HP Inc.2016 Annual Report 2017 Proxy StatementTwitter @HPYouTube www.youtube.com/user/HPInstagram www.instagram.com/hpFacebook www.facebook.com/HPThis cover is an HP Indigo digital print, on paper containing 30% post-consumer recycled paper that is environmentally and socially responsible sourced from well-managed forests, and independently certified according to the standards of the Forest Stewardship Council (FSC®).By printing this annual report and proxy statement on paper containing 30% post-consumer recycled waste, the following environmental savings were achieved:25 fewer tons of wood was harvested, or the equivalent of 157 trees71 million fewer BTUs of net energy were used over the lifecycle of the paper, enough energy to power an average US home for 285 days13,617 fewer pounds CO2 equivalents were released into the atmosphere, the equivalent of removing one average car off the road for 1 year 86 days73,858 fewer gallons of water were consumed or degraded throughout the lifecycle of the paper4,944 fewer pounds of solid waste were produced, including sludge and paper disposed of in landfills and incineratorsEnvironmental impact estimates were made using the Environmental Paper Network Paper Calculator Version 3.2.1. www.papercalculator.org.314689_NPS_Cvr_R6.indd 12/15/17 2:39 PM Expand your Annual Meeting experience
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About us1Annual ReportOur vision is to create technology that makes life better for everyone, everywhere — every person, every organization, and every community around the globe. This motivates us — inspires us — to do what we do. To make what we make. To invent, and to reinvent. To engineer experiences that amaze. We won’t stop pushing ahead, because you won’t stop pushing ahead. You’re reinventing how you work. How you play. How you live. With our technology, you’ll reinvent your world. This is our calling. This is a new HP.Keep reinventing.i Message from our President and CEOii Strategyiii Performanceiv Board oversightv Meet the HP Boardvi Meet HP’s executivesvii Stockholder engagementviii Sustainability2Proxy Statement3Form 10-K Message from our President and CEO
Our journey to reinvent is just beginning
Dear Stockholders:
The end of fiscal 2016 concluded HP Inc.’s first year as an independently
traded, Fortune 100 corporation, following the successful completion of
the largest corporate separation in history.
We began our reinvention journey and made a commitment to you, our
stockholders, that we would provide reliable returns and predictable
cash flow, while also building a strong foundation for future growth.
I’m proud to report that we delivered on our financial promises while
solidifying our leadership in the global Personal Systems, Printing and 3D
Printing categories.
Despite volatile macroeconomic conditions and the continuing challenges
of maturing markets, we outperformed our competitors and the market
as a whole, taking profitable share in both Printing and Personal Systems
categories, proving that we can execute in both up and down markets. Our
strategy and vision is disciplined and paying off.
During the course of the year, we created an entirely new line of business
printers and announced the strategic acquisition of Samsung’s printer
business to strengthen our competitive position and accelerate disruption
in the $55 billion A3 copier space. We reinvigorated our Graphics business
and innovated in consumer printing and services. As network and device
security intensified as a global concern, HP met the challenge with the
world’s most secure printers. We also introduced the world’s most
advanced, production ready 3D printers and are partnering with materials,
technology, academic and manufacturing leaders to accelerate this
emerging industry.
In Personal Systems, our product portfolio is the strongest it has been
in decades, winning top awards and rave reviews for commercial and
consumer devices alike. Our new line of premium devices, including one
of the world’s thinnest laptops, is creating a bold new perception of the
company and taking share from the competition.
At the same time, we returned 72% of free cash flow to our stockholders
through dividends and share repurchases and captured savings to
reinvest into research and development. And we did all of this while
winning international acclaim for corporate social responsibility and
taking a leadership role in corporate diversity, inclusion, sustainability, and
community involvement.
Dion J.
Weisler
In short, we’re focused every day, every week, and every quarter on reinventing for our customers, partners, stockholders, and employees.
That intense focus will continue into fiscal 2017 and beyond, no matter what global economic, political, or industry challenges we encounter.
On behalf of the entire management team, thank you for the opportunity to honor this venerable brand by re-energizing HP’s creative,
entrepreneurial spirit. We accomplished a great deal in our first year of reinvention, but there is still much more to be done. I’m confident that
our most exciting – and rewarding — years are still to come.
Sincerely,
Dion J. Weisler
Annual Report
i
Strategy
Delivering on our commitments
We delivered on our commitments.
Second, we committed to delivering 50%
to 75% of free cash flow to stockholders
through share repurchases and dividends,
and returned 72% of free cash flow to
stockholders during the year through $2.0
billion of share repurchases and dividends.
Finally, we said we would invest to make
decisions with a focus on long-term results.
We delivered excellence in our core business
during fiscal year 2016, taking profitable share
where we chose to play and reinvesting our
savings to fund research and development
and to innovate in order to accelerate our
growth and future initiatives. We are focused
on both delivering for today and on building a
business for long-term success.
In our first year as a new company, we
delivered on our financial commitments
and made solid progress across all parts of
our business, from the product portfolio to
corporate and social responsibility. We are
delivering on exactly what we promised
returns,
to our stockholders:
predictable cash
long-term
growth.
flow and
reliable
First, we committed
to operational
excellence, and executed four quarters
in a row of both GAAP net earnings per
share and non-GAAP net earnings per
share within or above our outlook ranges.
Revenue declines have moderated in line
with our expectations, with an increase
in net revenues in the fourth quarter of
fiscal year 2016 compared to the prior year
period. We also implemented more than $1
billion in savings since the separation.
Our strategy.
Our strategy is based on three key pillars: core, growth and future, all of which are supported by a range of incredible innovations.
Core
Growth
Future
Our core is focused on our Personal
Systems and Printing product portfolios.
Our core business operates in a $385
billion market and makes up the vast
majority of our revenues and our operating
profits today. We are working to
aggressively protect, defend and innovate
in our core by revitalizing the consumer
market and driving the commercial market
in Printing and leading the commercial
market and growing the premium market
in Personal Systems.
Profits from our core business enable us to
pursue our growth markets and capture
natural adjacencies that we expect will
become more material over the next two
to three years. These markets have a total
addressable market of approximately
$150 billion and include the A3 copier
segment and graphics in Printing and
commercial mobility in Personal Systems.
Our third pillar, which we refer to as the
future, is for invention and category
creation. We are making investments in
world-class R&D innovation in categories
that we believe will set us up for results in
the next 3 to 10 years. This includes
developing and expanding 3D Printing and
creating a new immersive computing
category in Personal Systems. We believe
that these opportunities have a total
addressable market of approximately $10
to $30 billion.
Underlying all three strategic pillars is the foundation of services and solutions that we are delivering; everything from Managed Print Services
and Instant Ink, all the way through to device-as-a-service, security, manageability and support services. As one of the founders of Silicon Valley,
we are building on the legend of HP to create anew. We are reinventing ourselves, our technologies and what tomorrow holds, so that industries,
communities and individuals can keep reinventing how they operate and create what matters most to them.
Join us as we keep reinventing.
ii
www.hpannualmeeting.com
Performance
How we delivered
Americas
46% of net revenue
6% y/y
4% CC(1)
Non-US net revenue was
63% of total net revenue
Personal systems FY16
$
Net revenue
$30.0 billion
5% y/y
1% CC (1)
Operating
profit
$1.2 billion
3.8% of net revenue
Total
units
Notebooks
net revenue
Desktops
net revenue
Commercial
net revenue
Consumer
net revenue
units
units
3% y/y
2% y/y
2% y/y
9% y/y
7% y/y
5% y/y
5% y/y
Asia Pacific
20% of net revenue
3% y/y
3% CC(1)
Supplies
net revenue
Total hardware
units
Commercial
hardware units
Consumer
hardware units
15% y/y
10% y/y
CC(1)
12% y/y
6% y/y
15% y/y
EMEA
34% of net revenue
8% y/y
2% CC(1)
Printing FY16
$
Net revenue
$18.2 billion
14% y/y
9% CC (1)
Operating
profit
$3.1 billion
17.1% of net revenue
1. CC = Constant currency; adjusted to eliminate the effects of foreign exchange fluctuations.
NOTE: Arrows represent the mathematical direction of the amount the arrow is associated with.
Operating highlights
• Year-over-year print hardware revenue growth in addition to improved average selling prices both year-over-year and
sequentially.
• Printing Supplies revenue trajectory on track to stabilize in constant currency by the end of fiscal year 2017.
• Constant currency growth in Graphics for the thirteenth consecutive quarter.
•
•
Instant Ink enrollees grew sequentially, with the highest quarterly enrollment to date in the fourth quarter of fiscal year 2016.
In Printing, we announced the acquisition of Samsung’s printer business, the A3 platform and 13 laser and 3 ink models, and
launched Sprocket, a mobile photo printer and new Indigo platform for Graphics.
• Year-over-year and sequential revenue growth, market share gains and increased operating profit in Personal Systems.
• Share gains in Personal Systems across all three regions, yielding a record high position of 21.4% market share worldwide,
outgrowing all major competitors.
• Revenue growth in our strategic areas in Personal Systems, which include consumer premium, gaming, commercial mobility
•
and commercial services.
In Personal Systems, we launched products like Elite Slice, EliteBook with privacy screen, OMEN gaming, Chromebook 13,
Pavilion Wave and Spectre x360.
Annual Report
iii
Board oversight
Our focus on good governance
begins with our Board
Introduction
The HP Board of Directors (the “Board”) oversees company strategy and management
performance, monitors business performance, and maintains an appropriate framework
to mitigate risk.
To fulfill these responsibilities, the Board reviews its composition and performance on an
ongoing basis to maintain:
•
•
•
Diverse and complementary skills and experiences which are appropriate to
recognize and seize HP’s strategic opportunities and overcome challenges;
Diversity of thought, background and culture to bring broad insights into the
boardroom; and
Ongoing education and access to management, employees and customers
to enable Directors to develop a sound understanding of HP’s operations and
competitive environment to make appropriately informed decisions.
HP director videos
Meet our directors in a new online video series featuring different members of our Board.
www.hpannualmeeting.com
Governance highlights
Independent board leadership
9 Robust board leadership with
non-executive Chairman and Lead
Independent Director (“LID”) roles, more
details beginning on page 19 of our
proxy statement.
9 Our LID participates in a robust
stockholder outreach program.
9 Our LID works with our non-executive
Chairman to coordinate the annual
performance evaluation of the Chief
Executive Officer (“CEO”).
9 Our LID works annually with our
non-executive Chairman to oversee
Board, committee and individual
director effectiveness.
Other governance best practices
9 Our Bylaws provide our stockholders
with a proxy access right.
9 Our stockholders owning 25% or more
of our common stock have a right to call
special meetings.
9 All of our key committee members
are independent.
9 Directors are elected annually
by majority vote in uncontested
director elections.
9 Each director nominee has agreed to
resign from the Board in the event that
he or she fails to receive a majority vote.
9 We have a robust stockholder and
investor outreach program.
9 Non-employee directors are expected to
own company stock equal to at least five
times their annual cash Board retainer
within five years.
iv
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Meet the HP Board
Committed to strong, independent oversight
Board composition(2)
Independence
8.3%
Our CEO
Aida
Alvarez
Shumeet
Banjeri
Carl
Bass
Robert R.
Bennett
8.3%
Non-executive
Chairman
Charles V.
Bergh
Stacy
Brown-
Philpot
Stephanie A.
Burns
Mary Anne
Citrino
Gender diversity
58%
Male
83.4%
Independent
Directors
42%
Female
Rajiv L.
Gupta(1)
Stacey
Mobley
Subra
Suresh
Dion J.
Weisler
Tenure (inc. HP Co. tenure)
75%
0-2 years
16.7%
5-8 years
8.3%
3-4 years
International experience
(2) Does not include Mr. Gupta, who is not standing
for re-election at this annual meeting.
Margaret C.
Whitman
Europe
North
America
Contact the HP Board*
Asia
You can reach us by emailing us at
directors@hp.com or by writing to us at:
Australia
The HP Board of Directors
1501 Page Mill Road
Palo Alto, CA
94304
(1) Mr. Gupta is not standing for re-election at this annual meeting but will continue serving on the Board until his term expires at the annual meeting. The independent directors
expect to, upon a recommendation of the Nominating, Governance and Social Responsibility Committee, appoint a new Lead Independent Director to serve in this role.
* All directors have access to this correspondence. In accordance with instructions from the Board, the Secretary to the Board reviews all correspondence, organizes the
communications for review by the Board and posts communications to the full Board or to individual directors, as appropriate. Our independent directors have requested that
certain items that are unrelated to the Board’s duties, such as spam, junk mail, mass mailings, solicitations, resumes and job inquiries, not be posted.
Communications that are intended specifically for the Chairman of the Board, the Lead Independent Director, other independent directors or the non-employee directors should be
sent to the e-mail address or street address noted above, to the attention of the Chairman of the Board.
Annual Report
v
Meet HP’s executives
Re-energizing HP’s creative,
entrepreneurial spirit
Our commitments
Optimize cost
structure
Ron
Coughlin
Jon E.
Flaxman
Tracy S.
Keogh
Catherine A.
Lesjak
President,
Personal Systems
Chief Operating
Officer
Chief Human
Resources Officer
Chief Financial
Officer
Enrique
Lores
Marie
Myers
Kim M.
Rivera
Dion J.
Weisler
President, Printing,
Solutions and
Services Systems
Global Controller
and Head of
Finance Services
Chief Legal Officer
and General
Counsel
President and
Chief Executive
Officer
Operating in
170 Countries
49,000
employees worldwide
as of October 31, 2016
over 70 years of history
Invest in our
growth and future
Manage the business
for the long term
Operate with integrity,
transparency
vi
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Stockholder engagement
Dialogue with HP investors
How we communicate with HP investors
We engage with current HP stockholders on a continual basis to gain insights into governance issues and trends that matter to our investors,
and to elicit feedback about our executive compensation program and other topics. We do so in a variety of forums, including in our investor
roadshow, which typically occurs in the first quarter of the calendar year.
Our engagement philosophy
We believe in having
a partnership with
our stockholders
We focus on an ongoing,
year-round dialogue
with our stockholders
We seek to continually
improve value for all of
our stockholders
We implement changes
as a result of feedback
from our stockholders
Who engages with our stockholders?
It is our ongoing conversation with the investor community that allows us to understand and respond to stockholder feedback, and to
continue our tireless effort to improve stockholder value. In addition to our investor relations and legal teams, our Executive Leadership
Team and our Board of Directors all speak directly to stockholders on an ongoing basis, sharing our progress on the journey of reinventing
HP and soliciting feedback on the way.
Our investor calendar
A calendar of events from
the 2016 fiscal year, with
all of our presentations and
webcasts, is available on our
investor relations website at
www.hp.com/investor/home.
November 2015
•
Q4 Earnings Conference Call
December 2015
•
•
•
Credit Suisse 2015: Technology,
Media, and Telecom Conference
Raymond James 2015
Technology Conference
Barclays 2015 Global
Technology, Media, and
Telecommunications
Conference
February 2016
•
Q1 Earnings Conference Call
June 2016
•
March 2016
•
Morgan Stanley Technology,
Media & Telecom Conference
Susquehanna Semi, Storage &
Tech Conference
Technology Briefing: Graphics
Solutions Business
•
•
April 2016
•
HP Inc. Annual Stockholder
Meeting
May 2016
•
•
Q2 Earnings Conference Call
HP at drupa 2016
Bernstein’s 32nd Annual
Strategic Decisions Conference
2016 Bank of America
Merrill Lynch
Global Technology Conference
Fireside chat with Dion Weisler
and Cathie Lesjak: drupa 2016
•
•
•
August 2016
•
•
Q3 Earnings Conference Call
Jefferies 2016 Semiconductor,
Hardware, and Communications
Infrastructure Summit
September 2016
•
Citi’s 2016 Global Technology
Conference
HP Investor Webcast
Regarding HP’s Acquisition of
Samsung Printer Business
2016 Deutsche Bank
Technology Conference
2016 Mizuho Investment
Conference Tokyo
•
•
•
October 2016
•
HP Securities Analyst Meeting
2016
Annual Report
vii
Sustainability
Reinventing a better world
Recognized as one of the
world’s most sustainable
companies
force
is a powerful
Sustainability
for
innovation and growth, and a differentiator
for our business. Customers are increasingly
making purchasing decisions based on
social and environmental performance, and
HP is well-positioned to deliver. Through
our technology and actions, we are helping
address the greatest challenges we face as
a society, including taking tangible action
to support 16 of the 17 United Nations
Sustainable Development Goals.
Environment
Sustainability is at the heart of how our
products are designed, manufactured, used,
and recovered. We are helping pioneer a
materials- and energy-efficient circular
economy—decoupling economic growth
from reliance on raw materials. Through
our closed loop recycling program, plastic
from HP ink and toner cartridges recovered
via the 25-years-strong HP Planet Partners
program, is combined with other plastics
to create billions of new HP cartridges.
Transformative service models, such as HP
Instant Ink, help reduce waste from everyday
printing, while breakthrough technologies,
like HP 3D printing solutions, offer promising
opportunities for localized manufacturing.
to making
Society
Central
lives better and
communities stronger, HP brings access
to quality education, digital literacy, and
entrepreneurship
to displaced
individuals and underserved populations,
wherever they are. For example, HP and
technology and
partners are providing
training
Integrity
Integrity, fairness, and accountability are
fundamental to an inclusive society and a
thriving business. We are uncompromising
in our expectations of ethical behavior by our
employees, partners, and suppliers, and we
have ambitious, programs and processes in
place to safeguard human rights and protect
Our sustainability goals
training to help people displaced by the
Syrian conflict learn new skills and improve
employment opportunities. In India, HP World
on Wheels digital inclusion and learning labs
are expected to impact millions of people
currently excluded from technology access.
and empower workers throughout our supply
chain. We work relentlessly to protect the
privacy of our customers’ and employees’
personal information. We are honored by the
confidence our customers and employees
place in us and are committed to continuing
our leading initiatives on information privacy.
1
2
3
3
Commit to 100% renewable electricity in our global operations with 40% by 2020
Achieve zero deforestation associated with HP brand paper and paper-based product
packaging by 2020*
Reduce the GHG emissions intensity of HP’s product portfolio by 25% by 2020,
compared to 2010*
* Learn more about our sustainability initiatives and goals at www.hp.com/sustainability.
viii
www.hpannualmeeting.com
Proxy Statement20172 Margaret C.
Whitman
Chairman of
the Board
Rajiv L.
Gupta
Lead Independent
Director
To our Stockholders:
We are pleased to invite you to attend the annual meeting of stockholders of HP
Inc. on Monday, April 17, 2017 at 2:00 p.m., Pacific Time. This year’s annual meeting
will again be a completely virtual meeting of stockholders, conducted via live audio
webcast. You will be able to attend the annual meeting of stockholders online and
submit questions during the meeting by visiting www.hpannualmeeting.com or
www.hp.onlineshareholdermeeting.com. You will also be able to vote your shares
electronically at the annual meeting (other than shares held through our 401(k)
Plan, which must be voted prior to the meeting).
We are embracing the latest technology to provide expanded access, improved
communication and cost savings for our stockholders and the Company. As we’ve
learned, hosting a virtual meeting enables increased stockholder attendance and
participation from locations around the world. In addition, the online format allows
us to communicate more effectively via a pre-meeting forum that you can enter by
visiting www.hpannualmeeting.com or www.proxyvote.com/HP.
Further details about how to attend the meeting online and the business to be
conducted at the annual meeting are included in the accompanying Notice of Annual
Meeting and Proxy Statement.
We are again providing access to our proxy materials online under the U.S. Securities
and Exchange Commission’s “notice and access” rules. As a result, we are mailing to
many of our stockholders a notice instead of a paper copy of this proxy statement
and our 2016 Annual Report. The notice contains instructions on how to access
documents online. The notice also contains instructions on how stockholders can
receive a paper copy of our materials, including this proxy statement, our 2016
Annual Report, and a form of proxy card or voting instruction card. Those who
do not receive a notice, including stockholders who have previously requested to
receive paper copies of proxy materials, will receive a paper copy by mail unless
they have previously requested delivery of materials electronically. This distribution
process is more resource and cost efficient.
Your vote is important. Regardless of whether you participate in the annual meeting,
we hope you vote as soon as possible. You may vote by proxy online or by phone,
or, if you received paper copies of the proxy materials by mail, you may also vote
by mail by following the instructions on the proxy card or voting instruction card.
Voting online or by phone, written proxy or voting instruction card ensures your
representation at the annual meeting regardless of whether you attend the virtual
meeting.
Thank you for your ongoing support of, and continued interest in, HP Inc.
Sincerely,
Margaret C. Whitman
Chairman of the Board
Rajiv L. Gupta
Lead Independent Director
Proxy Statement
01
Message from the Chairman and Lead Independent Director 1501 Page Mill Road
Palo Alto, California 94304
(650) 857-1501
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
This Notice of Annual Meeting, Proxy Statement and Form of
Proxy are being distributed and made available on or about
February 17, 2017.
Voting
Time and Date
2:00 p.m., Pacific Time, on Monday, April 17, 2017
Place
Online at www.hpannualmeeting.com or
www.hp.onlineshareholdermeeting.com
Items of Business
(1) Management Proposal - To elect the 12 directors named in this
proxy statement
(2) Management Proposal - To ratify the appointment of the
independent registered public accounting firm for the fiscal
year ending October 31, 2017
(3) Management Proposal - To approve, on an advisory basis, the
Company’s executive compensation (“say on pay” vote)
(4) Management Proposal - To approve, on an advisory basis, the
frequency of future “say on pay” votes
(5) To consider such other business as may properly come before
the meeting
Adjournments and Postponements
Any action on the items of business described above may be
considered at the annual meeting at the time and on the date
specified above or at any time and date to which the annual
meeting may be properly adjourned or postponed.
Record Date
You are entitled to vote only if you were an HP Inc. stockholder as
of the close of business on February 16, 2017.
By order of the Board of Directors,
Kim M. Rivera
Chief Legal Officer, General Counsel
and Secretary
Telephone
1-800-690-6903
Internet
www.hpannualmeeting.com
or www.proxyvote.com/HP
prior to the meeting.
During the meeting please visit
www.hpannualmeeting.com or
www.hp.onlineshareholdermeeting.com
Mail
You can vote by mail by requesting a
paper copy of the materials, which
will include a proxy card. Return
the card to Vote Processing, c/o
Broadridge, 51 Mercedes Way,
Edgewood, NY 11717.
Your vote is very important. Regardless of whether you plan to
virtually attend the annual meeting, we hope you will vote as soon
as possible. You may vote your shares over the Internet or via a
toll-free telephone number. If you received a paper copy of a proxy
or voting instruction card by mail, you may submit your proxy or
voting instruction card for the annual meeting by completing,
signing, dating and returning your proxy or voting instruction card
in the pre-addressed envelope provided. Stockholders of record
and beneficial owners will be able to vote their shares electronically
at the annual meeting (other than shares held through the HP Inc.
401(k) Plan, which must be voted prior to the meeting). For specific
instructions on how to vote your shares, please refer to the section
entitled Questions and Answers—Voting Information beginning on
page 62 of the proxy statement.
Virtual Meeting Admission
Stockholders of
record as of February 16, 2017, will
be able to participate in the annual meeting by visiting our
or
annual meeting website www.hpannualmeeting.com
www.hp.onlineshareholdermeeting.com. To participate
in the
annual meeting, you will need the 16-digit control number included
on your notice of Internet availability of the proxy materials, on
your proxy card or on the instructions that accompanied your proxy
materials.
The annual meeting will begin promptly at 2:00 p.m., Pacific Time.
Online check-in will begin at 1:30 p.m., Pacific Time, and you should
allow ample time for the online check-in procedures.
Annual Meeting Website and Pre-Meeting Forum
The online format used by HP Inc. for the annual meeting
to communicate more effectively with
also allows us
you. Stockholders
forum,
the
where you can submit questions
annual meeting, by visiting our annual meeting website
at www.hpannualmeeting.com or www.proxyvote.com/HP.
Stockholders can also access copies of our proxy statement and
annual report at the annual meeting website.
can access our pre-meeting
in advance of
Important Notice Regarding the Availability of Proxy Materials for the Annual Meeting of Stockholders to Be Held on April 17,
2017. The definitive proxy statement and HP Inc.’s 2016 Annual Report are available electronically at www.proxyvote.com/HP.
02
www.hpannualmeeting.com
Proxy Statement Summary
The following is a summary of certain key disclosures in our proxy statement. This is only a summary, and it may not contain all of the
information that is important to you. For more complete information, please review the proxy statement as well as our 2016 Annual Report,
which includes our Annual Report on Form 10-K. References to “HP,” “the Company,” “we,” “us” or “our” refer to HP Inc. (formerly known as
Hewlett-Packard Company (“HP Co.”)).
Management
Proposal
No. 1
Election of Directors
The Board recommends a vote FOR each director nominee
• Our Board is committed to independent oversight of HP.
• 10 of our 12 director nominees are independent and our Board is led by both a non-executive Chairman and
a Lead Independent Director.(1)
• Key information regarding all of our 12 Board nominees is summarized in the table below.
Further information on page 9.
Committees Independent
YES
HRC
NGSR
HRC
NGSR (Chair)
FIT
HRC
Name
Principal Occupation
Aida M. Alvarez
Chair, Latino Community Foundation
Shumeet Banerji
Co-Founder and Partner, Condorcet, LP
Carl Bass
Former President and Chief Executive Officer,
Autodesk Inc.
Robert R. Bennett
Managing Director, Hilltop Investments, LLC
Charles V. Bergh
President and Chief Executive Officer, Levi Strauss & Co.
Stacy Brown-Philpot
Chief Executive Officer, TaskRabbit
Stephanie A. Burns
Former Chief Executive Officer and Chairman,
Dow Corning
Mary Anne Citrino
Senior Advisor and former Senior Managing Director,
The Blackstone Group
Stacey Mobley
Former Senior Vice President,
Chief Administrative Officer and General Counsel,
E.I. du Pont de Nemours and Company
Subra Suresh
President, Carnegie Mellon University
Dion J. Weisler
President and Chief Executive Officer, HP Inc.
Margaret C. Whitman
President and Chief Executive Officer,
Hewlett Packard Enterprise Co.
HP Director
Since
2016
Age
60
57
59
58
59
41
61
57
71
60
49
60
2011
2015
2013
2015
2015
2015
2015
2015
2015
2015
2011
AC
FIT (Chair)
HRC
NGSR
AC
NGSR
AC
FIT
AC (Chair)
FIT
HRC
NGSR
AC
FIT
FIT
Other Current Public Company/
Public Registrant Boards
None
Innocoll AG
Autodesk, Inc.
Discovery Communications, Inc.
Liberty Media Corporation
Levi Strauss & Co.
None
Corning, Inc.
Kellogg Company
Dollar Tree, Inc.
Royal Ahold Delhaize
Alcoa Corporation
International Paper Company
None
None
The Procter & Gamble Company
Hewlett Packard Enterprise Co.
YES
YES
YES
YES
YES
YES
YES
YES
YES
NO
NO
• AC – Audit Committee
• FIT – Finance, Investment
• HRC – HR and
and Technology Committee
Compensation Committee
• NGSR – Nominating, Governance and
Social Responsibility Committee
(1) Mr. Rajiv Gupta, who currently serves as our Lead Independent Director and Chair of the HRC Committee, is not standing for re-election at this annual
meeting. A new Lead Independent Director and a new Chair of the HRC Committee will be appointed to serve in these roles.
Proxy Statement
03
Board Composition(1)
Independence
8.3%
Our CEO
8.3%
Non-executive
Chairman
Gender Diversity
Tenure (inc. HP Co. tenure)
83.4%
Independent
Directors
58%
Male
42%
Female
16.7%
5-8 years
8.3%
3-4 years
75%
0-2 years
(1) Does not include Mr. Gupta who is not standing for re-election at this annual meeting.
Governance Highlights
Independent
Board Leadership
Other Governance
Best Practice
• Robust board leadership with non-executive Chairman and Lead Independent Director roles, more details beginning
on page 19.
• Our Lead Independent Director participates in a robust stockholder outreach program.
• Our Lead Independent Director works with our non-executive Chairman to coordinate the annual performance
valuation of the CEO.
• Our Lead Independent Director works annually with our non-executive Chairman to oversee Board, committee and
individual director effectiveness.
• Our Bylaws provide our stockholders with a proxy access right.
• All members of our key committees are independent.
• Our stockholders owning 25% or more of our common stock have a right to call special meetings.
• Directors are elected annually by majority vote in uncontested director elections.
• Each director nominee has agreed to resign from the Board in the event that he or she fails to receive a majority vote.
• We have a robust stockholder and investor outreach program.
• Non-employee directors are expected to own Company stock equal to at least five times their annual cash Board
retainer within five years.
Management
Proposal
No. 2
Management
Proposal
No. 3
Ratification of Independent Registered Public Accounting Firm
The Board recommends a vote FOR this Proposal
• The Audit Committee of the Board has selected Ernst & Young LLP to act as HP’s registered public accounting
firm for the fiscal year ending October 31, 2017, and seeks ratification of the selection.
Further information on page 30.
Advisory Vote to Approve Executive Compensation (“Say on Pay” Vote)
The Board recommends a vote FOR this Proposal
• Our Board and the HRC Committee are committed to excellence in corporate governance and to an executive
compensation program that aligns the interests of our executives with those of our stockholders. To
fulfill this mission, we have a pay-for-performance philosophy that forms the foundation for decisions
regarding executive compensation.
• Our compensation programs have been structured to balance near-term results with long-term success,
and enable us to attract, retain, focus, and reward our executive team for delivering stockholder value.
Further information, including an overview of the compensation of our NEOs, on page 32.
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Proxy Statement Summary Management
Proposal
No. 4
Advisory Vote on the Frequency of Future “Say on Pay” Votes
The Board recommends ANNUAL voting
• Our stockholders currently have the opportunity to participate annually in an advisory vote on our
executive compensation.
• The Board believes that annual voting on HP’s executive compensation sets the correct, ongoing cadence
for dialogue between HP and its stockholders on executive compensation matters.
Further information on page 57.
Business Overview and Performance
HP Inc. is comprised of the following business segments: Personal
Systems, Printing, and Corporate Investments. In fiscal 2015,
we executed the largest corporate separation in history without
customer or partner disruption, creating two market-leading,
independent, publicly-traded companies with strong financial
foundations, compelling innovation roadmaps, sharp strategic focus,
and experienced leadership teams. In fiscal 2016, our objective was
to achieve a successful transition following the separation, while
continuing to focus on providing value to our stockholders.
Our continued efforts resulted in the following accomplishments:
• Executed our strategy in the core business with a strong
portfolio and profitable share gains through detailed customer
segmentation, in growth areas including graphics and commercial
mobility, and in future categories with the launch of our multi-jet
3D printing solutions.
• Announced the definitive agreement to acquire Samsung’s
printer business to accelerate our disruption of the A3 copier
segment, one of the key growth areas
in Printing. This
transaction is expected to close in the second half of fiscal 2017.
• Returned over $2 billion of capital to stockholders in the form of
dividends and share repurchases.
• Celebrated the 50th anniversary of HP Labs, our hub for
innovation and megatrends.
• Established HP Tech Ventures, which gives us greater
connections with Silicon Valley’s start-up community and the
cutting edge of tech, to help accelerate our future.
In a challenging global macroeconomic and foreign currency
environment, our fiscal 2016 results for the incentive plan included:
$48.2
billion
$3.0
billion
6.6%
in Corporate Revenue
(as defined on page 38) compared to a
target goal of $52.5 billion under our
annual incentive plan.
in Corporate Net Earnings
(as defined on page 38) compared to
a target goal of $3.1 billion under our
annual incentive plan.
Corporate Free Cash Flow
(as a percentage of revenue; as defined on
page 38) and including adjustment defined on
footnote 2 on page 39 compared to a target
goal of 5.2% under our annual incentive plan.
Through discipline and focus, we out-performed our competition
and gained market share throughout the year. We have momentum
as we enter fiscal 2017 with the best product lineup in decades
and a consistent strategy to further stabilize revenue. We have an
incredible channel network, passionate employees and a culture
committed to keep reinventing.
Proxy Statement
05
Proxy Statement Summary
Executive Compensation Philosophy
Alignment with Stockholders and Compensation Best Practices
Pay-for-Performance
Corporate Governance
The majority of target total direct compensation for
executives is performance-based as well as equity-based
to align their rewards with stockholder value
We generally do not enter
compensation agreements
into
individual executive
Total direct compensation
market median
is targeted at or near the
We devote significant time to management succession
planning and leadership development efforts
total direct compensation and pay
Actual realized
positioning are designed to fluctuate with, and be
commensurate with, actual annual and long-term
performance recognizing companywide, business, and
individual results
Incentive awards are heavily dependent upon our stock
performance, and are measured against objective financial
metrics that we believe link either directly or indirectly to
the creation of value for our stockholders. In addition,
25% of our target annual incentives are contingent upon the
achievement of qualitative objectives that we believe will
contribute to our long-term success
We balance growth and return objectives, top and bottom
line objectives, and short and long-term objectives to reward
for overall performance that does not over-emphasize a
singular focus
A significant portion of our long-term incentives are delivered
in the form of performance-adjusted restricted stock units
“PARSUs”, which vest only upon the achievement of two-
and three-year relative TSR and ROIC objectives
We provide no U.S. supplemental defined benefit pensions
We validate our pay-for-performance relationship on an
annual basis
We maintain a market-aligned severance policy for
executives that does not have automatic single-trigger
equity vesting upon a change in control when the acquirer
assumes the equity awards
The HRC Committee utilizes an independent compensation
consultant
Our compensation programs are designed to mitigate
compensation-related risk to the organization from both
a financial and reputational perspective
We maintain stock ownership guidelines for executive
officers and non-employee directors
We prohibit executive officers and directors from engaging in
any form of hedging transaction, from holding HP securities
in margin accounts and pledging as collateral for loans in a
manner that could create compensation-related risk for the
Company
We conduct a robust stockholder outreach program
throughout the year
We disclose our corporate performance goals and
achievements relative to these goals
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Proxy Statement Summary Components of Compensation
Our primary focus in compensating executives is on the longer-term and performance-based elements of compensation. The table below
shows our pay components, along with the role and factors for determining each pay component. The percentages are based on the average
percentage among the NEOs, and do not include our one-time Launch Grants discussed on page 42.
Pay Component
Role
Determination Factors
Base Salary
• Fixed portion of annual cash income
• Value of role in competitive marketplace
• Value of role to the Company
performance
• Skills
individual
compared to the market as well as others in
the Company
and
of
13%
17%
Annual Incentive
(i.e., PfR Plan)
Long-Term Incentives
70%
• Restricted Stock Units (RSUs)
• PARSUs
All other:
• Benefits
• Perquisites
• Severance protection
• Variable portion of annual cash income
• Focus executives on annual objectives that
support the long-term strategy and creation
of value
• Target
awards
based
on
competitive
marketplace and level of experience
• Actual awards based on actual performance
against annual corporate, business unit and
individual goals
• Reinforce need
performance
for
long-term sustained
• Align interests of executives and stockholders,
reflecting the time-horizon and risk to investors
• Encourage equity ownership
• Encourage retention
• Target
awards
competitive
based
marketplace, level of executive, and skills and
performance of executive
on
• Actual value relative to target based on actual
performance against corporate goals and total
stockholder returns (“TSR”) performance
• Support the health and security of our
executives and their ability to save on a tax-
deferred basis
• Enhance executive productivity
Level of executive
• Competitive marketplace
•
• Standards of best in class governance
• Performance-based pay
Proxy Statement
07
Proxy Statement Summary CORPORATE GOVERNANCE
Management Proposal No. 1 Election of Directors
Stockholder Outreach
Corporate Governance Highlights
Director Independence
Board Leadership Structure
Board Risk Oversight
Board Committees and Committee Composition
Executive Sessions
Communications with the Board
Director Compensation and Stock Ownership Guidelines
Related Person Transactions Policies and Procedures
AUDIT MATTERS
Management Proposal No. 2 Ratification of Independent Registered Public Accounting Firm
Report of the Audit Committee of the Board of Directors
Principal Accounting Fees and Services
EXECUTIVE COMPENSATION
Management Proposal No. 3 Advisory Vote to Approve Executive Compensation
Compensation Discussion and Analysis
HR and Compensation Committee Report on Executive Compensation
Summary Compensation Table
Grants of Plan-Based Awards in Fiscal 2016
Outstanding Equity Awards at 2016 Fiscal Year-End
Option Exercises and Stock Vested in Fiscal 2016
Fiscal 2016 Pension Benefits Table
Fiscal 2016 Non-qualified Deferred Compensation Table
Potential Payments Upon Termination or Change in Control
Equity Compensation Plan Information
Management Proposal No. 4 Advisory Vote on the Frequency of Future “Say On Pay” Votes
OWNERSHIP OF OUR STOCK
Common Stock Ownership of Certain Beneficial Owners and Management
Section 16(a) Beneficial Ownership Reporting Compliance
OTHER MATTERS
Questions and Answers
Voting Information
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09
09
18
18
18
19
20
21
26
26
26
29
30
30
30
31
32
32
32
46
47
49
50
52
52
53
54
57
57
58
58
59
60
60
62
Table of Contents Management
Proposal
No. 1
Election of Directors
The Board recommends a vote FOR each director nominee
The Board currently consists of 13 directors. On the recommendation of the Nominating, Governance and Social Responsibility (“NGSR”)
Committee, the Board has nominated the 12 persons named below for election as directors this year, each to serve for a one-year term and
until the director’s successor is elected and qualified or, if earlier, until his or her resignation or removal.
Vote Required
Each director nominee who receives more “FOR” votes than
“AGAINST” votes representing shares of HP common stock present
in person or represented by proxy and entitled to be voted at the
annual meeting will be elected.
If you sign your proxy or voting instruction card but do not give
instructions with respect to voting for directors, your shares will be
voted by Dion J. Weisler, Catherine A. Lesjak and Kim M. Rivera, as
proxy holders. If you wish to give specific instructions with respect
to voting for directors, you may do so by indicating your instructions
on your proxy or voting instruction card.
You may not cumulate your votes in the election of directors. See
“Questions and Answers—Voting Information—Is cumulative voting
permitted for the election of directors?” for further information.
Director Election Voting Standard and Resignation Policy
We have adopted a policy whereby any incumbent director nominee who receives a greater number of votes “AGAINST” his or her election
than votes “FOR” such election will tender his or her offer of resignation for consideration by the NGSR Committee. The NGSR Committee will
then make a recommendation to the Board regarding the appropriate response to such an offer of resignation.
Identifying and Evaluating Candidates for Directors
The NGSR Committee uses a variety of methods for identifying
and evaluating nominees for director. The NGSR Committee, in
consultation with the Chairman, regularly assesses the appropriate
size of the Board and whether any vacancies on the Board are
expected due to retirement or otherwise. In the event that vacancies
are anticipated, or otherwise arise, the NGSR Committee considers
various potential candidates for director. Candidates may come
to the attention of the NGSR Committee through current Board
members, professional search firms, stockholders or other persons.
Identified candidates are evaluated at regular or special meetings of
the NGSR Committee and may be considered at any point during the
year. As described above, the NGSR Committee considers properly
submitted stockholder recommendations of candidates for the
Board to be included in our proxy statement. Following verification
of the stockholder status of individuals proposing candidates,
recommendations are considered collectively by the NGSR
Committee at a regularly scheduled meeting, which is generally
the first or second meeting prior to the issuance of the proxy
statement for our annual meeting. If any materials are provided
by a stockholder in connection with the nomination of a director
candidate, such materials are forwarded to the NGSR Committee. The
NGSR Committee also reviews materials provided by professional
search firms and other parties in connection with a nominee who is
not proposed by a stockholder. In evaluating such nominations, the
NGSR Committee seeks to achieve a balance of diverse knowledge,
experience and capability on the Board. The NGSR Committee
evaluates nominees recommended by stockholders using the same
criteria it uses to evaluate all other candidates.
Proxy Statement
09
Corporate Governance Corporate Governance
Stockholder Recommendations
The policy of the NGSR Committee is to consider properly submitted
stockholder recommendations of candidates for membership on
the Board as described above under “Identifying and Evaluating
Candidates for Directors.” In evaluating such recommendations,
the NGSR Committee seeks to achieve a balance of diverse
knowledge, experience and capability on the Board and to address
the membership criteria set forth below. Any stockholder
recommendations submitted for consideration by the NGSR
Committee should include verification of the stockholder status of
Stockholder Nominations
the person submitting the recommendation and the recommended
candidate’s name and qualifications for Board membership and
should be addressed to:
Corporate Secretary
HP Inc.
1501 Page Mill Road
Palo Alto, California 94304
Fax: 650-275-9138
In addition, our Bylaws permit stockholders to nominate directors for consideration at an annual stockholder meeting and, under certain
circumstances, to include their nominees in the HP proxy statement. For a description of the process for nominating directors in accordance
with our Bylaws, see “Questions and Answers—Voting Information.”
Director Nominees and Director Nominees’ Experience and Qualifications
The Board annually reviews the appropriate skills and characteristics
required of directors in the context of the current composition of
the Board, our operating requirements and the long-term interests
of our stockholders. The Board believes that its members should
possess a variety of skills, professional experience and backgrounds
in order to effectively oversee our business. In addition, the Board
believes that each director should possess certain attributes, as
reflected in the Board membership criteria described below.
Our Corporate Governance Guidelines contain the current Board
membership criteria that apply to nominees recommended for
a position on the Board. Under those criteria, members of the
Board should:
• have the highest professional and personal ethics and
values, consistent with our long-standing values and
standards;
• have broad experience at the policy-making level in
business, government, education, technology or public
service;
• be committed to enhancing stockholder value and
represent the interests of all of our stockholders; and
• have sufficient time to carry out their duties and to provide
insight and practical wisdom based on experience (which
means that directors’ service on other boards of public
companies should be limited to a number that permits
them, given their individual circumstances, to perform
responsibly all director duties).
In addition, the NGSR Committee takes into account a potential
director’s ability to contribute to the diversity of background (such as
race, gender, and cultural background) and experience represented
on the Board, and it reviews its effectiveness in balancing these
considerations when assessing the composition of the Board.
Although the Board uses these and other criteria as appropriate to
evaluate potential nominees, it has no stated minimum criteria for
nominees. Our corporate governance guidelines can be found on our
website at http://h30261.www3.hp.com/governance/corporate-
governance-guidelines.aspx.
The Board believes that all the nominees named below are highly
qualified and have the skills and experience required for effective
service on the Board. Each director biography below describes each
director’s qualifications and relevant experience in more detail
and summarizes key qualifications, skills, and attributes most
relevant to the decision to nominate candidates to serve on the
Board of Directors.
All of the nominees have indicated to us that they will be available
to serve as directors. In the event that any nominee should become
unavailable, the proxy holders, Dion J. Weisler, Catherine A. Lesjak
and Kim M. Rivera, will vote for a nominee or nominees designated
by the Board, or the Board may choose to decrease the size of
the Board.
There are no family relationships among our executive officers
and directors.
10
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Director Skills and Background
Corporate Governance
Diverse perspectives,
interests, ideas and experiences
Finance
Science
Government
Strategy
Disruptive
Innovation
Where are we today? What are
some of the challenges for the
future and what skills are invaluable
to address these?
One of the most diverse
Boards in Corporate America
Academics
The collective skills of the Board
provide context to the outside
world for our business leaders
International
Business
Operations
Technology
Robust Business
Experience
Collective Skills of the Director Nominees
KEEP
REINVENTING.
Our directors bring an extraordinary wealth of skills and backgrounds
to the HP Inc. Board. From Subra Suresh, an acclaimed scientist
whose background in microfluidics gives him key understanding into
the future of technologies including 3D printing, to Stacy Brown-
Philpot, CEO of TaskRabbit, a company at the forefront of today’s
personal services-oriented disruptive technology boom – our
Board members are advising us based on real world experiences.
Their skills are complementary. Carl Bass led a storied technology
company and knows the fine balance between innovation and
execution, while Charles Bergh’s history leading first Gillette and
now Levi’s means he can instantly grasp the complexities of our
supply chain. Shumeet Banerji and Mary Anne Citrino both come
from financial industry careers, lending keen eyes to our balance
sheets and our risk management profile. Former public company
CEOs Stephanie Burns and Robert Bennett lend the benefit of
their experience at the helms of companies and Aida Alvarez and
Stacey Mobley provide perspectives from the fields of government
and corporate law, respectively. We are also fortunate to have our
former CEO, Meg Whitman, as a member of our Board – her roles
leading multiple public technology companies coupled with her in-
depth understanding of HP give her unique insight. Together, their
skills all help us to keep reinventing.
Proxy Statement
11
Corporate Governance
Aida M. Alvarez
Independent Director
Age 60
Director since 2016
HP Board Committees:
HRC
NGSR
Current Role
• Chair, Latino Community Foundation
Current Public Company Boards
• HP
Prior Public Company Boards
• MUFG Americas Holdings
Corporation
• Wal-Mart Stores, Inc.
Qualifications:
Prior Business and Other Experience
• Administrator, U.S. Small Business Administration (1997–2001)
• Director, Office of Federal Housing Enterprise Oversight
(1993–1997)
• Vice President, First Boston Corporation and Bear Stearns & Co.
(prior to 1993)
Other Key Qualifications
Ms. Alvarez brings to the Board a wealth of expertise in media,
public affairs, finance and government given her executive
roles at government agencies, her leadership at a prominent
philanthropic organization and her career as a prominent
journalist. The Board also benefits from Ms. Alvarez’s knowledge
of investment banking and finance.
Shumeet Banerji
Independent Director
Age 57
Director since 2011
HP Board Committees:
HRC
NGSR, Chair
Current Role
• Co-founder and Partner of
Condorcet, LP, an advisory and
investment firm that specializes in
developing early stage companies
(since 2013)
Current Public Company Boards
• HP
•
Innocoll AG
Prior Public Company Boards
• None
Qualifications:
Prior Business and Other Experience
• Senior Partner, Booz & Company, a consulting company
(May 2012–March 2013)
• Chief Executive Officer, Booz & Company (July 2008–
May 2012)
• President of the Worldwide Commercial Business, Booz
Allen Hamilton (February 2008–July 2008)
• Managing Director, Europe, Booz Allen Hamilton (2007–2008)
• Managing Director, United Kingdom, Booz Allen Hamilton
(2003–2007)
• Faculty, University of Chicago Graduate School of Business
Other Key Qualifications
Mr. Banerji brings to the Board a robust understanding of the
issues facing companies and governments in both mature and
emerging markets around the world through his two decades
of work with Booz & Company. In particular, Mr. Banerji has
valuable experience in addressing a variety of complex issues
ranging from corporate strategy, organizational structure,
governance, transformational change, operational performance
improvement and merger integration.
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Carl Bass
Independent Director
Age 59
Director since 2015
HP Board Committees:
FIT
HRC
Current Role
•
Former President and Chief Executive
Officer Autodesk Inc. (“Autodesk”),
a software company (since
February 2017)
Current Public Company Boards
• HP
• Autodesk
Prior Public Company Boards
• McAfee, Inc.
• E2open, Inc.
Qualifications:
Prior Business and Other Experience
• President and Chief Executive Officer, Autodesk Inc.
•
(“Autodesk”), a software company (May 2006-February 2017)
Interim Chief Financial Officer, Autodesk (August 2014–
November 2014; August 2008-April 2009)
• Chief Operating Officer, Autodesk (2001–2006)
• Chief Strategy Officer and Chief Executive Officer,
Buzzsaw.com (1999–2001)
Other Key Qualifications
Mr. Bass brings to the Board decades of experience in the
technology industry and has spent nearly two decades in
management roles within Autodesk. His leadership experience
brings valuable insight into the operational, strategic, and
information technology issues specific to the technology sector.
Corporate Governance
Robert R. Bennett
Independent Director
Age 58
Director since 2013
HP Board Committees:
Audit
FIT, Chair
Current Role
• Managing Director, Hilltop
Investments, LLC, a private
investment company (since 2005)
Current Public Company Boards
• HP
• Discovery Communications, Inc.
Liberty Media Corporation
•
Prior Public Company Boards
• Sprint Corporation
• Demand Media, Inc.
• Discovery Holding Company
•
• Sprint Nextel Corporation
Liberty Interactive Corporation
Qualifications:
Prior Business and Other Experience
• President of Discovery Holding Company (2005–2008)
• President and Chief Executive Officer of Liberty Media
Corporation (now Liberty Interactive Corporation)
(prior to 2005)
Other Key Qualifications
Mr. Bennett brings to the Board in-depth knowledge of the
media and telecommunications industry and his knowledge
of the capital markets and other financial and operational
matters from his experience as the president and chief
executive officer of another public company, which allows him
to provide an important perspective to the Board’s discussions
on financial and operational issues. Mr. Bennett also has an in-
depth understanding of finance and has held various financial
management positions during the course of his career. He also
contributes valuable insight to the Board due to his experience
serving on the boards of both public and private companies.
Proxy Statement
13
Corporate Governance
Charles V. Bergh
Independent Director
Age 59
Director since 2015
HP Board Committees:
HRC
NGSR
Current Role
• President, Chief Executive Officer
and Director of Levi Strauss & Co.,
an apparel/retail company (since
September 2011)
Current Public Company Boards
• HP
•
Levi Strauss & Co.
Prior Public Company Boards
• VF Corporation
Qualifications:
Prior Business and Other Experience
• Group President, Global Male Grooming, Procter & Gamble
•
Co., a consumer goods company (2009–September 2011)
In 28 years at Procter & Gamble, Mr. Bergh served in a
variety of executive roles, including managing business in
multiple regions worldwide
Other Key Qualifications
Mr. Bergh brings to the Board extensive experience in executive
leadership at large global companies and international business
management. From his more than 30 years at Levi Strauss
and Procter & Gamble, Mr. Bergh has a strong operational
and strategic background with significant experience in brand
management. He also brings public company governance
experience as a board member and chair of boards and board
committees of other public and private companies.
Stacy Brown-Philpot
Independent Director
Age 41
Director since 2015
HP Board Committees:
Audit
NGSR
Current Role
• Chief Executive Officer, Taskrabbit,
an online labor interface company
(since April 2016)
Current Public Company Boards
• HP
Prior Public Company Boards
• None
Qualifications:
Prior Business and Other Experience
• Chief Operating Officer, Taskrabbit (January 2013-April 2016)
• Entrepreneur-in-Residence, Google Ventures, the venture
capital investment arm of Google, Inc., a technology
company (May 2012–December 2012)
• Senior Director of Global Consumer Operations, Google
(2010–May 2012)
• Prior to 2010, Ms. Brown-Philpot served in a variety of
director-level positions at Google
• Prior to joining Google in 2003, Ms. Brown-Philpot served as
a senior analyst and senior associate at the financial firms
Goldman Sachs and PwC
Other Key Qualifications
Ms. Brown-Philpot brings to the Board extensive operational,
analytical, financial, and strategic experience. In addition to her
current role as CEO of Taskrabbit, Ms. Brown-Philpot’s decade
of experience leading various operations at Google and her prior
financial experience from her roles at Goldman Sachs and PwC
provide unique operational and financial expertise to the Board.
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Stephanie A. Burns
Independent Director
Age 61
Director since 2015
HP Board Committees:
Audit
FIT
Current Role
• Director
Current Public Company Boards
• HP
• Corning, Inc.
• Kellogg Company
Prior Public Company Boards
• Dow Corning Corp.
• GlaxoSmithKline plc
• Manpower, Inc.
Qualifications:
Prior Business and Other Experience
• Chief Executive Officer, Dow Corning Corp., a silicon-based
manufacturing company (2004–May 2011)
• President, Dow Corning (2003–November 2010) Executive
Vice President, Dow Corning (2000–2003)
Other Key Qualifications
innovation
Dr. Burns has more than 30 years of global
and business leadership experience and brings significant
expertise in scientific research, product development, issues
management, science and technology leadership, and business
management to the Board. Dr. Burns also brings public company
governance experience to the Board as a member of boards and
board committees of other public companies.
Corporate Governance
Mary Anne Citrino
Independent Director
Age 57
Director since 2015
HP Board Committees:
Audit, Chair
FIT
Current Role
• Senior Advisor and former Senior
Managing Director, The Blackstone
Group, an investment firm
(since 2004)
Current Public Company Boards
• HP
• Dollar Tree, Inc.
• Royal Ahold Delhaize
• Alcoa Corporation
Prior Public Company Boards
• Health Net, Inc.
Qualifications:
Prior Business and Other Experience
• Managing Director, Global Head of Consumer Products
Investment Banking Group, and Co-head of Health Care
Services Investment Banking, Morgan Stanley (1986–2004)
Other Key Qualifications
Ms. Citrino’s more than 30-year career as an investment banker
provides the Board with substantial knowledge regarding
business operations strategy, as well as valuable financial
and investment expertise. She also brings public company
governance experience as a member of boards and board
committees of other public companies.
Proxy Statement
15
Corporate Governance
Stacey Mobley
Independent Director
Age 71
Director since 2015
HP Board Committees:
HRC
NGSR
Current Role
• Former Senior Vice President, Chief
Administrative Officer and General
Counsel, E.I. du Pont de Nemours
and Company (“DuPont”), a
chemical company (1999–2008)
Current Public Company Boards
• HP
•
International Paper Company
Prior Public Company Boards
• None
Subra Suresh
Independent Director
Age 60
Director since 2015
HP Board Committees:
Audit
FIT
Current Role
• President, Carnegie Mellon
University (since July 2013)
Current Public Company Boards
• HP
Prior Public Company Boards
• None
Other Boards
• Battelle Memorial Institute, a
nonprofit applied science and
technology development company
Qualifications:
Prior Business and Other Experience
• Senior Counsel and Advisor, Dickstein Shapiro, LLP, a law
firm (2008–2016)
• 35 years of experience at DuPont (1973–2008) serving in a
variety of leadership roles
Other Key Qualifications
Mr. Mobley’s more than 35 years of legal and senior management
experience at DuPont brings a deep understanding of
governance, regulations and risk management. He also brings
public company governance experience as a member of boards
and board committees of other public and private companies.
Qualifications:
Prior Business and Other Experience
• Director, National Science Foundation, a federal agency
charged with advancing science and engineering research
and education (October 2010–March 2013)
• Dean, School of Engineering, and the Vannevar Bush
Professor of Engineering, Massachusetts Institute of
Technology (2007–2010)
Other Key Qualifications
Mr. Suresh’s experience as the president of a prominent research
university and his experience leading new entrepreneurship,
innovations and creativity efforts brings the Board valuable
insights with respect to strategic opportunities and a robust
understanding of the organizational, scientific and technological
requirements of ongoing innovation.
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Dion J. Weisler
President, Chief Executive Officer
and Director
Age 49
Director since 2015
HP Board Committees:
N/A
Current Role
• President and Chief Executive
Officer, HP (since November 1, 2015)
Current Public Company Boards
• HP
Prior Public Company Boards
• None
Qualifications:
Prior Business and Other Experience
• Executive Vice President, the Printing and Personal
Systems Group, Hewlett-Packard Company (June 2013–
November 2015)
• Senior Vice President and Managing Director, Printing and
Personal Systems, Asia Pacific and Japan, Hewlett-Packard
Company (January 2012–June 2013)
• Vice President and Chief Operating Officer, the Product and
Mobile Internet Digital Home Groups, Lenovo Group Ltd., a
technology company (January 2008–December 2011)
Other Key Qualifications
Mr. Weisler’s international business and leadership experience
provide the Board with an enhanced global perspective.
Mr. Weisler’s more than 25 years of experience
in the
information & technology industry and his position as HP’s
Chief Executive Officer provide the Board with valuable
industry insight and expertise.
Corporate Governance
Margaret C. Whitman
Chairman of the Board
Age 60
Chairman since 2011
HP Board Committees:
FIT
Current Role
• President and Chief Executive
Officer, Hewlett Packard Enterprise
Company, a multinational
enterprise information technology
company (since November 2015)
Current Public Company Boards
• HP
• Hewlett Packard Enterprise Company
• Procter & Gamble Co.
Prior Public Company Boards
• Zipcar, Inc.
Qualifications:
Prior Business and Other Experience
• President and Chief Executive Officer, Hewlett-Packard
Company (September 2011–November 2015)
• Strategic Advisor, Kleiner Perkins Caufield & Byers, a private
equity firm (March 2011–September 2011)
• President and Chief Executive Officer, eBay Inc.
(1998–2008)
• Prior to joining eBay, Ms. Whitman held executive-
level positions at Hasbro Inc., FTD, Inc., The Stride Rite
Corporation, The Walt Disney Company, and Bain & Company
Other Key Qualifications
Ms. Whitman brings to the Board unique experience
in
developing transformative business models, building global
brands and driving sustained growth and expansion through her
10 years as President and Chief Executive Officer of eBay and
unique knowledge of HP through her four years as President and
Chief Executive Officer of Hewlett-Packard Company. From her
previous executive positions with other large public companies,
she also brings strong operational and strategic expertise.
In addition, Ms. Whitman brings public company governance
experience having previously served as a member of boards
and board committees of other public companies, including as
Chairman of Hewlett-Packard Company.
Proxy Statement
17
Corporate Governance
Stockholder Outreach
We believe that effective corporate governance should include
regular, constructive conversations with our stockholders. Over the
past year, the Board has continued to engage with stockholders
both directly and through the ongoing video interview series. The
Board has also sought and encouraged feedback from stockholders
about our corporate governance practices by conducting additional
stockholder outreach and engagement throughout the year. Our
annual corporate governance investor outreach cycle is described in
our Annual Report available at www.hp.com/investor/home. In fiscal
2016, we met with institutional investors representing more than 25%
of our outstanding stock as well as with proxy advisor firms.
Corporate Governance Highlights
HP’s corporate governance policies and practices are continuously
evolving – from our time as Hewlett-Packard Company to our new
identity as HP Inc., we’ve always led by example, adopting changes
in line with our commitment to the highest standards of governance.
Stockholder input has been key to our progression and as we
continue to evolve our corporate governance policies and practices
we will continue to solicit feedback from our stockholders regarding
our governance profile. The following examples highlight the variety
of changes we have recently made to strengthen our corporate
governance policies and practices:
• After the separation of Hewlett-Packard Company into
two
independent publicly-traded companies, Hewlett
Packard Enterprise Company (“HPE”) and HP Inc., our
Board had determined that it was in the best interests of
our stockholders and the Company to separate the roles
of our CEO and Chairman. As a result, our Board appointed
Director Independence
Our Corporate Governance Guidelines provide that a substantial
majority of the Board will consist of independent directors and
that the Board can include no more than three directors who
are not independent directors. These standards are available on
our website at www.hp.com/investor/director_standards. Our
director independence standards are consistent with and in some
respects more stringent than the New York Stock Exchange director
independence standards. In addition, each member of the Audit
Committee meets the heightened independence standards required
for audit committee members under the applicable listing and the
U.S. Securities and Exchange Commission (the “SEC”) standards
and each member of the HRC Committee meets the heightened
independence standards required for compensation committee
members under the applicable listing standards, SEC standards and
tax standards.
Under our Corporate Governance Guidelines, a director will not be
considered independent in the following circumstances:
• The director is, or has been within the last three years,
an employee of HP, or an immediate family member of
the director is, or has been within the last three years, an
executive officer of HP.
• The director has been employed as an executive officer of
HP, its subsidiaries or affiliates within the last five years.
• The director has received, or has an immediate family
member who has received, during any twelve-month
period within the last three years, more than $120,000 in
direct compensation from HP, other than compensation
for Board service, compensation received by a director’s
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a non-executive Chairman, and our independent directors
designated a Lead Independent Director (“LID”) with clearly
delineated, expanded duties and responsibilities. With
Mr. Gupta’s term expiring at this annual meeting, and given
that he is not standing for re-election, our independent
directors expect to appoint a new Lead Independent
Director to serve in this role.
• We continuously update our stockholder engagement
program. Last year, in addition to our CEO and non-executive
Chairman, our LID, who is also the Chair of the HRC Committee,
was also involved in our stockholder engagement program.
• We recently revised our Corporate Governance Guidelines to
make it clear that the NGSR Committee takes into account,
among other criteria, a director’s or potential director’s
ability to contribute to the diversity of background (such as
race, gender, age and cultural background) when assessing
the composition of the Board.
•
immediate family member for service as a non-executive
employee of HP, and pension or other forms of deferred
compensation for prior service with HP that
is not
contingent on continued service.
(A) The director or an immediate family member is a current
partner of the firm that is HP’s internal or external auditor;
(B) the director is a current employee of such a firm; (C) the
director has an immediate family member who is a current
employee of such a firm and who personally worked
on HP’s audit; or (D) the director or an immediate family
member was within the last three years (but is no longer) a
partner or employee of such a firm and personally worked
on HP’s audit within that time.
• The director or an immediate family member is, or has
been in the past three years, employed as an executive
officer of another company where any of HP’s present
executive officers at the same time serves or has served
on that company’s compensation committee.
• The director is a current employee, or an immediate family
member is a current executive officer, of a company that
has made payments to, or received payments from, HP for
property or services in an amount which, in any of the last
three fiscal years, exceeds the greater of $1 million, or 2%
of such other company’s consolidated gross revenues.
• The director is affiliated with a charitable organization that
receives significant contributions from HP.
• The director has a personal services contract with HP or an
executive officer of HP.
For these purposes, an “immediate family” member includes a
person’s spouse, parents, step-parents, children, step-children,
siblings, mother and father-in-law, sons and daughters-in-law,
brothers and sisters-in-law, and anyone (other than domestic
employees) who shares the director’s home.
In determining independence, the Board reviews whether directors
have any material relationship with HP. An independent director
must not have any material relationship with HP, either directly
or as a partner, stockholder or officer of an organization that has
a relationship with HP, nor any relationship that would interfere
with the exercise of independent judgment in carrying out the
responsibilities of a director. In assessing the materiality of a
director’s relationship to HP, the Board considers all relevant facts
and circumstances, including consideration of the issues from the
director’s standpoint and from the perspective of the persons or
organizations with which the director has an affiliation, and is guided
by the standards set forth above.
In making its independence determinations, the Board considered
transactions occurring since the beginning of fiscal 2014 between
HP and entities associated with the independent directors or their
immediate family members. In addition to the transactions described
below under “Fiscal 2016 Related Person Transactions,” if any, the
Board’s independence determinations included consideration of the
following transactions:
Current Directors:
• Mr. Bass served as President and Chief Executive Officer of
Autodesk from May 2006-February 2017. HP has entered
into transactions for the purchase and sale of goods and
services in the ordinary course of its business during the
past three fiscal years with Autodesk. The amount that
HP paid in each of the last three fiscal years to Autodesk,
and the amount received in each fiscal year by HP from
Autodesk, did not, in any of the previous three fiscal years
exceed the greater of $1 million or 2% of either company’s
consolidated gross revenues.
• Mr. Bergh has served as President and Chief Executive
Officer and a Director of Levi Strauss & Co., since
September 2011. HP has entered into transactions for the
purchase and sale of goods and services in the ordinary
course of its business during the past three fiscal years
Board Leadership Structure
Corporate Governance
with Levi Strauss & Co. The amount that HP paid in each
of the last three fiscal years to Levi Strauss & Co., and the
amount received in each fiscal year by HP from Levi Strauss
& Co., did not, in any of the previous three fiscal years
exceed the greater of $1 million or 2% of either company’s
consolidated gross revenues.
• Each of Mr. Banerji, Mr. Bennett, Ms. Burns, Ms. Citrino, Mr.
Gupta and Mr. Mobley, or one of their immediate family
members, is a non-employee director, trustee or advisory
board member of another company that did business with
HP at some time during the past three fiscal years. These
business relationships were as a supplier or purchaser of
goods or services in the ordinary course of business.
• Mr. Banerji, or one of his immediate family members,
serves or has served as a non-employee director, trustee
or advisory board member for one or more charitable
institutions to which HP has made charitable contributions
during the previous three fiscal years. Contributions by
(including employee-matching contributions and
HP
discretionary contributions by HP) to each charitable
institution did not exceed $100,000 in any of the previous
three fiscal years.
As a result of this review, the Board has determined the transactions
described above and below under “Fiscal 2016 Related Person
Transactions,” if any, would not interfere with the director’s exercise
of independent judgment in carrying out the responsibilities of a
director. The Board has also determined that, with the exception of
Mr. Weisler and Ms. Whitman, (i) each of the current non-employee
directors, including Ms. Alvarez, Mr. Banerji, Mr. Bass, Mr. Bennett,
Mr. Bergh, Ms. Brown-Philpot, Ms. Burns, Ms. Citrino, Mr. Gupta,
Mr. Mobley and Mr. Suresh, and (ii) each of the members of the Audit
Committee, the HRC Committee and the NGSR Committee, has (or
had) no material relationship with HP (either directly or as a partner,
stockholder or officer of an organization that has a relationship with
HP) and is independent within the meaning of the New York Stock
Exchange (“NYSE”) and our director independence standards. The
Board has determined that:
• Mr. Weisler is not independent because of his status as our
current President and CEO.
• Ms. Whitman is not independent because of her status as
our former President and CEO.
The HP Board continuously evaluates its leadership structure.
Subsequent to the departure of Ms. Whitman from the Chief
Executive Officer role in 2015, the Board determined that it would be
in the best interests of the Company and its stockholders to separate
the Chairman of the Board and Chief Executive Officer roles, with
Ms. Whitman continuing as Chairman and Mr. Gupta being appointed
Lead Independent Director. The Board believes that appointment of
a Lead Independent Director ensures that HP benefits from effective
oversight by its independent directors. Our Board believes that our
current structure, with a non-executive Chairman who intimately
knows and understands our business working in tandem with a Lead
Independent Director who has strong, well-defined duties, gives our
Board a strong leadership and corporate governance structure that
best serves the needs of HP and its stockholders. The Board will
continue to evaluate its leadership structure on an ongoing basis
and may make changes as appropriate to HP and its future needs.
Proxy Statement
19
Corporate Governance
Non-Executive Chairman
• oversees the planning of the annual Board of Directors
Lead Independent Director
• presides at all meetings of the Board of Directors at which the
calendar
Chairman is not present
•
•
•
in consultation with the CEO, the Lead Independent Director
and the other directors, schedules and sets the agenda for
meetings of the Board of Directors and chairs and leads the
discussion at such meetings
chairs HP’s annual meetings of stockholders
is available in appropriate circumstances to speak on behalf of
the Board of Directors
• provides guidance and oversight to management
• has the authority to call meetings of the independent directors
and schedules, sets the agenda for and presides at executive
sessions of the independent directors
•
serves as a liaison between the Chairman and the independent
directors
• approves information sent to the Board of Directors
• approves Board of Directors meeting agendas and schedules
to assure that there is sufficient time to cover all agenda items
• helps with the formulation and implementation of HP’s
• assists the Chairs of the Board committees in preparing
strategic plan
•
serves as the Board liaison to management
agendas for the respective committee meetings
•
is available for consultation and direct communication with
major stockholders upon request
Together
• work with the HRC Committee to coordinate the annual performance evaluation of the CEO
• work with the NGSR Committee to oversee the Board of Directors and committee evaluations and recommend changes to improve
the Board of Directors, the committees and individual director effectiveness
• perform such other functions and responsibilities as set forth in the Corporate Governance Guidelines or as requested by the Board
of Directors from time to time
Board Risk Oversight
The Board, with the assistance of committees of the Board
as discussed below, reviews and oversees our enterprise risk
management (“ERM”) program, which is an enterprise-wide program
designed to enable effective and efficient identification of, and
management visibility into, critical enterprise risks and to facilitate
the incorporation of risk considerations into decision making. The
ERM program was established to clearly define risk management
roles and responsibilities, bring together senior management to
discuss risk, promote visibility and constructive dialogue around
risk at the senior management and Board levels and facilitate
appropriate risk response strategies. Under the ERM program,
management develops a holistic portfolio of our enterprise risks
by facilitating business and function risk assessments, performing
targeted risk assessments and incorporating information regarding
specific categories of risk gathered from various internal HP
organizations. Management then develops risk response plans for
risks categorized as needing management focus and response and
monitors other identified risk focus areas. Management provides
regular reports on the risk portfolio and risk response efforts to
senior management and to the Audit Committee.
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The Board oversees management’s implementation of the ERM program, including reviewing our enterprise risk portfolio and evaluating
management’s approach to addressing identified risks. Various Board committees also have responsibilities for oversight of risk management
that supplement the ERM program as follows:
Corporate Governance
BOARD:
Stays Informed of Our Risk Profile
Considers Risk in Connection with Strategic Planning and Other Matters
AUDIT
Risk oversight
FINANCE,
INVESTMENT
AND TECHNOLOGY
Financial risks
and innovation
opportunities
HR AND
COMPENSATION
Compensation risks
and practices
NOMINATING,
GOVERNANCE
AND SOCIAL
RESPONSIBILITY
Risks associated with
governance structure
and processes
Management HP:
The BOD and all its committees acting to supervise and
advise management on risk management
Current Committees Memberships
Audit
Finance, Investment
and Technology
HR and Compensation
Nominating,
Governance and
Social Responsibility
Chair
Chair
Chair
Chair
Name
Independent Directors
Aida M. Alvarez
Shumeet Banerji
Carl Bass
Robert R. Bennett
Charles V. Bergh
Stacy Brown-Philpot
Stephanie A. Burns
Mary Anne Citrino
Rajiv L. Gupta(1)
Stacey Mobley
Subra Suresh
Other Directors
Dion J. Weisler
Margaret C. Whitman
— Member
— Audit Committee “financial expert”
(1) Mr. Gupta is not standing for re-election and, therefore, his term will expire at this annual meeting. The Board will appoint a new Chair of the HRC Committee.
Proxy Statement
21
Corporate Governance
During fiscal 2016, the Board held eight meetings, five of which
included executive sessions. Each
incumbent director serving
during fiscal 2016 attended at least 75% of the aggregate of all
Board and applicable committee meetings held during the period
that he or she served as a director. During fiscal 2016, we had
the following four standing committees, which held the number
of meetings indicated in parenthesis during fiscal 2016: Audit
Committee (12); Finance, Investment and Technology Committee
(5); HRC Committee (5); and NGSR Committee (5). All of the
committee charters are available on our investor relations website
at www.hp.com/investor/board_charters.
Directors are encouraged to participate in our annual meeting of
stockholders. At our last annual meeting on April 4, 2016, all of
our directors, 12 of whom are standing for re-election this year,
attended the meeting.
Audit Committee
We have an Audit Committee established in accordance with the
requirements of the Securities Exchange Act of 1934, as amended
(the “Exchange Act”). The Audit Committee represents and assists
the Board in fulfilling its responsibilities for overseeing our financial
reporting processes and the audit of our financial statements.
Specific duties and responsibilities of the Audit Committee include,
among other things:
Independent Registered Public
Accounting Firm
• appointing, overseeing the work of, evaluating and compensating the independent registered
public accounting firm;
• discussing with the public accounting firm relationships with HP and its independence;
• overseeing the rotation of the independent registered public accounting firm’s lead audit and
concurring partners at least once every five years and the rotation of other audit partners at
least once every seven years in accordance with SEC regulations; and
• determining whether to retain or, if appropriate, terminate the independent registered public
accounting firm.
Audit and Non-Audit Services;
Financial Statements;
Audit Report
•
reviewing and approving the scope of the annual independent audit, the audit fee, other audit
services and the financial statements;
• preparing the Audit Committee report for inclusion in the annual proxy statement; and
• overseeing our financial reporting processes and the audit of our financial statements,
including the integrity of our financial statements.
Disclosure Controls;
Internal Controls & Procedures;
Legal Compliance
•
reviewing our disclosure controls and procedures, internal controls, information security
policies, internal audit function, and corporate policies with respect to financial information
and earnings guidance; and
Risk Oversight
• overseeing compliance with legal and regulatory requirements.
•
reviewing risks facing HP and management’s approach to addressing these risks, including
significant risks or exposures relating to litigation and other proceedings and regulatory
matters that may have a significant impact on our financial statements; and
• discussing policies with respect to risk assessment and risk management.
Related Party Transactions
• overseeing relevant related party transactions governed by applicable accounting standards
(other than related person transactions addressed by the NGSR Committee).
Annual Review/Evaluation
• annually reviewing the Audit Committee’s charter and performance.
The Board determined that each of Ms. Citrino, chair of the Audit
Committee, and the other Audit Committee members (Mr. Bennett,
Ms. Brown-Philpot, Ms. Burns and Mr. Suresh) is independent within
the meaning of the NYSE and SEC standards of independence for
directors and audit committee members and has satisfied the NYSE
financial literacy requirements. The Board also determined that
each of Mr. Bennett, Ms. Brown-Philpot, Ms. Burns, Ms. Citrino and
Mr. Suresh is an “audit committee financial expert” as defined by the
SEC rules.
The report of the Audit Committee is included on page 30.
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Corporate Governance
Finance, Investment and Technology Committee
The Finance, Investment and Technology Committee provides oversight of the finance and investment functions of HP. The Finance,
Investment and Technology Committee’s responsibilities and duties include, among other things:
Treasury Matters
M&A Transactions &
Strategic Alliances
Capitalization; Debt &
Obligations; Swaps
Technology Strategies &
Guidance
•
reviewing or overseeing significant treasury matters such as capital structure and allocation
strategy, derivative policy, global liquidity, fixed income investments, borrowings, currency
exposure, dividend policy, share issuances and repurchases, and capital spending.
• assisting the Board in evaluating investment, acquisition, enterprise services, joint venture and
divestiture transactions in which we engage as part of our business strategy from time to time and
reporting and making recommendations to the Board as to scope, direction, quality, investment
levels and execution of such transactions;
• evaluating and revising our approval policies with respect to such transactions;
• overseeing our integration planning and execution and the financial results of such transactions
after integration;
• evaluating the execution, financial results and integration of our completed transactions; and
• overseeing and approving our strategic alliances.
•
reviewing or overseeing our capital structure and allocation strategy;
• overseeing our loans and loan guarantees of third-party debt and obligations; and
• annually reviewing and approving certain swaps and other derivative transactions.
• making recommendations to the Board as to scope, direction, quality, investment levels and
execution of our technology strategies;
• overseeing the execution of technology strategies formulated by management; and
• providing guidance on technology as it may pertain to, among other things, market entry and exit,
investments, mergers, acquisitions and divestitures, new business divisions and spin-offs, research
and development investments, and key competitor and partnership strategies.
Proxy Statement
23
Corporate Governance
Nominating, Governance and Social Responsibility Committee
The NGSR Committee oversees, and represents and assists the Board
(and management, as applicable) in fulfilling its responsibilities
relating to, our corporate governance, director nominations and
elections, HP’s policies and programs relating to global citizenship
and other legal, regulatory and compliance matters relating to
current and emerging political, environmental, global citizenship
and public policy trends. Specific duties and responsibilities of the
NGSR Committee include, among other things:
Board Matters
• developing and recommending to the Board the criteria for identifying and evaluating director
candidates and periodically reviewing these criteria;
•
identifying and recommending candidates to be nominated for election as directors at our annual
meeting, consistent with criteria approved by the Board;
• annually assessing the size, structure, functioning and composition of the Board and recommending
assignments of directors to Board committees and chairs of Board committees;
•
identifying and recruiting new directors, establishing procedures for the consideration of director
candidates recommended by stockholders and considering candidates proposed by stockholders;
• assessing the contributions and independence of directors in determining whether to recommend
them for election or reelection to the Board; and
• periodically reviewing the Board’s leadership structure, recommending changes to the Board as
appropriate, and making a recommendation to the independent directors regarding the appointment
of the Lead Independent Director.
HP Governing Documents &
Corporate Governance
Guidelines & Other Policies
•
conducting a preliminary review of director independence and the financial literacy and expertise
of Audit Committee members, and making recommendations to the Board related to such matters;
• developing and regularly reviewing corporate governance principles, including our Corporate
Governance Guidelines;
•
reviewing proposed changes to our Certificate of Incorporation, Bylaws and Board committee
charters; and
• establishing policies and procedures for the review and approval of related-person transactions
and conflicts of interest, including the reviewing and approving all potential “related-person
transactions” as defined under SEC rules.
Stockholder Rights
• assessing and making recommendations regarding stockholder rights plans or other stockholder
Public Policy Trends & Issues
protections, as appropriate; and
•
•
•
•
reviewing stockholder proposals in conjunction with the CEO and recommending Board responses.
reviewing emerging corporate governance issues and practices;
identifying, evaluating and monitoring social, political and environmental trends, issues, concerns,
legislative proposals and regulatory developments that could significantly affect the public affairs
of HP; and
reviewing, assessing, reporting and providing guidance to management and the full Board relating
to activities, policies and programs with respect to public policy matters and policies and programs
relating to global citizenship, as applicable.
Annual Review/Evaluation
• overseeing the policies relating to, and the manner in which HP conducts, its government relations
activities;
• annually reviewing the NGSR Committee’s charter and performance; and
• overseeing the annual self-evaluation of the Board and its committees.
The Board determined that each of Mr. Banerji, who serves as chair of the NGSR Committee, and the other NGSR
Committee members (Ms. Alvarez, Mr. Bergh, Mr. Gupta(1), Mr. Mobley and Ms. Brown-Philpot) is independent within the meaning of
the NYSE director independence standards.
