10-Q 1 a2221140z10-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: July 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 August 31, 2014 was 1,866,275,323 shares.


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HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
INDEX

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 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. HP assumes no obligation and does not intend to update these forward-looking statements.

2


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Part I. Financial Information

ITEM 1.    Financial Statements and Supplementary Data.

Table of Contents

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

  4

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

 
5

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

 
6

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

 
7

Notes to Consolidated Condensed Financial Statements (Unaudited)

 
8

Note 1: Basis of Presentation

 
8

Note 2: Stock-Based Compensation

 
9

Note 3: Net Earnings Per Share

 
11

Note 4: Balance Sheet Details

 
13

Note 5: Goodwill and Intangible Assets

 
16

Note 6: Restructuring Charges

 
18

Note 7: Fair Value

 
19

Note 8: Financial Instruments

 
22

Note 9: Financing Receivables and Operating Leases

 
30

Note 10: Guarantees

 
33

Note 11: Borrowings

 
35

Note 12: Income Taxes

 
38

Note 13: Stockholders' Equity

 
39

Note 14: Retirement and Post-Retirement Benefit Plans

 
42

Note 15: Litigation and Contingencies

 
44

Note 16: Segment Information

 
55

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HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Consolidated Condensed Statements of Earnings

(Unaudited)

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

Net revenue:

                         

Products

  $ 18,190   $ 17,375   $ 54,712   $ 53,103  

Services

    9,295     9,741     28,030     29,722  

Financing income

    100     110     306     342  
                   

Total net revenue

    27,585     27,226     83,048     83,167  
                   

Costs and expenses:

                         

Cost of products

    13,913     13,397     41,902     40,669  

Cost of services

    6,991     7,385     21,301     23,036  

Financing interest

    70     77     211     238  

Research and development

    887     797     2,571     2,406  

Selling, general and administrative

    3,388     3,274     9,989     9,916  

Amortization of intangible assets

    227     356     774     1,056  

Restructuring charges

    649     81     1,015     619  

Acquisition-related charges

    2     4     8     19  
                   

Total operating expenses

    26,127     25,371     77,771     77,959  
                   

Earnings from operations

    1,458     1,855     5,277     5,208  
                   

Interest and other, net

    (145 )   (146 )   (482 )   (518 )
                   

Earnings before taxes

    1,313     1,709     4,795     4,690  

Provision for taxes

    (328 )   (319 )   (1,112 )   (991 )
                   

Net earnings

  $ 985   $ 1,390   $ 3,683   $ 3,699  
                   
                   

Net earnings per share:

                         

Basic

  $ 0.53   $ 0.72   $ 1.95   $ 1.91  
                   
                   

Diluted

  $ 0.52   $ 0.71   $ 1.93   $ 1.89  
                   
                   

Cash dividends declared per share

  $ 0.32   $ 0.29   $ 0.61   $ 0.55  

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

                         

Basic

    1,870     1,929     1,889     1,939  
                   
                   

Diluted

    1,899     1,948     1,913     1,952  
                   
                   

   

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
July 31
  Nine months
ended
July 31
 
 
  2014   2013   2014   2013  
 
  In millions
 

Net earnings

  $ 985   $ 1,390   $ 3,683   $ 3,699  
                   

Other comprehensive income (loss) before taxes:

                         

Change in unrealized gains on available-for-sale securities:

                         

Unrealized gains arising during the period

    7     11     6     33  

Gains reclassified into earnings

        (49 )   (1 )   (49 )
                   

    7     (38 )   5     (16 )
                   

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

                         

Unrealized gains (losses) arising during the period

    134     116     (105 )   (44 )

Losses (gains) reclassified into earnings

    125     (21 )   335     19  
                   

    259     95     230     (25 )
                   

Change in unrealized components of defined benefit plans:               

                         

(Losses) gains arising during the period

    (8 )   30     (119 )   31  

Amortization of actuarial loss and prior service benefit               

    67     78     196     242  

Curtailments, settlements and other

    2     15     42     28  
                   

    61     123     119     301  
                   

Change in cumulative translation adjustment

    (22 )   (99 )   (63 )   (157 )
                   

