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Financial Instruments
6 Months Ended
Apr. 30, 2011
Financial Instruments  
Financial Instruments

Note 8: Financial Instruments

  • Cash Equivalents and Available-for-Sale Investments

        Cash equivalents and available-for-sale investments at fair value as of April 30, 2011 and October 31, 2010 were as follows:

 
  April 30, 2011   October 31, 2010  
 
  Cost   Gross
Unrealized
Gain
  Gross
Unrealized
Loss
  Estimated
Fair
Value
  Cost   Gross
Unrealized
Gain
  Gross
Unrealized
Loss
  Estimated
Fair
Value
 
 
  In millions
 

Cash Equivalents

                                                 
 

Time deposits

  $ 7,920   $   $   $ 7,920   $ 6,590   $   $   $ 6,590  
 

Commercial paper

    325             325                  
 

Money market funds

    807             807     971             971  
                                   

Total cash equivalents

    9,052             9,052     7,561             7,561  
                                   

Available-for-Sale Investments

                                                 

Debt securities:

                                                 
 

Time deposits

    8             8     8             8  
 

Foreign bonds

    336     60         396     315     58         373  
 

Corporate bonds and other debt securities

    76         (22 )   54     89         (30 )   59  
                                   

Total debt securities

    420     60     (22 )   458     412     58     (30 )   440  
                                   

Equity securities in public companies

    3     2         5     5     4         9  
                                   

Total cash equivalents and available-for-sale investments

  $ 9,475   $ 62   $ (22 ) $ 9,515   $ 7,978   $ 62   $ (30 ) $ 8,010  
                                   

        Cash equivalents consist of investments in time deposits, commercial paper and money market funds with original maturities of ninety days or less. Time deposits were primarily issued by institutions outside the U.S. as of April 30, 2011 and October 31, 2010. Available-for-sale securities consist of short-term investments which mature within twelve months or less and long-term investments with maturities longer than twelve months. Investments include primarily time deposits, fixed-interest securities, and institutional bonds. HP estimates the fair values of its investments based on quoted market prices or pricing models using current market rates. These estimated fair values may not be representative of actual values that will be realized in the future.

        The gross unrealized loss as of April 30, 2011 was due primarily to declines in certain debt securities and included $22 million that has been in a continuous loss position for more than twelve months. The gross unrealized loss as of October 31, 2010 was due primarily to declines in the fair value of certain debt securities and included $28 million that has been in a continuous loss position for more than twelve months. HP does not intend to sell these debt securities, and it is not likely that HP will be required to sell these debt securities prior to the recovery of the amortized cost. In the three and six months ended April 30, 2011, HP did not recognize any impairment charge associated with debt securities. In the three and six months ended April 30, 2010, HP recognized an impairment charge of $2 million associated with debt securities.

        Contractual maturities of short-term and long-term investments in available-for-sale securities at April 30, 2011 were as follows:

 
  Available-for-Sale
Securities
 
 
  April 30, 2011  
 
  Cost   Estimated
Fair Value
 
 
  In millions
 

Due in 1-5 years

  $ 11   $ 11  

Due in more than five years

    409     447  
           

 

  $ 420   $ 458  
           

        A summary of the carrying values and balance sheet classification of all short-term and long-term investments in debt and equity securities as of April 30, 2011 and October 31, 2010 was as follows:

 
  April 30,
2011
  October 31,
2010
 
 
  In millions
 

Available-for-sale debt securities

  $   $ 5  
           
 

Included in Other current assets

        5  
           

Available-for-sale debt securities

    458     435  

Available-for-sale equity securities

    5     9  

Equity securities in privately-held companies

    51     154  

Other investments

    9     9  
           
 

Included in long-term financing receivables and other assets

    523     607  
           

Total investments

  $ 523   $ 612  
           

        Equity securities in privately held companies include cost basis and equity method investments. Other investments include marketable trading securities. HP includes gains or losses from changes in fair value of these securities, offset by losses or gains on the related liabilities, in Interest and other, net, in HP's Consolidated Condensed Statements of Earnings. The net impact associated with these securities was not material for the three and six months ended April 30, 2011 and 2010.

  • Derivative Financial Instruments

        HP is a global company that is 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 fair values of assets and liabilities. HP does not have any leveraged derivatives and does not use derivative contracts for speculative purposes. HP designates its derivatives 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 derivatives, on a gross basis, in the Consolidated Condensed Balance Sheets at fair value and reports them in Other current assets, Long-term financing receivables and other assets, Other accrued liabilities, or Other liabilities. HP classifies cash flows from the derivative programs as operating activities in the Consolidated Condensed Statements of Cash Flows.

