10-Q 1 a2227395z10-q.htm 10-Q

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



FORM 10-Q

(Mark One)    

ý

 

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

For the quarterly period ended: January 31, 2016

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



HP INC.
(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.)

1501 Page Mill Road, 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 Inc. common stock outstanding as of January 31, 2016 was 1,736,936,115 shares.


Table of Contents


HP INC. AND SUBSIDIARIES

Form 10-Q

For the Quarterly Period ended January 31, 2016


Table of Contents

        In this report on Form 10-Q, for all periods presented, "we", "us", "our", "company", "HP" and "HP Inc." refer to HP Inc. (formerly Hewlett-Packard Company) and its consolidated subsidiaries.

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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 HP Inc. 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, effective tax rates, net earnings, net earnings per share, cash flows, benefit plan funding, deferred tax assets, 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 cost savings, revenue 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; the impact of macroeconomic and geopolitical trends and events; the need to manage third-party suppliers and the distribution of HP's products and the delivery of HP's 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 resolution of pending investigations, claims and disputes; and other risks that are described herein, including but not limited to, those discussed in this Quarterly Report on Form 10-Q, and in particular, the risks discussed in Part I, Item 1A "Risk Factors" in our Annual Report on Form 10-K for the fiscal year ended October 31, 2015, 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.

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PART I. Financial Information

ITEM 1. Financial Statements and Supplementary Data (Unaudited).


Index

 
  Page  

Consolidated Condensed Statements of Earnings for the three months ended January 31, 2016 and 2015

    5  

Consolidated Condensed Statements of Comprehensive Income for the three months ended January 31, 2016 and 2015

   
6
 

Consolidated Condensed Balance Sheets as of January 31, 2016 and as of October 31, 2015

   
7
 

Consolidated Condensed Statements of Cash Flows for the three months ended January 31, 2016 and 2015

   
8
 

Notes to Consolidated Condensed Financial Statements

   
9
 

Note 1: Overview and Basis of Presentation

   
9
 

Note 2: Discontinued Operations

   
12
 

Note 3: Segment Information

   
13
 

Note 4: Restructuring

   
17
 

Note 5: Retirement and Post-Retirement Benefit Plans

   
19
 

Note 6: Stock-Based Compensation

   
20
 

Note 7: Taxes on Earnings

   
23
 

Note 8: Balance Sheet Details

   
26
 

Note 9: Fair Value

   
30
 

Note 10: Financial Instruments

   
33
 

Note 11: Borrowings

   
39
 

Note 12: Stockholders' Equity

   
41
 

Note 13: Net Earnings Per Share

   
44
 

Note 14: Litigation and Contingencies

   
45
 

Note 15: Guarantees, Indemnifications and Warranties

   
53
 

4


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HP INC. AND SUBSIDIARIES

Consolidated Condensed Statements of Earnings

(Unaudited)

 
  Three months ended
January 31
 
 
  2016   2015  
 
  In millions, except
per share amounts

 

Net revenue:

             

Products

  $ 11,732   $ 13,356  

Services

    514     502  

Total net revenue

    12,246     13,858  

Costs and expenses:

             

Cost of products

    9,626     10,851  

Cost of services

    335     322  

Research and development

    292     304  

Selling, general and administrative

    1,037     1,222  

Amortization of intangible assets

    8     27  

Restructuring charges

    20     14  

Total operating expenses

    11,318     12,740  

Earnings from continuing operations before interest and taxes

    928     1,118  

Interest and other, net

    (94 )   (121 )

Earnings from continuing operations before taxes

    834     997  

Provision for taxes

    (184 )   (227 )

Earnings from continuing operations

    650     770  

(Loss) earnings from discontinued operations, net of taxes

    (58 )   596  

Net earnings

  $ 592   $ 1,366  

Net earnings (loss) per share:

             

Basic

   
 
   
 
 

Continuing operations

  $ 0.37   $ 0.42  

Discontinued operations

    (0.04 )   0.33  

Total basic net earnings per share

  $ 0.33   $ 0.75  

Diluted

             

Continuing operations

  $ 0.36   $ 0.41  

Discontinued operations

    (0.03 )   0.32  

Total diluted net earnings per share

  $ 0.33   $ 0.73  

Cash dividends declared per share

  $ 0.25   $ 0.32  

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

             

Basic

    1,776     1,833  

Diluted

    1,785     1,861  

   

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

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HP INC. AND SUBSIDIARIES

Consolidated Condensed Statements of Comprehensive Income

(Unaudited)

 
  Three months
ended
January 31
 
 
  2016   2015  
 
  In millions
 

Net earnings

  $ 592   $ 1,366  

Other comprehensive income before taxes:

             

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

             

Unrealized gains arising during the period

        46  

        46  

Change in unrealized gains on cash flow hedges:

             

Unrealized gains arising during the period

    105     631  

Gains reclassified into earnings

    (34 )   (334 )

    71     297  

Change in unrealized components of defined benefit plans:

             

Amortization of actuarial loss and prior service benefit

    12     112  

Curtailments, settlements and other

        (2 )

    12     110  

Change in cumulative translation adjustment

        (68 )

Other comprehensive income before taxes

    83     385  

Benefit from (provision for) taxes

    16     (179 )

Other comprehensive income, net of taxes

    99     206  

Comprehensive income

  $ 691   $ 1,572  

   

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

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HP INC. AND SUBSIDIARIES

Consolidated Condensed Balance Sheets

(Unaudited)

 
  As of  
 
  January 31,
2016
  October 31,
2015
 
 
  In millions, except par value
 

ASSETS

             

Current assets:

             

Cash and cash equivalents

  $ 3,688   $ 7,584  

Accounts receivable

    4,114     4,825  

Inventory

    4,052     4,288  

Other current assets

    3,301     4,498  

Current assets of discontinued operations

        30,592  

Total current assets

    15,155     51,787  

Property, plant and equipment

    1,529     1,492  

Goodwill

    5,680     5,680  

Other non-current assets

    3,153     1,592  

Non-current assets of discontinued operations

        46,331  

Total assets

  $ 25,517   $ 106,882  

LIABILITIES AND STOCKHOLDERS' EQUITY

             

Current liabilities:

             

Notes payable and short-term borrowings

  $ 49   $ 2,194  

Accounts payable

    9,041     10,194  

Employee compensation and benefits

    553     747  

Taxes on earnings

    182     243  

Deferred revenue

    863     1,051  

Other accrued liabilities

    6,073     6,241  

Current liabilities of discontinued operations

        21,521  

Total current liabilities

    16,761     42,191  

Long-term debt

    6,683     6,677  

Other non-current liabilities

    6,982     7,414  

Non-current liabilities of discontinued operations

        22,449  

Commitments and contingencies

             

Stockholders' equity:

             

HP stockholders' (deficit) equity

             

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

         

Common stock, $0.01 par value (9,600 shares authorized; 1,737 and 1,804 shares issued and outstanding at January 31, 2016 and October 31, 2015, respectively)

    17     18  

Additional paid in capital

    1,222     1,963  

Retained earnings (deficit)

    (5,026 )   32,089  

Accumulated other comprehensive loss

    (1,122 )   (6,302 )

Total HP stockholders' (deficit) equity

    (4,909 )   27,768  

Non-controlling interests of discontinued operations

        383  

Total stockholders' (deficit) equity

    (4,909 )   28,151  

Total liabilities and stockholders' equity

  $ 25,517   $ 106,882  

   

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

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HP INC. AND SUBSIDIARIES

Consolidated Condensed Statements of Cash Flows

(Unaudited)

 
  For the three
month ended
January 31
 
 
  2016   2015  
 
  In millions
 

Cash flows from operating activities:

             

Net earnings

  $ 592   $ 1,366  

Adjustments to reconcile net earnings to net cash (used in) provided by operating activities:

             

Depreciation and amortization

    79     1,028  

Stock-based compensation expense

    61     187  

Provision for doubtful accounts

    11     (2 )

