agreement to acquire Teradici
Corporation , a global innovator in remote computing software that enables users
to securely access high-performance computing from any PC, Chromebook, or
tablet, for $275 million , subject to customary working capital and other
adjustments. The transaction is expected to close in the fourth quarter of
calendar 2021, pending regulatory review and other customary closing conditions.
Our cash and cash equivalents balances are held in numerous locations throughout
the world. We utilize a variety of planning and financing strategies in an
effort to ensure that our worldwide cash is available when and where it is
needed. Amounts held outside of the United States are generally utilized to
support non-U.S. liquidity needs and may from time to time be distributed to the
United States . The Tax Cuts and Jobs Act ("TCJA") made significant changes to
the U.S. tax law, including a one-time transition tax on accumulated foreign
earnings. The payments associated with this one-time transition tax will be paid
over eight years and began in fiscal year 2019. We expect a significant portion
of the cash and cash equivalents held by our foreign subsidiaries will no longer
be subject to U.S. income tax consequences upon a subsequent repatriation to the
United States as a result of the transition tax on accumulated foreign earnings.
However, a portion of this cash may still be subject to foreign income tax or
withholding tax consequences upon repatriation. As we evaluate the future cash
needs of our operations, we may revise the amount of foreign earnings considered
to be permanently reinvested in our foreign subsidiaries and how to utilize such
funds, including reducing our gross debt level, or other uses.
Liquidity
Our cash and cash equivalents, marketable debt securities and total debt were
as follows:
Nine months ended July 31
2021 2020
In billions
Cash and cash equivalents $ 3.4 $ 4.7
Marketable debt securities(1) $ - $ 0.2
Total debt $ 7.1 $ 6.3
(1) Includes highly liquid U.S. treasury notes, U.S. agency securities, non-U.S.
government bonds, corporate debt securities, money market and other funds. We
classify these investments within Other current assets in Consolidated Balance
Sheets, including those with maturity dates beyond one year, based on their
highly liquid nature and availability for use in current operations.
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HP INC. AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
Our key cash flow metrics were as follows:
Nine months ended July 31
2021 2020
In millions
Net cash provided by operating activities $ 3,561 $ 2,442
Net cash used in investing activities (612) (931)
Net cash used in financing activities (4,374) (1,369)
Net (decrease) increase in cash and cash equivalents $
(1,425)
Operating Activities Compared to the corresponding period in fiscal year 2020, net cash provided by operating activities increased by$1.1 billion for the nine months endedJuly 31, 2021 , primarily due to higher earnings from operations. Key Working Capital Metrics Management utilizes current cash conversion cycle information to manage our working capital level. Our working capital metrics and cash conversion cycle impacts were as follows: As of As of July 31, 2021 October 31, 2020 Change July 31, 2020 October 31, 2019 Change Y/Y Change Days of sales outstanding in 29 32 (3) 33 35 (2) (4) accounts receivable ("DSO") Days of supply in inventory ("DOS") 62 43 19 45 41 4 17 Days of purchases outstanding in (120) (105) (15) (108) (107) (1) (12) accounts payable ("DPO") Cash conversion cycle (29) (30) 1 (30) (31) 1 1July 31, 2021 as compared toJuly 31, 2020 The cash conversion cycle is the sum of days of DSO and DOS less DPO. Items which may cause the cash conversion cycle in a particular period to differ from a long-term sustainable rate include, but are not limited to, changes in business mix, changes in payment terms, extent of receivables factoring, seasonal trends and the timing of revenue recognition and inventory purchases within the period. DSO measures the average number of days our receivables are outstanding. DSO is calculated by dividing ending accounts receivable, net of allowance for credit losses, by a 90-day average net revenue. The decrease in DSO was primarily due to higher revenue as compared to prior-year period and favorable 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 higher strategic buys to better assure supply of commodities in Personal Systems, partially offset by improvement in Printing. DPO measures the average number of days our accounts payable balances are outstanding. DPO is calculated by dividing ending accounts payable by a 90-day average cost of revenue. The increase in DPO was primarily due to working capital management activities and higher inventory purchasing volume. Investing Activities Compared to the corresponding period in fiscal year 2020, net cash used in investing activities decreased by$0.3 billion for the nine months endedJuly 31, 2021 , primarily due to lower investments of$0.5 billion and collateral for derivative instruments of$0.4 billion , partially offset by higher net payments for acquisitions of$0.6 billion . 57
