Discussion and analysis of the financial position and the operating result by the management of HP INC. (Form 10-K)
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. This section discusses the results of operations for the
fiscal year ended October 31, 2021 compared to the fiscal year ended October 31,
2020 . A discussion of the results of operations is followed by a more detailed
discussion of the results of operations by segment. For a discussion of the
fiscal year ended October 31, 2020 compared to the fiscal year ended October 31,
2019 , please refer to Part II, Item 7, "Management's Discussion and Analysis of
Financial Condition and Results of Operations" in our Annual Report on Form 10-K
for the fiscal year ended October 31, 2020 .
•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.
The discussion of financial condition and results of our operations that follows
provides information that will assist the reader in understanding our
Consolidated 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 Financial Statements. This discussion should
be read in conjunction with our Consolidated Financial Statements and the
related notes that appear elsewhere in this document.
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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 with the PC becoming essential for hybrid work, learn and play. We believe that we are well positioned due to our competitive product lineup along with our recent acquisitions in peripherals and remote-computing solutions. •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 at least in the short-term, 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 and other supply chain disruptions particularly in printer hardware which we expect to continue to negatively impact our ability to meet demand at least in the short-term. We also obtain many Printing components from single source 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 fiscal year 2022, we expect to see continued demand for both Personal Systems and Printing. We also anticipate that component shortages, manufacturing disruptions and logistics challenges will continue to impact our revenues and margins. 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, production and backlog management, strengthening our capabilities in our areas of strategic focus, strengthening our pricing discipline, and developing and capitalizing on market opportunities. 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 33
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Management's Discussion and Analysis of
Financial Condition and Results of Operations
"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 continued to look at new cost savings
opportunities and remained ahead of our $1.2 billion gross run rate structural
cost reduction plan. In the third quarter of fiscal year 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 enabling HP '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 Financial
Statements in Item 8 of Part II 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 reviews
the latest data from our business and site leaders and identifies and addresses
emerging risks and issues, and we have put in place global policies and
protocols based on guidance from healthcare experts and public health leaders,
which we continue to review and update. 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. We have commenced a phased approach to returning our employees onsite,
which included modifications to certain of our facilities as we adapt to a
hybrid work environment.
The business impact of the COVID-19 pandemic has created new and different
demand dynamics in the market. Our Personal Systems business benefited from the
remote working and learning environment, including growth in gaming. We saw
continued strong demand in Consumer PCs and mix shifts from low end to premium
products in Commercial PCs in the second half of fiscal year 2021.We had seen a
strong Chromebook demand in first half of the year. In Printing, Consumer print
demand remained strong, and Commercial print is expected to continue its gradual
improvement as more offices reopen. Also, favorable pricing including
historically low promotions and incentives have 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 and component constraints primarily integrated circuits and panels,
manufacturing disruptions in Asia and logistics challenges globally, at least in
short-term.
As the COVID-19 pandemic continues and new variants of the virus 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 in Asia ,
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 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
On March 2, 2020 , Xerox Holdings Corporation ("Xerox") commenced an unsolicited
exchange offer for all outstanding shares of HP 's common stock (the "Offer").
Xerox had also previously nominated candidates for election to HP 's Board of
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Directors at HP 's 2020 annual meeting of stockholders. On March 31, 2020 , Xerox
announced that the Offer had been terminated and subsequently withdrew its slate
of director nominees. In order to respond to Xerox's actions, HP incurred
certain costs during the fiscal year ended October 31, 2020 .
Oracle Corporation ("Oracle") Litigation proceeds
On October 12, 2021 , Oracle paid approximately $4.65 billion , to satisfy the
judgment with interest, related to the litigation in connection with Oracle's
discontinuation of software support for former Hewlett-Packard Company's
Itanium-based line of mission-critical servers. The net proceeds from the
judgement are being shared equally between HP and Hewlett Packard Enterprise
pursuant to the terms of the separation and distribution agreement. For more
information, see Note 14, "Litigation and Contingencies" to the Consolidated
Financial Statements in Item 8 of Part II of this report, which is incorporated
herein by reference.
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 this Annual Report on Form 10-K.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
General
The Consolidated Financial Statements of HP are prepared in accordance with
United States ("U.S.") generally accepted accounting principles ("GAAP"), which
require management to make estimates, judgments and assumptions that affect the
reported amounts of assets, liabilities, net revenue and expenses, and the
disclosure of contingent liabilities. As of October 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.
Management bases its estimates on historical experience and on various other
assumptions that it believes to be reasonable under the circumstances, the
results of which form the basis for making judgments about the carrying amount
of assets and liabilities that are not readily apparent from other sources.
Management has discussed the development, selection and disclosure of these
estimates with the Audit Committee of HP 's Board of Directors. Management
believes that the accounting estimates employed and the resulting amounts are
reasonable; however, actual results may differ from these estimates. Making
estimates and judgments about future events is inherently unpredictable and is
subject to significant uncertainties, some of which are beyond our control.