Provision for inventory

    34     64  

Restructuring charges

    20     146  

Deferred taxes on earnings

    526     (173 )

Excess tax benefit from stock-based compensation

    (1 )   (109 )

Other, net

    (18 )   138  

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

             

Accounts receivable

    704     1,540  

Financing receivable

        222  

Inventory

    202     (224 )

Accounts payable

    (1,104 )   (852 )

Taxes on earnings

    (534 )   293  

Restructuring

    (31 )   (483 )

Other assets and liabilities

    (649 )   (2,397 )

Net cash (used in) provided by operating activities

    (108 )   744  

Cash flows from investing activities:

             

Investment in property, plant and equipment

    (120 )   (947 )

Proceeds from sale of property, plant and equipment

        130  

Purchases of available-for-sale securities and other investments

        (50 )

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

    9     30  

Payment made in connection with business acquisitions

        (1 )

Net cash used in investing activities

    (111 )   (838 )

Cash flows from financing activities:

             

Short-term borrowings with original maturities less than 90 days, net

    26     77  

Proceeds from debt, net of issuance costs

    4     299  

Payment of debt

    (2,155 )   (911 )

Settlement of cash flow hedges

    (11 )    

Net transfer of cash and cash equivalents to Hewlett Packard Enterprise Company

    (10,375 )    

Issuance of common stock under employee stock plans

    2     181  

Repurchase of common stock

    (797 )   (1,571 )

Excess tax benefit from stock-based compensation

    1     109  

Cash dividends paid

    (221 )   (304 )

Net cash used in financing activities

    (13,526 )   (2,120 )

Decrease in cash and cash equivalents

    (13,745 )   (2,214 )

Cash and cash equivalents at beginning of period

    17,433     15,133  

Cash and cash equivalents at end of period

  $ 3,688   $ 12,919  

Supplemental schedule of non-cash investing and financing activities:

             

Net assets transferred to Hewlett Packard Enterprise Company

  $ 22,197   $  

Purchase of assets under capital leases

  $ 40   $  

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

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HP INC. AND SUBSIDIARIES

Notes to Consolidated Condensed Financial Statements

(Unaudited)

Note 1: Overview and Basis of Presentation

    Overview

        On November 1, 2015 (the "Distribution Date"), Hewlett-Packard Company completed the separation of Hewlett Packard Enterprise Company ("Hewlett Packard Enterprise"), Hewlett-Packard Company's former enterprise technology infrastructure, software, services and financing businesses (the "Separation"). In connection with the Separation, Hewlett-Packard Company changed its name to HP Inc. ("HP").

        On the Distribution Date, each of HP's stockholders of record as of the close of business on October 21, 2015 (the "Record Date") received one share of Hewlett Packard Enterprise common stock for every one share of HP common stock held as of the Record Date. Hewlett Packard Enterprise is now an independent public company trading on the New York Stock Exchange ("NYSE") under the symbol "HPE". HP distributed a total of approximately 1.8 billion shares of Hewlett Packard Enterprise common stock to HP's stockholders. After the Separation, HP does not beneficially own any shares of Hewlett Packard Enterprise common stock.

        In connection with the Separation, HP and Hewlett Packard Enterprise have entered into a separation and distribution agreement as well as various other agreements that provide a framework for the relationships between the parties going forward, including among others a tax matters agreement, an employee matters agreement, a transition service agreement, a real estate matters agreement, a master commercial agreement and an information technology service agreement. For more information on the impacts of these agreements, see Note 5, "Retirement and Post-Retirement Benefit Plans", Note 6, "Stock-Based Compensation", Note 7 "Taxes on Earnings", Note 14, "Litigation and Contingencies" and Note 15, "Guarantees, Indemnifications and Warranties".

    Basis of Presentation

        The accompanying Consolidated Condensed Financial Statements of HP and its wholly-owned subsidiaries are prepared in conformity with United States ("U.S.") generally accepted accounting principles ("GAAP"). HP has eliminated all intercompany accounts and transactions. The interim financial information is unaudited, but reflects all normal adjustments that are necessary to provide a fair statement of results for the interim periods presented. This interim information should be read in conjunction with the Consolidated Financial Statements in the Annual Report on Form 10-K for the fiscal year ended October 31, 2015. The historical results of operations and financial position of Hewlett Packard Enterprise are included in the Consolidated Condensed Financial Statements and reported as discontinued operations in all periods presented within this Form 10-Q. Fiscal 2015 information in the accompanying Notes to the Consolidated Condensed Financial Statements have been revised to reflect the effect of the Separation, except balances related to stockholders' (deficit) equity. The historical statements of comprehensive income and cash flows have not been revised to reflect the effect of the Separation. For further information on discontinued operations, see Note 2, "Discontinued Operations".

    Principles of Consolidation

        The Consolidated Condensed Financial Statements include the accounts of HP and its subsidiaries and affiliates in which HP has a controlling financial interest or is the primary beneficiary. HP accounts

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HP INC. AND SUBSIDIARIES

Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 1: Overview and Basis of Presentation (Continued)

for investments in companies over which HP has the ability to exercise significant influence but does not hold a controlling interest under the equity method, and HP records its proportionate share of income or losses in Interest and other, net in the Consolidated Condensed Statements of Earnings. HP presents non-controlling interests as a separate component within Total stockholders' (deficit) equity in the Consolidated Condensed Balance Sheets.

    Reclassifications

        HP has made certain segment and business unit realignments in order to optimize its operating structure. Reclassifications of certain prior-year segment and business unit financial information have been made to conform to the current-year presentation. None of the changes impacts HP's previously reported consolidated net revenue, earnings from operations, net earnings or net earnings per share ("EPS"). See Note 3, "Segment Information, for a further discussion of HP's segment realignment.

    Use of Estimates

        The preparation of financial statements in accordance with U.S. 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.

    Accounting Pronouncements

        In February 2016, the Financial Accounting Standards Board ("FASB") issued guidance which amends the existing accounting standards for leases. Consistent with current guidance, the recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee primarily will depend on its classification. Under the new guidance, a lessee will be required to recognize assets and liabilities for all leases with lease terms of more than 12 months. HP is required to adopt the guidance in the first quarter of fiscal 2020 using a modified retrospective approach. HP is currently evaluating the timing and the impact of these amendments on its Consolidated Condensed Financial Statements.

        In January 2016, the FASB issued guidance which amends the existing accounting standards for the recognition and measurement of financial assets and financial liabilities. The updated guidance primarily addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. HP is required to adopt the guidance in the first quarter of fiscal 2019. The amendments should be applied by means of a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption, with other amendments related specifically to equity securities without readily determinable fair values applied prospectively. HP is currently evaluating the timing and the impact of these amendments on its Consolidated Condensed Financial Statements.

        In November 2015, the FASB issued new accounting guidance related to income taxes to simplify the presentation of deferred income taxes. This guidance requires that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position. HP early adopted this new accounting guidance prospectively for the interim period beginning November 1, 2015. The adoption of this new accounting guidance resulted in all deferred tax liabilities and assets to be classified as

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HP INC. AND SUBSIDIARIES

Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 1: Overview and Basis of Presentation (Continued)

noncurrent on the Consolidated Condensed Balance Sheets for the interim period beginning November 1, 2015. See Note 7, "Taxes on Earnings", for additional information related to the presentation of deferred income taxes.

        In April 2015, the FASB amended the existing accounting standards for intangible assets. The amendments provide explicit guidance to customers in determining the accounting for fees paid in a cloud computing arrangement, wherein the arrangements that do not convey a software license to the customer are accounted for as service contracts. HP is required to adopt the guidance in the first quarter of fiscal 2017; however early adoption is permitted. The amendment may be adopted either prospectively to all arrangements entered into or materially modified after the effective date or retrospectively. HP is currently evaluating the impact of these amendments on its Consolidated Condensed Financial Statements.