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HP INC. AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) Financing Activities Compared to the corresponding period in fiscal year 2020, net cash used in financing activities increased by$3.0 billion for the nine months endedJuly 31, 2021 , primarily due to higher share repurchases of$2.7 billion and lower proceeds from debt issuance of$1.0 billion , partially offset by lower repayment of debt of$0.6 billion . Share Repurchases and Dividends During the nine months endedJuly 31, 2021 ,HP returned$5.2 billion to the shareholders in the form of share repurchases of$4.5 billion and cash dividends of$0.7 billion . As ofJuly 31, 2021 ,HP had approximately$8.2 billion remaining under the share repurchase authorizations approved byHP 's Board of Directors. For more information on our share repurchases, see Note 10, "Stockholders' Deficit", to the Consolidated Condensed Financial Statements in Item 1 of Part I of this report, which is incorporated herein by reference. Capital Resources Debt Levels We maintain debt levels that we establish through consideration of a number of factors, including cash flow expectations, cash requirements for operations, investment plans (including acquisitions), share repurchase activities, our cost of capital and targeted capital structure. Depending on these factors, we may, from time to time, incur additional indebtedness or refinance existing indebtedness. Outstanding borrowings increased to$7.1 billion as ofJuly 31, 2021 as compared to$6.2 billion as ofOctober 31, 2020 , bearing weighted-average interest rates of 3.3% and 3.9% forJuly 31, 2021 andOctober 31, 2020 , respectively. OnJune 16, 2021 , we issued$2.0 billion in aggregate principal amount of senior notes across various maturities. We used approximately$1.0 billion of the proceeds from such issuance to fund the redemption of existing notes maturing in 2021. For more information on the new notes and the redemption of existing notes, see Note 9, "Borrowings", to the Consolidated Condensed Financial Statements in Item 1 of Part I of this report, which is incorporated herein by reference. Our weighted-average interest rate reflects the effective rate on our borrowings prevailing during the period and reflects the effect of interest rate swaps. For more information on our interest rate swaps, see Note 8, "Financial Instruments", to the Consolidated Condensed Financial Statements in Item 1 of Part I of this report, which is incorporated herein by reference. OnMay 26, 2021 , we entered into a new$5.0 billion 5-year sustainability-linked senior unsecured committed revolving credit facility (the 'New Revolving Facility"). Commitment fees, interest rates and other terms of borrowing under the New Revolving Facility vary based onHP 's external credit ratings and certain sustainability metrics. Funds borrowed under the New Revolving Facility may be used for general corporate purposes. As ofJuly 31, 2021 , we maintained the above mentioned 5-year senior unsecured committed revolving credit facility with aggregate lending commitments of$5.0 billion . Commitments under the$5.0 billion revolving credit facility will be available untilMay 26, 2027 . Available Borrowing Resources As ofJuly 31, 2021 , we had available borrowing resources of$575 million from uncommitted lines of credit in addition to the senior unsecured committed revolving credit facilities. InDecember 2020 , we filed a post-effective amendment to convert the shelf registration statement we initially filed inDecember 2019 (the "2019 Shelf Registration Statement") to a non-automatic shelf registration statement because we are no longer a "well-known seasoned issuer". The 2019 Shelf Registration Statement was declared effective by theSEC onFebruary 25, 2021 and enables us to offer for sale, from time to time, in one or more offerings,$5.0 billion , in the aggregate, of debt securities, common stock, preferred stock, depository shares and warrants. For more information on our borrowings, see Note 9, "Borrowings", to the Consolidated Condensed Financial Statements in Item 1 of Part I of this report, which is incorporated herein by reference. Credit Ratings Our credit risk is evaluated by major independent rating agencies based upon publicly available information as well as information obtained in our ongoing discussions with them. While we do not have any rating downgrade triggers that would accelerate the maturity of a material amount of our debt, previous downgrades have increased the cost of borrowing under our credit facilities, have reduced market capacity for our commercial paper and have required the posting of additional collateral under some of our derivative contracts. In addition, any further downgrade to our credit ratings by any rating agencies may further impact us in a similar manner, and, depending on the extent of any such downgrade, could have a negative impact on our liquidity and capital position. We can access alternative sources of funding, including drawdowns under our credit facilities, if necessary, to offset potential reductions in the market capacity for our commercial paper. 58