        As a result of the use of derivative instruments, HP is exposed to the risk that counterparties to derivative contracts will fail to meet their contractual obligations. To mitigate the counterparty credit risk, HP has a policy of only entering into contracts with carefully selected major financial institutions based upon their credit ratings and other factors, and HP maintains dollar and term limits that correspond to each institution's credit rating. HP's established policies and procedures for mitigating credit risk on principal transactions and short-term cash include reviewing and establishing limits for credit exposure and continually assessing the creditworthiness of counterparties. Master agreements with counterparties include master netting arrangements as further mitigation of credit exposure to counterparties. These arrangements permit HP to net amounts due from HP to a counterparty with amounts due to HP from the same counterparty.

        To further mitigate credit exposure to counterparties, HP may enter into collateral security arrangements with its counterparties. These arrangements require HP to post collateral or to hold collateral from counterparties when the derivative fair values exceed contractually established thresholds. As of April 30, 2011, the fair value of all derivative instruments under these collateralized arrangements were in a net asset position of approximately $40 million for which approximately $30 million of U.S. Treasury securities have been deposited to a third-party custodian by the counterparties.

        Certain of HP's derivative instruments contain credit risk-related contingent features, such as provisions whereby HP and the counterparties to the derivative instruments could request collateralization on derivative instruments in net liability positions if HP's or the counterparties' credit ratings fall below certain thresholds. As of April 30, 2011 and 2010, HP was not required to post any collateral, and HP did not have any derivative instruments with credit risk-related contingent features that were in a significant net liability position.

  • Fair Value Hedges

        HP enters into fair value hedges to reduce the exposure of its debt portfolio to interest rate risk. HP issues long-term debt in U.S. dollars based on market conditions at the time of financing. HP uses interest rate swaps to mitigate the market risk exposures in connection with the debt to achieve 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 returns into variable interest returns and would classify these swaps as fair value hedges. For derivative instruments that are designated and qualify as fair value hedges, HP recognizes the gain or loss on the derivative instrument, as well as the offsetting loss or gain on the hedged item, in Interest and other, net in the Consolidated Condensed Statements of Earnings in the current period.

  • Cash Flow Hedges

        HP uses a combination of forward contracts and options 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 expense, and intercompany lease loan denominated in currencies other than the U.S. dollar. HP's foreign currency cash flow hedges mature generally within six to twelve months. However, certain leasing revenue-related forward contracts and intercompany lease loan forward contracts extend for the duration of the lease term, which can be up to five years. For derivative instruments that are designated and qualify as cash flow hedges, HP initially records the effective portion of the gain or loss on the derivative instrument in accumulated other comprehensive income or loss as a separate component of stockholders' equity 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 cash flow hedges in the same financial statement line item as the changes in value of the hedged item. During the three and six months ended April 30, 2011 and 2010, HP did not discontinue any cash flow hedge for which it was probable that a forecasted transaction would not occur.

  • 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. These derivative instruments are designated as net investment hedges and, as such, HP records the effective portion of the gain or loss on the derivative instrument together with changes in the hedged items in cumulative translation adjustment as a separate component of stockholders' equity.

  • Other Derivatives

        Other derivatives not designated as hedging instruments consist primarily of forward contracts HP uses to hedge foreign currency balance sheet exposures. HP also uses total return swaps and, to a lesser extent, interest rate swaps, based on the equity and fixed income indices, to hedge its executive deferred compensation plan liability. For derivative instruments not designated as hedging instruments, HP recognizes changes in the fair values in earnings in the period of change. HP recognizes the gain or loss on foreign currency forward contracts used to hedge balance sheet exposures in Interest and other, net in the same period as the remeasurement gain and loss of the related foreign currency denominated assets and liabilities. HP recognizes the gain or loss on the total return swaps and interest rate swaps in Interest and other, net in the same period as the gain or loss from the change in market value of the executive deferred compensation plan liability.

  • Hedge Effectiveness

        For interest rate swaps designated as fair value hedges, HP measures effectiveness by offsetting the change in fair value of the hedged debt 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, as well as amounts not included in the assessment of effectiveness, in the Consolidated Condensed Statements of Earnings. As of April 30, 2011 and 2010, the portion of hedging instruments' gain or loss excluded from the assessment of effectiveness was not material 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 six months ended April 30, 2011 and 2010.