Other comprehensive income before taxes

    305     81     291     103  

(Provision) benefit for taxes

    (86 )   8     (123 )   23  
                   

Other comprehensive income, net of taxes

    219     89     168     126  
                   

Comprehensive income

  $ 1,204   $ 1,479   $ 3,851   $ 3,825  
                   
                   

   

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  
 
  July 31,
2014
  October 31,
2013
 
 
  In millions, except par value
 
 
  (Unaudited)
   
 

ASSETS

             

Current assets:

             

Cash and cash equivalents

  $ 14,474   $ 12,163  

Accounts receivable

    14,198     15,876  

Financing receivables

    3,130     3,144  

Inventory

    6,249     6,046  

Other current assets

    11,236     13,135  
           

Total current assets

    49,287     50,364  
           

Property, plant and equipment

    11,434     11,463  

Long-term financing receivables and other assets

    8,981     9,556  

Goodwill

    31,132     31,124  

Intangible assets

    2,336     3,169  
           

Total assets

  $ 103,170   $ 105,676  
           
           

LIABILITIES AND STOCKHOLDERS' EQUITY

             

Current liabilities:

             

Notes payable and short-term borrowings

  $ 2,705   $ 5,979  

Accounts payable

    15,141     14,019  

Employee compensation and benefits

    4,038     4,436  

Taxes on earnings

    1,228     1,203  

Deferred revenue

    6,434     6,477  

Accrued restructuring

    828     901  

Other accrued liabilities

    12,102     12,506  
           

Total current liabilities

    42,476     45,521  
           

Long-term debt

    17,128     16,608  

Other liabilities

    14,664     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; 1,865 and 1,908 shares issued and outstanding at July 31, 2014 and October 31, 2013, respectively)

    19     19  

Additional paid-in capital

    4,116     5,465  

Retained earnings

    27,984     25,563  

Accumulated other comprehensive loss

    (3,610 )   (3,778 )
           

Total HP stockholders' equity

    28,509     27,269  

Non-controlling interests

    393     387  
           

Total stockholders' equity

    28,902     27,656  
           

Total liabilities and stockholders' equity

  $ 103,170   $ 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)

 
  Nine months
ended July 31
 
 
  2014   2013  
 
  In millions
 

Cash flows from operating activities:

             

Net earnings

  $ 3,683   $ 3,699  

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

             

Depreciation and amortization

    3,259     3,491  

Stock-based compensation expense

    432     398  

Provision for doubtful accounts

    38     43  

Provision for inventory

    166     222  

Restructuring charges

    1,015     619  

Deferred taxes on earnings

    (129 )   542  

Excess tax benefit from stock-based compensation

    (49 )   (1 )

Other, net

    65     343  

Changes in operating assets and liabilities (net of acquisitions):

             

Accounts receivable

    1,662     2,072  

Financing receivables

    340     568  

Inventory

    (369 )   (445 )

Accounts payable

    1,196     (70 )

Taxes on earnings

    292     (520 )

Restructuring

    (1,050 )   (644 )

Other assets and liabilities

    (919 )   (1,525 )
           

Net cash provided by operating activities

    9,632     8,792  
           

Cash flows from investing activities:

             

Investment in property, plant and equipment

    (2,897 )   (2,280 )

Proceeds from sale of property, plant and equipment

    702     507  

Purchases of available-for-sale securities and other investments

    (1,007 )   (793 )

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

    1,224     874  

Payments made in connection with business acquisitions, net of cash acquired

    (20 )   (167 )
           

Net cash used in investing activities

    (1,998 )   (1,859 )
           

Cash flows from financing activities:

             

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

    86     (170 )

Issuance of debt

    2,005     254  

Payment of debt

    (4,853 )   (3,473 )

Issuance of common stock under employee stock plans

    243     279  

Repurchase of common stock

    (1,978 )   (1,053 )

Excess tax benefit from stock-based compensation

    49     1  

Cash dividends paid

    (875 )   (821 )
           

Net cash used in financing activities

    (5,323 )   (4,983 )
           

Increase in cash and cash equivalents

    2,311     1,950  

Cash and cash equivalents at beginning of period

    12,163     11,301  
           

Cash and cash equivalents at end of period

  $ 14,474   $ 13,251  
           
           

Supplemental schedule of non-cash investing and financing activities:

             

Purchase of assets under capital leases

  $ 113   $ 3  

   

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 July 31, 2014 and October 31, 2013, its results of operations for the three and nine months ended July 31, 2014 and 2013 and its cash flows for the nine months ended July 31, 2014 and 2013.