Should any of these estimates and assumptions change or prove to have been
incorrect, it could have a material impact on our results of operations,
financial position and cash flows.
A summary of significant accounting policies is included in Note 1, "Overview
and Summary of Significant Accounting Policies" to the Consolidated Financial
Statements in Item 8, which is incorporated herein by reference. An accounting
policy is deemed to be critical if it requires an accounting estimate to be made
based on assumptions about matters that are highly uncertain at the time the
estimate is made, if different estimates reasonably could have been used, or if
changes in the estimate that are reasonably possible could materially impact the
financial statements. Management believes the following critical accounting
policies reflect the significant estimates and assumptions used in the
preparation of the Consolidated Financial Statements.
Revenue Recognition
We recognize revenue depicting the transfer of promised goods or services to
customers in an amount that reflects the consideration to which we are expected
to be entitled in exchange for those goods or services. We evaluate customers'
ability to pay based on various factors like historical payment experience,
financial metrics and customer credit scores.
We enter into contracts to sell our products and services, and while many of our
sales contracts contain standard terms and conditions, there are contracts which
contain non-standard terms and conditions. Further, many of our arrangements
include multiple performance obligations. As a result, significant contract
interpretation may be required to determine the appropriate accounting,
including the identification of performance obligations that are distinct, the
allocation of the transaction price among performance obligations in the
arrangement and the timing of transfer of control of promised goods or services
for each of those performance obligations.
We evaluate each performance obligation in an arrangement to determine whether
it represents a distinct good or services. A performance obligation constitutes
distinct goods or services when the customer can benefit from the goods or
services either on its own or together with other resources that are readily
available to the customer and the performance obligation is distinct within the
context of the contract.
Transaction price is the amount of consideration to which we expect to be
entitled in exchange for transferring goods or services to the customer. If the
transaction price includes a variable amount, we estimate the amount using
either the expected value or most likely amount method. We reduce the
transaction price at the time of revenue recognition for customer and
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Management's Discussion and Analysis of
Financial Condition and Results of Operations
distributor programs and incentive offerings, rebates, promotions, other
volume-based incentives and expected returns. We use estimates to determine the
expected variable consideration for such programs based on historical
experience, expected consumer behavior and market conditions.
When a sales arrangement contains multiple performance obligations, such as
hardware and/or services, we allocate revenue to each performance obligation in
proportion to their selling price. The selling price for each performance
obligation is based on its Standalone Selling Price ("SSP"). We establish SSP
using the price charged for a performance obligation when sold separately
("observable price") and, in some instances, using the price established by
management having the relevant authority. When observable price is not
available, we establish SSP based on management's judgment considering internal
factors such as margin objectives, pricing practices and controls, customer
segment pricing strategies and the product life-cycle. Consideration is also
given to market conditions such as competitor pricing strategies and technology
industry life cycles. We may modify or develop new go-to-market practices in the
future, which may result in changes in selling prices, impacting standalone
selling price determination applying the aforementioned management judgments and
estimates. This may change the pattern and timing of revenue recognition for
identical arrangements executed in future periods but will not change the total
revenue recognized for any given arrangement. In most arrangements with multiple
performance obligations, the transaction price is allocated to each performance
obligation at the inception of the arrangement based on their relative selling
price.
Revenue is recognized when, or as, a performance obligation is satisfied by
transferring control of a promised good or service to a customer. We generally
invoice the customer upon delivery of the goods or services and the payments are
due as per contract terms. For fixed-price support or maintenance and other
service contracts that are in the nature of stand-ready obligations, payments
are generally received in advance from customers and revenue is recognized on a
straight-line basis over the duration of the contract. In instances when revenue
is derived from sales of third-party vendor products or services, we record
revenue on a gross basis when we are a principal in the transaction and on a net
basis when we are acting as an agent between the customer and the vendor. We
consider several factors to determine whether we are acting as a principal or an
agent, most notably whether we are the primary obligor to the customer, have
established our own pricing and have inventory and credit risks.
Warranty
We accrue the estimated cost of product warranties at the time we recognize
revenue. We evaluate our warranty obligations on a product group basis. Our
standard product warranty terms generally include post-sales support and repairs
or replacement of a product at no additional charge for a specified period.
While we engage in extensive product quality programs and processes, including
actively monitoring and evaluating the quality of our component suppliers, we
base our estimated warranty obligation on 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
failure outside of our baseline experience. Warranty terms generally range from
90 days to three years for parts, labor and onsite services, depending upon the
product. If actual product failure rates or repair costs differ from estimates,
revisions to the estimated warranty obligation may be required.