(1) Mr. Gupta is not standing for re-election at this annual meeting. His membership of the NGSR Committee will end at the annual meeting.
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Corporate Governance
HR and Compensation Committee
The HRC Committee discharges the Board’s responsibilities related to the compensation of our executives and directors and provides general
oversight of our compensation structure, including our equity compensation plans and benefits programs. Specific duties and responsibilities
of the HRC Committee include, among other things:
Executive Compensation,
Stock Ownership and
Performance Reviews
•
•
recommending all elements of the CEO’s compensation to the independent members of the Board;
reviewing and approving objectives relevant to other executive officer compensation and evaluating
performance and determining the compensation of other executive officers in accordance with
those objectives;
• approving severance arrangements and other applicable agreements and policies for
executive officers; and
• adopting and monitoring compliance with stock ownership guidelines and policies for executive
officers.
Equity Compensation Plans,
Incentive Plans and Other
Employee Benefit Plans
• overseeing and monitoring the effectiveness of non-equity-based benefit plan offerings, including
but not limited to non-qualified deferred compensation, fringe benefits and any perquisites,
in particular those pertaining to Section 16 officers, and approving any material new employee
benefit plan or change to an existing plan that creates a material financial commitment by HP.
Director Compensation &
Stock Ownership
• establishing compensation policies and practices for service on the Board and its committees,
including annually reviewing the appropriate level of director compensation and recommending to
the Board any changes to that compensation; and
• adopting and monitoring compliance with stock ownership guidelines and policies for directors.
Executive Succession
Planning & Leadership
Development
Compensation Consultants
Risk Assessment;
Other Disclosure
•
reviewing senior management selection and overseeing succession planning,
development, diversity and pay equality.
leadership
• assessing the independence of all advisors (whether retained by the HRC Committee or
management) that provide advice to the HRC Committee, in accordance with applicable listing
standards; and
• annually assessing whether the work of compensation consultants has raised any conflict of
interest.
• overseeing, approving, and evaluating HP’s overall human resources and compensation structure,
policies and programs, and assessing whether these establish appropriate incentives and leadership
development opportunities for management and other employees, and confirming they do not
encourage risk taking that is reasonably likely to have a material adverse effect on HP;
•
•
reviewing and discussing with management the Compensation Discussion and Analysis and
performing other reviews and analyses and making additional disclosures as required of
compensation committees by the rules of the SEC or applicable exchange listing requirements; and
reviewing the results of stockholder advisory votes on HP’s executive compensation program and
recommending to the Board or the NGSR Committee how to respond to such votes.
Annual Review/Evaluation
• overseeing the annual evaluation of the CEO with input from all Board members; and
• annually evaluating the HRC Committee’s performance and its charter.
The Board determined that each of Mr. Gupta(1), who serves as chair of the HRC Committee, and the other HRC Committee members
(Ms. Alvarez, Mr. Banerji, Mr. Bass, Mr. Bergh and Mr. Mobley) is independent within the meaning of the NYSE standards of independence for
directors and compensation committee members.
(1) Mr. Gupta is not standing for re-election and, therefore, his term will expire at this annual meeting. The Board will appoint a new chair of the
HRC Committee.
Proxy Statement
25
Corporate Governance
Executive Sessions
During fiscal 2016, the directors met in executive session five times of which at least one included an additional executive session of only the
independent directors. As Lead Independent Director during fiscal 2016, Mr. Gupta scheduled and chaired each executive session held during
fiscal 2016. Any independent director may request that an additional executive session be scheduled.
Communications with the Board
contract
Stockholders
directors@hp.com or by mail at:
can
the HP Board by email at
The HP Board of Directors
1501 Page Mill Road
Palo Alto, CA
94304
All directors have access to this correspondence. In accordance with
instructions from the Board, the Secretary to the Board reviews all
correspondence, organizes the communications for review by the
Code of Conduct
Board and posts communications to the full Board or to individual
directors, as appropriate. Our independent directors have requested
that certain items that are unrelated to the Board’s duties, such
as spam, junk mail, mass mailings, solicitations, resumes and
job inquiries, not be posted. Communications that are intended
specifically for the Chairman of the Board, the Lead Independent
Director, other independent directors or the non-employee directors
should be sent to the e-mail address or street address noted above,
to the attention of the Chairman of the Board.
We maintain a code of business conduct and ethics for directors, officers and employees known as our Standards of Business Conduct, which
is available on our website at http://h30261.www3.hp.com/governance/standards-of-business-conduct.aspx.
Director Compensation and Stock Ownership Guidelines
Employee directors such as Mr. Weisler do not receive any separate
compensation for their Board activities. Non-employee director
compensation is determined annually by the Board acting on
the recommendation of the HRC Committee. In formulating its
recommendation, the HRC Committee considers market data for our
peer group and input from the third-party compensation consultant
retained by the HRC Committee regarding market practices for
director compensation. In fiscal 2016, non-employee directors
received the compensation described below.
Each non-employee director serving during fiscal 2016 was entitled
to receive an annual cash retainer of $100,000. Non-employee
directors may elect to defer up to 50% of their annual cash retainer.
There were two non-employee directors who elected to defer. In
lieu of the annual cash retainer, non-employee directors may elect
to receive an equivalent value of equity either entirely in RSUs or in
equal values of RSUs and stock options.
Each non-employee director also received an annual equity
retainer of $200,000 for service during fiscal 2016. Under special
circumstances, the annual equity retainer may be paid in cash. No
annual equity retainer was paid in cash during fiscal 2016. Typically,
the annual equity retainer is paid at the election of the director either
entirely in RSUs or in equal values of RSUs and stock options. The
number of shares subject to the RSU awards is determined based
on the fair market value of our stock on the grant date, and the
number of shares subject to the stock option awards is determined
as of the grant date based on a Black-Scholes-Merton option pricing
formula. Non-employee directors are entitled to receive dividend
equivalent units with respect to RSUs, but not stock options. RSUs
and stock options generally vest after one year from the date of
grant. In addition, non-employee directors may elect to defer the
settlement of all RSUs received as part of the director compensation
program until either (a) upon the first to occur of the director’s death,
disability (as defined in Section 409A of the Internal Revenue Code)
or when the director no longer serves as a member of the HP Board
of Directors (a “Separation From Service” as defined in Section 409A)
or (b) as of April 1 of a given year; however, non-employee directors
may not defer the settlement of any stock options received.
In fiscal 2016, the Board approved an annual retainer for the Lead
Independent Director in the amount of $35,000. In addition to the
annual cash and equity retainers, the Lead Independent Director
and non-employee directors who served as chairs of standing
committees during fiscal 2016 received cash retainers for such
service. The Board also approved annual chair retainers as follows:
• $25,000 for the Audit Committee Chair;
• $20,000 for the HRC Committee Chair; and
• $15,000 for other Board committees.
Each non-employee director also receives $2,000 for Board
meetings attended in excess of ten meetings per Board year
(which begins in March and ends the following February), and
$2,000 for each committee meeting attended in excess of a total of
ten meetings of each committee per Board year.
Non-employee directors are reimbursed for their expenses in
connection with attending Board meetings (including expenses
related to spouses when spouses are invited to attend Board
events), and non-employee directors may use the Company aircraft
for travel to and from Board meetings and other company events.
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Fiscal 2016 Director Compensation
Name
Aida Alvarez
Shumeet Banerji
Carl Bass
Robert R. Bennett
Charles V. Bergh
Stacy Brown-Philpot
Stephanie A. Burns
Mary Anne Citrino
Rajiv L. Gupta
Stacey Mobley
Subra Suresh
Dion J. Weisler(3)
Margaret C. Whitman
Corporate Governance
Fees Earned or
Paid in Cash(1)
($)
Stock
Awards(2)
($)
Option
Awards(2)
($)
All Other
Compensation
($)
72,465
116,921
33,219
122,921
99,931
99,931
33,219
58,202
158,893
99,931
99,931
—
33,219(4)
210,070
199,997
207,534
199,997
157,543
257,536
357,540
207,534
100,004
257,536
257,536
—
207,534
0
0
152,185
0
101,457
0
0
152,185
101,457
0
0
—
152,185
0
0
0
0
0
0
0
0
0
0
0
—
0
Total
($)
282,535
316,918
392,938
322,918
358,931
357,467
390,759
417,921
360,354
357,467
357,467
—
392,938
(1) For purposes of determining director compensation, the board year begins in March and ends the following February, which does not coincide with our
November through October fiscal year. Cash amounts included in the table above represent the portion of the annual retainers, committee chair fees
and Lead Independent Director fees earned with respect to service during fiscal 2016, as well as any additional meeting fees paid during fiscal 2016. See
“Additional Information about Fees Earned or Paid in Cash in Fiscal 2016” below.
(2) Represents the grant date fair value of stock awards and option awards granted in fiscal 2016 calculated in accordance with applicable accounting
standards relating to share-based payment awards. For awards of RSUs, that amount is calculated by multiplying the closing price of HP’s stock on the
date of grant by the number of units awarded. For option awards, that amount is calculated by multiplying the Black-Scholes-Merton value determined
as of the date of grant by the number of options awarded. For information on the assumptions used to calculate the value of the stock awards, refer to
Note 6 to our Consolidated Financial Statements in our Annual Report on Form 10-K for the fiscal year ended October 31, 2016, as filed with the SEC on
December 15, 2016. See “Additional Information about Non-Employee Director Equity Awards” below.
(3) Mr. Weisler has served as President and CEO of HP since November 1, 2015. Accordingly, he does not receive compensation for his Board service.
(4) As Chairman of the Board, Ms. Whitman was eligible for an additional annual cash retainer of $200,000. She declined this retainer for fiscal 2016.
Additional Information about Fees Earned or Paid in Cash in Fiscal 2016
Name
Aida Alvarez
Shumeet Banerji
Carl Bass
Robert R. Bennett
Charles V. Bergh
Stacy Brown-Philpot
Stephanie A. Burns
Mary Anne Citrino
Rajiv L. Gupta
Stacey Mobley
Subra Suresh
Margaret C. Whitman
Annual
Retainers(1)
($)
72,465
99,931
33,219
99,931
99,931
99,931
33,219
33,219
99,931
99,931
99,931
33,219
Committee Chair/
Lead Independent
Director Fees(2)
($)
0
14,990
0
14,990
0
0
0
24,983
54,962
0
0
0
Additional
Meeting Fees(3)
($)
0
2,000
0
8,000
0
0
0
0
4,000
0
0
0
Total ($)
72,465
116,921
33,219
122,921
99,931
99,931
33,219
58,202
158,893
99,931
99,931
33,219
(1) The board year begins in March and ends the following February, which does not coincide with HP’s November through October fiscal year. The dollar
amounts shown include cash annual retainers earned for service during the last four months of the March 2015 through February 2016 Board year and
cash annual retainers earned for service during the first eight months of the March 2016 through February 2017 Board year. This also includes cash
earned in the period described that was deferred by director election into the 2005 Executive Deferred Compensation Plan, which provides that directors
may elect when to receive their deferred cash annual retainer. Directors may not receive their deferred cash annual retainer earlier than January 2019. In
the case of a termination of service, directors can elect to receive the deferred money in the January following the termination of the service if the date
occurs prior to the specified distribution year elected.
Proxy Statement
27
Corporate Governance
(2) Committee chair fees are calculated based on service during each Board term. The dollar amounts shown include such fees earned for service during
the last four months of the March 2015 through February 2016 Board term and fees earned for service during the first eight months of the March 2016
through February 2017 Board term.
(3) Additional meeting fees are calculated based on the number of designated Board meetings and the number of committee meetings attended during each
Board term. The dollar amounts shown include any additional meeting fees paid during fiscal 2016 for service in the 2015 Board term ending February
2016. Additional meeting fees for the 2016 Board term, if any, will be paid during fiscal 2017.
Additional Information about Non-Employee Director Equity Awards
The following table provides additional information about non-
employee director equity awards, including the stock awards and
option awards made to non-employee directors during fiscal 2016,
the grant date fair value of each of those awards and the number
of stock awards and option awards outstanding as of the end of
fiscal 2016:
Name
Aida Alvarez
Shumeet Banerji
Carl Bass
Robert R. Bennett
Charles V. Bergh
Stacy Brown-Philpot
Stephanie A. Burns
Mary Anne Citrino
Rajiv L. Gupta
Stacey Mobley
Subra Suresh
Margaret C. Whitman
Stock Awards
Granted During
Fiscal 2016
(#)
18,305
17,467
17,175
17,467
12,809
21,542
30,276
17,175
8,734
21,542
21,542
17,175
Option Awards
Granted During
Fiscal 2016
(#)
0
0
72,816
0
48,544
0
0
72,816
48,544
0
0
72,816
Grant Date
Fair Value of
Stock and
Option Awards
Granted During
Fiscal 2016(1)
($)
210,070
199,997
359,719
199,997
259,000
257,536
357,540
359,719
201,461
257,536
257,536
359,719
Stock Awards
Outstanding
at Fiscal
Year End(2)
(#)
18,631
17,778
17,567
17,778
13,123
22,011
30,901
17,567
8,890
22,011
22,011
17,567
Option Awards
Outstanding at
Fiscal Year End
(#)
0
0
72,816
0
48,544
0
0
72,816
204,824
0
0
5,613,838(3)
(1) Represents the grant date fair value of stock and option awards granted in fiscal 2016 calculated in accordance with applicable accounting standards. For
awards of RSUs, that number is calculated by multiplying the closing price of HP’s stock on the date of grant by the number of units awarded. For option
awards, that amount is calculated by multiplying the Black-Scholes-Merton value determined as of the date of grant by the number of options awarded.
For information on the assumptions used to calculate the value of the stock awards, refer to Note 6 to our Consolidated Financial Statements in our
Annual Report on Form 10-K for the fiscal year ended October 31, 2016, as filed with the SEC on December 15, 2016.
Includes dividend equivalent units accrued with respect to awards of RSUs outstanding at fiscal year end, as well as RSUs granted in previous years, that
have been deferred at the election of the director.
Includes the number of option awards outstanding that were granted to Ms. Whitman while she served as President and CEO of HP prior to the separation.
A portion of Ms. Whitman’s options were converted to options of HPE in connection with the separation.
(2)
(3)
Non-Employee Director Stock Ownership Guidelines
Under our stock ownership guidelines, non-employee directors
are required to accumulate within five years of election to the
Board shares of HP’s stock equal in value to at least five times
the amount of their annual cash retainer. Shares counted toward
these guidelines include any shares held by the director directly or
indirectly, including deferred vested awards.
All non-employee directors with more than five years of service
have met our stock ownership guidelines and all non-employee
directors with less than five years of service have either met or are
on track to meet our stock ownership guidelines within the required
time based on current trading prices of HP’s stock. See “Common
Stock Ownership of Certain Beneficial Owners and Management” on
page 58 of this proxy statement.
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Related Person Transactions Policies and Procedures
We have adopted a written policy for approval of transactions
between us and our directors, director nominees, executive
officers, beneficial owners of more than 5% of HP’s stock, and their
respective immediate family members where the amount involved
in the transaction exceeds or is expected to exceed $100,000 in a
single calendar year.
The policy provides that the NGSR Committee reviews certain
transactions subject to the policy and decides whether or not
to approve or ratify those transactions. In doing so, the NGSR
Committee determines whether the transaction is in the best
interests of HP. In making that determination, the NGSR Committee
takes into account, among other factors it deems appropriate:
•
the extent of
the transaction;
the
related person’s
interest
in
•
•
• whether the transaction is on terms generally available
to an unaffiliated third party under the same or
similar circumstances;
the benefits to HP;
the impact or potential impact on a director’s independence
in the event the related party is a director, an immediate
family member of a director or an entity in which a director
is a partner, 10% stockholder or executive officer;
the availability of other sources for comparable products
or services; and
the terms of the transaction.
•
•
The NGSR Committee has delegated authority to the chair of the
NGSR Committee to pre-approve or ratify transactions where the
aggregate amount involved is expected to be less than $1 million.
Fiscal 2016 Related Person Transactions
Corporate Governance
A summary of any new transactions pre-approved by the chair is
provided to the full NGSR Committee for its review at each of the
NGSR Committee’s regularly scheduled meetings.
The NGSR Committee has adopted standing pre-approvals under the
policy for limited transactions with related persons. Pre-approved
transactions include:
•
compensation of executive officers that is excluded from
reporting under SEC rules where the HRC Committee
approved (or recommended that the Board approve)
such compensation;
• director compensation;
•
transactions with another company with a value that does
not exceed the greater of $1 million or 2% of the other
company’s annual revenues, where the related person
has an interest only as an employee (other than executive
officer), director or beneficial holder of less than 10% of the
other company’s shares;
contributions to a charity in an amount that does not exceed
$1 million or 2% of the charity’s annual receipts, where the
related person has an interest only as an employee (other
than executive officer) or director; and
transactions where all stockholders receive proportional
benefits.
•
•
A summary of new transactions covered by the standing
pre-approvals relating to other companies (as described above) is
provided to the NGSR Committee for its review in connection with
that committee’s regularly scheduled meetings.
We enter into commercial transactions with many entities for which our executive officers or directors serve as directors and/or executive
officers in the ordinary course of our business. All of those transactions were pre-approved transactions as defined above.
Proxy Statement
29
Management
Proposal
No. 2
Ratification of Independent Registered Public Accounting Firm
Our Board recommends a vote FOR the ratification of the appointment of Ernst & Young LLP as our
independent registered public accounting firm for the 2017 fiscal year.
The Audit Committee of the Board has appointed, and as a matter
of good corporate governance, is requesting ratification by the
stockholders of Ernst & Young LLP as the independent registered
public accounting firm to audit our consolidated financial statements
for the fiscal year ending October 31, 2017. During fiscal 2016, Ernst
& Young LLP served as our independent registered public accounting
firm and also provided certain other audit-related and tax services.
See “Principal Accounting Fees and Services” and “Report of the
Audit Committee of the Board of Directors” below. Representatives
of Ernst & Young LLP are expected to participate in the annual
meeting, where they will be available to respond to appropriate
questions and, if they desire, to make a statement.
Vote Required
Ratification of the appointment of Ernst & Young LLP as our independent registered public accounting firm for the 2017 fiscal year requires
the affirmative vote of a majority of the shares of HP common stock present in person or represented by proxy and entitled to be voted at
the annual meeting. If the appointment is not ratified, the Board will consider whether it should select another independent registered public
accounting firm.
Report of the Audit Committee of the Board of Directors
The Audit Committee represents and assists the Board in fulfilling
its responsibilities for general oversight of the integrity of HP’s
financial statements, HP’s compliance with legal and regulatory
requirements, the independent registered public accounting firm’s
qualifications and independence, the performance of HP’s internal
audit function and independent registered public accounting firm,
and risk assessment and risk management. The Audit Committee
manages HP’s relationship with its independent registered public
accounting firm (which reports directly to the Audit Committee). The
Audit Committee has the authority to obtain advice and assistance
from outside legal, accounting or other advisors as the Audit
Committee deems necessary to carry out its duties and receives
appropriate funding, as determined by the Audit Committee, from
HP for such advice and assistance.
HP’s management is primarily responsible for HP’s internal control
and financial reporting process. HP’s independent registered public
accounting firm, Ernst & Young LLP, is responsible for performing
an independent audit of HP’s consolidated financial statements
and issuing opinions on the conformity of those audited financial
statements with United States generally accepted accounting
principles and the effectiveness of HP’s internal control over
financial reporting. The Audit Committee monitors HP’s financial
reporting process and reports to the Board on its findings.
In this context, the Audit Committee hereby reports as follows:
1. The Audit Committee has reviewed and discussed the
audited financial statements with HP’s management.
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2. The Audit Committee has discussed with the independent
registered public accounting firm the matters required
to be discussed under the rules adopted by the Public
Company Accounting Oversight Board (“PCAOB”).
3. The Audit Committee has received from the independent
registered public accounting firm the written disclosures
and the letter required by the applicable requirements
independent registered
of the PCAOB regarding the
public accounting firm’s communications with the Audit
Committee concerning independence and has discussed
with
registered public accounting
firm its independence.
independent
the
4. Based on the review and discussions referred to
in
paragraphs (1) through (3) above, the Audit Committee
recommended to the Board, and the Board has approved,
that the audited financial statements be included in HP’s
Annual Report on Form 10-K for the fiscal year ended
October 31, 2016, for filing with the SEC.
The undersigned members of the Audit Committee have submitted
this Report to the Board of Directors.
AUDIT COMMITTEE
Mary Anne Citrino, Chair
Robert R. Bennett
Stacy Brown-Philpot
Stephanie A. Burns
Subra Suresh
Audit Matters Principal Accounting Fees and Services
Fees incurred by HP for Ernst & Young LLP
The following table shows the fees paid or accrued by HP for audit and other services provided by Ernst & Young LLP for fiscal 2016 and 2015.
Audit Matters
Audit Fees(1)
Audit-Related Fees(2)
Tax Fees(3)
All Other Fees(4)
Total
2016
2015
In Millions
$15.3
3.2
4.0
0.2
$22.7
$65.7
21.9
21.0
4.1
$112.7
(1) Audit fees represent fees for professional services provided in connection with the audit of our financial statements and review of our quarterly financial
statements and audit services provided in connection with other statutory or regulatory filings. Audit fees for fiscal 2015 included fees for audit services
provided in connection with the separation of Hewlett-Packard Company into two independent publicly-traded companies, HPE and HP Inc.
(2) Audit-related fees for fiscal 2016 consisted primarily of merger and acquisition due diligence of $1.8 million and also included accounting consultations,
employee benefit plan audits and other attestation services of $1.4 million. Audit-related fees for fiscal 2015 consisted primarily of service organization
control examinations and other attestation services of $9.0 million and also included accounting consultations, employee benefit plan audits and merger
and acquisition due diligence of $12.9 million.
(3) Tax fees consisted primarily of tax advice and tax planning fees of $3 million and $18.8 million for fiscal 2016 and fiscal 2015, respectively. For fiscal 2016
and fiscal 2015, tax fees also included tax compliance fees of $993,366 and $1.2 million, respectively.
(4) For fiscal 2016 and 2015, all other fees included primarily advisory service fees.
Pre-Approval of Audit and Non-Audit Services Policy
The Audit Committee has delegated to the chair of the Audit Committee the authority to pre-approve audit-related and non-audit services
not prohibited by law to be performed by our independent registered public accounting firm and associated fees up to a maximum for any
one service of $250,000, provided that the chair shall report any decisions to pre-approve services and fees to the full Audit Committee at
its next regular meeting.
Proxy Statement
31
Management
Proposal
No. 3
Advisory Vote to Approve Executive Compensation
Our Board recommends a vote FOR the approval of the compensation of our NEOs, including the
Compensation Discussion and Analysis, the compensation tables and narrative discussion following
such compensation tables, and the other related disclosures in this proxy statement.
In accordance with SEC rules, our stockholders are being asked to
approve, on an advisory or non-binding basis, the compensation
of our Named Executive Officers (“NEOs”) as disclosed in this proxy
statement — a detailed description of our compensation program is
available in the “Compensation Discussion and Analysis.”
Our Board and the HRC Committee believe that we have created
a compensation program that is tied to performance, aligns with
stockholder interests and merits stockholder support. Accordingly,
we are asking for stockholder approval of the compensation of our
NEOs as disclosed in this proxy statement in the Compensation
Discussion and Analysis, the compensation tables and the narrative
discussion following the compensation tables.
Vote Required
Although this vote is non-binding, the Board and the HRC Committee
value the views of our stockholders and will review the voting
results. If there are significant negative votes, we will take steps to
understand those concerns that influenced the vote, and consider
them in making future decisions about executive compensation. We
currently conduct annual advisory votes on executive compensation,
and we expect to conduct the next advisory vote at our 2018 annual
meeting of stockholders.
The affirmative vote of a majority of the shares of HP common stock present in person or represented by proxy and entitled to be voted on
the proposal at the annual meeting is required for advisory approval of this proposal.
Compensation Discussion and Analysis
Introduction
This Compensation Discussion and Analysis describes our executive compensation philosophy and programs, the compensation decisions
the HRC Committee has made under those programs, and the considerations in making those decisions.
Named Executive Officers
Our NEOs for fiscal 2016, are as follows:
• Dion J. Weisler, President and CEO;
• Catherine A. Lesjak, Chief Financial Officer;
• Kim M. Rivera, Chief Legal Officer and General Counsel;
• Tracy S. Keogh, Chief Human Resources Officer; and
•
Jon E. Flaxman, Chief Operating Officer.
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Executive Compensation Executive Compensation
Executive Summary
Fiscal 2016 was the first full year for HP as a standalone
organization, which was created as the successor company when
HPE was separated from Hewlett-Packard Company in November
2015. The separation resulted in two ongoing entities, HP and HPE,
each ranked among the 100-largest US companies in revenues.
This Compensation Discussion and Analysis provides details on HP’s
executive compensation program structure, policies, and practices
as related to NEOs during the fiscal 2016 “start-up” year. HP’s HRC
Committee oversees the program and highlights the following four
major aspects of the program for readers of the Compensation
Discussion and Analysis:
First, HP’s regular ongoing target compensation opportunities are reasonable versus peers with a strong emphasis on
performance-contingent pay.
Amounts shown in the Summary Compensation Table on page 47 include all cash, equity, and other reportable compensation value for
NEOs that are attributable to fiscal 2016. For HP, these amounts include two significant items that are unique to the Company’s initial year of
operations and are not part of regular ongoing compensation:
• First, due to the extraordinary circumstances of the company, one-time “Launch Grants” were awarded at the successful completion
of the separation. These one-time performance-based awards were made to selected NEOs for retention, ownership and incentive
over the critical new-company formation period. The Launch Grants are discussed in detail on page 42.
• Second, the incremental accounting value in connection with the modification and adjustment of stock-based awards outstanding
at the time of the separation. The adjustments were made with the additional intention of preserving the intrinsic value of the
awards prior to the separation.
The following table shows reported compensation for the CEO and other NEOs on average, breaking-out these two non-recurring
components. Based on extensive review of peer-group data, the HRC Committee concluded that the regular ongoing cash and equity
compensation structure is within a competitive range of the market median for our NEOs, with individual differences related to incumbent-
specific performance and additional relevant considerations explained more fully in the subsequent narrative:
Summary Compensation Table Reported Total
Less: One-Time Launch Grants
Less: The accounting-related value due to adjustments of stock-based compensation awards in connection
with separation
Equals Regular Earned Cash, Equity and Other
CEO
($)
$28,696,267
$13,213,435
Avg. Other
NEOs
($)
$8,355,437
$2,007,425
$541,630
$14,941,202
$230,386
$6,117,625
Second, special “Launch Grants” are equity and performance related, and effectively serve a unique one-time purpose for the
new Company.
As previously mentioned, the HRC Committee’s rationale for making
the Launch Grants combined objectives related to performance
focus, stockholder alignment, ownership, and talent retention,
which are discussed in further detail on page 42. To balance these
objectives, half of the Launch Grants are comprised of Performance
Contingent Stock Options (“PCSOs”) that will be forfeited if certain
stock price targets are not met within specified time periods. The
remaining half is in time-based RSUs. The Launch Grants vest
ratably over three years (contingent on achievement of performance
conditions for the PCSOs) and require continued employment at
each vesting.
For the PCSOs, real pay delivery from the grants is intended to
align with future stockholder value creation. Subject to continued
employment, vesting of the PCSOs in one-third installments is
contingent on our stock price increasing (for 20 consecutive trading
days) 10% within two years after the grant date, 20% within four
years after the grant date and 30% within five years after the grant
date. Any portion not earned at the end of the performance period
is forfeited, and cannot subsequently be re-earned by cumulative
price growth over the longer periods. As illustrated below for grants
made to NEOs during fiscal 2016, none of the price hurdles had been
achieved as of fiscal year-end and there was no earned or realizable
compensation as of that time:
Tranche 1
Tranche 2
Tranche 3
Price Hurdle
$15.21
$16.60
$17.98
Growth from
$13.83 Grant Price
10%
20%
30%
Forfeited if Not
Achieved Within
2 years
4 years
5 years
Status at End
of Fiscal 2016
Unearned
Unearned
Unearned
Proxy Statement
33
Executive Compensation
Third, fiscal 2016 compensation decisions related to the NEOs reflect the market and align with performance.
In addition to making the Launch Grants at the outset of the year as described above, the HRC Committee made three primary compensation
decisions regarding NEOs during fiscal 2016, which are summarized below along with the HRC Committee’s rationale:
Fiscal 2016 NEO Pay Action
Adjust base salaries
Determine earned annual
bonuses for fiscal 2016
performance
HRC Committee Decision
Due to the separation, there was extensive
personnel restructuring, including a number
of promotions. Salary changes ranged from
-14% to 45%, with the CEO at 45% due to his
promotion into his current leadership role.
Annual bonuses for fiscal 2016 were
earned, ranging from 94.7% to 100% of
target, with the CEO at 95.9% of target and
the average for other NEOs at 96.3%. At the
beginning of the year, target awards were
set at competitive levels versus peers.
Make regular long-term
incentive grants
long-term
incentives were
Fiscal 2016
granted
in an approximate mix of 60%
PARSUs and 40% time-based RSUs. Grant
values were set at competitive levels versus
peers with appropriate incumbent-specific
variability for performance, experience, and
internal equity. Grants for Ms. Lesjak and
Ms. Keogh were reduced while grants for Mr.
Weisler and Mr. Flaxman were increased vs.
fiscal 2015 grants to better align with market
data for the new company.
HRC Committee Rationale
Reflect peer group market positioning, individual experience,
performance, advancement potential, and internal equity.
Earned awards reflected performance against applicable
enterprise-wide, business, and individual goals. Goals were
set for the overall Company and businesses against internal
budgets for revenues, net earnings/profits, and free cash
flow. Non-financial individual performance goals under
the Management by Objective program (“MBOs”) were set
for individuals. While the company did deliver on external
EPS targets, overall performance fell short of target for
revenues and net earnings, and exceeded target for free
cash flow and MBOs. As a gauge of goal-setting rigor, HP’s
initial year TSR of 11.1% was more than double the S&P 500
return of 4.9%.
PARSUs continued to be based on equally weighted two-
and three-year goals for return on invested capital (“ROIC”)
and relative TSR compared to the S&P 500. The intent was
to align pay delivery with stockholder returns. RSUs were
time-based in annual installments over three years to
reward and reinforce ownership and support retention.
Fourth, the HRC Committee continues to review the overall executive compensation program to maintain support of HP’s evolving
business strategy without potential material risk to the organization.
Much of HP’s 2016 program structure was continued from the pre-separation HP, where there was 95.3% approval of the say-on-pay proposal
for 2015. Meanwhile, the HRC Committee continually considers feedback from stockholders and the potential executive-compensation
implications of evolving business and strategic objectives. These considerations led to the following refinements for fiscal 2017:
•
In annual incentives, there will be an increased focus on enterprise-wide revenues and net income for teamwork among business
leaders.
• For PARSUs, the ROIC measure will be replaced by Earnings Per Share (“EPS”) for improved stockholder alignment. This change is
discussed in further detail on page 43 “Fiscal 2017 Compensation Program.”
Oversight and Authority over Executive Compensation
Role of the HRC Committee and its Advisors
The HRC Committee oversees and provides strategic direction
to management regarding all aspects of our pay program for
senior executives.
It makes recommendations regarding the
CEO’s compensation to the independent members of the Board
for approval, and it reviews and approves the compensation of
the remaining Section 16 officers, including our NEOs. Each HRC
Committee member is an independent non-employee director with
significant experience in executive compensation matters.
During fiscal 2016, the HRC Committee engaged Frederick W. Cook
and Co. (“FW Cook”) as its independent compensation consultant
beginning in January 2016. In addition, during fiscal 2016, the
HRC Committee continued to retain Dentons US LLP (“Dentons”)
as its independent legal counsel. FW Cook provides analyses and
recommendations that inform the HRC Committee’s decisions,
evaluates market pay data and competitive-position benchmarking,
provides analysis and input on performance measures and goals,
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Executive Compensation
input on program structure, provides
provides analysis and
updates on market trends and the regulatory environment as it
relates to executive compensation, reviews various management
proposals presented to the HRC Committee related to executive
compensation, and works with the HRC Committee to validate and
strengthen the pay-for-performance relationship and alignment
with stockholders. Prior to fiscal 2016, the HRC Committee engaged
Farient Advisors LLC (“Farient”) as its independent compensation
consultant. Although Farient did not provide any recommendations
during fiscal 2016, it did provide guidance on the fiscal 2016 peer
group and compensation decisions. Pursuant to SEC rules the HRC
Committee has assessed the independence of FW Cook, Farient and
Dentons, and concluded each is independent and that no conflict
of interest exists that would prevent FW Cook, Farient or Dentons
from independently providing service to the HRC Committee. FW
Cook, Farient and Dentons do not currently perform other services
for HP Inc., and none will do so without the prior consent of the HRC
Committee chair. FW Cook meets with the HRC Committee chair and
the HRC Committee outside the presence of management while in
executive session.
The HRC Committee met five times in fiscal 2016, and all five of
these meetings included an executive session. FW Cook participated
in most of the meetings and, when requested by the HRC Committee
chair, in the preparatory meetings and the executive sessions.
Role of Management and the CEO in Setting Executive Compensation
individual performance
On an annual basis, management considers market competitiveness,
business results, experience and
in
evaluating NEO compensation and our compensation structure. The
Chief Human Resources Officer and other members of our human
resources organization, together with members of our finance
and legal organizations, work with the CEO to design and develop
the compensation program, to recommend changes to existing
program provisions applicable to NEOs and other senior executives,
as well as financial and other targets to be achieved under those
programs, prepare analyses of financial data, peer comparisons
and other briefing materials to assist the HRC Committee in making
its decisions, and implement the decisions of the HRC Committee.
During fiscal 2016, management continued to engage Meridian
its compensation
Compensation Partners, LLC (“Meridian”) as
consultant. The HRC Committee took
into consideration that
Meridian provided executive compensation-related services to
management when it evaluated any information and analyses
provided by Meridian, all of which were also independently reviewed
by FW Cook, as applicable, on the HRC Committee’s behalf.
During fiscal 2016, Mr. Weisler provided input to the HRC Committee
regarding performance metrics and the setting of appropriate
performance targets. Mr. Weisler also recommended MBOs for the
NEOs (other than himself) and the other senior executives who
report directly to him. Mr. Weisler is subject to the same financial
performance goals as the executives who lead global functions and
Mr. Weisler’s MBOs and compensation are established by the HRC
Committee and recommended to the independent members of the
Board for approval.
Use of Comparative Compensation Data and Compensation Philosophy
Each year, the HRC Committee reviews the compensation levels
and structure of our Section 16 officers and compares it to that of
executives in similar positions at our peer group companies. Our
peer group includes companies we compete with for executive
talent due to our geographical proximity and technology industry
overlap. The HRC Committee takes any notable size differentiations
into consideration when reviewing the results of market data
analysis. The HRC Committee finds this information useful in
evaluating whether our pay practices are reasonable versus market
practice and appropriate to support our strategic objectives. The
HRC Committee continues to employ this method post-separation,
but has made significant changes to its peer group to account for the
separation of HPE and HP Inc.
The process for fiscal 2016 started with the proposal of a peer group
by Farient, which was reviewed by HP. When determining the peer
group, Farient and HP considered the following characteristics:
• Companies
• Companies that are U.S.-based, listed on a major U.S.
exchange, and with executives primarily living in the U.S.
industry
information
sector, as well as non-technology peers in industrial,
consumer
and
telecommunications services
discretionary,
technology
consumer
staples
the
in
• Companies with revenue between $12 billion and $200
billion for the most recent fiscal year-end
• Companies with international revenue greater than or
equal to 40% of total revenue
• Companies with comparable organizational complexity
(i.e., at least two operating segments and products and
services components)
• Companies with R&D greater than or equal to 2.5% of total
revenue
• Companies with primarily B2B, or business-to-business, focus
We believe the resulting peer group provides HP and the HRC
Committee with a valid comparison and benchmark for the
Company’s executive compensation program and governance
practices. There were many changes to the peer group for fiscal 2016
once the screening process was applied to the newly separated HP
Inc., which was to be expected due to the significant changes to HP
Inc. in connection with the separation. The following companies were
removed: Accenture, AT&T Inc., The Boeing Company, Caterpillar,
Chevron Corporation, Ford Motor Company, Johnson & Johnson and
United Technologies Corporation. The following companies were
added: Amazon.com, Inc., Honeywell International, Inc., Nike, Inc.,
Seagate Technology PLC, Texas Instruments Inc., Western Digital
Corporation, and Xerox Corporation.
Proxy Statement
35
Executive Compensation
The peer group for fiscal 2016 consisted of the following companies:
Company Name
Apple Inc.
Verizon Communications Inc.
General Electric Company
Amazon.com, Inc.
Microsoft Corporation
International Business Machines Corporation
Alphabet Inc.
The Procter & Gamble Company
PepsiCo, Inc.
Intel Corporation
Cisco Systems, Inc.
HP Inc.
Honeywell International, Inc.
Oracle Corporation
Nike, Inc.
Qualcomm
EMC Corporation
Xerox Corporation
Western Digital Corporation
Seagate Technology PLC
Texas Instruments Inc.
Revenue ($ in billions)*
215.6
131.6
117.4
107.0
85.3
81.7
75.0
65.3
63.1
55.4
49.2
48.2
38.6
37.0
32.4
23.6
24.7
18.0
13.0
11.2
13.0
* Represents fiscal 2015 reported revenue, except fiscal 2016 reported revenue is provided for Apple, HP, Microsoft, Procter & Gamble, Cisco Systems,
Oracle, Nike, Qualcomm, Western Digital and Seagate.
Process for Setting and Awarding Executive Compensation
A broad range of facts and circumstances is considered in setting
our overall executive compensation levels. In fiscal 2016 the HRC
Committee continued to set target compensation levels within a
competitive level of the market median, although in some cases
lower or higher based on each executive’s situation (e.g., attraction
and retention purposes). The Board maintains a total CEO target
compensation package that approximates the competitive median
of our market and is consistent with our pay positioning strategy and
pay for performance philosophy.
Among the factors considered for our executives generally, and
for the NEOs in particular, are market competitiveness, internal
equity and individual performance. The weight given to each
factor may differ from year to year, is not formulaic and may differ
among individual NEOs in any given year. For example, when we
recruit externally, market competitiveness, experience and the
candidate-specific circumstances may weigh more heavily in the
compensation analysis. In contrast, when determining year-over-
year compensation for current NEOs, internal equity and individual
performance may factor more heavily in the analysis. Length of
service and prior awards generally are not considered.
Because such a large percentage of NEO pay is performance-
based, the HRC Committee spends significant time determining the
appropriate goals for our annual- and long-term incentive plans.
In general, management makes an initial recommendation of the
goals, which is then assessed by the HRC Committee’s independent
compensation advisor, and discussed and approved by the HRC
Committee. Major factors considered in setting financial goals
for each fiscal year are business results from the most recently
completed fiscal year, budgets and strategic plans, macroeconomic
factors, guidance and analyst expectations, competitive performance
results and goals, conditions or goals specific to a particular business
segment and strategic initiatives. To permit eligible compensation
to qualify as “performance-based” under Section 162(m) of the U.S.
tax code, the HRC Committee sets the overall funding target under
the “umbrella” structure created for the annual incentives, and sets
performance goals for annual incentives and equity awards within the
first 90 days of the fiscal year. MBOs are set based on major shared
and individual strategic, operating and tactical initiatives.
Following the close of the fiscal year, the HRC Committee reviews
actual financial results and MBO performance against the goals that it
had set for the applicable plans for that year, with payouts under the
plans determined by reference to performance against the established
goals. The HRC Committee meets in executive session to review the
MBO results for the CEO and to determine a recommendation for his
annual incentive award to be approved by the independent members
of the Board. See section ‘2016 Annual Incentives’ below for a further
description of our results and corresponding incentive payouts.
In setting compensation for fiscal 2016, the HRC Committee took
into consideration the new roles and responsibilities, as applicable,
each NEO had taken or was expected to take on in connection
with the separation, as discussed in further detail throughout this
Compensation Discussion and Analysis.
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Executive Compensation
Listening to our Stockholders on Compensation
We engage with our stockholders on a variety of issues on an ongoing
basis, including discussing their views on best practices in executive
compensation. Some recent changes to our executive compensation
program, shown here, have reflected those conversations with
stockholders. HP believes in aligning our compensation with our
stockholders in order to deliver better value to all our stakeholders.
• Reduction in cap within our Pay-for-Results (“PfR”) plan to
200% of target
• Simplification of long-term incentive program to include
only two equity elements
• The HRC Committee conducted full talent review of
executives
Determination of Fiscal 2016 Executive Compensation
Under our Total Rewards Program, executive compensation consists of: base salary, annual incentives, long-term incentives, benefits and
perquisites.
Fiscal 2016 Compensation Highlights
Prior to and following the separation, the HRC Committee regularly
explored and continues to explore ways to improve our executive
compensation program. In making changes for fiscal 2016, the HRC
Committee considered our current business needs and strategy,
and the impact of the separation. The objectives were to achieve a
successful transition following the separation, support the business
strategy, continue to align pay with stockholder interests, and
maintain best-in-class governance standards. While many elements
of the fiscal 2016 executive compensation program remained
consistent with prior years, some changes were made that reflect
strategy and market considerations, and take into account feedback
from stockholders.
What we Did
Reduced the maximum payout under the PfR Plan from 250% of
target to 200% of target
Increased the portion of PARSUs to 60% of the total long-term
incentive value (previously 40%)
Increased the portion of RSUs to 40% from 30% and correspondingly
discontinued the use of PCSOs
Rationale
To further support stockholder alignment and align with market
practices, updated PfR Plan to reduce potential maximum payout.
To simplify the long-term incentive program and further support
stockholder alignment.
To
incorporate appropriate upside potential and risk/reward
tradeoff and provide additional retention opportunities we changed
allocation of long-term equity.
2016 Base Salary
Consistent with our philosophy of tying pay to performance, our
executives receive a small percentage of their overall compensation
in the form of base salary. The NEOs are paid an amount in the form
of base salary sufficient to attract qualified executive talent and
maintain a stable management team. The HRC Committee aims
to have executive base salaries set at or near the market median
for comparable positions and comprise 10% to 20% of the NEOs’
overall compensation, which is consistent with the practice of our
peer group companies. The HRC Committee typically establishes
executive base salaries at the beginning of the fiscal year.
For fiscal 2016, Mr Weisler’s salary was increased to $1.2 million,
consistent with the median of our peer group. This increase reflects
Mr. Weisler’s promotion to CEO.
The HRC Committee did not change Ms. Lesjak’s base salary. Ms.
Keogh’s base salary was reduced from $700,000 to $600,000 to
better align with market data for the new Company. Mr. Flaxman’s
salary was increased from $535,000 to $700,000 due to an increase
in responsibilities as Chief Operating Officer for the Company.
Ms. Rivera’s salary was set at $625,000 when she was hired as Chief
Legal Officer and General Counsel.
2016 Annual Incentives
The NEOs are eligible to earn an annual incentive under the PfR
Plan. For fiscal 2016 and purposes of 162(m) deductibility, the
HRC Committee again established an “umbrella” formula governing
the maximum bonus and then exercised negative discretion in setting
actual bonuses. Under the umbrella formula, each Section 16 officer
was allocated a pro rata share of 0.75% of net earnings based on
his or her target annual incentive award, subject to a maximum bonus
of 200% of the NEO’s target bonus, and the maximum $10 million cap
under the PfR Plan. Below this umbrella funding structure, actual
payouts were determined based upon financial metrics and MBOs
established and evaluated by the HRC Committee for Section 16
officers and by the independent members of the Board for the CEO.
Proxy Statement
37
Executive Compensation
After the end of the fiscal year, the actual funding for the umbrella
pool was certified, and it exceeded the maximum potential bonus
for the combined covered officers. The actual awards, based on
financial metrics and MBOs, were then determined.
The fiscal 2016 annual incentive plan consisted of three core financial
metrics (i.e., revenue, net earnings/profit, and free cash flow as a
percentage of revenue) and a fourth metric, MBOs, with each metric
Fiscal 2016 Annual Incentive Plan
weighted equally at 25% of the target award value. Each individual
metric may fund up to 250% of target; however, the maximum
annual incentive for each executive will be capped at 200% of target.
The target annual incentive awards for fiscal 2016 were set at 200%
of salary for the CEO and 125% of salary for the other NEOs.
Key Design Elements
Weight
Linkage
Global Function Executives(4)
Corporate Performance Goals
Maximum
Target
Threshold
Corporate Goals
Revenue(1)
($ in billions)
25%
Net
Earnings/Profit
($ in billions)
25%
Free Cash Flow as a
% of Revenue(2)
(%)
25%
% Payout
Metric(3)
(%)
MBOs
25%
Corporate
Corporate
Corporate
Individual
N/A
$52.5
—
—
$3.1
—
—
5.2%
—
Various
Various
Various
250
100
0
(1) For revenue above target, weight is moved to net earnings/profit if net earnings/profit is also above target; otherwise, it is capped at target.
(2) Maximum funding for corporate free cash flow as a percentage of revenue is capped at 150% of target if corporate net earnings/profit achievement
was below target and is capped at 100% of target if corporate net earnings/profit achievement was below threshold. If corporate net earnings/profit
achievement was above target, the maximum funding level is 250% for this metric.
Interpolate for performance between discrete points. Maximum payout is equal to 200% of target.
(3)
(4) All NEOs are Global Function Executives. As such, we have not included information regarding business unit goals.
The specific metrics, their linkage to corporate results, and the weighting that was placed on each were chosen because the HRC Committee
believed that:
• performance against these metrics, in combination, would
link to enhanced value for stockholders, capturing both the
top and bottom line, as well as cash and capital efficiency;
requiring both revenue and profitability above target
in order to achieve an above-target payout on these
the pursuit of
two measures would encourage
profitable revenue;
•
• a balanced weighting and various caps would limit
the likelihood of rewarding executives for excessive
risk-taking;
• different measures would avoid paying for the same
performance twice; and
• MBOs would enhance focus on business objectives, such
as operational objectives, strategic initiatives, succession
planning, and people development, which will be important
to the long-term success of the Company.
The definition of and rationale for each of the financial performance metrics that was used is described in greater detail below:
Fiscal 2016 PfR
Financial Performance Metrics(1)
Definition
Corporate Revenue
Business Revenue
Corporate Net Earnings
Business Net Profit (“BNP”)
Corporate Free Cash Flow
Net revenue as reported in our Annual Report on
Form 10-K for fiscal 2016
Segment net revenue as reported in our Annual Report on
Form 10-K for fiscal 2016
Non-GAAP net earnings, as defined and reported in
our fourth quarter fiscal 2016 earnings press release,
excluding bonus net of income tax(2)
Business net profit, excluding bonus net of income tax
Cash flow from operations less net capital expenditures
(gross purchases less retirements) divided by net revenue
(expressed as a percentage of revenue)
Rationale for Metric
Reflects top line financial performance,
which is a strong indicator of our long-term
ability to drive stockholder value
Reflects bottom line financial performance,
which is directly tied to stockholder value
on a short-term basis
Reflects efficiency of cash management
practices, including working capital and
capital expenditures
(1) While we report our financial results in accordance with generally accepted accounting principles (“GAAP”), our financial performance targets and results
under our incentive plans are sometimes based on non-GAAP financial measures. The financial results, whether GAAP or non-GAAP, may be further
adjusted as permitted by those plans and approved by the HRC Committee. We review GAAP to non-GAAP adjustments and any other adjustments with
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Executive Compensation
the HRC Committee to ensure performance takes into account the way the goals were set and executive accountability for performance. These metrics
and the related performance targets are relevant only to our executive compensation program and should not be used or applied in other contexts.
(2) Fiscal year 2016 non-GAAP net earnings of $2.8 billion excludes after-tax costs of $0.16 billion related to the amortization of intangible assets, restructuring
charges, and acquisition-related charges. Management uses non-GAAP net earnings to evaluate and forecast our performance before gains, losses, or
other charges that are considered by management to be outside of our core business segment operating results. We believe that presenting non-GAAP
net earnings provides investors with greater visibility with respect to the information used by management in its financial and operational decision
making. We further believe that providing this additional non-GAAP information helps investors understand our operating performance and evaluate the
efficacy of the methodology and information used by management to evaluate and measure such performance. This additional non-GAAP information is
not intended to be considered in isolation or as a substitute for GAAP diluted net earnings.
Following fiscal 2016, the HRC Committee reviewed performance against the financial metrics and certified the results as follows:
Fiscal 2016 PfR Plan Performance Against Financial Metrics(1)
Metric
Corporate Revenue
Corporate Net Earnings
Corporate Free Cash Flow (% of revenue)(2)
Total
Adjusted Total
Weight(3)
25.0%
25.0%
25.0%
75.0%
75.0%
Target
($ in billions)
$52.5
$3.1
5.2%
—
—
Result
($ in billions)
$48.2
$3.0
6.6%
—
—
Percentage of Target
Annual Incentive Funded
0.0%
17.7%
37.5%
55.2%
38.4%
(1) Mr. Weisler, Ms. Lesjak, Ms. Rivera, Ms. Keogh, and Mr. Flaxman received PfR Plan payments based on corporate financial metrics. As a general guideline,
financial funding for Global Functions Executives cannot exceed the highest funding for a Business Group Executive. Financial funding for Global Function
Executives (i.e., all our NEOs) has been adjusted downward from 55.2% to 38.4% since it exceeds the highest Business Group Executive.
In fiscal 2016, management reinvested the gains from software divestitures, which negatively impacted fiscal 2016 free cash flow. The HRC Committee
approved an upward adjustment to the fiscal 2016 FCF performance results because the Company believes the reinvestment was in the best long-
term interests of our stockholders and our preference to encourage management to continue to make the right business decisions without negatively
impacting their payout. The percentage of target annual incentive funded was the same before and after the adjustment.
(2)
(3) The financial metrics were equally weighted to account for 75% of the target annual incentive.
With respect to performance against the MBOs, the independent
members of the Board evaluated the CEO’s performance at fiscal
year-end. The evaluation included an analysis of Mr. Weisler’s
performance against all of his MBOs, which included, but were
not limited to: successfully launch HP Inc., deliver against 2016
financials, with an effective currency hedging strategy and focus
on cash flow, support the turnaround of the print business, drive
continued progress in the personal systems business unit, invest
in a robust innovation pipeline, ensure the Company is optimally
managed, continue to make progress in 3D product release and
ensure we have a people and labor strategy that reflects current and
future needs. After conducting a thorough review of Mr. Weisler’s
independent members of the HP Board
performance, the
determined that Mr. Weisler did an extraordinary job in launching
the new company and that his MBO performance had been achieved
substantially above target. Mr. Weisler’s accomplishments included:
• Delivered EPS and Free Cash Flow within the consensus
range for the year
• Successfully launched the A3 portfolio, one of the key
growth areas in printing
• Delivered a year of share growth
in commercial
personal systems and in key areas such as gaming and
premium with a strong product portfolio that included
award-winning devices such as the Spectre13, EliteBook
Folio, X3 and Omen
• Completed Samsung commercial agreement (integration
is underway to add Samsung’s A3 offerings to our print
portfolio)
• Achieved substantial cost reductions
• Executed a robust plan to engage with channel partners
and customers
• Articulated and delivered on the HP strategy. Rolled out
“Keep Reinventing”, our highly acclaimed mission, vision
and brand
• Worked with the Board chair, Lead Independent Director
and HR to recruit the most diverse board in the technology
industry
• Recruited and assembled a diverse team of highly capable
leaders at the executive leadership team level
As CEO, Mr. Weisler evaluated the performance of each of the other
Section 16 officers and presented the results of those evaluations to
the HRC Committee at its November 2016 meeting. The evaluations
included an analysis of the officers’ performance against all of their
MBOs. The HRC Committee reviewed in the CEO’s assessment of the
degree of attainment of the MBOs of the other Section 16 officers
and set their MBO scores. The results of these evaluations and
selected MBOs for the other NEOs are summarized below.
Proxy Statement
39
Executive Compensation
Ms. Lesjak. The HRC Committee determined that Ms. Lesjak’s MBOs
performance had been achieved above target. Ms. Lesjak is a highly
experienced leader who was vital in setting up the Company for
success. Ms. Lesjak worked on critical projects such as the finance
organization redesign, Samsung printing business acquisition, and
cash flow management. Her knowledge of the business and vast
experience with investors, analysts and boards was critical to the
successful launch of the Company.
Ms. Rivera. The HRC Committee determined that Ms. Rivera’s MBOs
performance had been achieved at target. She led all legal and
intellectual property aspects during the Samsung acquisition and
acted as a driver to close the deal. She helped design and implement
an updated enterprise intellectual property strategy. She supported
the Board, helped integrate all the new members and ensured the
right governance and cadence was implemented.
Ms. Keogh. The HRC Committee determined that Ms. Keogh’s MBO
performance had been achieved above target. She redesigned key
people processes across the organization that aligned with the
new Company, launched a new employee engagement survey,
implemented our new culture focus and reworked our performance
management and compensation systems. She drove a robust talent
agenda across the company, focusing on succession planning,
development and talent acquisition.
Mr. Flaxman. The HRC Committee determined that Mr. Flaxman’s
MBO performance had been achieved above target. He was critical
in getting the Company up and running. He successfully managed
customer support, sales operations, IT, real estate and strategy.
Further, he delivered significant cost reductions across the Company
while driving internal efficiencies within his organization.
Based on the findings of these performance evaluations, the HRC
Committee (and, in the case of the CEO, the independent members
of the Board) evaluated performance against the non-financial
metrics for the NEOs as follows:
Fiscal 2016 PfR Plan Performance Against Non-Financial Metrics (MBOs)
Named Executive Officer
Dion J. Weisler
Catherine A. Lesjak
Kim M. Rivera
Tracy S. Keogh
Jon E. Flaxman
Percentage of Target
Annual Incentive
Funded
(%)
57.5
56.3
25.0
56.3
57.5
Weight
(%)
25
25
25
25
25
Based on the level of performance described above on both the financial and non-financial metrics for fiscal 2016, the payouts to the NEOs
under the PfR Plan were as follows:
Fiscal 2016 PfR Plan Annual Incentive Payout
Percentage of Target
Annual Incentive Funded
Total Annual
Incentive Payout
Named Executive Officer
Dion J. Weisler
Catherine A. Lesjak
Kim M. Rivera*
Tracy S. Keogh
Jon E. Flaxman
Financial
Metrics
(%)
38.4%
38.4%
38.4%
38.4%
38.4%
Non-Financial
Metrics
(%)
57.5%
56.3%
25.0%
56.3%
57.5%
As % of
Target Annual
Incentive
(%)
Payout
($)
95.9% 2,302,585
94.7% 1,006,092
781,250
710,182
839,484
100.0%
94.7%
95.9%
* Fiscal 2016 bonus payout for Ms. Rivera was guaranteed to be no less than 100% of target as a condition of her employment letter with the company and
as a transition from a former employer. This was a one-time guaranteed bonus due to her status as a newly hired executive.
Long-Term Incentive Compensation
The HRC Committee established a total long-term incentive target
value for each NEO in early fiscal 2016 that was 60% weighted in the
form of PARSUs and 40% weighted in the form of time-based RSUs.
The high proportion of performance-based awards reflects our pay-
for-performance philosophy. The time-based awards encourage
retention, and are linked to stockholder value and ownership, which
are also important goals of our executive compensation program.
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2016 PARSUs
The fiscal 2016-2018 PARSUs have a two- and three-year
performance period that began at the start of fiscal 2016 and
continue through the end of fiscal 2017 and 2018, respectively.
Under this program, 50% of the PARSUs (including dividend
equivalent units) are eligible for vesting based on performance over
two years with continued service, and 50% are eligible for vesting
based on performance over three years with continued service. The
two- and three-year awards are equally weighted between relative
TSR and ROIC. This structure is depicted in the chart below:
Executive Compensation
2016-2018 PARSUs
Key Design Elements
Weight
Performance/Vesting Periods(1)
Performance Levels:
Max
> Target
Target
Threshold
< Threshold
ROIC vs. Internal Goals
25%
3 years
25%
2 years
Relative TSR vs. S&P 500
25%
3 years
25%
2 years
Payout
% of Target(2)
Target to be disclosed
after the end of the
performance periods
only, out of concern for
competitive harm
> 90th percentile
70th percentile
50th percentile
25th percentile
< 25th percentile
200%
150%
100%
50%
0%
(1) Performance measurement and vesting occur at the end of the two- and three-year periods, subject to continued service.
(2)
Interpolate for performance between discrete points.
Internal ROIC goals were set after consideration of historical
performance, internal budgets, external expectations, and peer
group performance.
For more information on grants of RSUs to the NEOs during fiscal
2016, see “Executive Compensation—Grants of Plan-Based Awards
in Fiscal 2016.”
Relative TSR was chosen as a performance measure because it is
a direct measure of stockholder value. ROIC was chosen because it
measures capital allocation and efficiency, which is a key driver of
stockholder value.
For more information on grants of PARSUs to the NEOs during fiscal
2016, see “Executive Compensation—Grants of Plan-Based Awards
in Fiscal 2016.”
2016 RSUs
2016 RSUs and related dividend equivalent units vest ratably on
an annual basis over three years from the grant date. Three-year
vesting is common in our industry and supports executive retention
and stockholder alignment.
Fiscal 2015 PARSUs
In addition to regular 2016 PARSUs, Mr. Weisler, Ms. Lesjak and
Ms. Keogh, who continued with the Company after the separation,
also received PARSUs in 2016 that replaced grants they had
received at HP during fiscal 2015, prior to the separation (FY15
PARSUs). The HRC Committee determined that
it would be
appropriate and desirable to cancel the FY15 PARSUs and replace
them with PARSUs denominated in shares of HP stock. Originally,
the FY15 PARSUs had a two and a three-year performance period,
such that one-half the FY15 PARSUs was eligible for vesting based
on performance over two years with continued service and one-
half was eligible for vesting based on performance over three
years with continued service. The FY15 PARSUs were equally
weighted between relative TSR and ROIC. The chart below shows
the structure of the FY15 PARSUs when initially granted.
2015 – 2017 HP PARSUs (Pre-separation)
Key Design Elements
Weight
Performance/Vesting Periods(1)
Performance Levels:
Max
> Target
Target
Threshold
< Threshold
HP ROIC vs. Internal Goals
25%
3 years
25%
2 years
HP Relative TSR vs. S&P 500
25%
3 years
25%
2 years
Payout
% of Target(2)
Target to be disclosed
at end of the
performance periods
> 90th percentile
70th percentile
50th percentile
25th percentile
<25th percentile
200%
150%
100%
50%
0%
(1) Performance measurement and vesting occur at the end of the two- and three-year periods, subject to continued service.
(2)
Interpolate for performance between discrete points.
Proxy Statement
41
Executive Compensation
in early fiscal 2016. The
The replacement grant was made
replacement ratio was set so the intrinsic value of the HP target
replacement PARSUs (“HP PARSUs”) equaled the intrinsic value of
the cancelled target number of FY15 PARSUs immediately prior to
the separation. HP PARSUs maintain the original service-vesting
requirements. HP PARSUs use the same performance metrics as the
replaced FY15 PARSUs and the performance goals were established
by the HRC Committee after the separation. The chart below shows
the structure of the HP PARSUs after the separation.
HP PARSUs (Post-separation)
Key Design Elements
Weight
Adjusted Performance Periods(1)
Vesting Periods(2)
Performance Levels:
Max
> Target
Target
Threshold
< Threshold
HP ROIC vs. Internal Goals
25%
2 years
3 years
25%
1 year
2 years
HP Relative TSR vs. S&P 500
25%
2 years
3 years
25%
1 year
2 years
Payout
% of Target(3)
Target to be disclosed
at end of the
performance periods
> 90th percentile
70th percentile
50th percentile
25th percentile
<25th percentile
200%
150%
100%
50%
0%
(1) Performance measurement occurs at the end of the one-and two-year periods, measured from the date of the separation.
(2) Vesting occurs at the end of the two- and three-year periods, measured from the original grant date.
(3)
Interpolate for performance between discrete points.
Under accounting rules, the fair value of HP PARSUs exceeded the fair value of the replaced FY15 PARSUs as of November 1, 2015. This
additional value is reflected in the Summary Compensation Table and Grants of Plan-Based Awards Table for affected NEOs.
The actual performance achievement for the one-year period post separation as a percent of target for the HP PARSUs as of October 31,
2016 is summarized in the table below:
Fiscal 2015 PARSUs (Actual Performance)
Segment
Segment 1 (50%)
ROIC vs. Internal Goals(1)
(% of target earned)
Relative TSR vs. S&P 500(2)
(% of target earned)
Fiscal 2016 Results
Payout
106.1%
76.8%
Fiscal 2016 Results
65th percentile
Payout
137.0%
Percent of Target
Vested
(Segment 1)
106.9%
(1)
In connection with the separation, HP entered into a Tax Matters Agreement (“TMA”) with HPE that governs the rights and obligations of HP and HPE for
certain pre-separation tax liabilities. The TMA provides that HP and HPE will share certain pre-separation income tax liabilities through indemnification
accounting. The actual amount that HP may be obligated to HPE could vary depending upon the outcome of certain unresolved tax matters, which may
not be resolved for several years. Based on the perspective of our independent auditor, HP changed its accounting methodology to account for the change
recommended by auditors. Please see our 8-K filed on April 27, 2016 for further information on this change. Because this change was recommended by
our auditor after our FY16 goals were set, it was determined to adjust the FY16 ROIC results upward. As a result, the calculation of our performance and
goals are aligned and provide a more accurate representation of Company performance.
(2) Through October 2016, HP’s actual TSR performance was at the 65th percentile of the S&P 500 which corresponds to a payout of 137.0% of target.
Launch Grants at Time of Separation
In November 2015, in conjunction with our successful separation,
certain NEOs and key talent received special one-time equity grants
(“Launch Grants”). HP’s compensation consultants performed a
market analysis of merger and spin-off transactions valued over
$1BN that occurred between two and three years prior to HP’s
separation date, and found that in many of the relevant cases, Launch
Grants (sometimes called “Founder’s Grants”) were made to key
personnel. The HRC Committee determined that such grants were
appropriate to ensure retention and senior management continuity
during this critical time in the company’s evolution and to strengthen
alignment with stockholders’ interests by focusing management’s
efforts on successfully launching the independent company and
driving increased stockholder value. Additionally, some NEOs took
reductions in their compensation as they transitioned from HP Co.
to HP Inc.
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Unlike the vast majority of other companies, where Launch Grants
were made solely in the form of time based awards, HP’s Launch
Grants were structured to align with company performance and are
denominated 50% in PCSOs and 50% in RSUs, vesting ratably over
three years (contingent on achievement of significant performance
conditions for the PCSOs), and subject to continued employment at
each vesting date. Vesting of the PCSOs is contingent on our stock
price increasing (for 20 consecutive trading days) 10% within two
years after the grant date, 20% within four years after the grant date
and 30% within five years after the grant date.
For Launch Grants made to NEOs during fiscal 2016, the price hurdle
had not been achieved as fiscal year-end and there was no earned or
realizable compensation as of that time.
Launch Grants will not vest upon voluntary retirement, voluntary
termination, or termination for cause (including neglect, lack of
fulfillment of duties, or harm to HP) to ensure that employees will
not experience a windfall if they do not remain with the company.
In determining the size of the Launch Grants the HRC Committee
considered, among other factors, unvested equity at the time of
grant, value of grants vesting in the next few months, compensation
Fiscal 2016 Launch Grants at Target
Named Executive Officer
Dion J. Weisler
Catherine A. Lesjak
Tracy S. Keogh
Executive Compensation
reductions and potential retention concerns. Based on the analysis
performed by HP’s compensation consultants, in other situations
where launch grants were made to NEOs, the launch grant value as a
multiple of annual long-term incentive awards ranged between 0.5x
to 4.5x, and our approach was at the lower end of that range. The
Launch Grants were allocated as follows:
PCSOs
RSUs
Total Launch Grant
$6,500,000
$2,500,000
$1,450,000
$6,500,000
$2,500,000
$1,450,000
$ 13,000,000
$ 5,000,000
$ 2,900,000
Sign-on Bonus and New Hire Equity Award
Ms. Rivera received a one-time sign-on bonus in connection with
her hiring as Chief Legal Officer and General Counsel, equal to
$500,000. She also received a guaranteed annual incentive bonus
for fiscal 2016 of no less than target ($781,250), as a condition of her
employment letter with the company and as a transition from a prior
employer. This was a one-time guaranteed bonus due to her status
as a newly hired executive.
In addition, Ms. Rivera received a one-time new hire equity award
valued at $3,300,000 in the form of RSUs that vest one-third a year for
three years, subject to her continued employment. Also, HP assisted
Ms. Rivera in her relocation from Cherry Hills Village, Colorado to
Palo Alto, California. HP provided a relocation package pursuant to
its Standard Relocation Program with Housing for Executives. For
additional information, see the Summary Compensation Table on
page 47.
Fiscal 2017 Compensation Program
The HRC Committee regularly identifies and evaluates ways to
improve our executive compensation program. We engage with our
stockholders to elicit their feedback, and we take this feedback very
seriously. In 2016, our “say-on-pay” proposal was approved by 95%
of the voted shares. We did not make any specific program changes
because of this support and determined that it would be appropriate
to maintain the same overall program structure for 2017.
However, as we plan to discuss in further detail in the fiscal
2017 proxy statement, we made the following fine-tuning
changes that we believe are in our stockholders’ interests and
appropriate to the characteristics and business strategy of the
post-separation Company:
• Annual Incentives. For fiscal 2017, we removed the
revenue cap and replaced it with discrete revenue metrics.
Further, we included HP enterprise-wide revenue and
net profit metrics for business group leaders. These
adjustments were made to further support stockholder
alignment.
Benefits
• Long-Term Incentive Compensation. The Compensation
Committee has approved changing from ROIC to EPS
as a primary financial metric of our PARSU awards.
Starting with awards made in fiscal 2017, EPS will be
weighted equally with relative total shareholder return in
determining earned PARSUs. The Committee believes that
EPS is a more-relevant driver of long-term shareholder
value than ROIC given the Company’s post-separation
capital structure and balance sheet, as well as our focus on
bottom-line profitability in the business-transformation
strategy. EPS is also a common measure for performance-
based long-term incentives among our peer companies.
In fiscal 2017, the HRC Committee plans to continue to carefully
review our talent needs, and compensation programs and actions to:
support the current and long-term business strategy;
continue to align pay with stockholder interests; and
•
•
• maintain good governance standards.
We do not provide our executives, including the NEOs, with special
or supplemental U.S. defined benefit pension or health benefits. Our
NEOs receive health and welfare benefits (including retiree medical
benefits, if eligibility conditions are met) under the same programs
and subject to the same eligibility requirements that apply to our
employees generally.
Benefits under all U.S. pension plans were frozen effective
December 31, 2007. Benefits under the Electronic Data Systems
(“EDS”) Pension Plan ceased upon HP’s acquisition of EDS in 2009.
As a result, no NEO or any other HP employee accrued a benefit
under any HP U.S. defined benefit pension plan during fiscal 2016.
The amounts reported as an increase in pension benefits are for
Proxy Statement
43
Executive Compensation
those NEOs who previously accrued a benefit in a defined benefit
pension plan prior to the cessation of accruals and reflect changes
in actuarial values only, not additional benefit accruals.
from among nearly all of the proprietary funds available to
employees under the 401(k) Plan. No amounts earn above-market
returns.
The NEOs, along with other executives who earn base pay or an
annual incentive in excess of certain limits of the U.S. tax code, are
eligible to participate in the Executive Deferred Compensation Plan
(the “EDCP”). This plan is maintained to permit executives to defer
some of their compensation in order to also defer taxation on such
amounts. This is a standard benefit plan also offered by most of
our peer group companies. The EDCP permits deferral of base pay
in excess of the amount taken into account under the qualified HP
401(k) Plan ($10,600 in fiscal 2016) and up to 95% of the annual
incentive payable under the PfR and Variable Performance Bonus
(“VPB”) Plans. In addition, we make a 4% matching contribution to
the plan on base pay contributions in excess of IRS limits up to a
maximum of two times that limit. This is the same percentage as
that which those executives are eligible to receive under the 401(k)
Plan. In effect, the EDCP permits these executives and all eligible
employees to receive a 401(k)-type matching contribution on a
portion of base-pay deferrals in excess of IRS limits. Amounts
deferred or matched under the EDCP are credited with investment
earnings based on investment options selected by the participant
Executives are also eligible to have a yearly HP-paid medical
exam as part of the HP U.S. executive physical program. This
includes a comprehensive exam, thorough health assessment and
personalized health advice. This benefit is also offered by our peer
group companies.
its practice of not providing any special or
Consistent with
supplemental executive defined benefit programs,
including
arrangements that would otherwise provide special benefits to the
family of a deceased executive, in 2011 the HRC Committee adopted
a policy that, unless approved by our stockholders pursuant to
an advisory vote, we will not enter into a new plan, program or
agreement or modify an existing plan, program or agreement with
a Section 16 officer that provides for payments, grants or awards
following the death of the officer in the form of unearned salary or
unearned annual incentives, accelerated vesting or the continuation
in force of unvested equity grants, perquisites, and other payments
or awards made in lieu of compensation, except to the extent that
such payments, grants or awards are provided or made available to
our employees generally.
Perquisites
Consistent with the practices of many of our peer group companies,
we provide a small number of perquisites to our senior executives,
including the NEOs, as discussed below.
We provide our NEOs with financial counseling services to assist
them in obtaining professional financial advice, which is a common
benefit among our peer group companies, for convenience and to
increase the understanding and effectiveness of our executive
compensation program.
Due to our global presence, we maintain one corporate aircraft. In
the event an NEO is accompanied by a guest or family member on
the aircraft for personal reasons, as approved by the CEO, the NEO
is taxed on the value of this usage according to the relevant U.S. tax
code rules. There is no tax gross-up paid on the income attributable
to this value. None of our NEOs used the corporate aircraft for
personal use during fiscal 2016, either personally or for a guest or
family member.
Our Audit Committee periodically conducts global risk management
reviews, which include reviewing home security services of NEOs.
Services considered necessary by the Audit Committee may be paid
for by HP, due to the range of security issues that may be encountered
by key executives of any large, multinational corporation.
Prior to October 2015, Mr. Weisler’s home location was Singapore
and he was on international assignment in Palo Alto, California. In
connection with his appointment as CEO of HP Inc. effective at the
separation, Mr. Weisler relocated to Palo Alto in October 2015. While
most relocations costs were incurred in fiscal 2015, there were some
trailing costs in connection with Mr. Weisler’s relocation to Palo Alto
that were paid in fiscal 2016.
Severance and Long-term Incentive Change in Control Plan
for Executive Officers
In fiscal 2016, our Section 16 officers (including all of the NEOs)
were covered by the Severance and Long-term Incentive Change
in Control Plan for Executive Officers (“SPEO”), which is intended
to protect us and our stockholders, and provide a level of
transition assistance in the event of an involuntary termination of
employment. Under the SPEO, participants who incur an involuntary
termination (i.e., a termination not for cause), and who execute a
full and effective release of claims following such termination, are
eligible to receive severance benefits in an amount determined
as a multiple of base pay, plus the average of the actual annual
incentives paid for the preceding three years. In the case of the NEOs
other than the CEO, the multiplier is 1.5. In the case of the CEO, the
multiplier is 2.0. In all cases, this benefit will not exceed 2.99 times
the sum of the executive’s base pay plus target annual incentive as
in effect immediately prior to the termination of employment.
Although the majority of compensation for our executives is
performance-based and largely contingent upon achievement of
financial goals, the HRC Committee continues to believe that the
SPEO is appropriate for the attraction and retention of executive
talent. In addition, we find it more equitable to offer severance
benefits based on a standard formula for the Section 16 officers
because severance often serves as a bridge when employment is
involuntarily terminated, and should therefore not be affected by
other, longer-term accumulations. As a result, and consistent with
the practice of our peer group companies, other compensation
decisions are not generally based on the existence of this
severance protection.
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Executive Compensation
NEOs could become fully vested in their outstanding equity awards
upon a change in control only if the Board or the HRC Committee
affirmatively acts to accelerate vesting.
Effective November 1, 2015, the HRC Committee approved the
change of control terms in the SPEO. In addition to the benefits
provided for involuntary terminations, the SPEO provides for full
vesting of outstanding stock options, RSUs, PCSOs, and PARSUs
upon involuntary termination not for Cause or voluntary termination
for Good Reason (as defined in the plan) within 24 months after a
change in control (“double trigger”), and in situations where equity
awards are not assumed by the surviving corporation (a “modified
double trigger”). The SPEO further provides that under a double
trigger, PARSUs will vest based on target performance, whereas
under a modified double trigger, PARSUs will vest based upon the
greater of the number of PARSUs that would vest based on actual
performance and the number of PARSUs that would vest pro-rata
based upon target performance.
The HRC Committee approved the change of control provisions in the
SPEO as it determined that providing for double trigger and modified
double trigger equity acceleration is consistent with market practice,
will provide clarity to prospective and current executives and help
attract and retain talent.
In fiscal 2016, an executive talent review was conducted along with
succession plans for each of the executive leaders. Successors were
identified to reflect necessary skill sets, performance, potential and
diversity. Development plans for successors were also established
to ensure readiness and will be managed throughout the year.
In addition to the annual succession planning process, the HRC
participates in an in-depth performance discussion of each executive
officer at the time of the annual compensation review. Further, there
is a People Update at each HRC meeting which includes a review of
key people processes and developments for that quarter.
In addition, the executive team participated in a robust development
process that included individual assessments, interviews with
executive coaches, and an individualized development plan that
can be leveraged throughout the year. Development themes for the
entire executive team will be addressed during quarterly face-to-
face meetings for full team development.
In addition to the cash benefit, SPEO participants are eligible to
receive (1) a pro-rata annual incentive for the year of termination
based on actual performance results, at the discretion of the
HRC Committee, (2) pro-rata vesting of unvested equity awards
(and for performance-based equity awards, only if any applicable
performance conditions have been satisfied), and (3) payment
of a lump-sum health-benefit stipend of an amount equal to
18 months’ COBRA premiums for continued group medical coverage
for the executive and his or her eligible dependents, to the extent
those premiums exceed 18 times the monthly premiums for
active employees in the same plan with the same level of coverage
as of the date of termination.
Benefits in the Event of a Change in Control
Until November 1, 2015, we did not provide specific change in
control benefits to our executive officers. While the HRC Committee
had broad discretion to accelerate vesting of all stock and option
awards upon a change in control, accelerated vesting was not
automatic. This approach allowed the Board or the HRC Committee
to decide whether to vest equity after taking into consideration
the facts and circumstances of a given transaction. As a result, the
Other Compensation-Related Matters
Succession Planning
Among the HRC Committee’s responsibilities described in its charter
is to oversee succession planning and leadership development. The
Board plans for succession of the CEO and annually reviews senior
management selection and succession planning that is undertaken
by the HRC Committee. As part of this process, the independent
directors annually review the HRC Committee’s recommended
candidates for senior management positions to see that qualified
candidates are available for all positions and that development
plans are being utilized to strengthen the skills and qualifications of
the candidates. The criteria used when assessing the qualifications
of potential CEO successors include, among others, strategic vision
and leadership, operational excellence, financial management,
executive officer leadership development, ability to motivate
employees, and an ability to develop an effective working
relationship with the Board. We also host a Board Buddy program
through which each executive officer is aligned to a board member
as a mentor to aid the executive’s development while giving board
members a deeper understanding of the day-to-day operations of
the company.
Stock Ownership Guidelines
Our stock ownership guidelines are designed to align executives’
interests more closely with those of our stockholders and mitigate
compensation-related risk. The current guidelines provide that,
within five years of assuming a designated position, the CEO should
attain an investment position in our stock equal to seven times his
base salary and all other Section 16 officers reporting directly to the
CEO should attain an investment position equal to five times their
base salaries. Shares counted toward these guidelines include any
shares held by the executive directly or through a broker, shares
held through the 401(k) Plan, shares held as restricted stock, shares
Proxy Statement
45
Executive Compensation
underlying time-vested RSUs, and shares underlying vested but
unexercised stock options (50% of the in-the-money value of such
options is used for this calculation). Ms. Lesjak and Ms. Keogh are the
only NEOs who have served in roles covered by our stock ownership
guidelines for over five years and they are in compliance with the
stock ownership guidelines. In addition, our other NEOs were on
track for compliance within the required time or held the required
investment position in our stock as of the end of fiscal 2016.
The HRC Committee has adopted a policy prohibiting our executive
officers from engaging
in any form of hedging transaction
(derivatives, equity swaps, forwards, etc.) including, among other
things, short sales and transactions involving publicly traded
options. In addition, with limited exceptions, our executive officers
are prohibited from holding our securities in margin accounts and
from pledging our securities as collateral for loans. We believe that
these policies further align our executives’ interests with those of
our stockholders.
