Financial Instruments

6 Months Ended

Apr. 30, 2015

Financial Instruments

Financial Instruments

Note 11: Financial Instruments

Cash Equivalents and Available-for-Sale Investments

        Cash equivalents and available-for-sale investments were as follows:

	As of April 30, 2015									As of October 31, 2014
	Cost		Gross Unrealized Gain		Gross Unrealized Loss			Fair Value		Cost		Gross Unrealized Gain		Gross Unrealized Loss			Fair Value
	In millions
Cash Equivalents:
Time deposits	$	3,290	$	—	$	—		$	3,290	$	2,720	$	—	$	—		$	2,720
Money market funds		8,326		—		—			8,326		9,857		—		—		$	9,857
Mutual funds		156		—		—			156		110		—		—			110
Total cash equivalents		11,772		—		—			11,772		12,687		—		—			12,687
Available-for-Sale Investments:
Debt securities:
Time deposits		174		—		—			174		145		—		—			145
Foreign bonds		255		84		—			339		286		90		—			376
Other debt securities		57		—		(13	)		44		61		—		(14	)		47
Total debt securities		486		84		(13	)		557		492		90		(14	)		568
Equity securities:
Mutual funds		96		—		—			96		134		—		—			134
Equity securities in public companies		59		7		(8	)		58		8		7		—			15
Total equity securities		155		7		(8	)		154		142		7		—			149
Total available-for-sale investments		641		91		(21	)		711		634		97		(14	)		717
Total cash equivalents and available-for-sale investments	$	12,413	$	91	$	(21	)	$	12,483	$	13,321	$	97	$	(14	)	$	13,404

        All highly liquid investments with original maturities of three months or less at the date of acquisition are considered cash equivalents. As of April 30, 2015 and October 31, 2014, the carrying amount of cash equivalents approximated fair value due to the short period of time to maturity. Time deposits were primarily issued by institutions outside the U.S. as of April 30, 2015 and October 31, 2014. The estimated fair value of the available-for-sale investments may not be representative of values that will be realized in the future.

        Contractual maturities of investments in available-for-sale debt securities were as follows:

	As of April 30, 2015
	Amortized Cost		Fair Value
	In millions
Due in one year	$	159	$	159
Due in one to five years		2		2
Due in more than five years		325		396
	$	486	$	557

        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 $28 million and $97 million at April 30, 2015 and October 31, 2014, 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 derivative 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 financial 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 reassessing the creditworthiness of its counterparties. Master netting agreements further mitigate credit exposure to counterparties by permitting HP to net amounts due from HP to counterparty against amounts due to HP from the same counterparty under certain conditions.

        To further 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 $30 million and $38 million at April 30, 2015 and October 31, 2014, respectively, all of which were fully collateralized within two business days.

        Under HP's derivative contracts, the counterparty can terminate all outstanding trades following a covered change of control event affecting HP that results in the surviving entity being rated below a specified credit rating. This credit contingent provision did not affect HP's financial position or cash flows as of April 30, 2015 and October 31, 2014.

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 London Interbank Offered Rate ("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 of the derivative instrument, as well as the offsetting change in the fair value of the hedged item, in Interest and other, net in the Consolidated Condensed Statements of Earnings in the period of change.

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, hedges related to longer term procurement arrangements extend several years and forward contracts associated with sales-type and direct-financing leases and intercompany loans extend for the duration of the lease or loan term, which typically range from two to five years.

        For derivative instruments that are designated and qualify as cash flow hedges, HP initially records changes in fair value for the effective portion of the derivative instrument in Accumulated other comprehensive loss as a separate component of stockholders' 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.

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. HP records the effective portion of such derivative instruments 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 of the derivative instrument, as well as the offsetting change in the fair value of the hedged item, in Interest and other net in the Consolidated Condensed Statements of Earnings in the period of change.

Hedge Effectiveness

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

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 April 30, 2015										As of October 31, 2014
	Outstanding Gross Notional		Other Current Assets		Long-Term Financing Receivables and Other Assets		Other Accrued Liabilities		Long-Term Other Liabilities		Outstanding Gross Notional		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	$	10,800	$	2	$	109	$	—	$	—	$	10,800	$	3	$	102	$	—	$	55
Cash flow hedges:
Foreign currency contracts		19,695		571		234		310		141		20,196		539		124		131		94
Net investment hedges:
Foreign currency contracts		1,883		86		60		25		5		1,952		44		47		10		8
Total derivatives designated as hedging instruments		32,378		659		403		335		146		32,948		586		273		141		157
Derivatives not designated as hedging instruments
Foreign currency contracts		16,266		268		59		172		43		21,384		82		32		82		25
Other derivatives		308		4		—		1		—		361		6		1		—		—
Total derivatives not designated as hedging instruments		16,574		272		59		173		43		21,745		88		33		82		25
Total derivatives	$	48,952	$	931	$	462	$	508	$	189	$	54,693	$	674	$	306	$	223	$	182

Offsetting of Derivative Instruments

        HP recognizes all derivative instruments on a gross basis in the Consolidated Condensed Balance Sheets. HP does not offset the fair value of its derivative instruments against the fair value of cash collateral posted under its collateral security agreements. As of April 30, 2015 and October 31, 2014, information related to the potential effect of HP's master netting agreements and collateral security agreements was as follows:

	As of April 30, 2015
	In the Consolidated Condensed Balance Sheets
												(vi) = (iii)–(iv)–(v)
	(i)		(ii)		(iii) = (i)–(ii)		(iv)		(v)
							Gross Amounts Not Offset
	Gross Amount Recognized		Gross Amount Offset		Net Amount Presented		Derivatives		Financial Collateral			Net Amount
	In millions
Derivative assets	$	1,393	$	—	$	1,393	$	649	$	752	(1)	$	(8	)
Derivative liabilities	$	697	$	—	$	697	$	649	$	28	(2)	$	20

	As of October 31, 2014
	In the Consolidated Condensed Balance Sheets
												(vi) = (iii)–(iv)–(v)
	(i)		(ii)		(iii) = (i)–(ii)		(iv)		(v)
							Gross Amounts Not Offset
	Gross Amount Recognized		Gross Amount Offset		Net Amount Presented		Derivatives		Financial Collateral			Net Amount
	In millions
Derivative assets	$	980	$	—	$	980	$	361	$	452	(1)	$	167
Derivative liabilities	$	405	$	—	$	405	$	361	$	29	(2)	$	15

(1)	Represents the cash collateral posted by counterparties as of the respective reporting date for HP's asset position, net of derivative amounts that could be offset, as of, generally, two business days prior to the respective reporting date.
(2)	Represents the collateral posted by HP through re-use of counterparty cash collateral as of the respective reporting date for HP's liability position, net of derivative amounts that could be offset, as of, generally, two business days prior to the respective reporting date.

Effect of Derivative Instruments 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 and six months ended April 30, 2015 and 2014 were as follows:

	Gain (Loss) Recognized in Earnings on Derivative and Related Hedged Item
Derivative Instrument	Location	Three months ended April 30, 2015			Six months ended April 30, 2015		Hedged Item	Location	Three months ended April 30, 2015		Six months ended April 30, 2015
		In millions							In millions
Interest rate contracts	Interest and other, net	$	(80	)	$	61	Fixed-rate debt	Interest and other, net	$	80	$	(61	)

	Gain (Loss) Recognized in Earnings on Derivative and Related Hedged Item
Derivative Instrument	Location	Three months ended April 30, 2014			Six months ended April 30, 2014			Hedged Item	Location	Three months ended April 30, 2014		Six months ended April 30, 2014
		In millions								In millions
Interest rate contracts	Interest and other, net	$	(22	)	$	(46	)	Fixed-rate debt	Interest and other, net	$	22	$	46

        The pre-tax effect of derivative instruments in cash flow and net investment hedging relationships for the three and six months ended April 30, 2015 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 April 30, 2015			Six months ended April 30, 2015			Location	Three months ended April 30, 2015			Six months ended April 30, 2015
	In millions							In millions
Cash flow hedges:
Foreign currency contracts	$	(84	)	$	653		Net revenue	$	533		$	867
Foreign currency contracts		(2	)		(140	)	Cost of products		(43	)		(69	)
Foreign currency contracts		1			(2	)	Other operating expenses		(3	)		(7	)
Foreign currency contracts		67			102		Interest and other, net		69			99
Total cash flow hedges	$	(18	)	$	613			$	556		$	890
Net investment hedges:
Foreign currency contracts	$	(6	)	$	123		Interest and other, net	$	—		$	—

        The pre-tax effect of derivative instruments in cash flow and net investment hedging relationships for the three and six months ended April 30, 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 April 30, 2014			Six months ended April 30, 2014			Location	Three months ended April 30, 2014			Six months ended April 30, 2014
	In millions							In millions
Cash flow hedges:
Foreign currency contracts	$	(311	)	$	(136	)	Net revenue	$	(63	)	$	(126	)
Foreign currency contracts		9			(78	)	Cost of products		(21	)		(44	)
Foreign currency contracts		11			11		Other operating expenses		(3	)		(7	)
Foreign currency contracts		(18	)		(36	)	Interest and other, net		(14	)		(33	)
Total cash flow hedges	$	(309	)	$	(239	)		$	(101	)	$	(210	)
Net investment hedges:
Foreign currency contracts	$	(67	)	$	(1	)	Interest and other, net	$	—		$	—

        As of April 30, 2015 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 April 30, 2014, the portion of hedging instruments gain or loss excluded from the assessment of effectiveness was not material for fair value, cash flow or net investment hedges. Hedge ineffectiveness for fair value, cash flow and net investment hedges was not material in the three and six months ended April 30, 2015 and 2014.

        As of April 30, 2015, HP expects to reclassify an estimated net accumulated other comprehensive gain of approximately $8 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 six months ended April 30, 2015 and 2014 was as follows:

	Gain (Loss) Recognized in Earnings on Derivatives
	Location	Three months ended April 30, 2015			Six months ended April 30, 2015
		In millions
Foreign currency contracts	Interest and other, net	$	(81	)	$	136
Other derivatives	Interest and other, net		(2	)		(5	)
Total		$	(83	)	$	131

	Gain (Loss) Recognized in Earnings on Derivatives
	Location	Three months ended April 30, 2014			Six months ended April 30, 2014
		In millions
Foreign currency contracts	Interest and other, net	$	(169	)	$	40
Other derivatives	Interest and other, net		2			(8	)
Total		$	(167	)	$	32