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Financial Instruments
 9 Months Ended
Jul. 31, 2014
Financial Instruments  
Financial Instruments

 

Note 8: Financial Instruments

  • Cash Equivalents and Available-for-Sale Investments

        Cash equivalents and available-for-sale investments were as follows:

 
   As of July 31, 2014   As of October 31, 2013  
 
   Cost   Gross
Unrealized
Gain		   Gross
Unrealized
Loss		   Fair
Value		   Cost   Gross
Unrealized
Gain		   Gross
Unrealized
Loss		   Fair
Value		  
 
   In millions
  

Cash Equivalents

                                                  

Time deposits

   $ 2,540   $ —   $ —   $ 2,540   $ 2,207   $ —   $ —   $ 2,207  

Money market funds

     8,731     —     —     8,731     6,819     —     —     6,819  

Mutual funds

     143     —     —     143     13     —     —     13  
                                   
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Total cash equivalents

     11,414     —     —     11,414     9,039     —     —     9,039  
                                   
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Available-for-Sale Investments

                                                  

Debt securities:

                                                  

Time deposits

     105     —     —     105     14     —     —     14  

Foreign bonds

     305     90     —     395     310     86     —     396  

Other debt securities

     63     —     (14 )   49     64     —     (15 )   49  
                                   
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Total debt securities

     473     90     (14 )   549     388     86     (15 )   459  
                                   
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Equity securities:

                                                  

Mutual funds

     162     —     —     162     300     —     —     300  

Equity securities in public companies

     8     6     —     14     5     6     —     11  
                                   
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Total equity securities

     170     6     —     176     305     6     —     311  
                                   
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Total available-for-sale investments

     643     96     (14 )   725     693     92     (15 )   770  
                                   
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Total cash equivalents and available-for-sale investments

   $ 12,057   $ 96   $ (14 ) $ 12,139   $ 9,732   $ 92   $ (15 ) $ 9,809  
                                   
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​
                                   

        All highly liquid investments with original maturities of three months or less at the date of acquisition are considered cash equivalents. As of July 31, 2014 and October 31, 2013, the carrying value of cash equivalents approximated fair value due to the short period of time to maturity. Time deposits were primarily issued by institutions outside the United States as of July 31, 2014 and October 31, 2013. The estimated fair value of the available-for-sale investments may not be representative of values that will be realized in the future.

        Contractual maturities of short- and long-term investments in available-for-sale debt securities were as follows:

 
   As of
July 31,
2014		  
 
   Cost   Fair
Value		  
 
   In millions
  

Due in one year

   $ 83   $ 83  

Due in one to five years

     9     9  

Due in more than five years

     381     457  
           
​ ​ ​ ​ ​ ​ ​ ​

 

   $ 473   $ 549  
           
​ ​ ​ ​ ​ ​ ​ ​
​ ​ ​ ​ ​ ​ ​ ​
           

        Equity securities in privately held companies include cost basis and equity method investments and are included in Long-term financing receivables and other assets in the Consolidated Condensed Balance Sheets. These amounted to $97 million and $50 million at July 31, 2014 and October 31, 2013, respectively.

  • Derivative Instruments

        HP is a global company exposed to foreign currency exchange rate fluctuations and interest rate changes in the normal course of its business. As part of its risk management strategy, HP uses derivative instruments, primarily forward contracts, option contracts, interest rate swaps, and total return swaps, to hedge certain foreign currency, interest rate and, to a lesser extent, equity exposures. HP's objective is to offset gains and losses resulting from these exposures with losses and gains on the derivative contracts used to hedge them, thereby reducing volatility of earnings or protecting the fair value of assets and liabilities. HP does not have any leveraged derivatives and does not use derivative contracts for speculative purposes. HP may designate its derivative contracts as fair value hedges, cash flow hedges or hedges of the foreign currency exposure of a net investment in a foreign operation ("net investment 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 Condensed Balance Sheets. HP classifies cash flows from its derivative programs as operating activities in the Consolidated Condensed 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. To mitigate counterparty credit risk, HP has a policy of only entering into contracts with carefully selected major financial institutions based on their credit ratings and other factors, and HP maintains dollar risk limits that correspond to each institution's credit rating and other factors. HP's established policies and procedures for mitigating credit risk include reviewing and establishing limits for credit exposure and periodically re-assessing the creditworthiness of counterparties. Master netting agreements mitigate credit exposure to counterparties by permitting HP to net amounts due from HP to a counterparty against amounts due to HP from the same counterparty under certain conditions.