Accounting and Tax Effects
implementing our compensation programs,
The impact of accounting treatment is considered in developing
including the
and
accounting treatment as it applies to amounts awarded or paid to
our executives.
The impact of federal tax laws on our compensation programs is also
considered, including the deductibility of compensation paid to the
NEOs, as limited by Section 162(m) of the Code. Our compensation
program is designed with the intention that compensation paid in
various forms may be eligible to qualify for deductibility under
Section 162(m), but there may be exceptions for administrative or
other reasons with a business justification.
Policy on Recovery of Annual Incentive in Event of Financial Restatement
In fiscal 2006, the Board adopted a “clawback” policy that permits
the Board to recover certain annual
incentives from senior
executives whose fraud or misconduct resulted in a significant
restatement of financial results. The policy allows for the recovery
of annual incentives paid at or above target from those senior
executives whose fraud or misconduct resulted in the restatement
where the annual incentives would have been lower absent the
fraud or misconduct, to the extent permitted by applicable law.
Additionally, our incentive plan document allows for the recoupment
of performance-based annual incentives and long-term incentives
consistent with applicable law and the clawback policy. Also, in
fiscal 2014, we added a provision to our equity grant agreements to
clarify that they are subject to the clawback policy.
HR and Compensation Committee Report on Executive Compensation
The HRC Committee of the Board of HP has reviewed and discussed with management this Compensation Discussion and Analysis. Based
on this review and discussion, it has recommended to the Board that the Compensation Discussion and Analysis be included in this proxy
statement and in the Annual Report on Form 10-K of HP filed for the fiscal year ended October 31, 2016.
HR and Compensation Committee of the Board of Directors
Rajiv L. Gupta, Chair
Aida Alvarez
Carl Bass
Shumeet Banerji
Charles V. Bergh
Stacey Mobley
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Executive Compensation
Summary Compensation Table
The following table sets forth information concerning the compensation of our CEO, our chief financial officer, and our three other most
highly compensated executive officers serving during fiscal 2016.
Salary(1)
Year
($)
2016 1,200,046
774,999
2015
831,251
2014
850,033
2016
850,033
2015
850,033
2014
612,004 1,281,250 5,747,980
2016
Option
Stock
Awards(4)(5)
Awards(3)(4)
Bonus(2)
($)
($)
($)
— 18,164,053 6,889,397
— 3,286,543 2,163,437
— 3,133,726 2,059,650
— 7,573,319 2,758,055
— 3,287,819 2,163,437
— 3,447,082 2,265,610
—
Non-Equity
Incentive Plan
Compensation(6)
($)
2,302,585
386,719
1,722,400
1,006,092
868,864
1,421,392
—
Change
in Pension
Value and
Non-qualified
Deferred
Compensation
Earnings(7)
($)
—
—
—
434,684
95,650
356,262
—
All Other
Compensation(8)
($)
Total
($)
140,186 28,696,267
12,116,105 18,727,803
5,765,765 13,512,792
43,877 12,666,060
7,317,665
51,862
8,373,516
33,137
7,945,721
304,487
2016
2015
600,023
700,027
— 4,379,891 1,593,592
— 3,793,332 1,180,059
710,182
715,535
—
—
38,920
55,847
7,322,608
6,444,800
2016
700,027
— 3,295,365
84,496
839,484
557,485
10,500
5,487,357
Name and
Principal Position
Dion J. Weisler
President and CEO
Catherine A. Lesjak
Chief Financial Officer
Kim M. Rivera
Chief Legal Officer and
General Counsel
Tracy S. Keogh
Chief Human
Resources Officer
Jon E. Flaxman
Chief Operating Officer
(1) Amounts shown represent base salary earned or paid during the fiscal year, as described under “Compensation Discussion and Analysis—Determination of
Fiscal 2016 Executive compensation —2016 Base Salary.”
(2) The fiscal 2016 bonus amount for Ms. Rivera represents a signing bonus of $500,000 and a guaranteed portion of her annual incentive bonus payable
under the PfR Plan of $781,250.
(3) The grant date fair value of all stock awards has been calculated in accordance with applicable accounting standards. In the case of RSUs, the value is
determined by multiplying the number of units granted by the closing price of our stock on the grant date. For PARSUs awarded in fiscal 2016, amounts
shown reflect the grant date fair value of the PARSUs for the two- and three-year performance periods beginning with fiscal 2016 based on the probable
outcome of performance conditions related to these PARSUs at the grant date. The 2016 PARSUs include both market-related (TSR) and internal (ROIC)
performance goals as described under the “Compensation Discussion and Analysis—Determination of Fiscal 2016 Executive Compensation—Long-Term
Incentive Compensation.” Consistent with the applicable accounting standards, the grant date fair value of the market-related TSR component has been
determined using a Monte Carlo simulation model. The table below sets forth the grant date fair value for the PARSUs granted in fiscal 2016:
Name
Dion J. Weisler
Catherine A. Lesjak
Kim M. Rivera
Tracy S. Keogh
Jon E. Flaxman
Probable Outcome of
Performance Conditions
Grant Date Fair Value
($)*
2,742,695
1,142,786
594,245
662,820
799,950
Maximum Outcome of
Performance Conditions
Grant Date Fair Value
($)
5,485,391
2,285,572
1,188,490
1,325,639
1,599,900
Market-related
Component Grant Date
Fair Value
($)**
3,755,685
1,564,871
813,734
907,623
1,095,414
* Amounts shown represent the grant date fair value of the PARSUs subject to the internal ROIC performance goal (i) based on the probable or target
outcome as of the date the goals were set and (ii) based on achieving the maximum level of performance for the two- and three-year performance
periods beginning in fiscal 2016. The grant date fair value of the ROIC goal component of the PARSUs awarded on December 9, 2015 was $9.49 per
unit, which was the closing share price of our common stock on January 25, 2016 when the ROIC goal was approved.
** Amounts shown represent the grant date fair value of PARSUs subject to the market-related TSR goal component of the PARSUs, for which expense
recognition is not subject to probable or maximum outcome assumptions. The weighted-average grant date fair value of the market-related TSR
goal component of the PARSUs awarded on December 9, 2015 was $13.00 per unit, which was determined using a Monte Carlo simulation model. The
significant assumptions used in this simulation model were a volatility rate of 32.5%, a risk-free interest rate of 1.2%, and a simulation period of 2.9
years. For information on the assumptions used to calculate the fair value of the awards, refer to Note 6 to our consolidated financial statements in
our Annual Report on Form 10-K for the fiscal year ended October 31, 2016, as filed with the SEC on December 15, 2016.
(4)
In connection with the separation and in accordance with the employee matters agreement, HP has made certain adjustments to the exercise price and
number of stock-based compensation awards with the intention of preserving the intrinsic value of the awards prior to the separation. Exercisable and
non-exercisable stock options have been converted to similar awards of the entity where the employee is working post-separation. RSU awards and
PARSU awards have been adjusted to provide holders with RSUs and performance-contingent awards in the Company that employs such employee
following the separation. These adjustments resulted in incremental compensation cost that is reflected in this column and is shown in the table below.
Adjustments to RSUs did not result in an incremental cost. The incremental cost for PARSUs also includes the modification expense related to the adjusted
performance period.
Proxy Statement
47
Executive Compensation
Name
Dion J. Weisler
Catherine A. Lesjak
Kim M. Rivera
Tracy S. Keogh
Jon E. Flaxman
PARSUs
Incremental
Compensation Cost
($)
365,665
365,665
—
199,437
—
Stock Options &
PCSOs Incremental
Compensation Cost
($)
175,965
175,965
—
95,981
84,496
Total
($)
541,630
541,630
—
295,418
84,496
(5) The awards granted as part of the Launch Grants described under “Compensation Discussion and Analysis—Launch Grants.” The grant date fair value of
PCSO awards is calculated using a combination of a Monte Carlo simulation model and a lattice model as these awards contain market conditions. For
information on the assumptions used to calculate the fair value of the awards, refer to Note 5 to our consolidated financial statements in our Annual
Report on Form 10-K for the fiscal year ended October 31, 2016, as filed with the SEC on December 15, 2016.
(6) Amounts shown represent payouts under the PfR Plan (amounts earned during the applicable fiscal year but paid after the end of that fiscal year).
(7) Amounts shown represent the increase in the actuarial present value of NEO pension benefits during the applicable fiscal year. As described in more detail
under “Narrative to the Fiscal 2016 Pension Benefits Table” below, pension accruals have ceased for all NEOs, and NEOs hired after the dates that pension
accruals ceased are not eligible to participate in any U.S. defined benefit pension plan. Accordingly, the amounts reported for the NEOs do not reflect
additional accruals but reflect the passage of one more year from the prior present value calculation and changes in other actuarial assumptions. The
assumptions used in calculating the changes in pension benefits are described in footnote (2) to the “Fiscal 2016 Pension Benefits Table” below. No HP
plan provides for above-market earnings on deferred compensation amounts, so the amounts reported in this column do not reflect any such earnings.
(8) The amounts shown are detailed in the “Fiscal 2016 All Other Compensation Table” below.
Fiscal 2016 All Other Compensation Table
The following table provides additional information about the amounts that appear in the “All Other Compensation” column in the “Summary
Compensation Table” above.
Name
Dion J. Weisler
Catherine A. Lesjak
Kim M. Rivera
Tracy S. Keogh
Jon E. Flaxman
401(k)
Company
Match(1)
($)
17,941
10,600
10,600
10,320
10,500
NQDC
Company
Match(2)
($)
—
10,600
—
10,600
—
Mobility
Program(3)
($)
101,749
—
189,434
—
—
Security
Services/
Systems(4)
($)
2,496
4,677
—
—
—
Tax
Gross-Up(5)
($)
—
—
95,778
—
—
Miscellaneous(6)
($)
18,000
18,000
8,675
18,000
—
Total
AOC
($)
140,186
43,877
304,487
38,920
10,500
(1) Represents matching contributions made under the HP 401(k) Plan. Mr. Weisler’s contributions to the 401(k) Plan began in October 2015 and his matching
amount represents matching contributions received during the 2015 and 2016 Plan years.
(2) Represents matching contributions credited during fiscal 2016 under the HP Executive Deferred Compensation Plan with respect to the 2015 calendar
year of that plan.
(3) For Mr. Weisler, represents benefits provided under our executive mobility program related to his international assignment. Until October 2015,
Mr. Weisler’s home location was Singapore, and Mr. Weisler was on assignment in Palo Alto, California. In October 2015, Mr. Weisler permanently moved
to Palo Alto, however, there were some trailing costs incurred related to his move during fiscal 2016. For Ms. Rivera, represents benefits provided under
our domestic executive mobility program. As of October 31, 2016, Ms. Rivera had relocated from Cherry Hills Village, Colorado to Palo Alto, California.
(4) Represents home security services provided to the NEOs and, consistent with SEC guidance, the expense is reported here as a perquisite due to the fact
that there is an incidental personal benefit.
(5) For Ms. Rivera, the amount represents a tax gross-up provided under the domestic executive mobility program as part of her relocation from Colorado
to California.
(6) For Mr. Weisler, Ms. Lesjak, Ms. Rivera, and Ms. Keogh, includes amounts paid either directly to the executives or on their behalf for financial counseling.
Narrative to the Summary Compensation Table
The amounts reported in the “Summary Compensation Table,”
including base pay, annual and equity award amounts, benefits
and perquisites, are described more fully under “Compensation
Discussion and Analysis.”
The amounts reported in “Non-Equity Incentive Plan Compensation”
column include amounts earned in fiscal 2016 by each of the NEOs
under the PfR Plan. The narrative description of the remaining
information in the “Summary Compensation Table” is provided in
the narrative to the other compensation tables.
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Grants of Plan-Based Awards in Fiscal 2016
The following table provides information on awards granted under the PfR Plan for fiscal 2016 and awards of RSUs, PCSOs, and PARSUs
granted as part of the fiscal 2016 long-term incentives program:
Executive Compensation
Estimated Future Payouts
Under Non-Equity
Incentive Plan Awards(1)
Estimated Future Payouts
Under Equity
Incentive Plan Awards(2)(3)(4)
Grant
Date
Threshold
($)
Target
($)
Maximum
($)
Threshold
(#)
Target
(#)
Maximum
(#)
All Other
Stock
Awards:
Number
of Shares
of Stock
or Units(5)
(#)
All Other
Option
Awards:
Number of
Securities
Underlying
Options
(#)
All Other
Option
Awards:
Exercise
or Base
Price of
Option
Awards
($)
Grant-Date
Fair Value
of Stock
and Option
Awards(3)(6)
($)
12/9/2015
12/9/2015
11/2/2015
11/2/2015
11/1/2015
—
24,000 2,400,000 4,800,000
—
—
— 289,010
—
—
—
— 1,577,157
—
— 1,688,910
—
—
—
—
—
—
—
—
—
—
—
—
—
578,019 1,156,038
—
—
— 396,367
—
— 469,993
—
—
—
—
—
—
—
— 4,800,004
—
— 6,498,380
—
—
— 6,500,003
— 13.83 6,713,432
— 175,965
—
11/1/2015
—
—
— 21,294
42,587
85,174
—
—
— 365,665
12/9/2015
12/9/2015
11/2/2015
11/2/2015
11/1/2015
—
10,625 1,062,500 2,125,000
—
—
—
—
— 120,421
240,841
—
—
—
— 606,599
—
— 1,813,034
—
—
—
—
—
—
—
—
—
—
—
481,682
—
—
— 165,153
—
— 180,766
—
—
—
—
11/1/2015
—
—
— 21,294
42,587
85,174
—
12/9/2015
12/9/2015
11/9/2015
12/9/2015
12/9/2015
11/2/2015
11/2/2015
11/1/2015
7,813
—
—
—
7,500
—
—
—
—
—
—
781,250 1,562,500
—
—
— 62,619
—
—
—
—
—
—
—
125,237
—
—
—
— 85,879
—
— 237,924
250,474
—
750,000 1,500,000
—
—
—
—
139,688
— 69,844
—
—
—
— 351,827
—
— 1,186,143
—
—
—
—
—
—
279,376
—
—
— 95,789
—
— 104,845
—
—
—
—
—
—
—
—
— 2,000,003
—
— 2,707,657
— 2,499,994
—
— 13.83 2,582,090
— 175,965
—
—
—
—
—
—
— 365,665
—
—
— 1,039,995
— 1,407,979
— 3,300,006
—
—
—
— 1,160,005
—
— 1,570,442
—
—
— 1,450,006
— 13.83 1,497,610
95,981
—
—
11/1/2015
—
—
— 11,614
23,229
46,457
—
—
— 199,437
12/9/2015
12/9/2015
11/1/2015
8,750
—
—
—
—
875,000 1,750,000
—
—
— 84,295
—
—
—
—
—
—
—
168,589
—
—
—
—
—
— 115,607
—
—
— 129,933
337,178
—
—
—
— 1,400,001
— 1,895,364
13,810
—
11/1/2015
—
—
—
— 470,928
—
—
—
—
70,686
Name
Dion J. Weisler
PfR
RSU
PARSU
RSU
PCSO
Separation PCSO
Acct Cost
Separation
PARSU Acct Cost
Catherine A. Lesjak
PfR
RSU
PARSU
RSU
PCSO
Separation PCSO
Acct Cost
Separation
PARSU Acct Cost
Kim M. Rivera
PfR
RSU
PARSU
RSU
Tracy S. Keogh
PfR
RSU
PARSU
RSU
PCSO
Separation PCSO
Acct Cost
Separation
PARSU Acct Cost
Jon E. Flaxman
PfR
RSU
PARSU
Separation Stock
Options Acct Cost
Separation PCSO
Acct Cost
(1) Amounts represent the range of possible cash payouts for fiscal 2016 awards under the PfR Plan.
(2) PCSO awards, granted as part of the Launch Grants in fiscal 2016, vest as follows: one third of the PCSO award will vest upon continued service of one
year and our closing stock price is at least 10% over the grant date stock price for at least 20 consecutive trading days within two years from the date
of grant; one third will vest upon continued service for two years and our closing stock price is at least 20% over the grant date stock price for at least
Proxy Statement
49
Executive Compensation
20 consecutive trading days within four years from the date of grant; and one third will vest upon continued service of three years and our closing stock
price is at least 30% over the grant date stock price for at least 20 consecutive trading days within five years from the date of grant. All PCSO awards have
an eight-year term.
(3) PARSU amounts represent the range of shares that may be released at the end of the two- and three-year performance periods applicable to the
PARSUs assuming achievement of threshold, target or maximum performance. PARSUs vest as follows: 50% of the PARSUs are eligible for vesting
based on performance over two years with continued service, and 50% of the PARSUs are eligible for vesting based on performance over three years
with continued service. The awards eligible for two-year vesting are 50% contingent upon our two-year relative TSR and 50% contingent on our ROIC
performance, and similarly, the awards eligible for three-year vesting are 50% contingent upon our three-year relative TSR and 50% contingent on our
ROIC performance. If our relative TSR and ROIC performance is below threshold for the performance period, no shares will be released for the applicable
segment. For additional details, see the discussion of PARSUs under “Compensation Discussion and Analysis—Determination of Fiscal 2016 Executive
Compensation—Long-Term Incentive Compensation—2016 PARSUs.”
(4) For Separation PCSO, PARSU, Stock Options Acct. Cost, these values represent the number of units associated with the incremental compensation cost.
(5) RSUs vest as to one-third of the units on each of the first three anniversaries of the grant date, subject to continued service.
(6)
In connection with the separation and in accordance with the employee matters agreement, HP has made certain adjustments to the exercise price
and number of stock-based compensation awards with the intention of preserving the intrinsic value of the awards prior to the separation. Exercisable
and non-exercisable stock options have been converted to similar awards of the entity where the employee is working post-separation. RSUs and
performance-contingent awards have been adjusted to provide holders with RSUs and performance-contingent awards in the Company that employs
such employee following the separation. These adjustments resulted in incremental compensation cost. This incremental cost is represented in this table
as awards with a grant date of 11/1/2015. For additional information, see footnote (4) to the “Summary Compensation Table.”
Outstanding Equity Awards at 2016 Fiscal Year-End
The following table provides information on stock and option awards held by the NEOs as of October 31, 2016:
Option Awards
Stock Awards
Name
Dion J. Weisler
Catherine A. Lesjak
Kim M. Rivera
Tracy S. Keogh
Jon E. Flaxman
Number of
Securities
Underlying
Unexercised
Options
Exercisable
(#)
27,024
807,758
163,811
—
—
337,576
180,191
—
—
—
69,026
98,286
—
—
43,239
18,376
16,647
156,976
Option
Expiration
Date(4)
Option
Exercise
Price(3)
($)
Number of
Shares or
Units of
Stock That
Have Not
Vested(5)
(#)
Equity
Incentive
Plan
Market
Awards:
Value of
Number of
Shares or
Securities
Units of
Underlying
Stock That
Unexercised
Have Not
Unearned
Options(2)
Vested(6)
(#)
($)
— 12.56 1/18/2020 1,010,717 14,645,289
—
— 12.14 7/31/2021
—
12.49 12/10/2021
—
17.29 12/9/2022
13.83 11/1/2023
—
474,375 6,873,694
— 6.40 12/5/2020
—
12.49 12/10/2021
—
—
17.29 12/9/2022
—
—
13.83 11/1/2023
—
— 336,385 4,874,219
363,179 5,262,464
—
—
—
270,018 3,912,561
—
—
—
Number of
Securities
Underlying
Unexercised
Options
Unexercisable(1)
(#)
—
—
— 163,812
— 553,529
— 1,577,157
—
— 180,193
— 553,529
— 606,599
—
—
— 6.40 12/5/2020
—
12.49 12/10/2021
—
98,288
17.29 12/9/2022
— 301,926
13.83 11/1/2023
— 351,827
— 6.40 12/5/2020
—
— 12.49 12/10/2021
18,377
— 17.29 12/9/2022
33,294
12.47 10/29/2023
— 313,952
—
—
—
—
—
—
—
—
—
—
—
Equity
Incentive
Plan
Awards:
Number of
Unearned
Shares,
Units
or Other
Rights That
Have Not
Vested(7)
(#)
645,072
—
—
—
—
294,602
—
—
—
130,175
169,340
—
—
—
175,236
—
—
—
Equity
Incentive
Plan Awards:
Market or
Payout Value
of Unearned
Shares, Units
or Other
Rights That
Have Not
Vested(6)
($)
9,347,093
—
—
—
—
4,268,783
—
—
—
1,886,236
2,453,737
—
—
—
2,539,170
—
—
—
(1) The 18,377 share option held by Mr. Flaxman fully vests with continued service as to 18,377 of the shares on the third anniversary of December 11, 2013,
the date of the grant. The 33,294 share option held by Mr. Flaxman vests with continued service as to 16,647 of the shares on each of the second and third
anniversaries of December 10, 2014, the date of the grant.
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Executive Compensation
(2) Option awards in this column vest as to one-third of the shares on each of the first, second, and third anniversaries of December 11, 2013, December 10,
2014, October 30, 2015, and November 2, 2015, the respective dates of grant, or upon later satisfaction of certain stock price performance conditions,
and subject to continued service in each case.
(3) Option exercise prices are the fair market value of our stock on the grant date. For some awards, in connection with the separation and in accordance
with the employee matters agreement, HP has made certain adjustments to the exercise price and number of stock-based compensation awards
with the intention of preserving the intrinsic value of the awards prior to the separation. For additional information, see footnote (4) to the “Summary
Compensation Table.”
(4) All options have an eight-year term.
(5) The amounts in this column include shares underlying dividend equivalent units credited with respect to outstanding stock awards through October 31,
2016. The release dates and release amounts for all unvested stock awards are as follows, assuming continued employment and satisfaction of any
applicable financial performance conditions:
• Mr. Weisler: November 2, 2016 (156,664 shares plus accrued dividend equivalent shares); December 9, 2016 (132,122 shares plus accrued dividend
equivalent shares); December 10, 2016 (31,828 shares plus accrued dividend equivalent shares); December 11, 2016 (40,053 shares plus accrued
dividend equivalent shares); November 2, 2017 (156,664 shares plus accrued dividend equivalent shares); December 9, 2017 (132,122 shares
plus accrued dividend equivalent shares); December 10, 2017 (31,829 shares plus accrued dividend equivalent shares); November 2, 2018
(156,665 shares plus accrued dividend equivalent shares); December 9, 2018 (132,123 shares plus accrued dividend equivalent shares);
• Ms. Lesjak: November 2, 2016 (60,255 shares plus accrued dividend equivalent shares); December 9, 2016 (55,051 shares plus accrued dividend
equivalent shares); December 11, 2016 (44,057 shares plus accrued dividend equivalent shares); December 10, 2016 (31,828 shares plus accrued
dividend equivalent shares); November 2, 2017 (60,255 shares plus accrued dividend equivalent shares); December 9, 2017 (55,051 shares
plus accrued dividend equivalent shares); December 10, 2017 (31,828 shares plus accrued dividend equivalent shares); November 2, 2018
(60,256 shares plus accrued dividend equivalent shares); December 9, 2018 (55,051 shares plus accrued dividend equivalent shares);
• Ms. Rivera: November 9, 2016 (79,308 shares plus accrued dividend equivalent shares); December 9, 2016 (28,626 shares plus accrued dividend
equivalent shares); November 9, 2017 (79,308 shares plus accrued dividend equivalent shares); December 9, 2017 (28,626 shares plus accrued
dividend equivalent shares); November 9, 2018 (79,308 shares plus accrued dividend equivalent shares); December 9, 2018 (28,627 shares plus
accrued dividend equivalent shares);
• Ms. Keogh: November 2, 2016 (34,948 shares plus accrued dividend equivalent shares); December 9, 2016 (31,929 shares plus accrued
dividend equivalent shares); December 10, 2016 (46,294 shares plus accrued dividend equivalent shares); December 11, 2016 (24,032 shares
plus accrued dividend equivalent shares); November 2, 2017 (34,948 shares plus accrued dividend equivalent shares); December 9, 2017
(31,930 shares plus accrued dividend equivalent shares); December 10, 2017 (46,294 shares plus accrued dividend equivalent shares);
November 2, 2018 (34,949 shares plus accrued dividend equivalent shares); December 9, 2018 (31,930 shares plus accrued dividend equivalent
shares); December 10, 2018 (28,936 shares plus accrued dividend equivalent shares);
• Mr. Flaxman: December 9, 2016 (38,535 shares plus accrued dividend equivalent shares); December 10, 2016 (5,549 shares plus accrued dividend
equivalent shares); December 11, 2016 (6,127 shares plus accrued dividend equivalent shares); April 27, 2017 (16,344 shares plus accrued
dividend equivalent shares); October 30, 2017 (46,779 shares plus accrued dividend equivalent shares); December 9, 2017 (38,536 shares plus
accrued dividend equivalent shares); December 10, 2017 (5,549 shares plus accrued dividend equivalent shares); April 27, 2018 (16,344 shares plus
accrued dividend equivalent shares); October 30, 2018 (46,779 shares plus accrued dividend equivalent shares); December 9, 2018 (38,536 shares
plus accrued dividend equivalent shares).
(6) Value calculated based on the $14.49 closing price of our stock on October 31, 2016.
(7) The amounts in this column include the amounts of PARSUs granted in fiscal 2015 (segment 2) and fiscal 2016 plus accrued dividend equivalent shares. The
shares are reported at target, but actual payout will be on achievement of performance goals at the end of the two- and three-year performance periods.
Proxy Statement
51
Executive Compensation
Option Exercises and Stock Vested in Fiscal 2016
The following table provides information about options exercised and stock awards vested for the NEOs during the fiscal year
ended October 31, 2016:
Name
Dion J. Weisler
Catherine A. Lesjak
Kim M. Rivera
Tracy S. Keogh
Jon E. Flaxman
Option Awards
Stock Awards(1)
Number of
Shares Acquired
on Exercise
(#)
—
324,310
—
500,000
—
Value Realized
on Exercise(2)
($)
—
1,803,164
—
3,777,060
—
Number of
Shares Acquired
on Vesting
(#)
132,427
268,501
—
58,219
92,904
Value Realized
on Vesting(3)
($)
1,909,229
3,535,807
—
843,593
1,237,547
Includes PARSUs, RSUs and accrued dividend equivalent shares.
(1)
(2) Represents the amounts realized based on the difference between the market price of HP stock on the date of grant and the exercise price.
(3) Represents the amounts realized based on the fair market value of our stock on the vesting date for PARSUs, RSUs and accrued dividend equivalent
shares. Fair market value is determined based on the closing price of our stock on the applicable vesting date.
Fiscal 2016 Pension Benefits Table
The following table provides information about the present value of accumulated pension benefits payable to each NEO:
Name
Dion J. Weisler(3)
Catherine A. Lesjak
Kim M. Rivera(3)
Tracy S. Keogh(3)
Jon E. Flaxman
Plan Name(1)
—
RP
EBP
—
—
RP
EBP
Number of Years of
Credited Service
(#)
—
21.3
21.3
—
—
26.6
26.6
Present Value of
Accumulated Benefit(2)
($)
—
412,388
2,675,084
—
—
423,286
3,673,981
Payments During
Last Fiscal Year
($)
—
—
—
—
—
—
—
(1) The “RP” and the “EBP” are the qualified HP Retirement Plan and the non-qualified HP Excess Benefit Plan, respectively. All benefits are frozen under
these plans. The RP has been merged into the HP Inc. Pension Plan (formerly known as the HP Pension Plan).
(2) The present value of accumulated benefits is shown at the age 65 unreduced retirement age for the RP and the EBP using the assumptions under
Accounting Standards Codification (ASC) Topic 715-30 Defined Benefit Plans—Pension for the 2016 fiscal year-end measurement (as of October 31,
2016). The present value is based on a discount rate of 3.98% for the RP and 2.77% for the EBP, lump sum interest rates of 1.47% for the first five years,
3.34% for the next 15 years and 4.30% thereafter, and applicable mortality for lump sums. As of October 31, 2015 (the prior measurement date), the ASC
Topic 715-30 assumptions included a discount rate of 4.43% for the RP and 3.32% for the EBP, lump sum interest rates of 1.69% for the first five years,
4.11% for the next 15 years and 5.07% thereafter, and applicable mortality and the RP-2014 White-Collar Table Projected Generationally with MP-2015
for annuity payment forms.
(3) Mr. Weisler, Ms. Rivera, Ms. Keogh are not eligible to receive benefits under any defined benefit pension plan because we ceased benefit accruals under all
of our U.S.-qualified defined benefit pension plans prior to the commencement of their employment with HP in the US.
Narrative to the Fiscal 2016 Pension Benefits Table
No NEO currently accrues a benefit under any qualified or non-qualified defined benefit pension plan because we ceased benefit accruals in
all of our U.S.-qualified defined benefit pension plans (and their non-qualified plan counterparts) in prior years. Benefits previously accrued
by the NEOs under HP pension plans are payable to them following termination of employment, subject to the terms of the applicable plan.
52
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Terms of the HP Retirement Plan
Ms. Lesjak and Mr. Flaxman earned benefits under the RP and the
EBP based on pay and service prior to 2008. The RP is a traditional
defined benefit plan that provided a benefit based on years of
service and the participant’s “highest average pay rate,” reduced
by a portion of Social Security earnings. “Highest average pay rate”
was determined based on the 20 consecutive fiscal quarters when
pay was the highest. Pay for this purpose included base pay and
bonus, subject to applicable IRS limits. Benefits under the RP may
be taken in one of several different annuity forms or in an actuarially
equivalent lump sum. Benefits calculated under the RP are offset by
the value of benefits earned under the HP Deferred Profit Sharing
Plan (the “DPSP”) before November 1, 1993. Together, the RP and
the DPSP constitute a “floor-offset” arrangement for periods before
November 1, 1993.
Executive Compensation
Benefits not payable from the RP and the DPSP due to IRS limits are
paid from the nonqualified EBP under which benefits are unfunded
and unsecured. When an EBP participant terminates employment,
the benefit liability is transferred to the EDCP, where an account is
established for the participant. That account is then credited with
hypothetical investment earnings (gains or losses) based upon the
investment election made by participants from among investment
options similar to those offered under the HP 401(k) Plan. There is
no formula that would result in above-market earnings or payment
of a preferential interest rate on this benefit.
At the time of distribution, amounts representing EBP benefits are
paid from the EDCP in a lump sum or installment form, according
to pre-existing elections made by those participants, except that
participants with a small benefit or who have not qualified for
retirement status (age 55 with at least 15 years of service) are paid
their EBP benefit in January of the year following their termination,
subject to any delay required by Section 409A of the Code.
Fiscal 2016 Non-qualified Deferred Compensation Table
The following table provides information about contributions, earnings, withdrawals, distributions, and balances under the EDCP:
Name
Dion J. Weisler
Catherine A. Lesjak
Kim M. Rivera
Tracy S. Keogh
Jon E. Flaxman
Executive
Contributions
in Last FY(1)
($)
8,840
11,500
8,840
334,437
—
Registrant
Contributions
in Last FY(2)
($)
—
10,600
—
10,600
—
Aggregate
Earnings
in Last FY
($)
215
27,946
513
82,173
—
Aggregate
Withdrawals/
Distributions(3)
($)
—
(663,963)
—
—
—
Aggregate
Balance at FY End(4)
($)
9,055
2,747,745
9,353
2,030,429
—
(1) The amounts reported here as “Executive Contributions” and “Registrant Contributions” are reported as compensation to such NEO in the “Summary
Compensation Table” above.
(2) The contributions reported here as “Registrant Contributions” were made in fiscal 2016 with respect to calendar year 2015 participant base-pay deferrals.
During fiscal 2016, the NEOs were eligible to receive a 4% matching contribution on base-pay deferrals that exceeded the IRS limit that applies to the
qualified HP 401(k) Plan up to a maximum of two times that limit.
(3) The distributions reported here were made pursuant to participant elections made prior to the time that the amounts were deferred in accordance with
plan rules.
(4) Of these balances, the following amounts were reported as compensation to such NEO in the Summary Compensation Table in prior proxy statements:
Ms. Keogh $597,625. The information reported in this footnote is provided to clarify the extent to which amounts payable as deferred compensation
represent compensation reported in our prior proxy statements, rather than additional earned compensation.
Narrative to the Fiscal 2016 Non-qualified Deferred Compensation Table
HP sponsors the EDCP, a non-qualified deferred compensation plan
that permits eligible U.S. employees to defer base pay in excess of
the amount taken into account under the qualified HP 401(k) Plan
and bonus amounts of up to 95% of the annual incentive bonus
payable under the PfR Plan. In addition, a matching contribution
is available under the plan to eligible employees. The matching
contribution applies to base-pay deferrals on compensation above
the IRS limit that applies to the qualified HP 401(k) Plan up to a
maximum of two times that compensation limit (for fiscal 2016
matching contributions, on calendar year 2015 base pay from
$265,000 to $530,000). During fiscal 2016, the NEOs were eligible
for a matching contribution of up to 4% on base pay contributions
in excess of the IRS limit up to a maximum of two times that limit.
Upon becoming eligible for participation, employees must specify
the amount of base pay and/or the percentage of bonus to be
deferred, as well as the time and form of payment. If termination
of employment occurs before retirement (defined as at least age 55
with 15 years of service), distribution is made in the form of a lump
sum in January of the year following the year of termination, subject
to any delay required under Section 409A of the Code. At retirement
(or earlier, if properly elected), benefits are paid according to the
distribution election made by the participant at the time of the
deferral election subject to any delay required under Section 409A
of the Code. No withdrawals are permitted prior to the previously
elected distribution date, other than “hardship” withdrawals as
permitted by applicable law.
Proxy Statement
53
Executive Compensation
Amounts deferred or credited under the EDCP are credited with
hypothetical investment earnings based on participant investment
elections made from among the investment options available under
the HP 401(k) Plan. Accounts maintained for participants under the
EDCP are not held in trust, and all such accounts are subject to the
claims of general creditors of HP. No amounts are credited with
above-market earnings.
Potential Payments Upon Termination or Change in Control
The amounts in the following table estimate potential payments
due if an NEO had terminated employment with HP effective
October 31, 2016 under each of the circumstances specified below.
These amounts are in addition to benefits generally available to U.S.
employees upon termination of employment, such as distributions
from the retirement plans and the HP 401(k) Plan and payment of
accrued vacation where required.
Name
Dion J. Weisler
Catherine A. Lesjak(4)
Kim M. Rivera
Tracy S. Keogh
Jon E. Flaxman(4)
Termination
Scenario
Voluntary/For Cause
Disability
Retirement
Death
Not for Cause
Change in Control
Voluntary/For Cause
Disability
Retirement
Death
Not for Cause
Change in Control
Voluntary/For Cause
Disability
Retirement
Death
Not for Cause
Change in Control
Voluntary/For Cause
Disability
Retirement
Death
Not for Cause
Change in Control
Voluntary/For Cause
Disability
Retirement
Death
Not for Cause
Change in Control
Total(1)
($)
—
24,903,711
—
24,903,711
14,616,133
30,268,540
6,250,664
11,691,015
6,250,664
11,691,015
10,105,570
14,638,876
—
6,669,451
—
6,669,451
4,452,673
8,786,799
—
8,023,188
—
8,023,188
5,399,854
10,282,451
3,545,874
7,000,160
3,545,874
7,000,160
5,586,393
9,018,734
Severance(2)
($)
—
—
—
—
5,364,829
5,364,829
—
—
—
—
2,947,861
2,947,861
—
—
—
—
2,117,348
2,117,348
—
—
—
—
2,259,263
2,259,263
—
—
—
—
2,018,574
2,018,574
Long-Term Incentive Programs(3)
Stock
Options
($)
—
1,368,548
—
1,368,548
300,324
1,368,548
360,386
760,741
360,386
760,741
360,386
760,741
—
—
—
—
—
—
—
428,782
—
428,782
180,196
428,782
36,754
670,937
36,754
670,937
—
670,937
RSUs
($)
—
14,645,287
—
14,645,287
5,203,576
14,645,287
4,152,608
6,873,681
4,152,608
6,873,681
5,059,653
6,873,681
—
4,874,212
—
4,874,212
1,588,843
4,874,212
—
5,262,457
—
5,262,457
1,962,975
5,262,457
2,504,224
3,912,551
2,504,224
3,912,551
2,562,923
3,912,551
PARSUs
($)
—
8,889,876
—
8,889,876
3,747,404
8,889,876
1,737,670
4,056,592
1,737,670
4,056,592
1,737,670
4,056,592
—
1,795,239
—
1,795,239
746,482
1,795,239
—
2,331,949
—
2,331,949
997,420
2,331,949
1,004,896
2,416,672
1,004,896
2,416,672
1,004,896
2,416,672
(1) Total does not include amounts earned or benefits accumulated due to continued service by the NEO through October 31, 2016, including vested stock
options, PCSOs, RSUs, PARSUs, accrued retirement benefits, and vested balances in the EDCP, as those amounts are detailed in the preceding tables. Total
also does not include amounts the NEO was eligible to receive under the annual PfR Plan with respect to fiscal 2016 performance.
(2) The amounts reported are the cash benefits payable in the event of a qualifying termination under the SPEO: for CEO, 2x multiple of base pay plus the
average of the actual annual incentives paid for the preceding three years; for other NEOs, 1.5x multiple of base pay plus the average of the actual annual
incentives paid for the preceding three years.
54
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Executive Compensation
(3) On an involuntary termination not for cause, covered executives receive pro-rata vesting on unvested equity awards as discussed under “Executive
Compensation—Compensation Discussion and Analysis—Severance Plan for Executive Officers.” Full vesting of PARSUs based on performance at target
levels (to the extent that the actual performance period has not been completed) applies in the event of a termination due to death or disability for all
grant recipients. Pro-rata vesting of PARSUs based on actual performance applies in the event of a termination due to retirement for all grant recipients.
To calculate the value of unvested PARSUs for purposes of this table, target performance (to the extent that the actual performance period has not been
completed) is used since results will not be certified until the end of the two- and three-year performance periods. Full vesting of unvested PCSOs applies
in the event of a termination due to death or disability for all grant recipients. PCSOs vest pro-rata in the event of a termination due to retirement, with the
exception of Launch Grant PCSOs, which are forfeited. With respect to the treatment of equity in the event of a change in control of HP, the information
reported reflects the SPEO approved change in control terms.
(4) As of the end of fiscal 2016, Ms. Lesjak and Mr. Flaxman are retirement eligible (a minimum age of 55 plus years of service equal to or greater than
70 points). In the event that Ms. Lesjak or Mr. Flaxman retires, she or he would receive retirement equity treatment in regards to the long-term incentive
programs. Values in the “Voluntary/For Cause” section for Ms. Lesjak and Mr. Flaxman reflect the retirement equity treatment in a voluntary termination.
HP Severance Plan for Executive Officers
An executive will be deemed to have incurred a qualifying termination
for purposes of the SPEO if he or she is involuntarily terminated
without cause and executes a full release of claims in a form
satisfactory to HP promptly following termination. For purposes of
the SPEO, “cause” means an executive’s material neglect (other than
as a result of illness or disability) of his or her duties or responsibilities
to HP or conduct (including action or failure to act) that is not in the
best interest of, or is injurious to, HP. The material terms of the SPEO
are described under “Executive Compensation—Compensation
Discussion and Analysis—Severance Plan for Executive Officers.”
Narrative to the Potential Payments Upon Termination or Change in Control Table
immediately
thereafter, or was
Voluntary or “For Cause” Termination
In general, an NEO who remained employed through October 31,
2016 (the last day of the fiscal year) but voluntarily terminated
employment
terminated
immediately thereafter in a “for cause” termination, would be
eligible (1) to receive his or her annual incentive amount earned
for fiscal 2016 under the PfR Plan (subject to any discretionary
downward adjustment or elimination by the HRC Committee prior
to actual payment, and to any applicable clawback policy), (2) to
exercise his or her vested stock options up to three months following
a voluntary termination, and up to the date of termination in the
case of termination “for cause”, (3) to receive a distribution of vested
amounts deferred or credited under the EDCP, and (4) to receive a
distribution of his or her vested benefits, if any, under the HP 401(k)
and pension plans. An NEO who terminated employment before
October 31, 2016, either voluntarily or in a “for cause” termination,
would generally not have been eligible to receive any amount under
the PfR Plan with respect to the fiscal year in which the termination
occurred, except that the HRC Committee has the discretion to
make payment of prorated bonus amounts to individuals on leave
of absence or in non-pay status, as well as in connection with
certain voluntary severance incentives, workforce reductions and
similar programs.
“Not for Cause” Termination
A “not for cause” termination of an NEO who remained employed
through October 31, 2016 and was terminated
immediately
thereafter would qualify the NEO for the amounts described above
under a “voluntary” termination in addition to benefits under the
SPEO if the NEO signs the required release of claims in favor of HP.
In addition to the cash severance benefits and pro-rata equity
awards payable under the SPEO, the NEO would be eligible to
exercise vested stock options up to one year after termination and
receive distributions of vested, accrued benefits from HP deferred
compensation and pension plans.
Termination Following a Change in Control
In the event of a change in control of HP, RSUs, stock options and
PCSOs will vest in full if the successor does not assume such awards
or if an individual is terminated in connection with or following
a change in control. Outstanding PARSUs will vest in full upon a
termination in connection with or following a change in control,
assuming target performance level. Upon failure of the successor to
assume outstanding PARSUs in connection with a change in control,
the PARSUs will vest in full based on the better of (i) pro-rata vesting
at target, and (ii) 100% of units vesting based on actual performance
as determined by the Committee within 30 days of change in control.
Death or Disability Terminations
An NEO who continued in employment through October 31, 2016
whose employment is terminated immediately thereafter due
to death or disability would be eligible (1) to receive his or her full
annual incentive amount earned for fiscal 2016 under the PfR Plan
determined by HP in its sole discretion, (2) to receive a distribution
of vested amounts deferred or credited under the EDCP, and
(3) to receive a distribution of his or her vested benefits under the
HP 401(k) and pension plans.
Upon termination due to death or disability, equity awards held by
the NEO may vest in full. If termination is due to disability, stock
options, RSUs, and PCSOs will vest in full, subject to satisfaction of
applicable performance conditions, and must be exercised within
three years of termination or by the original expiration date, if
earlier; all unvested portions of the PARSUs, including any amounts
for dividend equivalent payments, shall vest based on performance
at target levels. If termination is due to the NEO’s death, stock
options, RSUs and PCSOs will vest in full and must be exercised
within one year of termination or by the original expiration date, if
earlier; all unvested portions of the PARSUs, including any amounts
for dividend equivalent payments, shall vest based on performance
at target levels.
Proxy Statement
55
Executive Compensation
HP Severance Policy for Senior Executives
Under the HP Severance Policy for Senior Executives adopted by
the Board in July 2003 (the “HP Severance Policy”), HP will seek
stockholder approval for future severance agreements, if any,
with certain senior executives that provide specified benefits in an
amount exceeding 2.99 times the sum of the executive’s current
annual base salary plus annual target cash bonus, in each case as in
effect immediately prior to the time of such executive’s termination.
Individuals subject to this policy consist of the Section 16 officers
designated by the Board. In implementing this policy, the Board may
elect to seek stockholder approval after the material terms of the
relevant severance agreement are agreed upon.
For purposes of the HP Severance Policy, future severance
agreements include any severance agreements or employment
agreements containing severance provisions that we may enter into
after the adoption of the HP Severance Policy by the Board, as well
as agreements renewing, modifying or extending such agreements.
Future severance agreements do not include retirement plans,
deferred compensation plans, early retirement plans, workforce
restructuring plans, retention plans in connection with extraordinary
transactions or similar plans or agreements entered
in
connection with any of the foregoing, provided that such plans or
agreements are applicable to one or more groups of employees in
addition to the Section 16 officers.
into
For purposes of determining the amounts subject to the HP
Severance Policy, benefits subject to the limit generally include cash
separation payments that directly relate to extraordinary benefits
that are not available to groups of employees other than the Section
16 officers upon termination of employment. Benefits that have
been earned or accrued, as well as prorated bonuses, accelerated
stock or option vesting and other benefits that are consistent with our
practices applicable to employees other than the Section 16 officers,
are not counted against the limit. Specifically, benefits subject to the
HP Severance Policy include: (a) separation payments based on a
multiplier of salary plus target bonus, or cash amounts payable for
the uncompleted portion of employment agreements; (b) the value
of any service period credited to a Section 16 officer in excess of
the period of service actually provided by such Section 16 officer
for purposes of any employee benefit plan; (c) the value of benefits
and perquisites that are inconsistent with our practices applicable to
one or more groups of employees in addition to, or other than, the
Section 16 officers (“Company Practices”); and (d) the value of any
accelerated vesting of any stock options, stock appreciation rights,
restricted stock or long-term cash incentives that is inconsistent
with Company Practices. The following benefits are not subject to
the HP Severance Policy, either because they have been previously
earned or accrued by the employee or because they are consistent
with Company Practices: (i) compensation and benefits earned,
accrued, deferred or otherwise provided for employment services
rendered on or prior to the date of termination of employment
pursuant to bonus, retirement, deferred compensation or other
benefit plans (e.g., 401(k) Plan distributions, payments pursuant
to retirement plans, distributions under deferred compensation
plans or payments for accrued benefits such as unused vacation
days), and any amounts earned with respect to such compensation
and benefits in accordance with the terms of the applicable plan;
(ii) payments of prorated portions of bonuses or prorated long-term
incentive payments that are consistent with Company Practices;
(iii) acceleration of the vesting of stock options, stock appreciation
rights, restricted stock, RSUs or long-term cash incentives that
is consistent with Company Practices; (iv) payments or benefits
required to be provided by law; and (v) benefits and perquisites
provided in accordance with the terms of any benefit plan, program
or arrangement sponsored by HP or its affiliates that are consistent
with Company Practices.
HP Retirement Arrangements
Upon retirement
immediately after October 31, 2016 with a
minimum age of 55 plus years of service equal to or greater than
70 points, HP employees in the United States receive full vesting
of time-based options granted under our stock plans with a three-
year post-termination exercise period. PCSOs, with the exception
of Launch Grant PCSOs, which are forfeited, will receive prorated
vesting if the stock price appreciation conditions are met and
may vest on a prorated basis post-termination to the end of the
performance period, subject to stock price appreciation conditions
and certain post-employment restrictions. Awards under the
PARSU program, if any, are paid on a prorated basis to participants
at the end of the performance period based on actual results, and
bonuses, if any, under the PfR Plan may be paid in prorated amounts
at the discretion of management based on actual results. In
accordance with Section 409A of the Code, certain amounts payable
upon retirement (or other termination) of the NEOs and other key
employees will not be paid out for at least six months following
termination of employment.
We sponsor two retiree medical programs in the United States,
one of which provides subsidized coverage for eligible participants
based on years of service. Eligibility for this program requires that
participants have been employed by HP before January 1, 2003 and
have met other age and service requirements. Mr. Flaxman is eligible
for this program.
The other U.S. retiree medical program we sponsor provides eligible
retirees with access to coverage at group rates only, with no direct
subsidy provided by HP. As of the end of fiscal 2016, Ms. Lesjak is
eligible to retire under this program. All of the other NEOs could be
eligible for this program if they retire from HP on or after age 55
with at least ten years of qualifying service or 80 age plus service
points. In addition, beginning at age 45, eligible U.S. employees may
participate in the HP Retirement Medical Savings Account Plan (the
“RMSA”), under which certain participants are eligible to receive HP
matching credits of up to $1,200 per year, beginning at age 45, up to a
lifetime maximum of $12,000, which can be used to cover the cost of
such retiree medical coverage (or other qualifying medical expenses)
if the employee retires from HP on or after age 55 with at least ten
years of qualifying service or 80 age plus service points. Ms. Lesjak
is the only NEO eligible for the HP matching credits under the RMSA.
56
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Executive Compensation
Equity Compensation Plan Information
The following table summarizes our equity compensation plan information as of October 31, 2016.
Plan Category
Equity compensation plans approved by HP stockholders
Equity compensation plans not approved by HP stockholders
Total
Common shares
to be issued
upon exercise of
outstanding
options, warrants
and rights(1)
(a)
56,214,355(3)
—
56,214,355
Weighted-
average exercise
price of
outstanding
options, warrants
and rights(2)
(b)
$12.3968
—
$12.3968
Common shares
available for future
issuance under equity
compensation plans
(excluding securities
reflected in column (a))
(c)
453,864,585(4)
—
453,864,585
(3)
(1) This column does not reflect awards of options and RSUs assumed in acquisitions where the plans governing the awards were not available for future
awards as of October 31, 2016. As of October 31, 2016, individual awards of options and RSUs to purchase a total of 96,663 shares were outstanding
pursuant to awards assumed in connection with acquisitions and granted under such plans at a weighted-average exercise price of options of $7.7630.
(2) This column does not reflect the exercise price of shares underlying the assumed options referred to in footnote (1) to this table or the purchase price
of shares to be purchased pursuant to the ESPP or the legacy HP Employee Stock Purchase Plan (the “Legacy ESPP”). In addition, the weighted-average
exercise price does not take into account the shares issuable upon vesting of outstanding awards of RSUs and PARSUs, which have no exercise price.
Includes awards of options and RSUs outstanding under the ESPP, the 2004 Plan and the HP 2000 Stock Plan. Also includes awards of PARSUs representing
2,691,161 shares that may be issued under the 2004 Plan. Each PARSU award reflects a target number of shares that may be issued to the award recipient.
HP determines the actual number of shares the recipient receives at the end of a three-year performance period based on results achieved compared with
Company performance goals and stockholder return relative to the market. The actual number of shares that a grant recipient receives at the end of the
period may range from 0% to 200% of the target number of shares.
Includes (i) 369,371,458 shares available for future issuance under the 2004 Plan; (ii) 80,401,136 shares available for future issuance under the
ESPP; (iii) 2,725,611 shares available for future issuances under the Legacy ESPP, a plan under which employee stock purchases are no longer made; and
(iv) 1,366,380 shares are reserved for issuance under our Service Anniversary Stock Plan, a plan under which awards are no longer granted. Taking into
account these adjustments, 449,772,594 shares were available for future grants as of October 31, 2016.
(4)
Management
Proposal
No. 4
Advisory Vote on the Frequency of Future “Say on Pay” Votes
The Board recommends a vote FOR approval of an ANNUAL advisory vote on the compensation of HP’s
named executive officers.
Under the Dodd-Frank Act, HP stockholders are being asked to vote,
on an advisory or non-binding basis, on how frequently they would
like to cast an advisory vote on the compensation of HP’s named
executive officers. By voting on this proposal, stockholders may
indicate whether they would prefer an advisory vote on named
executive officer compensation once every one, two, or three years.
Our prior say-on-frequency vote occurred in 2011. At that year’s
meeting, stockholders agreed with the Board’s recommendation
that advisory votes on executive compensation should occur every
year. Although this vote is non-binding, the Board and the HRC
Committee value the views of our stockholders and will review the
voting results. However, the Board may decide that it is in the best
interests of HP and its stockholders to hold an advisory vote more
or less frequently than the alternative that has been selected by
our stockholders.
After careful consideration of the frequency alternatives, and given
the ongoing cadence of dialogue between HP and its stockholders
on executive compensation matters, the Board believes that
conducting an advisory vote on executive compensation on an
annual basis is currently appropriate for HP and its stockholders.
Vote Required
The affirmative vote of a majority of the shares of HP common stock present in person or represented by proxy and entitled to be voted on
the proposal at the annual meeting is required for advisory approval of this proposal.
Proxy Statement
57
Common Stock Ownership of Certain Beneficial Owners and Management
The following table sets forth information as of December 31, 2016
concerning beneficial ownership by:
• holders of more than 5% of HP’s outstanding shares of
common stock;
• our directors and nominees;
• each of the named executive officers listed in the Summary
Compensation Table on page 47; and
• all of our directors and executive officers as a group.
The information provided in the table is based on our records,
information filed with the SEC and information provided to HP,
except where otherwise noted.
The number of shares beneficially owned by each entity or individual
is determined under SEC rules, and the information is not necessarily
indicative of beneficial ownership for any other purpose. Under such
Beneficial Ownership Table
rules, beneficial ownership includes any shares as to which the entity
or individual has sole or shared voting or investment power and
also any shares that the entity or individual has the right to acquire
as of March 1, 2017 (60 days after December 31, 2016) through
the exercise of any stock options, through the vesting/settlement
of RSUs payable in shares, or upon the exercise of other rights.
Beneficial ownership excludes options or other rights vesting after
March 1, 2017 and any RSUs vesting/settling, as applicable, on or
before March 1, 2017 that may be payable in cash or shares at HP’s
election. Unless otherwise indicated, each person has sole voting
and investment power (or shares such power with his or her spouse)
with respect to the shares set forth in the following table.
Name of Beneficial Owner
Dodge & Cox(1)
BlackRock, Inc.(2)
The Vanguard Group(3)
Aida M. Alvarez
Shumeet Banerji
Carl Bass
Robert R. Bennett
Charles V. Bergh
Stacy Brown-Philpot
Stephanie A. Burns
Mary Anne Citrino
Rajiv L. Gupta(4)
Stacey Mobley
Subra Suresh
Dion J. Weisler(5)
Margaret C. Whitman(6)
Jon Flaxman(7)
Tracy S. Keogh(8)
Catherine A. Lesjak(9)
Kim M. Rivera
All current executive officers and directors as a group (20 persons)(10)
Shares of
Common Stock
Beneficially Owned
Percent of
Common Stock
Outstanding
139,751,357
102,358,472
119,565,335
8.2%
6.0%
7.0%
—
45,623
4,234
21,544
4,234
4,234
4,234
4,234
267,896
4,234
4,234
1,501,902
5,998,430
357,475
476,108
960,465
—
10,529,377
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
* Represents holdings of less than 1% based on 1,703,985,486 shares of our common stock outstanding as of December 31, 2016.
58
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Ownership of our Stock Ownership of our Stock
(1) Based on the most recently available Schedule 13G/A filed with the SEC on February 14, 2017 by Dodge & Cox. According to its Schedule 13G/A, Dodge &
Cox reported having sole voting power over 132,962,056 shares, shared voting power over no shares, sole dispositive power over 139,751,357 shares and
shared dispositive power over no shares. The securities reported on the Schedule 13G/A are beneficially owned by clients of Dodge & Cox, which clients
may include investment companies registered under the Investment Company Act of 1940 and other managed accounts, and which clients have the right
to receive or the power to direct the receipt of dividends from, and the proceeds from the sale of, HP’s stock. The Schedule 13G/A contained information as
of December 31, 2016 and may not reflect current holdings of HP’s stock. The address of Dodge & Cox is 555 California Street, 40th Floor, San Francisco,
CA 94104.
(2) Based on the most recently available Schedule 13G/A filed with the SEC on January 24, 2017 by BlackRock, Inc. According to its Schedule 13G/A, BlackRock,
Inc. reported having sole voting power over 85,530,955 shares, shared voting power over 70,320 shares, sole dispositive power over 102,288,152 shares
and shared dispositive power over 70,320 shares. The Schedule 13G/A contained information as of December 31, 2016 and may not reflect current
holdings of HP’s stock. The address of BlackRock, Inc. is 55 East 52nd Street, New York, NY 10055.
(4)
(5)
(6)
(3) Based on the most recently available Schedule 13G/A filed by the Vanguard Group on February 13, 2017. According to its Schedule 13G/A, the Vanguard
Group reported having sole voting power over 2,713,198 shares, shared voting power over 312,493 shares, sole dispositive power over 116,576,739
shares, and shared dispositive power over 2,988,596 shares. The Schedule 13G/A contained information as of December 31, 2016 and may not reflect
current holdings of HP’s stock. The address for the Vanguard Group is 100 Vanguard Blvd., Malvern, PA 19355.
Includes 156,280 shares that Mr. Gupta has the right to acquire by exercise of stock options.
Includes 1,162,405 shares that Mr. Weisler has the right to acquire by exercise of stock options.
Includes 66 shares held by Ms. Whitman indirectly through a trust and 5,541,022 shares that Ms. Whitman has the right to acquire by exercise of
stock options.
Includes 270,262 shares that Mr. Flaxman has the right to acquire by exercise of stock options.
Includes 265,600 shares that Ms. Keogh has the right to acquire by exercise of stock options.
Includes 306 shares held by Ms. Lesjak’s spouse and 697,960 shares that Ms. Lesjak has the right to acquire by exercise of stock options.
(7)
(8)
(9)
(10) Includes 8,093,529 shares that current executive officers and directors have the right to acquire by exercise of stock options.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires our directors, executive
officers and holders of more than 10% of HP’s stock to file reports
with the SEC regarding their ownership and changes in ownership
of our securities. Based upon our examination of the copies of
Forms 3, 4, and 5, and amendments thereto furnished to us and
the written representations of our directors, executive officers
and 10% stockholders, we believe that, during fiscal 2016, our
directors, executive officers and 10% stockholders complied with all
Section 16(a) filing requirements.
Proxy Statement
59
Questions and Answers
Proxy Materials
1. Why am I receiving these materials?
We have made these materials available to you or delivered paper
copies to you by mail in connection with our annual meeting of
stockholders, which will take place online on Monday, April 17, 2017.
As a stockholder, you are invited to participate in the annual meeting
via live audio webcast and vote on the business items described in
this proxy statement. This proxy statement includes information
that we are required to provide to you under the SEC rules and that
is designed to assist you in voting your shares. See Questions 17 and
18 below for information regarding how you can vote your shares
at the annual meeting or by proxy (without attending the annual
meeting).
2. What is included in the proxy materials?
The proxy materials include:
• our proxy statement for the 2017 annual meeting of
stockholders; and
• our 2016 Annual Report, which includes our Annual Report
on Form 10-K for the fiscal year ended October 31, 2016.
If you received a paper copy of these materials by mail, the proxy
materials also include a proxy card or a voting instruction card for the
annual meeting. If you received a notice of the Internet availability of
the proxy materials instead of a paper copy of the proxy materials,
see Questions 17 and 18 below for information regarding how you
can vote your shares.
3. What information is contained in this proxy statement?
how to access the proxy materials over the Internet or to request a
paper copy may be found in the notice of the Internet availability of
the proxy materials. In addition, the notice contains instructions on
how you may request access to proxy materials in printed form by
mail or electronically on an ongoing basis.
5. Why didn’t I receive a notice in the mail about the Internet
availability of the proxy materials?
We are providing some of our stockholders, including stockholders
who have previously requested to receive paper copies of the proxy
materials and some of our stockholders who are living outside of
the United States, with paper copies of the proxy materials instead
of a notice of the Internet availability of the proxy materials.
In addition, we are providing proxy materials or notice of the Internet
availability of the proxy materials by e-mail to those stockholders
who have previously elected delivery of the proxy materials or
notice electronically. Those stockholders should receive an e-mail
containing a link to the website where those materials are available
and a link to the proxy voting website.
6. How can I access the proxy materials over the Internet?
Your notice of the Internet availability of the proxy materials, proxy
card or voting instruction card will contain instructions on how to:
•
•
view our proxy materials for the annual meeting on the
Internet; and
instruct us to send our future proxy materials to you
electronically by e-mail.
The information in this proxy statement relates to the proposals to
be voted on at the annual meeting, the voting process, the Board and
Board committees, the compensation of our directors and certain
executive officers for fiscal 2016 and other required information.
4. Why did I receive a notice in the mail regarding the Internet
availability of the proxy materials instead of a paper copy of the
full set of proxy materials?
This year, we are again using the SEC rule that allows companies
to furnish their proxy materials over the Internet. As a result, we
are mailing to many of our stockholders a notice of the Internet
availability of the proxy materials instead of a paper copy of the
proxy materials. All stockholders receiving the notice will have the
ability to access the proxy materials over the Internet and request to
receive a paper copy of the proxy materials by mail. Instructions on
Our proxy materials are available at www.proxyvote.com/HP. Please
have your 16-digit control number available to access them.
Our proxy materials are also publicly available on our dedicated
annual meeting website at www.hpannualmeeting.com.
Your notice of the Internet availability of the proxy materials, proxy
card or voting instruction card will contain instructions on how you
may request access to proxy materials electronically on an ongoing
basis. Choosing to access your future proxy materials electronically
will help us conserve natural resources and reduce the costs of
distributing our proxy materials. If you choose to access future proxy
materials electronically, you will receive an e-mail with instructions
containing a link to the website where those materials are available
and a link to the proxy voting website. Your election to access proxy
materials by e-mail will remain in effect until you terminate it.
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Other Matters 7. How may I obtain a paper copy of the proxy materials?
Stockholders receiving a notice of the Internet availability of the
proxy materials will find instructions about how to obtain a paper
copy of the proxy materials on their notice. Stockholders receiving
notice of the Internet availability of the proxy materials by e-mail
will find instructions about how to obtain a paper copy of the proxy
materials as part of that e-mail. All stockholders who do not receive
a notice or an e-mail will receive a paper copy of the proxy materials
by mail.
8. I share an address with another stockholder, and we received
only one paper copy of the proxy materials or notice of the
Internet availability of the proxy materials. How may I obtain
an additional copy?
If you share an address with another stockholder, you may receive
only one paper copy of the proxy materials or notice of the Internet
availability of the proxy materials, as applicable, unless you have
provided contrary instructions. If you are a beneficial owner and
wish to receive a separate set of proxy materials or notice of the
Internet availability of the proxy materials now, please request the
additional copy by contacting your individual broker. If you wish
to receive a separate set of the proxy materials or notice of the
Internet availability of the proxy materials now, please request the
additional copy by contacting Broadridge Financial Solutions, Inc.
(“Broadridge”) at:
By Internet: www.proxyvote.com/HP
By telephone: 1-800-579-1639
By e-mail: sendmaterial@proxyvote.com
If you request a separate set of the proxy materials or notice of
Internet availability of the proxy materials by e-mail, please be sure
to include your control number in the subject line. A separate set
of proxy materials or notice of the Internet availability of the proxy
materials, as applicable, will be sent promptly following receipt of
your request.
If you are a stockholder of record and wish to receive a separate set
of proxy materials or notice of the Internet availability of the proxy
materials, as applicable, in the future, please contact our transfer
agent. See Question 22 below.
If you are the beneficial owner of shares held through a broker,
trustee or other nominee and you wish to receive a separate set
of proxy materials or notice of the Internet availability of the proxy
materials, as applicable, in the future, please call Broadridge at:
1-866-540-7095
All stockholders also may write to HP at the address below to
request a separate set of proxy materials or notice of the Internet
availability of the proxy materials, as applicable:
NASDAQ
Print and Distribution Services
325 Donald Lynch Blvd, Suite 120
Marlborough, MA 01752-4724
Other Matters
9. I share an address with another stockholder, and we received
more than one paper copy of the proxy materials or notice of the
Internet availability of the proxy materials. How do we obtain a
single copy in the future?
Stockholders of record sharing an address who are receiving multiple
copies of the proxy materials or notice of the Internet availability of
the proxy materials, as applicable, and who wish to receive a single
copy of such materials in the future may contact our transfer agent.
See Question 22 below.
Beneficial owners of shares held through a broker, trustee or other
nominee sharing an address who are receiving multiple copies of
the proxy materials or notice of the Internet availability of the proxy
materials, as applicable, and who wish to receive a single copy of
such materials in the future may contact Broadridge at:
1-866-540-7095
10. What should I do if I receive more than one notice or e-mail
about the Internet availability of the proxy materials or more
than one paper copy of the proxy materials?
You may receive more than one notice, more than one e-mail or
more than one paper copy of the proxy materials, including multiple
paper copies of this proxy statement and multiple proxy cards
or voting instruction cards. For example, if you hold your shares
in more than one brokerage account, you may receive a separate
notice, a separate e-mail or a separate voting instruction card
for each brokerage account in which you hold shares. If you are a
stockholder of record and your shares are registered in more than
one name, you may receive more than one notice, more than one
e-mail or more than one proxy card. To vote all of your shares by
proxy, you must complete, sign, date and return each proxy card and
voting instruction card that you receive and vote over the Internet
the shares represented by each notice and e-mail that you receive
(unless you have requested and received a proxy card or voting
instruction card for the shares represented by one or more of those
notices or e-mails).
11. How may I obtain a copy of HP’s 2016 Form 10-K and other
financial information?
Stockholders may request a free copy of our combined 2016
Annual Report and 2017 Proxy Statement, which includes our 2016
Form 10-K, from:
NASDAQ
Print and Distribution Services
325 Donald Lynch Blvd, Suite 120
Marlborough, MA 01752-4724
www.hp.com/investor/informationrequest
Alternatively, stockholders can access the 2016 Annual Report on
HP’s Annual Meeting site:
www.hpannualmeeting.com.
All of HP’s filings, including the 2016 Form 10-K are also available on
HP’s Investor Relations site:
www.hp.com/investor/home
We also will furnish any exhibit to the 2016 Form 10-K if specifically
requested.
Proxy Statement
61
Other Matters
Voting Information
12. What proposals will be voted at the meeting? How does the Board recommend that I vote and what is the voting requirement for
each of the proposals?
Proposals
Election of Directors
Board
Recommendation
FOR EACH NOMINEE
Votes Required
Majority of votes cast
Effect of
Abstentions
None
Effect of
Broker Non-Votes
None
Ratification of Independent
Registered Public Accounting
Firm
Advisory Vote to Approve
Executive Compensation (“Say
on Pay” Vote)
FOR
FOR
Advisory Vote to Set the
Frequency of Future “Say on
Pay” Votes
FOR ANNUAL
Same as “AGAINST”
No Broker Non-Votes
(Routine Matter)
Same as “AGAINST”
None
Same as “AGAINST”
None
Majority of the shares
present, in person or
represented by proxy,
and entitled to vote
Majority of the shares
present, in person or
represented by proxy,
and entitled to vote
Majority of the shares
present, in person or
represented by proxy,
and entitled to vote
We also will consider any other business that properly comes before the annual meeting. See Question 29 below.
13. What are broker non-votes?
If you are the beneficial owner of shares held in the name of a broker,
trustee or other nominee and do not provide that broker, trustee or
other nominee with voting instructions, your shares may constitute
“broker non-votes.” Generally, broker non-votes occur on a matter
when a broker is not permitted to vote on that matter without
instructions from the beneficial owner and instructions are not given.
Under the rules of the New York Stock Exchange, brokers, trustees
or other nominees may generally vote on routine matters but
cannot vote on non-routine matters. Only Proposal No. 2 (ratifying
the appointment of the independent registered public accounting
firm) is considered a routine matter. The other proposals are not
considered routine matters, and without your instructions, your
broker cannot vote your shares. In tabulating the voting results for
any particular proposal, shares that constitute broker non-votes are
not considered entitled to vote on that proposal.
If you provide specific instructions with regard to certain items,
your shares will be voted as you instruct on such items. If you vote
by proxy card or voting instruction card and sign the card without
giving specific instructions, your shares will be voted in accordance
with the recommendations of the Board (FOR all of our nominees to
the Board, FOR ratification of the appointment of our independent
registered public accounting firm, FOR the approval of an
amendment extending the term of our PfR Plan, FOR the approval
of the compensation of our named executive officers (“say on pay”
vote), and FOR the ANNUAL frequency of future “say on pay” votes.
For any shares you hold in HP 401(k) Plan, if your voting instructions
are not received by 11:59 p.m., Eastern Time, on April 12, 2017, your
shares will be voted in proportion to the way the shares held by
the other HP 401(k) Plan participants are voted, except as may be
otherwise required by law.
14. Is cumulative voting permitted for the election of directors?
No, you may not cumulate your votes in the election of directors. Last
year, our stockholders approved an amendment to the Certificate of
Incorporation eliminating cumulative voting. Therefore, cumulative
voting is no longer available to our stockholders.
15. What is the difference between holding shares as a
stockholder of record and as a beneficial owner?
Most of our stockholders hold their shares through a broker,
trustee or other nominee rather than directly in their own name.
As summarized below, there are some distinctions between shares
held of record and those owned beneficially.
• Stockholder of Record—If your shares are registered
directly in your name with our transfer agent, you are
considered, with respect to those shares, the “stockholder
of record.” As the stockholder of record, you have the right
to grant your voting proxy directly to HP or to a third party,
or to vote your shares during the meeting.
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• Beneficial Owner—If your shares are held in a brokerage
account, by a trustee or by another nominee (that is, in
“street name”), you are considered the “beneficial owner”
of those shares. As the beneficial owner of those shares,
you have the right to direct your broker, trustee or nominee
how to vote, or to vote your shares during the annual
meeting (other than shares held in the HP’s 401(k) Plan
(the “HP 401(k) Plan”), which must be voted prior to the
annual meeting).
16. Who is entitled to vote and how many shares can I vote?
Each holder of shares of HP common stock issued and outstanding
as of the close of business on February 16, 2017, the record date for
the annual meeting, is entitled to cast one vote per share on all items
being voted upon at the annual meeting. You may vote all shares
owned by you as of this time, including (1) shares held directly in
your name as the stockholder of record, including shares purchased
through our dividend reinvestment program and employee stock
purchase plans, and shares held through our Direct Registration
Service; and (2) shares held for you as the beneficial owner through
a broker, trustee or other nominee.
On the record date, HP had approximately 1,690,781,974 shares of
common stock issued and outstanding.
17. How can I vote my shares during the annual meeting?
This year’s annual meeting will be held entirely online to allow
greater participation. Stockholders may participate in the annual
meeting by visiting either of the following websites:
www.hpannualmeeting.com or
www.hp.onlineshareholdermeeting.com
To participate in the annual meeting, you will need the 16-digit
control number included on your notice of Internet availability of
the proxy materials, on your proxy card or on the instructions that
accompanied your proxy materials.
Shares held in your name as the stockholder of record may be voted
electronically during the annual meeting. Shares for which you are
the beneficial owner but not the stockholder of record also may be
voted electronically during the annual meeting, except that shares
held in the HP 401(k) Plan cannot be voted electronically during
the annual meeting. If you hold shares in the HP 401(k) Plan, your
voting instructions must be received by 11:59 p.m., Eastern Time, on
April 12, 2017 for the trustee to vote your shares. However, holders
of shares in the HP 401(k) Plan will still be able to view the annual
meeting webcast and ask questions during the annual meeting.
Even if you plan to participate in the annual meeting online, we
recommend that you also vote by proxy as described below so that
your vote will be counted if you later decide not to participate in the
annual meeting.
Other Matters
18. How can I vote my shares without participating in the annual
meeting?
Whether you hold shares directly as the stockholder of record or
through a broker, trustee or other nominee as the beneficial owner,
you may direct how your shares are voted without participating in
the annual meeting. There are three ways to vote by proxy:
• VIA THE INTERNET: Stockholders who have received a
notice of the Internet availability of the proxy materials by
mail may submit proxies over the Internet by following the
instructions on the notice. Stockholders who have received
notice of the Internet availability of the proxy materials by
e-mail may submit proxies over the Internet by following
the instructions included in the e-mail. Stockholders
who have received a paper copy of a proxy card or voting
instruction card by mail may submit proxies over the
Internet by following the instructions on the proxy card or
voting instruction card.
• VIA TELEPHONE: Stockholders of record who live in the
United States or Canada may submit proxies by telephone
by calling 1-800-690-6903 and following the instructions.
Stockholders of record who have received a notice of the
Internet availability of the proxy materials by mail must
have the control number that appears on their notice
available when voting. Stockholders of record who received
notice of the Internet availability of the proxy materials
by e-mail must have the control number included in the
e-mail available when voting. Stockholders of record who
have received a proxy card by mail must have the control
number that appears on their proxy card available when
voting. Most stockholders who are beneficial owners of
their shares living in the United States or Canada and
who have received a voting instruction card by mail may
vote by phone by calling the number specified on the
voting instruction card provided by their broker, trustee
or nominee. Those stockholders should check the voting
instruction card for telephone voting availability.
• VIA MAIL: Stockholders who have received a paper copy
of a proxy card or voting instruction card by mail may
submit proxies by completing, signing and dating their
proxy card or voting instruction card and mailing it in the
accompanying pre-addressed envelope.
19. What is the deadline for voting my shares?
If you hold shares as the stockholder of record, or through HP’s 2011
Employee Stock Purchase Plan (the “ESPP”), your vote by proxy
must be received before the polls close during the annual meeting.
If you hold shares in the HP 401(k) Plan, your voting instructions
must be received by 11:59 p.m., Eastern Time, on April 12, 2017
for the trustee to vote your shares. If you are the beneficial owner
of shares held through a broker, trustee or other nominee, please
follow the voting instructions provided by your broker, trustee or
nominee.
Proxy Statement
63
Other Matters
20. May I change my vote or revoke my proxy?
You may change your vote or revoke your proxy at any time prior to
the vote during the annual meeting, except that any change to your
voting instructions for shares held in the HP 401(k) Plan must be
provided by 11:59 p.m., Eastern Time, on April 12, 2017 as described
above.
If you are the stockholder of record, you may change your vote by:
(1) granting a new proxy bearing a later date (which automatically
revokes the earlier proxy); (2) providing a written notice of revocation
to the Corporate Secretary at the address below in Question 33 prior
to your shares being voted; or (3) participating in the annual meeting
and voting your shares electronically during the annual meeting.
Participation in the annual meeting will not cause your previously
granted proxy to be revoked unless you specifically make that
request. For shares you hold beneficially in the name of a broker,
trustee or other nominee, you may change your vote by submitting
new voting instructions to your broker, trustee or nominee, or by
participating in the meeting and electronically voting your shares
during the meeting (except that shares held in the HP 401(k) Plan
cannot be voted electronically at the annual meeting).
21. Is my vote confidential?
Proxy instructions, ballots and voting tabulations that identify
individual stockholders are handled in a manner that protects
your voting privacy. Your vote will not be disclosed, either within
HP or to third parties, except: (1) as necessary to meet applicable
legal requirements; (2) to allow for the tabulation of votes and
certification of the votes; and (3) to facilitate a successful proxy
solicitation. Occasionally, stockholders provide on their proxy card
written comments, which are then forwarded to management.
22. What if I have questions for our transfer agent?
Please contact our transfer agent, at the phone number or address
listed below, with questions concerning stock certificates, dividend
checks, transfer of ownership or other matters pertaining to your
stock account.
Wells Fargo Bank, N.A.
Shareowner Services
1110 Centre Pointe Curve, Suite 101
Mendota Heights, MN 55120-4100
1-800-286-5977 (U.S. and Canada)
1-651-450-4064 (International)
A dividend reinvestment and stock purchase program is also
available through our transfer agent. For information about this
program, please contact our transfer agent as follows:
Wells Fargo Bank, N.A.
Shareowner Services
1110 Centre Pointe Curve, Suite 101
Mendota Heights, MN 55120-4100
1-800-286-5977 (U.S. and Canada)
1-651-450-4064 (International)
23. How can I attend the annual meeting?
This year’s annual meeting will be a completely virtual meeting of
stockholders, which will be conducted through an audio webcast.
You are entitled to participate in the annual meeting only if you
were an HP stockholder or joint holder as of the close of business on
February 16, 2017 or if you hold a valid proxy for the annual meeting.
64
www.hpannualmeeting.com
submit
to attend
the annual meeting of
You will be able
your questions during
stockholders online and
the meeting
or
www.hp.onlineshareholdermeeting.com. You also will be able to
vote your shares electronically at the annual meeting (other than
shares held through the HP 401(k) Plan, which must be voted prior
to the meeting).
visiting www.hpannualmeeting.com
by
To participate in the annual meeting, you will need the 16-digit
control number included on your notice of Internet availability of
the proxy materials, on your proxy card or on the instructions that
accompanied your proxy materials.
The meeting webcast will begin promptly at 2:00 p.m., Pacific Time.
We encourage you to access the meeting prior to the start time.
Online access to the meeting will open at 1:30 p.m., Pacific Time,
and you should allow ample time to log in to the meeting webcast
and test your computer audio system.
24. What is the pre-meeting forum and how can I access it?
The online format for the annual meeting allows us to communicate
more effectively with you. Our pre-meeting forum, where you
can submit questions in advance of the annual meeting, can
be entered by visiting our dedicated annual meeting website
www.hpannualmeeting.com or by visiting www.proxyvote.com/HP.
The annual meeting website also contains the contents of this proxy
statement in a user-friendly format and has complete PDF copies
of our proxy statement and annual report available for download.
25. Why a virtual meeting?
We are excited to embrace the latest technology to provide
expanded access, improved communication and cost savings for
our stockholders and the Company. Hosting a virtual meeting will
enable increased stockholder attendance and participation since
stockholders can participate from any location around the world.
submit
to attend
You will be able
the annual meeting of
stockholders online and
your questions during
or
the meeting
www.hp.onlineshareholdermeeting.com. You also will be able to
vote your shares electronically at the annual meeting (other than
shares held through the HP 401(k) Plan, which must be voted prior
to the meeting).
visiting www.hpannualmeeting.com
by
26. What if during the check-in time or during the meeting I have
technical difficulties or trouble accessing the virtual meeting
website?
We will have technicians ready to assist you with any technical
difficulties you may have accessing the virtual meeting. If you
encounter any difficulties accessing the virtual meeting during the
check-in or meeting time, please call:
1-855-449-0991 (Toll-free)
1-720-378-5962 (Toll line)
27. How many shares must be present or represented to conduct
business at the annual meeting?