Retirement and Post-Retirement Benefits
Our pension and other post-retirement benefit costs and obligations depend on
various assumptions. Our major assumptions relate primarily to discount rates,
mortality rates, expected increases in compensation levels and the expected
long-term return on plan assets. The discount rate assumption is based on
current investment yields of high-quality fixed-income securities with
maturities similar to the expected benefits payment period. Mortality rates help
predict the expected life of plan participants and are based on a historical
demographic study of the plan. The expected increase in the compensation levels
assumption reflects our long-term actual experience and future expectations. The
expected long-term return on plan assets is determined based on asset
allocations, historical portfolio results, historical asset correlations and
management's expected returns for each asset class. We evaluate our expected
return assumptions annually including reviewing current capital market
assumptions to assess the reasonableness of the expected long-term return on
plan assets. In any fiscal year, significant differences may arise between the
actual return and the expected long-term return on plan assets. Historically,
differences between the actual return and expected long-term return on plan
assets have resulted from changes in target or actual asset allocation,
short-term performance relative to expected long-term performance, and to a
lesser extent, differences between target and actual investment allocations, the
timing of benefit payments compared to expectations, and the use of derivatives
intended to effect asset allocation changes or hedge certain investment or
liability exposures. For the recognition of net periodic benefit (credit) cost,
the calculation of the expected long-term return on plan assets uses the fair
value of plan assets as of the beginning of the fiscal year unless updated as a
result of interim re-measurement.
Our major assumptions vary by plan, and the weighted-average rates used are set
forth in Note 4, "Retirement and Post-Retirement Benefit Plans" to the
Consolidated Financial Statements in Item 8, which is incorporated herein by
reference. The following table provides the impact a change of 25 basis points
in each of the weighted-average assumptions of the discount
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Management's Discussion and Analysis of
Financial Condition and Results of Operations
rate, expected increase in compensation levels and expected long-term return on
plan assets would have had on our net periodic benefit (credit) cost for fiscal
year 2021:
Change in Net Periodic
Benefit Cost
in millions
Assumptions:
Discount rate $ 7
Expected increase in compensation levels $ 2
Expected long-term return on plan assets $ 30
Taxes on Earnings
As a result of certain employment actions and capital investments we have
undertaken, income from manufacturing activities in certain jurisdictions is
subject to reduced tax rates and, in some cases, is wholly exempt from taxes for
fiscal years through 2029.
Material changes in our estimates of cash, working capital and long-term
investment requirements in the various jurisdictions in which we do business
could impact how future earnings are repatriated to the United States , and our
related future effective tax rate.
We calculate our current and deferred tax provisions based on estimates and
assumptions that could differ from the final positions reflected in our income
tax returns. We adjust our current and deferred tax provisions based on income
tax returns which are generally filed in the third or fourth quarters of the
subsequent fiscal year.
We recognize deferred tax assets and liabilities for the expected tax
consequences of temporary differences between the tax bases of assets and
liabilities and their reported amounts using enacted tax rates in effect for the
year in which we expect the differences to reverse.
We record a valuation allowance to reduce deferred tax assets to the amount that
we are more likely than not to realize. In determining the need for a valuation
allowance, we consider future market growth, forecasted earnings, future taxable
income, the mix of earnings in the jurisdictions in which we operate and prudent
and feasible tax planning strategies. In the event we were to determine that it
is more likely than not that we will be unable to realize all or part of our
deferred tax assets in the future, we would increase the valuation allowance and
recognize a corresponding charge to earnings or other comprehensive income in
the period in which we make such a determination. Likewise, if we later
determine that we are more likely than not to realize the deferred tax assets,
we would reverse the applicable portion of the previously recognized valuation
allowance. In order for us to realize our deferred tax assets, we must be able
to generate sufficient taxable income in the jurisdictions in which the deferred
tax assets are located.
We are subject to income taxes in the United States and approximately 60 other
countries, and we are subject to routine corporate income tax audits in many of
these jurisdictions. We believe that positions taken on our tax returns are
fully supported, but tax authorities may challenge these positions, and our
positions may not be fully sustained on examination by the relevant tax
authorities. Accordingly, our income tax provision includes amounts intended to
satisfy assessments that may result from these challenges. Our accrual for
uncertain tax positions is attributable primarily to uncertainties concerning
the tax treatment of our domestic operations, including the allocation of income
among different jurisdictions, intercompany transactions, pension and related
interest. We adjust our uncertain tax positions to reflect the impact of
negotiations, settlements, rulings, advice of legal counsel, and other
information and events pertaining to a particular audit. Determining the
appropriate provision for potential deficiencies or reductions in tax benefits
that could reasonably result from an audit requires management judgments and
estimates, and income tax audits are inherently unpredictable. We may not
accurately predict the outcomes of these audits, and the amounts ultimately paid
on resolution of an audit could be materially different from the amounts
previously included in our income tax provision and, therefore, could have a
material impact on our provision for taxes, net earnings and cash flows. For a
further discussion on taxes on earnings, refer to Note 6, "Taxes on Earnings" to
the Consolidated Financial Statements in Item 8, which is incorporated herein by
reference.
