10-Q 1 a2218511z10-q.htm 10-Q

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549



FORM 10-Q

(Mark One)    

ý

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended: January 31, 2014

Or

o

 

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



HEWLETT-PACKARD COMPANY
(Exact name of registrant as specified in its charter)

Delaware   94-1081436
(State or other jurisdiction of
incorporation or organization)
  (I.R.S. employer
identification no.)

3000 Hanover Street, Palo Alto, California

 

94304
(Address of principal executive offices)   (Zip code)

(650) 857-1501
(Registrant's telephone number, including area code)



        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 (the "Exchange Act") 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 ý    No o

        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 ý    No o

        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.

Large accelerated filer ý   Accelerated filer o   Non-accelerated filer o
(Do not check if a smaller
reporting company)
  Smaller reporting company o

        Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act).    Yes o    No ý

        The number of shares of HP common stock outstanding as of February 28, 2014 was 1,895,120,816 shares.


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HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
INDEX

 
   
   
  Page  

Part I.

  Financial Information        

  Item 1.  

Financial Statements

    4  

     

Consolidated Condensed Statements of Earnings for the three months ended January 31, 2014 and 2013 (Unaudited)

    4  

     

Consolidated Condensed Statements of Comprehensive Income for the three months ended January 31, 2014 and 2013 (Unaudited)

    5  

     

Consolidated Condensed Balance Sheets as of January 31, 2014 (Unaudited) and as of October 31, 2013 (Audited)

    6  

     

Consolidated Condensed Statements of Cash Flows for the three months ended January 31, 2014 and 2013 (Unaudited)

    7  

     

Notes to Consolidated Condensed Financial Statements (Unaudited)

    8  

  Item 2.  

Management's Discussion and Analysis of Financial Condition and Results of Operations

    57  

  Item 3.  

Quantitative and Qualitative Disclosures About Market Risk

    93  

  Item 4.  

Controls and Procedures

    93  

Part II.

  Other Information        

  Item 1.  

Legal Proceedings

    94  

  Item 1A.  

Risk Factors

    94  

  Item 2.  

Unregistered Sales of Equity Securities and Use of Proceeds

    94  

  Item 5.  

Other Information

    94  

  Item 6.  

Exhibits

    94  

Signature

    95  

Exhibit Index

    96  

Forward-Looking Statements

        This Quarterly Report on Form 10-Q, including "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Item 2 of Part I, 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 Hewlett-Packard Company 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 revenue, margins, expenses, HP's effective tax rate, net earnings, net earnings per share, cash flows, benefit plan funding, share repurchases, currency exchange rates or other financial items; any projections of the amount, timing or impact of cost savings or restructuring charges; any statements of the plans, strategies and objectives of management for future operations, including the execution of restructuring plans and any resulting revenue or cost savings 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; 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 and plans for future operations; the impact of macroeconomic and geopolitical trends and events; the need to manage third-party suppliers and the distribution of HP's products and services effectively; the protection of HP's intellectual property assets, including intellectual property licensed from third parties; risks associated with HP's

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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 execution, timing and results of restructuring plans, including estimates and assumptions related to the cost and the anticipated benefits of implementing those 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 II of this report, and that are otherwise described or updated from time to time in HP's Securities and Exchange Commission reports, including HP's Annual Report on Form 10-K for the fiscal year ended October 31, 2013. HP assumes no obligation and does not intend to update these forward-looking statements.

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PART I. FINANCIAL INFORMATION

Item 1.    Financial Statements.

        

HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Consolidated Condensed Statements of Earnings

(Unaudited)

 
  Three months ended
January 31
 
 
  2014   2013  
 
  In millions, except
per share amounts

 

Net revenue:

             

Products

  $ 18,770   $ 18,270  

Services

    9,281     9,971  

Financing income

    103     118  
           

Total net revenue

    28,154     28,359  
           

Costs and expenses:

             

Cost of products

    14,525     14,031  

Cost of services

    7,139     7,918  

Financing interest

    72     80  

Research and development

    811     794  

Selling, general and administrative

    3,210     3,300  

Amortization of intangible assets

    283     350  

Restructuring charges

    114     130  

Acquisition-related charges

    3     4  
           

Total operating expenses

    26,157     26,607  
           

Earnings from operations

    1,997     1,752  
           

Interest and other, net

    (163 )   (179 )
           

Earnings before taxes

    1,834     1,573  

Provision for taxes

    (409 )   (341 )
           

Net earnings

  $ 1,425   $ 1,232  
           
           

Net earnings per share:

             

Basic

  $ 0.75   $ 0.63  
           
           

Diluted

  $ 0.74   $ 0.63  
           
           

Cash dividends declared per share

  $ 0.29   $ 0.26  

Weighted-average shares used to compute net earnings per share:

             

Basic

    1,907     1,953  
           
           

Diluted

    1,935     1,956  
           
           

   

The accompanying notes are an integral part of these Consolidated Condensed Financial Statements.

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HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Consolidated Condensed Statements of Comprehensive Income

(Unaudited)

 
  Three months
ended
January 31
 
 
  2014   2013  
 
  In millions
 

Net earnings

  $ 1,425   $ 1,232  
           

Other comprehensive income (loss) before tax:

             

Change in unrealized (losses) gains on available-for-sale securities:

             

Unrealized (losses) gains arising during the period

    (1 )   3  

(Gains) losses reclassified into earnings

    (1 )    
           

    (2 )   3  
           

Change in unrealized gains (losses) on cash flow hedges:

             

Unrealized gains (losses) arising during the period

    70     (314 )

Losses (gains) reclassified into earnings

    109     64  
           

    179     (250 )
           

Change in unrealized components of defined benefit plans:

             

Amortization of actuarial loss and prior service benefit

    63     83  

Curtailments, settlements and other

        13  
           

    63     96  
           

Change in cumulative translation adjustment

    (24 )   (26 )
           

Other comprehensive income (loss) before taxes

    216     (177 )

(Provision) benefit for taxes

    (105 )   64  
           

Other comprehensive income (loss), net of tax

    111     (113 )
           

Comprehensive income

  $ 1,536   $ 1,119  
           
           

   

The accompanying notes are an integral part of these Consolidated Condensed Financial Statements.