The quorum requirement for holding the annual meeting and
transacting business is that holders of a majority of shares of
HP common stock entitled to vote must be present in person or
represented by proxy. Both abstentions and broker non-votes
described previously in Question 13 above are counted for the
purpose of determining the presence of a quorum.
28. What if a quorum is not present at the annual meeting?
If a quorum is not present at the scheduled time of the annual
meeting, then either the chairman of the annual meeting or the
stockholders by vote of the holders of a majority of the stock
present in person or represented by proxy at the annual meeting
are authorized by our Bylaws to adjourn the annual meeting until a
quorum is present or represented.
29. What happens if additional matters are presented at the
annual meeting?
Other than the four items of business described in this proxy
statement, we are not aware of any other business to be acted upon
at the annual meeting. If you grant a proxy, the persons named as
proxy holders, Dion J. Weisler, Catherine A. Lesjak and Kim M. Rivera,
will have the discretion to vote your shares on any additional matters
properly presented for a vote at the meeting. If for any reason any
of the nominees named in this proxy statement is not available as
a candidate for director, the persons named as proxy holders will
vote your proxy for such other candidate or candidates as may be
nominated by the Board or the Board may choose to reduce the size
of the Board.
30. Who will serve as inspector of elections?
inspector of elections will be a representative from an
The
independent firm, Broadridge.
31. Where can I find the voting results of the annual meeting?
We intend to announce preliminary voting results at the annual
meeting and publish final results in a Current Report on Form 8-K
to be filed with the SEC within four business days of the annual
meeting.
32. Who will bear the cost of soliciting votes for the annual
meeting?
HP is making this solicitation and will pay the entire cost of
preparing, assembling, printing, mailing and distributing the
In
notices and these proxy materials and soliciting votes.
addition to the mailing of the notices and these proxy materials,
the solicitation of proxies or votes may be made in person, by
telephone or by electronic communication by our directors, officers
and employees, who will not receive any additional compensation
for such solicitation activities. We also have hired Innisfree M&A
Incorporated (“Innisfree”) to assist us in the solicitation of votes
described above. We will pay Innisfree a base fee of $20,000
plus customary costs and expenses for these services. We have
agreed to indemnify Innisfree against certain liabilities arising out
of or in connection with these services. We also will reimburse
brokerage houses and other custodians, nominees and fiduciaries
for forwarding proxy and solicitation materials to stockholders.
Other Matters
executive offices no later than October 20, 2017. Such proposals
also must comply with SEC regulations under Rule 14a-8 regarding
the inclusion of stockholder proposals in Company-sponsored proxy
materials. Proposals should be addressed to:
Corporate Secretary
HP Inc.
1501 Page Mill Road
Palo Alto, California 94304
Fax: 650-275-9138
For a stockholder proposal that is not intended to be included in our
proxy statement for next year’s annual meeting under Rule 14a-8,
the stockholder must provide the information required by our Bylaws
and give timely notice to the Corporate Secretary in accordance with
our Bylaws, which, in general, require that the notice be received by
the Corporate Secretary:
• not earlier than the close of business on December 18,
2017; and
• not later than the close of business on January 17, 2018.
If the date of the stockholder meeting is moved more than 30 days
before or 60 days after the anniversary of our annual meeting for
the prior year, then notice of a stockholder proposal that is not
intended to be included in our proxy statement under Rule 14a-8
must be received no earlier than the close of business 120 days prior
to the meeting and not later than the close of business on the later
of the following two dates:
• 90 days prior to the meeting; and
• 10 days after public announcement of the meeting date.
Deadlines for the nomination of director candidates are discussed in
Question 35 below.
34. How may I recommend individuals to serve as directors and
what is the deadline for a director recommendation?
You may recommend director candidates for consideration by the
include
NGSR Committee. Any such recommendations should
verification of the stockholder status of the person submitting
the recommendation and the nominee’s name and qualifications
for Board membership and should be directed to the Corporate
Secretary at the address of our principal executive offices set
forth in Question 33 above. See “Proposal No. 1—Election of
Directors—Director Nominees and Director Nominees’ Experience
and Qualifications” for more information regarding our Board
membership criteria.
A stockholder may send a recommended director candidate’s name
and information to the Board at any time. Generally, such proposed
candidates are considered at the first or second Board meeting prior
to the issuance of the proxy statement for our annual meeting.
33. What is the deadline to propose actions (other than director
nominations) for consideration at next year’s annual meeting
of stockholders?
You may submit proposals for consideration at future stockholder
meetings. For a stockholder proposal to be considered for inclusion in
our proxy statement for the annual meeting next year, the Corporate
Secretary must receive the written proposal at our principal
35. How may I nominate individuals to serve as directors and
what are the deadlines for a director nomination?
Our Bylaws permit stockholders to nominate directors for
consideration at an annual meeting. To nominate a director for
consideration at an annual meeting, a nominating stockholder must
provide the information required by our Bylaws and give timely
notice of the nomination to the Corporate Secretary in accordance
Proxy Statement
65
Other Matters
with our Bylaws, and each nominee must meet the qualifications
required by our Bylaws. To nominate a director for consideration at
next year’s annual meeting (but not for inclusion in our annual proxy
statement ), in general the notice must be received by the Corporate
Secretary between the close of business on December 18, 2017
and the close of business on January 17, 2018, unless the annual
meeting is moved by more than 30 days before or 60 days after the
anniversary of the prior year’s annual meeting, in which case the
deadline will be as described in Question 33 above.
In addition, our Bylaws provide that under certain circumstances,
a stockholder or group of stockholders may include director
candidates that they have nominated in our annual meeting proxy
statement. These proxy access provisions of our Bylaws provide,
among other things, that a stockholder or group of up to 20
stockholders seeking to include director candidates in our annual
meeting proxy statement must own 3% or more of HP’s outstanding
common stock continuously for at least the previous three years.
The number of stockholder-nominated candidates appearing in any
annual meeting proxy statement cannot exceed 20% of the number
of directors then serving on the Board. If 20% is not a whole number,
the maximum number of stockholder-nominated candidates would
be the closest whole number below 20%. Based on the current
Board size of 12 directors, the maximum number of proxy access
candidates that we would be required to include in our proxy materials
for an annual meeting is two. Nominees submitted under the proxy
access procedures that are later withdrawn or are included in the
proxy materials as Board-nominated candidates will be counted in
determining whether the 20% maximum has been reached. If the
number of stockholder-nominated candidates exceeds 20%, each
nominating stockholder or group of stockholders may select one
nominee for inclusion in our proxy materials until the maximum
number is reached. The order of selection would be determined
by the amount (largest to smallest) of shares of HP common stock
held by each nominating stockholder or group of stockholders. The
nominating stockholder or group of stockholders also must deliver
the information required by our Bylaws, and each nominee must
meet the qualifications required by our Bylaws. Requests to include
stockholder-nominated candidates in our proxy materials for next
year’s annual meeting must be received by the Corporate Secretary:
• not earlier than the close of business on November 18,
2017; and
• not later than the close of business on December 18, 2017.
36. How may I obtain a copy of the provisions of our Bylaws
regarding stockholder proposals and director nominations?
You may contact the Corporate Secretary at our principal executive
offices for a copy of the relevant Bylaws provisions regarding the
requirements for making stockholder proposals and nominating
director candidates. Our Bylaws also are available on our investor
relations website at www.hp.com/investor/home.
37. Who can help answer my questions?
If you have any questions about the annual meeting or how to vote
or revoke your proxy, you should contact our proxy solicitor:
Innisfree M&A Incorporated
501 Madison Avenue, 20th Floor
New York, New York 10022
Stockholders: (877) 750-5838 (U.S. and Canada)
(412) 232-3651 (International)
Banks and brokers (call collect):
(212) 750-5833
66
www.hpannualmeeting.com
Financial Report20163 UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended October 31, 2016
Or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from
to
Commission file number 1-4423
HP INC.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of incorporation or organization)
94-1081436
(I.R.S. employer identification no.)
1501 Page Mill Road, Palo Alto, California
(Address of principal executive offices)
94304
(Zip code)
Registrant’s telephone number, including area code: (650) 857-1501
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Name of each exchange on which registered
Common stock, par value $0.01 per share
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer as defined in Rule 405 of the Securities Act. Yes No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past
90 days. Yes No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit
and post such files). Yes No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of
registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions
of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
Non-accelerated filer
(Do not check if a smaller reporting company)
Accelerated filer
Smaller reporting company
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes No
The aggregate market value of the registrant’s common stock held by non-affiliates was $20,976,115,846 based on the last sale price of common stock on
April 30, 2016.
The number of shares of HP Inc. common stock outstanding as of November 30, 2016 was 1,705,451,042 shares.
DOCUMENT DESCRIPTION
Portions of the Registrant’s proxy statement related to its 2016 Annual Meeting of Stockholders to be filed pursuant to Regulation 14A within
120 days after Registrant’s fiscal year end of October 31, 2016 are incorporated by reference into Part III of this Report.
10-K PART
III
DOCUMENTS INCORPORATED BY REFERENCE
HP INC. AND SUBSIDIARIES
FORM 10-K
FOR THE FISCAL YEAR ENDED OCTOBER 31, 2016
TABLE OF CONTENTS
Forward-Looking Statements
PART I
Item 1.
Business
Item 1A.
Risk Factors
Item 1B.
Unresolved Staff Comments
Item 2.
Properties
Item 3.
Legal Proceedings
Mine Safety Disclosures
Item 4.
PART II
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Item 6.
Selected Financial Data
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7A.
Quantitative and Qualitative Disclosures about Market Risk
Item 8.
Financial Statements and Supplementary Data
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A.
Controls and Procedures
Item 9B.
Other Information
PART III
Item 10.
Directors, Executive Officers and Corporate Governance
Item 11.
Executive Compensation
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13.
Certain Relationships and Related Transactions, and Director Independence
Item 14.
Principal Accounting Fees and Services
PART IV
Item 15.
Exhibits and Financial Statement Schedules
1
1
1
8
20
21
21
21
22
22
23
25
43
44
112
113
113
114
114
114
114
114
114
115
115
In this report on Form 10-K, for all periods presented, “we”, “us”, “our”, “company”, “HP” and “HP Inc.” refer to HP Inc. and subsidiaries
(formerly Hewlett-Packard Company).
iv
Forward-Looking Statements
This Annual Report on Form 10-K, including “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in
Item 7, contains forward-looking statements that involve risks, uncertainties and assumptions. If the risks or uncertainties ever materialize
or the assumptions prove incorrect, the results of HP Inc. and its consolidated subsidiaries (“HP”) may differ materially from those expressed
or implied by such forward-looking statements and assumptions. All statements other than statements of historical fact are statements that
could be deemed forward-looking statements, including but not limited to any projections of net revenue, margins, expenses, effective tax
rates, net earnings, net earnings per share, cash flows, benefit plan funding, deferred tax assets, share repurchases, currency exchange rates
or other financial items; any projections of the amount, timing or impact of cost savings or restructuring and other charges; any statements
of the plans, strategies and objectives of management for future operations, including, the execution of restructuring plans and any resulting
cost savings, net revenue or profitability improvements; any statements concerning the expected development, performance, market share
or competitive performance relating to products or services; any statements regarding current or future macroeconomic trends or events
and the impact of those trends and events on HP and its financial performance; any statements regarding pending investigations, claims or
disputes; any statements of expectation or belief, including with respect to the timing and expected benefits of acquisitions and other business
combination and investment transactions; and any statements of assumptions underlying any of the foregoing. Risks, uncertainties and
assumptions include the need to address the many challenges facing HP’s businesses; the competitive pressures faced by HP’s businesses;
risks associated with executing HP’s strategy; the impact of macroeconomic and geopolitical trends and events; the need to manage third-
party suppliers and the distribution of HP’s products and the delivery of HP’s services effectively; the protection of HP’s intellectual property
assets, including intellectual property licensed from third parties; risks associated with HP’s international operations; the development and
transition of new products and services and the enhancement of existing products and services to meet customer needs and respond to
emerging technological trends; the execution and performance of contracts by HP and its suppliers, customers, clients and partners; the hiring
and retention of key employees; integration and other risks associated with business combination and investment transactions; the results of
the restructuring plans, including estimates and assumptions related to the cost (including any possible disruption of HP’s business) and the
anticipated benefits of the restructuring plans; the resolution of pending investigations, claims and disputes; and other risks that are described
herein, including but not limited to the items discussed in “Risk Factors” in Item 1A of Part I of this report and that are otherwise described or
updated from time to time in HP’s other filings with the Securities and Exchange Commission (“the SEC”). HP assumes no obligation and does
not intend to update these forward-looking statements.
PART I
ITEM 1.
BUSINESS.
BUSINESS OVERVIEW
We are a leading global provider of products, technologies,
software, solutions and services to individual consumers, small- and
medium-sized businesses (“SMBs”) and large enterprises, including
customers in the government, health and education sectors.
HP was incorporated in 1947 under the laws of the state of
California as the successor to a partnership founded in 1939 by
William R. Hewlett and David Packard. Effective in May 1998, we
changed our state of incorporation from California to Delaware.
HP INC. SEPARATION TRANSACTION
On November 1, 2015 (the “Distribution Date”), we completed
the separation of Hewlett Packard Enterprise Company (“Hewlett
Packard Enterprise”), Hewlett-Packard Company’s former enterprise
financing
infrastructure, software, services and
technology
businesses (the “Separation”). In connection with the Separation,
Hewlett-Packard Company changed its name to HP Inc. (“HP”).
On the Distribution Date, each of our stockholders of record as
of the close of business on October 21, 2015 (the “Record Date”)
received one share of Hewlett Packard Enterprise common stock for
every one share of our common stock held as of the Record Date.
We distributed a total of approximately 1.8 billion shares of Hewlett
Packard Enterprise common stock to our stockholders. Hewlett
Packard Enterprise is an independent public company trading on the
New York Stock Exchange (“NYSE”) under the symbol “HPE”. After
the Separation, we do not beneficially own any shares of Hewlett
Packard Enterprise common stock.
In connection with the Separation, we and Hewlett Packard Enterprise
have entered into a separation and distribution agreement as well
as various other agreements that provide a framework for the
relationships between the parties going forward, including among
others a tax matters agreement, an employee matters agreement,
a transition service agreement, a real estate matters agreement,
a master commercial agreement and an information technology
service agreement.
2016 Form 10-K
I 1
HP PRODUCTS AND SERVICES; SEGMENT INFORMATION
We are a leading global provider of personal computing and
other access devices, imaging and printing products, and related
individual
technologies, solutions and services. We sell to
large
consumers, small- and medium-sized businesses and
enterprises, including customers in the government, health and
education sectors. We have three segments for financial reporting
purposes: Personal Systems, Printing and Corporate Investments.
The Personal Systems segment offers Commercial personal
computers (“PCs”), Consumer PCs, workstations, thin clients,
Commercial tablets and mobility devices, retail point-of-sale (“POS”)
systems, displays and other related accessories, software, support,
and services for the commercial and consumer markets. The Printing
segment provides consumer and commercial printer hardware,
supplies, media, solutions and services, as well as scanning devices.
Corporate Investments includes HP Labs and certain business
incubation projects.
In each of the past three fiscal years, notebook PCs, printing supplies,
printing Commercial Hardware and desktop PCs each accounted for
more than 10% of our consolidated net revenue.
A summary of our net revenue, earnings from operations and assets
for our segments can be found in Note 3, “Segment Information”
to the Consolidated Financial Statements in Item 8, which is
incorporated herein by reference. A discussion of factors potentially
affecting our operations is set forth in “Risk Factors” in Item 1A,
which is incorporated herein by reference.
PERSONAL SYSTEMS
Personal Systems provides Commercial PCs, Consumer PCs,
workstations, thin clients, Commercial tablets and mobility
devices, retail POS systems, displays and other related accessories,
software, support and services for the commercial and consumer
markets. We group Commercial notebooks, Commercial desktops,
Commercial services, Commercial tablets and mobility devices,
Commercial detachables, workstations, retail POS systems and thin
clients into Commercial clients and Consumer notebooks, Consumer
desktops, Consumer services and Consumer detachables into
Consumer clients when describing performance in these markets.
Both Commercial and Consumer PCs and Commercial tablets and
mobility devices are based predominately on Microsoft Windows
operating systems and use processors from Intel Corporation
(“Intel”) and Advanced Micro Devices, Inc. (“AMD”). Personal Systems
also maintains a multi-operating system, multi-architecture
strategy using the Google Chrome and Android operating systems
among others for notebooks and tablets.
Commercial PCs are optimized for use by customers including
enterprise and SMB customers, with a focus on robust designs,
security, serviceability, connectivity, reliability and manageability in
networked environments. Commercial PCs include the HP ProBook
and HP EliteBook lines of notebooks and hybrids (detachable tablets),
the HP Pro and HP Elite lines of business desktops and all-in-ones,
retail POS systems, HP Thin Clients, HP ElitePad, HP Pro Tablet PCs
and HP Chromebook. Commercial PCs also include workstations that
are designed and optimized for high-performance and demanding
application environments including Z desktop workstations, Z all-
in-ones and Z mobile workstations. Additionally, we offer a range
of services and solutions to enterprise and SMB customers to help
them manage the lifecycle of their PC and mobility installed base.
Consumer PCs are notebooks, desktops and hybrids that
are optimized for consumer usage, focusing on multi-media
consumption, online browsing and light productivity and include
the HP Spectre, HP Envy, HP Pavilion, HP Chromebook, Omen by HP,
hybrids and all-in-one desktops.
PRINTING
Printing provides consumer and commercial printer hardware,
supplies, media, solutions and services, as well as scanning devices.
Printing is also focused on imaging solutions in the commercial
markets. HP groups LaserJet, Graphics and PageWide printers
into Commercial Hardware and Consumer and Inkjet printers
into Consumer Hardware when describing performance in these
markets. Described below are our global business capabilities
within Printing.
LaserJet and Enterprise Solutions delivers our LaserJet printers,
supplies and solutions to SMBs and large enterprises. We go to
market through our extensive channel network and directly with
HP sales. Ongoing key initiatives include design and deployment of
A3 products and solutions for the copier and multifunction printer
market, printer security solutions, PageWide Enterprise solutions
and award-winning JetIntelligence products.
Inkjet and Printing Solutions delivers our consumer, SMB and
PageWide Inkjet solutions (hardware, supplies, media, and web-
connected hardware and services). Ongoing initiatives and programs
such as Instant Ink and newer initiatives such as Continuous Ink
Supply System provide innovative printing solutions to consumers
and SMBs.
Graphics Solutions delivers large format printers (DesignJet, Large
Format Production and Scitex Industrial), specialty printing, digital
press solutions (Indigo and PageWide Presses), supplies and services
to print service providers and design and rendering customers.
Print Solutions provides end-to-end services, as well as core
platforms to develop and deploy services across printing systems.
HP’s focus includes driving customer value through managed
print services and providing support solutions for new and
existing customers.
3D Printing delivers HP’s Multi-Jet Fusion 3D Printing Solution
designed for prototyping and production of functional parts and
functioning on an open platform facilitating the development of
new 3D printing materials.
CORPORATE INVESTMENTS
Corporate Investments includes HP Labs and certain business
incubation projects.
2 I
2016 Form 10-K
SALES, MARKETING AND DISTRIBUTION
We manage our business and report our financial results based
on the business segments described above. Our customers are
organized by consumer and commercial groups, and purchases of
HP products, solutions and services may be fulfilled directly by HP
or indirectly through a variety of partners, including:
• retailers that sell our products to the public through their own
physical or Internet stores;
• resellers that sell our products and services, frequently with
their own value-added products or services, to targeted
customer groups;
• distribution partners that supply our solutions to resellers; and
• system integrators and other advisory firms that provide
various levels of management and IT consulting, including
some systems integration work, and typically partner with
us on client solutions that require our unique products
and services.
MANUFACTURING AND MATERIALS
We utilize a significant number of outsourced manufacturers
(“OMs”) around the world to manufacture HP-designed products.
The use of OMs is intended to generate cost efficiencies and reduce
time to market for HP-designed products. We use multiple OMs to
maintain flexibility in our supply chain and manufacturing processes.
In some circumstances, third-party suppliers produce products that
we purchase and resell under the HP brand. In addition to our use
of OMs, we currently manufacture a limited number of finished
products from components and subassemblies that we acquire
from a wide range of vendors.
We utilize two primary methods of fulfilling demand for products:
building products to order and configuring products to order.
We build products to order to maximize manufacturing and
logistics efficiencies by producing high volumes of basic product
configurations. Alternatively, configuring products to order enables
units to match a customer’s particular hardware and software
inventory management and
customization requirements. Our
distribution practices in both building products to order and
configuring products to order seek to minimize inventory holding
periods by taking delivery of the inventory and manufacturing
shortly before the sale or distribution of products to our customers.
We purchase materials, supplies and product subassemblies from
a substantial number of vendors. For most of our products, we
have existing alternate sources of supply or such alternate sources
of supply are readily available. However, we do rely on sole sources
for laser printer engines, LaserJet supplies, certain customized
parts and parts for products with short life cycles (although some
of these sources have operations in multiple locations in the event
of a disruption). For instance, we source laser printer engines and
laser toner cartridges from Canon. Any non-renewal, or limitation
or reduction of the scope of our agreement with Canon could
adversely affect our net revenue from LaserJet products; however,
we have a long-standing business relationship with Canon and do
not anticipate non-renewal of this agreement.
The mix of our business conducted by direct sales or channel differs
substantially by business and region. We believe that customer
buying patterns and different regional market conditions require us
to tailor our sales, marketing and distribution efforts accordingly.
We are focused on driving the depth and breadth of our coverage,
in addition to identifying efficiencies and productivity gains, in both
our direct and indirect businesses. While each of our key business
segments manage the execution of its own go-to-market and
distribution strategy, our business segments also collaborate to
ensure strategic and process alignment where appropriate. For
example, we typically assign an account manager to manage
relationships across our business with large enterprise customers.
The account manager is supported by a team of specialists with
product and services expertise. For other customers and for
consumers, we typically manage direct online sales as well as
channel relationships with retailers, while our business segments
collaborate to manage relationships with commercial resellers
targeting SMBs where appropriate.
We are dependent upon Intel and AMD as suppliers of x86 processors
and Microsoft for various software products; however, we believe
that disruptions with these suppliers would result in industry-
wide ramifications and therefore would not disproportionately
disadvantage us relative to our competitors. See “Risk Factors—
We depend on third-party suppliers, and our financial results could
suffer if we fail to manage our suppliers effectively,” in Item 1A,
which is incorporated herein by reference.
Like other participants in the information technology (“IT”) industry,
we ordinarily acquire materials and components through a
combination of blanket and scheduled purchase orders to support
our demand requirements for periods averaging 90 to 120 days.
From time to time, we may experience significant price volatility
or supply constraints for certain components that are not available
from multiple sources. We also may acquire component inventory
in anticipation of supply constraints or enter into longer-term
pricing commitments with vendors to improve the priority, price
and availability of supplies. See “Risk Factors—We depend on third-
party suppliers, and our financial results could suffer if we fail to
manage our suppliers effectively,” in Item 1A, which is incorporated
herein by reference.
Sustainability also plays a role in the manufacturing and sourcing
of materials and components for our products. Some customer
segments expect that our products are made in an ethical and
sustainable manner, which we strive to ensure through our
sustainability programs. We have committed to building an efficient
and sustainable supplier network, and we collaborate with our
suppliers to improve their labor practices and working conditions,
and to reduce the environmental impact of their operations. These
actions, together with our broader sustainability program, help us
in our effort to meet customer sustainability requirements and
comply with regulations, for example, regarding supplier labor
practices and conflict minerals disclosure. For more information on
our sustainability goals, programs, and performance, we refer you
to our annual sustainability report, available on our website (which
is not incorporated by reference herein).
2016 Form 10-K
I 3
INTERNATIONAL
Our products and services are available worldwide. We believe this
geographic diversity allows us to meet demand on a worldwide basis
for both consumer and enterprise customers, draws on business
and technical expertise from a worldwide workforce, provides
stability to our operations, provides revenue streams that may
offset geographic economic trends and offers us an opportunity to
access new markets for maturing products. In addition, we believe
that future growth is dependent in part on our ability to develop
products and sales models that target developing countries. In this
regard, we believe that our broad geographic presence gives us a
solid base on which to build such future growth.
A summary of our domestic and international net revenue and net
property, plant and equipment is set forth in Note 3, “Segment
Information” to the Consolidated Financial Statements in Item 8, which
is incorporated herein by reference. Approximately 63% of our overall
net revenue in fiscal year 2016 came from outside the United States.
For a discussion of risks attendant to HP’s international operations,
see “Risk Factors—Due to the international nature of our business,
political or economic changes or other factors could harm our
business and financial performance,” in Item 1A, “Quantitative and
Qualitative Disclosure about Market Risk,” in Item 7A and Note 12,
“Borrowings” to the Consolidated Financial Statements in Item 8,
which are incorporated herein by reference.
RESEARCH AND DEVELOPMENT
Innovation is a key element of our culture. Our development efforts
are focused on designing and developing products, services and
solutions that anticipate customers’ changing needs and desires,
and emerging technological trends. Our efforts also are focused
on identifying the areas where we believe we can make a unique
contribution and the areas where partnering with other leading
technology companies will leverage our cost structure and maximize
our customers’ experiences.
HP Labs, together with the various research and development
groups within our business segments, is responsible for our
research and development efforts. HP Labs is part of our Corporate
Investments segment.
Expenditures for research and development were $1.2 billion in fiscal
year 2016, $1.2 billion in fiscal year 2015 and $1.3 billion in fiscal
year 2014. We anticipate that we will continue to have significant
research and development expenditures in the future to support the
design and development of innovative, high-quality products and
services to maintain and enhance our competitive position.
For a discussion of risks attendant to our research and development
activities, see “Risk Factors—If we cannot successfully execute our
go-to-market strategy and continue to develop, manufacture and
market innovative products and services, our business and financial
performance may suffer,” in Item 1A, which is incorporated herein
by reference.
PATENTS
Our general policy has been to seek patent protection for those
inventions likely to be incorporated into our products and services or
where obtaining such proprietary rights will improve our competitive
position. At October 31, 2016, our worldwide patent portfolio
included over 18,000 patents.
Patents generally have a term of twenty years from the date they are
filed. As our patent portfolio has been built over time, the remaining
terms of the individual patents across our patent portfolio vary.
We believe that our patents and patent applications are important
for maintaining the competitive differentiation of our products
and services, enhancing our freedom of action to sell our products
and services in markets in which we choose to participate, and
maximizing our return on research and development investments.
No single patent is in itself essential to HP as a whole or to any of
HP’s business segments.
BACKLOG
In addition to developing our patent portfolio, we license intellectual
property (“IP”) from third parties as we deem appropriate. We have
also granted and continue to grant to others licenses, and other
rights, under our patents when we consider these arrangements to
be in our interest. These license arrangements include a number of
cross-licenses with third parties.
For a discussion of risks attendant to IP rights, see “Risk Factors—
Our financial performance may suffer if we cannot continue to
develop, license or enforce the intellectual property rights on which
our businesses depend,” in Item 1A, which is incorporated herein
by reference.
We believe that backlog is not a meaningful indicator of future
business prospects due to our diverse products and services
portfolio, including the large volume of products delivered from
finished goods or channel partner inventories and the shortening of
product life cycles. Therefore, we believe that backlog information is
not material to an understanding of our overall business.
4 I
2016 Form 10-K
SEASONALITY
General economic conditions have an impact on our business and
financial results. From time to time, the markets in which we sell our
products and services experience weak economic conditions that
may negatively affect sales. We experience some seasonal trends in
the sale of our products and services. For example, European sales
are often weaker in the summer months and consumer sales are
often stronger in the fourth calendar quarter. Demand during the
spring and early summer months also may be adversely impacted
by market anticipation of seasonal trends. See “Risk Factors—Our
uneven sales cycle makes planning and inventory management
difficult and future financial results less predictable,” in Item 1A,
which is incorporated herein by reference.
COMPETITION
We encounter strong competition in all areas of our business
activity. We compete on the basis of technology, performance, price,
quality, reliability, brand, reputation, distribution, range of products
and services, ease of use of our products, account relationships,
customer training, service and support, security, availability of
application software and internet infrastructure offerings, and our
sustainability performance.
The markets for each of our key business segments are characterized
by strong competition among major corporations with long-
established positions and a large number of new and rapidly growing
firms. Most product life cycles are short, and to remain competitive
we must develop new products and services, periodically enhance
our existing products and services and compete effectively on the
basis of the factors listed above. In addition, we compete with many
of our current and potential partners, including OEMs that design,
manufacture and often market their products under their own brand
names. Our successful management of these competitive partner
relationships will be critical to our future success. Moreover, we
anticipate that we will have to continue to adjust prices on many of
our products and services to stay competitive.
We have a broad technology portfolio spanning personal computing
and other access devices, imaging and printing-related products
and services. We are the leader or among the leaders in each of our
key business segments.
The competitive environment in which each key segment operates
is described below:
Personal Systems. The markets
in which Personal Systems
operates are highly competitive and are characterized by price
competition. The decline in the PC market has moderated, though
the PC market still faces uncertainty. Our primary competitors
are Lenovo Group Limited, Dell Inc., Acer Inc., ASUSTeK Computer
Inc., Apple Inc., Toshiba Corporation and Samsung Electronics Co.,
Ltd. In particular regions, we also experience competition from
local companies and from generically-branded or “white box”
manufacturers. Our competitive advantages include our broad
product portfolio, our innovation and research and development
capabilities, our brand and procurement leverage, our ability to
cross-sell our portfolio of offerings, our extensive service and
support offerings and the accessibility of our products through
a broad-based distribution strategy from retail and commercial
channels to direct sales.
Printing. The markets for printer hardware and associated supplies
are highly competitive. Printing’s key customer segments each face
competitive market pressures in pricing and the introduction of new
products. Our primary competitors include Canon Inc., Lexmark
International, Inc., Xerox Corporation Ltd., Seiko Epson Corporation,
The Ricoh Company Ltd. and Brother Industries, Ltd. In addition,
independent suppliers offer refill and remanufactured alternatives
for HP original inkjet and toner supplies, which are often available
for lower prices but generally offer lower print quality and reliability.
Other competitors also have developed and marketed new
compatible cartridges for HP’s laser and inkjet products, particularly
outside of the United States where IP protection is inadequate or
ineffective. Our competitive advantages include our comprehensive
solutions for the home, office and publishing environments, our
innovation and research and development capabilities, our brand,
and the accessibility of our products through a broad-based
distribution strategy from retail and commercial channels to
direct sales.
For a discussion of risks attendant to these competitive factors,
see “Risk Factors—We operate in an intensely competitive industry
and competitive pressures could harm our business and financial
performance,” in Item 1A, which is incorporated herein by reference.
SUSTAINABILITY
Our approach to sustainability covers a broad range of sustainability
issues across three pillars: environment, society and integrity. We
prioritize issues to address based on their relative importance to our
business success and sustainable development.
Environment. We are focused on reinventing the way that
products are designed, manufactured, used and recovered as we
shift our business model and operations toward a materials and
energy-efficient circular economy that promotes greater resource
productivity and aims to reduce waste. Working with our supply
chain partners, we strive to reduce the environmental impact of our
products at every stage of the value chain.
Society. We strive to empower workers and ensure protections
for the people who make our products. Our agreements with our
suppliers require that workers receive fair treatment, safe working
conditions and freely chosen employment. We work to enforce
these requirements with suppliers through proactive engagement
and training, and corrective action plans when needed.
Integrity. We are committed to acting with integrity, fairness, and
accountability, which we believe are fundamental to an inclusive
society and a thriving business. We also expect ethical behavior by
our employees, partners and suppliers, and we have structures,
programs, and processes in place to safeguard human rights across
our value chain.
2016 Form 10-K
I 5
Goals. Our current long-term sustainability goals are:
• Commit to 100% renewable electricity in our global operations
with 40% by 2020;
• Achieve zero deforestation associated with HP brand paper
and paper-based product packaging (which is the box that
comes with the product and all paper inside the box) by
2020; and
• Reduce the greenhouse gas emissions intensity of HP’s
product portfolio (which refers to tonnes CO2e/net revenue
arising from the use of more than 95% of HP product units
shipped each year) by 25% by 2020, compared to 2010.
For more
information on our sustainability goals, programs,
and performance, we refer you to our annual sustainability
report, available on our website (which is not incorporated by
reference herein).
ENVIRONMENT
Our operations are subject to regulation under various federal, state,
local and foreign laws concerning the environment, including laws
addressing the discharge of pollutants into the air and water, the
management and disposal of hazardous substances and wastes,
and the cleanup of contaminated sites. We could incur substantial
costs, including cleanup costs, fines and civil or criminal sanctions,
and third-party damage or personal injury claims, if we were to
violate or become liable under environmental laws.
Many of our products are subject to various federal, state, local and
foreign laws governing chemical substances in products and their
safe use, including laws regulating the manufacture and distribution
of chemical substances and laws restricting the presence of certain
substances in electronics products. Most of our products also are
subject to requirements applicable to their energy consumption.
In addition, we face increasing complexity in our product design
and procurement operations as we adjust to new and future
requirements relating to the chemical and materials composition of
our products, and their safe use.
We proactively evaluate and at times replace materials in our
products and supply chain, taking into account published lists of
substances of concern, new and upcoming legal requirements,
customer preferences and scientific analysis that
indicates a
potential impact to human health or the environment.
We are also subject to legislation in an increasing number of
jurisdictions that makes producers of electrical goods, including
computers and printers, financially responsible for specified
collection, recycling, treatment and disposal of past and future
covered products (sometimes referred to as “product take-back
legislation”). We intend for our products to be easily reused and
re-cycled, and we provide many of our customers with reuse and
recycling programs.
In the event our products become non-compliant with these laws,
our products could be restricted from entering certain jurisdictions
and we could face other sanctions, including fines.
Our operations, and ultimately our products, are expected to
become increasingly subject to federal, state, local and foreign laws,
regulations and international treaties relating to climate change. We
strive to continually improve the energy efficiency of our product
portfolio and deliver more cost-effective and less greenhouse gas-
intensive technology solutions to our customers. As these and other
new laws, regulations, treaties and similar initiatives and programs
are adopted and implemented throughout the world, we will be
required to comply or potentially face market access limitations or
other sanctions, including fines. However, we believe that technology
will be fundamental to finding solutions to achieve compliance with
and manage those requirements, and we are collaborating with
industry, business groups and governments to find and promote
ways that HP technology can be used to address climate change and
to facilitate compliance with related laws, regulations and treaties.
We are committed to maintaining compliance with all environmental
laws applicable to our operations, products and services and
to reducing our environmental impact across all aspects of our
business. We meet this commitment with our sustainability policy,
our comprehensive environmental, health and safety policy, strict
environmental management of our operations and worldwide
environmental programs and services.
A liability for environmental remediation and other environmental
costs is accrued when we consider it probable that a liability has
been incurred and the amount of loss can be reasonably estimated.
Environmental costs and accruals are presently not material to our
operations, cash flows or financial position. Although there is no
assurance that existing or future environmental laws applicable to
our operations or products will not have a material adverse effect
on our operations, cash flows or financial condition, we do not
currently anticipate material capital expenditures for environmental
control facilities.
For a discussion of risks attendant to these environmental factors,
see “Risk Factors—Our business is subject to various federal, state,
local and foreign laws and regulations that could result in costs or
other sanctions that adversely affect our business and results of
operations,” in Item 1A, which is incorporated herein by reference.
In addition, for a discussion of our environmental contingencies see
Note 15, “Litigation and Contingencies” to the Consolidated Financial
Statements in Item 8, which is also incorporated herein by reference.
6 I
2016 Form 10-K
EXECUTIVE OFFICERS
The following are our current executive officers:
Ron Coughlin; age 50; President, Personal Systems
Mr. Coughlin has served as President, Personal Systems since
November 2015. Mr. Coughlin joined Hewlett-Packard Company
from PepsiCo in June 2007 as the senior vice president of the Imaging
and Printing Group Worldwide Strategy and Marketing team. In
2010, Mr. Coughlin transitioned to lead the LaserJet and Enterprise
Solutions global business unit at Hewlett-Packard Company and
later ran Consumer Personal Systems at Hewlett-Packard Company.
Jon Flaxman; age 59; Chief Operating Officer
Mr. Flaxman has served as Chief Operating Officer since November
2015. Previously, Mr. Flaxman served as Senior Vice President and
Chief Financial Officer for Hewlett-Packard Company’s Printing
and Personal Systems Group. Prior to such role, he was Senior
Vice President of Finance for Hewlett-Packard Company’s Imaging
and Printing Group for four years. From March 2007 to November
2008, Mr. Flaxman was Chief Administrative Officer and Executive
Vice President of Hewlett-Packard Company. Mr. Flaxman joined
Hewlett-Packard Company in 1981.
Tracy S. Keogh; age 55; Chief Human Resources Officer
Ms. Keogh has served as Chief Human Resources Officer since
November 2015. Previously, Ms. Keogh served as Executive Vice
President, Human Resources of Hewlett-Packard Company from
April 2011 to November 2015. Prior to joining Hewlett-Packard
Company, Ms. Keogh served as Senior Vice President of Human
Resources at Hewitt Associates, a provider of human resources
consulting services, from May 2007 until March 2011.
Catherine A. Lesjak; age 57; Chief Financial Officer
Ms. Lesjak has served as Chief Financial Officer since November
2015. Previously, Ms. Lesjak served as Executive Vice President
and Chief Financial Officer of Hewlett-Packard Company from
2007 to November 2015. Ms. Lesjak also served as Hewlett-
Packard Company’s interim Chief Executive Officer from August
2010 until November 2010. She also serves as a director of
SunPower Corporation.
Enrique Lores; age 51; President, Printing, Solutions
and Services
Mr. Lores has served as President, Printing, Solutions and Services
since November 2015. Throughout his 26-year tenure with Hewlett-
Packard Company, Mr. Lores held leadership positions across the
organization, most recently leading the Separation Management
Office for HP Inc. Previously, Mr. Lores was the Senior Vice President
and General Manager for Business Personal Systems. Before his
Business Personal Systems role, Mr. Lores was Senior Vice President
of Customer Support and Services.
Marie Myers; age 48; Global Controller and Head of
Finance Services
Ms. Myers has served as Global Controller and Head of Finance
Services since November 2015. Prior to that from October 2014 to
October 2015, Ms. Myers was in the Separation Management Office
at Hewlett-Packard Company and held other key leadership roles
at Hewlett-Packard Company, including Vice President for PPS HQ
and Finance from May 2012 to October 2015 and Vice President of
Finance for PSG Americas from March 2010 to May 2012.
Kim Rivera; age 48; Chief Legal Officer and General Counsel
Ms. Rivera has served as Chief Legal Officer and General Counsel
since November 2015. Prior to joining us, at DaVita Health Care
Partners she served as the Chief Legal Officer from July 2011
to October 2015, as Corporate Secretary from January 2010 to
December 2013 and as Vice President and General Counsel from
January 2010 to July 2011. From February 2006 to November 2009,
she served as Vice President and Associate General Counsel at The
Clorox Company. Prior to that, Ms. Rivera served as Vice President
Law and Chief Litigation Counsel to Rockwell Automation as well as
General Counsel for its Automation Controls and Information Group.
Dion J. Weisler; age 49; President and Chief Executive Officer
Mr. Weisler has served as President and Chief Executive Officer since
November 2015. Previously, he served as Executive Vice President
of the Printing and Personal Systems Group of Hewlett-Packard
Company from June 2013 to November 2015 and as Senior Vice
President and Managing Director, Printing and Personal Systems,
Asia Pacific and Japan from January 2012 to June 2013. Prior to
joining Hewlett-Packard Company, he was Vice President and Chief
Operating Officer of the Product and Mobile Internet Digital Home
Groups at Lenovo Group Ltd., a technology company, from January
2008 to December 2011.
EMPLOYEES
We had approximately 49,000 employees worldwide as of October 31, 2016.
2016 Form 10-K
I 7
AVAILABLE INFORMATION
Our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q,
Current Reports on Form 8-K and amendments to reports filed or
furnished pursuant to Sections 13(a) and 15(d) of the Securities
Exchange Act of 1934, as amended, are available on our website
at http://www.hp.com/investor/home, as soon as reasonably
practicable after HP electronically files such reports with, or furnishes
those reports to, the Securities and Exchange Commission. HP’s
Corporate Governance Guidelines, Board of Directors’ committee
charters (including the charters of the Audit Committee, Finance,
Investment and Technology Committee, HR and Compensation
ADDITIONAL INFORMATION
Committee, and Nominating, Governance and Social Responsibility
Committee) and code of ethics entitled “Standards of Business
Conduct” (none of which are incorporated by reference herein) are
also available at that same location on our website. Stockholders
may request free copies of these documents from:
HP Inc.
Attention: Investor Relations
1501 Page Mill Road,
Palo Alto, CA 94304
http://www.hp.com/investor/informationrequest
Microsoft® and Windows® are either registered trademarks
or trademarks of Microsoft Corporation in the United States
and/or other countries. Intel® is a trademark of Intel Corporation
in the United States and/or other countries. AMD is a trademark of
Advanced Micro Devices, Inc. Google is a registered trademark of
Google Inc. Android and Chrome are trademarks of Google Inc. All
other trademarks are the property of their respective owners.
ITEM 1A.
RISK FACTORS.
The following discussion of risk factors contains forward-looking
statements. These risk factors may be important for understanding
any statement in this Form 10-K or elsewhere. The following
information should be read in conjunction with Part II, Item 7,
“Management’s Discussion and Analysis of Financial Condition and
Results of Operation” and the Consolidated Financial Statements
and related notes in Part II, Item 8, “Financial Statements and
Supplementary Data” of this Form 10-K.
RISKS RELATED TO OUR BUSINESS
If we are unsuccessful at addressing our business challenges,
our business and results of operations may be adversely
affected and our ability to invest in and grow our business
could be limited.
We are in the process of addressing many challenges facing
our business. One set of challenges relates to dynamic and
accelerating market trends, such as the declines in the PC market
and home printing. A second set of challenges relates to changes
in the competitive landscape. Our primary competitors are exerting
increased 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. For example, we may
fail to develop innovative products and services, maintain the
manufacturing quality of our products, manage our distribution
network or successfully market new products and services, any of
which could adversely affect our business and financial condition.
In addition, we are facing a series of significant macroeconomic
challenges, including weakness across many geographic regions,
particularly in emerging markets and Europe, and certain countries
and businesses in Asia. We may experience delays in the anticipated
timing of activities related to our efforts to address these challenges
and higher than expected or unanticipated execution costs. In
addition, we are vulnerable to increased risks associated with our
8 I
2016 Form 10-K
Because of the following factors, as well as other variables affecting
our results of operations, past financial performance may not be a
reliable indicator of future performance, and historical trends should
not be used to anticipate results or trends in future periods.
efforts to address these challenges given the markets in which we
compete, the broad range of geographic regions in which we and
our customers and partners operate, and the ongoing integration
of acquired businesses. If we do not succeed in these efforts, or if
these efforts are more costly or time-consuming than expected, our
business and results of operations may be adversely affected, which
could limit our ability to invest in and grow our business.
We operate in an intensely competitive industry and competitive
pressures could harm our business and financial performance.
We encounter aggressive competition from numerous and varied
competitors in all areas of our business, and our competitors have
targeted and are expected to continue targeting our key market
segments. We compete on the basis of our technology, innovation,
performance, price, quality, reliability, brand, reputation, distribution,
range of products and services, ease of use of our products, account
relationships, customer training, service and support and security.
If our products, services, support and cost structure do not enable
us to compete successfully, our results of operations and business
prospects could be harmed.
We have a large portfolio of products and must allocate our financial,
personnel and other resources across all of our products while
competing with companies that have smaller portfolios or specialize
in one or more of our product lines. As a result, we may invest less
in certain areas of our business than our competitors do, and our
competitors may have greater financial, technical and marketing
resources available to them compared to the resources allocated to
our products and services that compete against their products.
Companies with whom we have alliances in certain areas may be or
may become our competitors in other areas. In addition, companies
with whom we have alliances also may acquire or form alliances with
our competitors, which could reduce their business with us. If we are
unable to effectively manage these complicated relationships with
alliance partners, our business and results of operations could be
adversely affected.
We face aggressive price competition and may have to continue
lowering the prices of many of our products and services to stay
competitive, while at the same time trying to maintain or improve
our revenue and gross margin. In addition, competitors who have
a greater presence in some of the lower-cost markets in which
we compete, or who can obtain better pricing, more favorable
contractual terms and conditions, or more favorable allocations of
products and components during periods of limited supply, may be
able to offer lower prices than we are able to offer. Our cash flows,
results of operations and financial condition may be adversely
affected by these and other industry-wide pricing pressures.
Industry consolidation may also affect competition by creating
larger, more homogeneous and potentially stronger competitors in
the markets in which we operate. Additionally, our competitors may
affect our business by entering into exclusive arrangements with
our existing or potential customers or suppliers.
Because our business model is based on providing innovative and
high-quality products, we may spend a proportionately greater
amount of our revenues on research and development than some
of our competitors. If we cannot proportionately decrease our
cost structure (apart from research and development expenses)
on a timely basis in response to competitive price pressures, our
gross margin and, therefore, our profitability could be adversely
affected. In addition, if our pricing and other facets of our offerings
are not sufficiently competitive, or if there is an adverse reaction
to our product decisions, we may lose market share in certain
areas, which could adversely affect our financial performance and
business prospects.
Even if we are able to maintain or increase market share for a
particular product, its financial performance could decline because
the product is in a maturing industry or market segment or contains
technology that
is becoming obsolete. Financial performance
could decline due to increased competition from other types of
products. For example, growing demand for an increasing array of
mobile computing devices has reduced demand for some of our
existing hardware products. In addition, refill and remanufactured
alternatives for some of our LaserJet toner and inkjet cartridges
compete with our printing supplies business.
If we cannot successfully execute our go-to-market strategy
and continue to develop, manufacture and market innovative
products and services, our business and financial performance
may suffer.
Our strategy is focused on leveraging our existing portfolio of
products and services to meet the demands of a continually
changing technological landscape and to offset certain areas of
industry decline. To successfully execute this strategy, we must
emphasize the aspects of our core business where demand remains
strong, identify and capitalize on natural areas of growth, and
innovate and develop new products and services that will enable us
to expand beyond our existing technology categories. Any failure
to successfully execute this strategy, including any failure to invest
sufficiently in strategic growth areas, could adversely affect our
business, results of operations and financial condition.
The process of developing new high-technology products and
services and enhancing existing products and services is complex,
costly and uncertain, and any failure by us to anticipate customers’
changing needs and emerging technological trends accurately
could significantly harm our market share, results of operations and
financial condition. For example, to offset industry declines in some
of our businesses, we must successfully grow in adjacencies such
as copier printers, maintain our strong position in graphics, develop
and introduce 3D printers and execute on our strategy to grow
commercial mobility by providing specialized products and services
to address the needs of our customers. We must make long-term
investments, develop or acquire and protect appropriate intellectual
property, and commit significant research and development and
other resources before knowing whether our predictions will
accurately reflect customer demand for our products and services.
Any failure to accurately predict technological and business trends,
control research and development costs or execute our innovation
strategy could harm our business and financial performance. Our
research and development initiatives may not be successful in
whole or in part, including research and development projects which
we have prioritized with respect to funding and/or personnel.
Our industry is subject to rapid and substantial innovation and
technological change. Even if we successfully develop new products
and technologies, future products and technologies may eventually
supplant ours if we are unable to keep pace with technological
advances and end-user requirements and preferences and timely
enhance our existing products and technologies or develop new
ones. Our competitors may also create products that replace ours.
As a result, any of our products and technologies may be rendered
obsolete or uneconomical.
After we develop a product, we must be able to manufacture
appropriate volumes quickly while also managing costs and
preserving margins. To accomplish this, we must accurately forecast
volumes, mixes of products and configurations that meet customer
requirements, and we may not succeed at doing so within a given
product’s lifecycle or at all. Any delay in the development, production
or marketing of a new product, service or solution could result in us
not being among the first to market, which could further harm our
competitive position.
If we cannot continue to produce quality products and services,
our reputation, business and financial performance may suffer.
In the course of conducting our business, we must adequately
address quality issues associated with our products and services,
including defects in our engineering, design and manufacturing
processes and unsatisfactory performance under service contracts,
as well as defects in third-party components included in our
products and unsatisfactory performance or even malicious acts
by third-party contractors or subcontractors or their employees.
In order to address quality issues, we work extensively with
our customers and suppliers and engage in product testing to
determine the causes of problems and to develop and implement
appropriate solutions. However, the products and services that we
2016 Form 10-K
I 9
offer are complex, and our regular testing and quality control efforts
may not be effective in controlling or detecting all quality issues or
errors, particularly with respect to faulty components manufactured
by third-parties. If we are unable to determine the cause or find an
appropriate solution to address quality issues with our products,
we may delay shipment to customers, which would delay revenue
recognition and receipt of customer payments and could adversely
affect our net revenue, cash flows and profitability. In addition, after
products are delivered, quality issues may require us to repair or
replace such products. Addressing quality issues can be expensive
and may result in additional warranty, repair, replacement and
other costs, adversely affecting our financial performance. If new
or existing customers have difficulty operating our products or
are dissatisfied with our services, our results of operations could
be adversely affected, and we could face possible claims if we fail
to meet our customers’ expectations. In addition, quality issues
can impair our relationships with new or existing customers and
adversely affect our brand and reputation, which could, in turn,
adversely affect our results of operations.
We are exposed to fluctuations in foreign currency exchange
rates, which could adversely impact our results.
Currencies other than the U.S. dollar, including the euro, the British
pound, Chinese yuan (renminbi) and the Japanese yen, can have an
impact on our results as expressed in U.S. dollars. In particular, the
economic uncertainties relating to European sovereign and other
debt obligations and the related European financial restructuring
efforts may cause the value of the euro to fluctuate. In addition,
the United Kingdom’s June 2016 vote to leave the European
Union (commonly known as “Brexit”) caused significant volatility
in currency exchange rates, especially between the U.S. dollar and
the British pound. Global economic events and uncertainty may
cause currencies to fluctuate and currency volatility contributes
to variations in our sales of products and services in impacted
jurisdictions. For example, in the event that one or more European
countries were to replace the euro with another currency, our
sales into such countries, or into Europe generally, would likely be
adversely affected until stable exchange rates are established.
Accordingly, fluctuations in foreign currency exchange rates, such as
the strengthening of the U.S. dollar against the euro or the British
pound or the weakness of the Japanese yen, could adversely affect
our net revenue growth in future periods. In addition, currency
variations can adversely affect margins on sales of our products
in countries outside of the United States and margins on sales of
products that include components obtained from suppliers located
outside of the United States.
From time to time, we may use forward contracts and options
designated as cash flow hedges to protect against foreign currency
exchange rate risks. The effectiveness of our hedges depends on our
ability to accurately forecast future cash flows, which is particularly
difficult during periods of uncertain demand for our products and
services and highly volatile exchange rates. We may incur significant
losses from our hedging activities due to factors such as demand
volatility and currency variations. In addition, certain or all of our
hedging activities may be ineffective, may expire and not be renewed
or may not offset any or more than a portion of the adverse financial
impact resulting from currency variations. Losses associated with
hedging activities also may impact our revenue, financial condition
and, to a lesser extent, our cost of sales.
10 I
2016 Form 10-K
Recent global, regional and
local economic weakness
and uncertainty could adversely affect our business and
financial performance.
Our business and financial performance depend significantly on
worldwide economic conditions and the demand for technology
products and services in the markets in which we compete. Recent
economic weakness and uncertainty in various markets throughout
the world have resulted, and may result in the future, in decreased
net revenue, gross margin, earnings or growth rates and in increased
expenses and difficulty in managing inventory levels. For example,
we are continuing to experience macroeconomic weakness across
many geographic regions, particularly in the Europe, the Middle East
and Africa region, China and certain other high-growth markets.
Ongoing U.S. federal government spending limits may continue to
reduce demand for our products and services from organizations
that receive funding from the U.S. government, and could negatively
affect macroeconomic conditions in the United States, which could
further reduce demand for our products and services. Brexit and
the uncertainty surrounding the United Kingdom’s exit from the
European Union has also begun to negatively impact markets and
cause weaker macroeconomic conditions that could continue for the
foreseeable future.
Economic weakness and uncertainty may adversely affect demand
for our products and services, may result in increased expenses due
to higher allowances for doubtful accounts and potential goodwill
and asset impairment charges, and may make it more difficult for
us to make accurate forecasts of revenue, gross margin, cash flows
and expenses.
We also have experienced, and may experience in the future, gross
margin declines in certain businesses, reflecting the effect of items
such as competitive pricing pressures and increases in component
and manufacturing costs resulting from higher labor and material
costs borne by our manufacturers and suppliers that, as a result of
competitive pricing pressures or other factors, we are unable to pass
on to our customers. In addition, our business may be disrupted
if we are unable to obtain equipment, parts or components from
our suppliers—and our suppliers from their suppliers—due to
the insolvency of key suppliers or the inability of key suppliers to
obtain credit.
Economic weakness and uncertainty could cause our expenses
to vary materially from our expectations. Any financial turmoil
affecting the banking system and financial markets or any
significant financial services institution failures could negatively
impact our treasury operations, as the financial condition of such
parties may deteriorate rapidly and without notice in times of
market volatility and disruption. Poor financial performance of asset
markets combined with lower interest rates and the adverse effects
of fluctuating currency exchange rates could lead to higher pension
and post-retirement benefit expenses. Interest and other expenses
could vary materially from expectations depending on changes in
interest rates, borrowing costs, currency exchange rates, costs
of hedging activities and the fair value of derivative instruments.
Economic downturns also may lead to future restructuring actions
and associated expenses.
The net revenue and profitability of our operations have
historically varied, which makes our future financial results
less predictable.
Our net revenue, gross margin and profit vary among our diverse
products and services, customer groups and geographic markets
and therefore will likely be different in future periods than our
current results. Our net revenue depends on the overall demand
for our products and services. Delays or reductions in hardware and
related services spending by our customers or potential customers
could have a material adverse effect on demand for our products and
services, which could result in a significant decline in net revenue. In
addition, net revenue declines in some of our businesses may affect
net revenue in our other businesses as we may lose cross-selling
opportunities. Overall gross margins and profitability in any given
period are dependent partially on the product, service, customer and
geographic mix reflected in that period’s net revenue. Competition,
lawsuits, investigations, increases in component and manufacturing
costs that we are unable to pass on to our customers, component
supply disruptions and other risks affecting those businesses
therefore may have a significant impact on our overall gross margin
and profitability. In addition, newer geographic markets may be
relatively less profitable due to our investments associated with
entering those markets and local pricing pressures, and we may have
difficulty establishing and maintaining the operating infrastructure
necessary to support the high growth rate associated with some of
those markets. Market trends, industry shifts, competitive pressures,
commoditization of products, increased component or shipping
costs, regulatory impacts and other factors may result in reductions
in revenue or pressure on gross margins in a given period, which
may lead to adjustments to our operations. Moreover, our efforts to
address the challenges facing our business could increase the level
of variability in our financial results because the rate at which we are
able to realize the benefits from those efforts may vary from period
to period.
If we fail to manage the distribution of our products and
services properly, our business and financial performance
could suffer.
We use a variety of distribution methods to sell our products and
services around the world, including third-party resellers and
distributors and both direct and indirect sales to enterprise accounts
and consumers. Successfully managing the interaction of our direct
and indirect channel efforts to reach various potential customer
segments for our products and services is a complex process.
Moreover, since each distribution method has distinct risks and
gross margins, our failure to implement the most advantageous
balance in the delivery model for our products and services could
adversely affect our net revenue and gross margins and therefore
our profitability.
Our financial results could be materially adversely affected due to
distribution channel conflicts or if the financial conditions of our
channel partners were to weaken. Our results of operations may
be adversely affected by any conflicts that might arise between
our various distribution channels or the loss or deterioration of any
alliance or distribution arrangement or the loss of retail shelf space.
Moreover, some of our wholesale and retail distributors may have
insufficient financial resources and may not be able to withstand
changes in business conditions, including economic weakness,
industry consolidation and market trends. Many of our significant
distributors operate on narrow margins and have been negatively
affected by business pressures in the past. Considerable trade
receivables that are not covered by collateral or credit insurance are
outstanding with our distribution and retail channel partners. Net
revenue from indirect sales could suffer, and we could experience
disruptions in distribution, if our distributors’ financial conditions,
abilities to borrow funds in the credit markets or operations weaken.
Our inventory management is complex, as we continue to sell a
significant mix of products through distributors. We must manage
both owned and channel inventory effectively, particularly with
respect to sales to distributors, which involves forecasting demand
and pricing challenges. Distributors may increase orders during
periods of product shortages, cancel orders if their inventory is too
high or delay orders in anticipation of new products. Distributors also
may adjust their orders in response to the supply of our products
and the products of our competitors and seasonal fluctuations in
end-user demand. Our reliance upon indirect distribution methods
may reduce our visibility into demand and pricing trends and issues,
and therefore make forecasting more difficult. If we have excess
or obsolete inventory, we may have to reduce our prices and write
down inventory. Moreover, our use of indirect distribution channels
may limit our willingness or ability to adjust prices quickly and
otherwise to respond to pricing changes by competitors.
We depend on third-party suppliers, and our financial results
could suffer if we fail to manage our suppliers effectively.
Our operations depend on our ability to anticipate our needs for
components, products and services, as well as our suppliers’ ability
to deliver sufficient quantities of quality components, products
and services at reasonable prices and in time for us to meet critical
schedules for the delivery of our own products and services. Given
the wide variety of systems, products and services that we offer,
the large number of our suppliers and contract manufacturers that
are located around the world, and the long lead times required
to manufacture, assemble and deliver certain components and
products, problems could arise in production, planning and inventory
management that could seriously harm our business. In addition, our
ongoing efforts to optimize the efficiency of our supply chain could
cause supply disruptions and be more expensive, time-consuming
and resource intensive than expected. Furthermore, certain of our
suppliers may decide to discontinue conducting business with us.
Other supplier problems that we could face include component
shortages, excess supply, risks related to the terms of our contracts
with suppliers, risks associated with contingent workers and risks
related to our relationships with single source suppliers, each of
which is described below.
• Component shortages. We may experience a shortage of, or
a delay in receiving, certain components as a result of strong
demand, capacity constraints, supplier financial weaknesses,
the inability of suppliers to borrow funds in the credit markets,
disputes with suppliers (some of whom are also our customers),
disruptions in the operations of component suppliers, other
problems experienced by suppliers or problems faced during
the transition to new suppliers. For example, our PC business
relies heavily upon OMs to manufacture its products and is
therefore dependent upon the continuing operations of those
OMs to fulfill demand for our PC products. We represent a
substantial portion of the business of some of these OMs,
and any changes to the nature or volume of our business
2016 Form 10-K
I 11
transactions with a particular OM could adversely affect the
operations and financial condition of the OM and lead to
shortages or delays in receiving products from that OM. If
shortages or delays persist, the price of certain components
may increase, we may be exposed to quality issues or the
components may not be available at all. We may not be
able to secure enough components at reasonable prices or
of acceptable quality to build products or provide services
in a timely manner in the quantities needed or according to
our specifications. Accordingly, our business and financial
performance could suffer if we lose time-sensitive sales, incur
additional freight costs or are unable to pass on price increases
to our customers. If we cannot adequately address supply
issues, we might have to reengineer some product or service
offerings, which could result in further costs and delays.
• Excess supply. In order to secure components for our products
or services, at times we may make advance payments
to suppliers or enter into non-cancelable commitments
with vendors. In addition, we may purchase components
strategically in advance of demand to take advantage of
favorable pricing or to address concerns about the availability
of future components. If we fail to anticipate customer
demand properly, a temporary oversupply could result in
excess or obsolete components, which could adversely affect
our business and financial performance.
• Contractual terms. As a result of binding long-term price or
purchase commitments with vendors, we may be obligated
to purchase components or services at prices that are higher
than those available in the current market and be limited in
our ability to respond to changing market conditions. If we
commit to purchasing components or services for prices
in excess of the then-current market price, we may be at a
disadvantage to competitors who have access to components
or services at lower prices, our gross margin could suffer,
and we could incur additional charges relating to inventory
obsolescence. In addition, many of our competitors obtain
products or components from the same OMs and suppliers
that we utilize. Our competitors may obtain better pricing,
more favorable contractual terms and conditions, and
more favorable allocations of products and components
during periods of limited supply, and our ability to engage in
relationships with certain OMs and suppliers could be limited.
The practice employed by our PC business of purchasing
product components and transferring those components to its
OMs may create large supplier receivables with the OMs that,
depending on the financial condition of the OMs, may create
collectability risks. In addition, certain of our OMs and suppliers
may decide to discontinue conducting business with us. Any of
these developments could adversely affect our future results
of operations and financial condition.
• Contingent workers. We also rely on third-party suppliers for
the provision of contingent workers, and our failure to manage
our use of such workers effectively could adversely affect our
results of operations. We have been exposed to various legal
claims relating to the status of contingent workers in the past
and could face similar claims in the future. We may be subject
to shortages, oversupply or fixed contractual terms relating
to contingent workers. Our ability to manage the size of,
and costs associated with, the contingent workforce may be
subject to additional constraints imposed by local laws.
• Single-source suppliers. We obtain a significant number of
components from single sources due to technology, availability,
price, quality or other considerations. For example, we rely
on Canon for certain laser printer engines and laser toner
cartridges. We also rely on Intel to provide us with a sufficient
supply of processors for many of our PCs and workstations,
and we rely on AMD to provide us with a sufficient supply of
processors for other products. Some of those processors are
customized for our products. New products that we introduce
may utilize custom components obtained from only one
source initially until we have evaluated whether there is a need
for additional suppliers. Replacing a single-source supplier
could delay production of some products as replacement
suppliers may be subject to capacity constraints or other
output limitations. For some components, such as customized
components and some of the processors that we obtain from
Intel, or the laser printer engines and toner cartridges that we
obtain from Canon, alternative sources either may not exist or
may be unable to produce the quantities of those components
necessary to satisfy our production requirements. In addition,
we sometimes purchase components from single-source
suppliers under short-term agreements that contain favorable
pricing and other terms but that may be unilaterally modified
or terminated by the supplier with limited notice and with
little or no penalty. The performance of such single-source
suppliers under those agreements (and the renewal or
extension of those agreements upon similar terms) may
affect the quality, quantity and price of our components.
The loss of a single-source supplier, the deterioration of our
relationship with a single-source supplier, or any unilateral
modification to the contractual terms under which we are
supplied components by a single source supplier could
adversely affect our business and financial performance.
Business disruptions could seriously harm our future revenue
and financial condition and increase our costs and expenses.
Our worldwide operations could be disrupted by earthquakes,
telecommunications failures, power or water shortages, tsunamis,
floods, hurricanes, typhoons, fires, extreme weather conditions,
medical epidemics or pandemics and other natural or manmade
disasters or catastrophic events, for which we are predominantly
self-insured. The occurrence of any of these business disruptions
could result in significant losses, seriously harm our revenue,
profitability and financial condition, adversely affect our competitive
position, increase our costs and expenses, and require substantial
expenditures and recovery time in order to fully resume operations.
Our corporate headquarters and a portion of our research and
development activities are located in California, and other critical
business operations and some of our suppliers are located in
California and Asia, near major earthquake faults known for
seismic activity. The manufacture of product components, the
final assembly of our products and other critical operations are
concentrated in certain geographic locations. We also rely on
12 I
2016 Form 10-K
major logistics hubs primarily in Asia to manufacture and distribute
our products, and primarily in the southwestern United States to
import products into the Americas region. Our operations could be
adversely affected if manufacturing, logistics or other operations
in these locations are disrupted for any reason, including natural
disasters, IT system failures, military actions or economic, business,
labor, environmental, public health, regulatory or political issues.
The ultimate impact on us, our significant suppliers and our general
infrastructure of being located near locations more vulnerable to
the occurrence of the aforementioned business disruptions, such
as near major earthquake faults, and being consolidated in certain
geographical areas is unknown and remains uncertain.
Our uneven sales cycle makes planning and
management
less predictable.
difficult
future
financial
and
inventory
results
Our quarterly sales often have reflected a pattern in which a
disproportionate percentage of each quarter’s total sales occurs
towards the end of the quarter. This uneven sales pattern makes
predicting net revenue, earnings, cash flow from operations and
working capital for each financial period difficult, increases the risk
of unanticipated variations in our quarterly results and financial
condition and places pressure on our inventory management and
logistics systems. If predicted demand is substantially greater
than orders, there may be excess inventory. Alternatively, if orders
substantially exceed predicted demand, we may not be able to
fulfill all of the orders received in each quarter and such orders
may be cancelled. Depending on when they occur in a quarter,
developments such as a systems failure, component pricing
movements, component shortages or global logistics disruptions
could adversely impact our inventory levels and results of operations
in a manner that is disproportionate to the number of days in the
quarter affected.
We experience some seasonal trends in the sale of our products that
also may produce variations in our quarterly results and financial
condition. For example, sales to governments (particularly sales
to the U.S. government) are often stronger in the third calendar
quarter, and many customers whose fiscal year is the calendar year
spend their remaining capital budget authorizations in the fourth
calendar quarter prior to new budget constraints in the first calendar
quarter of the following year. Consumer sales are often higher in the
fourth calendar quarter compared to other quarters due in part to
seasonal holiday demand. European sales are often weaker during
the summer months. Demand during the spring and early summer
also may be adversely impacted by market anticipation of seasonal
trends. Moreover, to the extent that we introduce new products in
anticipation of seasonal demand trends, our discounting of existing
products may adversely affect our gross margin prior to or shortly
after such product launches. Typically, our third fiscal quarter is
our weakest and our fourth fiscal quarter is our strongest. Many
of the factors that create and affect seasonal trends are beyond
our control.
Due to the international nature of our business, political or
economic changes or other factors could harm our business
and financial performance.
Sales outside the United States made up approximately 63% of
our net revenue for fiscal year 2016. In addition, a portion of our
business activity is being conducted in emerging markets. Our future
business and financial performance could suffer due to a variety of
international factors, including:
• ongoing instability or changes in a country’s or region’s
economic, regulatory or political conditions,
including
inflation, recession, interest rate fluctuations and actual or
anticipated military or political conflicts or any other change
resulting from Brexit;
•
longer collection cycles and financial
instability among
customers, the imposition by governments of additional
taxes, tariffs or other restrictions on foreign trade or changes
in restrictions on trade between the United States and
other countries;
• trade regulations and procedures and actions affecting
production, shipping, pricing and marketing of products,
including policies adopted by the United States or other
countries that may champion or otherwise favor domestic
companies and technologies over foreign competitors;
•
local labor conditions and regulations, including local labor
issues faced by specific suppliers and OEMs;
• managing a geographically dispersed workforce;
• changes or uncertainty in the international, national or local
regulatory and legal environments;
• differing technology standards or customer requirements;
•
import, export or other business licensing requirements or
requirements relating to making foreign direct investments,
which could increase our cost of doing business in certain
jurisdictions, prevent us from shipping products to particular
countries or markets, affect our ability to obtain favorable
terms for components, increase our operating costs or lead to
penalties or restrictions;
• stringent privacy and data protection policies
in some
foreign countries;
• difficulties associated with repatriating earnings generated
or held abroad in a tax-efficient manner and changes in tax
laws; and
• fluctuations in freight costs, limitations on shipping and
receiving capacity, and other disruptions in the transportation
and shipping infrastructure at important geographic points of
exit and entry for our products and shipments.
2016 Form 10-K
I 13
The factors described above also could disrupt our product and
component manufacturing and key suppliers located outside of the
United States. For example, we rely on manufacturers in Taiwan for
the production of notebook computers and other suppliers in Asia
for product assembly and manufacture.
In many foreign countries, particularly in those with developing
economies, there are companies that engage in business practices
prohibited by laws and regulations applicable to us, such as the
Foreign Corrupt Practices Act of 1977, as amended (the “FCPA”).
Although we implement policies, procedures and training designed
to facilitate compliance with these laws, our employees, contractors
and agents, as well as those of the companies to which we outsource
certain of our business operations, may take actions in violation of
our policies. Any such violation, even if prohibited by our policies,
could have an adverse effect on our business and reputation.
Any failure by us to identify, manage and complete acquisitions,
divestitures and other significant transactions successfully
could harm our financial results, business and prospects.
As part of our business strategy, we may acquire companies or
businesses, divest businesses or assets, enter into strategic alliances
and joint ventures and make investments to further our business
(collectively, “business combination and investment transactions”).
Risks associated with business combination and
investment
transactions include the following, any of which could adversely
affect our revenue, gross margin, profitability and financial results:
• Managing business combination and investment transactions
requires varying levels of management resources, which may
divert our attention from other business operations.
• We may not fully realize all of the anticipated benefits of any
particular business combination and investment transaction,
and the timeframe for realizing the benefits of a particular
business combination and
investment transaction may
depend partially upon the actions of employees, advisors,
suppliers, other third-parties or market trends.
combination and
• Certain prior business
investment
transactions entered
into by Hewlett-Packard Company
resulted, and in the future any such transactions by us may
result, in significant costs and expenses, including those
related to severance pay, early retirement costs, employee
benefit costs, goodwill and asset impairment charges, charges
from the elimination of duplicative facilities and contracts,
asset impairment charges, inventory adjustments, assumed
litigation and other liabilities, legal, accounting and financial
advisory fees, and required payments to executive officers
and key employees under retention plans.
• Any increased or unexpected costs, unanticipated delays or
failure to meet contractual obligations could make business
combination and investment transactions less profitable
or unprofitable.
• Our ability to conduct due diligence with respect to business
combination and investment transactions, and our ability to
evaluate the results of such due diligence, is dependent upon
the veracity and completeness of statements and disclosures
made or actions taken by third-parties or their representatives.
14 I
2016 Form 10-K
• The pricing and other terms of our contracts for business
combination and investment transactions require us to make
estimates and assumptions at the time we enter into these
contracts, and, during the course of our due diligence, we may
not identify all of the factors necessary to estimate accurately
our costs, timing and other matters or we may incur costs if a
business combination is not consummated.
•
In order to complete a business combination and investment
transaction, we may issue common stock, potentially creating
dilution for our existing stockholders.
• We may borrow to finance business combination and
investment transactions, and the amount and terms of any
potential future acquisition-related or other borrowings,
as well as other factors, could affect our liquidity and
financial condition.
• Our effective tax rate on an ongoing basis is uncertain, and
business combination and investment transactions could
adversely impact our effective tax rate.
• Any announced business combination and
investment
transaction may not close on the expected timeframe or
at all, which may cause our financial results to differ from
expectations in a given quarter.
• Business combination and investment transactions may lead
to litigation, which could impact our financial condition and
results of operations.
•
If we fail to identify and successfully complete and integrate
business combination and
investment transactions that
further our strategic objectives, we may be required to expend
resources to develop products, services and technology
internally, which may put us at a competitive disadvantage.
incurred and will
We have
incur additional depreciation and
amortization expense over the useful lives of certain assets
acquired in connection with business combination and investment
transactions, and, to the extent that the value of goodwill or
intangible assets acquired in connection with a business combination
and investment transaction becomes impaired, we may be required
to incur additional material charges relating to the impairment of
those assets. If there are future decreases in our stock price or
significant changes in the business climate or results of operations
of our reporting units, we may incur additional charges, which may
include goodwill impairment or intangible asset charges.
As part of our business strategy, we regularly evaluate the potential
disposition of assets and businesses that may no longer help us
meet our objectives. When we decide to sell assets or a business,
we may encounter difficulty in finding buyers or alternative exit
strategies on acceptable terms in a timely manner, which could
delay the achievement of our strategic objectives. We may also
dispose of a business at a price or on terms that are less desirable
than we had anticipated. In addition, we may experience greater
dis-synergies than expected, and the impact of the divestiture on
our revenue growth may be larger than projected. After reaching an
agreement with a buyer or seller for the acquisition or disposition of
a business, we are subject to satisfaction of pre-closing conditions
as well as necessary regulatory and governmental approvals
on acceptable terms, which, if not satisfied or obtained, may
prevent us from completing the transaction. Such regulatory and
governmental approvals may be required in diverse jurisdictions
around the world, including jurisdictions with opaque regulatory
frameworks, and any delays in the timing of such approvals could
materially delay the transaction or prevent it from closing. For
example, our acquisition of Samsung’s printer business is subject to
regulatory review in numerous jurisdictions, including South Korea
and the European Union, as well as customary closing conditions.
Dispositions may also involve continued financial involvement in the
divested business, such as through continuing equity ownership,
indemnities or other financial obligations. Under
guarantees,
these arrangements, performance by the divested businesses
or other conditions outside of our control could affect our future
financial results.
Integrating acquisitions may be difficult and time-consuming.
Any failure by us to integrate acquired companies, products
or services into our overall business in a timely manner could
harm our financial results, business and prospects.
In order to pursue our strategy successfully, we must identify
candidates for and successfully complete business combination and
investment transactions, some of which may be large or complex,
and manage post-closing issues such as the integration of acquired
businesses, products, services or employees. Integration issues are
often time-consuming and expensive and, without proper planning
and implementation, could significantly disrupt our business and the
acquired business. The challenges involved in integration include:
• successfully combining product and service offerings and
entering or expanding into markets in which we are not
experienced or are developing expertise;
• convincing both our customers and distributors and those of
the acquired business that the transaction will not diminish
client service standards or business focus;
• persuading both our customers and distributors and those
of the acquired business not to defer purchasing decisions
or switch to other suppliers (which could result in our
incurring additional obligations in order to address customer
uncertainty), minimizing sales force attrition and expanding
and coordinating sales, marketing and distribution efforts;
• consolidating and rationalizing corporate IT infrastructure,
legacy systems
from
integrating software code and
include multiple
which may
various acquisitions and
business processes;
• minimizing the diversion of management attention from
ongoing business concerns;
• persuading employees that business cultures are compatible,
maintaining employee morale and retaining key employees,
representing
engaging with employee works councils
an acquired company’s non-U.S. employees,
integrating
employees, correctly estimating employee benefit costs and
implementing restructuring programs;
• coordinating and combining administrative, manufacturing,
research and development and other operations, subsidiaries,
facilities and relationships with third-parties in accordance
with local laws and other obligations while maintaining
adequate standards, controls and procedures;
• achieving savings from supply chain integration; and
• managing integration issues shortly after or pending the
completion of other independent transactions.
We may not achieve some or all of the expected benefits of our
restructuring plan and our restructuring may adversely affect
our business.
We announced a restructuring plan in October 2016 to realign
our cost structure due to the changing nature of our business
and to achieve operating efficiencies that we expect to reduce
costs. Implementation of the restructuring plan may be costly and
disruptive to our business, and we may not be able to obtain the cost
savings and benefits that were initially anticipated in connection with
our restructuring. Additionally, as a result of our restructuring, we
may experience a loss of continuity, loss of accumulated knowledge
and/or inefficiency during transitional periods. Reorganization and
restructuring can require a significant amount of management
and other employees’ time and focus, which may divert attention
from operating and growing our business. If we fail to achieve
some or all of the expected benefits of restructuring, it could have
a material adverse effect on our competitive position, business,
financial condition, results of operations and cash flows. For more
information about our October 2016 restructuring plan, see Note 4
to our Consolidated Financial Statements in Item 8.
Our financial performance may suffer if we cannot continue to
develop, license or enforce the intellectual property rights on
which our businesses depend.
We rely upon patent, copyright, trademark, trade secret and other
intellectual property laws in the United States, similar laws in
other countries, and agreements with our employees, customers,
suppliers and other parties, to establish and maintain intellectual
property (“IP”) rights in the products and services we sell, provide
or otherwise use in our operations. However, any of our intellectual
property rights could be challenged, invalidated, infringed or
circumvented, or such intellectual property rights may not be
sufficient to permit us to take advantage of current market trends
or to otherwise provide competitive advantages, either of which
could result in costly product redesign efforts, discontinuance
of certain product offerings or other harm to our competitive
position. For example, our enforcement of inkjet printer supplies IP
against infringers may be successfully challenged or our IP may be
successfully circumvented. Further, the laws of certain countries do
not protect proprietary rights to the same extent as the laws of the
United States. Therefore, in certain jurisdictions we may be unable to
protect our proprietary technology adequately against unauthorized
third-party copying or use; this, too, could adversely affect our ability
to sell products or services and our competitive position.
Our products and services depend in part on intellectual
property and technology licensed from third parties.
Some of our business and some of our products rely on key
technologies developed or licensed by third parties. We may not be
able to obtain or continue to obtain licenses and technologies from
these third parties at all or on reasonable terms, or such third parties
may demand cross-licenses to our intellectual property. Third-party
components may become obsolete, defective or incompatible with
future versions of our products, or our relationship with the third
party may deteriorate, or our agreements with the third party may
expire or be terminated. We may face legal or business disputes
2016 Form 10-K
I 15
with licensors that may threaten or lead to the disruption of inbound
licensing relationships. In order to remain in compliance with the
terms of our licenses, we must carefully monitor and manage our
use of third-party components, including both proprietary and
open source license terms that may require the licensing or public
disclosure of our intellectual property without compensation or on
undesirable terms. Additionally, some of these licenses may not be
available to us in the future on terms that are acceptable or that
allow our product offerings to remain competitive. Our inability to
obtain licenses or rights on favorable terms could have a material
effect on our business, including our financial condition and results
of operations. In addition, it is possible that as a consequence of a
merger or acquisition, third parties may obtain licenses to some of
our intellectual property rights or our business may be subject to
certain restrictions that were not in place prior to such transaction.