        In April 2015, the FASB amended the existing accounting standards for imputation of interest. The amendments require that debt issuance costs related to a recognized debt liability be presented on the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by these amendments. HP is required to adopt the guidance in the first quarter of fiscal 2017. Early adoption is permitted. The amendments should be applied retrospectively with the adjusted balance sheet of each individual period presented, in order to reflect the period-specific effects of applying the new guidance. HP is currently evaluating the timing and the impact of these amendments on its Consolidated Condensed Financial Statements.

        In May 2014, the 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. In August 2015, the FASB issued an accounting standard update for a one-year deferral of the effective date, with an option of applying the standard on the original effective date, which for HP is the first quarter of fiscal 2018. In accordance with this deferral, HP is required to adopt these amendments in the first quarter of fiscal 2019. 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 continuing to evaluate the impact of these amendments and the transition alternatives on its Consolidated Condensed 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. HP has adopted the guidance in the first quarter of fiscal 2016 and prepared the Consolidated Condensed Financial Statements consistent with the provisions of the guidance. See Note 2, "Discontinued Operations", for additional information.

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HP INC. AND SUBSIDIARIES

Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 2: Discontinued Operations

        On November 1, 2015, HP completed the Separation of Hewlett Packard Enterprise. After the Separation, HP does not beneficially own any shares of Hewlett Packard Enterprise common stock.

        In connection with the Separation, HP and Hewlett Packard Enterprise have entered into a separation and distribution agreement as well as various other agreements that provide a framework for the relationships between the parties going forward, including among others a tax matters agreement, an employee matters agreement, a transition service agreement, a real estate matters agreement, a master commercial agreement and an information technology service agreement. These agreements provide for the allocation between HP and Hewlett Packard Enterprise of assets, employees, liabilities and obligations (including investments, property, employee benefits and tax-related assets and liabilities) attributable to periods prior to, at and after the Separation and govern certain relationships between HP and Hewlett Packard Enterprise after the Separation.

        HP no longer consolidates Hewlett Packard Enterprise within its financial results of continuing operations. The financial results of Hewlett Packard Enterprise are presented as (loss) earnings from discontinued operations, net of taxes on the Consolidated Condensed Statements of Earnings. Discontinued operations include results of Hewlett Packard Enterprise's business and separation costs primarily related to third-party consulting, contractor fees and other related costs.

        The following table presents the financial results of HP's discontinued operations:

 
  Three months
ended
January 31
 
 
  2016   2015  
 
  In millions
 

Net revenue

  $   $ 12,981  

Costs and expenses(1)

    87     12,179  

Interest and other, net

        53  

(Loss) earnings from discontinued operations before taxes

    (87 )   749  

Benefit from (provision for) taxes

    29     (153 )

(Loss) earnings from discontinued operations, net of taxes

  $ (58 ) $ 596  

(1)
Costs and expenses for the three months ended January 31, 2016 relate to separation costs.

        There were no significant non-cash items or capital expenditures of discontinued operations for the three months ended January 31, 2016. For the three months ended January 31, 2015, significant non-cash items and capital expenditures of discontinued operations are outlined below:

 
  In millions  

Depreciation and amortization

  $ 921  

Purchases of property, plant and equipment

  $ 613  

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HP INC. AND SUBSIDIARIES

Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 2: Discontinued Operations (Continued)

        The following table presents assets and liabilities that were transferred to Hewlett Packard Enterprise as of November 1, 2015 and presented as discontinued operations on the Consolidated Condensed Balance Sheets as of October 31, 2015:

 
  In millions  

Cash and cash equivalents

  $ 9,849  

Accounts receivable

    8,538  

Financing receivables

    2,918  

Inventory

    2,197  

Other current assets

    7,090  

Total current assets of discontinued operations

  $ 30,592  

Property, plant and equipment

  $ 9,598  

Goodwill

    27,261  

Long-term financing receivables and other non-current assets

    9,472  

Total non-current assets of discontinued operations

  $ 46,331  

Notes payable and short-term borrowings

  $ 691  

Accounts payable

    5,762  

Employee compensation and benefits

    2,861  

Taxes on earnings

    587  

Deferred revenue

    5,148  

Other accrued liabilities

    6,472  

Total current liabilities of discontinued operations

  $ 21,521  

Long-term debt

  $ 15,103  

Other non-current liabilities

    7,346  

Total non-current liabilities of discontinued operations

  $ 22,449  

        Subsequent to the Separation, HP made a final net cash transfer of $526 million to Hewlett Packard Enterprise.

Note 3: Segment Information

        HP is a leading global provider of personal computing and other access devices, imaging and printing products, and related technologies, solutions and services. HP sells to individual consumers, small- and medium-sized businesses ("SMBs") and large enterprises, including customers in the government, health and education sectors.

        HP's operations are organized into three segments for financial reporting purposes: Personal Systems, Printing and Corporate Investments. HP's organizational structure is based on a number of factors that the chief operating decision maker uses to evaluate, view and run its business operations, which include, but are not limited to, customer base and homogeneity of products and technology. The segments are based on this organizational structure and information reviewed by HP's chief operating decision maker to evaluate segment results. The chief operating decision maker uses several metrics to

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HP INC. AND SUBSIDIARIES

Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 3: Segment Information (Continued)

evaluate the performance of the overall business, including earnings from operations, and uses these results to allocate resources to each of the segments.

        A summary description of each segment follows.

        Personal Systems provides commercial personal computers ("PCs"), consumer PCs, workstations, thin clients, tablets, retail point-of-sale systems, calculators and other related accessories, software, support and services for the commercial and consumer markets. HP groups commercial notebooks, commercial desktops, commercial services, commercial tablets, commercial detachables, workstations, retail point-of-sale systems and thin clients into commercial clients and consumer notebooks, consumer desktops, consumer services, consumer tablets and consumer detachables into consumer clients when describing performance in these markets. Described below are HP's global business capabilities within Personal Systems.

    Commercial PCs are optimized for enterprise and SMB customers, with a focus on robust designs, serviceability, connectivity, reliability and manageability in networked environments. Additionally, HP offers a range of services and solutions to enterprise and SMB customers to help them manage the lifecycle of their PC and mobility installed base.

    Consumer PCs are notebooks, desktops, and hybrids that are optimized for consumer usage, focusing on multi-media consumption, online browsing, and light productivity.

        Printing provides consumer and commercial printer hardware, supplies, media, solutions and services, as well as scanning devices. Printing is also focused on imaging solutions in the commercial markets. HP groups LaserJet, graphics and PageWide printers into Commercial Hardware and Inkjet printers into Consumer Hardware when describing performance in these markets. Described below are HP's global business capabilities within Printing.

    LaserJet and Enterprise Solutions deliver HP's LaserJet printers, supplies and solutions to SMBs and large enterprises. HP goes to market through its extensive channel network and directly with HP sales. Ongoing key initiatives include printer security solutions, PageWide Enterprise solutions, and award-winning JetIntelligence products.

    Inkjet and Printing Solutions deliver HP's consumer, SMB, and PageWide Inkjet solutions (hardware, supplies, media, and web-connected hardware and services). Ongoing initiatives and programs such as Ink in the Office and Ink Advantage and newer initiatives such as Instant Ink provide innovative printing solutions to consumers and SMBs.

    Graphics Solutions deliver large format printers (Designjet, Large Format Production, and Scitex Industrial), specialty printing, digital press solutions (Indigo and PageWide Presses), supplies and services to print service providers and design and rendering customers.

    Print Solutions provide end-to-end services and software, as well as core platforms to develop and deploy services across printing systems. HP's focus includes driving customer value through managed print services, providing support solutions for new and existing customers and innovative software solutions for augmented reality, contact center analytics, customer communications management and digital experience management.

        Corporate Investments include HP Labs and certain business incubation projects among others.

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Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 3: Segment Information (Continued)

        The accounting policies HP uses to derive segment results are substantially the same as those used by the Company in preparing these financial statements. HP derives the results of the business segments directly from its internal management reporting system. Segment net revenue includes revenues from sales to external customers and intersegment revenues that reflect transactions between the segments on an arm's-length basis. HP's consolidated net revenue is derived and reported after the elimination of intersegment revenues from such arrangements.