        The results of operations for the three and nine months ended July 31, 2014 and cash flows for the nine months ended July 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 conformed 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 May 2014, the Financial Accounting Standards Board ("FASB") amended the existing accounting standards for revenue recognition. The amendments are based on the principle that revenue should be recognized to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. HP is required to adopt the amendments in the first quarter of fiscal 2018. Early adoption is not permitted. The amendments may be applied retrospectively to each prior period presented or retrospectively with the cumulative effect recognized as of the date of initial application. HP is

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HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 1: Basis of Presentation (Continued)

currently evaluating the impact of these amendments and the transition alternatives on its Consolidated Financial Statements.

        In April 2014, the FASB issued guidance which changes the criteria for identifying a discontinued operation. The guidance limits the definition of a discontinued operation to the disposal of a component or group of components that is disposed of or is classified as held for sale and represents a strategic shift that has, or will have, a major effect on an entity's operations and financial results. The guidance is effective in the first quarter of fiscal 2016, with early adoption permitted for transactions that have not been reported in financial statements previously issued.

        In July 2013, the 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 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 permitted as is retrospective application. HP expects to adopt the standard in the first fiscal quarter of 2015 on a prospective basis. Adoption of the standard is not expected to have a material effect on HP's Consolidated 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
July 31
  Nine months
ended
July 31
 
 
  2014   2013   2014   2013  
 
  In millions
 

Stock-based compensation expense

  $ 132   $ 107   $ 432   $ 398  

Income tax benefit

    (42 )   (36 )   (138 )   (125 )
                   

Stock-based compensation expense, net of tax

  $ 90   $ 71   $ 294   $ 273  
                   
                   

    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 nine months ended July 31, 2014, HP granted only restricted stock units.

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HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 2: Stock-Based Compensation (Continued)

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

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

Outstanding at beginning of period

    32,262   $ 21  

Granted

    25,042   $ 28  

Vested

    (13,428 ) $ 24  

Forfeited

    (2,702 ) $ 22  
             

Outstanding at end of period

    41,174   $ 24  
             
             

        At July 31, 2014, there was $587 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 1.5 years.

    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. 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
July 31
  Nine months
ended
July 31
 
 
  2014   2013   2014   2013  

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

  $ 7.53   $ 6.53   $ 7.44   $ 4.08  

Expected volatility(2)

    28 %   36 %   33 %   42 %

Risk-free interest rate(3)

    1.65 %   1.14 %   1.78 %   0.98 %

Expected dividend yield(4)

    1.87 %   2.36 %   2.14 %   3.72 %

Expected term in months(5)

    63     62     68     70  

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

(2)
For awards granted in fiscal 2014, expected volatility for stock options subject to service-based vesting was determined using the implied volatility derived from options traded on HP's common stock, whereas for performance-contingent stock options, expected volatility was determined using the historical volatility of HP's common stock. For awards granted in fiscal 2013, expected volatility for stock options subject to service-based vesting and performance-contingent stock options was determined using the implied volatility derived from options traded on HP's common stock.

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HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 2: Stock-Based Compensation (Continued)

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

(4)
The expected dividend yield represents a constant dividend yield applied for the duration of the expected term of the option.

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

        Options outstanding as of July 31, 2014 and changes during the nine months ended July 31, 2014 were as follows:

 
  Nine months ended July 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

    9,363   $ 27              

Exercised

    (8,760 ) $ 18              

Forfeited/cancelled/expired

    (23,434 ) $ 30              
                         

Outstanding at end of period

    61,211   $ 27     4.5   $ 660  
                         
                         

Vested and expected to vest at end of period

    57,123   $ 27     4.3   $ 597  
                         
                         

Exercisable at end of period

    30,784   $ 33     2.4   $ 192  
                         
                         

        The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value that option holders would have realized had all option holders exercised their options on July 31, 2014. The aggregate intrinsic value is the difference between HP's closing stock price on the last trading day of the third 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 and nine months ended July 31, 2014 was $60 million and $117 million, respectively.