Because the availability and cost of licenses from third parties
depends upon the willingness of third parties to deal with us on the
terms we request, there is a risk that third parties who license to
our competitors will either refuse to license to us at all, or refuse
to license to us on terms equally favorable to those granted to our
competitors. Consequently, we may lose a competitive advantage
with respect to these intellectual property rights or we may be
required to enter into costly arrangements in order to terminate or
limit these rights.
Third-party claims of intellectual property infringement are
commonplace in our industry and successful third-party claims
may limit or disrupt our ability to sell our products and services.
Third parties also may claim that we or customers indemnified
by us are infringing upon their intellectual property rights. For
example, patent assertion entities may purchase
intellectual
property assets for the purpose of asserting claims of infringement
and attempting to extract settlements from companies such as
us and our customers. If we cannot or do not license allegedly
infringed intellectual property at all or on reasonable terms, or
if we are required to substitute similar technology from another
source, our operations could be adversely affected. Even if we
believe that intellectual property claims are without merit, they can
be time-consuming and costly to defend against and may divert
management’s attention and resources away from our business.
Claims of intellectual property infringement also might require us to
redesign affected products, enter into costly settlement or license
agreements, pay costly damage awards, or face a temporary or
permanent injunction prohibiting us from importing, marketing or
selling certain of our products. Even if we have an agreement to
indemnify us against such costs, the indemnifying party may be
unable or unwilling to uphold its contractual obligations to us.
Further, our results of operations and cash flows have been and
could continue to be affected in certain periods and on an ongoing
basis by the imposition, accrual and payment of copyright levies or
similar fees. In certain countries (primarily in Europe), proceedings
are ongoing or have been concluded in which groups representing
copyright owners have sought or are seeking to impose upon and
collect from us levies upon equipment (such as PCs, MFDs and
printers) alleged to be copying devices under applicable laws. Other
such groups have also sought to modify existing levy schemes to
increase the amount of the levies that can be collected from us. Other
countries that have not imposed levies on these types of devices are
expected to extend existing levy schemes, and countries that do not
currently have levy schemes may decide to impose copyright levies
16 I
2016 Form 10-K
on these types of devices. The total amount of the copyright levies
will depend on the types of products determined to be subject to the
levy, the number of units of those products sold during the period
covered by the levy, and the per unit fee for each type of product, all
of which are affected by several factors, including the outcome of
ongoing litigation involving us and other industry participants and
possible action by the legislative bodies in the applicable countries,
and could be substantial. Consequently, the ultimate impact of
these copyright levies or similar fees, and our ability to recover such
amounts through increased prices, remains uncertain.
The allocation of intellectual property rights between Hewlett
Packard Enterprise and HP as part of the Separation, and the
shared use of certain intellectual property rights following
the Separation, could adversely impact our reputation, our
ability to enforce certain intellectual property rights that are
important to us and our competitive position.
In connection with the Separation, Hewlett-Packard Company
allocated to each of Hewlett Packard Enterprise and HP the
intellectual property assets relevant to their respective businesses.
The terms of the Separation include cross-licenses and other
arrangements to provide for certain ongoing use of intellectual
property in the existing operations of both businesses. For example,
through a joint brand holding structure, both Hewlett Packard
Enterprise and HP will retain the ability to make ongoing use of
certain variations of the legacy Hewlett-Packard and HP branding,
respectively. There is a risk that the joint brand holding structure
may impair the enforcement of HP’s trademark rights against third
parties that infringe them. Furthermore, as a result of this shared
use of the legacy branding there is a risk that conduct or events
adversely affecting the reputation of Hewlett Packard Enterprise
could also adversely affect the reputation of HP. In addition, as
a result of the allocation of intellectual property as part of the
Separation, we no longer own intellectual property allocated to
Hewlett Packard Enterprise and our resulting intellectual property
ownership position could adversely affect our position and options
relating to patent enforcement, patent licensing and cross-licensing,
our ability to sell our products or services, our competitive position
in the industry and our ability to enter new product markets.
Our business and financial performance could suffer if
we do not manage the risks associated with our services
business properly.
The risks that accompany our services business differ from those of
our other businesses and include the following:
• The success of our services business is to a significant degree
dependent on our ability to retain our significant services
clients and maintain or increase the level of revenues from
these clients. We may lose clients due to their merger or
acquisition, business failure, contract expiration or their
selection of a competing service provider or decision to
in-source services. In addition, we may not be able to retain
or renew relationships with our significant clients. As a result
of business downturns or for other business reasons, we are
also vulnerable to reduced business from our clients, which
can reduce the scope of services provided and the prices for
those services. We may not be able to replace the revenue and
earnings from any such lost clients or reductions in services.
In addition, our contracts may allow a client to terminate the
contract for convenience, and we may not be able to fully
recover our investments in such circumstances.
• The pricing and other terms of some of our service agreements
require us to make estimates and assumptions at the time we
enter into these contracts that could differ from actual results.
Any increased or unexpected costs or unanticipated delays
in connection with the performance of these engagements,
including delays caused by factors outside our control, could
make these agreements less profitable or unprofitable, which
could have an adverse effect on the profit margin of our
services business.
• Some of our service agreements require significant investment
in the early stages that is expected to be recovered through
billings over the life of the agreement. These agreements
may
involve the development and deployment of new
technologies. Varying degrees of performance risk exist in
each agreement with these characteristics, and some or all
elements of service delivery under these agreements are
dependent upon successful completion of the development
and deployment phases. Any failure to perform satisfactorily
under these agreements may expose us to legal liability, result
in the loss of customers and harm our reputation, which could
harm the financial performance of our services business.
•
If we do not hire, train, motivate and effectively utilize
employees with the right mix of skills and experience in the
right geographic regions to meet the needs of our services
clients, our financial performance could suffer. For example,
if our employee utilization rate is too low, our profitability
and the level of engagement of our employees could suffer.
If that utilization rate is too high, it could have an adverse
effect on employee engagement and attrition and the quality
of the work performed, as well as our ability to staff projects.
If we are unable to hire and retain a sufficient number of
employees with the skills or backgrounds to meet current
demand, we might need to redeploy existing personnel,
increase our reliance on subcontractors or increase employee
compensation levels, all of which could also negatively affect
our profitability. In addition, if we have more employees than
we need with certain skill sets or in certain geographies,
we may incur increased costs as we work to rebalance
our supply of skills and resources with client demand in
those geographies.
Failure to comply with our customer contracts or government
contracting regulations could adversely affect our business
and results of operations.
Our contracts with our customers may
include unique and
specialized performance requirements. In particular, our contracts
with federal, state, provincial and local governmental customers
are subject to various procurement regulations, contract provisions
and other requirements relating to their formation, administration
and performance. Any failure by us to comply with the specific
provisions in our customer contracts or any violation of government
contracting regulations could result in the imposition of various civil
and criminal penalties, which may include termination of contracts,
forfeiture of profits, suspension of payments and, in the case
of our government contracts, fines and suspension from future
government contracting. Such failures could also cause reputational
damage to our business. In addition, Hewlett-Packard Company has
in the past been, and we may in the future be, subject to qui tam
litigation brought by private individuals on behalf of the government
relating to our government contracts, which could include claims
for treble damages. Further, any negative publicity related to
our customer contracts or any proceedings surrounding them,
regardless of its accuracy, may damage our business by affecting
our ability to compete for new contracts. If our customer contracts
are terminated, if we are suspended or disbarred from government
work, or if our ability to compete for new contracts is adversely
affected, our financial performance could suffer.
Our stock price has historically fluctuated and may continue to
fluctuate, which may make future prices of our stock difficult
to predict.
Our stock price, like that of other technology companies, can be
volatile. Some of the factors that could affect our stock price are:
• speculation, coverage or sentiment in the media or the
investment community about, or actual changes in, our
business, strategic position, market share, organizational
structure, operations, financial condition, financial reporting
and results, effectiveness of cost-cutting efforts, value or
liquidity of our investments, exposure to market volatility,
prospects, business combination or investment transactions,
future stock price performance, board of directors, executive
team, our competitors or our industry in general;
• the announcement of new, planned or contemplated products,
services, technological innovations, acquisitions, divestitures
or other significant transactions by us or our competitors;
• quarterly
increases or decreases
in net revenue, gross
margin, earnings or cash flows, changes in estimates by the
investment community or our financial outlook and variations
between actual and estimated financial results;
• announcements of actual and anticipated financial results by
our competitors and other companies in the IT industry;
• developments relating to pending investigations, claims and
disputes; and
• the timing and amount of our share repurchases.
General or industry specific market conditions or stock market
performance or domestic or international macroeconomic and
geopolitical factors unrelated to our performance also may affect
the price of our stock. For these reasons, investors should not rely
on recent or historical trends to predict future stock prices, financial
condition, results of operations or cash flows. Additional volatility in
the price of our securities could result in the filing of securities class
action litigation matters, which could result in substantial costs and
the diversion of management time and resources.
Failure to maintain our credit ratings could adversely affect
our liquidity, capital position, borrowing costs and access to
capital markets.
Our credit risk is evaluated by the major independent rating agencies.
Fitch Ratings, Moody’s Investor Service and Standard & Poor’s Rating
Services downgraded Hewlett-Packard Company’s ratings in the
2016 Form 10-K
I 17
past. Past downgrades have increased the cost of borrowing under
our credit facilities, have reduced market capacity for our commercial
paper, and may require the posting of additional collateral under
some of our derivative contracts. We cannot be assured that we will
be able to maintain our current credit ratings, and any additional
actual or anticipated changes or downgrades in our credit ratings,
including any announcement that our ratings are under further
review for a downgrade, may further impact us in a similar manner
and may have a negative impact on our liquidity, capital position and
access to capital markets.
We make estimates and assumptions in connection with the
preparation of our Consolidated Financial Statements, and any
changes to those estimates and assumptions could adversely
affect our results of operations.
In connection with the preparation of our Consolidated Financial
Statements, we use certain estimates and assumptions based on
historical experience and other factors. Our most critical accounting
estimates are described in the section entitled “Management’s
Discussion and Analysis of Financial Condition and Results of
Operations” in Item 7 of this report. In addition, as discussed
in Note 15 to the Consolidated Financial Statements, we make
certain estimates, including decisions related to provisions for
legal proceedings and other contingencies. While we believe
that these estimates and assumptions are reasonable under the
circumstances, they are 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
adversely affect our results of operations.
Unanticipated changes in our tax provisions, the adoption of
new tax legislation or exposure to additional tax liabilities
could affect our financial performance.
We are subject to income and other taxes in the United States and
various foreign jurisdictions. Our tax liabilities are affected by the
amounts we charge in intercompany transactions for inventory,
services, licenses, funding and other items. We are subject to
ongoing tax audits in various jurisdictions. Tax authorities may
disagree with these intercompany transactions or other matters,
and may assess additional taxes or adjust taxable income on our
tax returns as a result. We regularly assess the likely outcomes of
these audits in order to determine the appropriateness of our tax
provision. However, we cannot assure you that we will accurately
predict the outcomes of these audits, and the amounts ultimately
paid upon resolution of audits could be materially different from
the amounts previously included in our income tax expense and
therefore could have a material impact on our tax provision, net
income and cash flows. In addition, our effective tax rate in the
future could be adversely affected by changes to our operating
structure, changes in the mix of earnings in countries with differing
statutory tax rates, changes in the valuation of deferred tax assets
and liabilities or changes in tax laws. In particular, if circumstances
change such that we are unable to indefinitely reinvest our foreign
earnings outside the United States, future income tax expense may
differ significantly from historical amounts and could materially
adversely affect our results. In addition, various tax legislation
has been introduced or is being considered that could significantly
impact our tax rate, the carrying value of deferred tax assets, or
our deferred tax liabilities. Any of these changes could affect our
financial performance.
18 I
2016 Form 10-K
In order to be successful, we must attract, retain, train,
motivate, develop and transition key employees, and failure to
do so could seriously harm us.
In order to be successful, we must attract, retain, train, motivate,
develop and transition qualified executives and other key
employees, including those in managerial, technical, development,
sales, marketing and IT support positions. Identifying, developing
internally or hiring externally, training and retaining qualified
executives, engineers and qualified sales representatives are critical
to our future, and competition for experienced employees in the IT
industry can be intense. In order to attract and retain executives
and other key employees in a competitive marketplace, we must
provide a competitive compensation package, including cash- and
equity-based compensation. Our equity-based incentive awards
may contain conditions relating to our stock price performance and
our long-term financial performance that make the future value of
those awards uncertain. If the anticipated value of such equity-based
incentive awards does not materialize,
if our equity-based
compensation otherwise ceases to be viewed as a valuable benefit, if
our total compensation package is not viewed as being competitive,
or if we do not obtain the stockholder approval needed to continue
granting equity-based incentive awards in the amounts we believe
are necessary, our ability to attract, retain and motivate executives
and key employees could be weakened. Our failure to successfully
hire executives and key employees or the loss of any executives and
key employees could have a significant impact on our operations.
Further, changes in our management team may be disruptive to our
business, and any failure to successfully transition and assimilate
key new hires or promoted employees could adversely affect our
business and results of operations.
System security risks, data protection breaches, cyberattacks
and systems integration issues could disrupt our internal
operations or services provided to customers, and any such
disruption could reduce our revenue, increase our expenses,
damage our reputation and adversely affect our stock price.
Experienced computer programmers and hackers may be able to
penetrate our network security and misappropriate or compromise
our confidential information or that of third parties, create system
disruptions or cause shutdowns. Computer programmers and
hackers also may be able to develop and deploy viruses, worms,
and other malicious software programs that attack our products
or otherwise exploit any security vulnerabilities of our products. In
addition, sophisticated hardware and operating system software
and applications that we produce or procure from third-parties
may contain defects in design or manufacture, including “bugs” and
other problems that could unexpectedly interfere with the operation
of the system. The costs to us to eliminate or alleviate cyber or
other security problems, including bugs, viruses, worms, malicious
software programs and other security vulnerabilities, could be
significant, and our efforts to address these problems may not be
successful and could result in interruptions, delays, cessation of
service and loss of existing or potential customers that may impede
our sales, manufacturing, distribution or other critical functions.
We manage and store various proprietary information and sensitive
or confidential data relating to our business and our customers.
Breaches of our security measures or the accidental loss, inadvertent
disclosure or unapproved dissemination of proprietary information or
sensitive or confidential data about us, our clients or our customers,
including the potential loss or disclosure of such information or
data as a result of fraud, trickery or other forms of deception, could
expose us, our customers or the individuals affected to a risk of
loss or misuse of this information, result in litigation and potential
liability for us, damage our brand and reputation or otherwise harm
our business. We also could lose existing or potential customers
or incur significant expenses in connection with our customers’
system failures or any actual or perceived security vulnerabilities
in our products and services. In addition, the cost and operational
consequences of implementing further data protection measures
could be significant.
Portions of our IT infrastructure also may experience interruptions,
delays or cessations of service or produce errors in connection with
systems integration or migration work that takes place from time to
time. We may not be successful in implementing new systems and
transitioning data, which could cause business disruptions and be
more expensive, time-consuming, disruptive and resource intensive.
Such disruptions could adversely impact our ability to fulfill orders
and respond to customer requests and interrupt other processes.
Delayed sales, lower margins or lost customers resulting from
these disruptions could reduce our revenue, increase our expenses,
damage our reputation and adversely affect our stock price.
Terrorist acts, conflicts, wars and geopolitical uncertainties
may seriously harm our business and revenue, costs and
expenses and financial condition and stock price.
Terrorist acts, conflicts or wars (wherever located around the world)
may cause damage or disruption to our business, our employees,
facilities, partners, suppliers, distributors, resellers or customers
or adversely affect our ability to manage logistics, operate our
transportation and communication systems or conduct certain other
critical business operations. The potential for future attacks, the
national and international responses to attacks or perceived threats
to national security, and other actual or potential conflicts or wars
have created many economic and political uncertainties. In addition,
as a major multinational company with headquarters and significant
operations located in the United States, actions against or by the
United States may impact our business or employees. Although it is
impossible to predict the occurrences or consequences of any such
events, if they occur, they could result in a decrease in demand for
our products, make it difficult or impossible to provide services or
deliver products to our customers or to receive components from
our suppliers, create delays and inefficiencies in our supply chain
and result in the need to impose employee travel restrictions. We
are predominantly uninsured for losses and interruptions caused by
terrorist acts, conflicts and wars.
Our business is subject to various federal, state, local and
foreign laws and regulations that could result in costs or other
sanctions that adversely affect our business and results of
operations.
We are subject to various federal, state, local and foreign laws and
regulations. For example, we are subject to laws and regulations
concerning environmental protection, including laws addressing
the discharge of pollutants into the air and water, the management
and disposal of hazardous substances and wastes, the clean-up of
contaminated sites, the content of our products and the recycling,
treatment and disposal of our products, including batteries. In
particular, we face increasing complexity in our product design
and procurement operations as we adjust to new and future
requirements relating to the chemical and materials composition
of our products, their safe use, the energy consumption associated
with those products, climate change laws and regulations, and
product take-back legislation. If we were to violate or become liable
under environmental laws or if our products become non-compliant
with environmental laws, we could incur substantial costs or face
other sanctions, which may include restrictions on our products
entering certain jurisdictions. Our potential exposure includes
fines and civil or criminal sanctions, third-party property damage,
personal injury claims and clean-up costs. Further, liability under
some environmental laws relating to contaminated sites can be
imposed retroactively, on a joint and several basis, and without any
finding of noncompliance or fault. The amount and timing of costs
to comply with environmental laws are difficult to predict.
Some anti-takeover provisions contained in our certificate of
incorporation and bylaws, as well as provisions of Delaware
law, could impair a takeover attempt.
We have provisions in our certificate of incorporation and bylaws
each of which could have the effect of rendering more difficult or
discouraging an acquisition of HP deemed undesirable by our Board
of Directors. These include provisions:
• authorizing blank check preferred stock, which we could issue
with voting, liquidation, dividend and other rights superior to
our common stock;
•
limiting the liability of, and providing indemnification to, our
directors and officers;
• specifying that our stockholders may take action only at a
duly called annual or special meeting of stockholders and
otherwise in accordance with our bylaws and limiting the
ability of our stockholders to call special meetings;
• requiring advance notice of proposals by our stockholders
for business to be conducted at stockholder meetings and
for nominations of candidates for election to our Board of
Directors; and
• controlling the procedures for conduct of our Board of Directors
and stockholder meetings and election, appointment and
removal of our directors.
These provisions, alone or together, could deter or delay
hostile takeovers, proxy contests and changes in control or our
management. As a Delaware corporation, we are also subject to
provisions of Delaware law, including Section 203 of the Delaware
General Corporation Law, which prevents some stockholders from
engaging in certain business combinations without approval of the
holders of substantially all of our outstanding common stock.
Any provision of our certificate of incorporation or bylaws or
Delaware law that has the effect of delaying or deterring a change
in control of HP could limit the opportunity for our stockholders to
receive a premium for their shares of our stock and also could affect
the price that some investors are willing to pay for our stock.
2016 Form 10-K
I 19
RISKS RELATED TO THE SEPARATION
The separation of Hewlett-Packard Company
into two
independent publicly traded companies is subject to various
risks and uncertainties and may not achieve some or all of the
anticipated benefits.
On November 1, 2015, we completed the Separation of our
enterprise technology
infrastructure, software, services and
financing businesses from our personal systems and printing
businesses. The process of completing the Separation involved
significant costs and expenses. Uncertainty related to the Separation
may lead customers and other parties with which we currently do
business or may do business in the future to terminate or attempt
to negotiate changes in our existing business relationships, or cause
them to consider entering into business relationships with parties
other than us. These disruptions could have a material and adverse
effect on our businesses, financial condition, results of operations
and prospects.
We may not realize some or all of the anticipated strategic, financial,
operational, marketing or other benefits from the Separation. As
an independent publicly traded company we are a smaller, less
diversified company with a narrower business focus and may
be more vulnerable to changing market conditions, which could
materially and adversely affect our business, financial condition
and results of operations. We continue to review our acquisitions,
dispositions, and other transactions, including those related to the
Separation, in light of the economic and legislative environment.
The Separation could result in substantial tax liability.
We obtained an opinion of outside counsel that, for U.S. federal
income tax purposes, the Separation qualified, for both the
company and our stockholders, as a tax-free reorganization within
the meaning of Sections 368(d)(1)(D) and 355 of the U.S. Internal
Revenue Code of 1986, as amended. In addition, we obtained a
private letter ruling from the Internal Revenue Service (the “IRS”)
and opinions of outside counsel regarding certain matters impacting
the U.S. federal income tax treatment of the Separation for the
company and certain related transactions as transactions that
are generally tax-free for U.S. federal income tax purposes. The
opinions of outside counsel and the IRS private letter ruling were
based, among other things, on various factual assumptions we have
authorized and representations we have made to outside counsel
and the IRS. If any of these assumptions or representations are, or
become, inaccurate or incomplete, reliance on the opinions and IRS
ITEM 1B.
UNRESOLVED STAFF COMMENTS.
None.
private letter ruling may be affected. An opinion of outside counsel
represents their legal judgment but is not binding on the IRS or any
court. Accordingly, there can be no assurance that the IRS will not
challenge the conclusions reflected in the opinions or that a court
would not sustain such a challenge. Notwithstanding the foregoing,
we incurred certain tax costs in connection with the Separation,
including non-U.S. tax expenses resulting from the Separation in
multiple non-U.S. jurisdictions that do not legally provide for tax-free
Separation, which may be material. If the Separation or certain
internal transactions undertaken in anticipation of the Separation
are determined to be taxable for U.S. federal income tax purposes,
we and/or our stockholders that are subject to U.S. federal income
tax could incur significant U.S. federal income tax liabilities.
We or Hewlett Packard Enterprise may fail to perform under the
transaction agreements executed as part of the Separation.
In connection with the Separation, we and Hewlett Packard
Enterprise entered into several agreements, including among
others a transition services agreement, a separation and
distribution agreement, a tax matters agreement, an employee
matters agreement, a real estate matters agreement, a commercial
agreement and an IT service agreement. The transition services
agreement provides for the performance of certain services by
each company for the benefit of the other for a transition period
after the Separation. The separation and distribution agreement,
tax matters agreement, employee matters agreement and real
estate matters agreement determine the allocation of assets and
liabilities between the companies following the Separation for those
respective areas and include any necessary indemnifications related
to liabilities and obligations. The commercial agreement establishes
a bilateral relationship between Hewlett Packard Enterprise and
us for the purchase and sale of commercially available products
and services for internal use, incorporation and bundling in OEM
products and services, resale to customers and use in the provision
of managed services to customers, as well as joint customer
pursuits and joint development activities. The IT service agreement
provides for the performance by one of Hewlett Packard Enterprise’s
subsidiaries of certain application development and maintenance
and IT infrastructure services for us. We will rely on Hewlett Packard
Enterprise to satisfy its performance and payment obligations under
these agreements. If Hewlett Packard Enterprise is unable to satisfy
its obligations under these agreements, we could incur operational
difficulties or losses that could have a material and adverse effect
on our business, financial condition and results of operations.
20 I
2016 Form 10-K
ITEM 2.
PROPERTIES.
As of October 31, 2016, we owned or leased approximately 21 million square feet of space worldwide, a summary of which is
provided below.
FISCAL YEAR ENDED OCTOBER 31, 2016
OWNED
LEASED
TOTAL
(SQUARE FEET IN MILLIONS)
Administration and support . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(Percentage) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Core data centers, manufacturing plants, research and development
facilities and warehouse operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(Percentage) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(Percentage). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3.9
41%
2.4
28%
6.3
35%
5.6
59%
6.3
72%
11.9
65%
9.5
100%
8.7
100%
18.2
100%
(1) Excludes 3 million square feet of vacated space, of which 2 million square feet is leased to third parties.
We believe that our existing properties are in good condition and are suitable for the conduct of our business. Our segments Personal
Systems, Printing and Corporate Investments, use substantially all of the properties at least in part, and we retain the flexibility to use each
of the properties in whole or in part for each of the segments.
PRINCIPAL EXECUTIVE OFFICES
Our principal executive offices, including our global headquarters, are located at 1501 Page Mill Road, Palo Alto, California, United States.
HEADQUARTERS OF GEOGRAPHIC OPERATIONS
The locations of our geographic headquarters are as follows:
Americas
Palo Alto, United States
Europe, Middle East, Africa
Geneva, Switzerland
Asia Pacific
Singapore
PRODUCT DEVELOPMENT AND MANUFACTURING
The locations of our major product development, manufacturing, data centers and HP Labs facilities are as follows:
Americas
United States—Boise,
Corvallis, San Diego,
Vancouver
Asia Pacific
China—Shanghai
Malaysia—Penang
Singapore—Singapore
Europe, Middle East, Africa
Israel—Kiryat-Gat, Netanya, Rehovot
Spain—Barcelona
Technology office (HP Labs)
United Kingdom—Bristol
United States—Palo Alto
ITEM 3.
LEGAL PROCEEDINGS.
Information with respect to this item may be found in Note 15, “Litigation and Contingencies” to the Consolidated Financial Statements in
Item 8, which is incorporated herein by reference.
ITEM 4.
MINE SAFETY DISCLOSURES.
Not applicable.
2016 Form 10-K
I 21
PART II
ITEM 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
Information regarding the market prices of HP common stock and
the markets for that stock may be found in the “Quarterly Summary”
in Item 8 and on the cover page of this Annual Report on Form 10-K,
respectively, which are incorporated herein by reference. We have
declared and paid cash dividends each fiscal year since 1965.
Dividends declared and paid per share by fiscal quarter in 2016 and
2015 were as follows:
Dividends declared. . . . . . . . . . . . . . . . . . .
Q4
—
Dividends paid. . . . . . . . . . . . . . . . . . . . . . .
$0.12
2016
2015
Q3
$0.25
$0.12
Q2
—
$0.12
Q1
$0.25
$0.12
Q4
—
$0.18
Q3
$0.35
$0.18
Q2
—
$0.16
Q1
$0.32
$0.16
Additional information concerning dividends may be found in
“Selected Financial Data” in Item 6 and Note 13, “Stockholders’
(Deficit) Equity” to the Consolidated Financial Statements in Item 8,
which are incorporated herein by reference.
As of November 30, 2016, there were approximately 68,192
stockholders of record.
In connection with the Separation, on November 1, 2015, we
completed the distribution of the outstanding common stock of
Hewlett Packard Enterprise to our stockholders as of the close of
RECENT SALES OF UNREGISTERED SECURITIES
business on October 21, 2015, the record date for the distribution.
Our stockholders received one share of Hewlett Packard Enterprise
common stock for every one share of our common stock held at
the close of business on the record date. We distributed a total of
approximately 1.8 billion shares of Hewlett Packard Enterprise
common stock to our stockholders.
There were no unregistered sales of equity securities in fiscal year
2016. We did not repurchase any shares of our common stock during
the fourth quarter of 2016. All share repurchases settled in the
fourth quarter of fiscal year 2016 were open market transactions.
On July 21, 2011, HP’s Board of Directors authorized a $10.0 billion
share repurchase program. HP may choose to repurchase shares
when sufficient liquidity exists and the shares are trading at a
discount relative to estimated intrinsic value. This program, which
does not have a specific expiration date, authorizes repurchases in
the open market or in private transactions. On October 10, 2016, the
Board authorized an additional $3.0 billion for future repurchases
of its outstanding shares of common stock. HP intends to use
repurchases from time to time to offset the dilution created by
shares issued under employee stock plans and to repurchase shares
opportunistically. As of October 31, 2016, HP had approximately
$3.8 billion remaining under repurchase authorization.
22 I
2016 Form 10-K
STOCK PERFORMANCE GRAPH AND CUMULATIVE TOTAL RETURN
The graph below shows the cumulative total stockholder return
assuming the investment of $100 at the market close on October 31,
2011 (and the reinvestment of dividends thereafter) in each of
HP common stock, the S&P 500 Index, and the S&P Information
Technology Index. The comparisons in the graph below are based
on historical data and are not indicative of, or intended to forecast,
future performance of our common stock.
$250
$200
$150
$100
$50
$0
10/2011
10/2012
10/2013
10/2014
10/2015
10/2016
HP Inc.
S&P 500 Index
S&P Information Technology Index
HP Inc.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
S&P 500 Index . . . . . . . . . . . . . . . . . . . . . . . . . . . .
S&P Information Technology Index . . . . . . . . . .
$100.00
$100.00
$100.00
$53.26
$115.20
$110.71
$96.37
$146.49
$132.76
$144.63
$171.77
$166.88
$110.97
$180.69
$185.55
$136.00
$188.82
$205.64
10/11
10/12
10/13
10/14
10/15
10/16
ITEM 6.
SELECTED FINANCIAL DATA.
The information set forth below is not necessarily indicative of
results of future continuing operations and should be read in
conjunction with Item 7, “Management’s Discussion and Analysis of
Financial Condition and Results of Operations” and the Consolidated
Financial Statements and notes thereto included in Item 8, “Financial
Statements and Supplementary Data” of this Annual Report on
Form 10-K, which are incorporated herein by reference, in order to
understand further the factors that may affect the comparability of
the financial data presented below.
2016 Form 10-K
I 23
SELECTED FINANCIAL DATA
FOR THE FISCAL YEARS ENDED OCTOBER 31
2016
2015
2014
2013
2012
IN MILLIONS, EXCEPT PER SHARE AMOUNTS
Net revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Earnings from continuing operations(1) . . . . . . . . . . . . . . . . . . . .
$48,238
$3,549
$51,463
$56,651
$55,273
$59,454
$3,920
$4,256
$3,516
$2,571
Net (loss) earnings from discontinued operations net
of taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net earnings (loss)(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$(170)
$2,496
$836
$4,554
$2,089
$5,013
$2,653
$5,113
$(14,420)
$(12,650)
Net earnings (loss) per share:
Basic
Continuing operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Discontinued operations . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total basic net earnings (loss) per share . . . . . . . . .
Diluted
Continuing operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Discontinued operations . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total diluted net earnings (loss) per share . . . . . . .
$1.54
(0.10)
$1.44
$1.53
(0.10)
$1.43
$2.05
0.46
$2.51
$2.02
0.46
$2.48
$1.55
1.11
$2.66
$1.53
1.09
$2.62
$1.27
1.37
$2.64
$1.26
1.36
$2.62
$0.90
(7.31)
$(6.41)
$0.90
(7.31)
$(6.41)
Cash dividends declared per share. . . . . . . . . . . . . . . . . . . . . . . .
$0.50
$0.67
$0.61
$0.55
$0.50
At year-end:
Total assets(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term debt(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total debt(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$29,010
$106,882
$103,206
$105,676
$108,768
$6,758
$6,836
$6,677
$8,871
$15,563
$18,157
$15,996
$20,931
$21,089
$25,515
(1) Earnings from continuing operations and net earnings (loss) include the following items:
2016
2015
2014
2013
2012
Amortization of intangible assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Impairment of goodwill and intangible assets. . . . . . . . . . . . . . . . . . . . . . . . . . .
Restructuring and other charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Defined benefit plan settlement charges (credits) . . . . . . . . . . . . . . . . . . . . . . .
Acquisition and other related charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total charges before taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total charges, net of taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$16
—
205
179
7
$407
$293
IN MILLIONS
$102
$129
$198
—
63
(57)
—
$108
$113
—
176
—
—
$305
$238
—
168
—
—
$366
$260
$217
1,227
354
—
10
$1,808
$1,200
(2)
(3)
Total assets, for all periods prior to fiscal year 2016, include the total assets of Hewlett Packard Enterprise which are presented as discontinued operations in the
Consolidated Balance Sheet. For further information on discontinued operations, see Note 2, “Discontinued Operations” in the Consolidated Financial Statements
and notes thereto included in Item 8, “Financial Statements and Supplementary Data” of this Annual Report on Form 10-K.
The decrease in Long-term debt and Total debt in fiscal year 2015 was due to the early extinguishment of debt as a result of the Separation of Hewlett Packard
Enterprise. For further information on HP Inc. separation transaction, see Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of
Operations” of this Annual Report on Form 10-K.
24 I
2016 Form 10-K
HP INC. AND SUBSIDIARIES ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
This Management’s Discussion and Analysis of Financial Condition
and Results of Operations (“MD&A”) is organized as follows:
• HP Inc. Separation Transaction. A discussion of the separation
of Hewlett Packard Enterprise Company, HP Inc.’s former
enterprise technology infrastructure, software, services and
financing businesses.
• Overview. A discussion of our business and other highlights
affecting the company to provide context for the remainder
of this MD&A.
• Critical Accounting Policies and Estimates. A discussion
of accounting policies and estimates that we believe are
important to understanding the assumptions and judgments
incorporated in our reported financial results.
• Results of Operations. An analysis of our continuing financial
results comparing fiscal year 2016 to fiscal year 2015 and
fiscal year 2015 to fiscal year 2014. A discussion of the
results of continuing operations is followed by a more detailed
discussion of the results of operations by segment.
HP INC. SEPARATION TRANSACTION
• Liquidity and Capital Resources. An analysis of changes in our
cash flows and a discussion of our liquidity and continuing
financial condition.
• Contractual and Other Obligations. An overview of contractual
obligations, retirement and post-retirement benefit plan
contributions, restructuring plans, uncertain tax positions and
off-balance sheet arrangements of our continuing operations
and separation costs.
We intend the discussion of our continuing financial condition and
results of continuing operations that follows to provide 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.
On November 1, 2015 (the “Distribution Date”), we completed
the separation of Hewlett Packard Enterprise Company (“Hewlett
Packard Enterprise”), Hewlett-Packard Company’s former enterprise
technology
financing
infrastructure, software, services and
businesses (the “Separation”). In connection with the Separation,
Hewlett-Packard Company changed its name to HP Inc. (“HP”).
On the Distribution Date, each of our stockholders of record as
of the close of business on October 21, 2015 (the “Record Date”)
received one share of Hewlett Packard Enterprise common stock for
every one share of our common stock held as of the Record Date.
We distributed a total of approximately 1.8 billion shares of Hewlett
Packard Enterprise common stock to our stockholders. Hewlett
Packard Enterprise is an independent public company trading on the
New York Stock Exchange (“NYSE”) under the symbol “HPE”. After
the Separation, we do not beneficially own any shares of Hewlett
Packard Enterprise common stock.
In connection with the Separation, we and Hewlett Packard Enterprise
have entered into a separation and distribution agreement as well
as various other agreements that provide a framework for the
relationships between HP and Hewlett Packard Enterprise going
forward, including among others a tax matters agreement, an
employee matters agreement, a transition service agreement, a real
estate matters agreement, a master commercial agreement and an
information technology service agreement.
OVERVIEW
We are a leading global provider of personal computing and
other access devices, imaging and printing products, and related
individual
technologies, solutions, and services. We sell to
large
consumers, small- and medium-sized businesses and
enterprises, including customers in the government, health, and
education sectors. We have three segments for financial reporting
purposes: Personal Systems, Printing and Corporate Investments.
The Personal Systems segment offers Commercial personal
computers (“PCs”), Consumer PCs, workstations, thin clients,
Commercial tablets and mobility devices, retail point-of-sale
systems, displays and other related accessories, software, support,
and services for the commercial and consumer markets. The Printing
2016 Form 10-K
I 25
HP INC. AND SUBSIDIARIESMANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS segment provides Consumer and Commercial printer hardware,
Supplies, media, solutions and services, as well as scanning devices.
Corporate Investments include HP Labs and certain business
incubation projects.
•
•
through
In Personal Systems, our strategic focus is on profitable
growth
improved market segmentation with
respect to enhanced innovation in multi-operating systems,
multi-architecture, geography, customer segments and
other key attributes. Additionally, HP is investing in premium
and mobility form factors such as convertible notebooks,
detachable notebooks, and commercial tablets and mobility
devices in order to meet customer preference for mobile,
thinner and lighter devices. We expect a decrease in the rate of
the market decline and we believe that we are well positioned
due to our competitive product lineup.
In Printing, our strategic focus is on business printing,
a shift to contractual solutions and graphics. Business
printing includes delivering solutions to SMB and enterprise
customers, such as multi-function and PageWide printers,
including our JetIntelligence lineup of LaserJet printers. The
shift to contractual solutions includes an increased focus on
Managed Print Services and Instant Ink, which presents strong
aftermarket supplies opportunities. In the graphics space,
we are focused on innovations such as our Indigo and Latex
product offerings. We plan to continue to focus on shifting the
mix in the installed base to higher value units and expanding
our innovative ink, laser and graphics and 3D printing
programs. We continue to execute on our key initiatives of
focusing on products targeted at high usage categories and
introducing new revenue delivery models. Our Ink in the Office
initiative is continuing to shift the installed base to more
valuable units. In the commercial market, our focus is on
placing higher value printer units which offer positive annuity
of toner and ink, the design and deployment of A3 products
and solutions, accelerating growth
in graphic solutions
products, and launching and developing our first 3D printers.
During the third quarter of fiscal year 2016, we announced
our decision to make a one-time investment over time to
reduce the level of supplies inventory across the channels.
This change in the Supplies sales model supports our strategy
of maintaining a more consistent value proposition by shifting
from a push model to a pull model driven by market demand,
and allows for less price variability.
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 and
accelerating market trends such as the decline in the PC device
market and home printing. A second set of challenges relates to
changes in the competitive landscape. Our primary competitors are
exerting increased competitive pressure in targeted areas and are
entering new markets, our emerging competitors are introducing
new technologies and business models, and our alliance partners
in some businesses are increasingly becoming our competitors in
others. A third set of challenges relates to business model changes
and our go-to-market execution.
•
•
In Personal Systems, we are witnessing soft demand in the
PC market as customers hold onto their PCs longer, thereby
extending PC refresh cycles. Demand for PCs
is being
impacted by weaker macroeconomic conditions and currency
depreciation in Latin America, Canada and certain Asian
and European markets. As such, we anticipate continued
market headwinds.
In Printing, we are experiencing the impact of demand
challenges in consumer and commercial markets. We are also
experiencing an overall competitive pricing environment and
have yet to see evidence of a broad move for our Japanese
competitors to be less aggressive given the strength of
the yen. We obtain a number of components from single
sources due to technology, availability, price, quality or other
considerations. For instance, we source laser printer engines
and laser toner cartridges from Canon. Any decision by either
party to not renew our agreement with Canon or to limit or
reduce the scope of the agreement could adversely affect
our net revenue from LaserJet products; however, we have
a long-standing business relationship with Canon and do not
anticipate non-renewal of this agreement.
We may also face challenges as a result of the June 23, 2016
referendum by British voters to exit the European Union
(commonly known as “Brexit”). The outcome of Brexit and its
impact on our business cannot be known until the terms and
timing of the United Kingdom’s exit are clearer. Until that time,
we may face various Brexit-related challenges that may include
uncertainty in the markets, volatility in exchange rates and weaker
macroeconomic conditions.
To address these challenges, we continue to pursue innovation
with a view towards developing new products and services aligned
with generating market demand and meeting the needs of our
customers and partners. In addition, we need to continue to improve
our operations, with a particular focus on enhancing our end-to-end
processes and efficiencies. We also need to continue to optimize our
sales coverage models, align our sales incentives with our strategic
goals, improve channel execution, strengthen our capabilities
in our areas of strategic focus, and develop and capitalize on
market opportunities.
For a further discussion of trends, uncertainties and other factors
that could impact our continuing operating results, see the section
entitled “Risk Factors” in Item 1A in this Annual Report on Form 10-K.
26 I
2016 Form 10-K
HP INC. AND SUBSIDIARIESMANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) 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. 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 when persuasive evidence of an arrangement
exists, delivery has occurred or services are rendered, the sales
price or fee is fixed or determinable and collectability is reasonably
assured, as well as when other revenue recognition principles are
met, including industry-specific revenue recognition guidance.
We enter into contracts to sell our products and services, and
while many of our sales agreements contain standard terms and
conditions, there are agreements we enter into which contain
non-standard terms and conditions. Further, many of our
arrangements include multiple elements. As a result, significant
contract interpretation may be required to determine the appropriate
accounting, including the identification of deliverables considered to
be separate units of accounting, the allocation of the transaction
price among elements in the arrangement and the timing of revenue
recognition for each of those elements.
We recognize revenue for delivered elements as separate units of
accounting when the delivered elements have standalone value to
the customer. For elements with no standalone value, we recognize
revenue consistent with the pattern of the delivery of the final
deliverable. If the arrangement includes a customer-negotiated
refund or return right or other contingency relative to the delivered
items and the delivery and performance of the undelivered items
is considered probable and substantially within our control, the
delivered element constitutes a separate unit of accounting. In
arrangements with combined units of accounting, changes in the
allocation of the transaction price among elements may impact the
timing of revenue recognition for the contract but will not change
the total revenue recognized for the contract.
We establish the selling prices used for each deliverable based
on vendor specific objective evidence (“VSOE”) of selling price, if
available, third-party evidence (“TPE”), if VSOE of selling price is
not available, or estimated selling price (“ESP”), if neither VSOE of
selling price nor TPE is available. We establish VSOE of selling price
using the price charged for a deliverable when sold separately
and, in rare instances, using the price established by management
having the relevant authority. We evaluate TPE of selling price by
reviewing largely similar and interchangeable competitor products
or services in standalone sales to similarly situated customers.
ESP is established 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 industry technology life cycles.
We may modify or develop new go-to-market practices in the
future, which may result in changes in selling prices, impacting both
VSOE of selling price and ESP. In most arrangements with multiple
elements, the transaction price is allocated to the individual units of
accounting at inception of the arrangement based on their relative
selling price. However, the aforementioned factors may result in a
different allocation of the transaction price to deliverables in multiple
element arrangements entered into in future periods. This may
2016 Form 10-K
I 27
HP INC. AND SUBSIDIARIESMANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) 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.
We reduce revenue for customer and distributor programs and
incentive offerings, including price protection, rebates, promotions,
other volume-based
incentives and expected returns. Future
market conditions and product transitions may require us to take
actions to increase customer incentive offerings, possibly resulting
in an incremental reduction of revenue at the time the incentive is
offered. For certain incentive programs, we estimate the number
of customers expected to redeem the incentive based on historical
experience and the specific terms and conditions of the incentive.
WARRANTY
For hardware products, we recognize revenue generated from
direct sales to end customers and indirect sales to channel partners
(including resellers, distributors and value-added solution providers)
when the revenue recognition criteria are satisfied. For indirect sales
to channel partners, we recognize revenue at the time of delivery
when the channel partner has economic substance apart from HP
and HP has completed its obligations related to the sale.
We recognize revenue from fixed-price support or maintenance
contracts ratably over the contract period.
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 of time. 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. Over the last three fiscal years, the annual warranty
expense and actual warranty costs have averaged approximately
2.2% and 2.5% of annual net revenue, respectively.
RESTRUCTURING AND OTHER CHARGES
in
restructuring actions which
We have engaged
require
management to estimate the timing and amount of severance
and other employee separation costs for workforce reduction and
enhanced early retirement programs, fair value of assets made
redundant or obsolete, and the fair value of lease cancellation
and other exit costs. We accrue for severance and other employee
separation costs under these actions when it is probable that
benefits will be paid and the amount is reasonably estimable.
The rates used in determining severance accruals are based on
existing plans, historical experiences and negotiated settlements.
Other charges include non-recurring costs that are distinct from
ongoing operational costs such as information technology costs
incurred in connection with the Separation. For a full description of
our restructuring actions, refer to our discussions of restructuring
in “Results of Operations” below and in Note 4, “Restructuring and
Other Charges” to the Consolidated Financial Statements in Item 8,
which are incorporated herein by reference.
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. We update the expected long-term
return on assets when we observe a sufficient level of evidence
that would suggest the long-term expected return has changed.
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 cost, the calculation of the expected
28 I
2016 Form 10-K
HP INC. AND SUBSIDIARIESMANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) 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 remeasurement.
Our major assumptions vary by plan, and the weighted-average
rates used are set forth in Note 5, “Retirement and Post-Retirement
in
Benefit Plans” to the Consolidated Financial Statements
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 rate, expected
increase in compensation levels and expected long-term return on
plan assets would have had on our net periodic benefit cost for fiscal
year 2016:
Assumptions:
Discount rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected increase in compensation levels . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected long-term return on plan assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$9
$2
$31
CHANGE IN NET PERIODIC
BENEFIT COST
IN MILLIONS
TAXES ON EARNINGS
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.
Our effective tax rate includes the impact of certain undistributed
foreign earnings for which we have not provided United States
federal taxes because we plan to reinvest such earnings indefinitely
outside the United States. We plan distributions of foreign earnings
based on projected cash flow needs as well as the working capital
and long-term investment requirements of our foreign subsidiaries
and our domestic operations. Based on these assumptions, we
estimate the amount we expect to indefinitely invest outside the
United States and the amounts we expect to distribute to the
United States and provide the United States federal taxes due on
amounts expected to be distributed to the United States. Further, 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 2027. 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.
income tax audits
in many of these
We are subject to income taxes in the United States and
approximately 58 other countries, and we are subject to routine
corporate
jurisdictions.
We believe that positions taken on our tax returns are fully
supported, but tax authorities may challenge these positions,
which 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. Determining the income tax provision for these
potential assessments and recording the related effects requires
management judgments and estimates. 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 income tax provision,
net income and cash flows. Our accrual for uncertain tax positions is
attributable primarily to uncertainties concerning the tax treatment
of our international operations, including the allocation of income
among different
intercompany transactions and
related interest. For a further discussion on taxes on earnings,
refer to Note 7, “Taxes on Earnings” to the Consolidated Financial
Statements in Item 8, which is incorporated herein by reference.
jurisdictions,
2016 Form 10-K
I 29
HP INC. AND SUBSIDIARIESMANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) 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. 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.
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. We can
opt to perform a qualitative assessment to test a reporting unit’s
goodwill for impairment or we can directly perform the two-
step impairment test. Based on the qualitative assessment, if we
determine that the fair value of a reporting unit is more likely than
not (i.e., a likelihood of more than 50 percent) to be less than its
carrying amount, the two-step impairment test will be performed.
In the first step of the impairment test, we compare the fair value
of each reporting unit to its carrying amount with the fair values
derived most significantly from the income approach, and to a
lesser extent, the market approach. Under the income approach,
we estimate the fair value of a reporting unit based on the present
value of estimated future cash flows. We base cash flow projections
on management’s estimates of revenue growth rates and operating
margins, taking into consideration industry and market conditions.
We base the discount rate on the weighted-average cost of capital
adjusted for the relevant risk associated with business-specific
characteristics and the uncertainty related to the reporting unit’s
ability to execute on the projected cash flows. Under the market
approach, we estimate fair value based on market multiples of
revenue and earnings derived from comparable publicly-traded
companies with similar operating and investment characteristics
as the reporting unit. We weight the fair value derived from the
market approach depending on the level of comparability of these
publicly-traded companies to the reporting unit. When market
comparables are not meaningful or not available, we estimate the
fair value of a reporting unit using only the income approach.
If the fair value of a reporting unit exceeds the carrying amount of the
net assets assigned to that reporting unit, goodwill is not impaired
and no further testing is required. If the fair value of the reporting
unit is less than its carrying amount, then we perform the second
step of the goodwill impairment test to measure the amount of
impairment loss, if any. In the second step, we measure the reporting
unit’s assets, including any unrecognized intangible assets, liabilities
and non-controlling interests at fair value in a hypothetical analysis
to calculate the implied fair value of goodwill for the reporting unit
in the same manner as if the reporting unit was being acquired in a
business combination. If the implied fair value of the reporting unit’s
goodwill is less than its carrying amount, the difference is recorded
as an impairment loss.
Our annual goodwill impairment analysis, performed using the
qualitative assessment option as of the first day of the fourth
quarter of fiscal year 2016, resulted in a conclusion that it was more
likely than not that the fair value of our reporting units exceeded
their respective carrying values. As a result, we concluded that the
first step of the goodwill impairment test was not necessary.
FAIR VALUE OF DERIVATIVE INSTRUMENTS
We use derivative instruments to manage a variety of risks, including
risks related to foreign currency exchange rates and interest rates. We
use forwards, swaps and at times, options to hedge certain foreign
currency and interest rate exposures. We do not use derivative
instruments for speculative purposes. As of October 31, 2016, the
gross notional value of our derivative portfolio was $17.9 billion.
Assets and liabilities related to derivative instruments are measured
at fair value, and were $325 million and $97 million, respectively as
of October 31, 2016.
Fair value is the price we would receive to sell an asset or pay to transfer
a liability in an orderly transaction between market participants at
the measurement date. In the absence of active markets for the
identical assets or liabilities, such measurements involve developing
assumptions based on market observable data and, in the absence
of such data, internal information that is consistent with what
market participants would use in a hypothetical transaction that
occurs at the measurement date. The determination of fair value
often involves significant judgments about assumptions such as
30 I
2016 Form 10-K
HP INC. AND SUBSIDIARIESMANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) determining an appropriate discount rate that factors in both risk
and liquidity premiums, identifying the similarities and differences
in market transactions, weighting those differences accordingly
and then making the appropriate adjustments to those market
transactions to reflect the risks specific to the asset or liability being
valued. We generally use industry standard valuation models to
measure the fair value of our derivative positions. When prices in
active markets are not available for the identical asset or liability, we
use industry standard valuation models to measure fair value. Where
applicable, these models project future cash flows and discount the
future amounts to present value using market-based observable
inputs, including interest rate curves, HP and counterparty credit
risk, foreign currency exchange rates, and forward and spot prices.
For a further discussion on fair value measurements and derivative
instruments, refer to Note 10, “Fair Value” and Note 11, “Financial
Instruments”, respectively, to the Consolidated Financial Statements
in Item 8, which are incorporated herein by reference.
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 15, “Litigation and Contingencies” to the Consolidated Financial
RECENT ACCOUNTING PRONOUNCEMENTS
liability. Litigation
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 15,
“Litigation and Contingencies”, are not a meaningful indicator of
HP’s potential
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, 2016, it was not reasonably possible that a material
loss had been incurred in excess of the amounts recognized in our
financial statements.
is
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 supplementally present the
year-over-year percentage change in net revenue on a constant
currency basis, which assumes no change in foreign currency
exchange rates from the prior-year period and does not adjust for
any repricing or demand impacts from changes in foreign currency
exchange rates. This information is provided so that net revenue
can be viewed with and without the effect of fluctuations in foreign
currency exchange rates, which is consistent with how management
evaluates our net revenue results and trends. This constant currency
disclosure is provided in addition to, and not as a substitute for, the
year-over-year percentage change in net revenue on a GAAP basis.
Other companies may calculate and define similarly labeled items
differently, which may limit the usefulness of this measure for
comparative purposes.
2016 Form 10-K
I 31
HP INC. AND SUBSIDIARIESMANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Results of operations in dollars and as a percentage of net revenue were as follows:
FOR THE FISCAL YEARS ENDED OCTOBER 31
2016
2015
2014
DOLLARS IN MILLIONS
Net revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$48,238
100.0%
$51,463
100.0%
$56,651
100.0%
Cost of revenue. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
39,240
Gross profit. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Research and development . . . . . . . . . . . . . . . . . . . . . . .
Selling, general and administrative . . . . . . . . . . . . . . . .
Amortization of intangible assets. . . . . . . . . . . . . . . . . .
Restructuring and other charges . . . . . . . . . . . . . . . . . .
Defined benefit plan settlement
charges (credits) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Earnings from continuing operations before
interest and taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest and other, net. . . . . . . . . . . . . . . . . . . . . . . . . . . .
Earnings from continuing operations
before taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(Provision for) benefit from taxes. . . . . . . . . . . . . . . . . .
Net earnings from continuing operations . . . . .
Net (loss) earnings from discontinued
operations, net of taxes. . . . . . . . . . . . . . . . . . . . .
8,998
1,209
3,840
16
205
179
3,549
212
3,761
(1,095)
2,666
(170)
Net earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$2,496
81.3%
18.7%
2.5%
8.0%
0.0%
0.4%
0.4%
7.4%
0.4%
7.8%
(2.3)%
5.5%
41,524
9,939
1,191
4,720
102
63
80.7%
19.3%
2.3%
9.2%
0.2%
0.1%
45,431
11,220
1,298
5,361
129
176
80.2%
19.8%
2.3%
9.5%
0.2%
0.3%
(57)
(0.1)%
—
—
3,920
(388)
3,532
186
3,718
836
$4,554
7.6%
(0.7)%
6.9%
0.3%
7.2%
4,256
(393)
3,863
(939)
2,924
2,089
$5,013
7.5%
(0.7)%
6.8%
(1.6)%
5.2%
NET REVENUE
In fiscal year 2016, total net revenue from continuing operations
decreased 6.3% (decreased 2% on a constant currency basis) as
compared with fiscal year 2015. Net revenue from the United States
increased 1.7% to $18.0 billion, while net revenue from outside of the
United States decreased 10.4% to $30.2 billion. The primary factors
contributing to the net revenue decline were unfavorable currency
impacts, weak market demand, competitive pricing pressures and
the change in the Supplies sales model. The net revenue decline was
driven by decline in supplies, commercial and consumer printers,
commercial and consumer desktops and consumer notebooks,
partially offset by growth in commercial notebooks.
In fiscal year 2015, total net revenue from continuing operations
decreased 9.2% (decreased 4.7% on a constant currency basis) as
compared with fiscal year 2014. Net revenue from the United States
decreased 2.6% to $17.7 billion, while net revenue from outside of
the United States decreased 12.2% to $33.7 billion. The primary
factors contributing to the net revenue decline were unfavorable
currency impacts, particularly in EMEA, weak market demand and
competitive pricing pressures. The net revenue decline was driven
by desktops and supplies, partially offset by growth in notebooks
and graphics products.
A more detailed discussion of the factors contributing to the
changes in segment net revenue is included under “Segment
Information” below.
32 I
2016 Form 10-K
HP INC. AND SUBSIDIARIESMANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
GROSS MARGIN
Our gross margin from continuing operations decreased to 18.7% for
fiscal year 2016 compared with 19.3% for fiscal year 2015. The decline
in gross margin performance was primarily due to unfavorable
currency impacts, partially offset by operational improvements.
were competitive pricing environment and unfavorable currency
impacts, partially offset by favorable component costs in Personal
Systems, favorable mix of ink and graphics supplies and operational
cost improvements.
Our gross margin from continuing operations decreased to
19.3% for fiscal year 2015 compared with 19.8% for fiscal year
2014. The primary factors impacting gross margin performance
A more 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”)
AMORTIZATION OF INTANGIBLE ASSETS
R&D expense increased 2% in fiscal year 2016 as compared to
fiscal year 2015 primarily due to incremental investments in A3 and
3D printing, partially offset by favorable currency impacts.
R&D expense decreased 8% in fiscal year 2015 as compared to
fiscal year 2014 primarily due to favorable currency impacts.
SELLING, GENERAL AND ADMINISTRATIVE (“SG&A”)
SG&A expense decreased 19% in fiscal year 2016 as compared
to fiscal year 2015 primarily due to gains from the divestiture of
certain software assets to Open Text Corporation, lower corporate
governance and other overhead costs related to the pre-Separation
combined entity, our cost saving initiatives and favorable currency
impacts. These effects were partially offset by the gain from the
divestiture of Snapfish in the prior-year period.
SG&A expense decreased 12% in fiscal year 2015 as compared to
fiscal year 2014 primarily due to favorable currency impacts and
declines in go-to-market costs as a result of lower commissions and
productivity initiatives.
Amortization expense decreased by $86 million and $27 million
in fiscal year 2016 and in fiscal year 2015 respectively, primarily
due to prior acquisitions reaching the end of their respective
amortization periods.
RESTRUCTURING AND OTHER CHARGES
Restructuring and other charges increased by $142 million in
fiscal year 2016 primarily due to severance pay and infrastructure
related charges from our restructuring plan initially announced in
September 2015 (the “Fiscal 2015 Plan”).
On October 10, 2016, our Board of Directors approved a restructuring
plan (the “Fiscal 2017 Plan”) which will be implemented through
fiscal year 2019. HP recognized $24 million of charges related to
the Fiscal 2017 Plan during the fourth quarter of fiscal year 2016.
Restructuring and other charges decreased by $113 million in fiscal
year 2015 primarily due to lower charges from our restructuring
plan initially announced in May 2012 (the “Fiscal 2012 Plan”).
HP recognized $39 million of charges related to the Fiscal 2015 Plan
during the fourth quarter of fiscal year 2015.
INTEREST AND OTHER, NET
Interest and other, net expense decreased by $600 million in
fiscal year 2016. The decrease was primarily due to changes in
indemnification receivables from Hewlett Packard Enterprise for
certain tax liabilities that HP is jointly and severally liable for, but
for which it is indemnified by Hewlett Packard Enterprise under the
tax matters agreement and lower foreign currency losses, partially
offset by lower interest income.
Interest and other, net expense decreased by $5 million in fiscal year
2015. The decrease was due to lower other miscellaneous expense.
PROVISION FOR TAXES
Our effective tax rates were 29.1%, (5.3)% and 24.3% in fiscal years
2016, 2015 and 2014, respectively. Our effective tax rate generally
differs from the U.S. federal statutory rate of 35% due to favorable
tax rates associated with certain earnings from our operations
in lower tax jurisdictions throughout the world. 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, China, Malaysia and Ireland. We plan to reinvest certain
earnings of these jurisdictions indefinitely outside the United States
and therefore has not provided U.S. taxes on those indefinitely
reinvested earnings. In addition to the above factors, the overall tax
rates in fiscal year 2016 were impacted by adjustments to valuation
allowances and uncertain tax positions.
2016 Form 10-K
I 33
HP INC. AND SUBSIDIARIESMANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) For a reconciliation of our effective tax rate to the U.S. federal
statutory rate of 35% and further explanation of our provision for
taxes, see Note 7, “Taxes on Earnings” to the Consolidated Financial
Statements in Item 8, which is incorporated herein by reference.
In fiscal 2016, we recorded $301 million of net income tax charges
related to items unique to the year for continuing operations.
These amounts primarily include uncertain tax position charges
of $525 million related to pre-separation tax matters. In addition,
we recorded $62 million of net tax benefits on restructuring and
other charges, $52 million of net tax benefits related to the release
of foreign valuation allowances and $41 million of net tax benefits
arising from the retroactive research and development credit
provided by the Consolidated Appropriations Act of 2016 signed into
law in December 2015 and $70 million of other tax benefit.
In fiscal year 2015, we recorded $1.2 billion of net income tax
benefits related to items unique to the year. These amounts included
$1.7 billion of tax benefits due to a release of valuation allowances
pertaining to certain U.S. deferred tax assets, $449 million of tax
charges related to uncertain tax positions on pension transfers,
$70 million of tax benefits related to state tax impacts, and $6 million
of income tax charges related to various other items. In addition,
we recorded $33 million of income tax charges on restructuring and
pension-related costs.
In fiscal year 2014, we recorded $69 million of net income tax benefits
related to items unique to the year. These amounts included $37 million
of income tax benefits related to provision to return adjustments,
$25 million of income tax charges related to state rate changes,
$41 million of income tax benefits for adjustments related to
uncertain tax positions, and $16 million of income tax benefits
related to other items.
SEGMENT INFORMATION
A description of the products and services for each segment can be found in Note 3, “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
Net revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Earnings from operations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
FOR THE FISCAL YEARS ENDED OCTOBER 31
2016
2015
2014
DOLLARS IN MILLIONS
$29,987
$1,150
$31,520
$1,022
$34,387
$1,265
Earnings from operations as a % of net revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3.8%
3.2%
3.7%
The components of net revenue and the weighted net revenue change by business unit were as follows:
FOR THE FISCAL YEARS ENDED OCTOBER 31
NET REVENUE
2016
2015
DOLLARS IN MILLIONS
WEIGHTED NET
REVENUE CHANGE
PERCENTAGE POINTS
Notebook PCs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$16,982
$17,271
Desktop PCs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Workstations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
9,956
1,870
1,179
10,941
2,018
1,290
Total Personal Systems. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$29,987
$31,520
(0.9)
(3.1)
(0.5)
(0.4)
(4.9)
34 I
2016 Form 10-K
HP INC. AND SUBSIDIARIESMANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) FOR THE FISCAL YEARS ENDED OCTOBER 31
NET REVENUE
2015
2014
DOLLARS IN MILLIONS
WEIGHTED NET
REVENUE CHANGE
PERCENTAGE POINTS
Notebook PCs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$17,271
$17,540
Desktop PCs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
10,941
13,197
Workstations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,018
1,290
2,218
1,432
Total Personal Systems. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$31,520
$34,387
(0.8)
(6.6)
(0.6)
(0.3)
(8.3)
FISCAL YEAR 2016 COMPARED WITH FISCAL YEAR 2015
Personal systems net revenue decreased 4.9% (decreased 0.9%
on a constant currency basis) in fiscal year 2016. The net revenue
decline in Personal Systems was primarily due to unfavorable
currency impacts and weak market demand. Personal Systems net
revenue decreased as a result of a 3.5% decline in unit volume along
with a 1% decline in average selling price (“ASP”) as compared to the
prior-year period. The unit volume decline was primarily due to an
overall decline in desktops and consumer notebooks, partially offset
by unit volume growth in commercial notebooks. The decline in ASP
was primarily due to competitive pricing in the commercial segment
partially offset by favorable pricing in the consumer segment and
favorable mix shift in consumer high-end premium products.
Consumer and commercial revenue both decreased by 5%, primarily
due to weak market demand, partially offset by an increase in
commercial notebooks and PC services. Net revenue declined 2% in
Notebooks, 9% in Desktops, 7% in Workstations and 9% in Other as
compared to the prior-year period. The net revenue decline in Other
was primarily due to lower sales in consumer tablets and Personal
Systems options partially offset by revenue growth in PC services.
Personal Systems earnings from operations as a percentage of net
revenue increased by 0.6 percentage points in fiscal year 2016.
The increase was primarily due to growth in gross margin driven
by favorable commodity costs combined with product mix and
increase in PC services, the effects of which were partially offset
by unfavorable currency impacts in revenue. Operating expenses
as a percentage of net revenue increased by 0.1 percentage point
primarily driven by an increase in field selling cost.
FISCAL YEAR 2015 COMPARED WITH FISCAL YEAR 2014
Personal Systems net revenue decreased 8.3% (decreased 3.1%
on a constant currency basis) in fiscal year 2015. The net revenue
decline in Personal Systems was primarily due to unfavorable
currency impacts, particularly in EMEA, and weakening market
demand. Personal Systems net revenue decreased as a result of a
5% decline in ASP and a 3% decline in unit volume. The decline in
ASP was primarily due to unfavorable currency impacts, a shift in
consumer PCs to low end products and a lower mix of commercial
PCs within Personal Systems. The unit volume decline was primarily
due to a unit volume decline in desktops, partially offset by a unit
volume growth in notebooks, both consumer and commercial.
Net revenue for commercial clients decreased 8% primarily due to
unfavorable currency impacts, a decline in commercial desktops
as a result of weak market demand and higher net revenue in the
prior-year period resulting from the replacement of the Windows
XP operating system. Net revenue for consumer clients decreased
8% primarily due to unfavorable currency impacts and a decline
in consumer desktops. Net revenue declined 17% in Desktop PCs,
2% in Notebook PCs, 9% in Workstations and 10% in Other. The net
revenue decline in Other was primarily due to a decline in consumer
tablets, the sale of intellectual property assets in the prior-year
period, and unfavorable currency impacts, the effects of which were
partially offset by increased sales of extended warranties.
Personal Systems earnings from operations as a percentage of net
revenue decreased by 0.5 percentage points for fiscal year 2015
as a result of a decline in gross margin combined with an increase
in operating expenses as a percentage of net revenue. The decline
in gross margin was primarily due to unfavorable currency impacts
and a lower mix of commercial products, partially offset by favorable
component costs and operational cost improvements. Operating
expenses as a percentage of net revenue increased primarily
due to the size of the net revenue decline, higher administrative
expenses as a result of lower bad debt recoveries as compared to
the prior-year period and higher R&D investments in commercial,
mobility and immersive computing products, the effects of which
were partially offset by a decline in field selling costs as a result of
favorable currency impacts and operational cost improvements.
2016 Form 10-K
I 35
HP INC. AND SUBSIDIARIESMANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) PRINTING
Net revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$18,260
Earnings from operations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$3,128
$21,232
$3,765
$23,211
$4,161
Earnings from operations as a % of net revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
17.1%
17.7%
17.9%
The components of the net revenue and weighted net revenue change by business unit were as follows:
FOR THE FISCAL YEARS ENDED OCTOBER 31
2016
2015
2014
DOLLARS IN MILLIONS
FOR THE FISCAL YEARS ENDED OCTOBER 31
NET REVENUE
2016
2015
DOLLARS IN MILLIONS
WEIGHTED NET
REVENUE CHANGE
PERCENTAGE POINTS
Supplies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$11,875
$13,979
Commercial Hardware. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consumer Hardware . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5,131
1,254
5,466
1,787
Total Printing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$18,260
$21,232
(9.9)
(1.6)
(2.5)
(14.0)
FOR THE FISCAL YEARS ENDED OCTOBER 31
NET REVENUE
2015
2014
DOLLARS IN MILLIONS
WEIGHTED NET
REVENUE CHANGE
PERCENTAGE POINTS
Supplies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$13,979
$14,917
Commercial Hardware. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consumer Hardware . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5,466
1,787
6,035
2,259
Total Printing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$21,232
$23,211
(4.0)
(2.5)
(2.0)
(8.5)
FISCAL YEAR 2016 COMPARED WITH FISCAL YEAR 2015
Printing net revenue decreased 14.0% (decreased 9.3% on a
constant currency basis) for fiscal year 2016. The decline in net
revenue was primarily due to unfavorable currency
impacts,
weakness in demand, impact from the change in the Supplies sales
model and competitive pricing pressures. These factors resulted in a
net revenue decline across Supplies and Consumer and Commercial
Hardware. Net revenue for Supplies decreased 15.1% as compared
to the prior-year period, primarily due to unfavorable currency
impacts, demand weakness combined with a competitive pricing
environment and impact of the change in the Supplies sales model.
Printer unit volume decreased 12% and ASP increased by 2% as
compared to the prior-year period. Printer unit volume decreased
due to weakness in demand, our pricing discipline and focus on
placing positive NPV units. Printer ASP increased primarily due
to a favorable mix shift to high-value printers, partially offset by
unfavorable currency impacts.
Net revenue for Commercial Hardware decreased 6% for fiscal year
2016 as compared to the prior-year period primarily driven by a 6%
decline in unit volume and a decrease in other peripheral printing
solutions. The unit volume in Commercial Hardware declined
primarily due to a unit volume decline in LaserJet printers. The
ASP in Commercial Hardware increased slightly primarily due to
mix shift to high-value printer sales offset by unfavorable currency
impacts. Printer unit volume in Consumer Hardware declined 15%,
combined with a decline in other printing solutions largely driven
by the divestiture of Snapfish in the prior-year period and a 9%
36 I
2016 Form 10-K
HP INC. AND SUBSIDIARIESMANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) decline in ASP, resulted in a 30% decline in Consumer Hardware net
revenue for fiscal year 2016 as compared to the prior-year period.
The unit volume decline in Consumer Hardware was primarily due
to weakness in demand, our pricing discipline and our continued
efforts to place positive NPV units. The ASP in Consumer Hardware
decreased primarily due to unfavorable currency impacts.
Printing earnings from operations as a percentage of net revenue
decreased by 0.6% percentage points for fiscal year 2016 as
compared to the prior-year period due to decline in gross margin,
partially offset by the gains from the divestiture of certain software
assets. The gross margin decline was primarily due to unfavorable
currency impacts and supplies mix, partially offset by operational
improvements and favorable mix of printers. Operating expenses
decreased primarily due to the gains from the divestiture of certain
software assets to Open Text Corporation and cost-saving initiatives.
FISCAL YEAR 2015 COMPARED WITH FISCAL YEAR 2014
Printing net revenue decreased 8.5% (decreased 5.1% on a constant
currency basis) for fiscal year 2015. The decline in net revenue was
primarily due to unfavorable currency impacts, decline in Supplies,
weak market demand and competitive pricing pressures, the effects
of which were partially offset by growth in graphics products. From
a regional perspective, Printing experienced a net revenue decline
across all regions, primarily in EMEA and particularly in Russia as a
result of challenges in those markets.
Net revenue for Supplies decreased 6% primarily due to unfavorable
currency impacts and demand weakness in toner and ink, partially
offset by growth in graphics supplies. The demand weakness in
toner was particularly in EMEA, led by a net revenue decline in Russia.
Printer unit volumes declined 7% while ASP decreased 7%. Printer
unit volume declined primarily due to a decline in LaserJet and home
printer units, the effects of which were partially offset by growth
in graphics printer units. The ASP for printers decreased primarily
due to a highly competitive pricing environment and unfavorable
currency impacts on Inkjet and LaserJet printers. Net revenue for
Commercial Hardware decreased 9% driven by a 7% decline in
printer unit volume and a 4% decline in ASP, partially offset by a
net revenue increase in other peripheral solutions. In Commercial
Hardware, the decline in unit volume was primarily due to an
overall decline in LaserJet printer units, partially offset by growth in
graphics printer units. The ASP decline in Commercial Hardware was
primarily due to a competitive pricing environment and unfavorable
currency impacts. Net revenue for Consumer Hardware decreased
21% driven by a 13% decline in ASP, 7% decline in unit volume and
a decline in other peripheral solutions. The ASP decline in Consumer
Hardware was primarily due to a competitive pricing environment
and unfavorable currency impacts. The unit volume decline in
Consumer Hardware was primarily due to lower sales of home and
SMB printer units.
Printing earnings from operations as a percentage of net revenue
declined 0.2 percentage points for fiscal year 2015 due to a decline
in gross margin, partially offset by lower operating expenses
as a percentage of net revenue. The decline in gross margin was
primarily due to a competitive pricing environment in hardware and
unfavorable currency impacts, the effects of which were partially
offset by a favorable mix of ink and graphics supplies and favorable
currency impacts from the Japanese yen. Operating expenses as
a percentage of net revenue decreased primarily due to our cost
saving initiatives, lower marketing expenses, the impact of the
divestiture of our photo printing service Snapfish and favorable
currency impacts.
CORPORATE INVESTMENTS
Net revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(Loss) earnings from operations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(Loss) earnings from operations as a % of net revenue(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(1)
“NM” represents not meaningful.
FISCAL YEAR 2016 COMPARED WITH FISCAL YEAR 2015
FOR THE FISCAL YEARS ENDED OCTOBER 31
2016
2015
2014
DOLLARS IN MILLIONS
$7
$(98)
NM
$20
$(43)
NM
$296
$157
53%
The loss from operations for fiscal year 2016 was primarily due to expenses associated with our incubation projects.
FISCAL YEAR 2015 COMPARED WITH FISCAL YEAR 2014
The net revenue decrease for fiscal year 2015 was primarily due
to the sale of intellectual property assets related to the Palm
acquisition in the prior-year period.
The increase in the loss from operations for fiscal year 2015 was
primarily due to the sale of intellectual property assets in the prior-
year period and higher expenses associated with incubation projects
and HP Labs.
2016 Form 10-K
I 37
HP INC. AND SUBSIDIARIESMANAGEMENT’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. We believe that internally generated cash flows are
generally sufficient to support our operating businesses, capital
expenditures, restructuring activities, maturing debt, income tax
payments and the payment of stockholder dividends, in addition
to investments and share repurchases. We are able to supplement
this short-term liquidity, if necessary, with broad access to capital
markets and credit facilities made available by various domestic and
foreign financial institutions. Our access to capital markets may be
constrained and our cost of borrowing may increase under certain
business, market and economic conditions; however, 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 is incorporated
herein by reference.
Our cash balances are held in numerous locations throughout the
world, with majority of those amounts held outside of the United
States. We utilize a variety of planning and financing strategies
in an effort to ensure that our worldwide cash is available when
and where it is needed. Our cash position remains strong, and we
expect that our cash balances, anticipated cash flow generated from
operations and access to capital markets will be sufficient to cover
our expected near-term cash outlays.
LIQUIDITY
In September 2016, HP entered into a definitive agreement
to acquire Samsung Electronics Co., Ltd.’s printer business for
$1.05 billion. The transaction is expected to close within 12 months
pending regulatory review and other customary closing conditions.
Amounts held outside of the United States are generally utilized
to support non-U.S.
liquidity needs, although a portion of
those amounts may from time to time be subject to short-term
intercompany loans into the United States. Most of the amounts
held outside of the United States could be repatriated to the United
States but, under current law, some would be subject to U.S. federal
income taxes, less applicable foreign tax credits. Repatriation of
some foreign earnings is restricted by local law. Except for foreign
earnings that are considered indefinitely reinvested outside of the
United States, we have provided for the U.S. federal tax liability on
these earnings for financial statement purposes. Repatriation could
result in additional income tax payments in future years. Where local
restrictions prevent an efficient intercompany transfer of funds, our
intent is that cash balances would remain outside of the United
States and we would meet liquidity needs through ongoing cash
flows, external borrowings, or both. We do not expect restrictions
or potential taxes incurred on repatriation of amounts held outside
of the United States to have a material effect on our overall liquidity,
financial condition or results of operations.
Our cash and cash equivalents and total debt for continuing operations were as follows:
Cash and cash equivalents. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
AS OF OCTOBER 31
2016
2015
2014
IN BILLIONS
$6.3
$6.8
$7.6
$8.9
$12.9
$18.2
Our historical statements of cash flows represent the combined
cash flows and key cash flow metrics of HP prior to the Separation
and have not been revised to reflect the effect of the Separation.
For further information on discontinued operations, see Note 2,
“Discontinued Operations” in the Consolidated Financial Statements
and notes thereto included in Item 8, “Financial Statements and
Supplementary Data”, which is incorporated herein by reference.
38 I
2016 Form 10-K
HP INC. AND SUBSIDIARIESMANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Our key cash flow metrics were as follows:
FOR THE FISCAL YEARS ENDED OCTOBER 31
2016
2015
2014
Net cash provided by operating activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$3,230
Net cash provided by (used in) investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
48
Net cash (used in) provided by financing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(14,423)
Net (decrease) increase in cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$(11,145)
IN MILLIONS
$6,490
(5,534)
1,344
$2,300
$12,333
(2,792)
(6,571)
$2,970
OPERATING ACTIVITIES
Net cash provided by operating activities decreased by $3.3 billion
for fiscal year 2016 as compared to fiscal year 2015, since the net
cash provided by operating activities for fiscal year 2015 included
the impact of discontinued operations, which is not included in the
net cash provided by operating activities for fiscal year 2016, as a
result of the Separation.
Net cash provided by operating activities decreased by approximately
$5.8 billion for fiscal year 2015 as compared to fiscal year 2014. The
decrease was due primarily to lower cash generated from working
capital management activities, payments for Separation costs,
lower cash receipts from contract manufacturers and financing
receivables, lower net earnings in the current period, unfavorable
currency impacts, as well as higher cash payments for prepaid
expenses and employee benefits.
WORKING CAPITAL METRICS
Management utilizes current cash conversion cycle information to manage our working capital level. The table below presents the cash
conversion cycle as of October 31, 2016 and October 31, 2015.
Days of sales outstanding in accounts receivable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Days of supply in inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Days of purchases outstanding in accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash conversion cycle . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
AS OF OCTOBER 31
2016
2015
2014
30
39
(98)
(29)
35
39
(93)
(19)
33
35
(86)
(18)
The cash conversion cycle is the sum of days of sales outstanding in
accounts receivable (“DSO”) and days of supply in inventory (“DOS”)
less days of purchases outstanding in accounts payable (“DPO”).
Items which may cause the cash conversion cycle in a particular
period to differ from a long-term sustainable rate include, but are
not limited to, changes in business mix, changes in payment terms,
extent of receivables factoring, seasonal trends and the timing of
revenue recognition and inventory purchases within the period.
DSO measures the average number of days our receivables are
outstanding. DSO is calculated by dividing ending accounts receivable,
net of allowance for doubtful accounts, by a 90-day average of net
revenue. For fiscal year 2016, the decrease in DSO compared to
fiscal year 2015 was primarily due to favorable revenue linearity
and strong collections, partially offset by unfavorable currency
impacts. For fiscal year 2015, the increase in DSO compared to fiscal
year 2014 was primarily due to lower usage of cash discounts by
our customers.
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. For fiscal year 2016, the
DOS was flat compared to fiscal year 2015 due to strong inventory
management offset by higher inventory balance to support future
sales levels. For fiscal year 2015, the increase in DOS compared to
fiscal year 2014 was due to higher inventory balance to support
future sales levels.