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HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Consolidated Condensed Balance Sheets

 
  As of  
 
  January 31,
2014
  October 31,
2013
 
 
  In millions, except par value
 
 
  (Unaudited)
   
 

ASSETS

             

Current assets:

             

Cash and cash equivalents

  $ 16,165   $ 12,163  

Accounts receivable

    13,492     15,876  

Financing receivables

    3,054     3,144  

Inventory

    6,004     6,046  

Other current assets

    11,969     13,135  
           

Total current assets

    50,684     50,364  
           

Property, plant and equipment

    11,259     11,463  

Long-term financing receivables and other assets

    9,131     9,556  

Goodwill

    31,131     31,124  

Intangible assets

    2,820     3,169  
           

Total assets

  $ 105,025   $ 105,676  
           
           

LIABILITIES AND STOCKHOLDERS' EQUITY

             

Current liabilities:

             

Notes payable and short-term borrowings

  $ 6,621   $ 5,979  

Accounts payable

    12,640     14,019  

Employee compensation and benefits

    3,171     4,436  

Taxes on earnings

    1,224     1,203  

Deferred revenue

    6,754     6,477  

Accrued restructuring

    630     901  

Other accrued liabilities

    12,571     12,506  
           

Total current liabilities

    43,611     45,521  
           

Long-term debt

    17,971     16,608  

Other liabilities

    15,294     15,891  

Commitments and contingencies

             

Stockholders' equity:

             

HP stockholders' equity

             

Preferred stock, $0.01 par value (300 shares authorized; none issued)

         

Common stock, $0.01 par value (9,600 shares authorized; 1,899 and 1,908 shares issued and outstanding, respectively)

    19     19  

Additional paid-in capital

    4,966     5,465  

Retained earnings

    26,436     25,563  

Accumulated other comprehensive loss

    (3,667 )   (3,778 )
           

Total HP stockholders' equity

    27,754     27,269  

Non-controlling interests

    395     387  
           

Total stockholders' equity

    28,149     27,656  
           

Total liabilities and stockholders' equity

  $ 105,025   $ 105,676  
           
           

   

The accompanying notes are an integral part of these Consolidated Condensed Financial Statements.

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HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Consolidated Condensed Statements of Cash Flows

(Unaudited)

 
  Three months
ended January 31
 
 
  2014   2013  
 
  In millions
 

Cash flows from operating activities:

             

Net earnings

  $ 1,425   $ 1,232  

Adjustments to reconcile net earnings to net cash provided by operating activities:

             

Depreciation and amortization

    1,117     1,163  

Stock-based compensation expense

    170     184  

Provision for doubtful accounts

    (4 )   32  

Provision for inventory

    61     92  

Restructuring charges

    114     130  

Deferred taxes on earnings

    9     500  

Excess tax benefit from stock-based compensation

    (27 )    

Other, net

    (33 )   167  

Changes in operating assets and liabilities:

             

Accounts receivable

    2,391     2,148  

Financing receivables

    296     98  

Inventory

    (19 )   (149 )

Accounts payable

    (1,165 )   (1,690 )

Taxes on earnings

    170     (423 )

Restructuring

    (381 )   (237 )

Other assets and liabilities

    (1,134 )   (685 )
           

Net cash provided by operating activities

    2,990     2,562  
           

Cash flows from investing activities:

             

Investment in property, plant and equipment

    (997 )   (633 )

Proceeds from sale of property, plant and equipment

    450     127  

Purchases of available-for-sale securities and other investments

    (135 )   (299 )

Maturities and sales of available-for-sale securities and other investments

    465     161  
           

Net cash used in investing activities

    (217 )   (644 )
           

Cash flows from financing activities:

             

Issuance (repayment) of commercial paper and notes payable, net

    2     (105 )

Issuance of debt

    2,005     45  

Payment of debt

    (45 )   (114 )

Issuance of common stock under employee stock plans

    83     55  

Repurchase of common stock

    (565 )   (253 )

Excess tax benefit from stock-based compensation

    27      

Cash dividends paid

    (278 )   (258 )
           

Net cash provided by (used in) financing activities

    1,229     (630 )
           

Increase in cash and cash equivalents

    4,002     1,288  

Cash and cash equivalents at beginning of period

    12,163     11,301  
           

Cash and cash equivalents at end of period

  $ 16,165   $ 12,589  
           
           

Supplemental schedule of non-cash investing and financing activities:

             

Purchase of assets under capital leases

  $ 95   $ 2  

   

The accompanying notes are an integral part of these Consolidated Condensed Financial Statements.

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HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Notes to Consolidated Condensed Financial Statements

(Unaudited)

Note 1: Basis of Presentation

        In the opinion of management, the accompanying unaudited Consolidated Condensed Financial Statements of Hewlett-Packard Company and its consolidated subsidiaries ("HP") contain all adjustments, including normal recurring adjustments, necessary to present fairly HP's financial position as of January 31, 2014 and October 31, 2013 and its results of operations and cash flows for the three months ended January 31, 2014 and January 31, 2013.

        The results of operations and cash flows for the three months ended January 31, 2014 are not necessarily indicative of the results to be expected for the full year. The information included in this Quarterly Report on Form 10-Q should be read in conjunction with HP's Annual Report on Form 10-K for the fiscal year ended October 31, 2013, including "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Quantitative and Qualitative Disclosures About Market Risk" and the Consolidated Financial Statements and notes thereto included in Items 7, 7A and 8, respectively, included therein.

        The accompanying unaudited Consolidated Condensed Financial Statements include the accounts of HP and other subsidiaries and affiliates in which HP has a controlling financial interest. Non-controlling interests are presented as a separate component within Total stockholder's equity in the Consolidated Condensed Balance Sheets. Net earnings attributable to the non-controlling interests are eliminated within Interest and other, net in the Consolidated Condensed Statements of Earnings and are not presented separately as they were not material for any period presented. HP has eliminated all significant intercompany accounts and transactions.

    Use of Estimates

        The preparation of financial statements in accordance with U.S. generally accepted accounting principles ("GAAP") requires management to make estimates and assumptions that affect the amounts reported in HP's Consolidated Condensed Financial Statements and accompanying notes. Actual results could differ materially from those estimates.

    Segment Reorganization

        HP has implemented certain segment and business unit realignments in order to align its segment financial reporting more closely with its current business structure. Prior year segment and business unit financial information have been made to conform to the current-year presentation. None of the changes impacts HP's previously reported consolidated net revenue, earnings from operations, net earnings or net earnings per share. See Note 16 for a further discussion of HP's segment reorganization.

    Accounting Pronouncements

        In July 2013, the Financial Accounting Standards Board ("FASB") issued a new accounting standard requiring the presentation of certain unrecognized tax benefits as reductions to deferred tax assets rather than as liabilities in the Consolidated Condensed Balance Sheets when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. HP will be required to adopt this new standard on a prospective basis in the first quarter of fiscal 2015; however, early adoption is

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HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 1: Basis of Presentation (Continued)

permitted as is retrospective application. HP is currently evaluating the timing, transition method and impact of this new standard on its Consolidated Condensed Financial Statements.

Note 2: Stock-Based Compensation

        HP's stock-based compensation plans include HP's principal equity plans as well as various equity plans assumed through business combinations. HP's principal equity plans permit the issuance of restricted stock awards, stock options and performance-based awards.

        Stock-based compensation expense and the resulting tax benefits were as follows:

 
  Three months
ended
January 31,
2014
  Three months
ended
January 31,
2013
 
 
  In millions
 

Stock-based compensation expense

  $ 170   $ 184  

Income tax benefit

    (53 )   (57 )
           

Stock-based compensation expense, net of tax

  $ 117   $ 127  
           
           

    Restricted Stock Awards

        Restricted stock awards are non-vested stock awards that include grants of restricted stock and grants of restricted stock units. For the three months ended January 31, 2014, HP granted only restricted stock units.