        At July 31, 2014, there was $82 million of unrecognized pre-tax stock-based compensation expense related to unvested stock options which HP expects to recognize over the remaining weighted-average vesting period of 2.1 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 awards, stock options and performance-based awards.

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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
July 31
  Nine months
ended
July 31
 
 
  2014   2013   2014   2013  
 
  In millions, except per share amounts
 

Numerator:

                         

Net earnings(1)

  $ 985   $ 1,390   $ 3,683   $ 3,699  
                   
                   

Denominator:

                         

Weighted-average shares used to compute basic net EPS

    1,870     1,929     1,889     1,939  

Dilutive effect of employee stock plans

    29     19     24     13  
                   

Weighted-average shares used to compute diluted net EPS

    1,899     1,948     1,913     1,952  
                   
                   

Net earnings per share:

                         

Basic

  $ 0.53   $ 0.72   $ 1.95   $ 1.91  

Diluted

  $ 0.52   $ 0.71   $ 1.93   $ 1.89  

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

        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. As such, for the three and nine months ended July 31, 2014, HP excluded options to purchase 18 million shares and 19 million shares, respectively, from the calculation of diluted net EPS compared to 43 million shares and 52 million shares for the three and nine months ended July 31, 2013, respectively. HP also excluded options to purchase an additional 0.4 million shares and 8 million shares for the three and nine months ended July 31, 2014, respectively, from the calculation of diluted net EPS compared to an additional 8 million shares and 2 million shares for the three and nine months ended July 31, 2013, respectively, as their combined exercise price, unrecognized compensation and excess tax benefits were greater than the average market price for HP's stock in each of those periods.

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Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)


Note 4: Balance Sheet Details

        Balance sheet details were as follows:

    Accounts Receivable, Net

 
  As of  
 
  July 31,
2014
  October 31,
2013
 
 
  In millions
 

Accounts receivable

  $ 14,451   $ 16,208  

Allowance for doubtful accounts

    (253 )   (332 )
           

  $ 14,198   $ 15,876  
           
           

 

 
  Nine months
ended
July 31, 2014
 
 
  In millions
 

Allowance for doubtful accounts—accounts receivable:

       

Balance at beginning of period

  $ 332  

Provision for doubtful accounts

    14  

Deductions, net of recoveries

    (93 )
       

Balance at end of period

  $ 253  
       
       

        HP has third-party revolving short-term financing arrangements intended to facilitate the working capital requirements of certain customers. In the second quarter of fiscal 2014, HP expanded its financing arrangements, adding $1.6 billion of capacity. These financing arrangements, which in certain cases provide for partial recourse, result in a transfer of HP's trade receivables and collection risk to third parties. Transferred trade receivables are generally derecognized upon transfer to a third party. At July 31, 2014 and October 31, 2013, $449 million and $171 million, respectively, of transferred trade receivables had not been collected from the third parties.

        For the arrangements 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.

        Trade receivables sold and cash received under these facilities was as follows:

 
  Three months
ended July 31
 
 
  2014   2013  
 
  In millions
 

Trade receivables sold

  $ 2,903   $ 1,130  

Cash receipts

  $ 2,922   $ 995  

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HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 4: Balance Sheet Details (Continued)


 
  Nine months
ended July 31
 
 
  2014   2013  
 
  In millions
 

Trade receivables sold

  $ 6,853   $ 3,784  

Cash receipts

  $ 6,575   $ 3,510  

        The aggregate maximum, utilized and available program capacity under these arrangements were as follows:

 
  As of  
 
  July 31,
2014
  October 31,
2013
 
 
  In millions
 

Non-recourse arrangements:

             

Maximum program capacity

  $ 1,122   $ 764  

Utilized capacity(1)

    (692 )   (314 )
           

Available capacity

  $ 430   $ 450  
           

Partial-recourse arrangements:

             

Maximum program capacity

  $ 1,964   $ 631  

Utilized capacity(1)

    (1,408 )   (454 )
           

Available capacity

  $ 556   $ 177  
           

Total arrangements:

             

Maximum program capacity

  $ 3,086   $ 1,395  

Utilized capacity(1)

    (2,100 )   (768 )
           

Available capacity

  $ 986   $ 627  
           
           

(1)
Amount represents receivables sold to the third parties, but not collected from the customer by the third parties. Transferred trade receivables included in the utilized capacity that HP has not collected from third parties are as follows:

 
  As of  
 
  July 31,
2014
  October 31,
2013
 
 
  In millions
 

Non-recourse arrangements

  $ 62   $ 52  

Partial-recourse arrangements

    387     119  
           

Total arrangements

  $ 449   $ 171  
           
           

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HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 4: Balance Sheet Details (Continued)

    Inventory

 
  As of  
 
  July 31,
2014
  October 31,
2013
 
 
  In millions
 

Finished goods

  $ 3,991   $ 3,847  

Purchased parts and fabricated assemblies

    2,258     2,199  
           

  $ 6,249   $ 6,046  
           
           

    Property, Plant and Equipment

 
  As of  
 
  July 31,
2014
  October 31,
2013
 
 
  In millions
 

Land

  $ 552   $ 626  

Buildings and leasehold improvements

    8,976     8,942  

Machinery and equipment, including equipment held for lease

    17,205     16,565  
           

    26,733     26,133  
           

Accumulated depreciation

    (15,299 )   (14,670 )
           

  $ 11,434   $ 11,463  
           
           

        For the nine months ended July 31, 2014, the change in gross property, plant and equipment was due primarily to purchases of $2,936 million, which were partially offset by sales and retirements totaling $2,267 million. Accumulated depreciation associated with the assets sold and retired was $1,816 million.

    Other Liabilities

 
  As of  
 
  July 31,
2014
  October 31,
2013
 
 
  In millions
 

Pension, post-retirement, and post-employment liabilities

  $ 4,653   $ 5,098  

Long-term deferred revenue

    3,865     3,907  

Deferred tax liability—long-term

    1,228     2,668  

Other long-term liabilities

    4,918     4,218  
           

  $ 14,664   $ 15,891  
           
           

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Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)


Note 5: Goodwill and Intangible Assets

    Goodwill

        Goodwill allocated to HP's reportable segments as of July 31, 2014 and changes in the carrying amount of goodwill during the nine months ended July 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 acquired during the period

                    12             12  

Goodwill adjustments

            (6 )   2                 (4 )
                                   

Balance at end of period(1)

  $ 2,588   $ 2,591   $ 16,858   $ 99   $ 8,852   $ 144   $   $ 31,132  
                                   
                                   

(1)
Goodwill at July 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 July 31, 2014 and October 31, 2013 relates to the MphasiS Limited reporting unit.

        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 July 31, 2014, HP's 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 evaluates the recoverability of goodwill as of the beginning of its fourth fiscal quarter and whenever events or changes in circumstances indicate there may be a potential impairment.

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Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 5: Goodwill and Intangible Assets (Continued)

    Intangible Assets

        HP's intangible assets are composed of:

 
  As of July 31, 2014   As of 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

  $ 5,302   $ (3,106 ) $ (856 ) $ 1,340   $ 5,321   $ (2,709 ) $ (856 ) $ 1,756  

Developed and core technology and patents

    4,305     (1,291 )   (2,138 )   876     5,331     (1,966 )   (2,138 )   1,227  

Trade name and trade marks

    1,723     (270 )   (1,336 )   117     1,730     (211 )   (1,336 )   183  

In-process research and development

    3             3     3             3  
                                   

Total intangible assets

  $ 11,333   $ (4,667 ) $ (4,330 ) $ 2,336   $ 12,385   $ (4,886 ) $ (4,330 ) $ 3,169  
                                   
                                   

        During the first nine months of fiscal 2014, $752 million of intangible assets became fully amortized and have been eliminated from gross intangible assets and accumulated amortization. HP also eliminated gross intangible assets and accumulated amortization related to the sale of a portfolio of intellectual property in the first quarter of fiscal 2014.

