Financial Instruments

Cash Equivalents and Available-for-Sale Investments



	As of October 31, 2018									As of October 31, 2017
	Cost		Gross Unrealized Gain		Gross Unrealized Loss			Fair Value		Cost		Gross Unrealized Gain		Gross Unrealized Loss			Fair Value
	In millions
Cash Equivalents:
Corporate debt	$	1,620	$	—	$	—		$	1,620	$	1,390	$	—	$	—		$	1,390
Financial institution instruments	9		—		—			9		6		—		—			6
Government debt	2,367		—		—			2,367		4,002		—		—			4,002
Total cash equivalents	3,996		—		—			3,996		5,398		—		—			5,398
Available-for-Sale Investments:
Corporate debt⁽¹⁾	368		—		(2		)	366		629		—		—			629
Financial institution instruments⁽¹⁾	32		—		—			32		78		—		—			78
Government debt⁽¹⁾	314		—		(1		)	313		443		—		(1		)	442
Marketable equity securities	4		2		—			6		5		7		—			12
Mutual funds	38		9		—			47		39		10		—			49
Total available-for-sale investments	756		11		(3		)	764		1,194		17		(1		)	1,210
Total cash equivalents and available-for-sale investments	$	4,752	$	11	$	(3	)	$	4,760	$	6,592	$	17	$	(1	)	$	6,608


⁽¹⁾	HP classifies its marketable debt securities as available-for-sale investments within Other current assets on the Consolidated Balance Sheets, including those with maturity dates beyond one year, based on their highly liquid nature and availability for use in current operations.

All highly liquid investments with original maturities of three months or less at the date of acquisition are considered cash equivalents. As of October 31, 2018 and 2017, the carrying amount of cash equivalents approximated fair value due to the short period of time to maturity. Interest income related to cash, cash equivalents and debt securities was approximately $116 million in fiscal year 2018, $66 million in fiscal year 2017, and $24 million in fiscal year 2016. 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 October 31, 2018
	Amortized Cost		Fair Value
	In millions
Due in one year or less	$	694	$	691
Due in one to five years	20		20
	$	714	$	711

Equity securities in privately held companies include cost basis and equity method investments and are included in Other non-current assets in the Consolidated Balance Sheets. These amounted to $36 million and $37 million as of October 31, 2018 and 2017, 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. HP classifies cash flows from its designated derivative contracts with the activities that correspond to the underlying hedged items. 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 Balance Sheets.

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 $68 million and $258 million as of October 31, 2018 and 2017, 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 October 31, 2018 and 2017.

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 Statements of Earnings in the period of change.

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 revenue, 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 in the Consolidated 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.

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 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 Statements of Earnings in the same period in which ineffectiveness occurs. Amounts excluded from the assessment of effectiveness are recognized in the Consolidated Statements of Earnings in the period they arise.

Fair Value of Derivative Instruments in the Consolidated Balance Sheets

The gross notional and fair value of derivative instruments in the Consolidated Balance Sheets was as follows:



	As of October 31, 2018										As of October 31, 2017
	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	$	1,000	$	—	$	—	$	—	$	23	$	2,500	$	—	$	—	$	—	$	12
Cash flow hedges:
Foreign currency contracts	17,147		386		107		86		52		16,149		92		12		245		100
Total derivatives designated as hedging instruments	18,147		386		107		86		75		18,649		92		12		245		112
Derivatives not designated as hedging instruments
Foreign currency contracts	5,437		22		—		26		—		5,801		16		—		15		—
Other derivatives	71		—		—		8		—		123		1		—		—		—
Total derivatives not designated as hedging instruments	5,508		22		—		34		—		5,924		17		—		15		—
Total derivatives	$	23,655	$	408	$	107	$	120	$	75	$	24,573	$	109	$	12	$	260	$	112

In March 2018, HP terminated several interest rate swaps with a notional amount of $1.5 billion that were de-designated as fair value hedges of certain fixed rate debt securities. See Note 11, “Borrowings” for detailed information.

Offsetting of Derivative Instruments

HP recognizes all derivative instruments on a gross basis in the Consolidated 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 October 31, 2018 and 2017, information related to the potential effect of HP’s master netting agreements and collateral security agreements was as follows:



	In the Consolidated Balance Sheets
	(i)		(ii)		(iii) = (i)–(ii)		(iv)		(v)			(vi) = (iii)–(iv)–(v)
	Gross Amount Recognized		Gross Amount Offset		Net Amount Presented		Gross Amounts Not Offset
	Gross Amount Recognized		Gross Amount Offset		Net Amount Presented		Derivatives		Financial Collateral			Net Amount
	In millions
As of October 31, 2018
Derivative assets	$	515	$	—	$	515	$	112	$	299	⁽¹⁾	$	104
Derivative liabilities	$	195	$	—	$	195	$	112	$	69	⁽²⁾	$	14
As of October 31, 2017
Derivative assets	$	121	$	—	$	121	$	108	$	4	⁽¹⁾	$	9
Derivative liabilities	$	372	$	—	$	372	$	108	$	219	⁽²⁾	$	45


⁽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 in cash or 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 Statements of Earnings

The pre-tax effect of derivative instruments and related hedged items in a fair value hedging relationship for fiscal years ended October 31, 2018, 2017 and 2016 was as follows:



	(Loss) Gain Recognized in Income on Derivative Instruments and Related Hedged Items
Derivative Instrument	Location	2018			2017			2016		Hedged Item	Location	2018		2017		2016
		In millions										In millions
Interest rate contracts	Interest and other, net	$	(11	)	$	(60	)	$	10	Fixed-rate debt	Interest and other, net	$	11	$	60	$	(10	)

The pre-tax effect of derivative instruments in cash flow hedging relationships for fiscal years ended October 31, 2018, 2017 and 2016 was as follows:



Gain (Loss) Recognized in OCI on Derivatives (Effective Portion)								(Loss) Gain Reclassified from Accumulated OCI Into Earnings (Effective Portion)
	2018		2017			2016			2018			2017			2016
	In millions								In millions
Cash flow hedges:
Foreign currency contracts	$	341	$	(651	)	$	199	Net revenue	$	(239	)	$	(156	)	$	20
								Cost of revenue	(18		)	(35		)	(84		)
								Other operating expenses	(1		)	1			1
								Interest and other, net	—			(9		)	—
Total	$	341	$	(651	)	$	199	Total	$	(258	)	$	(199	)	$	(63	)

As of October 31, 2018, 2017 and 2016, no portion of the hedging instruments’ gain or loss was excluded from the assessment of effectiveness for fair value or cash flow hedges. Hedge ineffectiveness for fair value and cash flow hedges was not material for fiscal years 2018, 2017 and 2016.

As of October 31, 2018, HP expects to reclassify an estimated net Accumulated other comprehensive income of approximately $248 million, net of taxes, to earnings in the next twelve months along with the earnings effects of the related forecasted transactions associated with cash flow hedges.

The pre-tax effect of derivative instruments not designated as hedging instruments on the Consolidated Statements of Earnings for fiscal years 2018, 2017 and 2016 was as follows:



	Gain (Loss) Recognized in Income on Derivatives
	Location	2018			2017			2016
		In millions
Foreign currency contracts	Interest and other, net	$	35		$	(32	)	$	(34	)
Other derivatives	Interest and other, net	(9		)	3			(6		)
Total		$	26		$	(29	)	$	(40	)