        HP periodically engages in intercompany advanced royalty payment arrangements that may result in advance payments between subsidiaries. Revenues from these intercompany arrangements are deferred and recognized as earned over the term of the arrangement by the HP legal entities involved in such transactions; however, these advanced payments are eliminated from revenues as reported by HP and its business segments. As disclosed in Note 7, "Taxes on Earnings", in fiscal 2015, HP executed an intercompany advanced royalty payment arrangement which resulted in advanced payments of $3.8 billion, with a deferral of intercompany revenues over the term of the arrangements, which is approximately 5 years. The payments were received in the U.S. from a foreign consolidated affiliate, with a deferral of intercompany revenues over the term of the arrangement, as disclosed above. The impact of these intercompany arrangements is eliminated from both HP consolidated and segment net revenues.

        HP does not allocate to its segments certain operating expenses, which it manages at the corporate level. These unallocated costs include certain corporate governance costs, stock-based compensation expense, restructuring charges, amortization of intangible assets and non-operating retirement-related credits.

    Segment Realignment and Reporting Changes

        Effective at the beginning of its first quarter of fiscal 2016, HP implemented an organizational change to align its segment financial reporting more closely with its current business structure. In addition, HP implemented a reporting change to provide better transparency to its segment operating results. This reporting change resulted in the exclusion of certain market-related factors such as interest cost, expected return on plan assets, amortized actuarial gains/losses, and impacts from other market-related factors related to its defined benefit pension and post-retirement benefit plans from its segment operating results ("Non-operating retirement-related credits"). This change also resulted in the exclusion of certain plan curtailments, settlements and special termination benefits related to its defined benefit pension and post-retirement benefit plans from HP's segment operating results. Segment operating results will continue to include service costs and amortization of prior service costs associated with HP's defined benefit pension and post-retirement benefit plans. The organizational and reporting changes had an immaterial impact to previously reported segment net revenue and earnings from operations. These changes had no impact on HP's previously reported consolidated net revenue, earnings from operations, net earnings or net earnings per share.

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Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 3: Segment Information (Continued)

    Segment Operating Results from Continuing Operations

 
  Personal
Systems
  Printing   Corporate
Investments
  Total
Segments
  Intersegment
Eliminations
and
Other(1)
  Total  
 
  In millions
 

Three months ended January 31, 2016

                                     

Net revenue

  $ 7,467   $ 4,642   $ 3   $ 12,112   $ 134   $ 12,246  

Earnings (loss) from operations

  $ 229   $ 787   $ (23 ) $ 993              

Three months ended January 31, 2015

                                     

Net revenue

  $ 8,562   $ 5,596   $ 12   $ 14,170   $ (312 ) $ 13,858  

Earnings (loss) from operations

  $ 303   $ 1,050   $ (5 ) $ 1,348              

(1)
Other includes adjustments for sales to entities which, prior to the Separation, were included in intersegment eliminations. For the three months ended January 31, 2016, the amount includes the recognition of revenue previously deferred in relation to sales to the pre-Separation finance entity. For the three months ended January 31, 2015, the amount includes the elimination of intercompany sales to the pre-Separation finance entity, which is included in discontinued operations. The related cost adjustments are reflected in the reconciliation of the segment earnings to HP's consolidated earnings as included below.

        The reconciliation of segment operating results to HP consolidated results was as follows:

 
  Three months
ended
January 31
 
 
  2016   2015  
 
  In millions
 

Net revenue:

             

Total segments

  $ 12,112   $ 14,170  

Intersegment net revenue eliminations and other

    134     (312 )

Total HP consolidated net revenue

  $ 12,246   $ 13,858  

Earnings from continuing operations before taxes:

             

Total segment earnings from operations

  $ 993   $ 1,348  

Corporate and unallocated costs and eliminations

    (16 )   (196 )

Stock-based compensation expense

    (61 )   (51 )

Amortization of intangible assets

    (8 )   (27 )

Restructuring charges

    (20 )   (14 )

Non-operating retirement-related credits

    40     58  

Interest and other, net

    (94 )   (121 )

Total HP consolidated earnings from continuing operations before taxes

  $ 834   $ 997  

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Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 3: Segment Information (Continued)

        Net revenue by segment and business unit was as follows:

 
  Three months
ended
January 31
 
 
  2016   2015  
 
  In millions
 

Notebooks

  $ 4,205   $ 4,724  

Desktops

    2,527     2,949  

Workstations

    444     526  

Other

    291     363  

Personal Systems

    7,467     8,562  

Supplies

    3,101     3,601  

Commercial Hardware

    1,219     1,394  

Consumer Hardware

    322     601  

Printing

    4,642     5,596  

Corporate Investments

    3     12  

Total segment net revenue

    12,112     14,170  

Intersegment net revenue eliminations and other

    134     (312 )

Total net revenue

  $ 12,246   $ 13,858  

        Except for the separation of Hewlett Packard Enterprise, there have been no material changes to the total assets of HP's individual segments since October 31, 2015.

Note 4: Restructuring

Fiscal 2015 Plan

        In connection with the Separation, on September 14, 2015, HP's Board of Directors approved a cost saving plan which includes labor and non-labor actions which will be implemented through fiscal 2016. HP estimates that it will incur aggregate pre-tax charges of approximately $300 million which relate to workforce reductions, real estate consolidation and other non-labor charges. HP expects approximately 3,000 employees will exit by the end of fiscal 2016.

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Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 4: Restructuring (Continued)

        The following table summarizes the cost improvement activities in the three months ended January 31, 2016.

 
   
   
   
   
   
  As of
January 31, 2016
 
 
   
  Three months ended
January 31, 2016
   
 
 
  Accrued
Balance,
October 31,
2015
  Accrued
Balance,
January 31,
2016
  Total
Costs
Incurred
to Date
  Total
Expected
Costs to
Be Incurred
 
 
  Charges   Cash
Payments
  Other
Non-Cash
Adjustments
 
 
  In millions
 

Fiscal 2015 Plan

                                           

Severance

  $ 39   $ 15   $ (12 ) $   $ 42   $ 54   $ 240  

Infrastructure and other

        5         (4 )   1     5     60  

Total

  $ 39     20   $ (12 ) $ (4 ) $ 43   $ 59   $ 300  

Fiscal 2012 Plan

        The restructuring plan initiated by HP in fiscal 2012 is considered completed. Accrued expenses related to the plan, which were recorded in "Accrued restructuring" and "Other liabilities," totaled $4 million as of January 31, 2016. The severance and infrastructure cash payments associated with this plan are expected to be paid through fiscal 2021.

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Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 5: Retirement and Post-Retirement Benefit Plans

        The components of HP's pension and post-retirement benefit (credit) cost recognized in the Consolidated Condensed Statements of Earnings were as follows:

 
  Three months ended January 31  
 
  U.S.
Defined
Benefit Plans
  Non-U.S.
Defined
Benefit Plans
  Post-
Retirement
Benefit Plans
 
 
  2016   2015   2016   2015   2016   2015  
 
  In millions
 

Service cost

  $   $   $ 12   $ 68   $   $ 1  

Interest cost

    136     139     6     99     5     7  

Expected return on plan assets

    (183 )   (217 )   (12 )   (207 )   (8 )   (9 )

Amortization and deferrals:

                                     

Actuarial loss (gain)

    14     13     6     78     (3 )   (3 )

Prior service benefit

            (1 )   (5 )   (4 )   (5 )

Net periodic benefit (credit) cost

    (33 )   (65 )   11     33     (10 )   (9 )

Settlement loss

    1                      

Special termination benefits

                1          

Plan (credit) expense allocation(1)

                (4 )       8  

Total periodic benefit (credit) cost from continuing operations

    (32 )   (65 )   11     30     (10 )   (1 )

Summary of total periodic benefit (credit) cost:

                                     

Continuing operations

    (32 )   (65 )   11     30     (10 )   (1 )

Discontinued operations

        4         27         (8 )

Total periodic benefit (credit) cost

  $ (32 ) $ (61 ) $ 11   $ 57   $ (10 ) $ (9 )

(1)
Plan (credit) expense allocation relates to the employees of HP covered under Hewlett Packard Enterprise defined benefit pension or post-retirement benefit plans.