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

Fiscal year:
  In millions  

2014 (remaining 3 months)

  $ 226  

2015

    865  

2016

    646  

2017

    238  

2018

    146  

2019

    110  

Thereafter

    102  
       

Total

  $ 2,333  
       
       

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Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)


Note 6: Restructuring Charges

    Summary of Restructuring Plans

        HP's restructuring activities summarized by plan were as follows:

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

Fiscal 2012 Plan

                                                 

Severance and EER

  $ 945   $ 562   $ 817   $ (861 ) $ (12 ) $ 889   $ 3,853   $ 4,000  

Infrastructure and other

    40     86     195     (138 )       97     442     500  
                                   

Total 2012 Plan

    985     648     1,012     (999 )   (12 )   986     4,295     4,500  

Other Plans:

                                                 

Severance

    10             (3 )       7     2,629     2,629  

Infrastructure

    122     1     3     (48 )       77     1,442     1,443  
                                   

Total Other Plans

    132     1     3     (51 )       84     4,071     4,072  
                                   

Total restructuring plans

  $ 1,117   $ 649   $ 1,015   $ (1,050 ) $ (12 ) $ 1,070   $ 8,366   $ 8,572  
                                   
                                   

In Balance Sheets:

                                                 

Accrued restructuring

  $ 901                           $ 828              
                                               

Other liabilities

  $ 216                           $ 242              
                                               

    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. As of April 30, 2014, HP estimated that it would eliminate approximately 34,000 positions in connection with the 2012 Plan through fiscal 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. As of April 30, 2014, HP estimated that it would recognize approximately $4.0 billion in aggregate charges in connection with the 2012 Plan.

        In May 2014, HP increased the previously estimated 34,000 positions to be eliminated under the 2012 Plan by an additional 11,000 to 16,000 as HP continues to optimize the workforce and reengineer business processes to be more competitive and meet its objectives. HP estimates it will recognize an additional charge of approximately $500 million based on the low-end of the estimated headcount increase. As a result, as of July 31, 2014, HP estimated that it will eliminate approximately 45,000 to 50,000 positions in connection with the 2012 Plan, including those employees who have exited the company as part of voluntary EER programs in the United States and in certain other countries. HP expects a total of 41,000 positions to be eliminated by the end of fiscal 2014, with the remainder to be eliminated in fiscal 2015. As of July 31, 2014, HP estimated that it would recognize approximately $4.5 billion in aggregate charges in connection with the 2012 Plan based on the low-end of the estimated headcount reduction. HP expects to record these charges through the end of HP's fiscal 2014

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Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 6: Restructuring Charges (Continued)

as the accounting recognition criteria are met. HP expects to incur costs of approximately $4.0 billion related to workforce reductions and approximately $500 million related to infrastructure, including data center and real estate consolidation, and other items. As of July 31, 2014, HP had eliminated approximately 36,000 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 were substantially completed as of July 31, 2014. 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

        HP uses valuation techniques that 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 July 31, 2014   As of October 31, 2013  
 
  Fair Value
Measured Using
   
  Fair Value
Measured Using
   
 
 
  Level 1   Level 2   Level 3   Total   Level 1   Level 2   Level 3   Total  
 
  In millions
 

Assets

                                                 

Time deposits

  $   $ 2,645   $   $ 2,645   $   $ 2,221   $   $ 2,221  

Money market funds

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

Mutual funds

        305         305         313         313  

Marketable equity securities

    14     4         18     10     5         15  

Foreign bonds

    9     386         395     9     387         396  

Other debt securities

        2     47     49         2     47     49  

Derivatives:

                                                 

Interest rate contracts

        91         91         156         156  

Foreign exchange contracts

        354         354         284     3     287  

Other derivatives

        2         2         9         9  
                                   

Total assets

  $ 8,754   $ 3,789   $ 47   $ 12,590   $ 6,838   $ 3,377   $ 50   $ 10,265  
                                   
                                   

Liabilities

                                                 

Derivatives:

                                                 

Interest rate contracts

  $   $ 105   $   $ 105   $   $ 107   $   $ 107  

Foreign exchange contracts

        348     4     352         547     2     549  

Other derivatives

        7         7                  
                                   

Total liabilities

  $   $ 460   $ 4   $ 464   $   $ 654   $ 2   $ 656  
                                   
                                   

        For the nine months ended July 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 was 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:    HP uses forward contracts, interest rate and total return swaps and option contracts 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

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Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 7: Fair Value (Continued)

to measure fair value. Where 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. See Note 8 for a further discussion of HP's use of derivative instruments.