        To further mitigate credit exposure to counterparties, 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. Collateral is generally posted within two business days. The fair value of derivatives with credit contingent features in a net liability position was $66 million and $207 million at July 31, 2014 and October 31, 2013, respectively, all of which were fully collateralized within two business days.

        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 as of July 31, 2014 and October 31, 2013.

  • Fair Value Hedges

        HP issues long-term debt in U.S. dollars based on market conditions at the time of financing. HP may enter 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 LIBOR-based floating interest expense. The swap transactions generally involve principal and interest obligations for U.S. dollar-denominated amounts. Alternatively, HP may choose not to swap fixed for floating interest payments or may terminate a previously executed swap if it believes a larger proportion of fixed-rate debt would be beneficial.

        When investing in fixed-rate instruments, HP may enter into interest rate swaps that convert the fixed interest payments into variable interest payments and may designate these swaps as fair value hedges.

        For derivative instruments that are designated and qualify as fair value hedges, HP recognizes the change in fair value on the derivative instrument, as well as the offsetting change in fair value on the hedged item, in Interest and other, net in the Consolidated Condensed Statements of Earnings in the period of change.

  • Cash Flow Hedges

        HP uses a combination of forward contracts and 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 sales, 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, certain leasing revenue-related forward contracts and intercompany loan forward contracts extend for the duration of the lease or loan term, which can be up 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' equity in the Consolidated Condensed Balance Sheets and subsequently reclassifies these amounts into earnings in the period during which the hedged transaction is recognized in earnings. HP reports the effective portion of its cash flow hedges in the same financial statement line item as changes in the fair value of the hedged item. During the three and nine months ended July 31, 2014, and three months ended July 31, 2013, HP did not discontinue any cash flow hedge for which it was probable that a forecasted transaction would not occur. During the nine months ended July 31, 2013 there was no significant impact to results of operations as a result of discontinued cash flow hedges.

  • Net Investment Hedges

        HP uses forward contracts designated as net investment hedges to hedge net investments in certain foreign subsidiaries whose functional currency is the local currency. As these derivative instruments are designated as net investment hedges, HP records the effective portion of the derivative instrument together with changes in the fair value of the hedged items in Cumulative translation adjustment as a separate component of stockholders' equity in the Consolidated Condensed Balance Sheets.

  • Other Derivatives

        Other derivatives not designated as hedging instruments consist primarily of forward contracts used to hedge foreign currency-denominated balance sheet exposures. HP also uses total return swaps and, to a lesser extent, interest rate swaps, based on equity or fixed income indices, to hedge its executive deferred compensation plan liability.

        For derivative instruments not designated as hedging instruments, HP recognizes changes in fair value in earnings in the period of change. HP recognizes changes in fair value on foreign currency forward contracts used to hedge balance sheet exposures in Interest and other, net in the Consolidated Condensed Statements of Earnings in the same period as the remeasurement gain or loss of the related foreign currency-denominated assets and liabilities. HP recognizes the change in fair value on total return swaps and interest rate swaps in Interest and other, net in the same period as the gain or loss from changes in the amount owed to participants in the executive deferred compensation plan.

  • Hedge Effectiveness

        For interest rate swaps designated as fair value hedges, HP measures effectiveness by offsetting the change in fair value of the hedged instrument with the change in fair value of the derivative. For foreign currency options and forward contracts designated as cash flow or net investment hedges, HP measures effectiveness by comparing the cumulative change in the hedge contract with the cumulative change in the hedged item, both of which are based on forward rates. HP recognizes any ineffective portion of the hedge in the Consolidated Condensed Statements of Earnings in the same period in which ineffectiveness occurs. Amounts excluded from the assessment of effectiveness are recognized in the Consolidated Condensed Statements of Earnings in the period they arise.