Employer Contributions and Funding Policy

        HP's policy is to fund its pension plans so that it makes at least the minimum contribution required by local government, funding and taxing authorities.

        For fiscal 2016, HP expects to contribute approximately $18 million to its non-U.S. pension plans, $36 million to cover benefit payments to U.S. non-qualified plan participants and $43 million to cover benefit claims under HP's post-retirement benefit plans. During the three months ended January 31, 2016, HP contributed $3 million to its non-U.S. pension plans, $8 million to cover benefit payments to U.S. non-qualified plan participants, and $8 million to cover benefit claims under HP's post-retirement benefit plans.

        HP's pension and other post-retirement benefit costs and obligations depend on various assumptions. Differences between expected and actual returns on investments and changes in discount rates and other actuarial assumptions are reflected as unrecognized gains or losses, and such gains or losses are amortized to earnings in future periods. A deterioration in the funded status of a plan could

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Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 5: Retirement and Post-Retirement Benefit Plans (Continued)

result in a need for additional company contributions or an increase in net pension and post-retirement benefit costs in future periods. Actuarial gains or losses are determined at the measurement date and amortized over the remaining service life for active plans or the life expectancy of plan participants for frozen plans.

Note 6: Stock-Based Compensation

        HP's stock-based compensation plans permit the issuance of restricted stock awards, stock options and performance-based awards.

        In connection with the Separation and in accordance with the employee matters agreement, HP has made certain adjustments to the exercise price and number of stock-based compensation awards with the intention of preserving the intrinsic value of the awards prior to the Separation. Exercisable and non-exercisable stock options have been converted to similar awards of the entity where the employee is working post-separation. Restricted stock unit awards and performance-contingent awards have been adjusted to provide holders restricted stock units and performance-contingent awards in the company that employs such employee following the separation. The pre-tax stock-based compensation expense due to the adjustments was $2 million for the three months ended January 31, 2016. All outstanding restricted stock awards and stock options for employees transferred to Hewlett Packard Enterprise were cancelled (the "Cancelled Awards") in connection with the Separation.

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

 
  Three months
ended
January 31
 
 
  2016   2015  
 
  In millions
 

Stock-based compensation expense

  $ 61   $ 51  

Income tax benefit

    (22 )   (16 )

Stock-based compensation expense, net of tax

  $ 39   $ 35  

    Restricted Stock Awards

        Restricted stock awards are non-vested stock awards that may include grants of restricted stock or restricted stock units. For the three months ended January 31, 2016, HP granted only restricted stock units. HP uses the closing stock price of the grant date to estimate the fair value of service-based restricted stock units. HP estimates the fair value of restricted stock units subject to performance-adjusted vesting conditions using a combination of the closing stock price of the grant date and the Monte Carlo simulation model. The weighted-average fair value and the assumptions used to measure

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Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 6: Stock-Based Compensation (Continued)

fair value of restricted stock units subject to performance-adjusted vesting conditions in the Monte Carlo simulation model were as follows:

 
  Three months
ended
January 31
 
 
  2016   2015  

Weighted-average fair value(1)

  $ 13   $ 47  

Expected volatility(2)

    32.5 %   33.6 %

Risk-free interest rate(3)

    1.2 %   1.0 %

Expected performance period in years(4)

    2.9     2.9  

(1)
The weighted-average fair value was based on performance-adjusted restricted stock units granted during the period.

(2)
The expected volatility was estimated using the historical volatility derived from HP's common stock.

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

(4)
The expected performance period was estimated based on the length of the remaining performance period from the grant date.

        A summary of restricted stock award activity is as follows:

 
  Three months ended
January 31, 2016
 
 
  Shares   Weighted-
Average
Grant Date
Fair Value
Per Share
 
 
  In thousands
   
 

Outstanding at beginning of period

    29,717   $ 32  

Granted

    26,647   $ 9  

Vested

    (1,505 ) $ 11  

Cancelled Awards

    (23,926 ) $ 32  

Forfeited

    (339 ) $ 13  

Outstanding at end of period

    30,594   $ 13  

        At January 31, 2016, there was $275 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 1.7 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

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Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 6: Stock-Based Compensation (Continued)

to performance-contingent vesting conditions using a combination of a Monte Carlo simulation model and a lattice model, as these awards contain market conditions. The weighted-average fair value and the assumptions used to measure fair value were as follows:

 
  Three months
ended
January 31
 
 
  2016   2015  

Weighted-average fair value(1)

  $ 4   $ 8  

Expected volatility(2)

    36.4 %   26.3 %

Risk-free interest rate(3)

    1.9 %   1.7 %

Expected dividend yield(4)

    3.4 %   1.7 %

Expected term in years(5)

    6.0     5.8  

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

(2)
For all awards granted in fiscal 2016, expected volatility was estimated using the leverage-adjusted average of the term-matching volatilities of peer companies due to the lack of volume of forward traded options, which precluded the use of implied volatility. For all awards granted in fiscal 2015, expected volatility was estimated using the implied volatility derived from options traded on HP's common stock.

(3)
The risk-free interest rate was estimated based on 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 award.

(5)
For awards subject to service-based vesting, due to the lack of historical exercise and post-vesting termination patterns of the post-Separation employee base, the expected term was estimated using simplified method for all awards granted in fiscal 2016 and the expected term was estimated using historical exercise and post-vesting termination patterns for all awards granted in fiscal 2015; and for performance-contingent awards, the expected term represents an output from the lattice model.

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Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 6: Stock-Based Compensation (Continued)

        A summary of stock option activity is as follows:

 
  Three months ended January 31, 2016  
 
  Shares   Weighted-
Average
Exercise
Price
  Weighted-
Average
Remaining
Contractual
Term
  Aggregate
Intrinsic
Value
 
 
  In thousands
   
  In years
  In millions
 

Outstanding at beginning of period

    36,278   $ 26              

Granted

    25,102   $ 6              

Exercised

    (308 ) $ 8              

Cancelled Awards

    (26,252 ) $ 26              

Forfeited and expired

    (563 ) $ 18              

Outstanding at end of period

    34,257   $ 12     5.2   $ 25  

Vested and expected to vest at end of period

    32,049   $ 12     5.1   $ 25  

Exercisable at end of period

    19,585   $ 10     3.8   $ 25  

        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 the last trading day of the first quarter of fiscal 2016. The aggregate intrinsic value is the difference between HP's closing stock price on the last trading day of the first quarter of fiscal 2016 and the exercise price, multiplied by the number of in-the-money options. The total intrinsic value of options exercised for the three months ended January 31, 2016 was $2 million.

        At January 31, 2016, there was $33 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 2.3 years.

Note 7: Taxes on Earnings

    Tax Matters Agreement and Other Income Tax Matters

        In connection with the Separation, HP entered into a Tax Matters Agreement (the "Tax Matters Agreement") with Hewlett Packard Enterprise effective on November 1, 2015 that governs the rights and obligations of HP and Hewlett Packard Enterprise for certain pre-Separation tax liabilities. The Tax Matters Agreement provides that HP and Hewlett Packard Enterprise will share certain pre-Separation income tax liabilities that arise from adjustments made by tax authorities to HP and Hewlett Packard Enterprise's U.S. and certain non-U.S. income tax returns. In certain jurisdictions HP and Hewlett Packard Enterprise have joint and several liability for past income tax liabilities and accordingly, HP could be legally liable under applicable tax law for such liabilities and required to make additional tax payments.

