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