        Non-vested restricted stock awards as of January 31, 2014, and changes during the three months ended January 31, 2014 were as follows:

 
  Three months ended
January 31, 2014
 
 
  Shares   Weighted-
Average
Grant Date
Fair Value
Per Share
 
 
  In thousands
   
 

Outstanding at beginning of period

    32,262   $ 21  

Granted

    21,013   $ 27  

Vested

    (11,918 ) $ 24  

Forfeited

    (557 ) $ 21  
             

Outstanding at end of period

    40,800   $ 23  
             
             

        At January 31, 2014, there was $692 million of unrecognized pre-tax stock-based compensation expense related to non-vested restricted stock awards, which HP expects to recognize over the remaining weighted-average vesting period of 1.6 years.

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HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 2: 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 that are granted under its principal equity plans. 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:

 
  Three months
ended
January 31
 
 
  2014   2013  

Weighted-average fair value of grants per option(1)

  $ 7.45   $ 4.01  

Expected volatility(2)

    34 %   42 %

Risk-free interest rate(3)

    1.79 %   0.98 %

Expected dividend yield(4)

    2.15 %   3.77 %

Expected term in months(5)

    69     70  

(1)
The fair value calculation was based on stock options granted during the period.

(2)
For the three months ended January 31, 2014, expected volatility for stock options subject to service-based vesting was determined using implied volatility from traded options on HP's stock whereas for performance-contingent stock options, expected volatility was determined using historical volatility. For the three months ended January 31, 2013, expected volatility for stock options subject to service-based vesting and performance-contingent stock options was determined using implied volatility from traded options on HP's stock.

(3)
The risk-free interest rate was determined using the yield on U.S. Treasury zero-coupon issues.

(4)
The expected dividend yield was determined using a constant dividend yield during the expected term of the option.

(5)
For stock options subject to service-based vesting, expected term was determined using historical exercise and post-vesting termination patterns; and for performance-contingent stock options, expected term represents an output from the lattice model.

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HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 2: Stock-Based Compensation (Continued)

        Option activity as of January 31, 2014, and changes during the three months ended January 31, 2014 were as follows:

 
  Three months ended January 31, 2014  
 
  Shares   Weighted-
Average
Exercise
Price
  Weighted-
Average
Remaining
Contractual
Term
  Aggregate
Intrinsic
Value
 
 
  In thousands
   
  In years
  In millions
 

Outstanding at beginning of period

    84,042   $ 27              

Granted

    8,600   $ 27              

Exercised

    (2,240 ) $ 17              

Forfeited/cancelled/expired

    (18,362 ) $ 32              
                         

Outstanding at end of period

    72,040   $ 26     5.0   $ 481  
                         
                         

Vested and expected to vest at end of period

    66,593   $ 26     4.8   $ 432  
                         
                         

Exercisable at end of period

    34,307   $ 33     2.9   $ 138  
                         
                         

        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 January 31, 2014. The aggregate intrinsic value is the difference between HP's closing stock price on the last trading day of the first quarter of fiscal 2014 and the exercise price, multiplied by the number of in-the-money options. Total intrinsic value of options exercised for the three months ended January 31, 2014 was $24 million.

        At January 31, 2014, there was $135 million of unrecognized pre-tax, stock-based compensation expense related to stock options, which HP expects to recognize over the remaining weighted-average vesting period of 2.2 years.

Note 3: Net Earnings Per Share

        HP calculates basic net earnings per share ("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, stock options and performance-based restricted units.

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HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 3: Net Earnings Per Share (Continued)

        The reconciliations of the numerators and denominators of each of the basic and diluted net EPS calculations were as follows:

 
  Three months
ended January 31
 
 
  2014   2013  
 
  In millions, except
per share amounts

 

Numerator:

             

Net earnings(1)

  $ 1,425   $ 1,232  
           
           

Denominator:

             

Weighted-average shares used to compute basic net EPS

    1,907     1,953  

Dilutive effect of employee stock plans

    28     3  
           

Weighted-average shares used to compute diluted net EPS

    1,935     1,956  
           
           

Net earnings per share:

             

Basic

  $ 0.75   $ 0.63  

Diluted

  $ 0.74   $ 0.63  

(1)
Net earnings available to participating securities were not significant for the three months ended January 31, 2014 and 2013. HP considers restricted stock that provides the holder with a non-forfeitable right to receive dividends to be a participating security.

        HP excludes options with exercise prices that are greater than the average market price from the calculation of diluted net EPS because their effect would be anti-dilutive. In the three months ended January 31, 2014 and 2013, HP excluded from the calculation of diluted net EPS options to purchase 30 million shares and 74 million shares, respectively. In addition, HP also excluded from the calculation of diluted net EPS options to purchase an additional 7 million shares and 12 million shares, respectively, as their combined exercise price, unamortized fair value and excess tax benefits were greater in each of those periods than the average market price for HP's stock.

Note 4: Balance Sheet Details

      Balance sheet details were as follows:

    Accounts Receivable, Net

 
  January 31,
2014
  October 31,
2013
 
 
  In millions
 

Accounts receivable

  $ 13,760   $ 16,208  

Allowance for doubtful accounts

    (268 )   (332 )
           

  $ 13,492   $ 15,876  
           
           

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HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 4: Balance Sheet Details (Continued)

 
  Three months ended
January 31, 2014
 
 
  In millions
 

Allowance for doubtful accounts—accounts receivable:

       

Balance at beginning of period

  $ 332  

Provision for doubtful accounts

    (11 )

Deductions, net of recoveries

    (53 )
       

Balance at end of period

  $ 268  
       
       

        HP has third-party financing arrangements consisting of revolving short-term financing intended to facilitate the working capital requirements of certain customers. These financing arrangements, which in one case provides for partial recourse, result in a transfer of HP's trade receivables and risk to the third party. As these transfers qualify for sales accounting treatment, the trade receivables are derecognized from the Consolidated Condensed Balance Sheets upon transfer, and HP receives a payment for the trade receivables from the third party within a mutually agreed upon time period. For the arrangement involving an element of recourse, the recourse obligation is measured using market data from similar transactions and reported as a current liability in the Consolidated Condensed Balance Sheets. The recourse obligations as of January 31, 2014 and October 31, 2013 were not material.

        For both periods ended January 31, 2014 and 2013, $1.5 billion of trade receivables were sold under these facilities, which approximates the amount of cash received. The resulting costs associated with the sales of trade accounts receivable for both periods were not material. The maximum program capacity and available program capacity under these arrangements were as follows:

 
  January 31,
2014
  October 31,
2013
 
 
  In millions
 

Non-recourse arrangements:

             

Aggregate maximum program capacity

  $ 759   $ 764  

Aggregate available capacity

  $ 451   $ 450  

Aggregate utilized capacity

  $ 308   $ 314  

Partial-recourse arrangement:

             

Maximum program capacity

  $ 637   $ 631  

Available capacity

  $ 172   $ 177  

Utilized capacity

  $ 465   $ 454  

Total arrangements:

             

Aggregate maximum program capacity

  $ 1,396   $ 1,395  

Aggregate available capacity

  $ 623   $ 627  

Aggregate utilized capacity

  $ 773   $ 768  

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Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 4: Balance Sheet Details (Continued)

    Inventory

 
  January 31,
2014
  October 31,
2013
 
 
  In millions
 

Finished goods

  $ 3,757   $ 3,847  

Purchased parts and fabricated assemblies

    2,247     2,199  
           

  $ 6,004   $ 6,046  
           
           

    Property, Plant and Equipment

 
  January 31,
2014
  October 31,
2013
 
 
  In millions
 

Land

  $ 553   $ 626  

Buildings and leasehold improvements

    8,876     8,942  

Machinery and equipment, including equipment held for lease

    16,737     16,565  
           

    26,166     26,133  
           

Accumulated depreciation

    (14,907 )   (14,670 )
           

  $ 11,259   $ 11,463  
           
           

        For the three months ended January 31, 2014, the change in gross property, plant and equipment was due primarily to investments of $878 million, which were partially offset by sales and retirements totaling $766 million. Accumulated depreciation associated with assets sold or retired was $560 million.