        In addition, if the distribution of Hewlett Packard Enterprise's common shares to the HP stockholders is determined to be taxable, Hewlett Packard Enterprise and HP would share the tax liability equally, unless the taxability of the distribution is the direct result of action taken by either

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Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 7: Taxes on Earnings (Continued)

Hewlett Packard Enterprise or HP subsequent to the distribution in which case the party causing the distribution to be taxable would be responsible for any taxes imposed on the distribution.

        Upon completion of the Separation on November 1, 2015, HP recorded income tax indemnification receivables from Hewlett Packard Enterprise for certain income tax liabilities that HP is jointly and severally liable for, but for which it is indemnified by Hewlett Packard Enterprise under the Tax Matters Agreement. The actual amount that Hewlett Packard Enterprise may be obligated to pay HP could vary depending upon the outcome of certain unresolved tax matters, which may not be resolved for several years. The net receivable as of January 31, 2016 was $892 million.

    Provision for Taxes

        HP's effective tax rate for continuing operations was 22.0% and 22.7% for the three months ended January 31, 2016 and 2015, respectively. HP's effective tax rate generally differs from the U.S. federal statutory rate of 35% due to favorable tax rates associated with certain earnings from HP's operations in lower tax jurisdictions throughout the world. HP has not provided U.S. taxes for all foreign earnings because HP plans to reinvest some of those earnings indefinitely outside the U.S.

        During the three months ended January 31, 2016, HP recorded $54 million of net tax benefits related to items unique to the year in the provision for taxes for continuing operations. This amount included a tax benefit of $41 million arising from the retroactive research and development credit provided by the Consolidated Appropriations Act of 2016 signed into law in December 2015, a tax benefit of $6 million on restructuring charges, and a tax benefit of $39 million related to provision to return adjustments. These tax benefits were offset by tax charges of $27 million related to uncertain tax positions and $5 million related to various other items.

        During the three months ended January 31, 2015, HP recorded $26 million of net tax benefits related to items unique to the year in the provision for taxes for continuing operations. These amounts included a tax benefit of $26 million arising from the retroactive research and development credit provided by the Tax Increase Prevention Act of 2014 signed into law in December 2014, a tax benefit of $12 million on separation charges, a tax benefit of $3 million on restructuring charges, and a tax benefit of $11 million for adjustments related to uncertain tax positions. These tax benefits were offset by a tax charge of $26 million related to provision to return adjustments.

    Uncertain Tax Positions

        HP is subject to income tax in the U.S. and approximately 57 other countries and is subject to routine corporate income tax audits in many of these jurisdictions. In addition, HP is subject to numerous ongoing audits by federal, state and foreign tax authorities. The U.S. Internal Revenue Service ("IRS") is conducting an audit of HP's 2009, 2010, 2011, 2012, 2013 and 2014 income tax returns. HP has received from the IRS Notices of Deficiency for its fiscal 1999, 2000, 2003, 2004 and 2005 tax years, and Revenue Agent Reports ("RAR") for its fiscal 2001, 2002, 2006, 2007 and 2008 tax years. The proposed IRS adjustments for these tax years would, if sustained, reduce the benefits of tax refund claims HP has filed for net operating loss carrybacks to earlier fiscal years and tax credit carryforwards to subsequent years by approximately $445 million. In addition, HP expects the IRS to issue an RAR for 2009 through 2011 relating to certain tax positions taken on the filed tax returns,

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Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 7: Taxes on Earnings (Continued)

including matters related to the U.S. taxation of certain intercompany loans. While the RAR may be material in amount, HP believes it has valid positions supporting its tax returns and, if necessary, it will vigorously defend such matters.

        HP has filed petitions with the U.S. Tax Court regarding certain proposed IRS adjustments regarding tax years 1999 through 2003 and is continuing to contest additional adjustments proposed by the IRS for other tax years. The U.S. Tax Court ruled in May 2012 against HP regarding one of the IRS adjustments for which HP has filed a formal Notice of Appeal. The Court proceedings are expected to begin in fiscal 2016.

        With respect to major state and foreign tax jurisdictions, HP is no longer subject to tax authority examinations for years prior to 1999. No material tax deficiencies have been assessed in major state or foreign tax jurisdictions during the reporting period.

        HP believes it has provided adequate reserves for all tax deficiencies or reductions in tax benefits that could result from federal, state and foreign tax audits. HP regularly assesses the likely outcomes of these audits in order to determine the appropriateness of HP's tax provision. HP adjusts its uncertain tax positions to reflect the impact of negotiations, settlements, rulings, advice of legal counsel, and other information and events pertaining to a particular audit. However, income tax audits are inherently unpredictable and there can be no assurance that HP will accurately predict the outcome of these audits. The amounts ultimately paid on resolution of an audit could be materially different from the amounts previously included in the provision for taxes and therefore the resolution of one or more of these uncertainties in any particular period could have a material impact on net income or cash flows.

        As of January 31, 2016, the amount of unrecognized tax benefits was $9.3 billion, of which up to $3.2 billion would affect HP's effective tax rate if realized. The amount of unrecognized tax benefits increased by $55 million for the three months ended January 31, 2016 primarily related to tax attributes. HP continues to record its tax liabilities related to uncertain tax positions and certain liabilities for which it has joint and several liability with Hewlett Packard Enterprise. During the period, as part of the Separation, HP distributed $756 million of liabilities related solely to uncertain tax positions associated with Hewlett Packard Enterprise. HP and Hewlett Packard Enterprise have contractually agreed to share the responsibility of certain tax exposures, and as such have recorded indemnification assets and liabilities pursuant to the executed Tax Matters Agreement. HP recognizes interest income from favorable settlements and interest expense and penalties accrued on unrecognized tax benefits in the provision for taxes in the Consolidated Condensed Statements of Earnings. As of January 31, 2016, HP had accrued $140 million for interest and penalties.

        HP engages in continuous discussion and negotiation with taxing authorities regarding tax matters in various jurisdictions. HP does not expect complete resolution of any IRS audit cycle within the next 12 months. However, it is reasonably possible that certain federal, foreign and state tax issues may be concluded in the next 12 months, including issues involving transfer pricing and other matters. Accordingly, HP believes it is reasonably possible that its existing unrecognized tax benefits may be reduced by an amount up to $76 million within the next 12 months.

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Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 7: Taxes on Earnings (Continued)

    Deferred Tax Assets and Liabilities

        In 2015, the FASB issued Accounting Standards Update ("ASU") 2015-17, "Balance Sheet Classification of Deferred Taxes", which simplifies the presentation of deferred income taxes. This guidance requires that deferred tax liabilities and assets be classified as non-current in a classified statement of financial position. This guidance may be applied either prospectively to all deferred tax assets and liabilities or retrospectively to all periods presented. HP early adopted the FASB's new accounting guidance prospectively for the interim period beginning November 1, 2015; thus, the prior reporting period was not retrospectively adjusted.

        HP periodically engages in intercompany advanced royalty payment arrangements that may result in advance payments between subsidiaries in different tax jurisdictions. When the local tax treatment of the intercompany licensing arrangements differs from U.S. GAAP treatment, deferred taxes are recognized. During fiscal 2015, HP executed an intercompany advanced royalty payment arrangement which resulted in advanced payments of $3.8 billion, with a deferral of intercompany revenues over the term of the arrangements, which is approximately 5 years. There was no recognition of any net U.S. deferred tax assets as a result of this transaction. In these transactions, the payments were received in the U.S. from a foreign consolidated affiliate, with a deferral of intercompany revenues over the term of the arrangement, which is approximately 5 years. Intercompany royalty revenue is eliminated in consolidation.

