Financial Instruments

Cash Equivalents and Available-for-Sale Investments



	As of January 31, 2018									As of October 31, 2017
	Cost		Gross Unrealized Gain		Gross Unrealized Loss			Fair Value		Cost		Gross Unrealized Gain		Gross Unrealized Loss			Fair Value
	In millions
Cash Equivalents:
Corporate debt	$	1,180	$	—	$	—		$	1,180	$	1,390	$	—	$	—		$	1,390
Financial institution instruments	—		—		—			—		6		—		—			6
Government debt	2,833		—		—			2,833		4,002		—		—			4,002
Total cash equivalents	4,013		—		—			4,013		5,398		—		—			5,398
Available-for-Sale Investments:
Corporate debt ⁽¹⁾	669		—		(2		)	667		629		—		—			629
Financial institution instruments ⁽¹⁾	77		—		—			77		78		—		—			78
Government debt ⁽¹⁾	524		—		(2		)	522		443		—		(1		)	442
Marketable equity securities	4		2		—			6		5		7		—			12
Mutual funds	42		10		—			52		39		10		—			49
Total available-for-sale investments	1,316		12		(4		)	1,324		1,194		17		(1		)	1,210
Total cash equivalents and available-for-sale investments	$	5,329	$	12	$	(4	)	$	5,337	$	6,592	$	17	$	(1	)	$	6,608

⁽¹⁾HP classifies its marketable debt securities as available-for-sale investments within Other current assets on the Consolidated Condensed Balance Sheets, including those with maturity dates beyond one year, based on their highly liquid nature and availability for use in current operations.

All highly liquid investments with original maturities of three months or less at the date of acquisition are considered cash equivalents. As of January 31, 2018 and October 31, 2017, the carrying amount of cash equivalents approximated fair value due to the short period of time to maturity. 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 investments in available-for-sale debt securities were as follows:



	As of January 31, 2018
	Amortized Cost		Fair Value
	In millions
Due in one year or less	$	761	$	759
Due in one to five years	$	509	$	507

Equity securities in privately held companies include cost basis and equity method investments and are included in Other non-current assets on the Consolidated Condensed Balance Sheets. These amounted to $39 million and $37 million as of January 31, 2018 and October 31, 2017, 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 strategy, HP uses derivative instruments, primarily forward 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 and classifies the cash flows with the activities that correspond to the underlying hedged items. 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.

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 position was $765 million and $258 million as of January 31, 2018 and as of October 31, 2017, 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 or cash flows as of January 31, 2018 and October 31, 2017.

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 on the Consolidated Condensed 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 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 on 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.

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 Condensed 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 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.

As of January 31, 2018 and 2017, no portion of the hedging instruments’ gain or loss was excluded from the assessment of effectiveness for fair value and cash flow hedges. Hedge ineffectiveness for fair value and cash flow hedges recognized in earnings were not material for the three months ended January 31, 2018 and 2017.

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 January 31, 2018										As of October 31, 2017
	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	$	2,500	$	—	$	—	$	1	$	51	$	2,500	$	—	$	—	$	—	$	12
Cash flow hedges:
Foreign currency contracts	15,901		29		4		589		176		16,149		92		12		245		100
Total derivatives designated as hedging instruments	18,401		29		4		590		227		18,649		92		12		245		112
Derivatives not designated as hedging instruments
Foreign currency contracts	4,515		18		—		22		—		5,801		16		—		15		—
Other derivatives	142		4		—		—		—		123		1		—		—		—
Total derivatives not designated as hedging instruments	4,657		22		—		22		—		5,924		17		—		15		—
Total derivatives	$	23,058	$	51	$	4	$	612	$	227	$	24,573	$	109	$	12	$	260	$	112

Offsetting of Derivative Instruments

HP recognizes all derivative instruments 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 January 31, 2018 and October 31, 2017, information related to the potential effect of HP’s master netting agreements and collateral security agreements was as follows:



	In the Consolidated Condensed Balance Sheets
							Gross Amounts Not Offset
	Gross Amount Recognized (i)		Gross Amount Offset (ii)		Net Amount Presented (iii) = (i)–(ii)		Derivatives (iv)		Financial Collateral (v)			Net Amount (vi) = (iii)–(iv)–(v)
	In millions
As of January 31, 2018
Derivative assets	$	55	$	—	$	55	$	51	$	—	⁽¹⁾	$	4
Derivative liabilities	$	839	$	—	$	839	$	51	$	770	⁽²⁾	$	18
As of October 31, 2017
Derivative assets	$	121	$	—	$	121	$	108	$	4	⁽¹⁾	$	9
Derivative liabilities	$	372	$	—	$	372	$	108	$	219	⁽²⁾	$	45

_______________________________________________________________________________


⁽¹⁾	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.


⁽²⁾	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 in the Consolidated Condensed Statements of Earnings

The pre-tax effect of derivative instruments and related hedged items in a fair value hedging relationship for the three months ended January 31, 2018 and 2017 were as follows:



	Gain (Loss) Recognized in Earnings on Derivative and Related Hedged Item
Derivative Instrument	Location	Three months ended January 31, 2018			Three months ended January 31, 2017			Hedged Item	Location	Three months ended January 31, 2018		Three months ended January 31, 2017
		In millions								In millions
Interest rate contracts	Interest and other, net	$	(40	)	$	(52	)	Fixed-rate debt	Interest and other, net	$	40	$	52

The pre-tax effect of derivative instruments in cash flow hedging relationships for the three months ended January 31, 2018 was as follows:



	Loss Recognized in Other Comprehensive Income (“OCI”) on Derivatives (Effective Portion)						(Loss) Gain Reclassified from Accumulated OCI Into Earnings (Effective Portion)
	Three months ended January 31, 2018			Three months ended January 31, 2017			Location	Three months ended January 31, 2018			Three months ended January 31, 2017
	In millions							In millions
Cash flow hedges:
Foreign currency contracts	$	(551	)	$	(169	)	Net revenue	$	(52	)	$	76
							Cost of revenue	(18		)	—
							Interest and other, net	—			(5		)
Total	$	(551	)	$	(169	)		$	(70	)	$	71

As of January 31, 2018, HP expects to reclassify an estimated accumulated other comprehensive loss (“AOCI”) of $500 million, net of taxes, to earnings within the next twelve months associated with cash flow hedges along with the earnings effects of the related forecasted transactions. The amounts ultimately reclassified into earnings could be different from the amounts previously included in AOCI based on the change of market rate, and therefore could have a different impact on earnings.

The pre-tax effect of derivative instruments not designated as hedging instruments in the Consolidated Condensed Statements of Earnings for the three months ended January 31, 2018 and 2017 was as follows:



	Gain (Loss) Recognized in Earnings on Derivatives
	Location	Three months ended January 31, 2018			Three months ended January 31, 2017
		In millions
Foreign currency contracts	Interest and other, net	$	(17	)	$	(2	)
Other derivatives	Interest and other, net	2			3
Total		$	(15	)	$	1