Inventory
We state our inventory at the lower of cost or market on a first-in, first-out
basis. We make adjustments to reduce the cost of inventory to its net realizable
value at the product group level for estimated excess or obsolescence
considering judgments related to future demand and market conditions, along with
the impact of COVID-19. Factors influencing these adjustments include changes in
demand, technological changes, product life cycle and development plans,
component cost trends, product pricing, physical deterioration and quality
issues.
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Financial Condition and Results of Operations
Business Combinations
We allocate the fair value of purchase consideration to the assets acquired,
liabilities assumed, and non-controlling interests in the acquiree generally
based on their fair values at the acquisition date. The excess of the fair value
of purchase consideration over the fair value of these assets acquired,
liabilities assumed and non-controlling interests in the acquiree is recorded as
goodwill and may involve engaging independent third parties to perform an
appraisal. When determining the fair values of assets acquired, liabilities
assumed, and non-controlling interests in the acquiree, management makes
significant estimates and assumptions, especially with respect to intangible
assets.
Critical estimates in valuing intangible assets include, but are not limited to,
expected future cash flows, which includes consideration of future growth rates
and margins, attrition rates, future changes in technology and brand awareness,
loyalty and position, and discount rates. Fair value estimates are based on the
assumptions management believes a market participant would use in pricing the
asset or liability. Amounts recorded in a business combination may change during
the measurement period, which is a period not to exceed one year from the date
of acquisition, as additional information about conditions existing at the
acquisition date becomes available.
Goodwill
We review goodwill for impairment annually during our fourth quarter and
whenever events or changes in circumstances indicate the carrying amount of
goodwill may not be recoverable. A qualitative assessment is first performed to
determine if the fair value of a reporting unit is more likely than not to be
less than its carrying amount. Judgment in the assessment of qualitative factors
of impairment may include changes in business climate, market conditions, or
other events impacting the reporting unit. If we determine an impairment is more
likely than not based on our qualitative assessment, a quantitative assessment
of impairment is performed.
Performing a quantitative goodwill impairment test includes the determination of
the fair value of a reporting unit and involves significant estimates and
assumptions. These estimates and assumptions include, among others, revenue
growth rates and operating margins used to calculate projected future cash
flows, risk-adjusted discount rates, future economic and market conditions, and
the determination of appropriate market comparables. If we determine the
carrying amount exceeds fair value, goodwill is impaired and the excess is
recognized as an impairment loss.
Loss Contingencies
We are involved in various lawsuits, claims, investigations and proceedings
including those consisting of intellectual property ("IP"), commercial,
securities, employment, employee benefits and environmental matters that arise
in the ordinary course of business. We record a liability when we believe that
it is both probable that a liability has been incurred and the amount of loss
can be reasonably estimated. Significant judgment is required to determine both
the probability of having incurred a liability and the estimated amount of the
liability. We review these matters at least quarterly and adjust these
liabilities to reflect the impact of negotiations, settlements, rulings, advice
of legal counsel and other updated information and events, pertaining to a
particular case. Pursuant to the separation and distribution agreement, we share
responsibility with Hewlett Packard Enterprise for certain matters, as discussed
in Note 14, "Litigation and Contingencies" to the Consolidated Financial
Statements in Item 8, which is incorporated herein by reference, and Hewlett
Packard Enterprise has agreed to indemnify us in whole or in part with respect
to certain matters. Based on our experience, we believe that any damage amounts
claimed in the specific litigation and contingencies matters further discussed
in Note 14, "Litigation and Contingencies", are not a meaningful indicator of
HP 's potential liability. Litigation is inherently unpredictable. However, we
believe we have valid defenses with respect to legal matters pending against us.
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. We believe we have recorded adequate provisions for any such
matters and, as of October 31, 2021 , it was not reasonably possible that a
material loss had been incurred in excess of the amounts recognized in our
financial statements.
RECENT ACCOUNTING PRONOUNCEMENTS
For a summary of recent accounting pronouncements applicable to our consolidated
financial statements see Note 1, "Overview and Summary of Significant Accounting
Policies" to the Consolidated Financial Statements in Item 8, which is
incorporated herein by reference.