Note 5: Goodwill and Intangible Assets

    Goodwill

        Goodwill allocated to HP's reportable segments as of January 31, 2014 and changes in the carrying amount of goodwill during the three months ended January 31, 2014 are as follows:

 
  Personal
Systems
  Printing   Enterprise
Group
  Enterprise
Services(2)
  Software   HP
Financial
Services
  Corporate
Investments
  Total  
 
  In millions
 

Balance at beginning of period(1)

  $ 2,588   $ 2,591   $ 16,864   $ 97   $ 8,840   $ 144   $   $ 31,124  

Goodwill adjustments

            8     (1 )               7  
                                   

Balance at end of period(1)

  $ 2,588   $ 2,591   $ 16,872   $ 96   $ 8,840   $ 144   $   $ 31,131  
                                   
                                   

(1)
Goodwill at January 31, 2014 and October 31, 2013 is net of accumulated impairment losses of $14,518 million. Of that amount, $7,961 million relates to the Enterprise Services ("ES") segment, $5,744 million relates to Software, and the remaining $813 million relates to Corporate Investments.

(2)
Goodwill at January 31, 2014 and October 31, 2013 relates to the MphasiS Limited reporting unit.

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HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 5: Goodwill and Intangible Assets (Continued)

        Effective at the beginning of its first quarter of fiscal 2014, HP implemented certain organizational changes to align its segment financial reporting more closely with its current business structure. As a result of the organizational realignments, which are described in detail in Note 16, goodwill has been reclassified to the respective segments as of the beginning of the period using a relative fair value approach.

        Goodwill is tested for impairment at the reporting unit level. At the beginning of its first quarter of fiscal 2014, HP made a change to its reporting units. In connection with continued operational synergies and interdependencies between the Enterprise Servers, Storage and Networking reporting unit and the Technology Services ("TS") reporting unit within the Enterprise Group ("EG") segment, HP combined these reporting units to create the EG reporting unit. As of January 31, 2014 our reporting units are consistent with the reportable segments identified in Note 16, except for ES, which includes two reporting units: MphasiS Limited; and the remainder of ES.

        HP will continue to evaluate the recoverability of 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.

    Intangible Assets

        HP's intangible assets associated with completed acquisitions are composed of:

 
  January 31, 2014   October 31, 2013  
 
  Gross   Accumulated
Amortization
  Accumulated
Impairment
Loss
  Net   Gross   Accumulated
Amortization
  Accumulated
Impairment
Loss
  Net  
 
  In millions
 

Customer contracts, customer lists and distribution agreements

  $ 5,321   $ (2,847 ) $ (856 ) $ 1,618   $ 5,321   $ (2,709 ) $ (856 ) $ 1,756  

Developed and core technology and patents

    5,265     (2,089 )   (2,138 )   1,038     5,331     (1,966 )   (2,138 )   1,227  

Trade name and trade marks

    1,730     (233 )   (1,336 )   161     1,730     (211 )   (1,336 )   183  

In-process research and development

    3             3     3             3  
                                   

Total intangible assets

  $ 12,319   $ (5,169 ) $ (4,330 ) $ 2,820   $ 12,385   $ (4,886 ) $ (4,330 ) $ 3,169  
                                   
                                   

        For the first three months of fiscal 2014, the majority of the decrease in gross intangible assets was related to the sale of a portfolio of intellectual property.

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HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 5: Goodwill and Intangible Assets (Continued)

        Estimated future amortization expense related to finite-lived intangible assets at January 31, 2014 is as follows:

Fiscal year:
  In millions  

2014 (remaining 9 months)

  $ 715  

2015

    864  

2016

    645  

2017

    237  

2018

    145  

2019

    110  

Thereafter

    101  
       

Total

  $ 2,817  
       
       

Note 6: Restructuring Charges

    Summary of Restructuring Plans

        HP's restructuring activities summarized by plan for the three months ended January 31, 2014 were as follows:

 
   
   
   
   
   
  As of January 31,
2014
 
 
   
  Three months
ended
January 31,
2014
Charges
   
   
   
 
 
  Balance,
October 31,
2013
  Cash
Payments
  Other
Adjustments
and Non-Cash
Settlements
  Balance,
January 31,
2014
  Total
Costs
Incurred
to Date
  Total
Expected
Costs to Be
Incurred
 
 
  In millions
 

Fiscal 2012 Plan:

                                           

Severance and EER

  $ 945   $ 59   $ (333 ) $ 4   $ 675   $ 3,095   $ 3,500  

Infrastructure and other

    40     56     (35 )       61     303     600  
                               

Total 2012 Plan

    985     115     (368 )   4     736     3,398     4,100  

Other Plans:

                                           

Severance

    10         (2 )       8     2,629     2,629  

Infrastructure

    122     (1 )   (11 )       110     1,438     1,443  
                               

Total Other Plans

    132     (1 )   (13 )       118     4,067     4,072  
                               

Total restructuring plans

  $ 1,117   $ 114   $ (381 ) $ 4   $ 854   $ 7,465   $ 8,172  
                               
                               

        At January 31, 2014 and October 31, 2013, HP included the short-term portion of the restructuring liability of $630 million and $901 million, respectively, in Accrued restructuring, and the long-term portion of $224 million and $216 million, respectively, in Other liabilities in the accompanying Consolidated Condensed Balance Sheets. The timing of associated cash payments is dependent upon the type of restructuring charge and can extend over a multi-year period.

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HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 6: Restructuring Charges (Continued)

    Fiscal 2012 Restructuring Plan

        On May 23, 2012, HP adopted a multi-year restructuring plan (the "2012 Plan") designed to simplify business processes, accelerate innovation and deliver better results for customers, employees and stockholders. HP estimates that it will eliminate approximately 34,000 positions in connection with the 2012 Plan through fiscal year 2014, with a portion of those employees exiting the company as part of voluntary enhanced early retirement ("EER") programs in the United States and in certain other countries. HP estimates it will recognize approximately $4.1 billion in aggregate charges in connection with the 2012 Plan. HP expects to record these charges through the end of HP's 2014 fiscal year as the accounting recognition criteria are met. HP expects approximately $3.5 billion to relate to workforce reductions, including the EER programs, and approximately $0.6 billion to relate to infrastructure, including data center and real estate consolidation, and other items. As of January 31, 2014, HP had eliminated approximately 28,300 positions for which a severance payment has been or will be made as part of the 2012 Plan. The severance and infrastructure related cash payments associated with the 2012 Plan are expected to be paid out through fiscal 2021.