2016 Form 10-K
I 39
HP INC. AND SUBSIDIARIESMANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) FINANCING ACTIVITIES
Net cash used in financing activities increased by $15.8 billion in
fiscal year 2016 primarily due to the cash transfer of $10.4 billion
to Hewlett Packard Enterprise in connection with the Separation,
the redemption of $2.1 billion of U.S. Dollar Global Notes and
cash utilization of $2.0 billion for repurchases of common stock
and dividends.
Net cash used in financing activities decreased by approximately
$7.9 billion for fiscal year 2015 as compared to net cash used in
financing activities of $6.6 billion in fiscal year 2014. The change
was primarily due to proceeds from the issuance of senior unsecured
notes in October 2015 by Hewlett Packard Enterprise in principal
amount of $14.6 billion and higher proceeds from issuance of
commercial paper, partially offset by the redemption of $6.6 billion
of U.S. Dollar Global Notes and higher repayment of commercial
paper as compared to fiscal year 2014.
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. For
fiscal year 2016, the increase in DPO compared to fiscal year 2015
was primarily the result of extension of payment terms with our
product suppliers and increased strategic inventory purchases. For
fiscal year 2015, the increase in DPO compared to fiscal year 2014
was primarily the result of purchasing linearity and an extension of
payment terms with our product suppliers.
INVESTING ACTIVITIES
Net cash used in investing activities decreased by $5.6 billion for
fiscal year 2016 as compared to fiscal year 2015, due to capital
expenditures and payments made in connection with business
acquisitions, net of cash acquired, in fiscal year 2015 by the
discontinued operations.
Net cash used in investing activities increased by approximately
$2.7 billion for fiscal year 2015 as compared to fiscal year 2014,
primarily due to the acquisition of Aruba Networks, Inc., which
was transferred to Hewlett Packard Enterprise as a part of
the Separation.
CAPITAL RESOURCES
DEBT LEVELS
Short-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$78
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$6,758
Debt-to-equity ratio. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Weighted-average interest rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(1.76)x
4.2%
$2,194
$6,677
0.32x
3.7%
$2,594
$15,563
0.67x
2.7%
AS OF OCTOBER 31
2016
2015
2014
DOLLARS IN MILLIONS
Short-term debt decreased by $0.4 billion and long-term debt
decreased by $8.9 billion for fiscal year 2015 as compared to fiscal
year 2014. The net decrease in total debt was primarily due to the
redemption of $6.6 billion of U.S. Dollar Global Notes in connection
with the Separation and maturities of $2.5 billion of U.S. Dollar
Global Notes in fiscal year 2015. During the month of November
2015, we paid $2.1 billion for the redemption of U.S. Dollar Global
Notes as part of the final settlement of the debt redeemed as a part
of the Separation.
We maintain debt levels that we establish through consideration
of a number of factors, including cash flow expectations, cash
requirements
(including
acquisitions), share repurchase activities, our cost of capital and
targeted capital structure.
investment plans
for operations,
Short-term debt decreased by $2.1 billion and long-term debt
increased by $0.1 billion for fiscal year 2016 as compared to fiscal
year 2015. The net decrease in total debt was primarily due to
redemption of $2.1 billion of fixed rate U.S. Dollar Global Notes in
November 2015.
40 I
2016 Form 10-K
HP INC. AND SUBSIDIARIESMANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Our debt-to-equity ratio is calculated as the carrying amount of
debt divided by total stockholders’ equity. Our debt-to-equity ratio
decreased by 2.08x in fiscal year 2016, primarily due to negative
equity resulting from the transfer of net assets of $32.5 billion to
Hewlett Packard Enterprise and redemption of $2.1 billion of fixed-
rate U.S. Dollar Global Notes due to the Separation. During fiscal
year 2016, we generated operating cash flow of $3.2 billion. Our
debt-to-equity ratio decreased by 0.35x in fiscal year 2015, due
to a decrease in total debt balances of $9.3 billion coupled with an
increase in total stockholders’ equity by $1.0 billion at the end of
fiscal year 2015.
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 11, “Financial Instruments” in the Consolidated
Financial Statements and notes thereto in Item 8, “Financial
Statements and Supplementary Data”.
As of October 31, 2016, we maintain a senior unsecured committed
revolving credit facility with aggregate lending commitments of
$4.0 billion, which will be available until April 2, 2019 and is primarily
to support the issuance of commercial paper. Funds borrowed
under this revolving credit facility may also be used for general
corporate purposes.
AVAILABLE BORROWING RESOURCES
As of October 31, 2016, we had available borrowing resources of
$822 million from uncommitted lines of credit in addition to our
$4.0 billion senior unsecured committed revolving credit facility
discussed above. For more information on our borrowings, see Note
12, “Borrowings”, to the Consolidated Financial Statements in Item
8 of Part II, which is incorporated herein by reference.
CREDIT RATINGS
Our credit risk is evaluated by major independent rating agencies
based upon publicly available information as well as information
obtained in our ongoing discussions with them. While we do not
have any rating downgrade triggers that would accelerate the
maturity of a material amount of our debt, previous downgrades
have increased the cost of borrowing under our credit facilities,
have reduced market capacity for our commercial paper and have
required the posting of additional collateral under some of our
derivative contracts. In addition, any further downgrade to our credit
ratings by any rating agencies may further impact us in a similar
manner, and, depending on the extent of any such downgrade, could
have a negative impact on our liquidity and capital position. We can
access alternative sources of funding, including drawdowns under
our credit facilities, if necessary, to offset potential reductions in the
market capacity for our commercial paper.
CONTRACTUAL AND OTHER OBLIGATIONS
Our contractual and other obligations as of October 31, 2016, were as follows:
Principal payments on debt(1) . . . . . . . . . . . . . . . . . . . . . . . .
Interest payments on debt(2) . . . . . . . . . . . . . . . . . . . . . . . . .
Purchase obligations(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating lease obligations(4) . . . . . . . . . . . . . . . . . . . . . . . .
Capital lease obligations(5) . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total(6)(7)(8) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PAYMENTS DUE BY PERIOD
TOTAL
1 YEAR OR LESS
1-3 YEARS
3-5 YEARS
DOLLARS IN MILLIONS
$6,558
2,758
249
850
248
$28
274
63
156
59
$421
$2,899
542
99
303
109
484
76
173
68
MORE THAN
5 YEARS
$3,210
1,458
11
218
12
$10,663
$580
$1,474
$3,700
$4,909
(1)
(2)
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.
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, 2016 was factored into the calculation of the future interest payments on debt.
2016 Form 10-K
I 41
HP INC. AND SUBSIDIARIESMANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) (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)
Amounts represent the operating lease obligations, net of total sublease income of $218 million.
(5)
Amounts represent the capital lease obligations, including total capital lease interest obligations of $35 million.
(6)
(7)
(8)
Retirement and Post-Retirement Benefit Plan Contributions. In fiscal year 2017, we anticipate making contributions of $26 million to non-U.S. pension plans,
approximately $33 million to cover benefit payments to U.S. non-qualified pension plan participants and approximately $9 million to cover benefit claims for
our post-retirement benefit plans. Our policy is to fund our pension plans so that we meet at least the minimum contribution requirements, as established by
local government, funding and taxing authorities. 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 5, “Retirement and Post-Retirement Benefit Plans”, to
the Consolidated Financial Statements in Item 8, which is incorporated herein by reference.
Cost Savings Plans. We expect to make future cash payments of between $384 million and $534 million in connection with our cost savings plans through fiscal
year 2019. 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, see Note 4, “Restructuring and Other Charges”, to the
Consolidated Financial Statements in Item 8, which is incorporated herein by reference.
Uncertain Tax Positions. As of October 31, 2016, we had approximately $1.9 billion of recorded liabilities and related interest and penalties pertaining to uncertain
tax positions. We are unable to make a reasonable estimate as to when cash settlement with the tax authorities might occur due to the uncertainties related to
these tax matters. Payments of these obligations would result from settlements with taxing authorities. For more information on our uncertain tax positions,
see Note 7, “Taxes on Earnings”, to the Consolidated Financial Statements in Item 8, which is incorporated herein by reference.
OFF-BALANCE SHEET ARRANGEMENTS
transactions
that generate material
As part of our ongoing business, we have not participated
in
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.
third-party
We have
financing arrangements
short-term
intended to facilitate the working capital requirements of certain
customers. For more information on our third-party short-term
financing arrangements, see Note 8 “Balance Sheet Details” to the
Consolidated Financial Statements in Item 8, which is incorporated
herein by reference.
42 I
2016 Form 10-K
HP INC. AND SUBSIDIARIESMANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
In the normal course of business, we are exposed to foreign currency
exchange rate and interest rate risks that could impact our financial
position and results of operations. Our risk management strategy
with respect to these market risks may include the use of derivative
financial instruments. We use derivative contracts only to manage
existing underlying exposures. Accordingly, we do not use derivative
contracts for speculative purposes. Our risks, risk management
strategy and a sensitivity analysis estimating the effects of changes
in fair value for each of these exposures is outlined below.
FOREIGN CURRENCY EXCHANGE RATE RISK
We are exposed to foreign currency exchange rate risk inherent in
our sales commitments, anticipated sales, anticipated purchases
and assets and liabilities denominated in currencies other than the
U.S. dollar. We transact business in approximately 44 currencies
worldwide, of which the most significant foreign currencies to our
operations for fiscal year 2016 were the euro, Chinese yuan renminbi,
the British pound and the Indian rupee. For most currencies, we
are a net receiver of the foreign currency and therefore benefit
from a weaker U.S. dollar and are adversely affected by a stronger
U.S. dollar relative to the foreign currency. Even where we are a net
receiver of the foreign currency, a weaker U.S. dollar may adversely
affect certain expense figures, if taken alone.
We use a combination of forward contracts and at times, options
designated as cash flow hedges to protect against the foreign
currency exchange rate risks inherent in our forecasted net revenue
and, to a lesser extent, cost of sales and intercompany loans
denominated in currencies other than the U.S. dollar. In addition,
when debt is denominated in a foreign currency, we may use swaps
to exchange the foreign currency principal and interest obligations
for U.S. dollar-denominated amounts to manage the exposure to
changes in foreign currency exchange rates. We also use other
INTEREST RATE RISK
We also are exposed to interest rate risk related to debt we have
issued and our investment portfolio.
We issue long-term debt in either U.S. dollars or foreign currencies
based on market conditions at the time of financing. We often
use interest rate and/or currency swaps to modify the market risk
exposures in connection with the debt to achieve U.S. dollar LIBOR-
based floating interest expense. The swap transactions generally
involve the exchange of fixed for floating interest payments.
However, we may choose not to swap fixed for floating interest
payments or may terminate a previously executed swap if we
believe a larger proportion of fixed-rate debt would be beneficial.
In order to hedge the fair value of certain fixed-rate investments,
we may enter into interest rate swaps that convert fixed interest
returns into variable interest returns. We may use cash flow hedges
to hedge the variability of LIBOR-based interest income received on
certain variable-rate investments. We may also enter into interest
rate swaps that convert variable rate interest returns into fixed-rate
interest returns.
Actual gains and losses in the future may differ materially from the
sensitivity analyses based on changes in the timing and amount of
foreign currency exchange rate and interest rate movements and
our actual exposures and derivatives in place at the time of the
change, as well as the effectiveness of the derivative to hedge the
related exposure.
derivatives not designated as hedging instruments consisting
primarily of forward contracts to hedge foreign currency balance
sheet exposures. Alternatively, we may choose not to hedge the
risk associated with our foreign currency exposures, primarily if
such exposure acts as a natural hedge for offsetting amounts
denominated in the same currency or if the currency is too difficult
or too expensive to hedge.
We have performed sensitivity analyses for continuing operations
as of October 31, 2016 and 2015, using a modeling technique that
measures the change in the fair values arising from a hypothetical
10% adverse movement in the levels of foreign currency exchange
rates relative to the U.S. dollar, with all other variables held constant.
The analyses cover all of our foreign currency derivative contracts
offset by underlying exposures. The foreign currency exchange
rates we used in performing the sensitivity analysis were based on
market rates in effect at October 31, 2016 and 2015. The sensitivity
analyses indicated that a hypothetical 10% adverse movement in
foreign currency exchange rates would result in a foreign exchange
fair value loss of $41 million and $54 million for continuing
operations at October 31, 2016 and October 31, 2015, respectively.
We have performed sensitivity analyses for continuing operations
as of October 31, 2016 and 2015, using a modeling technique that
measures the change in the fair values arising from a hypothetical
10% adverse movement in the levels of interest rates across the
entire yield curve, with all other variables held constant. The
analyses cover our debt, investments and interest rate swaps.
The analyses use actual or approximate maturities for the debt,
investments and interest rate swaps. The discount rates used were
based on the market interest rates in effect at October 31, 2016 and
2015. The sensitivity analyses for continuing operations indicated
that a hypothetical 10% adverse movement in interest rates would
have resulted in a loss in the fair values of our debt and investments,
net of interest rate swaps, of $51 million at October 31, 2016 and
$67 million at October 31, 2015.
2016 Form 10-K
I 43
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
TABLE OF CONTENTS
Report of Independent Registered Public Accounting Firm
Management’s Report on Internal Control Over Financial Reporting
Consolidated Statements of Earnings
Consolidated Statements of Comprehensive Income
Consolidated Balance Sheets
Consolidated Statements of Cash Flows
Consolidated Statements of Stockholders’ (Deficit) Equity
Notes to Consolidated Financial Statements
Note 1: Overview and Summary of Significant Accounting Policies
Note 2: Discontinued Operations
Note 3: Segment Information
Note 4: Restructuring and Other Charges
Note 5: Retirement and Post-Retirement Benefit Plan
Note 6: Stock-Based Compensation
Note 7: Taxes on Earnings
Note 8: Balance Sheet Details
Note 9: Goodwill
Note 10: Fair Value
Note 11: Financial Instruments
Note 12: Borrowings
Note 13: Stockholders’ (Deficit) Equity
Note 14: Earnings Per Share
Note 15: Litigation and Contingencies
Note 16: Guarantees, Indemnifications and Warranties
Note 17: Commitments
Note 18: Divestitures
Quarterly Summary
44 I
2016 Form 10-K
Page
45
47
48
49
50
51
53
55
55
61
62
66
67
78
82
87
90
91
92
98
100
102
103
108
109
XX
111
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of HP Inc.
We have audited the accompanying consolidated balance sheets of HP Inc. and subsidiaries as of October 31, 2016 and 2015, and the related
consolidated statements of earnings, comprehensive income, stockholders’ (deficit) equity, and cash flows for each of the three years in the
period ended October 31, 2016. These financial statements are the responsibility of the Company’s management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of HP Inc.
and subsidiaries at October 31, 2016 and 2015, and the consolidated results of their operations and their cash flows for each of the three
years in the period ended October 31, 2016, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), HP Inc. and
subsidiaries’ internal control over financial reporting as of October 31, 2016, based on criteria established in Internal Control—Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated
December 15, 2016 expressed an unqualified opinion thereon.
/s/ ERNST & YOUNG LLP
San Jose, California
December 15, 2016
2016 Form 10-K
I 45
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of HP Inc.
We have audited HP Inc. and subsidiaries’ internal control over financial reporting as of October 31, 2016, based on criteria established
in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013
framework) (the COSO criteria). HP Inc. and subsidiaries’ management is responsible for maintaining effective internal control over
financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying
Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the company’s internal
control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial
reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting,
assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based
on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit
provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting
principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide
reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally
accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of
management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections
of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, HP Inc. and subsidiaries maintained, in all material respects, effective internal control over financial reporting as of
October 31, 2016, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated
balance sheets of HP Inc. and subsidiaries as of October 31, 2016 and 2015, and the related consolidated statements of earnings,
comprehensive income, stockholders’ (deficit) equity and cash flows for each of the three years in the period ended October 31, 2016 and
our report dated December 15, 2016 expressed an unqualified opinion thereon.
/s/ ERNST & YOUNG LLP
San Jose, California
December 15, 2016
46 I
2016 Form 10-K
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
HP’s management is responsible for establishing and maintaining adequate internal control over financial reporting for HP. HP’s internal
control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles. HP’s internal
control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect the transactions and dispositions of the assets of HP; (ii) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and
that receipts and expenditures of HP are being made only in accordance with authorizations of management and directors of HP; and
(iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of HP’s assets
that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections
of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or procedures may deteriorate.
HP’s management assessed the effectiveness of HP’s internal control over financial reporting as of October 31, 2016, utilizing the criteria
set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control—Integrated Framework
(2013 framework). Based on the assessment by HP’s management, we determined that HP’s internal control over financial reporting was
effective as of October 31, 2016. The effectiveness of HP’s internal control over financial reporting as of October 31, 2016 has been audited
by Ernst & Young LLP, HP’s independent registered public accounting firm, as stated in their report which appears on page 54 of this Annual
Report on Form 10-K.
/s/ DION J. WEISLER
Dion J. Weisler
President and Chief Executive Officer
December 15, 2016
/s/ CATHERINE A. LESJAK
Catherine A. Lesjak
Chief Financial Officer
December 15, 2016
2016 Form 10-K
I 47
CONSOLIDATED STATEMENTS OF EARNINGS
FOR THE FISCAL YEARS ENDED OCTOBER 31
2016
2015
2014
IN MILLIONS, EXCEPT PER SHARE AMOUNTS
Net revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$48,238
$51,463
$56,651
Costs and expenses:
Cost of revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Research and development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Selling, general and administrative . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restructuring and other charges. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Defined benefit plan settlement charges (credits) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
39,240
1,209
3,840
205
16
179
Total costs and expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
44,689
Earnings from continuing operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest and other, net. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Earnings from continuing operations before taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(Provision for) benefit from taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net earnings from continuing operations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net (loss) earnings from discontinued operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3,549
212
3,761
(1,095)
2,666
(170)
41,524
1,191
4,720
63
102
(57)
47,543
3,920
(388)
3,532
186
3,718
836
45,431
1,298
5,361
176
129
—
52,395
4,256
(393)
3,863
(939)
2,924
2,089
Net earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$2,496
$4,554
$5,013
Net earnings (loss) per share:
Basic
Continuing operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Discontinued operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total basic net earnings per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted
Continuing operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Discontinued operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total diluted net earnings per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Weighted-average shares used to compute net earnings per share:
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$1.54
(0.10)
$1.44
$1.53
(0.10)
$1.43
1,730
1,743
$2.05
0.46
$2.51
$2.02
0.46
$2.48
1,814
1,836
$1.55
1.11
$2.66
$1.53
1.09
$2.62
1,882
1,912
48 I
2016 Form 10-K
HP INC. AND SUBSIDIARIESThe accompanying notes are an integral part of these Consolidated Financial Statements. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Net earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$2,496
$4,554
$5,013
FOR THE FISCAL YEARS ENDED OCTOBER 31
2016
2015
2014
IN MILLIONS
Other comprehensive loss before taxes:
Change in unrealized gains (losses) on available-for-sale securities:
Unrealized gains (losses) arising during the period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gains reclassified into earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Change in unrealized components of cash flow hedges:
Unrealized gains arising during the period. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Losses (gains) reclassified into earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Change in unrealized components of defined benefit plans:
Losses arising during the period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of actuarial loss and prior service benefit . . . . . . . . . . . . . . . . . . . . . . . . . .
Curtailments, settlements and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Change in cumulative translation adjustment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other comprehensive loss before taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Benefit from (provision for) taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other comprehensive loss, net of taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1
—
1
199
63
262
(759)
51
183
(525)
—
(262)
45
(217)
(17)
—
(17)
1,091
(1,312)
(221)
7
(1)
6
337
151
488
(548)
(2,756)
443
115
10
(207)
(435)
14
(421)
259
51
(2,446)
(85)
(2,037)
(66)
(2,103)
$2,910
Comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$2,279
$4,133
2016 Form 10-K
I 49
HP INC. AND SUBSIDIARIESThe accompanying notes are an integral part of these Consolidated Financial Statements. CONSOLIDATED BALANCE SHEETS
AS OF OCTOBER 31
2016
2015
IN MILLIONS, EXCEPT
PAR VALUE
Current assets:
ASSETS
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$6,288
$7,584
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Inventory. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Current assets of discontinued operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4,114
4,484
3,582
—
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
18,468
Property, plant and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other non-current assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-current assets of discontinued operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,736
5,622
3,184
—
4,825
4,288
4,498
30,592
51,787
1,492
5,680
1,592
46,331
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$29,010
$106,882
Current liabilities:
LIABILITIES AND STOCKHOLDERS’ (DEFICIT) EQUITY
Notes payable and short-term borrowings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$78
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
11,103
Employee compensation and benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Taxes on earnings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other accrued liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Current liabilities of discontinued operations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
759
231
919
5,718
—
Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
18,808
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other non-current liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-current liabilities of discontinued operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commitments and contingencies
Stockholders’ (deficit) equity:
HP stockholders’ (deficit) equity
Preferred stock, $0.01 par value (300 shares authorized; none issued) . . . . . . . . . . . . . . . . . . . . . . . . . . .
Common stock, $0.01 par value (9,600 shares authorized; 1,712 and 1,804 shares issued and
outstanding at October 31, 2016, and 2015 respectively) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Additional paid in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retained (deficit) earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated other comprehensive loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total HP stockholders’ (deficit) equity. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-controlling interests of discontinued operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
6,758
7,333
—
—
17
1,030
(3,498)
(1,438)
(3,889)
—
$2,194
10,194
747
243
1,051
6,241
21,521
42,191
6,677
7,414
22,449
—
18
1,963
32,089
(6,302)
27,768
383
Total stockholders’ (deficit) equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(3,889)
28,151
Total liabilities and stockholders’ (deficit) equity. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$29,010
$106,882
50 I
2016 Form 10-K
HP INC. AND SUBSIDIARIESThe accompanying notes are an integral part of these Consolidated Financial Statements. CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE FISCAL YEARS ENDED OCTOBER 31
2016
2015
2014
IN MILLIONS
Cash flows from operating activities:
Net earnings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$2,496
$4,554
$5,013
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation and amortization. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock-based compensation expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for doubtful accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for inventory. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restructuring and other charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred taxes on earnings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Excess tax benefit from stock-based compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other, net. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Financing receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts payable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Taxes on earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restructuring and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets and liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash provided by operating activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
332
182
65
95
200
401
(6)
(198)
565
—
(291)
928
106
(157)
(1,488)
3,230
4,061
4,334
709
71
305
1,017
(700)
(145)
1,031
572
(65)
(330)
31
(137)
(1,243)
(3,241)
6,490
560
55
211
1,619
(34)
(58)
81
2,017
420
(580)
1,912
310
(1,506)
(2,021)
12,333
Cash flows from investing activities:
Investment in property, plant and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(433)
(3,603)
(3,853)
Proceeds from sale of property, plant and equipment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchases of available-for-sale securities and other investments . . . . . . . . . . . . . . . . . . . . . .
Maturities and sales of available-for-sale securities and other investments . . . . . . . . . . . . .
Payments made in connection with business acquisitions, net of cash acquired . . . . . . . . .
Proceeds from business divestitures, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash provided by (used in) investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . .
6
(126)
133
(7)
475
48
424
(259)
302
(2,644)
246
843
(1,086)
1,347
(49)
6
(5,534)
(2,792)
2016 Form 10-K
I 51
HP INC. AND SUBSIDIARIES FOR THE FISCAL YEARS ENDED OCTOBER 31
2016
2015
2014
IN MILLIONS
Cash flows from financing activities:
Short-term borrowings with original maturities less than 90 days, net. . . . . . . . . . . . . . . . . .
Proceeds from debt, net of issuance costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
97
4
74
20,758
148
2,875
Payment of debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(2,188)
(15,867)
(6,037)
Settlement of cash flow hedges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4
Net transfer of cash and cash equivalents to Hewlett Packard Enterprise Company . . . . . .
(10,375)
Issuance of common stock under employee stock plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
48
(4)
—
371
—
—
297
Repurchase of common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(1,161)
(2,883)
(2,728)
Excess tax benefit from stock-based compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
6
145
Cash dividends paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(858)
(1,250)
58
(1,184)
(6,571)
2,970
12,163
1,344
2,300
15,133
$17,433
$15,133
$1,012
$532
$1,267
$678
$70
$31
$113
$—
Net cash (used in) provided by financing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(Decrease) increase in cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash and cash equivalents at beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash and cash equivalents at end of period. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Supplemental cash flow disclosures:
Income taxes paid, net of refunds. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Supplemental schedule of non-cash investing and financing activities:
Purchase of assets under capital leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock awards assumed in business acquisitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(14,423)
(11,145)
17,433
$6,288
$587
$318
$185
$—
52 I
2016 Form 10-K
The accompanying notes are an integral part of these Consolidated Financial Statements. CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ (DEFICIT) EQUITY
COMMON STOCK
NUMBER OF
SHARES
PAR
VALUE
ADDITIONAL
PAID-IN
CAPITAL
RETAINED
(DEFICIT)
EARNINGS
ACCUMULATED
OTHER
COMPREHENSIVE
(LOSS) INCOME
TOTAL HP
STOCKHOLDERS’
(DEFICIT)
EQUITY
NON-
CONTROLLING
INTERESTS OF
DISCONTINUED
OPERATIONS
TOTAL
IN MILLIONS, EXCEPT NUMBER OF SHARES IN THOUSANDS
Balance October 31, 2013 . . . . . . 1,907,883
$19
$5,465 $25,563
$(3,778)
$27,269
$387 $27,656
Net earnings. . . . . . . . . . . . . . . .
Other comprehensive loss,
net of taxes . . . . . . . . . . . . . . . .
Comprehensive income. . . . . .
Issuance of common stock
in connection with employee
stock plans and other . . . . . . .
Repurchases of
common stock. . . . . . . . . . . . . .
Tax deficiency from
employee stock plans . . . . . . .
Cash dividends declared . . . . .
Stock-based
compensation expense . . . . . .
Changes in
non-controlling interest . . . . .
5,013
(2,103)
23,785
142
1
(92,380)
(1)
(2,694)
(262)
(1,151)
(43)
560
5,013
(2,103)
2,910
143
(2,957)
(43)
(1,151)
560
5,013
(2,103)
2,910
143
(2,957)
(43)
(1,151)
560
9
9
Balance October 31, 2014 . . . . . . 1,839,288
$18
$3,430 $29,164
$(5,881)
$26,731
$396 $27,127
Net earnings. . . . . . . . . . . . . . . .
Other comprehensive loss,
net of taxes . . . . . . . . . . . . . . . .
Comprehensive income. . . . . .
Issuance of common stock
in connection with employee
stock plans and other . . . . . . .
Repurchases of
common stock. . . . . . . . . . . . . .
Assumption of equity
awards in connection
with acquisitions . . . . . . . . . . . .
Tax benefit from employee
stock plans . . . . . . . . . . . . . . . . .
Cash dividends declared . . . . .
Stock-based
compensation expense . . . . . .
Changes in
non-controlling interest . . . . .
4,554
(421)
39,834
(34)
1
(75,403)
(2,237)
(411)
31
64
709
(1,219)
4,554
(421)
4,133
(33)
(2,648)
31
64
(1,219)
709
4,554
(421)
4,133
(33)
(2,648)
31
64
(1,219)
709
(13)
(13)
Balance October 31, 2015 . . . . . . 1,803,719
$18
$1,963 $32,089
$(6,302)
$27,768
$383 $28,151
2016 Form 10-K
I 53
HP INC. AND SUBSIDIARIES COMMON STOCK
NUMBER OF
SHARES
PAR
VALUE
ADDITIONAL
PAID-IN
CAPITAL
RETAINED
(DEFICIT)
EARNINGS
ACCUMULATED
OTHER
COMPREHENSIVE
(LOSS) INCOME
TOTAL HP
STOCKHOLDERS’
(DEFICIT)
EQUITY
NON-
CONTROLLING
INTERESTS OF
DISCONTINUED
OPERATIONS
TOTAL
IN MILLIONS, EXCEPT NUMBER OF SHARES IN THOUSANDS
Separation of Hewlett
Packard Enterprise . . . . . . . . . .
Net earnings. . . . . . . . . . . . . . . .
Other comprehensive loss,
net of taxes . . . . . . . . . . . . . . . .
Comprehensive income. . . . . .
Issuance of common stock
in connection with employee
stock plans and other . . . . . . .
Repurchases of
common stock. . . . . . . . . . . . . .
Cash dividends declared . . . . .
Stock-based
compensation expense . . . . . .
(37,225)
2,496
5,081
(217)
8,227
29
(99,855)
(1)
(1,144)
(858)
182
(32,144)
2,496
(217)
2,279
29
(1,145)
(858)
182
(383)
(32,527)
2,496
(217)
2,279
29
(1,145)
(858)
182
Balance October 31, 2016 . . . . . . 1,712,091
$17
$1,030
$(3,498)
$(1,438)
$(3,889)
$— $(3,889)
54 I
2016 Form 10-K
The accompanying notes are an integral part of these Consolidated Financial Statements. Note 1: overview aNd summary of sigNificaNt accouNtiNg policies
overview
priNciples of coNsolidatioN
On November 1, 2015 (the “Distribution Date”), Hewlett-Packard
Company completed the separation of Hewlett Packard Enterprise
Company
(“Hewlett Packard Enterprise”), Hewlett-Packard
Company’s former enterprise technology infrastructure, software,
services and financing businesses (the “Separation”). In connection
with the Separation, Hewlett-Packard Company changed its name
to HP Inc. (“HP”).
On the Distribution Date, each of HP’s stockholders of record as
of the close of business on October 21, 2015 (the “Record Date”)
received one share of Hewlett Packard Enterprise common stock for
every one share of HP common stock held as of the Record Date.
Hewlett Packard Enterprise is an independent public company
trading on the New York Stock Exchange (“NYSE”) under the symbol
“HPE”. HP distributed a total of approximately 1.8 billion shares of
Hewlett Packard Enterprise common stock to HP’s stockholders.
After the Separation, HP does not beneficially own any shares of
Hewlett Packard Enterprise common stock.
In connection with the Separation, HP and Hewlett Packard
Enterprise entered into a separation and distribution agreement
as well as various other agreements that provide a framework
for the relationships between the parties, including among others
a tax matters agreement, an employee matters agreement, a
transition service agreement, a real estate matters agreement,
a master commercial agreement and an information technology
service agreement. For more information on the impacts of these
agreements, see Note 5, “Retirement and Post-Retirement Benefit
Plans”, Note 6, “Stock-Based Compensation”, Note 7, “Taxes on
Earnings”, Note 15, “Litigation and Contingencies” and Note 16,
“Guarantees, Indemnifications and Warranties”.
Basis of preseNtatioN
The accompanying Consolidated Financial Statements of HP and
its wholly-owned subsidiaries are prepared in conformity with
United States (“U.S.”) generally accepted accounting principles
(“GAAP”). For all the periods prior to the Separation, the financial
results of Hewlett Packard Enterprise are presented as net earnings
from discontinued operations in the Consolidated Statements of
Earnings and assets and liabilities from discontinued operations
in the Consolidated Balance Sheets. The historical statements of
comprehensive income and cash flows and the balances related to
stockholders’ (deficit) equity have not been revised to reflect the
effect of the Separation. For further information on discontinued
operations, see Note 2, “Discontinued Operations”.
The Consolidated Financial Statements include the accounts of
HP and its subsidiaries and affiliates in which HP has a controlling
financial interest or is the primary beneficiary. All intercompany
balances and transactions have been eliminated.
use of estimates
The preparation of financial statements in accordance with U.S.
GAAP requires management to make estimates and assumptions
that affect the amounts reported in HP’s Consolidated Financial
Statements and accompanying notes. Actual results could differ
materially from those estimates.
foreigN curreNcy traNslatioN
HP uses the U.S. dollar as its functional currency. Assets and
liabilities denominated in non-U.S. dollars are remeasured into
U.S. dollars at current exchange rates for monetary assets and
liabilities and at historical exchange rates for nonmonetary assets
and liabilities. Net revenue, costs and expenses denominated in
non-U.S. dollars are recorded in U.S. dollars at monthly average
exchange rates prevailing during the period. HP includes gains or
losses from foreign currency remeasurement in Interest and other,
net in the Consolidated Statements of Earnings.
receNt accouNtiNg proNouNcemeNts
In August 2016, the Financial Accounting Standards Board (“FASB”)
issued guidance which amends the existing accounting standards for
the classification of certain cash receipts and cash payments on the
statement of cash flows. HP is required to adopt the guidance in the
first quarter of fiscal year 2019. Earlier adoption is permitted. HP is
currently evaluating the impact of this guidance on its Consolidated
Financial Statements.
In June 2016, the FASB issued guidance which requires credit
losses on financial assets measured at amortized cost basis to be
presented at the net amount expected to be collected, not based
on incurred losses. Further, credit losses on available-for-sale debt
securities should be recorded through an allowance for credit losses
limited to the amount by which fair value is below amortized cost.
HP is required to adopt the guidance in the first quarter of fiscal year
2021. Earlier adoption is permitted. HP is currently evaluating the
impact of this guidance on its Consolidated Financial Statements.
In March 2016, the FASB issued guidance which amends the existing
accounting standards for share-based payments. The amendment
changes the accounting for share-based payment transactions,
including the income tax consequences, classification of awards as
2016 Form 10-K
I 55
HP INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1: overview aNd summary of sigNificaNt accouNtiNg policies (coNtiNued)
either equity or liabilities, and classification on the statements of
cash flows. HP is required to adopt the guidance in the first quarter
of fiscal year 2018. Earlier adoption is permitted. HP has elected to
early adopt the amendment in the first quarter of fiscal year 2017.
HP expects that the implementation of this guidance will not have a
material effect on its Consolidated Financial Statements.
In February 2016, the FASB issued guidance which amends the
existing accounting standards for leases. Consistent with current
guidance, the recognition, measurement, and presentation of
expenses and cash flows arising from a lease by a lessee primarily
will depend on its classification. Under the new guidance, a lessee
will be required to recognize assets and liabilities for all leases
with lease terms of more than twelve months. HP is required to
adopt the guidance in the first quarter of fiscal year 2020 using a
modified retrospective approach. Earlier adoption is permitted. HP
is currently evaluating the timing and the impact of this guidance on
its Consolidated Financial Statements.
In January 2016, the FASB issued guidance which amends the
existing accounting standards for the recognition and measurement
of financial assets and financial liabilities. The updated guidance
primarily addresses certain aspects of recognition, measurement,
presentation, and disclosure of financial instruments. HP is required
to adopt the guidance in the first quarter of fiscal year 2019. The
amendments should be applied by means of a cumulative-effect
adjustment to the balance sheet as of the beginning of the fiscal
year of adoption, with other amendments related specifically to
equity securities without readily determinable fair values applied
prospectively. HP is currently evaluating the timing and the impact
of this guidance on its Consolidated Financial Statements.
In May 2015, the FASB issued guidance which amends the existing
disclosures for investments in certain entities that calculate net
asset value per share (or its equivalent). This amendment removes
the requirement to categorize within the fair value hierarchy all
investments for which fair value is measured using the net asset
value per share practical expedient. The amendment also removes
the requirement to make certain disclosures for all investments that
are eligible to be measured at fair value using the net asset value
per share practical expedient. HP is required to adopt the guidance
in the first quarter of fiscal year 2017. Earlier adoption is permitted.
HP will adopt the amendment in the first quarter of fiscal year 2017.
HP expects that the implementation of this guidance will impact the
disclosures on its notes to the Consolidated Financial Statements
but will not have an effect on its Consolidated Balance Sheets or
Consolidated Statements of Earnings.
In April 2015, the FASB amended the existing accounting standards
for intangible assets. The amendments provide explicit guidance
to customers in determining the accounting for fees paid in a
cloud computing arrangement, wherein the arrangements that
do not convey a software license to the customer are accounted
for as service contracts. HP is required to adopt the guidance in
56 I
2016 Form 10-K
the first quarter of fiscal year 2017; however earlier adoption is
permitted. The amendment may be adopted either prospectively
to all arrangements entered into or materially modified after the
effective date or retrospectively. HP will adopt the amendments
prospectively in the first quarter of fiscal year 2017. HP expects that
the implementation of this guidance will not have a material effect
on its Consolidated Financial Statements.
In April 2015, the FASB amended the existing accounting standards
for the presentation of debt issuance costs. The amendments
require that debt issuance costs related to a recognized debt liability
be presented on the balance sheet as a direct deduction from the
carrying amount of that debt liability, consistent with debt discounts.
The recognition and measurement guidance for debt issuance costs
are not affected by these amendments. HP is required to adopt the
guidance in the first quarter of fiscal year 2017. Earlier adoption is
permitted. The amendments should be applied retrospectively with
the adjusted balance sheet of each individual period presented,
in order to reflect the period-specific effects of applying the new
guidance. HP will adopt the amendments in the first quarter of fiscal
year 2017. HP expects that the implementation of this guidance will
not have a material effect on its Consolidated Financial Statements.
In May 2014, the FASB amended the existing accounting standards
for revenue recognition. The amendments are based on the
principle that revenue should be recognized to depict the transfer
of promised goods or services to customers in an amount that
reflects the consideration to which the entity expects to be entitled
in exchange for those goods or services. In August 2015, the FASB
issued an accounting standard update for a one-year deferral of
the effective date, with an option of applying the standard on the
original effective date, which for HP is the first quarter of fiscal
year 2018. In accordance with this deferral, HP is required to adopt
these amendments in the first quarter of fiscal year 2019. The
amendments may be applied retrospectively to each prior period
presented or retrospectively with the cumulative effect recognized
as of the date of initial application. HP is continuing to evaluate
the impact of this guidance and the transition alternatives on its
Consolidated Financial Statements.
reveNue recogNitioN
GENERAL
HP recognizes revenue when persuasive evidence of an arrangement
exists, delivery has occurred or services are rendered, the sales
price or fee is fixed or determinable, and collectability is reasonably
assured. Additionally, HP recognizes hardware revenue on sales to
channel partners, including resellers, distributors or value-added
solution providers at the time of delivery when the channel partners
have economic substance apart from HP, and HP has completed its
obligations related to the sale.
HP INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Note 1: overview aNd summary of sigNificaNt accouNtiNg policies (coNtiNued)
HP reduces revenue for customer and distributor programs and
incentive offerings, including price protection, rebates, promotions,
other volume-based incentives and expected returns, at the later
of the date of revenue recognition or the date the sales incentive
is offered. Future market conditions and product transitions may
require HP to take actions to increase customer incentive offerings,
possibly resulting in an incremental reduction of revenue at the time
the incentive is offered. For certain incentive programs, HP estimates
the number of customers expected to redeem the incentive based
on historical experience and the specific terms and conditions of the
incentive.
In instances when revenue is derived from sales of third-party
vendor products or services, HP records revenue on a gross basis
when HP is a principal to the transaction and on a net basis when
HP is acting as an agent between the customer and the vendor.
HP considers several factors to determine whether it is acting as
a principal or an agent, most notably whether HP is the primary
obligor to the customer, has established its own pricing and has
inventory and credit risks.
HP reports revenue net of any taxes collected from customers
and remitted to government authorities, with the collected
taxes recorded as current liabilities until remitted to the relevant
government authority.
MULTIPLE ELEMENT ARRANGEMENTS
When a sales arrangement contains multiple elements or
deliverables, such as hardware and/or services, HP allocates
revenue to each element based on a selling price hierarchy. The
selling price for a deliverable is based on its vendor specific objective
evidence (“VSOE”) of selling price, if available, third-party evidence
(“TPE”) if VSOE of selling price is not available, or estimated selling
price (“ESP”) if neither VSOE of selling price nor TPE is available.
HP establishes VSOE of selling price using the price charged for a
deliverable when sold separately and, in rare instances, using the
price established by management having the relevant authority.
HP evaluates TPE of selling price by reviewing largely similar and
interchangeable competitor products or services in standalone
sales to similarly situated customers. HP establishes ESP based on
management 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.
In most arrangements with multiple elements, HP allocates the
transaction price to the individual units of accounting at inception of
the arrangement based on their relative selling price. HP limits the
amount of revenue recognized for delivered elements to the amount
that is not contingent on the future delivery of products or services,
future performance obligations or subject to customer-specified
refund or return rights.
HP evaluates each deliverable in an arrangement to determine
whether it represents a separate unit of accounting. A deliverable
constitutes a separate unit of accounting when it has standalone
value to the customer. For deliverables with no standalone value,
HP recognizes revenue consistent with the pattern of delivery of the
final deliverable. If the arrangement includes a customer-negotiated
refund or return right or other contingency relative to the delivered
items, and the delivery and performance of the undelivered items
is considered probable and substantially within HP’s control, the
delivered element constitutes a separate unit of accounting. In
arrangements with combined units of accounting, changes in the
allocation of the transaction price among elements may impact the
timing of revenue recognition for the contract but will not change
the total revenue recognized for the contract.
NET REVENUE
HARDWARE
Under HP’s standard terms and conditions of sale, HP transfers title
and risk of loss to the customer at the time product is delivered to
the customer and recognizes revenue accordingly, unless customer
acceptance is uncertain or significant obligations to the customer
remain. HP reduces revenue for estimated customer returns,
price protection, rebates and other programs offered under sales
agreements established by HP with its distributors and resellers. HP
records revenue from the sale of equipment under sales-type leases
as revenue at the inception of the lease. HP accrues the estimated
cost of post-sale obligations, including standard product warranties,
based on historical experience at the time HP recognizes revenue.
SERVICES
HP recognizes revenue from fixed-price support or maintenance
contracts ratably over the contract period and recognizes the costs
associated with these contracts as incurred.
DEFERRED REVENUE
HP records amounts invoiced to customers in excess of revenue
recognized as deferred revenue until the revenue recognition
criteria are satisfied. HP records revenue that is earned and
recognized in excess of amounts invoiced on services contracts as
trade receivables. Deferred revenue represents amounts invoiced in
advance for product support contracts and product sales.
2016 Form 10-K
I 57
HP INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Note 1: overview aNd summary of sigNificaNt accouNtiNg policies (coNtiNued)
sHippiNg aNd HaNdliNg
HP includes costs related to shipping and handling in Cost
of revenue.
stocK-Based compeNsatioN
HP determines stock-based compensation expense based on
the measurement date fair value of the award. HP recognizes
compensation cost only for those awards expected to meet the
service and performance vesting conditions on a straight-line
basis over the requisite service period of the award. HP determines
compensation costs at the aggregate grant level for service-based
awards and at the individual vesting tranche level for awards with
performance and/or market conditions. HP estimates the forfeiture
rate based on its historical experience.
retiremeNt aNd post-retiremeNt plaNs
HP has various defined benefit, other contributory and
retirement and post-retirement plans. HP
noncontributory
generally amortizes unrecognized actuarial gains and losses on a
straight-line basis over the average remaining estimated service life
of participants. In limited cases, HP amortizes actuarial gains and
losses using the corridor approach. See Note 5, “Retirement and
Post-Retirement Benefit Plans” for a full description of these plans
and the accounting and funding policies.
advertisiNg
Costs to produce advertising are expensed as incurred during
production. Costs to communicate advertising are expensed
when the advertising is first run. Such costs totaled approximately
$586 million in fiscal year 2016, $635 million in fiscal year 2015 and
$614 million in fiscal year 2014.
restructuriNg aNd otHer cHarges
HP records charges associated with management-approved
restructuring plans to reorganize one or more of HP’s business
segments, to remove duplicative headcount and infrastructure
associated with business acquisitions or to simplify business
innovation. Restructuring charges
processes and accelerate
can include severance costs to eliminate a specified number
of employees,
infrastructure charges to vacate facilities and
consolidate operations, and contract cancellation costs. HP records
restructuring charges based on estimated employee terminations
and site closure and consolidation plans. HP accrues for severance
and other employee separation costs under these actions when it
is probable that benefits will be paid and the amount is reasonably
estimable. The rates used in determining severance accruals are
based on existing plans, historical experiences and negotiated
settlements. Other charges
include non-recurring costs that
are distinct from ongoing operational costs such as information
technology costs incurred in connection with the Separation.
taXes oN earNiNgs
HP recognizes 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 the differences are expected to reverse.
HP records a valuation allowance to reduce the deferred tax assets
to the amount that is more likely than not to be realized.
HP records accruals for uncertain tax positions when HP believes
that it is not more likely than not that the tax position will be
sustained on examination by the taxing authorities based on the
technical merits of the position. HP makes adjustments to these
accruals when facts and circumstances change, such as the closing
of a tax audit or the refinement of an estimate. The provision for
income taxes includes the effects of adjustments for uncertain tax
positions, as well as any related interest and penalties.
accouNts receivaBle
HP establishes an allowance for doubtful accounts for accounts
receivable. HP records a specific reserve for individual accounts
when HP becomes aware of specific customer circumstances,
such as in the case of a bankruptcy filing or deterioration in the
customer’s operating results or financial position. If there are
additional changes in circumstances related to the specific customer,
HP further adjusts estimates of the recoverability of receivables. HP
maintains bad debt reserves for all other customers based on a
variety of factors, including the use of third-party credit risk models
that generate quantitative measures of default probabilities based
on market factors, the financial condition of customers, the length
of time receivables are past due, trends in the weighted-average
risk rating for the portfolio, macroeconomic conditions, information
derived from competitive benchmarking, significant one-time
events and historical experience. The past due or delinquency
status of a receivable is based on the contractual payment terms
of the receivable.
HP has third-party short-term financing arrangements intended to
facilitate the working capital requirements of certain customers.
These financing arrangements, which in certain cases provide for
partial recourse, result in the transfer of HP’s trade receivables to a
third party. HP reflects amounts transferred to, but not yet collected
from, the third party in accounts receivable in the Consolidated
Balance Sheets. For arrangements involving an element of recourse,
the fair value of the recourse obligation is measured using market
data from similar transactions and reported as a current liability in
the Consolidated Balance Sheets.
58 I
2016 Form 10-K
HP INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Note 1: overview aNd summary of sigNificaNt accouNtiNg policies (coNtiNued)
coNceNtratioNs of risK
Financial instruments that potentially subject HP to significant
concentrations of credit risk consist principally of cash and cash
equivalents, investments, receivables from trade customers and
contract manufacturers and derivatives.
HP maintains cash and cash equivalents, investments, derivatives
and certain other financial instruments with various financial
institutions. These financial institutions are located in many different
geographic regions, and HP’s policy is designed to limit exposure
from any particular institution. As part of its risk management
processes, HP performs periodic evaluations of the relative credit
standing of these financial institutions. HP has not sustained material
credit losses from instruments held at these financial institutions.
HP utilizes derivative contracts to protect against the effects of
foreign currency and interest rate exposures. Such contracts involve
the risk of non-performance by the counterparty, which could result
in a material loss. The likelihood of which HP deems to be remote.
HP sells a significant portion of its products through third-party
distributors and resellers and, as a result, maintains individually
significant receivable balances with these parties. If the financial
condition or operations of these distributors’ and resellers’
aggregated business deteriorates substantially, HP’s operating
results could be adversely affected. The ten largest distributor and
reseller receivable balances, which were concentrated primarily in
North America and Europe, collectively represented approximately
34% and 42% of gross accounts receivable as of October 31, 2016
and 2015, respectively. No single customer accounts for more than
10% of gross accounts receivable as of October 31, 2016 or 2015.
Credit risk with respect to other accounts receivable is generally
diversified due to the large number of entities comprising HP’s
customer base and their dispersion across many different industries
and geographic regions. HP performs ongoing credit evaluations of
the financial condition of its third-party distributors, resellers and
other customers and may require collateral, such as letters of credit
and bank guarantees, in certain circumstances.
HP utilizes outsourced manufacturers around the world to
manufacture HP-designed products. HP may purchase product
components from suppliers and sell those components to its
outsourced manufacturers thereby creating receivable balances
from the outsourced manufacturers. The three largest outsourced
manufacturer receivable balances collectively represented 78% and
81% of HP’s supplier receivables of $774 million and $634 million
as of October 31, 2016 and 2015, respectively. HP includes the
supplier receivables in Other current assets in the Consolidated
Balance Sheets on a gross basis. HP’s credit risk associated with
these receivables is mitigated wholly or in part, by the amount HP
owes to these outsourced manufacturers, as HP generally has the
legal right to offset its payables to the outsourced manufacturers
against these receivables. HP does not reflect the sale of these
components in net revenue and does not recognize any profit on
these component sales until the related products are sold by HP, at
which time any profit is recognized as a reduction to cost of revenue.
HP obtains a significant number of components from single source
suppliers due to technology, availability, price, quality or other
considerations. The loss of a single source supplier, the deterioration
of HP’s relationship with a single source supplier, or any unilateral
modification to the contractual terms under which HP is supplied
components by a single source supplier could adversely affect HP’s
net revenue and gross margins.
Upon completion of the Separation on November 1, 2015, HP
recorded net income tax indemnification receivables from Hewlett
Packard Enterprise for certain income tax liabilities that HP is jointly
and severally liable for, but for which it is indemnified by Hewlett
Packard Enterprise under the tax matters agreement (“TMA”). The
actual amount that Hewlett Packard Enterprise may be obligated
to pay HP could vary depending upon the outcome of certain
unresolved tax matters, which may not be resolved for several
years. The net receivable as of October 31, 2016 was $1.6 billion.
iNveNtory
HP values inventory at the lower of cost or market. Cost is computed
using standard cost which approximates actual cost on a first-in,
first-out basis. Adjustments to reduce the cost of inventory to its
net realizable value are made, if required, for estimated excess,
obsolete or impaired balances.
property, plaNt aNd eQuipmeNt
HP states property, plant and equipment at cost less accumulated
improvements and
depreciation. HP capitalizes additions and
expenses maintenance and repairs as
incurred. Depreciation
expense is recognized on a straight-line basis over the estimated
useful lives of the assets. Estimated useful lives are five to 40 years
for buildings and improvements and three to 15 years for machinery
and equipment. HP depreciates leasehold improvements over the
life of the lease or the asset, whichever is shorter. HP depreciates
equipment held for lease over the initial term of the lease to the
equipment’s estimated residual value. On retirement or disposition,
the asset cost and related accumulated depreciation are removed
from the Consolidated Balance Sheets with any gain or loss
recognized in the Consolidated Statements of Earnings.
2016 Form 10-K
I 59
HP INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Note 1: overview aNd summary of sigNificaNt accouNtiNg policies (coNtiNued)
goodwill
HP reviews goodwill for impairment annually during its fourth
quarter and whenever events or changes in circumstances indicate
the carrying amount of goodwill may not be recoverable. HP can
opt to perform a qualitative assessment to test a reporting unit’s
goodwill for impairment or HP can directly perform the two-step
impairment test. Based on the qualitative assessment, if HP
determines that the fair value of a reporting unit is more likely than
not (i.e., a likelihood of more than 50 percent) to be less than its
carrying amount, the two-step impairment test will be performed.
In the first step of the impairment test, HP compares the fair value
of each reporting unit to its carrying amount with the fair values
derived most significantly from the income approach, and to a
lesser extent, the market approach. Under the income approach,
HP estimates the fair value of a reporting unit based on the present
value of estimated future cash flows. HP bases cash flow projections
on management’s estimates of revenue growth rates and operating
margins, taking into consideration industry and market conditions.
HP bases the discount rate on the weighted-average cost of capital
adjusted for the relevant risk associated with business-specific
characteristics and the uncertainty related to the reporting unit’s
ability to execute on the projected cash flows. Under the market
approach, HP estimates fair value based on market multiples of
revenue and earnings derived from comparable publicly-traded
companies with similar operating and investment characteristics
as the reporting unit. HP weights the fair value derived from the
market approach depending on the level of comparability of these
publicly-traded companies to the reporting unit. When market
comparables are not meaningful or not available, HP estimates the
fair value of a reporting unit using only the income approach.
In order to assess the reasonableness of the estimated fair value
of HP’s reporting units, HP compares the aggregate reporting unit
fair value to HP’s market capitalization on an overall basis and
calculates an implied control premium (the excess of the sum of
the reporting units’ fair value over HP’s market capitalization on an
overall basis). HP evaluates the control premium by comparing it to
observable control premiums from recent comparable transactions.
If the implied control premium is determined to not be reasonable in
light of these recent transactions, HP reevaluates its reporting unit
fair values, which may result in an adjustment to the discount rate
and/or other assumptions. This reevaluation could result in a change
to the estimated fair value for certain or all reporting units.
If the fair value of a reporting unit exceeds the carrying amount
of the net assets assigned to that reporting unit, goodwill is not
impaired and no further testing is required. If the fair value of the
reporting unit is less than its carrying amount, then HP performs
the second step of the goodwill impairment test to measure the
amount of impairment loss, if any. In the second step, HP measures
60 I
2016 Form 10-K
the reporting unit’s assets, including any unrecognized intangible
assets, liabilities and non-controlling interests at fair value in a
hypothetical analysis to calculate the implied fair value of goodwill
for the reporting unit in the same manner as if the reporting unit was
being acquired in a business combination. If the implied fair value
of the reporting unit’s goodwill is less than its carrying amount, the
difference is recorded as an impairment loss.
deBt aNd marKetaBle eQuity securities iNvestmeNts
Debt and marketable equity securities are generally considered
available-for-sale and are reported at fair value with unrealized
gains and losses, net of applicable taxes, in Accumulated other
comprehensive loss in the Consolidated Balance Sheets. Realized
gains and losses for available-for-sale securities are calculated
based on the specific identification method and included in Interest
and other, net in the Consolidated Statements of Earnings. HP
monitors its investment portfolio for potential impairment on a
quarterly basis. When the carrying amount of an investment in
debt securities exceeds its fair value and the decline in value is
determined to be other-than-temporary (i.e., when HP does not
intend to sell the debt securities and it is not more likely than not
that HP will be required to sell the debt securities prior to anticipated
recovery of its amortized cost basis), HP records an impairment
charge to Interest and other, net in the amount of the credit loss
and the remaining amount, if any, is recorded in Accumulated other
comprehensive loss in the Consolidated Balance Sheets.
derivatives
HP uses derivative instruments, primarily forwards, swaps, and
at times, options, to hedge certain foreign currency and interest
rate exposures. HP also may use other derivative instruments not
designated as hedges, such as forwards used to hedge foreign
currency balance sheet exposures. HP does not use derivative
instruments for speculative purposes. See Note 11, “Financial
Instruments” for a full description of HP’s derivative financial
instrument activities and related accounting policies.
loss coNtiNgeNcies
HP is involved in various lawsuits, claims, investigations and
proceedings that arise in the ordinary course of business. HP
records a liability for contingencies when it believes it is both
probable that a liability has been incurred and the amount of the
loss can be reasonably estimated. See Note 15, “Litigation and
Contingencies” for a full description of HP’s loss contingencies and
related accounting policies.
HP INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Note 2: discoNtiNued operatioNs
On November 1, 2015, HP completed the Separation of Hewlett
Packard Enterprise. After the Separation, HP does not beneficially
own any shares of Hewlett Packard Enterprise common stock.
In connection with the Separation, HP and Hewlett Packard
Enterprise have entered
into a separation and distribution
agreement as well as various other agreements that provide a
framework for the relationships between the parties, including
among others a tax matters agreement, an employee matters
agreement, a transition service agreement, a real estate matters
agreement, a master commercial agreement and an information
technology service agreement. These agreements provide for the
allocation between HP and Hewlett Packard Enterprise of assets,
investments,
liabilities and obligations (including
employees,
property, employee benefits and tax-related assets and liabilities)
attributable to periods prior to, at and after the Separation and
govern certain relationships between HP and Hewlett Packard
Enterprise after the Separation.
After the Separation, HP no longer consolidates the financial
results of Hewlett Packard Enterprise within its financial results of
continuing operations. For all the periods prior to the Separation,
the financial results of Hewlett Packard Enterprise are presented
as net earnings from discontinued operations on the Consolidated
Statements of Earnings and assets and liabilities of discontinued
operations on the Consolidated Balance Sheets.
The following table presents the financial results of HP’s
discontinued operations:
Net revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cost of revenue(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expenses(2). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest and other, net(3)(4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Earnings from discontinued operations before taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for taxes(4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net (loss) earnings from discontinued operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(1) Cost of products, cost of services and financing interest.
(2) Expenses for fiscal year 2016 were primarily related to separation costs.
for tHe fiscal years eNded octoBer 31
2016
2015
2014
iN millioNs
$51,892
$54,803
37,072
13,269
351
39,408
12,466
235
$1,200
$2,694
(364)
$836
(605)
$2,089
$—
—
201
(208)
$7
(177)
$(170)
(3)
(4)
In fiscal years 2015 and 2014, allocation of interest to Hewlett Packard Enterprise was based on using the average effective interest rate of the debt assumed
by Hewlett Packard Enterprise and the debt repaid as part of the Separation. In fiscal year 2015, Interest and other, net also includes loss from the early
extinguishment of debt in connection with the review of HP’s capital structure and the Separation.
In connection with the TMA, Interest and other, net for fiscal year 2016 includes $208 million of changes in the tax indemnifications amounts and Provision for
taxes for fiscal year 2016 includes $201 million of the tax impact relating to the changes described above. For more information on tax indemnifications and the
TMA, see Note 7, “Taxes on Earnings”.
The following table presents the significant non-cash items and capital expenditures of HP’s discontinued operations:
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchases of property, plant and equipment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
for tHe fiscal years eNded
octoBer 31
2015
2014
iN millioNs
$3,657
$3,020
$3,861
$3,228
2016 Form 10-K
I 61
HP INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Note 2: discoNtiNued operatioNs (coNtiNued)
The following table presents assets and liabilities that were transferred to Hewlett Packard Enterprise as of November 1, 2015 and are
presented as discontinued operations on the Consolidated Balance Sheets as of October 31, 2015:
iN millioNs
Cash and cash equivalents. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$9,849
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Financing receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
8,538
2,918
2,197
7,090
Total current assets of discontinued operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$30,592
Property, plant and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term financing receivables and other non-current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$9,598
27,261
9,472
Total non-current assets of discontinued operations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$46,331
Notes payable and short-term borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Employee compensation and benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Taxes on earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other accrued liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total current liabilities of discontinued operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other non-current liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total non-current liabilities of discontinued operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$691
5,762
2,861
587
5,148
6,472
$21,521
$15,103
7,346
$22,449
Subsequent to the Separation, in conformity with the separation agreement, HP made a final cash transfer of $526 million to Hewlett
Packard Enterprise.
Note 3: segmeNt iNformatioN
HP is a leading global provider of personal computing and other
imaging and printing products, and related
access devices,
technologies, solutions and services. HP sells to
individual
consumers, small- and medium-sized businesses (“SMBs”) and
large enterprises, including customers in the government, health
and education sectors.
HP’s operations are organized into three segments for financial
reporting purposes: Personal Systems, Printing and Corporate
Investments. HP’s organizational structure is based on a number of
factors that the chief operating decision maker uses to evaluate, view
and run its business operations, which include, but are not limited
to, customer base and homogeneity of products and technology.
The segments are based on this organizational structure and
information reviewed by HP’s chief operating decision maker to
evaluate segment results. The chief operating decision maker uses
62 I
2016 Form 10-K
several metrics to evaluate the performance of the overall business,
including earnings from operations, and uses these results to
allocate resources to each of the segments.
A summary description of each segment follows.
Personal Systems provides Commercial personal computers
(“PCs”), Consumer PCs, workstations, thin clients, Commercial
tablets and mobility devices , retail point-of-sale systems, displays
and other related accessories, software, support and services for
the commercial and consumer markets. HP groups Commercial
notebooks, Commercial desktops, Commercial services, Commercial
tablets and mobility devices, Commercial detachables, workstations,
retail point-of-sale systems and thin clients into Commercial clients
and Consumer notebooks, Consumer desktops, Consumer services
HP INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Note 3: segmeNt iNformatioN (coNtiNued)
and Consumer detachables into Consumer clients when describing
performance in these markets. Described below are HP’s global
business capabilities within Personal Systems.
• Commercial PCs are optimized for enterprise and SMB
customers, with a focus on robust designs, serviceability,
in networked
connectivity, reliability and manageability
environments. Additionally, HP offers a range of services
and solutions to enterprise and SMB customers to help them
manage the lifecycle of their PC and mobility installed base.
• Consumer PCs are notebooks, desktops, and hybrids that
are optimized for consumer usage, focusing on multi-media
consumption, online browsing, and light productivity.
Printing provides consumer and commercial printer hardware,
supplies, media, solutions and services, as well as scanning devices.
Printing is also focused on imaging solutions in the commercial
markets. HP groups LaserJet, Graphics and PageWide printers into
Commercial Hardware and Inkjet printers into Consumer Hardware
when describing performance in these markets. Described below
are HP’s global business capabilities within Printing.
• LaserJet and Enterprise Solutions delivers HP’s LaserJet
printers, supplies and solutions to SMBs and large enterprises.
HP goes to market through its extensive channel network
and directly with HP sales. Ongoing key initiatives include
design and deployment of A3 products and solutions for
the copier and multifunction printer market, printer security
solutions, PageWide Enterprise solutions, and award-winning
JetIntelligence products.
•
Inkjet and Printing Solutions delivers HP’s consumer, SMB and
PageWide Inkjet solutions (hardware, supplies, media, and
web-connected hardware and services). Ongoing initiatives
and programs such as Instant Ink and newer initiatives such
as Continuous Ink Supply System provide innovative printing
solutions to consumers and SMBs.
• Graphics Solutions delivers large format printers (DesignJet,
Large Format Production and Scitex Industrial), specialty
printing, digital press solutions
(Indigo and PageWide
Presses), supplies and services to print service providers and
design and rendering customers.
• Print Solutions provides end-to-end services, as well as core
platforms to develop and deploy services across printing
systems. HP’s focus includes driving customer value through
managed print services and providing support solutions for
new and existing customers.
Corporate Investments includes HP Labs and certain business
incubation projects.
The accounting policies HP uses to derive segment results are
substantially the same as those used by the company in preparing
these financial statements. HP derives the results of the business
segments directly from its internal management reporting system.
Segment net revenue includes revenues from sales to external
customers and intersegment revenues that reflect transactions
between the segments on an arm’s-length basis. HP’s consolidated
net revenue is derived and reported after the elimination of
intersegment revenues from such arrangements.
Effective at the beginning of its first quarter of fiscal year 2016, HP
implemented a reporting change to its segment operating results.
This reporting change resulted in the exclusion of retirement related
credits representing the market related components of pension and
post-retirement benefits such as interest expense, expected return
on plan assets, and actuarial gain (loss) amortization (“Market
related retirement credits”). The reporting change had an immaterial
impact to previously reported segment net revenue and earnings
from operations and no impact to previously reported consolidated
net revenue, earnings from continuing operations, net earnings or
net earnings per share.
HP does not allocate certain operating expenses (credits), which it
manages at the corporate level, to its segments. These unallocated
amounts include certain corporate governance costs and market
related retirement credits, stock-based compensation expense,
amortization of intangible assets, restructuring and other charges,
acquisition and other related charges, defined benefit plan
settlement charges (credits) and intersegment eliminations.
2016 Form 10-K
I 63
HP INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Note 3: segmeNt iNformatioN (coNtiNued)
segmeNt operatiNg results from coNtiNuiNg operatioNs
persoNal
systems
priNtiNg
corporate
iNvestmeNts
total
segmeNts
iNtersegmeNt
elimiNatioNs
aNd otHer
total
2016
Net revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$29,987
$18,260
$7
$48,254
$(16)
$48,238
Earnings (loss) from continuing operations . . . . .
$1,150
$3,128
$(98)
$4,180
2015
Net revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$31,520
$21,232
Earnings (loss) from continuing operations . . . . .
$1,022
$3,765
$20
$(43)
$52,772
$4,744
$(1,309)
$51,463
Net revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$34,387
$23,211
Earnings from continuing operations . . . . . . . . . .
$1,265
$4,161
$296
$157
$57,894
$5,583
$(1,243)
$56,651
2014
The reconciliation of segment operating results to HP consolidated results was as follows:
for tHe fiscal years eNded octoBer 31
2016
2015
2014
iN millioNs
Net revenue:
Total segments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$48,254
$52,772
$57,894
Intersegment net revenue eliminations and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(16)
(1,309)
(1,243)
Total HP consolidated net revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$48,238
$51,463
$56,651
earnings from continuing operations before taxes:
Total segment earnings from operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$4,180
$4,744
$5,583
Corporate and unallocated costs and eliminations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock-based compensation expense. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of intangible assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Acquisition and other related charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restructuring and other charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Defined benefit plan settlement (charges) credits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest and other, net. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(42)
(182)
(16)
(7)
(205)
(179)
212
(504)
(212)
(102)
—
(63)
57
(388)
(826)
(196)
(129)
—
(176)
—
(393)
Total earnings from continuing operations before taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$3,761
$3,532
$3,863
64 I
2016 Form 10-K
HP INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Note 3: segmeNt iNformatioN (coNtiNued)
segmeNt assets from coNtiNuiNg operatioNs
HP allocates assets to its business segments based on the segments primarily benefiting from the assets. Total assets by segment and
the reconciliation of segment assets to HP consolidated assets from continuing operations were as follows:
as of octoBer 31
2016
2015
iN millioNs
Personal Systems . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$10,686
$11,240
Printing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
9,959
10,687
Corporate Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1
9
Corporate and unallocated assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
8,364
8,023
Total assets from continuing operations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$29,010
$29,959
maJor customers
No single customer represented 10% or more of HP’s net revenue in any fiscal year presented.
geograpHic iNformatioN
Net revenue by country is based upon the sales location that predominately represents the customer location. For each of the fiscal years
of 2016, 2015 and 2014, other than the United States, no country represented more than 10% of HP net revenue.
Net revenue by country in which HP operates was as follows:
United States. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$18,042
$17,746
$18,229
Other countries. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
30,196
33,717
38,422
Total net revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$48,238
$51,463
$56,651
Net property, plant and equipment by country in which HP operates was as follows:
for tHe fiscal years eNded octoBer 31
2016
2015
2014
iN millioNs
as of octoBer 31
2016
2015
iN millioNs
United States. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$737
$650
Singapore. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Malaysia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Israel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other countries. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
314
170
155
360
325
105
157
255
Total net property, plant and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$1,736
$1,492
No single country other than those represented above exceed 10% or more of HP’s total net property, plant and equipment in any fiscal
year presented.
2016 Form 10-K
I 65
HP INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Note 3: segmeNt iNformatioN (coNtiNued)
Net revenue by segment and business unit was as follows:
for tHe fiscal years eNded octoBer 31
2016
2015
2014
iN millioNs
Notebooks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$16,982
$17,271
$17,540
Desktops . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Workstations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Personal Systems. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Supplies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial Hardware. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consumer Hardware . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
9,956
1,870
1,179
29,987
11,875
5,131
1,254
10,941
13,197
2,018
1,290
31,520
13,979
5,466
1,787
2,218
1,432
34,387
14,917
6,035
2,259
Printing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
18,260
21,232
23,211
Corporate Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
7
Total segment net revenue. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
48,254
Intersegment net revenue eliminations and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(16)
20
52,772
(1,309)
296
57,894
(1,243)
Total net revenue. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$48,238
$51,463
$56,651
Note 4: restructuriNg aNd otHer cHarges
summary of restructuriNg plaNs
HP’s restructuring activities in fiscal years 2016 and 2015 summarized by plan were as follows:
fiscal 2017 plaN
fiscal 2015 plaN
fiscal 2012 plaN
severaNce
severaNce
aNd prp(1)
iNfrastructure
aNd otHer
severaNce
aNd eer(2)
iNfrastructure
aNd otHer
total
Accrued balance as of October 31, 2014 . . . . . . . . .
$—
$—
Charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-cash and other adjustments . . . . . . . . . . . . .
Accrued balance as of October 31, 2015 . . . . . . . . .
Charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-cash and other adjustments . . . . . . . . . . . . .
—
—
—
—
24
—
—
Accrued balance as of October 31, 2016 . . . . . . . . .
$24
39
—
—
39
117
(122)
(13)
$21
iN millioNs
$—
—
—
—
—
27
(4)
(19)
$4
$218
23
(216)
(4)
21
7
(30)
9
$7
$7
1
(4)
(1)
3
—
$225
63
(220)
(5)
63
175
(1)
(157)
—
$2
(23)
$58
Total costs incurred to date as of
October 31, 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$24
$156
$27
$1,074
$44 $1,325
66 I
2016 Form 10-K
HP INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Note 4: restructuriNg aNd otHer cHarges (coNtiNued)
Reflected in Consolidated Balance Sheets:. . . . . . . .
Other accrued liabilities. . . . . . . . . . . . . . . . . . . . . .
Other non-current liabilities . . . . . . . . . . . . . . . . . .
(1)
PRP represents Phased Retirement Program.
(2) EER represents Enhanced Early Retirement.
fiscal 2017 plaN
On October 10, 2016, HP’s Board of Directors approved a
restructuring plan (the “Fiscal 2017 Plan”) which it expects will
be implemented through fiscal year 2019. HP estimates that
it will incur aggregate pre-tax charges between $350 million
and $500 million relating to workforce reductions, real estate
consolidation and other non-labor charges. HP estimates that
approximately half of the expected cumulative pre-tax costs will
relate to severance and the remaining will relate to infrastructure
and other. HP expects between 3,000 and 4,000 employees to exit
by the end of fiscal year 2019.
fiscal 2015 plaN
In connection with the Separation, on September 14, 2015, HP’s
Board of Directors approved a cost savings plan (the “Fiscal 2015
Plan”) which includes labor and non-labor actions. The Fiscal 2015
Plan was considered complete as of October 31, 2016 and we do not
expect any further costs associated with this plan. Approximately
3,000 employees exited by the end of fiscal year 2016.
fiscal 2017 plaN
fiscal 2015 plaN
fiscal 2012 plaN
severaNce
severaNce
aNd prp(1)
iNfrastructure
aNd otHer
severaNce
aNd eer(2)
iNfrastructure
aNd otHer
total
iN millioNs
$24
$—
$21
$—
$4
$—
$7
$—
$1
$1
$57
$1
During fiscal year 2016, HP announced a voluntary PRP for certain
qualified employees. Qualified employees will retire gradually over
a defined period of time and at the end of which they will receive
severance and certain benefits. HP recognized charges aggregating
$29 million during fiscal year 2016 related to the PRP.
fiscal 2012 plaN
The severance and infrastructure cash payments associated with
the restructuring plan initiated by HP in fiscal year 2012 (the “Fiscal
2012 Plan”) are expected to be paid through fiscal year 2021. The
Fiscal 2012 Plan was considered complete as of October 31, 2016
and we do not expect any further costs associated with this plan.
otHer cHarges
Other charges include non-recurring costs that are distinct from
ongoing operational costs such as information technology costs
incurred in connection with the Separation. HP incurred $30 million
of other charges in fiscal year 2016.
Note 5: retiremeNt aNd post-retiremeNt BeNefit plaN
separatioN related activities
defiNed BeNefit plaNs
In advance of the Separation, HP underwent a plan-by-plan analysis
and determined which plans would be assigned to either HP or
Hewlett Packard Enterprise. While some pension plans transitioned
in their entirety to Hewlett Packard Enterprise or remain in
their entirety with HP, other plans were split into two identical
plans resulting in both companies splitting the plan’s assets
and liabilities. In the fourth quarter of fiscal year 2015, the plans
were legally separated and the amounts attributable to Hewlett
Packard Enterprise were transferred and reported as discontinued
operations in fiscal year 2015.
The Hewlett-Packard Company 401(k) Plan, now known as the HP
Inc. 401(k) Plan, remained with HP. A new 401(k) Plan was created
for the employees of Hewlett Packard Enterprise. Balances for
Hewlett Packard Enterprise employees were transferred to the new
plan post-Separation.
HP sponsors a number of defined benefit pension plans worldwide.
The most significant defined benefit plan, the HP Inc. Pension Plan
(“Pension Plan”) is in the United States.
HP reduces the benefit payable to certain U.S. employees under the
Pension Plan for service before 1993, if any, by any amounts due
to the employee under HP’s frozen defined contribution Deferred
Profit-Sharing Plan (“DPSP”). At October 31, 2016 and 2015, the fair
value of plan assets of the DPSP was $606 million and $742 million,
respectively. The DPSP obligations are equal to the plan assets and
are recognized as an offset to the Pension Plan when HP calculates
its defined benefit pension cost and obligations. The Pension Plan
and the DPSP both remain entirely with HP post-Separation.
2016 Form 10-K
I 67
HP INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Note 5: retiremeNt aNd post-retiremeNt BeNefit plaN (coNtiNued)
post-retiremeNt BeNefit plaNs
HP sponsors retiree health and welfare benefit plans, of which the
most significant are in the United States. Under the HP Inc. Retiree
Welfare Benefits Plan, certain pre-2003 retirees and grandfathered
participants with continuous service to HP since 2002 are eligible
to receive partially-subsidized medical coverage based on years of
service at retirement. HP’s share of the premium cost is capped for
all subsidized medical coverage provided under the HP Inc. Retiree
Welfare Benefits Plan. HP currently leverages the employer group
waiver plan process to provide HP Inc. Retiree Welfare Benefits Plan
post-65 prescription drug coverage under Medicare Part D, thereby
giving HP access to federal subsidies to help pay for retiree benefits.
Certain employees not grandfathered under the above programs,
and employees hired after 2002 but before August 2008, are
eligible for credits under the HP Inc. Retirement Medical Savings
Account Plan (“RMSA”) upon attaining age 45. Credits offered after
September 2008 are provided in the form of matching credits on
employee contributions made to a voluntary employee beneficiary
association. On retirement, former employees may use these
credits for the reimbursement of certain eligible medical expenses,
including premiums required for coverage.
defiNed coNtriButioN plaNs
HP offers various defined contribution plans for U.S. and non-U.S.
employees. Total defined contribution expense was $100 million for
fiscal year 2016, $92 million in fiscal year 2015 and $93 million in
fiscal year 2014.
U.S. employees are automatically enrolled in the HP Inc. 401(k)
Plan when they meet eligibility requirements, unless they decline
participation. The quarterly employer matching contributions in the
HP Inc. 401(k) Plan are 100% of an employee’s contributions, up to
a maximum of 4% of eligible compensation. Effective January 2017,
the funding of employer matching contributions will change to be
made annually, sometime after the end of the calendar year.
peNsioN aNd post-retiremeNt BeNefit eXpeNse
The components of HP’s pension and post-retirement benefit cost (credit) recognized in the Consolidated Statements of Earnings were
as follows:
for tHe fiscal years eNded octoBer 31
2016
2015
2014
2016
2015
2014
2016
2015
2014
u.s. defiNed
BeNefit plaNs
NoN-u.s. defiNed
BeNefit plaNs
iN millioNs
post-retiremeNt
BeNefit plaNs
Service cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest cost. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$—
543
$1
556
$1
554
$47
20
$208
289
$234
454
$1
20
$5
28
Expected return on plan assets . . . . . . . . . . . .
(732)
(849)
(811)
(36)
(601)
(776)
(33)
(39)
Amortization and deferrals:
Actuarial loss (gain) . . . . . . . . . . . . . . . . . . . .
Prior service benefit (credit) . . . . . . . . . . . . .
55
—
52
—
13
—
Net periodic benefit (credit) cost. . . . . . . . . . . .
(134)
(240)
(243)
28
(3)
56
(1)
3
—
—
213
(15)
94
—
—
7
25
236
(21)
127
(6)
4
11
(6)
(12)
(17)
(41)
—
—
4
—
(11)
(19)
(36)
—
—
1
28
—
180
—
—
—
(79)
—
—
—
1
—
—
$46
$(319)
$(242)
$58
$126
$130
$(37)
$(7)
Curtailment gain. . . . . . . . . . . . . . . . . . . . . . . . . .
Settlement loss (gain) . . . . . . . . . . . . . . . . . . . . .
Special termination benefits . . . . . . . . . . . . . . .
Plan expense (credit) allocation(1) . . . . . . . . . . .
Total benefit cost (credit) from continuing
operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
68 I
2016 Form 10-K
$5
32
(34)
(10)
(41)
(48)
—
—
32
18
$2
HP INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Note 5: retiremeNt aNd post-retiremeNt BeNefit plaN (coNtiNued)
for tHe fiscal years eNded octoBer 31
2016
2015
2014
2016
2015
2014
2016
2015
2014
u.s. defiNed
BeNefit plaNs
NoN-u.s. defiNed
BeNefit plaNs
iN millioNs
post-retiremeNt
BeNefit plaNs
summary of total benefit (credit) cost:
Continuing operations. . . . . . . . . . . . . . . . . . . . .
Discontinued operations. . . . . . . . . . . . . . . . . . .
Total benefit cost (credit) . . . . . . . . . . . . . . . . . .
$46
—
$46
$(319)
$(242)
236
17
$(83)
$(225)
$58
—
$58
$126
105
$231
$130
125
$255
$(37)
—
$(7)
(28)
$2
(18)
$(37)
$(35)
$(16)
(1)
Plan expense (credit) allocation relates to the employees of HP covered under Hewlett Packard Enterprise plans or employees of Hewlett Packard Enterprise
covered under HP plans.
lump sum program
During fiscal year 2016, HP offered certain terminated vested
participants of the Pension Plan the option of receiving their pension
benefit in a one-time voluntary lump sum during a specific window.