    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 on 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 $20.3 billion at July 31, 2014, compared to its carrying amount of $19.8 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 amount 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 included 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 2 or 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 were as follows:

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

Cash Equivalents

                                                 

Time deposits

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

Money market funds

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

Mutual funds

    143             143     13             13  
                                   

Total cash equivalents

    11,414             11,414     9,039             9,039  
                                   

Available-for-Sale Investments

                                                 

Debt securities:

                                                 

Time deposits

    105             105     14             14  

Foreign bonds

    305     90         395     310     86         396  

Other debt securities

    63         (14 )   49     64         (15 )   49  
                                   

Total debt securities

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

Equity securities:

                                                 

Mutual funds

    162             162     300             300  

Equity securities in public companies

    8     6         14     5     6         11  
                                   

Total equity securities

    170     6         176     305     6         311  
                                   

Total available-for-sale investments

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

Total cash equivalents and available-for-sale investments

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

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

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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:

 
  As of
July 31,
2014
 
 
  Cost   Fair
Value
 
 
  In millions
 

Due in one year

  $ 83   $ 83  

Due in one to five years

    9     9  

Due in more than five years

    381     457  
           

  $ 473   $ 549  
           
           

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

    Derivative Instruments

        HP is a global company exposed to foreign currency exchange rate fluctuations and interest rate changes in the normal course of its business. As part of its risk management strategy, HP uses derivative instruments, primarily forward contracts, option contracts, interest rate swaps, and total return swaps, to hedge certain foreign currency, interest rate and, to a lesser extent, equity exposures. HP's objective is to offset gains and losses resulting from these exposures with losses and gains on the derivative contracts used to hedge them, thereby reducing volatility of earnings or protecting the fair value of assets and liabilities. HP does not have any leveraged derivatives and does not use derivative contracts for speculative purposes. HP may designate its derivative contracts as fair value hedges, cash flow hedges or hedges of the foreign currency exposure of a net investment in a foreign operation ("net investment hedges"). Additionally, for derivatives not designated as hedging instruments, HP categorizes those economic hedges as other derivatives. HP recognizes all derivative instruments at fair value in the Consolidated Condensed Balance Sheets. HP classifies cash flows from its derivative programs as operating activities in the Consolidated Condensed Statements of Cash Flows.

        As a result of its use of derivative instruments, HP is exposed to the risk that its counterparties will fail to meet their contractual obligations. To mitigate counterparty credit risk, HP has a policy of only entering into contracts with carefully selected major financial institutions based on their credit ratings and other factors, and HP maintains dollar risk limits that correspond to each institution's credit rating and other factors. HP's established policies and procedures for mitigating credit risk include reviewing and establishing limits for credit exposure and periodically re-assessing the creditworthiness of counterparties. Master netting agreements mitigate credit exposure to counterparties by permitting HP to net amounts due from HP to a counterparty against amounts due to HP from the same counterparty under certain conditions.

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HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 8: Financial Instruments (Continued)

        To further mitigate credit exposure to counterparties, HP has collateral security agreements that allow HP to hold collateral from, or require HP to post collateral to, counterparties when aggregate derivative fair values exceed contractually established thresholds which are generally based on the credit ratings of HP and its counterparties. If HP's or the counterparty's credit rating falls below a specified credit rating, either party has the right to request full collateralization of the derivatives' net liability position. Collateral is generally posted within two business days. The fair value of derivatives with credit contingent features in a net liability position was $66 million and $207 million at July 31, 2014 and October 31, 2013, respectively, all of which were fully collateralized within two business days.

        Under HP's derivative contracts, the counterparty can terminate all outstanding trades following a covered change of control event affecting HP that results in the surviving entity being rated below a specified credit rating. This credit contingent provision did not affect HP's financial position as of July 31, 2014 and October 31, 2013.

    Fair Value Hedges

        HP issues long-term debt in U.S. dollars based on market conditions at the time of financing. HP may enter into fair value hedges, such as interest rate swaps, to reduce the exposure of its debt portfolio to changes in fair value resulting from changes in interest rates by achieving a primarily U.S. dollar LIBOR-based floating interest expense. The swap transactions generally involve principal and interest obligations for U.S. dollar-denominated amounts. Alternatively, HP may choose not to swap fixed for floating interest payments or may terminate a previously executed swap if it believes a larger proportion of fixed-rate debt would be beneficial.