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

        As discussed in Note 7, HP estimates the fair values of derivatives primarily based on pricing models using current market rates and records all derivatives on the balance sheet at fair value. The gross notional and fair value of derivative financial instruments in the Consolidated Condensed Balance Sheets were recorded as follows:

 
  As of April 30, 2011   As of October 31, 2010  
 
  Gross
Notional(1)
  Other
Current
Assets
  Long-term
Financing
Receivables and
Other Assets
  Other
Accrued
Liabilities
  Other
Liabilities
  Gross
Notional(1)
  Other
Current
Assets
  Long-term
Financing
Receivables and
Other Assets
  Other
Accrued
Liabilities
  Other
Liabilities
 
 
  In millions
 

Derivatives designated as hedging instruments

                                                             

Fair value hedges:

                                                             
 

Interest rate contracts

  $ 8,575   $   $ 453   $   $   $ 8,575   $   $ 656   $   $  

Cash flow hedges:

                                                             
 

Foreign exchange contracts

    17,689     62     3     898     199     16,862     98     20     503     83  

Net investment hedges:

                                                             
 

Foreign exchange contracts

    1,519     2     1     86     82     1,466     8     2     58     62  
                                           

Total derivatives designated as hedging instruments

    27,783     64     457     984     281     26,903     106     678     561     145  
                                           

Derivatives not designated as hedging instruments

                                                             

Foreign exchange contracts

    11,679     37     3     283     51     13,701     51     3     129     55  

Interest rate contracts(2)

    2,200         54         63     2,200         79         89  

Other derivatives

    427     8     13             397     5     6          
                                           

Total derivatives not designated as hedging instruments

    14,306     45     70     283     114     16,298     56     88     129     144  
                                           

Total derivatives

  $ 42,089   $ 109   $ 527   $ 1,267   $ 395   $ 43,201   $ 162   $ 766   $ 690   $ 289  
                                           

(1)
Represents the face amounts of contracts that were outstanding as of April 30, 2011 and October 31, 2010, respectively.

(2)
Represents offsetting swaps acquired through previous business combinations that were not designated as hedging instruments.
  • Effect of Derivative Instruments on the Consolidated Condensed Statements of Earnings

        The before-tax effect of a derivative instrument and related hedged item in a fair value hedging relationship for the three and six months ended April 30, 2011 and 2010 were as follows:

 
  Gain (Loss) Recognized in Income on Derivative and Related Hedged Item  
Derivative Instrument
  Location   Three
months
ended
April 30,
2011
  Six
months
ended
April 30,
2011
  Hedged Item   Location   Three
months
ended
April 30,
2011
  Six
months
ended
April 30,
2011
 
 
   
  In millions
   
   
  In millions
 

Interest rate contracts

  Interest and other, net   $ (25 ) $ (203 )   Fixed-rate debt   Interest and other, net   $ 27   $ 201  

 

 
  Gain (Loss) Recognized in Income on Derivative and Related Hedged Item  
Derivative Instrument
  Location   Three
months
ended
April 30,
2010
  Six
months
ended
April 30,
2010
  Hedged Item   Location   Three
months
ended
April 30,
2010
  Six
months
ended
April 30,
2010
 
 
   
  In millions
   
   
  In millions
 

Interest rate contracts

  Interest and other, net   $ 18   $ 27     Fixed-rate debt   Interest and other, net   $ (15 ) $ (24 )

        The before-tax effect of derivative instruments in cash flow and net investment hedging relationships for the three and six months ended April 30, 2011 were as follows:

 
  Gain (Loss)
Recognized in
Other
Comprehensive
Income ("OCI")
on Derivative
(Effective
Portion)
  Gain (Loss) Reclassified from
Accumulated OCI Into Income
(Effective Portion)
  Gain Recognized in
Income on Derivative(1)
(Ineffective portion
and Amount Excluded
from Effectiveness Testing)
 
 
  Three
months
ended
April 30,
2011
  Six
months
ended
April 30,
2011
  Location   Three
months
ended
April 30,
2011
  Six
months
ended
April 30,
2011
  Location   Three
months
ended
April 30,
2011
  Six
months
ended
April 30,
2011
 
 
  In millions
   
  In millions
   
  In millions
 

Cash flow hedges:

                                             
 

Foreign exchange contracts

  $ (780 ) $ (680 )

Net revenue

  $ (296 ) $ (320 )

Net revenue

  $   $  
 

Foreign exchange contracts

    27     18  

Cost of products

    (4 )   22  

Cost of products

         
 

Foreign exchange contracts

    7     5  

Other operating expenses

    1     2  

Other operating expenses

         
 

Foreign exchange contracts

    (36 )   (20 )