RESULTS OF OPERATIONS
Revenue from our international operations has historically represented, and we
expect will continue to represent, a majority of our overall net revenue. As a
result, our net revenue growth has been impacted, and we expect it will continue
to be impacted, by fluctuations in foreign currency exchange rates. In order to
provide a framework for assessing performance excluding the impact of foreign
currency fluctuations, we supplement the year-over-year percentage change in net
revenue with the year-over-year percentage change in net revenue on a constant
currency basis, which excludes the effect of foreign currency
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exchange fluctuations calculated by translating current period revenues using
monthly 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:
For the fiscal years ended October 31
2021 2020 2019
Dollars % of Net Dollars % of Net Dollars % of Net
Revenue Revenue Revenue
Dollars in millions
Net revenue $ 63,487 100.0 % $ 56,639 100.0 % $ 58,756 100.0 %
Cost of revenue 50,070 78.9 % 46,202 81.6 % 47,586 81.0 %
Gross profit 13,417 21.1 % 10,437 18.4 % 11,170 19.0 %
Research and development 1,907 3.0 % 1,478 2.6 % 1,499 2.6 %
Selling, general and administrative 5,741 9.0 % 4,906 8.6 % 5,368 9.1 %
Restructuring and other charges 245 0.4 % 462 0.9 % 275 0.4 %
Acquisition-related charges 68 0.1 % 16 - % 35 0.1 %
Amortization of intangible assets 154 0.2 % 113 0.2 % 116 0.2 %
Earnings from operations 5,302 8.4 % 3,462 6.1 % 3,877 6.6 %
Interest and other, net 2,209 3.4 % (231) (0.4) % (1,354) (2.3) %
Earnings before taxes 7,511 11.8 % 3,231 5.7 % 2,523 4.3 %
(Provision for) benefit from taxes (1,008) (1.6) % (387) (0.7) % 629 1.1 %
Net earnings $ 6,503 10.2 % $ 2,844 5.0 % $ 3,152 5.4 %
Net Revenue
In fiscal year 2021, total net revenue increased 12.1% (increased 10.2% on a
constant currency basis) as compared to the prior-year period. Net revenue from
the United States increased 11.0% to $22.4 billion , and outside of the United
States increased 12.7% to $41.1 billion .
The increase in net revenue was primarily driven by growth in Notebooks,
Supplies, Consumer and Commercial Printing, and favorable foreign currency
impacts, partially offset by decline in Desktops. The increase in net revenue is
due to strong demand and higher ASPs driven by work from home and remote
learning.
A detailed discussion of the factors contributing to the changes in segment net
revenue is included under "Segment Information" below.
Gross Margin
For fiscal year 2021, gross margin increased by 2.7 percentage points, primarily
driven by favorable pricing including lower promotions and favorable foreign
currency impacts, partially offset by higher costs including commodity costs. A
detailed discussion of the factors contributing to the changes in segment gross
margins is included under "Segment Information" below.
Operating Expenses
Research and Development ("R&D")
R&D expense increased 29.0% in fiscal year 2021, 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 17.0% in fiscal year 2021, primarily driven by
go-to-market initiatives and higher variable compensation.
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Management's Discussion and Analysis of
Financial Condition and Results of Operations
Restructuring and other Charges
Restructuring and other charges relate primarily to the Fiscal 2020 Plan. For
more information, see Note 3, "Restructuring and Other Charges", to the
Consolidated Financial Statements in Item 8 of Part II of this report, which is
incorporated herein by reference.
Acquisition-related Charges
Acquisition-related charges relate primarily to third-party professional and
legal fees, and integration-related costs, as well as fair value adjustments of
certain acquired assets such as inventory. Acquisition-related charges increased
by $52 million in the fiscal year 2021, primarily due to recent acquisitions.
Amortization of Intangible Assets
Amortization of intangible assets relates primarily to intangible assets
resulting from acquisitions. Amortization of Intangible assets increased by $41
million in the fiscal year 2021, primarily due to recent acquisitions.
Interest and Other, Net
Interest and other, net for the fiscal year 2021 was net gain as compared to a
net expense in the fiscal year 2020, primarily due to gain from one-time Oracle
litigation proceeds of $2.3 billion , impact from defined benefit plan
settlements, partially offset by lower Net Periodic Post -retirement Benefit
Credit. For more information, see Note 7, "Supplementary Financial Information",
to the Consolidated Financial Statements in Item 8 of Part II of this report,
which is incorporated herein by reference.
Provision for taxes
Our effective tax rate was 13.4% in fiscal year 2021. In fiscal year 2021, our
effective tax rate differed from the U.S. federal statutory rate of 21%
primarily due to changes in valuation allowances and favorable tax rates
associated with certain earnings in lower-tax jurisdictions throughout the
world. The jurisdictions with favorable tax rates that had the most significant
impact on our effective tax rate in the periods presented were Puerto Rico ,
Singapore , and Malaysia .
For a reconciliation of our effective tax rate to the U.S. federal statutory
rate of 21% in fiscal year 2021, and further explanation of our provision for
income taxes, see Note 6, "Taxes on Earnings" to the Consolidated Financial
Statements in Item 8, which is incorporated herein by reference.
In fiscal year 2021, we recorded $9 million of net income tax charges related to
discrete items in the provision for taxes. This amount included income tax
charges of $533 million related to the Oracle litigation proceeds, $15 million
of uncertain tax position charges, and $9 million of other net tax charges.