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

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

    Cash Flow Hedges

        HP uses a combination of forward contracts and option contracts designated as cash flow hedges to protect against the foreign currency exchange rate risks inherent in its forecasted net revenue and, to a lesser extent, cost of sales, operating expenses, and intercompany loans denominated in currencies other than the U.S. dollar. HP's foreign currency cash flow hedges mature generally within twelve months; however, certain leasing revenue-related forward contracts and intercompany loan forward contracts extend for the duration of the lease or loan term, which can be up to five years.

        For derivative instruments that are designated and qualify as cash flow hedges, HP initially records changes in fair value for the effective portion of the derivative instrument in Accumulated other comprehensive loss as a separate component of stockholders' equity in the Consolidated Condensed Balance Sheets and subsequently reclassifies these amounts into earnings in the period during which the hedged transaction is recognized in earnings. HP reports the effective portion of its cash flow

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HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 8: Financial Instruments (Continued)

hedges in the same financial statement line item as changes in the fair value of the hedged item. During the three and nine months ended July 31, 2014, and three months ended July 31, 2013, HP did not discontinue any cash flow hedge for which it was probable that a forecasted transaction would not occur. During the nine months ended July 31, 2013 there was no significant impact to results of operations as a result of discontinued cash flow hedges.

    Net Investment Hedges

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

    Other Derivatives

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

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

    Hedge Effectiveness

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

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

Derivatives designated as hedging instruments

                                                             

Fair value hedges:

                                                             

Interest rate contracts

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

Cash flow hedges:

                                                             

Foreign exchange contracts

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

Net investment hedges:

                                                             

Foreign exchange contracts

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

Total derivatives designated as hedging instruments

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

Derivatives not designated as hedging instruments

                                                             

Foreign exchange contracts

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

Other derivatives

    348     1     1     7         344     8     1          
                                           

Total derivatives not designated as hedging instruments

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

Total derivatives

  $ 47,399   $ 270   $ 177   $ 239   $ 225   $ 51,875   $ 220   $ 232   $ 437   $ 219  
                                           
                                           

(1)
Represents the amount of contracts that were outstanding as of July 31, 2014 and October 31, 2013, respectively.

    Offsetting of Derivative Instruments

        HP recognizes all derivatives on a gross basis in the Consolidated Condensed Balance Sheets. HP does not offset the fair value of its derivative instruments against the fair value of cash collateral posted under its collateral security agreements. As of July 31, 2014 and October 31, 2013, information

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Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 8: Financial Instruments (Continued)

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

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

Derivative assets

  $ 447   $   $ 447   $ 303   $ 48   $ 96  

Derivative liabilities

  $ 464   $   $ 464   $ 303   $ 92 (1) $ 69  

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


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

Derivative assets

  $ 452   $   $ 452   $ 372   $ 30   $ 50  

Derivative liabilities

  $ 656   $   $ 656   $ 372   $ 283 (1) $ 1  

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

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Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 8: Financial Instruments (Continued)

    Effect of Derivative Instruments on the Consolidated Condensed Statements of Earnings

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

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

Interest rate contracts

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

 

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

Interest rate contracts

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

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

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

Cash flow hedges:

                             

Foreign exchange contracts

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

Foreign exchange contracts

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

Foreign exchange contracts

    3     14   Other operating expenses         (7 )

Foreign exchange contracts

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

Total cash flow hedges

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

Net investment hedges:

                             

Foreign exchange contracts

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

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Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 8: Financial Instruments (Continued)

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

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

Cash flow hedges:

                             

Foreign exchange contracts

  $ 139   $ 146   Net revenue   $ 88   $ 77  

Foreign exchange contracts

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

Foreign exchange contracts

    (28 )   (17 ) Other operating expenses     1     6  

Foreign exchange contracts

    16     7   Interest and other, net     9     5  
                       

Total cash flow hedges

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

Net investment hedges:

                             

Foreign exchange contracts

  $ 81   $ 64   Interest and other, net   $   $  
                       
                       

        As of July 31, 2014 and 2013, no portion of a hedging instrument's gain or loss was excluded from the assessment of effectiveness for fair value, cash flow or net investment hedges. Hedge ineffectiveness for fair value, cash flow and net investment hedges was not material in the three and nine months ended July 31, 2014 and 2013.

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

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

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

Foreign exchange contracts

  Interest and other, net   $ 1   $ 8  

Other derivatives

  Interest and other, net     (5 )   (13 )
               

Total

      $ (4 ) $ (5 )