    Other Plans

        Restructuring plans initiated by HP in fiscal 2008 and 2010 have been substantially completed as of January 31, 2014, with $5 million of restructuring charges anticipated in future periods. HP estimates it will recognize approximately $4.1 billion in aggregate charges in connection with these plans. The severance and infrastructure-related cash payments associated with the other plans are expected to be paid out through fiscal 2019.

Note 7: 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.

    Fair Value Hierarchy

        Valuation techniques used by HP are based upon observable and unobservable inputs. Observable or market inputs reflect market data obtained from independent sources, while unobservable inputs reflect HP's assumptions about market participant assumptions based on the best information available. Assets and liabilities are classified in the fair value hierarchy based on the lowest level input that is significant to the fair value measurement:

        Level 1—Quoted prices (unadjusted) in active markets for identical assets or liabilities.

        Level 2—Quoted prices in active markets for similar assets or liabilities, quoted prices for identical or similar assets or liabilities in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

        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.

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Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 7: Fair Value (Continued)

        The following table presents HP's assets and liabilities that are measured at fair value on a recurring basis:

 
  As of January 31, 2014   As of October 31, 2013  
 
  Fair Value
Measured Using
   
  Fair Value
Measured Using
   
 
 
  Total
Balance
  Total
Balance
 
 
  Level 1   Level 2   Level 3   Level 1   Level 2   Level 3  
 
  In millions
 

Assets

                                                 

Time deposits

  $   $ 3,385   $   $ 3,385   $   $ 2,221   $   $ 2,221  

Money market funds

    9,627             9,627     6,819             6,819  

Mutual funds

        359         359         313         313  

Marketable equity securities

    8     7         15     10     5         15  

Foreign bonds

    9     385         394     9     387         396  

Other debt securities

        2     46     48         2     47     49  

Derivatives:

                                                 

Interest rate contracts

        141         141         156         156  

Foreign exchange contracts

        556         556         284     3     287  

Other derivatives

        3         3         9         9  
                                   

Total assets

  $ 9,644   $ 4,838   $ 46   $ 14,528   $ 6,838   $ 3,377   $ 50   $ 10,265  
                                   
                                   

Liabilities

                                                 

Derivatives:

                                                 

Interest rate contracts

  $   $ 116   $   $ 116   $   $ 107   $   $ 107  

Foreign exchange contracts

        447     5     452         547     2     549  

Other derivatives

        4         4                  
                                   

Total liabilities

  $   $ 567   $ 5   $ 572   $   $ 654   $ 2   $ 656  
                                   
                                   

        For the three months ended January 31, 2014, there were no transfers between levels within the fair value hierarchy.

    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 net asset value, or models utilizing market observable inputs. The fair value of debt instruments were based on quoted market prices or model driven valuations using inputs primarily derived from or corroborated by observable market data, and in certain instances internally developed valuation models that utilize assumptions which cannot be corroborated with observable market data.

        Derivative Instruments:    As discussed in Note 8, HP holds forwards, swaps and options to hedge certain foreign currency and interest rate exposures. When prices in active markets are not available for the identical asset or liability, HP uses industry standard valuation models to measure fair value. Where

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Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 7: Fair Value (Continued)

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.

    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 upon observable market inputs using interest rates currently 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 Condensed 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 approximately $24.8 billion at January 31, 2014, compared to its carrying value of $24.6 billion at that date. The estimated fair value of HP's short- and long-term debt was approximately $22.7 billion at October 31, 2013, compared to its carrying value of $22.6 billion at that date. If measured at fair value in the Consolidated Condensed 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 in other accrued liabilities, the carrying amounts approximate fair value due to their short maturities. If measured at fair value in the Consolidated Condensed Balance Sheets, these other financial instruments would be classified in 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.

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Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 8: Financial Instruments

    Cash Equivalents and Available-for-Sale Investments

        Cash equivalents and available-for-sale investments as of January 31, 2014 and October 31, 2013 were as follows:

 
  January 31, 2014   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

  $ 3,338   $   $   $ 3,338   $ 2,207   $   $   $ 2,207  

Money market funds

    9,627             9,627     6,819             6,819  

Mutual funds

    261             261     13             13  
                                   

Total cash equivalents

    13,226             13,226     9,039             9,039  
                                   

Available-for-Sale Investments

                                                 

Debt securities:

                                                 

Time deposits

    47             47     14             14  

Foreign bonds

    307     87         394     310     86         396  

Other debt securities

    63         (15 )   48     64         (15 )   49  
                                   

Total debt securities

    417     87     (15 )   489     388     86     (15 )   459  
                                   

Equity securities:

                                                 

Mutual funds

    98             98     300             300  

Equity securities in public companies

    8     3         11     5     6         11  
                                   

Total equity securities

    106     3         109     305     6         311  
                                   

Total available-for-sale investments

    523     90     (15 )   598     693     92     (15 )   770  
                                   

Total cash equivalents and available-for-sale investments

  $ 13,749   $ 90   $ (15 ) $ 13,824   $ 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 January 31, 2014 and October 31, 2013, the carrying value of cash equivalents approximates fair value due to the short period of time to maturity. Time deposits were primarily issued by institutions outside the United States as of January 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.

        The gross unrealized loss of $15 million as of January 31, 2014 and October 31, 2013 was due primarily to a decline in the fair value of a debt security that has been in a continuous loss position for more than twelve months. HP does not intend to sell this debt security, and it is not likely that HP will be required to sell this debt security prior to the recovery of the amortized cost.

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HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 8: Financial Instruments (Continued)

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

 
  January 31,
2014
 
 
  Cost   Fair
Value
 
 
  In millions
 

Due in one to five years

  $ 34   $ 34  

Due in more than five years

    383     455  
           

  $ 417   $ 489  
           
           

        Equity securities in privately held companies include cost basis and equity method investments. These amounted to $49 million and $50 million at January 31, 2014 and October 31, 2013, respectively, and are included in Long-term financing receivables and other assets in the Consolidated Condensed Balance Sheets.

    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 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 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 upon 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

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Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 8: Financial Instruments (Continued)

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 on the derivatives' net liability position. Such funds are generally transferred within two business days of the due date.

        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 January 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 interest rate risk and achieve 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 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 period of change.

    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 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 the effective portion of the gain or loss on 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 months ended January 31, 2014, HP did not discontinue any cash flow hedge for which it was probable that a forecasted transaction would not occur. During the three months ended January 31, 2013 there was no significant impact to results of operations as a result of discontinued cash flow hedges.

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Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 8: Financial Instruments (Continued)

    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 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 HP uses 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 the gain or loss 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 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 changes in the fair value of amounts 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.