These charges were partially offset by income tax benefits of $393 million
related to changes in valuation allowances, $89 million of tax effects related
to internal reorganization, $50 million related to restructuring charges, and
$16 million related to the filing of tax returns in various jurisdictions.
Segment Information
A description of the products and services for each segment can be found in
Note 2, "Segment Information," to the Consolidated Financial Statements in Item
8, which is incorporated herein by reference. Future changes to this
organizational structure may result in changes to the segments disclosed.
Personal Systems
For the fiscal years ended October 31
2021 2020 2019
Dollars in millions
Net revenue $ 43,359 $ 38,997 $ 38,694
Earnings from operations $ 3,101$ 2,312 $
1,898
Earnings from operations as a % of net revenue 7.2% 5.9 % 4.9%
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Management's Discussion and Analysis of
Financial Condition and Results of Operations
The components of net sales and the weighted change in net sales by business area are as follows:
For the fiscal years endedOctober 31 Net Revenue Weighted Net Revenue Change
Percentage points (1)
2021 2020 2019 2021 2020
In millions
Notebooks $ 30,522 $ 25,766 $ 22,928 12.2 7.3
Desktops 9,381 9,806 12,046 (1.1) (5.8)
Workstations 1,669 1,816 2,389 (0.4) (1.5)
Other 1,787 1,609 1,331 0.5 0.8
Total Personal Systems $ 43,359 $ 38,997 $ 38,694 11.2 0.8
(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.
Fiscal Year 2021 compared with Fiscal Year 2020
Personal Systems net revenue increased 11.2% (increased 8.8% on a constant
currency basis) in fiscal year 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. The net
revenue increase was driven by 9.8% increase in unit volume and 1.3% increase in
ASPs. The increase in unit volume was primarily due to growth in Notebooks
resulting from strong demand driven by work from home, remote learning and
gaming, partially offset by decline in Desktops. Also, industry-wide supply
chain constraints limited unit growth during the fiscal year 2021. The increase
in ASPs was primarily due to favorable pricing including lower promotions and
favorable foreign currency impacts, partially offset by mix shifts.
Consumer PCs revenue increased 19.9% driven by unit growth in Notebooks and
Desktops and higher ASPs. Commercial revenue increased 6.4% primarily driven by
unit growth in Notebooks, partially offset by lower ASPs driven by higher
Chromebook mix and unit declines in Desktops.
Consequently, net revenue increased 18.5% in Notebooks and decreased 4.3% in
Desktops and 8.1% in Workstations.
Personal Systems earnings from operations as a percentage of net revenue
increased by 1.3 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 revenue. The increase in gross margin was primarily due to
favorable pricing including lower promotions and favorable foreign currency
impacts, partially offset by higher commodity and logistics costs. Operating
expenses as a percentage of revenue increased by 0.7 percentage points primarily
due to R&D investments in innovation, go-to-market initiatives and higher
variable compensation.
Printing
For the fiscal years ended October 31
2021 2020 2019
Dollars in millions
Net revenue $ 20,128 $ 17,641 $ 20,066
Earnings from operations $ 3,636 $ 2,495 $ 3,202
Earnings from operations as a % of net revenue 18.1% 14.1% 16.0%
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Management's Discussion and Analysis of
Financial Condition and Results of Operations
The components of net sales and the weighted change in net sales by business area are made up as follows:
For the fiscal years endedOctober 31 Net Revenue Weighted Net Revenue
Change percentage points (1)
2021 2020 2019 2021 2020
In millions
Supplies $ 12,632 $ 11,586 $ 12,921 5.9 (6.7)
Commercial 4,209 3,539 4,612 3.8 (5.3)
Consumer 3,287 2,516 2,533 4.4 (0.1)
Total Printing $ 20,128 $ 17,641 $ 20,066 14.1 (12.1)
(1) Weighted Net Revenue Change Percentage Points measures the 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 period by
total segment revenue for the prior-year period.
Fiscal Year 2021 compared with Fiscal Year 2020
Printing net revenue increased 14.1% (increased 13.2% on a constant currency
basis) for fiscal year 2021 as compared to the prior-year period. The growth in
net revenue was primarily driven by a growth in Supplies, Consumer and
Commercial. Net revenue for Supplies increased 9.0% as compared to the
prior-year period, primarily driven by favorable pricing including lower
promotions and improvement in enterprise and SMB demand. Printer ASPs increased
26.2% and printer unit volume increased 3.0% as compared to the prior-year
period. Printer ASPs increased primarily due to favorable pricing including
lower promotions. The increase in printer unit volume was driven by both
Consumer and Commercial. While there has been unit growth compared to prior-year
period, we continue to experience supply chain constraints, including component
shortages, which limited growth during fiscal year 2021.