Interest and other, net

    (39 )   (32 )

Interest and other, net

         
 

Foreign exchange contracts

    11     (2 )

Net revenue

    2     6  

Interest and other, net

    1     3  
                                   
   

Total cash flow hedges

  $ (771 ) $ (679 )     $ (336 ) $ (322 )     $ 1   $ 3  
                                   

Net investment hedges:

                                             
 

Foreign exchange contracts

  $ (92 ) $ (97 )

Interest and other, net

  $   $  

Interest and other, net

  $   $  
                                   

(1)
Amount of gain recognized in income on derivative represents a $1 million gain and $3 million gain related to the amount excluded from the assessment of hedge effectiveness in the three and six months ended April 30, 2011, respectively.

        The before-tax effect of derivative instruments in cash flow and net investment hedging relationships for the three and six months ended April 30, 2010 were as follows:

 
  Gain (Loss)
Recognized in
OCI on Derivative
(Effective Portion)
  Gain (Loss) Reclassified from
Accumulated OCI Into Income
(Effective Portion)
  Gain Recognized in
Income on Derivative(1)
(Ineffective portion
and Amount Excluded
from Effectiveness Testing)
 
 
  Three
months
ended
April 30,
2010
  Six
months
ended
April 30,
2010
  Location   Three
months
ended
April 30,
2010
  Six
months
ended
April 30,
2010
  Location   Three
months
ended
April 30,
2010
  Six
months
ended
April 30,
2010
 
 
  In millions
   
  In millions
   
  In millions
 

Cash flow hedges:

                                             
 

Foreign exchange contracts

  $ 230   $ 655  

Net revenue

  $ 188   $ 58  

Net revenue

  $   $  
 

Foreign exchange contracts

    (12 )   (7 )

Cost of products

    12     27  

Cost of products

         
 

Foreign exchange contracts

         

Other operating expenses

        1  

Other operating expenses

         
 

Foreign exchange contracts

    (5 )   1  

Interest and other, net

    (4 )    

Interest and other, net

         
 

Foreign exchange contracts

    25     36  

Net revenue

    7     15  

Interest and other, net

    2     6  
                                   
   

Total cash flow hedges

  $ 238   $ 685       $ 203   $ 101       $ 2   $ 6  
                                   

Net investment hedges:

                                             
 

Foreign exchange contracts

  $ (47 ) $ (44 )

Interest and other, net

  $   $  

Interest and other, net

  $   $  
                                   

(1)
Amount of gain recognized in income on derivative represents a $2 million gain and $6 million gain related to the amount excluded from the assessment of hedge effectiveness in the three and six months ended April 30, 2010, respectively.

        HP expects to reclassify a net accumulated other comprehensive loss of approximately $444 million, net of taxes, to earnings in the next twelve months along with the earnings effects of the related forecasted transactions in association with cash flow hedges.

        The before-tax effect of derivative instruments not designated as hedging instruments on the Consolidated Condensed Statements of Earnings for the three and six months ended April 30, 2011 and 2010 were as follows:

 
  Gain (Loss) Recognized in Income on Derivative  
 
  Location   Three months
ended
April 30,
2011
  Six months
ended
April 30,
2011
 
 
   
  In millions
 

Foreign exchange contracts

  Interest and other, net   $ (621 ) $ (698 )

Other derivatives

  Interest and other, net     12     10  

Interest rate contracts

  Interest and other, net     1     3  
               

Total

      $ (608 ) $ (685 )
               

 

 
  Gain (Loss) Recognized in Income on Derivative  
 
  Location   Three months
ended
April 30,
2010
  Six months
ended
April 30,
2010
 
 
   
  In millions
 

Foreign exchange contracts

  Interest and other, net   $ (129 ) $ (63 )

Other derivatives

  Interest and other, net     13     2  

Interest rate contracts

  Interest and other, net     6     5  
               

Total

      $ (110 ) $ (56 )
               
  • Other Financial Instruments

        For the balance of HP's financial instruments, accounts receivable, financing receivables, notes payable and short-term borrowings, accounts payable and other accrued liabilities, the carrying amounts approximate fair value due to their short maturities. The estimated fair value and carrying value of HP's short- and long-term debt was approximately $18.6 billion at April 30, 2011. The estimated fair value of HP's short- and long-term debt was approximately $22.5 billion at October 31, 2010, compared to a carrying value of $22.3 billion at that date. The estimated fair value of the debt is based primarily on quoted market prices, as well as borrowing rates currently available to HP for bank loans with similar terms and maturities.