  • Fair Value of Derivative Instruments in the Consolidated Condensed Balance Sheets

        The gross notional and fair value of derivative instruments in the Consolidated Condensed Balance Sheets were as follows:

 
   As of July 31, 2014   As of October 31, 2013  
 
   Gross
Notional(1)		   Other
Current
Assets		   Long-Term
Financing
Receivables
and Other
Assets		   Other
Accrued
Liabilities		   Long-Term
Other
Liabilities		   Gross
Notional(1)		   Other
Current
Assets		   Long-Term
Financing
Receivables
and Other
Assets		   Other
Accrued
Liabilities		   Long-Term
Other
Liabilities		  
 
   In millions
  

Derivatives designated as hedging instruments

                                                              

Fair value hedges:

                                                              

Interest rate contracts

   $ 9,800   $ —   $ 91   $ —   $ 105   $ 11,100   $ 31   $ 125   $ —   $ 107  

Cash flow hedges:

                                                              

Foreign exchange contracts

     20,041     183     35     168     84     22,463     79     40     341     80  

Net investment hedges:

                                                              

Foreign exchange contracts

     1,938     25     30     15     16     1,920     30     40     20     12  
                                           
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Total derivatives designated as hedging instruments

     31,779     208     156     183     205     35,483     140     205     361     199  
                                           
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Derivatives not designated as hedging instruments

                                                              

Foreign exchange contracts

     15,272     61     20     49     20     16,048     72     26     76     20  

Other derivatives

     348     1     1     7     —     344     8     1     —     —  
                                           
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Total derivatives not designated as hedging instruments

     15,620     62     21     56     20     16,392     80     27     76     20  
                                           
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Total derivatives

   $ 47,399   $ 270   $ 177   $ 239   $ 225   $ 51,875   $ 220   $ 232   $ 437   $ 219  
                                           
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​
                                           
(1)
Represents the amount of contracts that were outstanding as of July 31, 2014 and October 31, 2013, respectively.

  • Offsetting of Derivative Instruments

        HP recognizes all derivatives on a gross basis in the Consolidated Condensed Balance Sheets. HP does not offset the fair value of its derivative instruments against the fair value of cash collateral posted under its collateral security agreements. As of July 31, 2014 and October 31, 2013, information related to the potential effect of HP's master netting agreements and collateral security agreements was as follows:

 
   As of July 31, 2014  
 
   In the Consolidated Condensed Balance Sheets    
  
 
   (i)
   (ii)
   (iii) = (i)-(ii)
   (iv)
   (v)
   (vi) = (iii)-(iv)-(v)
  
 
    
    
    
   Gross Amounts Not
Offset		    
  
 
   Gross Amount
Recognized		   Gross Amount
Offset		   Net Amount
Presented		   Derivatives   Financial
Collateral		   Net Amount  
 
   In millions
  

Derivative assets

   $ 447   $ —   $ 447   $ 303   $ 48   $ 96  

Derivative liabilities

   $ 464   $ —   $ 464   $ 303   $ 92 (1) $ 69  
(1)
Of the $92 million of collateral posted, $36 million was through re-use of counterparty cash collateral and $56 million was in cash.


 
   As of October 31, 2013  
 
   In the Consolidated Condensed Balance Sheets    
  
 
   (i)
   (ii)
   (iii) = (i)-(ii)
   (iv)
   (v)
   (vi) = (iii)-(iv)-(v)
  
 
    
    
    
   Gross Amounts Not
Offset		    
  
 
   Gross Amount
Recognized		   Gross Amount
Offset		   Net Amount
Presented		   Derivatives   Financial
Collateral		   Net Amount  
 
   In millions
  

Derivative assets

   $ 452   $ —   $ 452   $ 372   $ 30   $ 50  

Derivative liabilities

   $ 656   $ —   $ 656   $ 372   $ 283 (1) $ 1  
(1)
Of the $283 million of collateral posted, $30 million was through re-use of counterparty cash collateral and $253 million was in cash.

  • Effect of Derivative Instruments on the Consolidated Condensed Statements of Earnings

        The pre-tax effect of derivative instruments and related hedged items in fair value hedging relationships for the three and nine months ended July 31, 2014 and 2013 were as follows:

 
   Gain (Loss) Recognized in Earnings on Derivative and Related Hedged Item  
Derivative Instrument
  Location   Three
months
ended
July 31,
2014		   Nine
months
ended
July 31,
2014		   Hedged Item   Location   Three
months
ended
July 31,
2014		   Nine
months
ended
July 31,
2014		  
 
    
   In millions
    
    
   In millions
  

Interest rate contracts

   Interest and other, net   $ (17 ) $ (63 ) Fixed-rate
debt		   Interest and
other, net		   $ 17   $ 63  


 

 
   Gain (Loss) Recognized in Earnings on Derivative and Related Hedged Item  
Derivative Instrument
  Location   Three
months
ended
July 31,
2013		   Nine
months
ended
July 31,
2013		   Hedged Item   Location   Three
months
ended
July 31,
2013		   Nine
months
ended
July 31,
2013		  
 