Net revenue for Commercial increased 18.9% as compared to the prior-year period,
due to a 7.6% increase in printer unit volume and a 20.4% 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 30.6% as compared to the prior-year period,
due to a 27.4% increase in ASPs and a 2.4% increase in printer unit volume. The
increase in ASPs was primarily driven by favorable pricing. The printer unit
volume increased due to strong demand from remote working and learning.
Printing earnings from operations as a percentage of net revenue increased by
4.0 percentage points for the fiscal year 2021 as compared to the prior-year
period, primarily due to increase in gross margin driven by favorable pricing
including lower promotions, partially offset by mix shifts. Operating expenses
as a percentage of revenue remained flat.
Corporate Investments
The loss from operations in Corporate Investments for the fiscal year 2021 was
primarily due to expenses associated with our incubation projects and
investments in digital enablement.
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,
however, with the emergence of new 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 and
market risks identified in the section entitled "Quantitative and Qualitative
Disclosures about Market Risk" in Item 7A, which are incorporated herein by
reference.
During the fiscal year 2021, HP completed four acquisitions with a combined
purchase price of $854 million , net of cash acquired, of which $400 million was
recorded as goodwill and $385 million as intangible assets related to these
acquisitions. For more information, see Note 18, "Acquisitions", to the
Consolidated Financial Statements in Item 8 of Part II 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
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 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 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:
As of October 31
2021 2020 2019
In billionsCash and cash equivalents
Marketable Debt Securities (1) $ –
$ 7.5 $ 6.2 $ 5.1 (1)Includes highly liquidU.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. Our key cash flow metrics were as follows:
For the past fiscal years
2021 2020 2019
In millions
Net cash provided by operating activities $ 6,409 $ 4,316 $ 4,654
Net cash used in investing activities (1,012) (1,016) (438)
Net cash used in financing activities (5,962) (2,973) (4,845)
Net (decrease) increase in cash and cash equivalents
$ 327 $ (629) Operating Activities Net cash provided by operating activities increased by$2.1 billion for fiscal year 2021 as compared to fiscal year 2020, primarily due to higher earnings from operation including net gain from the one-time Oracle litigation proceeds of$1.8 billion , partially offset by higher cash utilized in working capital activities as a result of changes in demand dynamics and supply chain constraints due to COVID-19. Key Working Capital Metrics Management utilizes current cash conversion cycle information to manage our working capital level. The table below presents the cash conversion cycle:
away
2021 2020 2019 Days of sales outstanding in accounts receivable 30 32 35
(“DSO”)
Days of supply in inventory ("DOS") 53 43 41
Days of purchases outstanding in accounts payable (108) (105) (107)
("DPO")
Cash conversion cycle (25) (30) (31)
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,
macro-economic factors, seasonal trends and the timing of revenue recognition
and inventory purchases within the period.
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Management's Discussion and Analysis of
Financial Condition and Results of Operations
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 of net revenue. The decrease in DSO as compared to
prior-year period, was due to strong collections 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 of cost of
goods sold. The increase in DOS as compared to prior-year period, was primarily
due to higher strategic buys to better assure supply of commodities in Personal
Systems and recovering Printing inventory from the impacts of COVID-19.
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 of cost of goods sold. The decrease in DPO compared to prior-year
period, was primarily due to higher commodity costs, partially offset by working
capital management activities.
Investing Activities
Net cash used in investing activities remained flat for fiscal year 2021 as
compared to fiscal year 2020, primarily due to decrease in investments of $0.6
billion and collateral related to derivative instruments of $0.3 billion ,
partially offset by higher net payments for acquisitions of $0.9 billion .
Financing Activities
Net cash used in financing activities increased by $3.0 billion in fiscal year
2021 compared to fiscal year 2020, primarily due to higher share repurchases of
$3.1 billion and lower proceeds from debt issuance of $1.0 billion , partially
offset by lower payment of debt of $0.6 billion and higher proceeds from
commercial paper of $0.4 billion .
Share Repurchases and Dividends
In fiscal year 2021, HP returned $7.2 billion to the shareholders in the form of
share repurchases of $6.3 billion and cash dividends of $0.9 billion . As of
October 31, 2021 , HP had approximately $6.4 billion remaining under the share
repurchase authorizations approved by HP 's Board of Directors. HP intends to
continue to repurchase shares at an elevated level of at least $4.0 billion in
fiscal year 2022.
For more information on our share repurchases, see Note 12, "Stockholders'
Deficit", to the Consolidated Financial Statements in Item 8, which is
incorporated herein by reference.
Capital Resources
Debt Levels
As of October 31
2021 2020 2019
Dollars in millions
Short-term debt $ 1,106 $ 674 $ 357
Long-term debt $ 6,386 $ 5,543 $ 4,780
Weighted-average interest rate 3.1 % 3.9 % 4.6 %
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 leverage ratio.