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HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 8: Financial Instruments (Continued)

    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, 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

  $ 12,350   $ 14   $ 127   $   $ 116   $ 11,100   $ 31   $ 125   $   $ 107  

Cash flow hedges:

                                                             

Foreign exchange contracts

    22,035     226     60     234     106     22,463     79     40     341     80  

Net investment hedges:

                                                             

Foreign exchange contracts

    1,957     60     67     7     9     1,920     30     40     20     12  
                                           

Total derivatives designated as hedging instruments

    36,342     300     254     241     231     35,483     140     205     361     199  
                                           

Derivatives not designated as hedging instruments

                                                             

Foreign exchange contracts

    12,652     98     45     64     32     16,048     72     26     76     20  

Other derivatives

    310     2     1     4         344     8     1          
                                           

Total derivatives not designated as hedging instruments

    12,962     100     46     68     32     16,392     80     27     76     20  
                                           

Total derivatives

  $ 49,304   $ 400   $ 300   $ 309   $ 263   $ 51,875   $ 220   $ 232   $ 437   $ 219  
                                           
                                           

(1)
Represents the amount of contracts that were outstanding as of January 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 under its collateral security agreements. As of January 31, 2014 and October 31, 2013 information related to

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HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 8: Financial Instruments (Continued)

the potential effect of HP's master netting agreements and collateral security agreements were as follows:

 
  As of January 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

  $ 700   $   $ 700   $ 363   $ 180   $ 157  

Derivative liabilities

  $ 572   $   $ 572   $ 363   $ 155 (1) $ 54  

(1)
Of the $155 million of collateral posted, $62 million was through re-use of counterparty cash collateral and $93 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 a fair value hedging relationship for the three months ended January 31, 2014 and 2013 were as follows:

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

Interest rate contracts

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

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HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 8: Financial Instruments (Continued)


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

Interest rate contracts

  Interest and other, net   $ (99 ) Fixed-rate debt   Interest and other, net   $ 98  

        The pre-tax effect of derivative instruments in cash flow and net investment hedging relationships for the three months ended January 31, 2014 and 2013 were 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
January 31, 2014
  Location   Three months
ended January 31,
2014
 
 
  In millions
   
  In millions
 

Cash flow hedges:

                 

Foreign exchange contracts

  $ 175   Net revenue   $ (63 )

Foreign exchange contracts

    (87 ) Cost of products     (23 )

Foreign exchange contracts

      Other operating expenses     (4 )

Foreign exchange contracts

    (18 ) Interest and other, net     (19 )
               

Total cash flow hedges

  $ 70       $ (109 )
               
               

Net investment hedges:

                 

Foreign exchange contracts

  $ 66   Interest and other, net   $  
               
               

 

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

Cash flow hedges:

                 

Foreign exchange contracts

  $ (199 ) Net revenue   $ (57 )

Foreign exchange contracts

    (125 ) Cost of products     (3 )

Foreign exchange contracts

    8   Other operating expenses     1  

Foreign exchange contracts

    2   Interest and other, net     (5 )
               

Total cash flow hedges

  $ (314 )     $ (64 )
               
               

Net investment hedges:

                 

Foreign exchange contracts

  $ (15 ) Interest and other, net   $  
               
               

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HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 8: Financial Instruments (Continued)

        As of January 31, 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. As of January 31, 2013, 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 months ended January 31, 2014 and 2013.

        As of January 31, 2014, HP expects to reclassify an estimated net Accumulated other comprehensive loss of approximately $28 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 Condensed Statements of Earnings for the three months ended January 31, 2014 and 2013 were as follows:

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

Foreign exchange contracts

  Interest and other, net   $ 190  

Other derivatives

  Interest and other, net     (10 )

Interest rate contracts

  Interest and other, net      
           

Total

      $ 180  
           
           

 

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

Foreign exchange contracts

  Interest and other, net   $ (40 )

Other derivatives

  Interest and other, net     7  

Interest rate contracts

  Interest and other, net     2  
           

Total

      $ (31 )
           
           

Note 9: Financing Receivables and Operating Leases

        Financing receivables represent sales-type and direct-financing leases resulting from the placement of HP and third-party products. These receivables typically have terms from two to five years and are usually collateralized by a security interest in the underlying assets. Financing receivables also include billed receivables from operating leases. The components of financing receivables, which are included

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HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 9: Financing Receivables and Operating Leases (Continued)

in Financing receivables, net and Long-term financing receivables and other assets in the accompanying Consolidated Condensed Balance Sheets, were as follows:

 
  January 31,
2014
  October 31,
2013
 
 
  In millions
 

Minimum lease payments receivable

  $ 7,198   $ 7,505  

Unguaranteed residual value

    249     252  

Unearned income

    (597 )   (604 )
           

Financing receivables, gross

    6,850     7,153  

Allowance for doubtful accounts

    (132 )   (131 )
           

Financing receivables, net

    6,718     7,022  

Less current portion

    (3,054 )   (3,144 )
           

Amounts due after one year, net

  $ 3,664   $ 3,878  
           
           

    Credit Quality Indicators

        Due to the homogenous nature of its leasing transactions, HP manages its financing receivables on an aggregate basis when assessing and monitoring credit risk. Credit risk is generally diversified due to the large number of entities comprising HP's customer base and their dispersion across many different industries and geographical regions. HP evaluates the credit quality of an obligor at lease inception and monitors that credit quality over the term of a transaction. HP assigns risk ratings to each lease based on the creditworthiness of the obligor and other variables that augment or mitigate the inherent credit risk of a particular transaction. Such variables include the underlying value and liquidity of the collateral, the essential use of the equipment, the term of the lease, and the inclusion of guarantees, letters of credit, security deposits or other credit enhancements.

        The credit risk profile of gross financing receivables, based on internally assigned ratings, was as follows:

 
  January 31,
2014
  October 31,
2013
 
 
  In millions
 

Risk Rating

             

Low

  $ 3,724   $ 3,948  

Moderate

    3,000     3,084  

High

    126     121  
           

Total

  $ 6,850   $ 7,153  
           
           

        Accounts rated low risk typically have the equivalent of a Standard & Poor's rating of BBB- or higher, while accounts rated moderate risk generally have the equivalent of BB+ or lower. HP classifies accounts as high risk when it considers the financing receivable to be impaired or when management believes that there is a near-term risk of impairment.

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HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 9: Financing Receivables and Operating Leases (Continued)

    Allowance for Doubtful Accounts

        The allowance for doubtful accounts for financing receivables is comprised of a general reserve and a specific reserve. HP maintains general reserve percentages on a regional basis and bases such percentages on several factors, including consideration of historical credit losses and portfolio delinquencies, trends in the overall weighted-average risk rating of the portfolio, current economic conditions and information derived from competitive benchmarking. HP excludes accounts evaluated as part of the specific reserve from the general reserve analysis. HP establishes a specific reserve for leases with identified exposures, such as customer defaults, bankruptcy or other events, that make it unlikely that HP will recover its investment in the lease. For individually evaluated receivables, HP determines the expected cash flow for the receivable, which includes consideration of estimated proceeds from disposition of the collateral, and calculates an estimate of the potential loss and the probability of loss. For those accounts where a loss is probable, HP records a specific reserve. HP generally records a write-off or specific reserve when an account reaches 180 days past due, or sooner if HP determines that the account is not collectible.