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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
Principal and Interest payments on debt
In June 2021 , we issued $2.0 billion in aggregate principal amount of senior
notes across various maturities. We used approximately $1.0 billion of the
proceeds from such issuance to fund the redemption of existing notes maturing in
2021. As a result our future principal payments on debt increased from $6.2
billion as at October 31, 2020 to $7.2 billion as at July 31, 2021 and interest
payment on debt increased from $2.2 billion as at October 31, 2020 to $2.4
billion as at July 31, 2021 . For more information on the new notes and the
redemption of existing notes, see Note 9, "Borrowings", to the Consolidated
Condensed Financial Statements in Item 1 of Part I of this report, which is
incorporated herein by reference.
Unconditional Purchase Obligation
Purchase obligations include agreements to purchase goods or services that are
enforceable and legally binding on HP 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
unconditional purchase obligations are primarily related to inventory and
service support. Unconditional purchase obligations exclude agreements that are
cancellable without penalty. As of July 31, 2021 , the Company had outstanding
purchase commitments of $6.8 billion . The majority of these commitments are due
within five years, see Note 14, "Commitments", to the Consolidated Condensed
Financial Statements in Item 1 of Part I of this report, which is incorporated
herein by reference.
Retirement and Post-Retirement Benefit Plan Contributions
As of July 31, 2021 , we anticipate making contributions for the remainder of
fiscal year 2021 of approximately $27 million to our non-U.S. pension plans,
$13 million to cover benefit payments to U.S. non-qualified pension plan
participants and $2 million to cover benefit claims for our post-retirement
benefit plans. Our policy is to fund our pension plans so that we meet at least
the minimum contribution required by local government, funding and taxing
authorities. For more information on our retirement and post-retirement benefit
plans, see Note 4, "Retirement and Post-Retirement Benefit Plans", to the
Consolidated Condensed Financial Statements in Item 1 of Part I of this report,
which is incorporated herein by reference.
Cost Savings Plan
As a result of our approved restructuring plans, we expect to make future cash
payments of approximately $0.4 billion . We expect to make future cash payments
of $0.1 billion in fiscal year 2021 with remaining cash payments through fiscal
year 2023. For more information on our restructuring activities that are part of
our cost improvements, see Note 3, "Restructuring and Other Charges", to the
Consolidated Condensed Financial Statements in Item 1 of Part I of this report,
which is incorporated herein by reference.
Uncertain Tax Positions
As of July 31, 2021 , we had approximately $566 million of recorded liabilities
and related interest and penalties pertaining to uncertain tax positions. We are
unable to make a reasonable estimate as to when cash settlement with the tax
authorities might occur due to the uncertainties related to these tax matters.
Payments of these obligations would result from settlements with taxing
authorities. For more information on our uncertain tax positions, see Note 5,
"Taxes on Earnings", to the Consolidated Condensed Financial Statements in
Item 1 of Part I of this report, which is incorporated herein by reference.
Off-balance sheet arrangements
As part of our ongoing business, we have not participated in transactions that
generate material relationships with unconsolidated entities or financial
partnerships, such as entities often referred to as structured finance or
special purpose entities, which would have been established for the purpose of
facilitating off-balance sheet arrangements or other contractually narrow or
limited purposes.
We have third-party short-term financing arrangements intended to facilitate the
working capital requirements of certain customers. For more information on our
third-party short-term financing arrangements, see Note 6, "Supplementary
Financial Information", to the Consolidated Condensed Financial Statements in
Item 1 of Part I of this report, which is incorporated herein by reference.
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