Note 8: Balance Sheet Details

    Accounts Receivable, Net

 
  As of  
 
  January 31,
2016
  October 31,
2015
 
 
  In millions
 

Accounts receivable

  $ 4,197   $ 4,905  

Allowance for doubtful accounts

    (83 )   (80 )

  $ 4,114   $ 4,825  

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Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 8: Balance Sheet Details (Continued)

        The allowance for doubtful accounts related to accounts receivable and changes were as follows:

 
  Three months
ended
January 31, 2016
 
 
  In millions
 

Balance at beginning of period

  $ 80  

Provision for doubtful accounts

    11  

Deductions, net of recoveries

    (8 )

Balance at end of period

  $ 83  

        HP has third-party arrangements, consisting of revolving short-term financing, which provide liquidity to certain partners in order to facilitate their working capital requirements. These financing arrangements, which in certain circumstances may contain partial recourse, result in a transfer of HP's receivables and risk, to the third-party. As these transfers qualify as true sales under the applicable accounting guidance, the receivables are derecognized from the Consolidated Condensed Balance Sheets upon transfer, and HP receives a payment for the receivables from the third-party within a mutually agreed upon time period. For arrangements involving an element of recourse, the recourse obligation is measured using market data from the similar transactions and reported as a current liability in the Consolidated Condensed Balance Sheets. The recourse obligations as of January 31, 2016 and October 31, 2015 were not material. As of January 31, 2016 and October 31, 2015 HP had $89 million and $93 million respectively, outstanding from the third parties which is reported in Accounts receivable on the Consolidated Condensed Balance Sheets. The costs associated with the sales of trade receivables for the three months ended January 31, 2016 and January 31, 2015 were not material.

        The following is a summary of the activity under these arrangements:

 
  Three months
ended
January 31, 2016
 
 
  In millions
 

Balance at beginning of period

  $ 93  

Trade receivables sold

    1,876  

Cash receipts

    (1,877 )

Foreign currency and other

    (3 )

Balance at end of period

  $ 89  

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Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 8: Balance Sheet Details (Continued)

    Inventory

 
  As of  
 
  January 31,
2016
  October 31,
2015
 
 
  In millions
 

Finished goods

  $ 2,477   $ 2,820  

Purchased parts and fabricated assemblies

    1,575     1,468  

  $ 4,052   $ 4,288  

    Other Current Assets

 
  As of  
 
  January 31,
2016
  October 31,
2015
 
 
  In millions
 

Value-added taxes receivable

  $ 759   $ 942  

Supplier and other receivables

    1,223     1,316  

Prepaid and other current assets

    1,319     1,193  

Deferred tax assets(1)

        1,047  

  $ $3,301   $ 4,498  

(1)
Effective beginning November 1, 2015, HP prospectively adopted ASU 2015-17, "Balance Sheet Classification of Deferred Taxes" and as a result classified all deferred tax assets and liabilities as non-current.

    Property, Plant and Equipment

 
  As of  
 
  January 31,
2016
  October 31,
2015
 
 
  In millions
 

Land, buildings and leasehold improvements

  $ 2,319   $ 2,272  

Machinery and equipment, including equipment held for lease

    3,500     3,459  

    5,819     5,731  

Accumulated depreciation

    (4,290 )   (4,239 )

  $ 1,529   $ 1,492  

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HP INC. AND SUBSIDIARIES

Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 8: Balance Sheet Details (Continued)

    Other Non-Current Assets

 
  As of  
 
  January 31,
2016
  October 31,
2015
 
 
  In millions
 

Tax indemnifications receivable(1)

  $ 989   $  

Deferred tax assets(2)

    882     216  

Other

    1,282     1,376  

  $ 3,153   $ 1,592  

(1)
In connection with the Tax Matters Agreement discussed under Note 7, "Taxes on Earnings".

(2)
Effective beginning November 1, 2015, HP prospectively adopted ASU 2015-17, "Balance Sheet Classification of Deferred Taxes" and as a result classified all deferred tax assets and liabilities as non-current.

    Other Accrued Liabilities

 
  As of  
 
  January 31,
2016
  October 31,
2015
 
 
  In millions
 

Accrued taxes-other

  $ 743   $ 1,007  

Warranty

    843     871  

Sales and marketing programs

    2,018     2,181  

Other

    2,469     2,182  

  $ 6,073   $ 6,241  

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HP INC. AND SUBSIDIARIES

Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 8: Balance Sheet Details (Continued)

    Other Non-Current Liabilities

 
  As of  
 
  January 31,
2016
  October 31,
2015
 
 
  In millions
 

Pension, post-retirement, and post-employment liabilities

  $ 2,124   $ 2,203  

Deferred tax liability

    1,977     1,813  

Tax liability

    1,267     1,803  

Deferred revenue

    825     812  

Tax indemnifications payable(1)

    97      

Other

    692     783  

  $ 6,982   $ 7,414  

(1)
In connection with the Tax Matters Agreement discussed under Note 7, "Taxes on Earnings".

Note 9: 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 inputs are developed using market data such as publicly available information and reflect the assumptions market participants would use, while unobservable inputs are developed using the best information available about the assumptions market participants would use. 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 for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability and market-corroborated inputs.

        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 9: Fair Value (Continued)

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

 
  As of January 31, 2016   As of October 31, 2015  
 
  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

                                                 

Cash Equivalents and Investments:

                                                 

Time deposits

  $   $ 1,055   $   $ 1,055   $   $ 1,111   $   $ 1,111  

Money market funds

    1,367             1,367     4,303             4,303  

Marketable equity securities

    5     3         8     6     3         9  

Foreign bonds

        44         44         42         42  

Other debt securities

        1         1         2         2  

Derivative Instruments:

                                                 

Interest rate contracts

        52         52         38         38  

Foreign currency contracts

        224     2     226         213     2     215  

Other derivatives

                        5         5  

Total assets

  $ 1,372   $ 1,379   $ 2   $ 2,753   $ 4,309   $ 1,414   $ 2   $ 5,725  

Liabilities

                                                 

Derivative Instruments:

                                                 

Foreign currency contracts

  $   $ 240   $ 1   $ 241   $   $ 302   $ 2   $ 304  

Other derivatives

        4         4                  

Total liabilities

  $   $ 244   $ 1   $ 245   $   $ 302   $ 2   $ 304  

        There were no transfers between levels within the fair value hierarchy during the three months ended January 31, 2016.

    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 investments 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, valuation models that utilize assumptions which cannot be corroborated with observable market data.

        Derivative Instruments: From time to time HP uses forward contracts, interest rate and total return swaps and option contracts to hedge certain foreign currency and interest rate exposures. HP uses industry standard valuation models to measure fair value. Where applicable, these models project future cash flows and discount the future amounts to present value using market-based observable

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Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 9: Fair Value (Continued)

inputs, including interest rate curves, HP and counterparty credit risk, foreign currency rates, and forward and spot prices for currencies and interest rates. See Note 10, "Financial Instruments" 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 $6.5 billion at January 31, 2016, compared to its carrying amount of $6.7 billion at that date. The estimated fair value of HP's short- and long-term debt approximated its carrying value of $8.9 billion at October 31, 2015. 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 goodwill, intangible assets and property, plant and equipment, are recorded at fair value in the period an impairment charge is recognized. If measured at fair value in the Consolidated Condensed Balance Sheets, these would generally be classified in Level 3 of the fair value hierarchy.

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HP INC. AND SUBSIDIARIES

Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 10: Financial Instruments

    Cash Equivalents and Available-for-Sale Investments

 
  As of January 31, 2016   As of October 31, 2015  
 
  Cost   Gross
Unrealized
Gain
  Gross
Unrealized
Loss
  Fair
Value
  Cost   Gross
Unrealized
Gain
  Gross
Unrealized
Loss
  Fair
Value
 
 
  In millions
 

Cash Equivalents:

                                                 

Time deposits

  $ 1,055   $   $   $ 1,055   $ 1,111   $   $   $ 1,111  

Money market funds

    1,367             1,367     4,303             4,303  

Total cash equivalents

    2,422             2,422     5,414             5,414  

Available-for-Sale Investments:

                                                 

Debt securities:

                                                 

Foreign bonds

    34     10         44     32     10         42  

Other debt securities

    1             1     2             2  

Total debt securities

    35     10         45     34     10         44  

Equity securities:

                                                 

Equity securities in public companies

    1     4         5     1     4         5  

Total equity securities

    1     4         5     1     4         5  

Total available-for-sale investments

    36     14         50     35     14         49  

Total cash equivalents and available-for-sale investments

  $ 2,458   $ 14   $   $ 2,472   $ 5,449   $ 14   $   $ 5,463  

        All highly liquid investments with original maturities of three months or less at the date of acquisition are considered cash equivalents. As of January 31, 2016 and October 31, 2015, 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 January 31, 2016 and October 31, 2015. The estimated fair value of the available-for-sale investments may not be representative of values that will be realized in the future.