Approximately 16,000 plan participants elected to receive their
benefits and as a result the pension plan trust paid $977 million
in lump sum payments to these participants in fiscal year 2016.
As a result of the lump sum program, HP recognized a settlement
expense of approximately $177 million in October 2016. The
resulting re-measurement coincided with annual year end plan
remeasurement and no additional net periodic pension cost was
incurred in fiscal year 2016.
In January 2015, HP offered certain terminated vested participants
of the Pension Plan the option of receiving their pension benefit
in a one-time voluntary lump sum during a specified window.
Approximately 50% of the eligible participants elected to receive
their benefits and as a result the pension plan trust paid $826 million
in lump sum payments to these participants in fiscal year 2015. As a
result of the lump sum program, HP recognized a settlement credit
of approximately $79 million in fiscal year 2015. As a result of the
settlement, additional net periodic benefit cost of $20 million was
recorded in fiscal year 2015, which offset the actuarial gain from the
settlement and was recognized in the Consolidated Statements of
Earnings as Defined benefit plan settlement credits.
The weighted-average assumptions used to calculate the total periodic benefit (credit) cost were as follows:
for tHe fiscal years eNded octoBer 31
2016
2015
2014
2016
2015
2014
2016
2015
2014
u.s. defiNed
BeNefit plaNs
NoN-u.s. defiNed
BeNefit plaNs
post-retiremeNt
BeNefit plaNs
Discount rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected increase in compensation levels . . . . . . . . . .
Expected long-term return on plan assets. . . . . . . . . .
4.4%
2.0%
6.9%
4.4%
2.0%
7.2%
4.9%
2.0%
7.7%
2.3%
2.5%
5.6%
3.0%
2.4%
6.9%
3.9%
2.4%
7.0%
3.6%
3.6%
3.9%
—
—
—
8.0%
9.0%
8.9%
2016 Form 10-K
I 69
HP INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Note 5: retiremeNt aNd post-retiremeNt BeNefit plaN (coNtiNued)
fuNded status
The funded status of the defined benefit and post-retirement benefit plans was as follows:
as of octoBer 31
2016
2015
2016
2015
2016
2015
u.s. defiNed
BeNefit plaNs
NoN-u.s. defiNed
BeNefit plaNs
iN millioNs
post-retiremeNt
BeNefit plaNs
Change in fair value of plan assets:
Fair value of assets — beginning of year . . . . .
$11,077
$11,979
$853
$12,472
$434
$458
Acquisition/addition of plans . . . . . . . . . . . . . . . .
Actual return on plan assets . . . . . . . . . . . . . . . .
Employer contributions . . . . . . . . . . . . . . . . . . . . .
Participant contributions. . . . . . . . . . . . . . . . . . . .
Benefits paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Settlement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Currency impact . . . . . . . . . . . . . . . . . . . . . . . . . . .
Transfers to Hewlett Packard Enterprise. . . . . .
—
736
32
—
(339)
(1,330)
—
—
(1)
506
8
—
(301)
(1,114)
—
—
Fair value of assets — end of year . . . . . . . . . . .
$10,176
$11,077
—
(14)
20
10
(15)
(9)
4
(157)
$692
9
547
487
48
(297)
(9)
(737)
(11,667)(1)
—
11
18
48
(121)
—
—
—
—
45
38
57
(124)
—
—
(40)(1)
$853
$390
$434
$12,709
$13,386
$1,082
$13,885
$597
$840
Change in benefits obligation . . . . . . . . . . . . . . . . . .
Projected benefit obligation —
beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . .
Acquisition/addition of plans . . . . . . . . . . . . . . . .
Service cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Participant contributions. . . . . . . . . . . . . . . . . . . .
Actuarial loss (gain) . . . . . . . . . . . . . . . . . . . . . . . .
—
—
543
—
561
Benefits paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(339)
Plan amendments . . . . . . . . . . . . . . . . . . . . . . . . .
Curtailment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
—
(1)
1
556
—
(170)
(301)
—
—
Settlement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(1,330)
(1,114)
Special termination benefits . . . . . . . . . . . . . . . .
Currency impact . . . . . . . . . . . . . . . . . . . . . . . . . . .
Transfers from Hewlett Packard Enterprise . . .
Transfers to Hewlett Packard Enterprise. . . . . .
Projected benefit obligation — end
of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
—
—
—
—
—
365(2)
(13)(1)
$12,144
$12,709
Funded status at end of year. . . . . . . . . . . . . . . . . . .
$(1,968)
$(1,632)
Accumulated benefit obligation . . . . . . . . . . . . . . . .
$12,144
$12,708
(2)
47
20
10
120
(15)
—
(1)
(9)
—
(4)
—
4
208
289
48
48
(297)
(7)
—
(9)
7
(825)
—
(128)
(12,269)(1)
—
1
20
48
16
(121)
(30)
—
—
4
—
—
—
—
5
28
57
(49)
(126)
—
—
—
1
(9)
—
(150)(1)
$1,120
$(428)
$1,013
$1,082
$(229)
$989
$535
$(145)
—
$597
$(163)
—
(1)
In fiscal year 2015, in connection with the Separation, HP transferred plan assets and liabilities from HP’s plans to establish the Hewlett Packard Enterprise plans.
(2)
In October 2015, in connection with the Separation, Hewlett Packard Enterprise transferred to HP three unfunded non-qualified U.S. defined benefit plans.
70 I
2016 Form 10-K
HP INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Note 5: retiremeNt aNd post-retiremeNt BeNefit plaN (coNtiNued)
The weighted-average assumptions used to calculate the projected benefit obligations for the fiscal years ended October 31, 2016 and
2015 were as follows:
for tHe fiscal years eNded octoBer 31
2016
2015
2016
2015
2016
2015
u.s. defiNed
BeNefit plaNs
NoN-u.s. defiNed
BeNefit plaNs
post-retiremeNt
BeNefit plaNs
Discount rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected increase in compensation levels . . . . . . .
4.0%
2.0%
4.4%
2.0%
1.6%
2.7%
2.3%
2.5%
3.4%
—
3.6%
—
The net amounts of non-current assets and current and non-current liabilities for HP’s defined benefit and post-retirement benefit plans
recognized on HP’s Consolidated Balance Sheet were as follows:
as of octoBer 31
2016
2015
2016
2015
2016
2015
u.s. defiNed
BeNefit plaNs
NoN-u.s. defiNed
BeNefit plaNs
iN millioNs
post-retiremeNt
BeNefit plaNs
Non-current assets . . . . . . . . . . . . . . . . . . . . . . . . . . .
Current liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$—
(33)
$—
(35)
Non-current liabilities . . . . . . . . . . . . . . . . . . . . . . . . .
(1,935)
(1,597)
Funded status at end of year. . . . . . . . . . . . . . . . . . .
$(1,968)
$(1,632)
$17
(5)
(440)
$(428)
$37
(4)
(262)
$(229)
$—
(9)
(136)
$(145)
$—
(43)
(120)
$(163)
The following table summarizes the pre-tax net actuarial loss (gain) and prior service benefit recognized in Accumulated other
comprehensive loss for the defined benefit and post-retirement benefit plans.
Net actuarial loss (gain) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prior service benefit. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total recognized in Accumulated other comprehensive loss (gain) . . . . . . . . . .
as of octoBer 31, 2016
u.s. defiNed
BeNefit plaNs
NoN u.s. defiNed
BeNefit plaNs
post-retiremeNt
BeNefit plaNs
$1,702
—
$1,702
iN millioNs
$456
(21)
$435
$(105)
(112)
$(217)
The following table summarizes HP’s pre-tax net actuarial loss (gain) and prior service benefit that are expected to be amortized from
Accumulated other comprehensive loss (income) and recognized as components of net periodic benefit cost (credit) during the next
fiscal year.
Net actuarial loss (gain) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prior service benefit. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total expected to be recognized in net periodic benefit cost (credit) . . . . . . . . .
u.s. defiNed
BeNefit plaNs
NoN-u.s. defiNed
BeNefit plaNs
post-retiremeNt
BeNefit plaNs
iN millioNs
$39
(3)
$36
$73
—
$73
$(10)
(19)
$(29)
2016 Form 10-K
I 71
HP INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Note 5: retiremeNt aNd post-retiremeNt BeNefit plaN (coNtiNued)
Defined benefit plans with projected benefit obligations exceeding the fair value of plan assets were as follows:
as of octoBer 31
2016
2015
2016
2015
u.s. defiNed
BeNefit plaNs
NoN-u.s. defiNed
BeNefit plaNs
iN millioNs
Aggregate fair value of plan assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$10,176
$11,077
$626
Aggregate projected benefit obligation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$12,144
$12,709
$1,070
$418
$684
Defined benefit plans with accumulated benefit obligations exceeding the fair value of plan assets were as follows:
as of octoBer 31
2016
2015
2016
2015
u.s. defiNed
BeNefit plaNs
NoN-u.s. defiNed
BeNefit plaNs
iN millioNs
Aggregate fair value of plan assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$10,176
$11,077
Aggregate accumulated benefit obligation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$12,144
$12,708
$619
$960
$409
$609
fair value of plaN assets
The table below sets forth the fair value of plan assets by asset category within the fair value hierarchy as of October 31, 2016. Refer to
Note 10, “Fair Value” for details on fair value hierarchy.
u.s. defiNed BeNefit plaNs
NoN-u.s. defiNed BeNefit plaNs
post-retiremeNt BeNefit plaNs
level 1
level 2
level 3
total
level 1 level 2 level 3 total
level 1 level 2 level 3
total
as of octoBer 31, 2016
iN millioNs
$1,716
$59
$— $1,775
$122
$4
$7
$133
$—
$1
$—
$1
Asset Category:
Equity securities(1) . . . . .
Debt securities(2)
Corporate . . . . . . . . . .
— 3,132
Government . . . . . . . .
— 1,782
—
—
3,132
1,782
—
— 1,027
1,027
— 124
— 124
—
—
26
2
—
11
26
13
—
—
—
—
—
—
26
42
—
—
26
42
— 219
219
—
—
—
—
—
—
—
—
—
— 1,834
—
—
—
—
—
—
—
1,834
— 277
— 277
—
—
1
24
—
25
—
2
1
3
—
639
—
639
—
11
—
11
—
51
—
51
Alternative
Investments(3) . . . . . . . . .
Common Contractual
Funds (4) . . . . . . . . . . . . . .
Real Estate Funds. . . . . .
Insurance Group
Annuity Contracts. . . . . .
Common Collective
Trusts and 103-12
Investment Entities(5). . .
72 I
2016 Form 10-K
HP INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Note 5: retiremeNt aNd post-retiremeNt BeNefit plaN (coNtiNued)
u.s. defiNed BeNefit plaNs
NoN-u.s. defiNed BeNefit plaNs
post-retiremeNt BeNefit plaNs
level 1
level 2
level 3
total
level 1 level 2 level 3 total
level 1 level 2 level 3
total
as of octoBer 31, 2016
iN millioNs
Registered Investment
Companies(6) . . . . . . . . . .
Cash and Cash
Equivalents(7) . . . . . . . . . .
Other(8) . . . . . . . . . . . . . . .
$20
$103
$—
$123
$30
$— $— $30
$54
$4
$— $58
4
(169)
52
(23)
—
—
56
(192)
18
7
—
16
—
9
18
32
—
(12)
5
—
—
5
— (12)
Total . . . . . . . . . . . . . . . . .
$1,571
$7,578
$1,027 $10,176
$178
$486
$28
$692
$42
$129
$219
$390
(1)
(2)
(3)
(4)
(5)
Investments in publicly-traded equity securities are valued using the closing price on the measurement date as reported on the stock exchange on which the
individual securities are traded.
The fair value for corporate, government and asset-backed debt securities is based on observable inputs of comparable market transactions. For corporate and
government debt securities traded on active exchanges, fair value is based on observable quoted prices. Also included in this category is debt issued by national,
state and local governments and agencies.
Alternative Investments primarily include private equities and hedge funds. The valuation of alternative investments, such as limited partnerships and joint
ventures, may require significant management judgment. For alternative investments, valuation is based on net asset value (“NAV”) as reported by the Asset
Manager and adjusted for cash flows, if necessary. In making such an assessment, a variety of factors are reviewed by management, including but not limited
to the timeliness of NAV as reported by the asset manager and changes in general economic and market conditions subsequent to the last NAV reported by the
asset manager. Depending on the amount of management judgment, the lack of near-term liquidity, and the absence of quoted market prices, these assets are
classified in Level 2 or Level 3 of the fair value hierarchy. Further, depending on how quickly HP can redeem its hedge fund investments, and the extent of any
adjustments to NAV, hedge funds are classified in either Level 2 or Level 3 of the fair value hierarchy.
• Private equities include limited partnerships such as equity, buyout, venture capital, real estate and other similar funds that invest in the United States and
internationally where foreign currencies are hedged.
• Hedge funds include limited partnerships that invest both long and short primarily in common stocks and credit, relative value, event driven equity,
distressed debt and macro strategies. Management of the hedge funds has the ability to shift investments from value to growth strategies, from small to
large capitalization stocks and bonds, and from a net long position to a net short position.
The Common Contractual Fund is an investment arrangement in which institutional investors pool their assets. Units may be acquired in six different sub-funds
focused on equities, fixed income, alternative investments and emerging markets. Each sub-fund is invested in accordance with the fund’s investment objective
and units are issued in relation to each sub-fund. While the sub-funds are not publicly traded, the custodian strikes a net asset value either once or twice a month,
depending on the sub-fund. These assets are valued at NAV and classified in Level 2 of the fair value hierarchy.
Department of Labor 103-12 IE (Investment Entity) designation is for plan assets held by two or more unrelated employee benefit plans which includes limited
partnerships and venture capital partnerships. Common collective trusts, interests in 103-12 entities and registered investment companies are valued at NAV.
The valuation for some of these assets requires judgment due to the absence of quoted market prices, and these assets are generally classified in Level 2 of the
fair value hierarchy.
(6)
Includes publicly and privately traded Registered Investment Entities.
(7)
Includes cash and cash equivalents such as short-term marketable securities. Cash and cash equivalents include money market funds, which are valued based
on NAV. Other assets were classified in the fair value hierarchy based on the lowest level input (e.g., quoted prices and observable inputs) that is significant to
the fair value measure in its entirety.
(8)
Includes primarily unsettled transactions, international insured contracts, and derivative instruments. Such unsettled transactions relate primarily to fixed
income securities settled in the first quarter of fiscal year 2017.
2016 Form 10-K
I 73
HP INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Note 5: retiremeNt aNd post-retiremeNt BeNefit plaN (coNtiNued)
Changes in fair value measurements of Level 3 investments were as follows:
for tHe fiscal year eNded octoBer 31, 2016
u.s. defiNed BeNefit plaNs
NoN-u.s. defiNed BeNefit plaNs
corporate
deBt
alterNative
iNvestmeNts
total
NoN u.s.
eQuities
alterNative
iNvestmeNts
iNsuraNce
group
aNNuities otHer total
iN millioNs
post-
retiremeNt
BeNefit
plaNs
alterNative
iNvestmeNts
$31
$1,291 $1,322
$15
$16
$3
$7
$41
$253
—
—
(9)
(22)
(128)
(128)
131
131
(267)
(276)
—
—
—
—
—
—
—
—
—
— —
— —
— —
—
(22)
(8)
(5)
(2)
2
(13)
(9)
14
(39)
—
$—
$1,027 $1,027
$7
$11
$1
$9
$28
$219
Beginning balance at
October 31, 2015 . . . . . . . . . . . . . . . . .
Actual return on plan assets:
Relating to assets still held
at the reporting date . . . . . . . . . . .
Relating to assets sold during
the period . . . . . . . . . . . . . . . . . . . . .
Purchases, sales, and
settlements (net) . . . . . . . . . . . . . . . . .
Transfers in and/or out
of Level 3 . . . . . . . . . . . . . . . . . . . . . . . .
Ending balance at
October 31, 2016 . . . . . . . . . . . . . . . . .
The table below sets forth the fair value of plan assets by asset category within the fair value hierarchy as of October 31, 2015.
u.s. defiNed BeNefit plaNs
NoN-u.s. defiNed BeNefit plaNs post-retiremeNt BeNefit plaNs
level 1
level 2
level 3
total
level 1 level 2 level 3 total level 1 level 2 level 3 total
as of octoBer 31, 2015
iN millioNs
Asset Category:
Equity securities(1) . . . . . . . . . $2,100
Debt securities(2)
$60
$— $2,160
$120
$97
$15 $232
$—
$1
$— $1
Corporate . . . . . . . . . . . . . .
— 3,198
31
3,229
— 260
— 260 —
— 1,712
— 1,712
—
— 1,291
1,291
—
—
59
2
— 59 —
16
18 —
— 253
253
Government . . . . . . . . . . . .
Alternative Investments(3). . .
Common Contractual
Funds(4) . . . . . . . . . . . . . . . . . . .
28
39
— 28
— 39
—
—
—
—
—
—
— 1,837
— 1,837
— 182
— 182 —
Real Estate Funds. . . . . . . . . .
—
—
—
—
2
25
— 27 —
74 I
2016 Form 10-K
HP INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Note 5: retiremeNt aNd post-retiremeNt BeNefit plaN (coNtiNued)
u.s. defiNed BeNefit plaNs
NoN-u.s. defiNed BeNefit plaNs post-retiremeNt BeNefit plaNs
level 1
level 2
level 3
total
level 1 level 2 level 3 total level 1 level 2 level 3 total
as of octoBer 31, 2015
iN millioNs
$—
$—
$—
$—
$—
$5
$3
$8
$—
$— $— $—
—
38
5
(153)
756
176
71
(45)
—
—
—
—
756
214
76
(198)
—
30
18
7
4
—
—
1
—
4 —
59
— 59
— 30
52
— 18
7
15
4
(8)
3
3
—
— 55
—
—
7
(8)
Insurance Group Annuity
Contracts . . . . . . . . . . . . . . . . .
Common Collective Trusts
and 103-12 Investment
Entities(5). . . . . . . . . . . . . . . . . .
Registered Investment
Companies(6) . . . . . . . . . . . . . .
Cash and Cash
Equivalents(7) . . . . . . . . . . . . . .
Other(8) . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . $1,990 $7,765 $1,322 $11,077
$177
$635
$41 $853
$48
$133
$253 $434
(1)
(2)
(3)
(4)
(5)
Investments in publicly-traded equity securities are valued using the closing price on the measurement date as reported on the stock exchange on which the
individual securities are traded.
The fair value for corporate, government and asset-backed debt securities is based on observable inputs of comparable market transactions. For corporate and
government debt securities traded on active exchanges, fair value is based on observable quoted prices. Also included in this category is debt issued by national,
state and local governments and agencies.
Alternative Investments primarily include private equities and hedge funds. The valuation of alternative investments, such as limited partnerships and joint
ventures, may require significant management judgment. For alternative investments, valuation is based on NAV as reported by the Asset Manager and adjusted
for cash flows, if necessary. In making such an assessment, a variety of factors are reviewed by management, including but not limited to the timeliness of
NAV as reported by the asset manager and changes in general economic and market conditions subsequent to the last NAV reported by the asset manager.
Depending on the amount of management judgment, the lack of near-term liquidity, and the absence of quoted market prices, these assets are classified in Level
2 or Level 3 of the fair value hierarchy. Further, depending on how quickly HP can redeem its hedge fund investments, and the extent of any adjustments to NAV,
hedge funds are classified in either Level 2 or Level 3 of the fair value hierarchy.
• Private equities include limited partnerships such as equity, buyout, venture capital, real estate and other similar funds that invest in the United States and
internationally where foreign currencies are hedged.
• Hedge funds include limited partnerships that invest both long and short primarily in common stocks and credit, relative value, event driven equity,
distressed debt and macro strategies. Management of the hedge funds has the ability to shift investments from value to growth strategies, from small to
large capitalization stocks and bonds, and from a net long position to a net short position.
The Common Contractual Fund is an investment arrangement in which institutional investors pool their assets. Units may be acquired in six different sub-funds
focused on equities, fixed income, alternative investments and emerging markets. Each sub-fund is invested in accordance with the fund’s investment objective
and units are issued in relation to each sub-fund. While the sub-funds are not publicly traded, the custodian strikes a net asset value either once or twice a month,
depending on the sub-fund. These assets are valued at NAV and classified in Level 2 of the fair value hierarchy.
Department of Labor 103-12 IE (Investment Entity) designation is for plan assets held by two or more unrelated employee benefit plans which includes limited
partnerships and venture capital partnerships. Common collective trusts, interests in 103-12 entities and registered investment companies are valued at NAV.
The valuation for some of these assets requires judgment due to the absence of quoted market prices, and these assets are generally classified in Level 2 of the
fair value hierarchy.
(6)
Includes publicly and privately traded Registered Investment Entities.
(7)
Includes cash and cash equivalents such as short-term marketable securities. Cash and cash equivalents include money market funds, which are valued based
on NAV. Other assets were classified in the fair value hierarchy based on the lowest level input (e.g., quoted prices and observable inputs) that is significant to
the fair value measure in its entirety.
(8)
Includes primarily unsettled transactions, international insured contracts, and derivative instruments. Such unsettled transactions relate primarily to fixed
income securities settled in the first quarter of fiscal year 2016.
2016 Form 10-K
I 75
HP INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Note 5: retiremeNt aNd post-retiremeNt BeNefit plaN (coNtiNued)
Changes in fair value measurements of Level 3 investments were as follows:
for tHe fiscal year eNded octoBer 31, 2015
u.s. defiNed BeNefit plaNs
NoN-u.s. defiNed BeNefit plaNs
corporate
deBt
alterNative
iNvestmeNts
total
NoN u.s.
eQuities
alterNative
iNvestmeNts
iNsuraNce
group
aNNuities otHer total
iN millioNs
post-
retiremeNt
BeNefit plaNs
alterNative
iNvestmeNts
$7
$1,409 $1,416
$80
$160
$35
$— $275
$272
—
—
24
—
(26)
(26)
(13)
144
144
(236)
(212)
—
—
—
—
(52)
(6)
(21)
(77)
(40)
(7)
— (26)
—
—
— (21)
— (77)
(25)
7 (110)
(2)
46
(63)
—
$31
$1,291 $1,322
$15
$16
$3
$7
$41
$253
Beginning balance at
October 31, 2014 . . . . . . . . . .
Actual return on plan assets:
Relating to assets
still held at the
reporting date . . . . . . . . . .
Relating to assets sold
during the period . . . . . . .
Purchases, sales, and
settlements (net) . . . . . . . . . .
Transfers in and/or out of
Level 3 . . . . . . . . . . . . . . . . . . .
Ending balance at
October 31, 2015 . . . . . . . . . .
plaN asset allocatioNs
Refer to the fair value hierarchy table above for actual assets allocations across the benefit plans. The weighted-average target asset
allocations across the benefit plans represented in the fair value tables above were as follows:
asset category
2016 target allocatioN
u.s. defiNed
BeNefit plaNs
NoN-u.s. defiNed
BeNefit plaNs
post-retiremeNt
BeNefit plaNs
Equity-related investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Debt securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Real estate. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash and cash equivalents. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
53.9 %
46.1 %
—
—
—
44.3 %
38.8 %
6.2 %
2.7 %
8.0 %
67.7 %
29.2 %
2.0 %
1.1 %
—
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
100.0 %
100.0 %
100.0 %
76 I
2016 Form 10-K
HP INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Note 5: retiremeNt aNd post-retiremeNt BeNefit plaN (coNtiNued)
iNvestmeNt policy
HP’s investment strategy is to seek a competitive rate of return
relative to an appropriate level of risk depending on the funded
status of each plan and the timing of expected benefit payments.
The majority of the plans’ investment managers employ active
investment management strategies with the goal of outperforming
the broad markets in which they invest. Risk management practices
include diversification across asset classes and investment styles
and periodic rebalancing toward asset allocation targets. A number
of the plans’ investment managers are authorized to utilize
derivatives for investment or liability exposures, and HP may utilize
derivatives to effect asset allocation changes or to hedge certain
investment or liability exposures.
The target asset allocation selected for each U.S. plan reflects a
risk/return profile HP believes is appropriate relative to each plan’s
liability structure and return goals. HP conducts periodic asset-
liability studies for U.S. plans in order to model various potential
asset allocations in comparison to each plan’s forecasted liabilities
and liquidity needs. HP invests a portion of the U.S. defined benefit
plan assets and post-retirement benefit plan assets in private market
securities such as private equity funds to provide diversification and
a higher expected return on assets.
Outside the United States, asset allocation decisions are typically
made by an independent board of trustees for the specific plan. As
in the United States, investment objectives are designed to generate
returns that will enable the plan to meet its future obligations. In
some countries, local regulations may restrict asset allocations,
estimated future BeNefits paymeNts
typically leading to a higher percentage of investment in fixed
income securities than would otherwise be deployed. HP reviews
the investment strategy and provides a recommended list of
investment managers for each country plan, with final decisions on
asset allocation and investment managers made by the board of
trustees for the specific plan.
Basis for eXpected loNg-term rate of returN oN plaN
assets
The expected long-term rate of return on plan assets reflects the
expected returns for each major asset class in which the plan invests
and the weight of each asset class in the target mix. Expected asset
returns reflect the current yield on government bonds, risk premiums
for each asset class and expected real returns which considers each
country’s specific inflation outlook. Because HP’s investment policy
is to employ primarily active investment managers who seek to
outperform the broader market, the expected returns are adjusted
to reflect the expected additional returns net of fees.
future coNtriButioNs aNd fuNdiNg policy
In fiscal year 2017, HP expects to contribute approximately
$26 million to its non-U.S. pension plans, $33 million to cover
benefit payments to U.S. non-qualified plan participants and
$9 million to cover benefit claims for HP’s post-retirement benefit
plans. HP’s policy is to fund its pension plans so that it makes at
least the minimum contribution required by local government,
funding and taxing authorities.
As of October 31, 2016, HP estimates that the future benefits payments for the retirement and post-retirement plans are as follows:
fiscal year
u.s. defiNed
BeNefit plaNs
NoN-u.s.
defiNed
BeNefit plaNs
post-
retiremeNt
BeNefit plaNs
iN millioNs
2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$687
2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
635
648
674
702
Next five fiscal years to October 31, 2026 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3,685
$27
24
28
29
28
188
$80
61
51
47
44
167
2016 Form 10-K
I 77
HP INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Note 6: stocK-Based compeNsatioN
HP’s stock-based compensation plans include incentive compensation plans and an employee stock purchase plan (“ESPP”).
stocK-Based compeNsatioN eXpeNse aNd related iNcome taX BeNefits for coNtiNuiNg operatioNs
Stock-based compensation expense and the resulting tax benefits for continuing operations were as follows:
Stock-based compensation expense. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax benefit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock-based compensation expense, net of tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
for tHe fiscal years
eNded octoBer 31
2016
2015
2014
iN millioNs
$212
(62)
$150
$182
(63)
$119
$196
(65)
$131
In connection with the Separation and in accordance with the
employee matters agreement, HP has made certain adjustments
to the exercise price and number of stock-based compensation
awards with the intention of preserving the intrinsic value of the
awards prior to the Separation. Exercisable and non-exercisable
stock options have been converted to similar awards of the entity
where the employee is working post-separation. Restricted stock
unit awards and performance-contingent awards have been
adjusted to provide holders with restricted stock units awards and
performance-contingent awards in the company that employs
such employee following the Separation. The pre-tax stock-based
compensation expense due to the adjustments was $2 million in
fiscal year 2016. All outstanding restricted stock awards and stock
options for employees transferred to Hewlett Packard Enterprise
were cancelled in connection with the Separation. The restricted
stock awards activity and stock options activity for fiscal years 2015
and 2014 in the tables below include discontinued operations, as
the awards were not cancelled until the Separation became effective
in the first quarter of fiscal year 2016.
In connection with the Separation, the Board of Directors approved
amendments to certain outstanding long-term incentive awards
on July 29, 2015. The amendments provided for the accelerated
vesting on September 17, 2015 of certain stock-based awards that
were otherwise scheduled to vest between September 18, 2015
and December 31, 2015. The pre-tax stock-based compensation
expense due to the acceleration for continuing operations was
approximately $23 million in fiscal year 2015.
Cash received from option exercises and purchases under the
Hewlett-Packard Company 2011 Employee Stock Purchase Plan
(the “2011 ESPP”) was $48 million in fiscal year 2016, $206 million
in fiscal year 2015 and $143 million in fiscal year 2014. The
benefit realized for the tax deduction from option exercises in
fiscal years 2016, 2015 and 2014 was $9 million, $30 million and
$9 million, respectively.
78 I
2016 Form 10-K
stocK-Based iNceNtive compeNsatioN plaNs
HP’s stock-based incentive compensation plans include equity plans
adopted in 2004 and 2000, as amended (“principal equity plans”),
as well as various equity plans assumed through acquisitions under
which stock-based awards are outstanding. Stock-based awards
granted from the principal equity plans include restricted stock
awards, stock options and performance-based awards. Employees
meeting certain employment qualifications are eligible to receive
stock-based awards.
Restricted stock awards are non-vested stock awards that may
include grants of restricted stock or restricted stock units. Restricted
stock awards and cash-settled awards are generally subject to
forfeiture if employment terminates prior to the lapse of the
restrictions. Such awards generally vest one to three years from the
date of grant. During the vesting period, ownership of the restricted
stock cannot be transferred. Restricted stock has the same dividend
and voting rights as common stock and is considered to be issued
and outstanding upon grant. The dividends paid on restricted stock
are non-forfeitable. Restricted stock units do not have the voting
rights of common stock, and the shares underlying restricted
stock units are not considered issued and outstanding upon grant.
However, shares underlying restricted stock units are included in the
calculation of diluted net EPS. Restricted stock units have forfeitable
dividend equivalent rights equal to the dividend paid on common
stock. HP expenses the fair value of restricted stock awards ratably
over the period during which the restrictions lapse. The majority
of restricted stock units issued by HP contain only service vesting
conditions. However, starting in fiscal year 2014, HP began granting
performance-adjusted restricted stock units that vest only on the
satisfaction of both service and market conditions prior to the
expiration of the awards.
HP INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Note 6: stocK-Based compeNsatioN (coNtiNued)
Stock options granted under the principal equity plans are generally
non-qualified stock options, but the principal equity plans permit
some options granted to qualify as incentive stock options under
the U.S. Internal Revenue Code. Stock options generally vest over
three to four years from the date of grant. The exercise price of a
stock option is equal to the closing price of HP’s stock on the option
grant date. The majority of stock options issued by HP contain only
service vesting conditions. However, starting in fiscal year 2011, HP
began granting performance-contingent stock options that vest
only on the satisfaction of both service and market conditions prior
to the expiration of the awards.
restricted stocK awards
HP uses the closing stock price on the grant date to estimate the
fair value of service-based restricted stock units. HP estimates the
fair value of restricted stock units subject to performance-adjusted
vesting conditions using a combination of the closing stock price on
the grant date and the Monte Carlo simulation model. The weighted-
average fair value and the assumptions used to measure fair value
of restricted stock units subject to performance-adjusted vesting
conditions in the Monte Carlo simulation model were as follows:
Weighted-average fair value(1). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected volatility(2). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Risk-free interest rate(3). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected performance period in years(4). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
for tHe fiscal years eNded octoBer 31
2016
2015
2014
$13
32.5%
1.2%
2.9
$47
33.6%
1.0%
2.9
$37
24.8%
0.4%
1.3
(1) The weighted-average fair value was based on performance-adjusted restricted stock units granted during the period.
(2) The expected volatility was estimated using the historical volatility derived from HP’s common stock.
(3) The risk-free interest rate was estimated based on the yield on U.S. Treasury zero-coupon issues.
(4) The expected performance period was estimated based on the length of the remaining performance period from the grant date.
A summary of restricted stock awards activity is as follows:
2016
as of octoBer 31
2015
2014
weigHted-
average
graNt date
fair value
per sHare
sHares
iN tHousaNds
Outstanding at beginning of year . . . . . . .
29,717
Granted and assumed
through acquisition . . . . . . . . . . . . . . . . . . .
Vested. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Awards cancelled due to Separation . . . .
Forfeited. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Outstanding at end of year . . . . . . . . . . . .
29,286
(4,161)
(23,926)
(2,206)
28,710
$32
$10
$13
$32
$14
$13
weigHted-
average
graNt date
fair value
per sHare
$24
$35
$26
$—
$29
$32
weigHted-
average
graNt date
fair value
per sHare
$21
$28
$24
$—
$22
$24
sHares
iN tHousaNds
32,262
26,036
(14,253)
—
(3,237)
40,808
sHares
iN tHousaNds
40,808
26,991
(34,177)
—
(3,905)
29,717
In fiscal year 2015, HP assumed approximately 8 million shares of
restricted stock units through acquisition with a weighted-average
grant date fair value of $33 per share.
The total grant date fair value of restricted stock awards vested in
fiscal years 2016, 2015 and 2014 was $54 million, $889 million
and $338 million, respectively. As of October 31, 2016, total
unrecognized pre-tax stock-based compensation expense related
to non-vested restricted stock awards for continuing operations was
$180 million, which is expected to be recognized over the remaining
weighted-average vesting period of 1.4 years.
2016 Form 10-K
I 79
HP INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Note 6: stocK-Based compeNsatioN (coNtiNued)
stocK optioNs
HP utilizes the Black-Scholes-Merton option pricing formula to
estimate the fair value of stock options subject to service-based
vesting conditions. HP estimates the fair value of stock options
subject to performance-contingent vesting conditions using a
combination of a Monte Carlo simulation model and a lattice model
as these awards contain market conditions. The weighted-average
fair value and the assumptions used to measure fair value were as
follows:
Weighted-average fair value(1). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected volatility(2). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Risk-free interest rate(3). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected dividend yield(4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected term in years(5) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(1) The weighted-average fair value was based on stock options granted during the period.
for tHe fiscal years eNded
octoBer 31
2016
2015
2014
$4
36.2%
1.8%
3.5%
6.0
$8
26.8%
1.7%
1.8%
5.9
$7
33.1%
1.8%
2.1%
5.7
(2)
For all awards granted in fiscal year 2016, expected volatility was estimated using the leverage-adjusted average of the term-matching volatilities of peer
companies due to the lack of volume of forward traded options, which precluded the use of implied volatility. For all awards granted in fiscal year 2015, expected
volatility was estimated using the implied volatility derived from options traded on HP’s common stock. For awards granted in fiscal year 2014, expected
volatility for awards subject to service-based vesting was estimated using the implied volatility derived from options traded on HP’s common stock, whereas for
performance-contingent awards, expected volatility was estimated using the historical volatility of HP’s common stock.
(3) The risk-free interest rate was estimated based on the yield on U.S. Treasury zero-coupon issues.
(4) The expected dividend yield represents a constant dividend yield applied for the duration of the expected term of the award.
(5)
For awards subject to service-based vesting, due to the lack of historical exercise and post-vesting termination patterns of the post-Separation employee base,
the expected term was estimated using a simplified method for all awards granted in fiscal year 2016 and the expected term was estimated using historical
exercise and post-vesting termination patterns for all awards granted in fiscal years 2015 and 2014; and for performance-contingent awards, the expected term
represents an output from the lattice model.
A summary of stock options activity is as follows:
2016
weigHted-
average
eXercise
price
weigHted-
average
remaiNiNg
coNtractual
term
aggregate
iNtriNsic
value
sHares
as of octoBer 31
2015
weigHted-
average
eXercise
price
weigHted-
average
remaiNiNg
coNtractual
term
2014
weigHted-
average
eXercise
price
weigHted-
average
remaiNiNg
coNtractual
term
aggregate
iNtriNsic
value
sHares
iN years
iN
millioNs
iN
tHousaNds
iN years
iN
millioNs
iN
tHousaNds
iN years
aggregate
iNtriNsic
value
iN
millioNs
sHares
iN
tHousaNds
36,278
$26
57,853
$27
84,042
$27
Outstanding at
beginning of
year. . . . . . . . . . .
Granted and
assumed
through
acquisitions . . . . .
Exercised. . . . . . .
(4,714)
25,425
$6
$8
9,086
(12,845)
$36
$19
9,575
(11,145)
$28
$18
Awards
cancelled due to
Separation. . . . . .
(26,252)
$26
—
$—
—
$—
80 I
2016 Form 10-K
HP INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Note 6: stocK-Based compeNsatioN (coNtiNued)
2016
weigHted-
average
eXercise
price
weigHted-
average
remaiNiNg
coNtractual
term
aggregate
iNtriNsic
value
sHares
as of octoBer 31
2015
weigHted-
average
eXercise
price
weigHted-
average
remaiNiNg
coNtractual
term
2014
weigHted-
average
eXercise
price
weigHted-
average
remaiNiNg
coNtractual
term
aggregate
iNtriNsic
value
sHares
iN years
iN
millioNs
iN
tHousaNds
iN years
iN
millioNs
iN
tHousaNds
iN years
aggregate
iNtriNsic
value
iN
millioNs
$17
$12
$12
$11
(17,816)
5.0
$73
36,278
4.9
3.7
$71
34,973
$62
25,630
$40
$26
$26
$24
(24,619)
$31
5.1
$153
57,853
$27
4.3
$629
5.0
$152
54,166
$27
4.4
$146
30,459
$33
4.1
2.3
$571
$197
sHares
iN
tHousaNds
(2,519)
28,218
26,850
15,418
Forfeited/
cancelled/
expired . . . . . . . .
Outstanding at
end of year . . . . .
Vested and
expected to vest
at end of year . . .
Exercisable at
end of year . . . . .
The aggregate intrinsic value in the table above represents the
total pre-tax intrinsic value that option holders would have received
had all option holders exercised their options on the last trading
day of fiscal years 2016, 2015 and 2014. The aggregate intrinsic
value is the difference between HP’s closing stock price on the last
trading day of the fiscal year and the exercise price, multiplied by the
number of in-the-money options. The total intrinsic value of options
exercised in fiscal years 2016, 2015 and 2014 was $26 million,
$214 million and $151 million, respectively. The total grant date fair
value of options vested in fiscal years 2016, 2015 and 2014 was
$11 million, $131 million and $82 million, respectively.
The following table summarizes significant ranges of outstanding and exercisable stock options:
raNge of eXercise prices
$0-$9.99 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$10-$19.99. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$20-$29.99. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
as of octoBer 31, 2016
optioNs outstaNdiNg
optioNs eXercisaBle
sHares
outstaNdiNg
weigHted-
average
remaiNiNg
coNtractual term
weigHted-
average
eXercise
price
iN tHousaNds
iN years
sHares
eXercisaBle
iN tHousaNds
weigHted-
average
eXercise
price
4,970
23,012
236
28,218
3.8
5.3
1.9
5.0
$7
$14
$23
$12
4,964
10,218
236
15,418
$7
$13
$23
$11
As of October 31, 2016, total unrecognized pre-tax stock-based compensation expense related to stock options for continuing operations
was $17 million, which is expected to be recognized over a weighted-average vesting period of 1.7 years.
employee stocK purcHase plaN
HP sponsors the 2011 ESPP, pursuant to which eligible employees may contribute up to 10% of base compensation, subject to certain
income limits, to purchase shares of HP’s common stock.
Pursuant to the terms of the 2011 ESPP, employees purchase stock under the 2011 ESPP at a price equal to 95% of HP’s closing stock price
on the purchase date. No stock-based compensation expense was recorded in connection with those purchases because the criteria of a
non-compensatory plan were met.
2016 Form 10-K
I 81
HP INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Note 6: stocK-Based compeNsatioN (coNtiNued)
sHares reserved
Shares available for future grant and shares reserved for future issuance under the stock-based incentive compensation plans and the 2011
ESPP were as follows:
Shares available for future grant . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Shares reserved for future issuance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
as of octoBer 31
2016
2015
2014
iN tHousaNds
453,865
510,176
215,949
276,481
246,852
344,848
Note 7: taXes oN earNiNgs
provisioN for taXes
The domestic and foreign components of earnings from continuing operations before taxes were as follows:
U.S. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-U.S. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
The provision for (benefit from) taxes on earnings from continuing operations was as follows:
for tHe fiscal years eNded octoBer 31
2016
2015
2014
iN millioNs
$216
3,316
$468
3,293
$3,761
$3,532
$1,511
2,352
$3,863
for tHe fiscal years eNded octoBer 31
2016
2015
2014
iN millioNs
U.S. federal taxes:
Current . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$439
470
$(2,206)
1,069
Non-U.S. taxes:
Current . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State taxes:
Current . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
288
(123)
(35)
56
431
76
362
82
$1,095
$(186)
$232
128
598
(26)
129
(122)
$939
82 I
2016 Form 10-K
HP INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Note 7: taXes oN earNiNgs (coNtiNued)
The differences between the U.S. federal statutory income tax rate and HP’s effective tax rate were as follows:
U.S. federal statutory income tax rate from continuing operations . . . . . . . . . . . . . . . . . . . . . .
State income taxes from continuing operations, net of federal tax benefit . . . . . . . . . . . . . . .
Lower rates in other jurisdictions, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Research and development (“R&D”) credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Valuation allowances. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Uncertain tax positions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Indemnification Related Items. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
for tHe fiscal years eNded octoBer 31
2016
35.0%
1.1%
(9.3)%
(2.4)%
(1.2)%
11.7%
(4.1)%
(1.7)%
29.1%
2015
35.0%
(6.1)%
(1.2)%
(0.2)%
(48.0)%
11.1%
—
4.1%
(5.3)%
2014
35.0%
0.5%
(11.6)%
(0.2)%
—
(1.6)%
—
2.2%
24.3%
The jurisdictions with favorable tax rates that have the most
significant effective tax rate impact in the periods presented include
Puerto Rico, Singapore, China, Malaysia and Ireland. To the extent
that HP plans to reinvest earnings of these jurisdictions indefinitely
outside the United States, U.S. taxes have not been provided on
those indefinitely reinvested earnings.
In fiscal year 2016, HP recorded $301 million of net income tax
charges related to items unique to the year for continuing operations.
These amounts primarily include uncertain tax positions charges of
$525 million related to pre-separation tax matters. In addition, HP
recorded $62 million of net tax benefits on restructuring and other
charges, $52 million of net tax benefits related to the release of
foreign valuation allowances and $41 million of net tax benefits
arising from the retroactive research and development credit
provided by the Consolidated Appropriations Act of 2016 signed into
law in December 2015 and $70 million of other tax benefit.
In fiscal year 2015, HP recorded $1.2 billion of net income tax
benefits related to items unique to the year. These amounts included
$1.7 billion of tax benefits due to a release of valuation allowances
pertaining to certain U.S. deferred tax assets, $449 million of tax
charges related to uncertain tax positions on pension transfers,
$70 million of tax benefits related to state tax impacts, and $6 million
of income tax charges related to various other items. In addition,
HP recorded $33 million of income tax charges on restructuring and
pension-related costs.
In fiscal year 2014, HP recorded $69 million of net income tax
benefits related to items unique to the year. These amounts included
$37 million of income tax benefits related to provision to return
adjustments, $25 million of income tax charges related to state rate
changes, $41 million of income tax benefits for adjustments related
to uncertain tax positions, and $16 million of income tax benefits
related to other items.
As a result of certain employment actions and capital investments
HP has undertaken, income from manufacturing and services in
certain countries is subject to reduced tax rates, and in some cases
is wholly exempt from taxes, through 2027. The gross income
tax benefits attributable to these actions and investments were
estimated to be $341 million ($0.20 diluted net EPS) in fiscal year
2016, $322 million ($0.18 diluted net EPS) in fiscal year 2015 and
$596 million ($0.31 diluted net EPS) in fiscal year 2014. The gross
income tax benefits were offset partially by accruals of U.S. income
taxes on undistributed earnings, among other factors.
2016 Form 10-K
I 83
HP INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Note 7: taXes oN earNiNgs (coNtiNued)
uNcertaiN taX positioNs
A reconciliation of unrecognized tax benefits is as follows:
as of octoBer 31
2016
2015
2014
iN millioNs
Balance at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$6,546
$1,545
$1,284
Increases:
For current year’s tax positions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
For prior years’ tax positions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Decreases:
For prior years’ tax positions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Statute of limitations expirations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Settlements with taxing authorities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
468
4,004
(62)
—
(98)
2,102
5,208
(2,063)
(46)
(200)
166
323
(113)
(41)
(74)
Balance at end of year. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$10,858
$6,546
$1,545
As of October 31, 2016, the amount of unrecognized tax benefits
was $10.9 billion, of which up to $3.9 billion would affect HP’s
effective tax rate if realized. As of October 31, 2015 the amount of
unrecognized tax benefits was $6.5 billion of which up to $3.2 billion
would affect HP’s effective tax rate if realized. HP continues to
record its tax liabilities related to uncertain tax positions and certain
liabilities for which it has joint and several liability with Hewlett
Packard Enterprise. During the twelve months ended October 31,
2016, as part of the Separation, HP distributed $732 million of
liabilities related solely to uncertain tax positions associated with
Hewlett Packard Enterprise. HP recognizes interest income from
favorable settlements and interest expense and penalties accrued
on unrecognized tax benefits in the provision for taxes in the
Consolidated Statements of Earnings. As of October 31, 2016, HP
had accrued $193 million for interest and penalties.
in various
HP engages in continuous discussion and negotiation with taxing
jurisdictions. HP
authorities regarding tax matters
expects to complete resolution of certain tax years with various
tax authorities within the next 12 months. It is also possible that
other federal, foreign and state tax issues may be concluded within
the next 12 months. HP believes it is reasonably possible that its
existing unrecognized tax benefits may be reduced by an amount
up to $2.5 billion within the next 12 months.
HP is subject to income tax in the United States and approximately 58
other countries and is subject to routine corporate income tax audits
in many of these jurisdictions. In addition, HP is subject to numerous
ongoing audits by federal, state and foreign tax authorities. The IRS
is conducting an audit of HP’s 2009, 2010, 2011, 2012, 2013 and
2014 income tax returns. HP has received from the IRS Notices of
Deficiency for its fiscal 1999, 2000, 2003, 2004 and 2005 tax years,
and Revenue Agent Reports (“RAR”) for its fiscal years 2001, 2002,
84 I
2016 Form 10-K
2006, 2007 and 2008 tax years. The proposed IRS adjustments
for these tax years would, if sustained, reduce the benefits of tax
refund claims HP has filed for net operating loss carrybacks to
earlier fiscal years and tax credit carryforwards to subsequent years
by approximately $377 million.
HP is waiting for the Ninth Circuit Court of Appeals to rule on HP’s
appeal of an adverse U.S. Tax Court determination related to IRS
adjustments for tax years 1999 through 2003. The U.S. Tax Court
ruled in May 2012 against HP related to certain tax attributes
claimed by HP for the tax years 1999 through 2003. HP appealed
the U.S. Tax Court determination by filing a formal Notice of Appeal
with the Ninth Circuit Court of Appeals. This case was argued before
the Ninth Circuit in November 2016. The Ninth Circuit has not yet
issue any determination in this Appeal.
With respect to major state and foreign tax jurisdictions, HP is no
longer subject to tax authority examinations for years prior to 1999.
No material tax deficiencies have been assessed in major state or
foreign tax jurisdictions as of the reporting period.
HP believes it has provided adequate reserves for all tax deficiencies
or reductions in tax benefits that could result from federal, state
and foreign tax audits. HP regularly assesses the likely outcomes
of these audits in order to determine the appropriateness of HP’s
tax provision. HP adjusts its 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.
However, income tax audits are inherently unpredictable and there
can be no assurance that HP will accurately predict the outcome of
these audits. The amounts ultimately paid on resolution of an audit
could be materially different from the amounts previously included
HP INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Note 7: taXes oN earNiNgs (coNtiNued)
in the Provision for taxes and therefore the resolution of one or
more of these uncertainties in any particular period could have a
material impact on net income or cash flows.
HP has not provided for U.S. federal income and foreign withholding
taxes on $20.3 billion of undistributed earnings from non-U.S.
operations as of October 31, 2016 because HP intends to reinvest
such earnings indefinitely outside of the United States. If HP were
to distribute these earnings, foreign tax credits may become
available under current law to reduce the resulting U.S. income tax
liability. Determination of the amount of unrecognized deferred tax
liability related to these earnings is not practicable. HP will remit
non-indefinitely reinvested earnings of its non-U.S. subsidiaries
for which deferred U.S. federal and withholding taxes have been
provided where excess cash has accumulated and HP determines
that it is advantageous for business operations, tax or cash
management reasons.
deferred iNcome taXes
The significant components of deferred tax assets and deferred tax liabilities were as follows:
as of octoBer 31
2016
2015
deferred
taX
assets
deferred
taX
liaBilities
deferred
taX
assets
deferred
taX
liaBilities
iN millioNs
Loss and credit carryforwards. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$8,725
$—
$7,395
Unremitted earnings of foreign subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . .
Inventory valuation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Intercompany transactions—profit in inventory. . . . . . . . . . . . . . . . . . . . . . .
—
—
—
Intercompany transactions—excluding inventory . . . . . . . . . . . . . . . . . . . . .
2,560
Fixed assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Warranty. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Employee and retiree benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts receivable allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restructuring and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross deferred tax assets and liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Valuation allowances. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net deferred tax assets and liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
274
248
592
117
23
17
206
399
13,161
(8,520)
$4,641
(5,179)
(12)
—
—
—
—
—
—
(213)
—
—
(99)
(5,503)
—
$(5,503)
—
5
7
2,069
692
386
1,728
100
—
19
201
500
13,102
(7,114)
$5,988
$(14)
(5,112)
—
(110)
—
(420)
(6)
(689)
—
(126)
—
(2)
(116)
(6,595)
—
$ (6,595)
In 2015, the FASB issued Accounting Standards Update (“ASU”)
2015-17, “Balance Sheet Classification of Deferred Taxes”, which
simplifies the presentation of deferred income taxes. This guidance
requires that deferred tax liabilities and assets be classified as
non-current in a classified statement of financial position. HP early
adopted the FASB’s new accounting guidance prospectively for
the interim period beginning November 1, 2015; thus, the prior
reporting period was not retrospectively adjusted.
2016 Form 10-K
I 85
HP INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Note 7: taXes oN earNiNgs (coNtiNued)
Current and long-term deferred tax assets and liabilities included in the Consolidated Balance Sheets as follows:
Current deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Current deferred tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term deferred tax liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
as of octoBer 31
2016
2015
iN millioNs
$—
—
254
(1,116)
$(862)
$1,047
(57)
216
(1,813)
$(607)
Excess tax benefits of approximately zero and $64 million were
recorded resulting from the exercise of employee stock options
and other employee stock programs during fiscal years 2016 and
2015. Tax deficits of approximately $43 million were recorded in
fiscal year 2014. The historical statements of stockholders’ (deficit)
equity have not been revised to reflect the effect of the Separation.
For further information on discontinued operations, see Note 2,
“Discontinued Operations”.
HP periodically engages in intercompany advanced royalty payment
arrangements that may result in advance payments between
subsidiaries in different tax jurisdictions. When the local tax
treatment of the intercompany licensing arrangements differs from
U.S. GAAP treatment, deferred taxes are recognized. During fiscal
year 2016, HP executed intercompany advanced royalty payment
arrangements resulting in advanced payments of $1.2 billion.
During fiscal year 2015, HP executed intercompany advanced
royalty payment arrangements resulting in advanced payments of
$3.8 billion, while during fiscal year 2014, HP executed a multi-year
intercompany licensing arrangement and an intercompany advanced
royalty payment arrangement which resulted in combined advanced
payments of $3.8 billion, the result of which was the recognition of
zero net U.S. deferred tax assets in fiscal years 2016 and 2015 and
$0.6 billion in fiscal year 2014. In these transactions, the payments
were received in the United States from a foreign consolidated
affiliate, with a deferral of intercompany revenues over the term of
the arrangements, which is approximately 18 months for fiscal year
2016, 5 years for fiscal year 2015 and 15 years for fiscal year 2014.
Intercompany royalty revenue is eliminated in consolidation.
Separation costs are expenses associated with HP’s plan to separate
into two companies. HP recorded a deferred tax asset on these
costs and expenses as they were incurred through fiscal year 2015.
HP expected a portion of these deferred tax assets associated with
separation costs and expenses to be non-deductible expenses, at
the time the Separation was executed. Furthermore, HP has also
concluded on the legal form of the Separation and in May 2015
announced that Hewlett Packard Enterprise was the spinnee in the
United States. In order to reflect the impact of separation activities,
HP recorded adjustments to certain deferred and prepaid tax assets
as well as income tax liabilities reflecting the impact of separation
related activities.
As of October 31, 2016, HP had $627 million, $2.0 billion and
$25.3 billion of federal, state and foreign net operating loss
carryforwards, respectively. Amounts included in state and foreign
net operating loss carryforwards will begin to expire in fiscal
year 2018 and amounts included in federal net operating loss
carryforwards will begin to expire in 2030. HP also has capital loss
carryforwards of approximately $197 million which will expire in
2021. HP has provided a valuation allowance of $87 million and
$8.2 billion for deferred tax assets related to state and foreign net
operating loss carryforwards, respectively, that HP does not expect
to realize.
As of October 31, 2016, HP had recorded deferred tax assets for various tax credit carryforwards as follows:
carryforward
U.S. foreign tax credits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
U.S. R&D and other credits. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax credits in state and foreign jurisdictions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance at end of year. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$6
2
256
$264
86 I
2016 Form 10-K
valuatioN
allowaNce
iN millioNs
$—
—
(137)
$(137)
iNitial
year of
eXpiratioN
2022
2017
2017
HP INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Note 7: taXes oN earNiNgs (coNtiNued)
deferred taX asset valuatioN allowaNce
The deferred tax asset valuation allowance and changes were as follows:
as of octoBer 31
2016
2015
2014
Balance at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax expense (benefit) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$7,114
1,421
Other comprehensive income, currency translation and charges to other accounts . . . . . . . . .
(15)
Balance at end of year. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$8,520
iN millioNs
$8,231
(2,183)
1,066
$7,114
$8,196
(14)
49
$8,231
Gross deferred tax assets at October 31, 2016, 2015 and 2014,
were reduced by valuation allowances of $8.5 billion, $7.1 billion
and $8.2 billion, respectively. Total valuation allowance increased by
$1.4 billion in fiscal year 2016, associated primarily with foreign net
operating losses, and decreased by $1.1 billion in fiscal year 2015,
associated with the release of a valuation allowance against deferred
tax assets in the United States, and increased by $35 million in fiscal
2014 associated primarily with foreign net operating losses.
In addition, if the distribution of Hewlett Packard Enterprise’s
common shares to HP stockholders is determined to be taxable,
Hewlett Packard Enterprise and HP would share the tax liability
equally, unless the taxability of the distribution is the direct result of
action taken by either Hewlett Packard Enterprise or HP subsequent
to the distribution in which case the party causing the distribution
to be taxable would be responsible for any taxes imposed on
the distribution.
taX matters agreemeNt aNd otHer iNcome taX matters
In connection with the Separation, HP entered into the TMA with
Hewlett Packard Enterprise effective on November 1, 2015 that
governs the rights and obligations of HP and Hewlett Packard
Enterprise for certain pre Separation tax liabilities. The TMA
provides that HP and Hewlett Packard Enterprise will share certain
pre Separation income tax liabilities. In certain jurisdictions, HP and
Hewlett Packard Enterprise have joint and several liability for past
income tax liabilities and accordingly, HP could be legally liable under
applicable tax law for such liabilities and required to make additional
tax payments.
Upon completion of the Separation on November 1, 2015, HP
recorded net income tax indemnification receivables from Hewlett
Packard Enterprise for certain income tax liabilities that HP is jointly
and severally liable for, but for which it is indemnified by Hewlett
Packard Enterprise under the TMA. The actual amount that Hewlett
Packard Enterprise may be obligated to pay HP could vary depending
upon the outcome of certain unresolved tax matters, which may not
be resolved for several years. The net receivable as of October 31,
2016 was $1.6 billion. In connection with the TMA, Interest and
other, net for fiscal year 2016 includes $472 million of changes in
the tax indemnifications amounts.
Note 8: BalaNce sHeet details
Balance sheet details were as follows:
accouNts receivaBle, Net
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$4,221
Allowance for doubtful accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(107)
$4,114
$4,905
(80)
$4,825
as of octoBer 31
2016
2015
iN millioNs
2016 Form 10-K
I 87
HP INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Note 8: BalaNce sHeet details (coNtiNued)
The allowance for doubtful accounts related to accounts receivable and changes were as follows:
as of octoBer 31
2016
2015
2014
iN millioNs
Balance at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for doubtful accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deductions, net of recoveries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$80
65
(38)
Balance at end of year. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$107
$106
$182
19
(45)
$80
(25)
(51)
$106
HP has third-party arrangements, consisting of revolving short-
term financing, which provide liquidity to certain partners in order
to facilitate their working capital requirements. These financing
arrangements, which in certain circumstances may contain partial
recourse, result in a transfer of HP’s receivables and risk, to the
third-party. As these transfers qualify as true sales under the
applicable accounting guidance, the receivables are derecognized
from the Consolidated Balance Sheets upon transfer, and HP
receives a payment for the receivables from the third-party within
a mutually agreed upon time period. For arrangements involving
The following is a summary of the activity under these arrangements:
an element of recourse, the recourse obligation is measured using
market data from the similar transactions and reported as a current
liability in the Consolidated Balance Sheets. The recourse obligations
as of October 31, 2016, 2015 and 2014 were not material. As of
October 31, 2016, 2015 and 2014, HP had $149 million, $93 million
and $271 million, respectively, outstanding from the third parties,
which is reported in Accounts receivable in the Consolidated Balance
Sheets. The costs associated with the sales of trade receivables for
fiscal year 2016 were not material.
Balance at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Trade receivables sold. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
as of octoBer 31
2016
2015
2014
iN millioNs
$93
8,222
$271
6,512
$102
5,680
Cash receipts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(8,160)
(6,671)
(5,491)
Foreign currency and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(6)
Balance at end of year. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$149
(19)
$93
(20)
$271
iNveNtory
Finished goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchased parts and fabricated assemblies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
as of octoBer 31
2016
2015
iN millioNs
$3,103
1,381
$4,484
$2,820
1,468
$4,288
88 I
2016 Form 10-K
HP INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Note 8: BalaNce sHeet details (coNtiNued)
otHer curreNt assets
as of octoBer 31
2016
2015
iN millioNs
Value-added taxes receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Supplier and other receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prepaid and other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred tax assets(1). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$795
1,700
1,087
—
$942
1,316
1,193
1,047
$3,582
$4,498
(1)
Effective November 1, 2015, HP prospectively adopted ASU 2015-17, “Balance Sheet Classification of Deferred Taxes” and as a result classified all deferred
assets and liabilities as non-current.
property, plaNt aNd eQuipmeNt, Net
as of octoBer 31
2016
2015
iN millioNs
Land, buildings and leasehold improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$2,421
Machinery and equipment, including equipment held for lease . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3,663
6,084
(4,348)
$1,736
$2,272
3,459
5,731
(4,239)
$1,492
Depreciation expense was $316 million, $302 million and $344 million in fiscal years 2016, 2015 and 2014, respectively.
otHer NoN-curreNt assets
Tax indemnifications receivable(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred tax assets(2). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
as of octoBer 31
2016
2015
iN millioNs
$1,591
254
1,339
$3,184
$—
216
1,376
$1,592
(1)
In connection with the TMA discussed under Note 7, “Taxes on Earnings”.
(2)
Effective November 1, 2015, HP prospectively adopted ASU 2015-17, “Balance Sheet Classification of Deferred Taxes” and as a result classified all deferred
assets and liabilities as non-current.
2016 Form 10-K
I 89
HP INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Note 8: BalaNce sHeet details (coNtiNued)
otHer accrued liaBilities
Other accrued taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Warranty. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Sales and marketing programs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
otHer NoN-curreNt liaBilities
as of octoBer 31
2016
2015
iN millioNs
$755
729
2,312
1,922
$1,007
871
2,181
2,182
$5,718
$6,241
as of octoBer 31
2016
2015
iN millioNs
Pension, post-retirement, and post-employment liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$2,705
Deferred tax liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,116
1,910
865
737
$2,203
1,813
1,803
812
783
$7,333
$7,414
Note 9: goodwill
Goodwill allocated to HP’s reportable segments and changes in the carrying amount of goodwill were as follows:
Balance at October 31, 2014(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$2,588
$3,103
$5,691
persoNal
systems
priNtiNg
total
iN millioNs
Dispositions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance at October 31, 2015(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
(11)
2,588
3,092
Acquisitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dispositions(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance at October 31, 2016(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(1) Goodwill is net of accumulated impairment losses of $0.8 billion related to Corporate Investments.
(11)
5,680
5
(63)
5
—
—
(63)
$2,593
$3,029
$5,622
(2) Divestiture of technology assets, including licensing and distribution rights, for certain software offerings to Open Text Corporation. See Note 18, “Divestitures”.
Goodwill is tested for impairment at the reporting unit level. As
of October 31, 2016, our reporting units are consistent with the
reportable segments identified in Note 3, “Segment Information.”
There were no goodwill impairments in fiscal years 2016 and
2015. HP will continue to evaluate goodwill on an annual basis as
of the beginning of its fourth fiscal quarter and whenever events
or changes in circumstances indicate there may be a potential
impairment.
90 I
2016 Form 10-K
HP INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Note 10: fair value
Fair value is defined as the price that would be received to sell
an asset or paid to transfer a liability (an exit price) in an orderly
transaction between market participants at the measurement date.
assumptions market participants would use. Assets and liabilities
are classified in the fair value hierarchy based on the lowest level
input that is significant to the fair value measurement:
fair value HierarcHy
HP uses valuation techniques that are based upon observable
and unobservable inputs. Observable inputs are developed using
market data such as publicly available information and reflect the
assumptions market participants would use, while unobservable
inputs are developed using the best information available about the
Level 1—Quoted prices (unadjusted) in active markets for identical
assets or liabilities.
Level 2—Quoted prices for similar assets or liabilities in active
markets, quoted prices for identical or similar assets or liabilities in
markets that are not active, inputs other than quoted prices that are
observable for the asset or liability and market-corroborated inputs.
Level 3—Unobservable inputs for the asset or liability.
The fair value hierarchy gives the highest priority to observable inputs and lowest priority to unobservable inputs.
The following table presents HP’s assets and liabilities that are measured at fair value on a recurring basis:
as of octoBer 31, 2016
as of octoBer 31, 2015
fair value
measured usiNg
fair value
measured usiNg
level 1
level 2
level 3
total
level 1
level 2
level 3
total
iN millioNs
assets
Cash Equivalents and Investments:
Time deposits . . . . . . . . . . . . . . . . . . . . . . . . .
$— $2,092
$— $2,092
$— $1,111
$— $1,111
Money market funds . . . . . . . . . . . . . . . . . . .
2,568
Marketable equity securities . . . . . . . . . . . .
Foreign bonds . . . . . . . . . . . . . . . . . . . . . . . . .
Mutual funds . . . . . . . . . . . . . . . . . . . . . . . . . .
Other debt securities . . . . . . . . . . . . . . . . . . .
Derivative Instruments:
Interest rate contracts . . . . . . . . . . . . . . . . . .
Foreign currency contracts . . . . . . . . . . . . . .
Other derivatives. . . . . . . . . . . . . . . . . . . . . . .
5
—
44
—
—
—
—
—
4
—
—
2
48
266
—
—
—
—
—
—
—
11
—
2,568
4,303
9
—
44
2
48
277
—
6
—
—
—
—
—
—
—
3
42
—
2
38
213
5
Total assets . . . . . . . . . . . . . . . . . . . . . . . .
$2,617
$2,412
$11
$5,040
$4,309
$1,414
liabilities
Derivative Instruments:
Interest rate contracts . . . . . . . . . . . . . . . . . .
Foreign currency contracts . . . . . . . . . . . . . .
Other derivatives. . . . . . . . . . . . . . . . . . . . . . .
Total liabilities . . . . . . . . . . . . . . . . . . . . . .
$—
—
—
$—
$—
94
2
$96
$—
1
—
$1
$—
95
2
$97
$—
—
—
$—
$—
302
—
$302
There were no transfers between levels within the fair value hierarchy during fiscal years 2016 and 2015.
—
—
—
—
—
—
2
—
$2
$—
2
—
$2
4,303
9
42
—
2
38
215
5
$5,725
$—
304
—
$304
2016 Form 10-K
I 91
HP INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Note 10: fair value (coNtiNued)
valuatioN tecHNiQues
Cash Equivalents and Investments: HP holds time deposits, money
market funds, mutual funds, other debt securities primarily
consisting of corporate and foreign government notes and bonds,
and common stock and equivalents. HP values cash equivalents and
equity investments using quoted market prices, alternative pricing
sources, including NAV, or models utilizing market observable
inputs. The fair value of debt investments was based on quoted
market prices or model-driven valuations using inputs primarily
derived from or corroborated by observable market data, and, in
certain instances, valuation models that utilize assumptions which
cannot be corroborated with observable market data.
Derivative Instruments: HP uses forward contracts, interest rate and
total return swaps and at times, option contracts to hedge certain
foreign currency and interest rate exposures. HP uses industry
standard valuation models to measure fair value. Where applicable,
these models project future cash flows and discount the future
amounts to present value using market-based observable inputs,
including interest rate curves, HP and counterparty credit risk,
foreign exchange rates, and forward and spot prices for currencies
and interest rates. See Note 11, “Financial Instruments” for a further
discussion of HP’s use of derivative instruments.
otHer fair value disclosures
Short- and Long-Term Debt: HP estimates the fair value of its debt
primarily using an expected present value technique, which is
based on observable market inputs using interest rates currently
Note 11: fiNaNcial iNstrumeNts
casH eQuivaleNts aNd availaBle-for-sale iNvestmeNts
available to companies of similar credit standing for similar terms
and remaining maturities, and considering its own credit risk. The
portion of HP’s debt that is hedged is reflected in the Consolidated
Balance Sheets as an amount equal to the debt’s carrying amount
and a fair value adjustment representing changes in the fair value of
the hedged debt obligations arising from movements in benchmark
interest rates. The estimated fair value of HP’s short- and long-term
debt was $7.1 billion at October 31, 2016 compared to its carrying
amount of $6.8 billion at that date. The estimated fair value of
HP’s short- and long-term debt approximated its carrying value of
$8.9 billion at October 31, 2015. If measured at fair value in the
Consolidated Balance Sheets, short- and long-term debt would be
classified in Level 2 of the fair value hierarchy.
Other Financial Instruments: For the balance of HP’s financial
instruments, primarily accounts receivable, accounts payable and
financial liabilities included in other accrued liabilities, the carrying
amounts approximate fair value due to their short maturities. If
measured at fair value in the Consolidated Balance Sheets, these
other financial instruments would be classified in Level 2 or Level 3
of the fair value hierarchy.
Non-Marketable Equity Investments and Non-Financial Assets: HP’s
non-marketable equity investments and non-financial assets, such
as intangible assets, goodwill and property, plant and equipment,
are recorded at fair value in the period an impairment charge is
recognized. If measured at fair value in the Consolidated Balance
Sheets, these would generally be classified in Level 3 of the fair
value hierarchy.
as of octoBer 31, 2016
as of octoBer 31, 2015
gross
uNrealiZed
gaiN
gross
uNrealiZed
loss
fair
value
cost
gross
uNrealiZed
gaiN
gross
uNrealiZed
loss
fair
value
cost
cash equivalents:
Time deposits . . . . . . . . . . . . . . . . .
$2,092
Money market funds . . . . . . . . . . .
Total cash equivalents. . . . . . . . . . . . .
available-for-sale investments:
Equity securities in public
companies . . . . . . . . . . . . . . . . . . . .
Foreign bonds . . . . . . . . . . . . . . . . .
2,568
4,660
1
—
$—
—
—
3
—
iN millioNs
$— $2,092
$1,111
—
2,568
— $4,660
4,303
5,414
—
—
4
—
1
32
$—
—
—
4
10
$— $1,111
—
4,303
— $5,414
—
—
5
42
92 I
2016 Form 10-K
HP INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Note 11: fiNaNcial iNstrumeNts (coNtiNued)
as of octoBer 31, 2016
as of octoBer 31, 2015
gross
uNrealiZed
gaiN
gross
uNrealiZed
loss
fair
value
cost
gross
uNrealiZed
gaiN
gross
uNrealiZed
loss
fair
value
cost
Mutual funds . . . . . . . . . . . . . . . . . .
Other debt securities . . . . . . . . . . .
Total available-for-sale
investments. . . . . . . . . . . . . . . . . . . . . .
Total cash equivalents and
available-for-sale investments . . . . .
$35
2
38
$9
—
12
iN millioNs
$—
—
—
$44
2
50
$—
2
35
$4,698
$12
$— $4,710
$5,449
$—
—
14
$14
$—
—
—
$—
2
49
$— $5,463
All highly liquid investments with original maturities of three months
or less at the date of acquisition are considered cash equivalents.
As of October 31, 2016 and 2015, the carrying amount of cash
equivalents approximated fair value due to the short period of
time to maturity. Interest income related to cash, cash equivalents
and debt securities was approximately $24 million in fiscal year
2016, $75 million in fiscal year 2015, and $72 million in fiscal
year 2014. Time deposits were primarily issued by institutions
outside the United States as of October 31, 2016 and 2015. The
estimated fair value of the available-for-sale investments may not
be representative of values that will be realized in the future.
There was no gross unrealized loss as of October 31, 2016
and 2015.
Contractual maturities of investments in available-for-sale debt securities were as follows:
Due in one year. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Due in one to five years. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Due in more than five years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
as of octoBer 31, 2016
amortiZed
cost
fair value
iN millioNs
$2
—
35
$37
$2
—
44
$46
Equity securities in privately held companies include cost basis and
equity method investments and are included in Other non-current
assets in the Consolidated Balance Sheets. These amounted to
$16 million and $13 million as of October 31, 2016 and 2015,
respectively.
derivative iNstrumeNts
HP uses derivatives to offset business exposure to foreign currency
and interest rate risk on expected future cash flows and on certain
existing assets and liabilities. As part of its risk management
instruments, primarily forward
strategy, HP uses derivative
contracts, interest rate swaps, total return swaps and, at times,
option contracts to hedge certain foreign currency, interest rate and,
to a lesser extent, equity exposures. HP may designate its derivative
contracts as fair value hedges or cash flow hedges. Additionally, for
derivatives not designated as hedging instruments, HP categorizes
those economic hedges as other derivatives. HP recognizes all
derivative instruments at fair value in the Consolidated Balance
Sheets. HP classifies cash flows from its derivative programs with
the activities that correspond to the underlying hedged items in the
Consolidated Statements of Cash Flows.
As a result of its use of derivative instruments, HP is exposed to
the risk that its counterparties will fail to meet their contractual
obligations. Master netting agreements mitigate credit exposure
to counterparties by permitting HP to net amounts due from
HP to counterparty against amounts due to HP from the same
counterparty under certain conditions. To further limit credit risk, HP
has collateral security agreements that allow HP to hold collateral
from, or require HP to post collateral to, counterparties when
aggregate derivative fair values exceed contractually established
thresholds which are generally based on the credit ratings of HP
and its counterparties. If HP’s or the counterparty’s credit rating falls
below a specified credit rating, either party has the right to request
full collateralization of the derivatives’ net liability position. The fair
value of derivatives with credit contingent features in a net liability
2016 Form 10-K
I 93
HP INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Note 11: fiNaNcial iNstrumeNts (coNtiNued)
position was $2 million and $138 million as of October 31, 2016
and 2015, respectively, all of which were fully collateralized within
two business days.
the hedged transaction is recognized in earnings. HP reports the
effective portion of its cash flow hedges in the same financial
statement line item as changes in the fair value of the hedged item.
Under HP’s derivative contracts, the counterparty can terminate
all outstanding trades following a covered change of control event
affecting HP that results in the surviving entity being rated below
a specified credit rating. This credit contingent provision did not
affect HP’s financial position or cash flows as of October 31, 2016
and 2015.
fair value Hedges
HP enters into fair value hedges, such as interest rate swaps, to
reduce the exposure of its debt portfolio to changes in fair value
resulting from changes in interest rates by achieving a primarily
U.S. dollar London Interbank Offered Rate (“LIBOR”)-based floating
interest expense.
For derivative instruments that are designated and qualify as fair
value hedges, HP recognizes the change in fair value of the derivative
instrument, as well as the offsetting change in the fair value of
the hedged item, in Interest and other, net in the Consolidated
Statements of Earnings in the period of change.
casH flow Hedges
HP uses forward contracts and at times, option contracts
designated as cash flow hedges to protect against the foreign
currency exchange rate risks inherent in its forecasted net revenue
and, to a lesser extent, cost of revenue, operating expenses, and
intercompany loans denominated in currencies other than the U.S.
dollar. HP’s foreign currency cash flow hedges mature generally
within twelve months; however, hedges related to longer term
procurement arrangements extend several years and forward
contracts associated with intercompany loans extend for the
duration of the lease or loan term, which typically range from two
to five years.
For derivative instruments that are designated and qualify as
cash flow hedges, HP initially records changes in fair value for the
effective portion of the derivative instrument in Accumulated other
comprehensive loss as a separate component of stockholders’
(deficit) equity in the Consolidated Balance Sheets and subsequently
reclassifies these amounts into earnings in the period during which
Net iNvestmeNt Hedges
HP used forward contracts designated as net investment hedges
to hedge net investments in certain foreign subsidiaries whose
functional currency was the local currency. As part of the Separation,
HP disposed of all these foreign subsidiaries and no longer utilizes
net investment hedges. HP recorded the effective portion of such
derivative instruments together with changes in the fair value of the
hedged items in Cumulative translation adjustment as a separate
component of stockholders’ (deficit) equity.
otHer derivatives
Other derivatives not designated as hedging instruments consist
primarily of forward contracts used to hedge foreign currency-
denominated balance sheet exposures. HP uses total return swaps
to hedge its executive deferred compensation plan liability.
For derivative instruments not designated as hedging instruments,
HP recognizes changes in fair value of the derivative instrument, as
well as the offsetting change in the fair value of the hedged item, in
Interest and other, net in the Consolidated Statements of Earnings in
the period of change.
Hedge effectiveNess
For interest rate swaps designated as fair value hedges, HP
measures hedge effectiveness by offsetting the change in fair value
of the hedged item with the change in fair value of the derivative.
For foreign currency options and forward contracts designated as
cash flow hedges, HP measures hedge effectiveness by comparing
the cumulative change in fair value of the hedge contract with the
cumulative change in fair value of the hedged item, both of which
are based on forward rates. HP recognizes any ineffective portion of
the hedge in the Consolidated Statements of Earnings in the same
period in which ineffectiveness occurs. Amounts excluded from the
assessment of effectiveness are recognized in the Consolidated
Statements of Earnings in the period they arise.
94 I
2016 Form 10-K
HP INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Note 11: fiNaNcial iNstrumeNts (coNtiNued)
fair value of derivative iNstrumeNts iN tHe coNsolidated BalaNce sHeets
The gross notional and fair value of derivative instruments in the Consolidated Balance Sheets was as follows:
AS OF OCTOBER 31, 2016
AS OF OCTOBER 31, 2015
outstaNdiNg
gross
NotioNal
otHer
curreNt
assets
otHer
NoN-
curreNt
assets
otHer
accrued
liaBilities
otHer
NoN-
curreNt
liaBilities
outstaNdiNg
gross
NotioNal
otHer
curreNt
assets
otHer
NoN-
curreNt
assets
otHer
accrued
liaBilities
otHer
NoN-
curreNt
liaBilities
iN millioNs
Derivatives designated as
hedging instruments
Fair value hedges:
Interest rate contracts. . . . .
$2,000
$—
$48
$—
$—
$3,175
$1
$37
$—
$—
Cash flow hedges:
Foreign currency
contracts . . . . . . . . . . . . . . . .
Total derivatives
designated as hedging
instruments . . . . . . . . . . . . . .
Derivatives not designated
as hedging instruments
Foreign currency
contracts . . . . . . . . . . . . . . . .
Other derivatives . . . . . . . . .
Total derivatives not
designated as hedging
instruments . . . . . . . . . . . . . .
11,852
203
63
13,852
203
111
3,934
150
11
—
—
—
4,084
11
—
Total derivatives . . . . . . . . . .