        The allowance for doubtful accounts for financing receivables as of January 31, 2014, and changes during the three months ended January 31, 2014 were as follows:

 
  Three months ended
January 31, 2014
 
 
  In millions
 

Balance at beginning of period

  $ 131  

Provision for doubtful accounts

    7  

Deductions, net of recoveries

    (6 )
       

Balance at end of period

  $ 132  
       
       

        The allowance and related gross financing receivables collectively and individually evaluated for loss were as follows:

 
  January 31,
2014
  October 31,
2013
 
 
  In millions
 

Allowance for financing receivables collectively evaluated for loss

  $ 93   $ 95  

Allowance for financing receivables individually evaluated for loss

    39     36  
           

Total

  $ 132   $ 131  
           
           

Gross financing receivables collectively evaluated for loss

  $ 6,510   $ 6,773  

Gross financing receivables individually evaluated for loss

    340     380  
           

Total

  $ 6,850   $ 7,153  
           
           

    Non-Accrual and Past-Due Financing Receivables

        HP considers a financing receivable to be past due when the minimum payment is not received by the contractually specified due date. HP generally places financing receivables on non-accrual status

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HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 9: Financing Receivables and Operating Leases (Continued)

(suspension of interest accrual) and considers such receivables to be non-performing at the earlier of the time at which full payment of principal and interest becomes doubtful or the receivable becomes contractually 90 days past due. Subsequently, HP may recognize revenue on non-accrual financing receivables as payments are received (i.e., on a cash basis) if HP deems the recorded financing receivable to be fully collectible; however, if there is doubt regarding the ultimate collectability of the recorded financing receivable, HP applies all cash receipts to reduce the carrying amount of the financing receivable (i.e., the cost recovery method). In certain circumstances, such as when HP deems a delinquency to be of an administrative nature, financing receivables may accrue interest after they reach 90 days past due. The non-accrual status of a financing receivable may not impact a customer's risk rating. After all of a customer's delinquent principal and interest balances are settled, HP may return the related financing receivable to accrual status.

        The following table summarizes the aging and non-accrual status of gross financing receivables:

 
  January 31,
2014
  October 31,
2013
 
 
  In millions
 

Billed(1):

             

Current 1-30 days

  $ 242   $ 217  

Past due 31-60 days

    38     50  

Past due 61-90 days

    24     15  

Past due >90 days

    56     46  

Unbilled sales-type and direct-financing lease receivables

    6,490     6,825  
           

Total gross financing receivables

  $ 6,850   $ 7,153  
           
           

Gross financing receivables on non-accrual status(2)

  $ 191   $ 199  
           
           

Gross financing receivables 90 days past due and still accruing interest(2)

  $ 149   $ 181  
           
           

(1)
Includes billed operating lease receivables and billed sales-type and direct-financing lease receivables.

(2)
Includes billed operating lease receivables and billed and unbilled sales-type and direct-financing lease receivables.

    Operating Leases

        Operating lease assets included in machinery and equipment in the Consolidated Condensed Balance Sheets were as follows:

 
  January 31,
2014
  October 31,
2013
 
 
  In millions
 

Equipment leased to customers

  $ 3,751   $ 3,822  

Accumulated depreciation

    (1,404 )   (1,452 )
           

Operating lease assets, net

  $ 2,347   $ 2,370  
           
           

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Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 10: Guarantees

    Guarantees

        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.

        HP has entered into service contracts with certain of its clients that are supported by financing arrangements. If a service contract is terminated as a result of HP's non-performance under the contract or failure to comply with the terms of the financing arrangement, HP could, under certain circumstances, be required to acquire certain assets related to the service contract. HP believes the likelihood of it being required to acquire a material amount of assets under these arrangements is remote.

    Indemnifications

        In the ordinary course of business, HP enters into contractual arrangements under which HP may agree to indemnify the 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 against claims of intellectual property infringement made by third parties arising from the vendor's use of HP's software products and certain other matters. Such indemnification obligations may not be subject to maximum loss clauses. Historically, payments made related to these indemnifications have been immaterial.

    Warranty

        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, ongoing product failure rates, as well as specific product class failures outside of HP's baseline experience, affect the estimated warranty obligation.

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Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 10: Guarantees (Continued)

        HP's aggregate product warranty liabilities as of January 31, 2014, and changes during the three months ended January 31, 2014 were as follows:

 
  Three months ended
January 31, 2014
 
 
  In millions
 

Balance at beginning of period

  $ 2,031  

Accruals for warranties issued

    447  

Adjustments related to pre-existing warranties (including changes in estimates)

    7  

Settlements made (in cash or in kind)

    (481 )
       

Balance at end of period

  $ 2,004  
       
       

Note 11: Borrowings

    Notes Payable and Short-Term Borrowings

        Notes payable and short-term borrowings, including the current portion of long-term debt, were as follows:

 
  January 31, 2014   October 31, 2013  
 
  Amount
Outstanding
  Weighted-
Average
Interest
Rate
  Amount
Outstanding
  Weighted-
Average
Interest
Rate
 
 
  In millions
   
  In millions
   
 

Current portion of long-term debt

  $ 5,882     2.7 % $ 5,226     2.8 %

Commercial paper(1)

    308     0.4 %   327     0.4 %

Notes payable to banks, lines of credit and other(1)

    431     3.7 %   426     1.7 %
                       

  $ 6,621         $ 5,979        
                       
                       

(1)
Commercial paper includes $308 million and $327 million and Notes payable to banks, lines of credit and other includes $389 million and $368 million at January 31, 2014 and October 31, 2013, respectively, of borrowing and funding-related activity associated with HP Financial Services ("HPFS") and its subsidiaries.

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Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 11: Borrowings (Continued)

    Long-Term Debt

        Long-term debt was as follows:

 
  January 31,
2014
  October 31,
2013
 
 
  In millions
 

U.S. Dollar Global Notes

             

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

  $ 499   $ 499  

$750 issued at discount to par at a price of 99.932% in March 2008 at 5.5%, due March 2018

    750     750  

$2,000 issued at discount to par at a price of 99.561% in December 2008 at 6.125%, paid March 2014

    2,000     1,999  

$1,500 issued at discount to par at a price of 99.993% in February 2009 at 4.75%, due June 2014

    1,500     1,500  

2009 Shelf Registration Statement:

             

$1,100 issued at discount to par at a price of 99.887% in September 2010 at 2.125%, due September 2015

    1,100     1,100  

$650 issued at discount to par at a price of 99.911% in December 2010 at 2.2%, due December 2015

    650     650  

$1,350 issued at discount to par at a price of 99.827% in December 2010 at 3.75%, due December 2020

    1,349     1,349  

$500 issued at par in May 2011 at three-month USD LIBOR plus 0.4%, due May 2014

    500     500  

$500 issued at discount to par at a price of 99.971% in May 2011 at 1.55%, due May 2014

    500     500  

$1,000 issued at discount to par at a price of 99.958% in May 2011 at 2.65%, due June 2016

    1,000     1,000  

$1,250 issued at discount to par at a price of 99.799% in May 2011 at 4.3%, due June 2021