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

 
  As of January 31, 2016  
 
  Amortized
Cost
  Fair Value  
 
  In millions
 

Due in one year

  $   $  

Due in one to five years

    1     1  

Due in more than five years

    34     44  

  $ 35   $ 45  

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HP INC. AND SUBSIDIARIES

Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 10: Financial Instruments (Continued)

        Equity securities in privately held companies include cost basis and equity method investments and are included in Other non-current assets in the Consolidated Condensed Balance Sheets. These amounted to $14 million and $13 million at January 31, 2016 and October 31, 2015, respectively.

    Derivative Instruments

        HP uses derivatives to offset business exposure to foreign currency and interest rate risk on expected future cash flows and on certain existing assets and liabilities. As part of its risk management strategy, HP uses derivative instruments, primarily forward contracts, interest rate swaps, total return swaps and, at times, option contracts to hedge certain foreign currency, interest rate and, to a lesser extent, equity exposures. HP may designate its derivative contracts as fair value hedges or cash flow hedges. 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 with the activities that correspond to the underlying hedged items 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. Master netting agreements mitigate credit exposure to counterparties by permitting HP to net amounts due from HP to counterparty against amounts due to HP from the same counterparty under certain conditions. To further limit credit risk, HP has collateral security agreements that allow HP to hold collateral from, or require HP to post collateral to, counterparties when aggregate derivative fair values exceed contractually established thresholds which are generally based on the credit ratings of HP and its counterparties. If HP's or the counterparty's credit rating falls below a specified credit rating, either party has the right to request full collateralization of the derivatives' net liability position. The fair value of derivatives with credit contingent features in a net liability position was $79 million and $138 million at January 31, 2016 and October 31, 2015, respectively, all of which were fully collateralized within two business days.

        Under HP's derivative contracts, the counterparty can terminate all outstanding trades following a covered change of control event affecting HP that results in the surviving entity being rated below a specified credit rating. This credit contingent provision did not affect HP's financial position or cash flows as of January 31, 2016 and October 31, 2015.

    Fair Value Hedges

        HP enters into fair value hedges, such as interest rate swaps, to reduce the exposure of its debt portfolio to changes in fair value resulting from changes in interest rates by achieving a primarily U.S. dollar London Interbank Offered Rate ("LIBOR")-based floating interest expense.

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

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Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 10: Financial Instruments (Continued)

    Cash Flow Hedges

        HP uses forward contracts and at times, option contracts designated as cash flow hedges to protect against the foreign currency exchange rate risks inherent in its forecasted net revenue and, to a lesser extent, cost of 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 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' (deficit) 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 used forward contracts designated as net investment hedges to hedge net investments in certain foreign subsidiaries whose functional currency was the local currency. As part of the Separation, HP disposed of all these foreign subsidiaries and no longer utilizes net investment hedges. HP recorded 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' (deficit) equity.

    Other Derivatives

        Other derivatives not designated as hedging instruments consist primarily of forward contracts used to hedge foreign currency-denominated balance sheet exposures. HP uses total return swaps to hedge its executive deferred compensation plan liability.

        For derivative instruments not designated as hedging instruments, HP recognizes changes in fair value of the derivative instrument, as well as the offsetting change in the fair value of the hedged item, in Interest and other, net in the Consolidated Condensed Statements of Earnings in the period of change.

    Hedge Effectiveness

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

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Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 10: Financial Instruments (Continued)

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 January 31, 2016   As of October 31, 2015  
 
  Outstanding
Gross
Notional
  Other
Current
Assets
  Other
Non-Current
Assets
  Other
Accrued
Liabilities
  Other
Non-Current
Liabilities
  Outstanding
Gross
Notional
  Other
Current
Assets
  Other
Non-Current
Assets
  Other
Accrued
Liabilities
  Other
Non-Current
Liabilities
 
 
  In millions
 

Derivatives designated as hedging instruments

                                                             

Fair value hedges:

                                                             

Interest rate contracts

  $ 2,000   $   $ 52   $   $   $ 3,175   $ 1   $ 37   $   $  

Cash flow hedges:

                                                             

Foreign currency contracts

    10,881     204     5     135     56     10,859     171     10     165     79  

Total derivatives designated as hedging instruments

    12,881     204     57     135     56     14,034     172     47     165     79  

Derivatives not designated as hedging instruments

                                                             

Foreign currency contracts

    4,841     17         26     24     8,955     33     1     37     23  

Other derivatives

    135             4         173     5              

Total derivatives not designated as hedging instruments

    4,976     17         30     24     9,128     38     1     37     23  

Total derivatives

  $ 17,857   $ 221   $ 57   $ 165   $ 80   $ 23,162   $ 210   $ 48   $ 202   $ 102  

    Offsetting of Derivative Instruments

        HP recognizes all derivative instruments on a gross basis in the Consolidated Condensed Balance Sheets. HP does not offset the fair value of its derivative instruments against the fair value of cash collateral posted under its collateral security agreements. As of January 31, 2016 and October 31, 2015,

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Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 10: Financial Instruments (Continued)

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

 
     
 
  In the Consolidated Condensed Balance Sheets    
 
 
  (vi) = (iii)–(iv)–(v)
 
 
  (i)
  (ii)
  (iii) = (i)–(ii)
  (iv)
  (v)
 
 
   
   
   
  Gross Amounts
Not Offset
   
 
As of January 31, 2016
  Gross
Amount
Recognized
  Gross
Amount
Offset
  Net Amount
Presented
  Derivatives   Financial
Collateral
  Net Amount  
 
  In millions
 

Derivative assets

  $ 278   $   $ 278   $ 159   $ 80 (1) $ 39  

Derivative liabilities

  $ 245   $   $ 245   $ 159   $ 65 (2) $ 21  

As of October 31, 2015

   
 
   
 
   
 
   
 
   
 
   
 
 

Derivative assets

  $ 258   $   $ 258   $ 162   $ 9 (1) $ 87  

Derivative liabilities

  $ 304   $   $ 304   $ 162   $   $ 142  

(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 months ended January 31, 2016 and 2015 were as follows:

 
  Gain (Loss) Recognized in Earnings on Derivative Instruments and Related
Hedged Items
 
 
   
  Three months
ended
January 31
   
   
  Three months
ended
January 31
 
Derivative Instrument
  Location   2016   2015   Hedged Item   Location   2016   2015  
 
   
  In millions
   
   
  In millions
 

Interest rate contracts

  Interest and other, net   $ 14   $ 141   Fixed-rate debt   Interest and other, net   $ (14 ) $ (141 )

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Notes to Consolidated Condensed Financial Statements (Continued)

(Unaudited)

Note 10: Financial Instruments (Continued)

        The pre-tax effect of derivative instruments in cash flow and net investment hedging relationships for the three months ended January 31, 2016 and 2015 were as follows:

 
  Gain (Loss)
Recognized
in Other
Comprehensive
Income ("OCI")
on Derivatives
(Effective
Portion)
  Gain (Loss) Reclassified from Accumulated OCI
into Earnings (Effective Portion)
 
 
  Three months
ended
January 31
   
  Three months
ended
January 31
 
 
  2016   2015   Location   2016   2015  
 
  In millions
   
  In millions
 

Cash flow hedges:

                             

Foreign currency contracts

  $ 105   $ 631   Net revenue   $ 78   $ 334  

              Cost of products     (40 )   (26 )

              Other operating expenses         (4 )

              Interest and other, net     (4 )   30  

Total

  $ 105   $ 631       $ 34   $ 334