$17,936
$214
$111
52
52
31
2
12
10,859
171
10
165
12
14,034
172
47
165
—
—
8,955
173
33
5
1
—
37
—
79
79
23
—
33
$85
—
$12
9,128
38
$23,162
$210
1
$48
37
$202
23
$102
2016 Form 10-K
I 95
HP INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Note 11: fiNaNcial iNstrumeNts (coNtiNued)
offsettiNg of derivative iNstrumeNts
HP recognizes all derivative instruments on a gross basis in the Consolidated Balance Sheets. HP does not offset the fair value of its
derivative instruments against the fair value of cash collateral posted under its collateral security agreements. As of October 31, 2016 and
2015, information related to the potential effect of HP’s master netting agreements and collateral security agreements was as follows:
IN THE CONSOLIDATED BALANCE SHEETS
(i)
(ii)
(III) = (I)–(II)
(iv)
(v)
(VI) = (III)–(IV)–(V)
gross
amouNt
recogNiZed
gross
amouNt
offset
Net
amouNt
preseNted
GROSS AMOUNTS
NOT OFFSET
derivatives
IN MILLIONS
fiNaNcial
collateral
NET AMOUNT
As of October 31, 2016
Derivative assets . . . . . . . . . . . . . . . . .
Derivative liabilities . . . . . . . . . . . . . . .
As of October 31, 2015
Derivative assets . . . . . . . . . . . . . . . . .
Derivative liabilities . . . . . . . . . . . . . . .
$325
$97
$258
$304
$—
$—
$—
$—
$325
$97
$258
$304
$88
$88
$162
$162
$189(1)
$2(2)
$9(1)
$—(2)
$48
$7
$87
$142
(1)
(2)
Represents the cash collateral posted by counterparties as of the respective reporting date for HP’s asset position, net of derivative amounts that could be offset,
as of, generally, two business days prior to the respective reporting date.
Represents the collateral posted by HP through re-use of counterparty cash collateral as of the respective reporting date for HP’s liability position, net of
derivative amounts that could be offset, as of, generally, two business days prior to the respective reporting date.
effect of derivative iNstrumeNts oN tHe coNsolidated statemeNts of earNiNgs
The pre-tax effect of derivative instruments and related hedged items in a fair value hedging relationship for fiscal years ended October 31,
2016, 2015 and 2014 was as follows:
DERIVATIVE INSTRUMENT
locatioN
2016
2015
2014
HEDGED ITEM
locatioN
2016
2015
2014
GAIN (LOSS) RECOGNIZED IN INCOME ON DERIVATIVE INSTRUMENTS AND RELATED HEDGED ITEMS
IN MILLIONS
IN MILLIONS
Interest rate contracts. . . . . Interest and other, net
$10 $(12)
$1 Fixed-rate debt Interest and other, net $(10)
$12 $(1)
96 I
2016 Form 10-K
HP INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Note 11: fiNaNcial iNstrumeNts (coNtiNued)
The pre-tax effect of derivative instruments in cash flow and net investment hedging relationships for fiscal years ended October 31, 2016,
2015 and 2014 was as follows:
GAIN (LOSS) RECOGNIZED IN OCI
ON DERIVATIVES
(EFFECTIVE PORTION)
GAIN (LOSS) RECLASSIFIED FROM ACCUMULATED OCI
INTO EARNINGS (EFFECTIVE PORTION)
2016
2015
2014
locatioN
2016
2015
2014
IN MILLIONS
IN MILLIONS
Cash flow hedges:
Foreign currency contracts . . . .
$199
$ 610
$226 Net revenue . . . . . . . . . . . . . . . . . . . .
Continuing Operations. . . . . . . .
199
610
226
Discontinued Operations. . . . . .
—
481
111
Cost of revenue. . . . . . . . . . . . . . . . .
Other operating expenses . . . . . . .
Interest and other, net. . . . . . . . . . .
Earnings from continuing
operations . . . . . . . . . . . . . . . . . . . . .
(Loss) earnings from
discontinued operations . . . . . . . . .
$20
(84)
1
—
(63)
—
$995
(156)
(3)
(4)
832
480
$(17)
(74)
—
—
(91)
(60)
Total . . . . . . . . . . . . . . . . . . . . .
$199
$1,091
$337
Total. . . . . . . . . . . . . . . . . . . . . . . .
$(63)
$1,312
$(151)
Net investment hedges:
Foreign currency contracts . . . .
Continuing Operations. . . . . . . .
Discontinued Operations. . . . . .
Total . . . . . . . . . . . . . . . . . . . . .
Interest and other, net. . . . . . . . . . .
$—
—
$—
$—
228
$— Continuing Operations . . . . . . . . . .
57 Discontinued Operations . . . . . . . .
$228
$57
Total. . . . . . . . . . . . . . . . . . . . . . . .
$—
—
$—
$—
—
$—
$—
—
$—
As of October 31, 2016, 2015 and 2014, no portion of the hedging
instruments’ gain or loss was excluded from the assessment of
effectiveness for fair value, cash flow or net investment hedges.
Hedge ineffectiveness for fair value, cash flow and net investment
hedges was not material for fiscal years 2016, 2015 and 2014.
As of October 31, 2016, HP expects to reclassify an estimated net
Accumulated other comprehensive income of approximately $139
million, net of taxes, to earnings in the next twelve months along
with the earnings effects of the related forecasted transactions
associated with cash flow hedges.
The pre-tax effect of derivative instruments not designated as
hedging instruments on the Consolidated Statements of Earnings
for fiscal years 2016, 2015 and 2014 was as follows:
GAIN (LOSS) RECOGNIZED IN INCOME ON DERIVATIVES
locatioN
2016
2015
2014
iN millioNs
Foreign currency contracts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest and other, net
$(34)
$293
Other derivatives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest and other, net
(6)
(1)
Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$(40)
$292
$(63)
—
$(63)
2016 Form 10-K
I 97
HP INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Note 12: BorrowiNgs
Notes payaBle aNd sHort-term BorrowiNgs
Current portion of long-term debt(1). . . . . . . . . . . . . . . . .
Notes payable to banks, lines of credit and other(2) . . .
AS OF OCTOBER 31
2016
2015
amouNt
outstaNdiNg
weigHted-average
INTEREST RATE
amouNt
outstaNdiNg
weigHted-average
INTEREST RATE
IN MILLIONS
IN MILLIONS
$51
27
$78
4.1%
2.0%
$2,160
34
$2,194
3.3%
4.7%
(1)
During the month of November 2015, HP redeemed and repaid $2.1 billion of fixed-rate U.S. Dollar Global Notes.
(2)
As of October 31, 2016, HP and HP’s subsidiaries had available borrowing resources of $822 million from uncommitted lines of credit for short-term or long-
term financing.
loNg-term deBt
U.S. Dollar Global Notes(1)(2)
2006 Shelf Registration Statement:
$500 issued at discount to par at a price of 99.694% in February 2007 at 5.4%, due March 2017,
paid November 2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$750 issued at discount to par at a price of 99.932% in March 2008 at 5.5%, due March 2018,
paid November 2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2009 Shelf Registration Statement:
$1,350 issued at discount to par at a price of 99.827% in December 2010 at 3.75%, due
December 2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$1,250 issued at discount to par at a price of 99.799% in May 2011 at 4.3%, due June 2021 . . . . . . . .
$1,000 issued at discount to par at a price of 99.816% in September 2011 at 4.375%, due
September 2021. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$1,500 issued at discount to par at a price of 99.707% in December 2011 at 4.65%, due
December 2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$500 issued at discount to par at a price of 99.771% in March 2012 at 4.05%,
due September 2022. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$1,200 issued at discount to par at a price of 99.863% in September 2011 at 6.0%, due
September 2041. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$650 issued at discount to par at a price of 99.911% in December 2010 at 2.2%, due
December 2015, paid November 2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$1,000 issued at discount to par at a price of 99.958% in May 2011 at 2.65%, due June 2016,
paid November 2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$1,300 issued at discount to par at a price of 99.784% in September 2011 at 3.0%, due
September 2016, paid November 2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
98 I
2016 Form 10-K
AS OF OCTOBER 31
2016
2015
IN MILLIONS
$—
—
648
1,248
$162
283
648
1,248
999
999
1,498
1,497
499
499
1,199
1,199
—
—
—
309
346
390
HP INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Note 12: BorrowiNgs (coNtiNued)
AS OF OCTOBER 31
2016
2015
IN MILLIONS
$850 issued at discount to par at a price of 99.790% in December 2011 at 3.3%, due
December 2016, paid November 2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$1,500 issued at discount to par at a price of 99.985% in March 2012 at 2.6%,
due September 2017, paid November 2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2012 Shelf Registration Statement:
$750 issued at par in January 2014 at three-month USD LIBOR plus 0.94%, due January 2019 . . . . . .
$1,250 issued at discount to par at a price of 99.954% in January 2014 at 2.75%,
due January 2019. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other, including capital lease obligations, at 0.51%-8.30%, due in calendar years 2015-2024 . . . . . . . . . .
Fair value adjustment related to hedged debt. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: current portion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$—
—
102
300
6,493
244
72
(51)
Total long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$6,758
$220
436
102
300
8,638
96
103
(2,160)
$6,677
(1)
HP may redeem some or all of the fixed-rate U.S. Dollar Global Notes at any time in accordance with the terms thereof. The U.S. Dollar Global Notes are senior
unsecured debt.
(2) HP redeemed and repaid $2.1 billion aggregate principal amount outstanding of its U.S. Dollar Global Notes during the month of November 2015.
As disclosed in Note 11, “Financial Instruments”, HP uses interest
rate swaps to mitigate some of the exposure of its debt portfolio
to changes in fair value resulting from changes in interest rates
by achieving a primarily U.S. dollar LIBOR-based floating interest
expense. Interest rates shown in the table of long-term debt have
not been adjusted to reflect the impact of any interest rate swaps.
Interest expense on borrowings recognized as “Interest and other,
net” on the Consolidated Statements of Earnings during the fiscal
years of 2016, 2015 and 2014 was $273 million, $167 million and
$167 million, respectively.
As of October 31, 2016, aggregate future maturities of debt at face value (excluding a fair value adjustment related to hedged debt of
$72 million and a discount on debt issuance of $7 million), including capital lease obligations were as follows:
FISCAL YEAR
2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
IN MILLIONS
$78
66
447
38
2,920
3,222
$6,771
2016 Form 10-K
I 99
HP INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Note 12: BorrowiNgs (coNtiNued)
eXtiNguisHmeNt of deBt
During the month of November 2015, HP redeemed and repaid a
total of $2.1 billion fixed-rate U.S. Dollar Global Notes.
commercial paper
On November 1, 2015, HP’s Board of Directors authorized HP to
borrow up to a total outstanding principal balance of $4.0 billion
or the equivalent in foreign currencies for the use and benefit of
HP and HP’s subsidiaries, by the issuance of commercial paper
or through the execution of promissory notes, loan agreements,
letters of credit, agreements for lines of credit or overdraft facilities.
As of October 31, 2016, HP maintained two commercial paper
programs. HP’s U.S. program provides for the issuance of U.S.
dollar-denominated commercial paper up to a maximum aggregate
principal amount of $4.0 billion. HP’s euro commercial paper
program provides for the issuance of commercial paper outside
of the United States denominated in U.S. dollars, euros or British
pounds up to a maximum aggregate principal amount of $4.0 billion
or the equivalent in those alternative currencies. The combined
Note 13: stocKHolders’ (deficit) eQuity
divideNds
The stockholders of HP common stock are entitled to receive
dividends when and as declared by HP’s Board of Directors.
Dividends declared were $0.50 per share of common stock in fiscal
year 2016, $0.67 per share of common stock in fiscal year 2015 and
$0.61 per share of common stock in fiscal year 2014.
sHare repurcHase program
HP’s share repurchase program authorizes both open market and
private repurchase transactions. In fiscal year 2016, HP executed
share repurchases of 100 million shares. In fiscal year 2016, HP
settled total shares for $1.2 billion.
taXes related to otHer compreHeNsive (loss) iNcome
aggregate principal amount of commercial paper outstanding under
those programs at any one time cannot exceed the $4.0 billion
authorized by HP’s Board of Directors.
credit facility
As of October 31, 2016, HP maintained a $4.0 billion senior
unsecured committed revolving credit facility to support the
issuance of commercial paper or for general corporate purposes.
Commitments under the revolving credit facility will be available
until April 2, 2019. Commitment fees, interest rates and other terms
of borrowing under the credit facilities vary based on HP’s external
credit ratings. As of October 31, 2016, HP was in compliance with
the financial covenants in the credit agreement governing the
revolving credit facility.
availaBle BorrowiNg resources
As of October 31, 2016, HP’s and HP’s subsidiaries had available
borrowing resources of $822 million from uncommitted lines of
credit in addition to the senior unsecured committed revolving credit
facility discussed above.
In fiscal year 2015, HP executed share repurchases of 75 million
shares which included 0.5 million shares settled in November 2015.
In fiscal year 2015, HP settled total shares for $2.9 billion. In fiscal
year 2014, HP executed share repurchases of 92 million shares and
settled total shares for $2.7 billion.
The shares repurchased in fiscal years 2016, 2015 and 2014 were
all open market repurchase transactions. On October 10, 2016, the
Board authorized an additional $3.0 billion for future repurchases of its
outstanding shares of common stock. HP intends to use the additional
authorization to repurchase its shares from time to time to offset the
dilution created by shares issued under employee stock plans and to
repurchase shares opportunistically. As of October 31, 2016, HP had
approximately $3.8 billion remaining under repurchase authorization.
Tax (provision) benefit on change in unrealized gains (losses) on available-for-sale securities:
Tax (provision) benefit on unrealized gains (losses) arising during the period . . . . . . . . . . . .
FOR THE FISCAL YEARS ENDED OCTOBER 31
2016
2015
2014
IN MILLIONS
$(3)
(3)
$2
2
$(1)
(1)
100 I
2016 Form 10-K
HP INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Note 13: stocKHolders’ (deficit) eQuity (coNtiNued)
Tax benefit (provision) on change in unrealized components of cash flow hedges:
Tax benefit (provision) on unrealized (losses) gains arising during the period . . . . . . . . . . . .
Tax (provision) benefit on (gains) losses reclassified into earnings . . . . . . . . . . . . . . . . . . . . . .
Tax benefit on change in unrealized components of defined benefit plans:
Tax benefit on losses arising during the period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax provision on amortization of actuarial loss and prior service benefit . . . . . . . . . . . . . . . .
Tax (provision) benefit on curtailments, settlements and other . . . . . . . . . . . . . . . . . . . . . . . .
Tax provision on change in cumulative translation adjustment. . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax benefit (provision) on other comprehensive (loss) income . . . . . . . . . . . . . . . . . . . . . . . . .
cHaNges aNd reclassificatioNs related to otHer compreHeNsive loss, Net of taXes
FOR THE FISCAL YEARS ENDED OCTOBER 31
2016
2015
2014
IN MILLIONS
$32
(1)
31
242
(12)
(213)
17
—
$45
$(294)
$(174)
368
74
5
(18)
24
11
(73)
$14
(18)
(192)
181
(18)
(9)
154
(27)
$(66)
FOR THE FISCAL YEARS ENDED OCTOBER 31
2016
2015
2014
IN MILLIONS
Other comprehensive loss, net of taxes:
Change in unrealized (losses) gains on available-for-sale securities:
Unrealized (losses) gains arising during the period. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gains reclassified into earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Change in unrealized components of cash flow hedges:
Unrealized gains arising during the period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Losses (gain) reclassified into earnings(1). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Change in unrealized components of defined benefit plans:
Losses arising during the period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of actuarial loss and prior service benefit. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Curtailments, settlements and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Change in cumulative translation adjustment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$(2)
—
(2)
231
62
293
(517)
39
(30)
(508)
—
Other comprehensive loss, net of taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$(217)
$(15)
—
(15)
797
(944)
(147)
$6
(1)
5
163
133
296
(543)
(2,575)
425
139
21
(280)
$(421)
241
42
(2,292)
(112)
$(2,103)
2016 Form 10-K
I 101
HP INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Note 13: stocKHolders' (deficit) eQuity (coNtiNued)
(1) Reclassification of pre-tax (gains) losses on cash flow hedges into the Consolidated Statements of Earnings was as follows:
FOR THE FISCAL YEARS ENDED OCTOBER 31
2016
2015
2014
IN MILLIONS
Net revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$(20)
Cost of revenue. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest and other, net. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Earnings from continuing operations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(Loss) earnings from discontinued operations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
84
(1)
—
63
—
$(995)
156
3
4
(832)
(480)
$17
74
—
—
91
60
Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$63
$(1,312)
$151
The components of accumulated other comprehensive loss, net of taxes as of October 31, 2016 and changes during fiscal year 2016 were
as follows:
Net uNrealiZed
gaiN oN
availaBle-for-
sale securities
Net uNrealiZed
gaiN (loss)
oN casH flow
Hedges
uNrealiZed
compoNeNts
of defiNed
BeNefit plaNs
cumulative
traNslatioN
adJustmeNt
accumulated
otHer
compreHeNsive
loss
Balance at beginning of period . . . . . . . . . . . . . . . .
Separation of Hewlett Packard Enterprise(1). . . . .
Other comprehensive (loss) income before
reclassifications . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reclassifications of losses into earnings. . . . . . . .
Balance at end of period. . . . . . . . . . . . . . . . . . . . . .
$66
(55)
(2)
—
$9
IN MILLIONS
$(5,355)
4,230
(547)
39
$(1,633)
$(39)
(68)
231
62
$186
$(974)
974
—
—
$—
$(6,302)
5,081
(318)
101
$(1,438)
(1) Represents amounts reclassified to retained earnings and distributed to Hewlett Packard Enterprise in connection with the Separation on November 1, 2015.
Note 14: earNiNgs per sHare
HP calculates basic net EPS using net earnings and the weighted-average number of shares outstanding during the reporting period.
Diluted net EPS includes any dilutive effect of restricted stock awards, stock options, performance-based awards and shares purchased
under the 2011 ESPP.
A reconciliation of the number of shares used for basic and diluted net EPS calculations is as follows:
Numerator:
Net earnings from continuing operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$2,666
$3,718
Net (loss) earnings from discontinued operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net earnings(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(170)
836
$2,496
$4,554
$2,924
2,089
$5,013
FOR THE FISCAL YEARS ENDED OCTOBER 31
2016
2015
2014
IN MILLIONS, EXCEPT PER SHARE AMOUNTS
102 I
2016 Form 10-K
HP INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Note 14: earNiNgs per sHare (coNtiNued)
FOR THE FISCAL YEARS ENDED OCTOBER 31
2016
2015
2014
IN MILLIONS, EXCEPT PER SHARE AMOUNTS
Denominator:
Weighted-average shares used to compute basic net EPS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$1,730
$1,814
$1,882
Dilutive effect of employee stock plans. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Weighted-average shares used to compute diluted net EPS . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Basic net earnings (loss) per share:
Continuing operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Discontinued operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Basic net earnings per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted net earnings (loss) per share:
Continuing operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Discontinued operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted net earnings per share. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Anti-dilutive weighted-average options(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
13
1,743
$1.54
(0.10)
$1.44
$1.53
(0.10)
$1.43
13
22
1,836
$2.05
0.46
$2.51
$2.02
0.46
$2.48
23
30
1,912
$1.55
1.11
$2.66
$1.53
1.09
$2.62
26
(1)
(2)
HP considers restricted stock that provides the holder with a non-forfeitable right to receive dividends to be participating securities. As of October 31, 2016 and
2015, there were no participating securities outstanding. For fiscal year 2014, the net earnings allocated to participating securities were not significant.
HP excludes stock options and restricted stock units where the assumed proceeds exceed the average market price from the calculation of diluted net EPS,
because their effect would be anti-dilutive. The assumed proceeds of a stock option include the sum of its exercise price, average unrecognized compensation
cost and excess tax benefits. The assumed proceeds of a restricted stock unit include the sum of its average unrecognized compensation cost and excess
tax benefits.
Note 15: litigatioN aNd coNtiNgeNcies
HP is involved in lawsuits, claims, investigations and proceedings,
including those identified below, consisting of IP, commercial,
securities, employment, employee benefits and environmental
matters that arise in the ordinary course of business. HP accrues a
liability when management believes that it is both probable that a
liability has been incurred and the amount of loss can be reasonably
estimated. HP believes it has recorded adequate provisions for any
such matters and, as of October 31, 2016, it was not reasonably
possible that a material loss had been incurred in excess of the
amounts recognized in HP’s financial statements. HP reviews
these matters at least quarterly and adjusts its accruals to reflect
the impact of negotiations, settlements, rulings, advice of legal
counsel, and other information and events pertaining to a particular
case. Pursuant to the separation and distribution agreement, HP
shares responsibility with Hewlett Packard Enterprise for certain
matters, as indicated below, and Hewlett Packard Enterprise has
agreed to indemnify HP in whole or in part with respect to certain
matters. Based on its experience, HP believes that any damage
amounts claimed in the specific matters discussed below are not a
meaningful indicator of HP’s potential liability. Litigation is inherently
unpredictable. However, HP believes it has valid defenses with
respect to legal matters pending against it. Nevertheless, cash flows
or results of operations could be materially affected in any particular
period by the resolution of one or more of these contingencies.
litigatioN, proceediNgs aNd iNvestigatioNs
Copyright Levies. Proceedings are ongoing or have been concluded
involving HP in certain European countries, including litigation in
Belgium and other countries, seeking to impose or modify levies
upon equipment (such as multifunction devices (“MFDs”) and PCs),
alleging that these devices enable the production of private copies
of copyrighted materials. The levies are generally based upon the
number of products sold and the per-product amounts of the levies,
which vary. Some European countries that do not yet have levies
on digital devices are expected to implement similar legislation to
enable them to extend existing levy schemes, while other European
countries have phased out levies or are expected to limit the scope of
levy schemes and applicability in the digital hardware environment,
particularly with respect to sales to business users. HP, other
companies and various industry associations have opposed the
extension of levies to the digital environment and have advocated
alternative models of compensation to rights holders.
2016 Form 10-K
I 103
HP INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Note 15: litigatioN aNd coNtiNgeNcies (coNtiNued)
Reprobel, a cooperative society with the authority to collect and
distribute the remuneration for reprography to Belgian copyright
holders, requested by extrajudicial means that HP amend certain
copyright levy declarations submitted for inkjet MFDs sold in
Belgium from January 2005 to December 2009 to enable it to
collect copyright levies calculated based on the generally higher
copying speed when the MFDs are operated in draft print mode
rather than when operated in normal print mode. In March 2010, HP
filed a lawsuit against Reprobel in the French-speaking chambers
of the Court of First Instance of Brussels seeking a declaratory
judgment that no copyright levies are payable on sales of MFDs in
Belgium or, alternatively, that copyright levies payable on such MFDs
must be assessed based on the copying speed when operated in the
normal print mode set by default in the device. On November 16,
2012, the court issued a decision holding that Belgium law is not
in conformity with EU law in a number of respects and ordered
that, by November 2013, Reprobel substantiate that the amounts
claimed by Reprobel are commensurate with the harm resulting
from legitimate copying under the reprographic exception. HP
subsequently appealed that court decision to the Courts of
Appeal in Brussels seeking to confirm that the Belgian law is not
in conformity with EU law and that, if Belgian law is interpreted in
a manner consistent with EU law, no payments by HP are required
or, alternatively, the payments already made by HP are sufficient
to comply with its obligations under Belgian law. On October 23,
2013, the Court of Appeal in Brussels stayed the proceedings and
referred several questions to the CJEU relating to whether the
Belgian reprographic copyright levies system is in conformity with
EU law. The case was heard by the CJEU on January 29, 2015 and on
November 12, 2015, the CJEU published its judgment providing that
a national legislation such as the Belgian one at issue in the main
proceedings is incompatible with EU law on multiple legal points, as
argued by HP. The Court of Appeal in Brussels now has to rule on the
litigation between HP and Reprobel following the answers provided
by the CJEU.
Based on industry opposition to the extension of levies to digital
products, HP’s assessments of the merits of various proceedings
and HP’s estimates of the number of units impacted and the
amounts of the levies, HP has accrued amounts that it believes are
adequate to address the ongoing disputes.
Hewlett-Packard Company v. Oracle Corporation. On June 15, 2011,
HP filed suit against Oracle Corporation (“Oracle”) in California
Superior Court in Santa Clara County in connection with Oracle’s
March 2011 announcement that it was discontinuing software
support for HP’s Itanium-based line of mission critical servers. HP
asserted, among other things, that Oracle’s actions breached the
contract that was signed by the parties as part of the settlement
of the litigation relating to Oracle’s hiring of Mark Hurd. The matter
eventually progressed to trial, which was bifurcated into two phases.
HP prevailed in the first phase of the trial, in which the court ruled
that the contract at issue required Oracle to continue to offer its
104 I
2016 Form 10-K
software products on HP’s Itanium-based servers for as long as HP
decided to sell such servers. The second phase of the trial was then
postponed by Oracle’s appeal of the trial court’s denial of Oracle’s
“anti-SLAPP” motion, in which Oracle argued that HP’s damages
claim infringed on Oracle’s First Amendment rights. On August 27,
2015, the California Court of Appeals rejected Oracle’s appeal. The
matter was remanded to the trial court for the second phase of the
trial, which began on May 23, 2016 and was submitted to the jury
on June 29, 2016. On June 30, 2016, the jury returned a verdict in
favor of HP, awarding HP approximately $3.0 billion in damages,
which included approximately $1.7 billion for past lost profits and
$1.3 billion for future lost profits. On October 20, 2016, the court
entered judgment for HP for this amount with interest accruing until
the judgment is paid. Oracle has filed a motion for a new trial and has
publicly stated that it will appeal the jury’s verdict. HP expects that
any appeals process could take several years to complete. Litigation
is unpredictable, and there can be no assurance that HP will recover
damages, or that any award of damages will be for the amount
awarded by the jury’s verdict. The amount ultimately awarded, if
any, would be recorded in the period received. No adjustment has
been recorded in the financial statements in relation to this potential
award. Pursuant to the terms of the separation and distribution
agreement, HP and Hewlett Packard Enterprise will share equally in
any recovery from Oracle once Hewlett Packard Enterprise has been
reimbursed for all costs incurred in the prosecution of the action
prior to the Separation.
Forsyth, et al. vs. HP Inc. and Hewlett Packard Enterprise. This is a
purported class and collective action filed on August 18, 2016 in the
United States District Court, Northern District of California, against
HP and Hewlett Packard Enterprise alleging the defendants violated
the Federal Age Discrimination in Employment Act (“ADEA”), the
California Fair Employment and Housing Act, California public policy
and the California Business and Professions Code by terminating
older workers and replacing them with younger workers. Plaintiffs
seek to certify a nationwide collective class action under the ADEA
comprised of all U.S. residents employed by defendants who had
their employment terminated pursuant to a workforce reduction
(“WFR”) plan on or after May 23, 2012 and who were 40 years of
age or older. Plaintiffs also seek to represent a Rule 23 class under
California law comprised of all persons 40 years or older employed
by defendants in the state of California and terminated pursuant
to a WFR plan on or after May 23, 2012. On November 14, 2016,
the defendants filed a partial motion to dismiss and a motion to
compel arbitration as to one plaintiff. On November 15, 2016, the
defendants filed a motion to strike the class definition so as to
shorten the class period.
India Directorate of Revenue Intelligence Proceedings. On April 30
and May 10, 2010, the India Directorate of Revenue Intelligence
(the “DRI”) issued show cause notices to Hewlett-Packard India
Sales Private Limited (“HP India”), a subsidiary of HP, seven HP India
employees and one former HP India employee alleging that HP India
HP INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Note 15: litigatioN aNd coNtiNgeNcies (coNtiNued)
underpaid customs duties while importing products and spare parts
into India and seeking to recover an aggregate of approximately
$370 million, plus penalties. Prior to the issuance of the show cause
notices, HP India deposited approximately $16 million with the DRI
and agreed to post a provisional bond in exchange for the DRI’s
agreement to not seize HP India products and spare parts and to
not interrupt the transaction of business by HP India.
On April 11, 2012, the Bangalore Commissioner of Customs issued
an order on the products-related show cause notice affirming
certain duties and penalties against HP India and the named
individuals of approximately $386 million, of which HP India had
already deposited $9 million. On December 11, 2012, HP India
voluntarily deposited an additional $10 million in connection with
the products-related show cause notice. The differential duty
demand is subject to interest. On April 20, 2012, the Commissioner
issued an order on the parts-related show cause notice affirming
certain duties and penalties against HP India and certain of the
named individuals of approximately $17 million, of which HP India
had already deposited $7 million. After the order, HP India deposited
an additional $3 million in connection with the parts-related show
cause notice so as to avoid certain penalties.
HP India filed appeals of the Commissioner’s orders before the
Customs Tribunal along with applications for waiver of the pre-
deposit of remaining demand amounts as a condition for hearing
the appeals. The Customs Department has also filed cross-appeals
before the Customs Tribunal. On January 24, 2013, the Customs
Tribunal ordered HP India to deposit an additional $24 million against
the products order, which HP India deposited in March 2013. The
Customs Tribunal did not order any additional deposit to be made
under the parts order. In December 2013, HP India filed applications
before the Customs Tribunal seeking early hearing of the appeals
as well as an extension of the stay of deposit as to HP India and the
individuals already granted until final disposition of the appeals. On
February 7, 2014, the application for extension of the stay of deposit
was granted by the Customs Tribunal until disposal of the appeals.
On October 27, 2014, the Customs Tribunal commenced hearings
on the cross-appeals of the Commissioner’s orders. The Customs
Tribunal rejected HP India’s request to remand the matter to the
Commissioner on procedural grounds. The hearings scheduled
to reconvene on April 6, 2015 and again on November 3, 2015
and April 11, 2016 were cancelled at the request of the Customs
Tribunal. Pursuant to the separation and distribution agreement,
Hewlett Packard Enterprise has agreed to indemnify HP in part,
based on the extent to which any liability arises from the products
and spare parts of Hewlett Packard Enterprise’s businesses.
Russia GPO and Other Anti-Corruption Investigations. The German
Public Prosecutor’s Office (“German PPO”) has been conducting an
investigation into allegations that current and former employees
of HP engaged in bribery, embezzlement and tax evasion relating
to a transaction between Hewlett-Packard ISE GmbH in Germany,
a former subsidiary of HP, and the General Prosecutor’s Office of
the Russian Federation. The approximately $35 million transaction,
which was referred to as the Russia GPO deal, spanned the years
2001 to 2006 and was for the delivery and installation of an IT
network. The German PPO issued an indictment of four individuals,
including one current and two former HP employees, on charges
including bribery, breach of trust and tax evasion. The German PPO
also requested that HP be made an associated party to the case,
and, if that request is granted, HP would participate in any portion
of the court proceedings that could ultimately bear on the question
of whether HP should be subject to potential disgorgement of
profits based on the conduct of the indicted current and former
employees. The Regional Court of Leipzig will determine whether
the matter should be admitted to trial. The Polish Central Anti-
Corruption Bureau is also investigating potential corrupt actions by
a former employee of Hewlett-Packard Polska Sp. z o.o., a former
indirect subsidiary of HP, in connection with certain public-sector
transactions in Poland. Criminal proceedings are pending before
the Regional Court in Warsaw against a number of individuals,
including the former employee of Hewlett-Packard Polska Sp. Z o.o,
on charges of bribery and bid-rigging. HP is cooperating with these
investigating agencies.
Cement & Concrete Workers District Council Pension Fund v. Hewlett-
Packard Company, et al. is a putative securities class action filed on
August 3, 2012 in the United States District Court for the Northern
District of California alleging, among other things, that from
November 13, 2007 to August 6, 2010 the defendants violated
Sections 10(b) and 20(a) of the Exchange Act by making statements
regarding HP’s Standards of Business Conduct (“SBC”) that were
false and misleading because Mr. Hurd, who was serving as HP’s
Chairman and Chief Executive Officer during that period, had been
violating the SBC and concealing his misbehavior in a manner that
jeopardized his continued employment with HP. On February 7,
2013, the defendants moved to dismiss the amended complaint.
On August 9, 2013, the court granted the defendants’ motion
to dismiss with leave to amend the complaint by September 9,
2013. The plaintiff filed an amended complaint on September 9,
2013, and the defendants moved to dismiss that complaint on
October 24, 2013. On June 25, 2014, the court issued an order
granting the defendants’ motions to dismiss and on July 25, 2014,
plaintiff filed a notice of appeal to the United States Court of Appeals
for the Ninth Circuit. On November 4, 2014, the plaintiff-appellant
filed its opening brief in the United States Court of Appeals for the
Ninth Circuit. HP filed its answering brief on January 16, 2015 and
the plaintiff-appellant’s reply brief was filed on March 2, 2015. The
appellate court heard oral argument on July 7, 2016.
Class Actions re Authentication of Supplies
Four purported consumer class actions have been filed against
HP, arising out of the supplies authentication protocol in certain
OfficeJet printers. This authentication protocol rejects some third-
party ink cartridges that use non-HP security chips.
2016 Form 10-K
I 105
HP INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Note 15: litigatioN aNd coNtiNgeNcies (coNtiNued)
On September 23, 2016, Bayse v. HP, Inc. was filed in the United
States District Court for the Northern District of Alabama alleging
claims for injunctive relief, negligence and/or wantonness, breach of
warranty, and violations of the Sherman Act - 15 U.S.C. § 1, et seq.
Plaintiffs seek to certify a class of all persons in the United States
who purchased and/or otherwise owned a printer manufactured
and/or sold by HP in the OfficeJet, OfficeJet Pro and/or OfficeJet
Pro X line of printers, any time between September 18, 2009 and
September 18, 2016.
On September 28, 2016, Doty v. HP, Inc. was filed in the United States
District Court for the Central District of California alleging claims for
violations of California’s False Advertising Law, Cal. Bus. & Prof. Code
§ 17500, et seq. and Unfair Competition Law, Cal. Bus. & Prof. Code
§ 17200, et seq. Plaintiffs added a claim under the Consumer Legal
Remedies Act, Cal. Civ. Code § 1750, et seq. on October 31, 2016.
Plaintiffs seek to certify a class of all United States citizens who,
between the applicable statute of limitations and the present, had
an HP printer that was modified to reject third party-ink cartridges.
On October 7, 2016, San Miguel v. HP Inc. was filed in the United
States District Court for the Northern District of California alleging
claims for violation of California’s Unfair Competition Law, Cal. Bus.
& Prof. Code § 17200, et seq. and for unjust enrichment. Plaintiffs
seek to certify a class of all persons in the United States who own
one or more HP printer or device in any of the following categories:
OfficeJet 6220 series; OfficeJet Pro 6230 series; OfficeJet 6820
series; OfficeJet Pro 6830 series; OfficeJet 8600 series; and
OfficeJet Pro X series.
On November 9, 2016, Ware v. HP Inc. was filed in the United States
District Court for the Northern District of California alleging claims
for violation of California’s Unfair Competition Law, Cal. Bus. & Prof.
Code § 17200, et seq. and for unjust enrichment. Plaintiffs seek
to certify a class of all persons in the United States who own one
or more HP printer or device in any of the following categories:
OfficeJet 6220 series; OfficeJet Pro 6230 series; OfficeJet 6820
series; OfficeJet Pro 6830 series; OfficeJet 8600 series; and OfficeJet
Pro X series.
autoNomy-related legal matters
Investigations. As a result of the findings of an ongoing investigation,
HP has provided information to the U.K. Serious Fraud Office,
the U.S. Department of Justice (“DOJ”) and the SEC related to the
accounting improprieties, disclosure failures and misrepresentations
at Autonomy that occurred prior to and in connection with HP’s
acquisition of Autonomy. On January 19, 2015, the U.K. Serious
Fraud Office notified HP that it was closing its investigation and
had decided to cede jurisdiction of the investigation to the U.S.
authorities. On November 14, 2016, the DOJ announced that a
federal grand jury indicted Sushovan Hussain, the former CFO
of Autonomy, on charges of conspiracy to commit wire fraud and
multiple counts of wire fraud. The indictment alleges that Hussain
106 I
2016 Form 10-K
engaged in a scheme to defraud purchasers and sellers of securities
of Autonomy and HP about the true performance of Autonomy’s
business, its financial condition, and its prospects for growth. On
November 15, 2016, the SEC announced that Stouffer Egan, the
former CEO of Autonomy’s US-based operations, settled charges
relating to his participation in an accounting scheme to meet internal
sales targets and analyst revenue expectations. HP is continuing to
cooperate with the ongoing enforcement actions.
Litigation. As described below, HP is involved in various stockholder
litigation relating to, among other things,
its October 2011
acquisition of Autonomy and its November 20, 2012 announcement
that it recorded a non-cash charge for the impairment of goodwill
and intangible assets within Hewlett Packard Enterprise’s software
segment of approximately $8.8 billion in the fourth quarter of its
2012 fiscal year and HP’s statements that, based on HP’s findings
from an ongoing investigation, the majority of this impairment
charge related to accounting improprieties, misrepresentations
to the market and disclosure failures at Autonomy that occurred
prior to and in connection with HP’s acquisition of Autonomy and
the impact of those improprieties, failures and misrepresentations
on the expected future financial performance of the Autonomy
business over the long term. This stockholder litigation was
commenced against, among others, certain current and former
HP executive officers, certain current and former members of HP’s
Board of Directors and certain advisors to HP. The plaintiffs in these
litigation matters are seeking to recover certain compensation paid
by HP to the defendants and/or other damages. Pursuant to the
separation and distribution agreement, HP and Hewlett Packard
Enterprise share equally the cost and any damages arising from
these litigation matters. These matters include the following:
•
In re Hewlett-Packard Shareholder Derivative Litigation
(the “Federal Court Derivative Action”) consists of seven
consolidated lawsuits filed beginning on November 26,
2012 in the United States District Court for the Northern
District of California alleging, among other things, that the
defendants violated Sections 10(b) and 20(a) of the Exchange
Act by concealing material information and making false
statements related to HP’s acquisition of Autonomy and the
financial performance of HP’s enterprise services business.
The lawsuits also allege that the defendants breached their
fiduciary duties, wasted corporate assets and were unjustly
enriched in connection with HP’s acquisition of Autonomy
and by causing HP to repurchase its own stock at allegedly
inflated prices between August 2011 and October 2012. One
lawsuit further alleges that certain individual defendants
engaged in or assisted insider trading and thereby breached
their fiduciary duties, were unjustly enriched and violated
Sections 25402 and 25403 of the California Corporations
Code. On May 3, 2013, the lead plaintiff filed a consolidated
complaint alleging, among other things, that the defendants
HP INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Note 15: litigatioN aNd coNtiNgeNcies (coNtiNued)
concealed material information and made false statements
related to HP’s acquisition of Autonomy and Autonomy’s
Intelligent Data Operating Layer technology and thereby
violated Sections 10(b) and 20(a) of the Exchange Act,
breached their fiduciary duties, engaged in “abuse of control”
over HP, corporate waste and were unjustly enriched. The
litigation was stayed until June 2014. The lead plaintiff filed
a stipulation of proposed settlement on June 30, 2014.
The court declined to grant preliminary approval to this
settlement, and, on December 19, 2014, also declined
to grant preliminary approval to a revised version of the
settlement. On January 22, 2015, the lead plaintiff moved
for preliminary approval of a further revised version of the
settlement. On March 13, 2015, the court issued an order
granting preliminary approval to the settlement. On July 24,
2015, the court held a hearing to entertain any remaining
objections to the settlement and decide whether to grant
final approval of the settlement. On July 30, 2015, the
court granted final approval to the settlement and denied
all remaining objections to the settlement. Three objectors
to the settlement appealed the court’s final approval order
to the Ninth Circuit. Plaintiffs-appellants filed their opening
briefs on December 30, 2015. HP’s response brief was filed
on February 29, 2016, and the reply briefs were filed on
May 12, 2016.
• Autonomy Corporation Limited v. Michael Lynch and
Sushovan Hussain. On April 17, 2015, four HP subsidiaries
(Autonomy Corporation Limited, Hewlett Packard Vision BV,
Autonomy Systems, Limited, and Autonomy, Inc.) initiated
civil proceedings in the U.K. High Court of Justice against two
members of Autonomy’s former management, Michael Lynch
and Sushovan Hussain. The Particulars of Claim seek damages
in excess of $5 billion from Messrs. Lynch and Hussain for
breach of their fiduciary duties by causing Autonomy group
companies to engage in improper transactions and accounting
practices. On October 1, 2015, Messrs. Lynch and Hussain
filed their defenses. Mr. Lynch also filed a counterclaim
against Autonomy Corporation Limited seeking $160 million
in damages, among other things, for alleged misstatements
regarding Lynch. The HP subsidiary claimants filed their
replies to the defenses and the asserted counter-claim on
March 11, 2016.
•
In re HP ERISA Litigation consists of three consolidated
putative class actions filed beginning on December 6, 2012
in the United States District Court for the Northern District of
California alleging, among other things, that from August 18,
2011 to November 22, 2012, the defendants breached their
fiduciary obligations to HP’s 401(k) Plan and its participants
and thereby violated Sections 404(a)(1) and 405(a) of the
Income Security Act of 1974, as
Employee Retirement
information regarding
amended, by concealing negative
the financial performance of Autonomy and HP’s enterprise
services business and by failing to restrict participants from
investing in HP stock. On August 16, 2013, HP filed a motion
to dismiss the lawsuit. On March 31, 2014, the court granted
HP’s motion to dismiss this action with leave to amend.
On July 16, 2014, the plaintiffs filed a second amended
complaint containing substantially similar allegations and
seeking substantially similar relief as the first amended
complaint. On June 15, 2015, the court granted HP’s motion
to dismiss the second amended complaint in its entirety and
denied plaintiffs leave to file another amended complaint. On
July 2, 2015, plaintiffs appealed the court’s order to the United
States Court of Appeals for the Ninth Circuit.
eNviroNmeNtal
HP’s operations and products are subject to various federal, state,
local and foreign laws and regulations concerning environmental
protection, including laws addressing the discharge of pollutants
into the air and water, the management and disposal of hazardous
substances and wastes, the cleanup of contaminated sites, the
content of HP’s products and the recycling, treatment and disposal
of those products. In particular, HP faces increasing complexity
in its product design and procurement operations as it adjusts
to new and future requirements relating to the chemical and
materials composition of its products, their safe use, and the energy
consumption associated with those products, including requirements
relating to climate change. HP is also subject to legislation in an
increasing number of jurisdictions that makes producers of electrical
goods, including computers and printers, financially responsible
for specified collection, recycling, treatment and disposal of past
and future covered products (sometimes referred to as “product
take-back legislation”). HP could incur substantial costs, its products
could be restricted from entering certain jurisdictions, and it could
face other sanctions, if it were to violate or become liable under
environmental laws or if its products become noncompliant with
environmental laws. HP’s potential exposure includes fines and
civil or criminal sanctions, third-party property damage or personal
injury claims and clean-up costs. The amount and timing of costs to
comply with environmental laws are difficult to predict.
HP is party to, or otherwise involved in, proceedings brought by
U.S. or state environmental agencies under the Comprehensive
Environmental Response, Compensation and Liability Act
(“CERCLA”), known as “Superfund,” or state laws similar to CERCLA,
and may become a party to, or otherwise involved in, proceedings
brought by private parties for contribution towards clean-up costs. HP
is also conducting environmental investigations or remediations at
several current or former operating sites pursuant to administrative
orders or consent agreements with state environmental agencies.
2016 Form 10-K
I 107
HP INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Note 15: litigatioN aNd coNtiNgeNcies (coNtiNued)
The separation and distribution agreement includes provisions
that provide for the allocation of environmental liabilities between
HP and Hewlett Packard Enterprise including certain remediation
obligations; responsibilities arising from the chemical and materials
composition of their respective products, their safe use and
their energy consumption; obligations under product take back
legislation that addresses the collection, recycling, treatment and
disposal of products; and other environmental matters. HP will
generally be responsible for environmental liabilities related to
the properties and other assets, including products, allocated
to HP under the separation and distribution agreement and
other ancillary agreements. Under these agreements, HP will
indemnify Hewlett Packard Enterprise for liabilities for specified
ongoing remediation projects, subject to certain limitations, and
Hewlett Packard Enterprise has a payment obligation for a specified
portion of the cost of those remediation projects. In addition, HP
will share with Hewlett Packard Enterprise other environmental
liabilities as set forth in the separation and distribution agreement.
HP is indemnified in whole or in part by Hewlett Packard Enterprise
for liabilities arising from the assets assigned to Hewlett Packard
Enterprise and for certain environmental matters as detailed in the
separation and distribution agreement.
Note 16: guaraNtees, iNdemNificatioNs aNd warraNties
guaraNtees
cross-iNdemNificatioNs witH Hewlett pacKard eNterprise
In the ordinary course of business, HP may issue performance
guarantees to certain of its clients, customers and other parties
pursuant to which HP has guaranteed the performance obligations
of third parties. Some of those guarantees may be backed by
standby letters of credit or surety bonds. In general, HP would be
obligated to perform over the term of the guarantee in the event
a specified triggering event occurs as defined by the guarantee.
HP believes the likelihood of having to perform under a material
guarantee is remote.
iNdemNificatioNs
In the ordinary course of business, HP enters into contractual
arrangements under which HP may agree to indemnify a third party
to such arrangement from any losses incurred relating to the services
they perform on behalf of HP or for losses arising from certain
events as defined within the particular contract, which may include,
for example, litigation or claims relating to past performance. HP
also provides indemnifications to certain vendors and customers
against claims of IP infringement made by third parties arising from
the vendors’ and customers’ use of HP’s software products and
services and certain other matters. Some indemnifications may not
be subject to maximum loss clauses. Historically, payments made
related to these indemnifications have been immaterial.
Under the separation and distribution agreement, HP agreed to
indemnify Hewlett Packard Enterprise, each of its subsidiaries and
each of their respective directors, officers and employees from
and against all liabilities relating to, arising out of or resulting
from, among other matters, the liabilities allocated to HP as part
of the Separation. Hewlett Packard Enterprise similarly agreed to
indemnify HP, each of its subsidiaries and each of their respective
directors, officers and employees from and against all liabilities
relating to, arising out of or resulting from, among other matters,
the liabilities allocated to Hewlett Packard Enterprise as part of the
Separation. HP expects Hewlett Packard Enterprise to fully perform
under the terms of the separation and distribution agreement.
For information on the cross-indemnifications related to the tax
matter agreements and litigations effective upon the Separation on
November 1, 2015, see Note 7, “Taxes on Earnings” and Note 15,
“Litigation and Contingencies”, respectively.
warraNties
HP accrues the estimated cost of product warranties at the
time it recognizes revenue. HP engages in extensive product
quality programs and processes, including actively monitoring
and evaluating the quality of its component suppliers; however,
contractual warranty terms, repair costs, product call rates, average
cost per call, current period product shipments and ongoing product
failure rates, as well as specific product class failures outside of HP’s
baseline experience, affect the estimated warranty obligation.
108 I
2016 Form 10-K
HP INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Note 16: guaraNtees, iNdemNificatioNs aNd warraNties (coNtiNued)
HP’s aggregate product warranty liabilities and changes were as follows:
Balance at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$1,184
Accruals for warranties issued . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjustments related to pre-existing warranties (including changes in estimates) . . . . . . . . . . . . . . . . . . . . . . . . . .
Settlements made (in cash or in kind) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance at end of year. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
966
(23)
(1,147)
$980
$1,385
1,134
(16)
(1,319)
$1,184
as of octoBer 31
2016
2015
iN millioNs
Note 17: commitmeNts
lease commitmeNts
HP leases certain real and personal property under non-cancelable operating leases. Certain leases require HP to pay property taxes,
insurance and routine maintenance and include renewal options and escalation clauses. Rent expense from continuing operations was
approximately $0.2 billion in each of fiscal years 2016, 2015 and 2014.
As of October 31, 2016, future minimum operating lease commitments were as follows:
fiscal year
2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: Sublease rental income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
iN millioNs
$199
204
175
136
75
279
(218)
$850
uNcoNditioNal purcHase oBligatioNs
As of October 31, 2016, HP had unconditional purchase obligations
of $249 million. These unconditional 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 cancelable without penalty.
As of October 31, 2016, future unconditional purchase obligations
were as follows:
fiscal year
2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
iN millioNs
$63
61
38
38
38
11
$249
2016 Form 10-K
I 109
HP INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Note 17: commitmeNts (coNtiNued)
During fiscal year 2016, HP entered into agreements to divest certain
technology assets, including licensing and distribution rights, for
certain software offerings to Open Text Corporation, an enterprise
information management company for $475 million. These
divestitures were substantially completed during the fourth quarter
of fiscal year 2016. The technology assets sold were previously
reported within the Commercial Hardware business unit within the
Printing segment. The total gain recognized from the divestitures
was $401 million. The gains associated with these divestitures
were included in Selling, general and administrative expenses in the
Consolidated Statements of Earnings.
110 I
2016 Form 10-K
HP INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) QUARTERLY SUMMARY
(UNAUDITED)
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
FOR THE THREE-MONTH FISCAL PERIODS
ENDED IN FISCAL YEAR 2016
JANUARY 31
APRIL 30
JULY 31
OCTOBER 31
Net revenue
$12,246
$11,588
$11,892
$12,512
Cost of revenue
Research and development
Selling, general and administrative
Restructuring and other charges
Amortization of intangible assets
Defined benefit plan settlement charges
9,961
292
1,037
20
8
—
9,338
301
1,002
100
6
—
9,720
10,221
298
719
36
2
—
318
1,082
49
—
179
Total costs and expenses
11,318
10,747
10,775
11,849
Earnings from continuing operations
Interest and other, net
Earnings from continuing operations before taxes
Provision for taxes
Net earnings from continuing operations
Net loss from discontinued operations
928
(94)
834
(184)
650
(58)
841
(5)
836
(176)
660
(31)
Net earnings
$592
$629
Net earnings (loss) per share:(1)
Basic
Continuing operations
Discontinued operations
Total basic net earnings per share
Diluted
Continuing operations
Discontinued operations
Total diluted net earnings per share
Cash dividends paid per share
Range of per share stock prices on the New York Stock Exchange
$037
(004)
$033
$036
(003)
$033
$012
$038
(001)
$037
$038
(002)
$036
$012
1,117
(36)
663
347
1,081
1,010
(238)
843
(60)
$783
$049
(003)
$046
$049
(004)
$045
$012
(497)
513
(21)
$492
$030
(001)
$029
$030
(002)
$028
$012
Low
$924
High
$1482
$891
$1296
$1131
$1427
$1355
$1588
2016 Form 10-K
I 111
HP INC. AND SUBSIDIARIES FOR THE THREE-MONTH FISCAL PERIODS
ENDED IN FISCAL YEAR 2015
JANUARY 31
APRIL 30
JULY 31
OCTOBER 31
Net revenue
$13,858
$12,977
$12,362
$12,266
Cost of revenue
11,173
10,415
10,036
Research and development
Selling, general and administrative
Amortization of intangible assets
Restructuring and other charges
Defined benefit plan settlement (credits) charges
Total costs and expenses
Earnings from continuing operations
Interest and other, net
Earnings from continuing operations before taxes
(Provision for) benefit from taxes
Net earnings from continuing operations
Net earnings (loss) from discontinued operations
304
1,222
27
14
—
12,740
1,118
(121)
997
(227)
770
596
305
1,228
25
7
—
11,980
997
(78)
919
(186)
733
278
Net earnings
$1,366
$1,011
Net earnings (loss) per share:(1)
Basic
Continuing operations
Discontinued operations
Total basic net earnings per share
Diluted
Continuing operations
Discontinued operations
Total diluted net earnings per share
Cash dividends paid per share
Range of per share stock prices on the New York Stock Exchange
$042
033
$075
$041
032
$073
$016
$041
015
$056
$040
015
$055
$016
300
1,058
24
1
(64)
11,355
1,007
(90)
917
(217)
700
154
$854
$039
008
$047
$039
008
$047
$018
9,900
282
1,212
26
41
7
11,468
798
(99)
699
816
1,515
(192)
$1,323
$084
(011)
$073
$083
(010)
$073
$018
Low
High
$3577
$4110
$3100
$3886
$2952
$3560
$2430
$3078
(1)
Net EPS for each quarter is computed using the weighted-average number of shares outstanding during that quarter, while EPS for the fiscal year is computed
using the weighted-average number of shares outstanding during the year Hence, the sum of the EPS for each of the four quarters may not equal the EPS for
the fiscal year
ITEM 9.
None
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
112 I
2016 Form 10-K
ITEM 9A.
CONTROLS AND PROCEDURES.
Under the supervision and with the participation of our management,
including our principal executive officer and principal financial
officer, we conducted an evaluation of the effectiveness of the
design and operation of our disclosure controls and procedures, as
defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act
as of the end of the period covered by this report (the “Evaluation
Date”) Based on this evaluation, our principal executive officer and
principal financial officer concluded as of the Evaluation Date that
our disclosure controls and procedures were effective such that the
information relating to HP, including our consolidated subsidiaries,
required to be disclosed in our SEC reports (i) is recorded, processed,
summarized and reported within the time periods specified in SEC
rules and forms, and (ii) is accumulated and communicated to HP’s
management, including our principal executive officer and principal
financial officer, as appropriate to allow timely decisions regarding
required disclosure
ITEM 9B.
OTHER INFORMATION.
None
Under the supervision and with the participation of our management,
including our principal executive officer and principal financial
officer, we conducted an evaluation of any changes in our internal
control over financial reporting (as such term is defined in Rules
13a-15(f) and 15d-15(f) under the Exchange Act) that occurred
during our most recently completed fiscal quarter Based on that
evaluation, our principal executive officer and principal financial
officer concluded that there has not been any change in our internal
control over financial reporting during fiscal year 2016 that has
materially affected, or is reasonably likely to materially affect, our
internal control over financial reporting
Internal Control over Financial
See Management’s Report on
Reporting and the Report of
Independent Registered Public
Accounting Firm on our internal control over financial reporting in
Item 8, which are incorporated herein by reference.
2016 Form 10-K
I 113
PART III
ITEM 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
The names of the executive officers of HP and their ages, titles and biographies as of the date hereof are incorporated by reference from
Part I, Item 1, above
The following information is included in HP’s Proxy Statement related to its 2017 Annual Meeting of Stockholders to be filed within 120 days
after HP’s fiscal year end of October 31, 2016 (the “Proxy Statement”) and is incorporated herein by reference:
•
•
•
•
Information regarding directors of HP who are standing for reelection and any persons nominated to become directors of HP is set
forth under “Proposals to be Voted On—Proposal No. 1—Election of Directors.”
Information regarding HP’s Audit Committee and designated “audit committee financial experts” is set forth under “Board Structure
and Committee Composition—Audit Committee”
Information on HP’s code of business conduct and ethics for directors, officers and employees, also known as the “Standards of Business
Conduct,” and on HP’s Corporate Governance Guidelines is set forth under “Corporate Governance Principles and Board Matters”
Information regarding Section 16(a) beneficial ownership reporting compliance is set forth under “Section 16(a) Beneficial Ownership
Reporting Compliance”
ITEM 11.
EXECUTIVE COMPENSATION.
The following information is included in the Proxy Statement and is incorporated herein by reference:
•
•
Information regarding HP’s compensation of its named executive officers is set forth under “Executive Compensation”
Information regarding HP’s compensation of its directors is set forth under “Director Compensation and Stock Ownership Guidelines”
• The report of HP’s HR and Compensation Committee is set forth under “HR and Compensation Committee Report on
Executive Compensation”
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS.
The following information is included in the Proxy Statement and is incorporated herein by reference:
•
•
Information regarding security ownership of certain beneficial owners, directors and executive officers is set forth under “Common
Stock Ownership of Certain Beneficial Owners and Management”
Information regarding HP’s equity compensation plans, including both stockholder approved plans and non-stockholder approved
plans, is set forth in the section entitled “Equity Compensation Plan Information”
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE.
The following information is included in the Proxy Statement and is incorporated herein by reference:
•
•
Information regarding transactions with related persons is set forth under “Transactions with Related Persons”
Information regarding director
Director Independence”
independence
is set forth under “Corporate Governance Principles and Board Matters—
ITEM 14.
PRINCIPAL ACCOUNTING FEES AND SERVICES.
Information regarding principal accounting fees and services is set forth under “Principal Accounting Fees and Services” in the Proxy
Statement, which information is incorporated herein by reference
114 I
2016 Form 10-K
PART IV
ITEM 15.
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) The following documents are filed as part of this report:
1 All Financial Statements:
The following financial statements are filed as part of this report under Item 8—“Financial Statements and Supplementary Data.”
Report of Independent Registered Public Accounting Firm
Management’s Report on Internal Control Over Financial Reporting
Consolidated Statements of Earnings
Consolidated Statements of Comprehensive Income
Consolidated Balance Sheets
Consolidated Statements of Cash Flows
Consolidated Statements of Stockholders’ (Deficit) Equity
Notes to Consolidated Financial Statements
45
47
48
49
50
51
53
55
Quarterly Summary
111
2 Financial Statement Schedules:
All schedules are omitted as the required information is not applicable or the information is presented in the Consolidated Financial
Statements and notes thereto in Item 8 above
3 Exhibits:
A list of exhibits filed or furnished with this Annual Report on Form 10-K (or incorporated by reference to exhibits previously filed or
furnished by HP) is provided in the accompanying Exhibit Index HP will furnish copies of exhibits for a reasonable fee (covering the expense
of furnishing copies) upon request Stockholders may request exhibits copies by contacting:
HP Inc.
Attn: Investor Relations
1501 Page Mill Road
Palo Alto, CA 94304
2016 Form 10-K
I 115
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized
Date: December 15, 2016
HP INC
By:
/s/ CATHERINE A LESJAK
Catherine A Lesjak
Chief Financial Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Catherine A. Lesjak,
Kim Rivera and Ruairidh Ross, or any of them, his or her attorneys-in-fact, for such person in any and all capacities, to sign any amendments
to this report and to file the same, with exhibits thereto, and other documents in connection therewith, with the Securities and Exchange
Commission, hereby ratifying and confirming all that either of said attorneys-in-fact, or substitute or substitutes, may do or cause to be
done by virtue hereof
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf
of the registrant and in the capacities and on the dates indicated
SIGNATURE
TITLE(S)
DATE
/s/ DION J. WEISLER
President and Chief Executive Officer
December 15, 2016
Dion J Weisler
(Principal Executive Officer)
/s/ CATHERINE A. LESJAK
Chief Financial Officer
Catherine A Lesjak
(Principal Financial Officer)
December 15, 2016
/s/ MARIE E. MYERS
Global Controller and Head of Finance Services
December 15, 2016
Marie E Myers
(Principal Accounting Officer)
/s/ AIDA ALVAREZ
Aida Alvarez
Director
December 15, 2016
/s/ SHUMEET BANERJI
Director
December 15, 2016
Shumeet Banerji
/s/ CARL BASS
Carl Bass
Director
December 15, 2016
/s/ ROBERT R. BENNETT
Director
Robert R Bennett
/s/ CHARLES V. BERGH
Director
Charles V Bergh
/s/ STACY BROWN-PHILPOT
Director
Stacy Brown-Philpot
116 I
2016 Form 10-K
December 15, 2016
December 15, 2016
December 15, 2016
SIGNATURE
TITLE(S)
DATE
/s/ STEPHANIE BURNS
Director
Stephanie Burns
/s/ MARY ANNE CITRINO
Director
Mary Anne Citrino
/s/ RAJIV L. GUPTA
Director
Rajiv L Gupta
/s/ STACEY MOBLEY
Director
Stacey Mobley
/s/ SUBRA SURESH
Director
Subra Suresh
/s/ MARGARET C. WHITMAN
Director
Margaret C Whitman
December 15, 2016
December 15, 2016
December 15, 2016
December 15, 2016
December 15, 2016
December 15, 2016
2016 Form 10-K
I 117
HP INC. AND SUBSIDIARIES
EXHIBIT INDEX
EXHIBIT
NUMBER
2(a)
2(b)
2(c)
2(d)
2(e)
2(f)
2(g)
3(a)
3(b)
3(c)
3(d)
3(e)
4(a)
4(b)
4(c)
4(d)
4(e)
4(f)
EXHIBIT DESCRIPTION
FORM
FILE NO.
EXHIBIT(S)
FILING DATE
Separation and Distribution Agreement, dated as of
October 31, 2015, by and among Hewlett-Packard Company,
Hewlett Packard Enterprise Company and the Other
Parties Thereto.**
Transition Services Agreement, dated as of November 1,
2015, by and between Hewlett-Packard Company and Hewlett
Packard Enterprise Company.**
Tax Matters Agreement, dated as of October 31, 2015, by
and between Hewlett-Packard Company and Hewlett Packard
Enterprise Company.**
Employee Matters Agreement, dated as of October 31, 2015,
by and between Hewlett-Packard Company and Hewlett
Packard Enterprise Company.**
Real Estate Matters Agreement, dated as of October 31, 2015,
by and between Hewlett-Packard Company and Hewlett
Packard Enterprise Company.**
Master Commercial Agreement, dated as of November 1,
2015, by and between Hewlett-Packard Company and Hewlett
Packard Enterprise Company.**
Information Technology Service Agreement, dated as of
November 1, 2015, by and between Hewlett-Packard
Company and HP Enterprise Services, LLC.**
8-K
001-04423
2.1 November 5, 2015
8-K
001-04423
2.2 November 5, 2015
8-K
001-04423
2.3 November 5, 2015
8-K
001-04423
2.4 November 5, 2015
8-K
001-04423
2.5 November 5, 2015
8-K
001-04423
2.6 November 5, 2015
8-K
001-04423
2.7 November 5, 2015
Registrant’s Certificate of Incorporation.
10-Q 001-04423
Registrant’s Amendment to the Certificate of Incorporation.
10-Q 001-04423
3(a) June 12, 1998
3(b) March 16, 2001
Registrant’s Certificate of Amendment to the Certificate
of Incorporation.
Registrant’s Certificate of Amendment to the Certificate
of Incorporation.
Registrant’s Amended and Restated Bylaws.
Senior Indenture between the Registrant and The Bank of
New York Mellon Trust Company, National Association, as
successor in interest to J.P. Morgan Trust Company, National
Association (formerly known as Chase Manhattan Bank and
Trust Company, National Association), as Trustee, dated
June 1, 2000.
Form of Subordinated Indenture.
Form of Registrant’s 3.750% Global Note due December 1,
2020 and form of related Officers’ Certificate.
Form of Registrant’s 4.300% Global Note due June 1, 2021
and form of related Officers’ Certificate.
Form of Registrant’s 4.375% Global Note due September 15,
2021 and 6.000% Global Note due September 15, 2041 and
form of related Officers’ Certificate.
Form of Registrant’s 4.650% Global Note due December 9,
2021 and related Officers’ Certificate.
8-K
001-04423
3.2 October 22, 2015
8-K
001-04423
3.1 April 7, 2016
8-K
S-3
001-04423
333-134327
3.2 July 25, 2016
4.9 June 7, 2006
S-3
8-K
333-30786
001-04423
4.2 March 17, 2000
4.2 and 4.3 December 2, 2010
8-K
001-04423
4.5 and 4.6 June 1, 2011
8-K
001-04423
4.4, 4.5 and 4.6 September 19, 2011
8-K
001-04423
4.3 and 4.4 December 12, 2011
118 I
2016 Form 10-K
EXHIBIT
NUMBER
4(g)
4(h)
4(i)
10(a)
10(b)
10(c)
10(d)
10(e)
10(f)
10(g)
10(h)
10(i)
10(j)
10(k)
10(l)
EXHIBIT DESCRIPTION
FORM
FILE NO.
EXHIBIT(S)
FILING DATE
Form of Registrant’s 4.050% Global Note due September 15,
2022 and related Officers’ Certificate.
Form of Registrant’s 2.750% Global Note due January 14,
2019 and Floating Rate Global Note due January 14, 2019 and
related Officers’ Certificate.
8-K
001-04423
4.2 and 4.3 March 12, 2012
8-K
001-04423
4.1, 4.2 and 4.3 January 14, 2014
Specimen certificate for the Registrant’s common stock.
8-A/A 001-04423
Registrant’s 2004 Stock Incentive Plan.*
Registrant’s Excess Benefit Retirement Plan, amended and
restated as of January 1, 2006.*
Hewlett-Packard Company Cash Account Restoration Plan,
amended and restated as of January 1, 2005.*
S-8
8-K
333-114253
001-04423
4.1 June 23, 2006
4.1 April 7, 2004
10.2 September 21, 2006
8-K
001-04423
99.3 November 23, 2005
Registrant’s 2005 Pay-for-Results Plan, as amended.*
10-K 001-04423
10(h) December 14, 2011
Registrant’s Executive Severance Agreement.*
10-Q 001-04423
10(u)(u) June 13, 2002
Registrant’s Executive Officers Severance Agreement.*
10-Q 001-04423
10(v)(v) June 13, 2002
Form letter regarding severance offset for restricted stock and
restricted units.*
Form of Agreement Regarding Confidential Information and
Proprietary Developments (California).*
Form of Agreement Regarding Confidential Information and
Proprietary Developments (Texas).*
Form of Stock Option Agreement for Registrant’s 2004 Stock
Incentive Plan.*
8-K
001-04423
10.2 March 22, 2005
8-K
001-04423
10.2 January 24, 2008
10-Q 001-04423
10(o)(o) March 10, 2008
10-Q 001-04423
10(c)(c) March 10, 2008
Form of Option Agreement for Registrant’s 2000 Stock Plan.*
10-Q 001-04423
10(t)(t) June 6, 2008
Form of Common Stock Payment Agreement for Registrant’s
2000 Stock Plan.*
10-Q 001-04423
10(u)(u) June 6, 2008
10(m)
Form of Stock Notification and Award Agreement for awards
of non-qualified stock options.*
10-K 001-04423
10(y)(y) December 18, 2008
10(n)
10(o)
10(p)
10(q)
10(r)
10(s)
10(t)
10(u)
10(v)
10(w)
First Amendment to the Hewlett-Packard Company Excess
Benefit Retirement Plan.*
Form of Stock Notification and Award Agreement for awards
of non-qualified stock options.*
Form of Agreement Regarding Confidential Information and
Proprietary Developments (California—new hires).*
Form of Agreement Regarding Confidential Information and
Proprietary Developments (California—current employees).*
Second Amended and Restated Hewlett-Packard
Company 2004 Stock Incentive Plan, as amended effective
February 28, 2013.*
Form of Stock Notification and Award Agreement for awards
of restricted stock units.*
Form of Stock Notification and Award Agreement for awards
of foreign stock appreciation rights.*
Form of Stock Notification and Award Agreement for long-
term cash awards.*
Form of Stock Notification and Award Agreement for awards
of non-qualified stock options.*
Form of Grant Agreement for grants of performance-adjusted
restricted stock units.*
10-Q 001-04423
10(b)(b)(b) March 10, 2009
10-K 001-04423
10(i)(i)(i) December 15, 2010
10-K 001-04423
10(j)(j)(j) December 15, 2010
10-K 001-04423
10(k)(k)(k) December 15, 2010
8-K
001-04423
10.2 March 21, 2013
10-Q 001-04423
10(u)(u) March 11, 2014
10-Q 001-04423
10(v)(v) March 11, 2014
10-Q 001-04423
10(w)(w) March 11, 2014
10-Q 001-04423
10(x)(x) March 11, 2014
10-Q 001-04423
10(y)(y) March 11, 2014
2016 Form 10-K
I 119
EXHIBIT
NUMBER
10(x)
10(y)
10(z)
EXHIBIT DESCRIPTION
FORM
FILE NO.
EXHIBIT(S)
FILING DATE
Form of Stock Notification and Award Agreement for awards
of restricted stock.*
Form of Stock Notification and Award Agreement for awards
of performance-contingent non-qualified stock options.*
Form of Grant Agreement for grants of performance-
contingent non-qualified stock options.*
10-Q 001-04423
10(z)(z) March 11, 2014
10-Q 001-04423
10(a)(a)(a) March 11, 2014
10-Q 001-04423
10(b)(b)(b) March 11, 2014
10(a)(a)
Form of Grant Agreement for grants of restricted stock units.* 10-Q 001-04423
10(c)(c)(c) March 11, 2015
10(b)(b)
10(c)(c)
10(d)(d)
10(e)(e)
10(f)(f)
10(g)(g)
10(h)(h)
10(i)(i)
10(j)(j)
Form of Grant Agreement for grants of foreign stock
appreciation rights.*
Form of Grant Agreement for grants of long-term
cash awards.*
Form of Grant Agreement for grants of non-qualified
stock options.*
10-Q 001-04423
10(d)(d)(d) March 11, 2015
10-Q 001-04423
10(c)(c)(c) March 11, 2015
10-Q 001-04423
10(f)(f)(f) March 11, 2015
Form of Grant Agreement for grants of performance-adjusted
restricted stock units.*
10-Q 001-04423
10(g)(g)(g) March 11, 2015
Form of Grant Agreement for grants of restricted
stock awards.*
Form of Grant Agreement for grants of performance-
contingent non-qualified stock options.*
Term Loan Agreement, dated as of April 30, 2015, among the
Registrant, the lenders named therein and JPMorgan Chase
Bank, N.A., as administrative agent.
Amendment, dated as of June 1, 2015, to the Term Loan
Agreement, dated as of April 30, 2015, among the Registrant,
the lenders named therein and JPMorgan Chase Bank, N.A., as
administrative agent.
Five-Year Credit Agreement, dated as of April 2, 2014, as
Amended and Restated as of November 1, 2015, among the
Registrant, the lenders named therein and Citibank, N.A., as
administrative processing agent and co-administrative agent,
and JPMorgan Chase Bank, N.A., as co-administrative agent.
10-Q 001-04423
10(h)(h)(h) March 11, 2015
10-Q 001-04423
10(i)(i)(i) March 11, 2015
10-Q 001-04423
10(b)(b)(b) June 8, 2015
10-Q 001-04423
10(c)(c)(c) June 8, 2015
8-K
001-04423
10.1 November 5, 2015
10(k)(k)
10(l)(l)
Form of Grant Agreement for grants of foreign stock
appreciation rights.*
Form of Grant Agreement for grants of performance-
contingent non-qualified stock options.*
10-K 001-04423
10(e)(e)(e) December 12, 2015
10-K 001-04423
10(f)(f)(f) December 12, 2015
10(m)(m) Form of Grant Agreement for grants of non-qualified
10-K 001-04423
10(g)(g)(g) December 12, 2015
stock options.*
10(n)(n)
10(o)(o)
10(p)(p)
10(q)(q)
10(r)(r)
10(s)(s)
Registrant’s 2005 Executive Deferred Compensation Plan,
amended and restated effective November 1, 2015.*
Registrant’s Severance and Long-Term Incentive Change in
Control Plan for Executive Officers, amended and restated
effective November 1, 2015.*
Form of Stock Notification and Award Agreement for awards
of performance-contingent non-qualified stock options
(launch grant).*
Form of Stock Notification and Award Agreement for awards
of restricted stock units (launch grant).*
Form of Stock Notification and Award Agreement for awards
of restricted stock units.*
Form of Stock Notification and Award Agreement for awards
of performance-adjusted restricted stock units.*
120 I
2016 Form 10-K
10-Q 001-04423
10(n)(n) March 3, 2016
10-Q 001-04423
10(o)(o) March 3, 2016
10-Q 001-04423
10(p)(p) March 3, 2016
10-Q 001-04423
10(q)(q) March 3, 2016
10-Q 001-04423
10(r)(r) March 3, 2016
10-Q 001-04423
10(s)(s) March 3, 2016
EXHIBIT
NUMBER
10(t)(t)
10(u)(u)
9
11
12
13-14
15
18
21
22
23
24
31.1
31.2
32
EXHIBIT DESCRIPTION
FORM
FILE NO.
EXHIBIT(S)
FILING DATE
10-Q 001-04423
10(t)(t) March 3, 2016
Form of Amendment to Award Agreements for awards of
restricted stock units or performance-adjusted restricted
stock units, effective January 1, 2016.*
First Amendment to Severance and Long-Term Incentive
Change in Control Plan for Executive Officers, as amended and
restated effective November 1, 2015.* †
None.
None.
Statements of Computation of Ratio of Earnings to
Fixed Charges.†
None.
None.
None.
Subsidiaries of the Registrant as of November 1, 2015.†
None.
Consent of Independent Registered Public Accounting Firm.†
Power of Attorney (included on the signature page).
Certification of Chief Executive Officer pursuant to
Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange
Act of 1934, as amended.†
Certification of Chief Financial Officer pursuant to
Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange
Act of 1934, as amended.†
Certification of Chief Executive Officer and Chief Financial
Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.†
101.INS
XBRL Instance Document.†
101.SCH XBRL Taxonomy Extension Schema Document.†
101.CAL XBRL Taxonomy Extension Calculation Linkbase Document.†
101.DEF XBRL Taxonomy Extension Definition Linkbase Document.†
101.LAB XBRL Taxonomy Extension Label Linkbase Document.†
101.PRE XBRL Taxonomy Extension Presentation Linkbase Document.†
* Indicates management contract or compensatory plan, contract or arrangement.
** Certain schedules and exhibits to this agreement have been omitted pursuant to Item 601(b)(2) of Registration S-K. A copy of any omitted schedule and/or exhibit
will be furnished supplementally to the SEC upon request.
† Filed herewith.
† Furnished herewith.
The registrant agrees to furnish to the Commission supplementally upon request a copy of (1) any instrument with respect to long-term
debt not filed herewith as to which the total amount of securities authorized thereunder does not exceed 10% of the total assets of the
registrant and its subsidiaries on a consolidated basis and (2) any omitted schedules to any material plan of acquisition, disposition or
reorganization set forth above.
2016 Form 10-K
I 121
FORWARD-LOOKING STATEMENTS
The information included on this website and other information provided from time to time through webcasts, conference calls, securities
analyst meetings, road show presentations, investor conferences, newsletters and similar events and communications contains forward-
looking statements that involve risks, uncertainties and assumptions. If the risks or uncertainties ever materialize or the assumptions prove
incorrect, the results of HP may differ materially from those expressed or implied by such forward-looking statements and assumptions. All
statements other than statements of historical fact are statements that could be deemed forward-looking statements, including but not limited
to any projections of net revenue, margins, expenses, effective tax rates, net earnings, net earnings per share, cash flows, benefit plan funding,
deferred tax assets, share repurchases, currency exchange rates or other financial items; any projections of the amount, timing or impact of
cost savings or restructuring and other charges; any statements of the plans, strategies and objectives of management for future operations,
including the execution of restructuring plans and any resulting cost savings, net revenue or profitability improvements; any statements
concerning the expected development, performance, market share or competitive performance relating to products or services; any statements
regarding current or future macroeconomic trends or events and the impact of those trends and events on HP and its financial performance;
any statements regarding pending investigations, claims or disputes; any statements of expectation or belief, including with respect to the
timing and expended benefits of acquisitions and other business combination and investment transactions; and any statements of assumptions
underlying any of the foregoing.
Risks, uncertainties and assumptions include the need to address the many challenges facing HP’s businesses; the competitive pressures
faced by HP’s businesses; risks associated with executing HP’s strategy; the impact of macroeconomic and geopolitical trends and events; the
need to manage third-party suppliers and the distribution of HP’s products and the delivery of HP’s services effectively; the protection of HP’s
intellectual property assets, including intellectual property licensed from third parties; risks associated with HP’s international operations; the
development and transition of new products and services and the enhancement of existing products and services to meet customer needs and
respond to emerging technological trends; the execution and performance of contracts by HP and its suppliers, customers, clients and partners;
the hiring and retention of key employees; integration and other risks associated with business combination and investment transactions; the
results of the restructuring plans, including estimates and assumptions related to the cost (including any possible disruption of HP’s business)
and the anticipated benefits of the restructuring plans; the resolution of pending investigations, claims and disputes; and other risks that are
described in HP’s Annual Report on Form 10-K for the fiscal year ended October 31, 2016 and HP’s other filings with the Securities and Exchange
Commission. HP assumes no obligation and does not intend to update these forward-looking statements.
HP’s Investor Relations website at http://www.hp.com/investor/home contains a significant amount of information about HP, including financial
and other information for investors. HP encourages investors to visit our website from time to time, as information is updated and new
information is posted.
© Copyright 2017 Hewlett-Packard Development Company, LP. The information contained herein is subject to change without notice. This document is provided for
information purposes only. The only warranties for HP products and services are set forth in the express warranty statements accompanying such products and services.
Nothing herein should be construed as constituting an additional warranty. HP shall not be liable for technical or editorial errors or omissions contained herein.
Prepared by www.argyle.company
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HP Inc.
2016 Annual Report
2017 Proxy Statement
314689_NPS_Cvr_R6.indd 1
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This cover is an HP Indigo digital print, on paper containing 30% post-consumer recycled paper that is environmentally and socially responsible sourced from well-managed forests, and independently certified according to the standards of the Forest Stewardship Council (FSC®).By printing this annual report and proxy statement on paper containing 30% post-consumer recycled waste, the following environmental savings were achieved:25 fewer tons of wood was harvested, or the equivalent of 157 trees71 million fewer BTUs of net energy were used over the lifecycle of the paper, enough energy to power an average US home for 285 days13,617 fewer pounds CO2 equivalents were released into the atmosphere, the equivalent of removing one average car off the road for 1 year 86 days73,858 fewer gallons of water were consumed or degraded throughout the lifecycle of the paper4,944 fewer pounds of solid waste were produced, including sludge and paper disposed of in landfills and incineratorsEnvironmental impact estimates were made using the Environmental Paper Network Paper Calculator Version 3.2.1. www.papercalculator.org.