    1,248     1,248  

$750 issued at discount to par at a price of 99.977% in September 2011 at 2.35%, due March 2015

    750     750  

$1,300 issued at discount to par at a price of 99.784% in September 2011 at 3.0%, due September 2016

    1,298     1,298  

$1,000 issued at discount to par at a price of 99.816% in September 2011 at 4.375%, due September 2021

    999     999  

$1,200 issued at discount to par at a price of 99.863% in September 2011 at 6.0%, due September 2041

    1,198     1,198  

$350 issued at par in September 2011 at three-month USD LIBOR plus 1.55%, due September 2014

    350     350  

$650 issued at discount to par at a price of 99.946% in December 2011 at 2.625%, due December 2014

    650     650  

$850 issued at discount to par at a price of 99.790% in December 2011 at 3.3%, due December 2016

    849     849  

$1,500 issued at discount to par at a price of 99.707% in December 2011 at 4.65%, due December 2021

    1,496     1,496  

$1,500 issued at discount to par at a price of 99.985% in March 2012 at 2.6%, due September 2017

    1,500     1,500  

$500 issued at discount to par at a price of 99.771% in March 2012 at 4.05%, due September 2022

    499     499  

2012 Shelf Registration Statement:

             

$750 issued at par in January 2014 at three-month USD LIBOR plus 0.94%, due January 2019

    750      

$1,250 issued at discount to par at a price of 99.954% in January 2014 at 2.75%, due January 2019

    1,249      
           

    22,684     20,684  

EDS Senior Notes

             

$300 issued October 1999 at 7.45%, due October 2029

    314     314  

Other, including capital lease obligations, at 0.00%-8.50%, due in calendar years 2014-2024(1)

    740     689  

Fair value adjustment related to hedged debt

    115     147  

Less: current portion

    (5,882 )   (5,226 )
           

Total long-term debt

  $ 17,971   $ 16,608  
           
           

(1)
Other, including capital lease obligations includes $211 million and $244 million at January 31, 2014 and October 31, 2013, respectively, of borrowing and funding-related activity associated with HPFS and its subsidiaries that are collateralized by receivables and underlying assets associated with the related capital and operating leases. For both the periods presented, the carrying amount of the assets approximated the carrying amount of the borrowings.

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Table of Contents


HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 11: Borrowings (Continued)

        As disclosed in Note 8, HP uses interest rate swaps to mitigate interest rate risk in connection with certain fixed-rate global notes in order to achieve primarily U.S. dollar LIBOR-based floating interest expense. The interest rates in the table above have not been adjusted to reflect the impact of any interest rate swaps.

        HP may redeem some or all of the fixed-rate U.S. Dollar Global Notes and EDS Senior Notes set forth in the above table at any time in accordance with the terms thereof. The U.S. Dollar Global Notes are senior unsecured debt.

        In May 2012, HP filed a shelf registration statement (the "2012 Shelf Registration Statement") with the Securities Exchange Commission ("SEC") to enable the company to offer for sale, from time to time, in one or more offerings, an unspecified amount of debt securities, common stock, preferred stock, depositary shares and warrants. The 2012 Shelf Registration Statement replaced the registration statement filed in May 2009.

        HP's Board of Directors has authorized the issuance of up to $16.0 billion in aggregate principal amount of commercial paper by HP. HP's subsidiaries are authorized to issue up to an additional $1.0 billion in aggregate principal amount of commercial paper. HP maintains two commercial paper programs, and a wholly-owned subsidiary maintains a third program. HP's U.S. program provides for the issuance of U.S. dollar-denominated commercial paper up to a maximum aggregate principal amount of $16.0 billion. HP's euro commercial paper program, which was established in September 2012, 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 $3.0 billion or the equivalent in those alternative currencies. The combined aggregate principal amount of commercial paper outstanding under those programs at any one time cannot exceed the $16.0 billion authorized by HP's Board of Directors. The HP subsidiary's Euro Commercial Paper/Certificate of Deposit Programme provides for the issuance of commercial paper in various currencies of up to a maximum aggregate principal amount of $500 million.

        HP maintains senior unsecured committed credit facilities primarily to support the issuance of commercial paper. HP has a $3.0 billion five-year credit facility that expires in March 2017 and a $4.5 billion four-year credit facility that expires in February 2015. Both facilities support the U.S. commercial paper program and the euro commercial paper program. In addition, the five-year credit facility was amended in September 2012 to permit borrowings in euros and British pounds, with the amounts available in euros and pounds being limited to the U.S. dollar equivalent of $2.2 billion and $300 million, respectively. Commitment fees, interest rates and other terms of borrowing under the credit facilities vary based on HP's external credit ratings. HP's ability to have an outstanding U.S. commercial paper balance that exceeds the $7.5 billion supported by these credit facilities is subject to a number of factors, including liquidity conditions and business performance.

        As of January 31, 2014, HP had the capacity to issue an unspecified amount of additional debt securities, common stock, preferred stock, depositary shares and warrants under the 2012 Shelf Registration Statement. As of that date, HP also had up to $17.6 billion of available borrowing resources, including $16.2 billion in available capacity under its commercial paper programs and $1.4 billion relating to uncommitted lines of credit. The extent to which HP is able to utilize the 2012 Shelf Registration Statement and the commercial paper programs as sources of liquidity at any given

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Table of Contents


HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 11: Borrowings (Continued)

time is subject to a number of factors, including market demand for HP securities and commercial paper, HP's financial performance, HP's credit ratings and market conditions generally.

        Interest expense on borrowings recognized in the Consolidated Condensed Statements of Earnings was as follows:

 
   
  Three months
ended
January 31
 
Expense
  Location   2014   2013  
 
   
  In millions
 

Financing interest

  Financing interest   $ 72   $ 80  

Interest expense

  Interest and other, net     99     122  
               

Total interest expense

      $ 171   $ 202  
               
               

Note 12: Income Taxes

    Provision for Taxes

        HP's effective tax rate was 22.3% and 21.7% for the three months ended January 31, 2014 and 2013, respectively. HP's effective tax rate generally differs from the U.S. federal statutory tax rate of 35% due to favorable tax rates associated with certain earnings from HP's operations in lower-tax jurisdictions throughout the world. HP has not provided U.S. taxes for all foreign earnings because HP plans to reinvest some of those earnings indefinitely outside the United States.

        In the three months ended January 31, 2014, HP recorded $22 million of net tax charges related to discrete items. These amounts included $37 million of various tax charges and $15 million of tax benefits on restructuring charges.

        In the three months ended January 31, 2013, HP recorded $5 million of net tax charges related to discrete items. These amounts consisted primarily of a tax charge of $150 million related to a past uncertain tax position offset by approximately $50 million of various adjustments to estimated tax provisions of foreign jurisdictions as well as $45 million of benefits associated with restructuring charges, various uncertain tax positions and valuation allowance adjustments. In addition, in January 2013, the American Taxpayer Relief Act of 2012 was signed into law. HP recorded a tax benefit of $50 million arising from the retroactive research and development credit provided by that legislation in the first quarter of fiscal 2013.

    Uncertain Tax Positions

        HP is subject to income tax in the United States and approximately 80 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. 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 our 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

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