Short-term debt increased by $0.4 billion and long-term debt increased by $0.8
billion for fiscal year 2021 as compared to fiscal year 2020. The net increase
in total debt was primarily due to issuance of unsecured senior debt in June
2021 amounting to $2.0 billion and commercial paper of $0.4 billion issued in
September 2021 , which was, partially offset by payment of $1.0 billion in July
2021 , towards redemption of existing notes maturing in September and December
2021 .
Our weighted-average interest rate reflects the effective interest 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 10, "Financial
Instruments" in the Consolidated Financial Statements and notes thereto in Item
8, "Financial Statements and Supplementary Data", which is incorporated herein
by reference.
On May 26, 2021 , we entered into a new $5.0 billion 5-year sustainability-linked
senior unsecured committed revolving credit facility (the 'New Revolving
Facility") which will be available until May 26, 2026 . Commitment fees, interest
rates and other terms of borrowing under the New Revolving Facility vary based
on HP 's external credit ratings and certain sustainability metrics.
As of October 31, 2021 , we continue to maintain the New Revolving Facility.
Funds borrowed under the New Revolving Facility may be used for general
corporate purposes.
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Management's Discussion and Analysis of
Financial Condition and Results of Operations
On June 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
September and December 2021 . For more information on the new notes and the
redemption of existing notes, see Note 11, "Borrowings", to the Consolidated
Financial Statements in Item 8 of Part II of this report, which is incorporated
herein by reference.
Available Borrowing Resources
As of October 31, 2021 , we had available borrowing resources of $579 million
from uncommitted lines of credit in addition to the New Revolving Facility.
The amendment to our 2019 Shelf Registration Statement to convert to a
non-automatic shelf registration statement was declared effective by the SEC on
February 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 11, "Borrowings", to the
Consolidated Financial Statements in Item 8, 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 they obtain during our
ongoing discussions. While we currently do not have any rating downgrade
triggers that would accelerate the maturity of a material amount of our debt, a
downgrade from our current credit rating may increase the cost of borrowing
under our credit facility, reduce market capacity for our commercial paper,
require the posting of additional collateral under some of our derivative
contracts and may have a negative impact on our liquidity and capital position,
depending on the extent of such downgrade. We can access alternative sources of
funding, including drawdowns under our credit facility, 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
Our contractual and other obligations as of October 31, 2021 , were as follows:
Payments Due by Period
Total Short-term Long-term
In millions
Principal payments on debt(1) $ 7,550 $ 1,099 $ 6,451
Interest payments on debt(2) 2,335 239 2,096
Purchase obligations(3) 6,940 2,642 4,298
Operating lease obligations 1,381 382 999
Finance lease obligations 24 10 14
Total(4)(5)(6) $ 18,230 $ 4,372 $ 13,858
(1)Amounts represent the principal cash payments relating to our short-term and
long-term debt and do not include any fair value adjustments, discounts or
premiums.
(2)Amounts represent the expected interest payments relating to our short-term
and long-term debt. We have outstanding interest rate swap agreements accounted
for as fair value hedges that have the economic effect of changing fixed
interest rates associated with some of our U.S. Dollar Global Notes to variable
interest rates. The impact of our outstanding interest rate swaps at October 31,
2021 was factored into the calculation of the future interest payments on debt.
(3)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 related principally to inventory and other items.
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.
(4)Retirement and Post-Retirement Benefit Plan Contributions. In fiscal year
2022, we expect to contribute approximately $44 million to non-U.S. pension
plans, $36 million to cover benefit payments to U.S. non-qualified plan
participants and $4 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. Expected contributions and payments to our pension and
post-retirement benefit plans are excluded from the contractual obligations
table because they do not represent contractual cash outflows as they are
dependent on numerous factors which may result in a wide range of outcomes. For
more information on our retirement and post-retirement benefit plans, see Note
4, "Retirement and Post-Retirement Benefit Plans", to the Consolidated Financial
Statements in Item 8, which is incorporated herein by reference.
(5)Cost Savings Plans. As a result of our approved restructuring plans, we
expect to make future cash payments of approximately $0.3 billion . We expect to
make future cash payments of $0.2 billion in fiscal year 2022 with remaining
cash payments through fiscal year 2023. These payments have been excluded from
the contractual obligations table because they do not represent contractual cash
outflows and there is uncertainty as to the timing of these payments. For more
information on our restructuring activities that are part of our cost
improvements, see Note 3, "Restructuring and Other Charges", to the Consolidated
Financial Statements in Item 8, which is incorporated herein by reference.
(6)Uncertain Tax Positions. As of October 31, 2021 , we had approximately $584
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 6, "Taxes on Earnings", to the Consolidated Financial
Statements in Item 8, which is incorporated herein by reference.
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Management's Discussion and Analysis of
Financial Condition and Results of Operations
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 Financial Statements in Item 8, which
is incorporated herein by reference.
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