    
   In millions
    
    
   In millions
  

Interest rate contracts

   Interest and other, net   $ (229 ) $ (300 ) Fixed-rate debt   Interest and other, net   $ 230   $ 300  

        The pre-tax effect of derivative instruments in cash flow and net investment hedging relationships for the three and nine months ended July 31, 2014 was as follows:

 
   Gain (Loss)
Recognized in
Other
Comprehensive
Income ("OCI")
on Derivatives
(Effective Portion)		   Gain (Loss) Reclassified from Accumulated OCI
Into Earnings (Effective Portion)		  
 
   Three
months
ended
July 31,
2014		   Nine
months
ended
July 31,
2014		   Location   Three
months
ended
July 31,
2014		   Nine
months
ended
July 31,
2014		  
 
   In millions
    
   In millions
  

Cash flow hedges:

                              

Foreign exchange contracts

   $ 155   $ 19   Net revenue   $ (103 ) $ (229 )

Foreign exchange contracts

     (6 )   (84 ) Cost of products     (12 )   (56 )

Foreign exchange contracts

     3     14   Other operating expenses     —     (7 )

Foreign exchange contracts

     (18 )   (54 ) Interest and other, net     (10 )   (43 )
                       
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Total cash flow hedges

   $ 134   $ (105 )     $ (125 ) $ (335 )
                       
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​
                       

Net investment hedges:

                              

Foreign exchange contracts

   $ (7 ) $ (8 ) Interest and other, net   $ —   $ —  
                       
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​
                       

        The pre-tax effect of derivative instruments in cash flow and net investment hedging relationships for the three and nine months ended July 31, 2013 was as follows:

 
   Gain (Loss)
Recognized in
OCI
on Derivatives
(Effective Portion)		   Gain (Loss) Reclassified from Accumulated OCI
Into Earnings (Effective Portion)		  
 
   Three
months
ended
July 31,
2013		   Nine
months
ended
July 31,
2013		   Location   Three
months
ended
July 31,
2013		   Nine
months
ended
July 31,
2013		  
 
   In millions
    
   In millions
  

Cash flow hedges:

                              

Foreign exchange contracts

   $ 139   $ 146   Net revenue   $ 88   $ 77  

Foreign exchange contracts

     (11 )   (180 ) Cost of products     (77 )   (107 )

Foreign exchange contracts

     (28 )   (17 ) Other operating expenses     1     6  

Foreign exchange contracts

     16     7   Interest and other, net     9     5  
                       
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Total cash flow hedges

   $ 116   $ (44 )     $ 21   $ (19 )
                       
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​
                       

Net investment hedges:

                              

Foreign exchange contracts

   $ 81   $ 64   Interest and other, net   $ —   $ —  
                       
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​
                       

        As of July 31, 2014 and 2013, no portion of a hedging instrument's 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 in the three and nine months ended July 31, 2014 and 2013.

        As of July 31, 2014, HP expects to reclassify an estimated net accumulated other comprehensive loss of approximately $21 million, net of taxes, to earnings in the next twelve months associated with cash flow hedges along with the earnings effects of the related forecasted transactions.

        The pre-tax effect of derivative instruments not designated as hedging instruments on the Consolidated Condensed Statements of Earnings for the three and nine months ended July 31, 2014 and 2013 was as follows:

 
   Gain (Loss) Recognized in Earnings on Derivatives  
 
   Location   Three months
ended
July 31,
2014		   Nine months
ended
July 31,
2014		  
 
    
   In millions
  

Foreign exchange contracts

   Interest and other, net   $ 1   $ 8  

Other derivatives

   Interest and other, net     (5 )   (13 )
               
​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Total

       $ (4 ) $ (5 )
               
​ ​ ​ ​ ​ ​ ​ ​ ​ ​
​ ​ ​ ​ ​ ​ ​ ​ ​ ​
               


 

 
   Gain (Loss) Recognized in Earnings on Derivatives  
 
   Location   Three months
ended
July 31,
2013		   Nine months
ended
July 31,
2013		  
 
    
   In millions
  

Foreign exchange contracts

   Interest and other, net   $ 288   $ 233  

Other derivatives

   Interest and other, net     2     12  

Interest rate contracts

   Interest and other, net     —     3  
               
​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Total

       $ 290   $ 248  
               
​ ​ ​ ​ ​ ​ ​ ​ ​ ​
​ ​ ​ ​ ​ ​ ​ ​ ​ ​