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TABLE OF CONTENTS
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 |
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For the quarterly period ended: January 31, 2014 |
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Or |
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o |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the transition period from to |
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Commission file number 1-4423 |
HEWLETT-PACKARD COMPANY
(Exact name of registrant as specified in its charter)
Delaware | 94-1081436 | |
(State or other jurisdiction of incorporation or organization) |
(I.R.S. employer identification no.) |
|
3000 Hanover Street, Palo Alto, California |
94304 |
|
(Address of principal executive offices) | (Zip code) | |
(650) 857-1501 (Registrant's telephone number, including area code) |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 (the "Exchange Act") during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer ý | Accelerated filer o | Non-accelerated filer o (Do not check if a smaller reporting company) |
Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act). Yes o No ý
The number of shares of HP common stock outstanding as of February 28, 2014 was 1,895,120,816 shares.
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
INDEX
Forward-Looking Statements
This Quarterly Report on Form 10-Q, including "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Item 2 of Part I, contains forward-looking statements that involve risks, uncertainties and assumptions. If the risks or uncertainties ever materialize or the assumptions prove incorrect, the results of Hewlett-Packard Company and its consolidated subsidiaries ("HP") may differ materially from those expressed or implied by such forward-looking statements and assumptions. All statements other than statements of historical fact are statements that could be deemed forward-looking statements, including but not limited to any projections of revenue, margins, expenses, HP's effective tax rate, net earnings, net earnings per share, cash flows, benefit plan funding, share repurchases, currency exchange rates or other financial items; any projections of the amount, timing or impact of cost savings or restructuring charges; any statements of the plans, strategies and objectives of management for future operations, including the execution of restructuring plans and any resulting revenue or cost savings or profitability improvements; any statements concerning the expected development, performance, market share or competitive performance relating to products or services; any statements regarding current or future macroeconomic trends or events and the impact of those trends and events on HP and its financial performance; any statements regarding pending investigations, claims or disputes; any statements of expectation or belief; and any statements of assumptions underlying any of the foregoing. Risks, uncertainties and assumptions include the need to address the many challenges facing HP's businesses; the competitive pressures faced by HP's businesses; risks associated with executing HP's strategy and plans for future operations; the impact of macroeconomic and geopolitical trends and events; the need to manage third-party suppliers and the distribution of HP's products and services effectively; the protection of HP's intellectual property assets, including intellectual property licensed from third parties; risks associated with HP's
2
international operations; the development and transition of new products and services and the enhancement of existing products and services to meet customer needs and respond to emerging technological trends; the execution and performance of contracts by HP and its suppliers, customers, clients and partners; the hiring and retention of key employees; integration and other risks associated with business combination and investment transactions; the execution, timing and results of restructuring plans, including estimates and assumptions related to the cost and the anticipated benefits of implementing those plans; the resolution of pending investigations, claims and disputes; and other risks that are described herein, including but not limited to the items discussed in "Risk Factors" in Item 1A of Part II of this report, and that are otherwise described or updated from time to time in HP's Securities and Exchange Commission reports, including HP's Annual Report on Form 10-K for the fiscal year ended October 31, 2013. HP assumes no obligation and does not intend to update these forward-looking statements.
3
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Consolidated Condensed Statements of Earnings
(Unaudited)
|
Three months ended January 31 |
||||||
---|---|---|---|---|---|---|---|
|
2014 | 2013 | |||||
|
In millions, except per share amounts |
||||||
Net revenue: |
|||||||
Products |
$ | 18,770 | $ | 18,270 | |||
Services |
9,281 | 9,971 | |||||
Financing income |
103 | 118 | |||||
| | | | | | | |
Total net revenue |
28,154 | 28,359 | |||||
| | | | | | | |
Costs and expenses: |
|||||||
Cost of products |
14,525 | 14,031 | |||||
Cost of services |
7,139 | 7,918 | |||||
Financing interest |
72 | 80 | |||||
Research and development |
811 | 794 | |||||
Selling, general and administrative |
3,210 | 3,300 | |||||
Amortization of intangible assets |
283 | 350 | |||||
Restructuring charges |
114 | 130 | |||||
Acquisition-related charges |
3 | 4 | |||||
| | | | | | | |
Total operating expenses |
26,157 | 26,607 | |||||
| | | | | | | |
Earnings from operations |
1,997 | 1,752 | |||||
| | | | | | | |
Interest and other, net |
(163 | ) | (179 | ) | |||
| | | | | | | |
Earnings before taxes |
1,834 | 1,573 | |||||
Provision for taxes |
(409 | ) | (341 | ) | |||
| | | | | | | |
Net earnings |
$ | 1,425 | $ | 1,232 | |||
| | | | | | | |
| | | | | | | |
Net earnings per share: |
|||||||
Basic |
$ | 0.75 | $ | 0.63 | |||
| | | | | | | |
| | | | | | | |
Diluted |
$ | 0.74 | $ | 0.63 | |||
| | | | | | | |
| | | | | | | |
Cash dividends declared per share |
$ | 0.29 | $ | 0.26 | |||
Weighted-average shares used to compute net earnings per share: |
|||||||
Basic |
1,907 | 1,953 | |||||
| | | | | | | |
| | | | | | | |
Diluted |
1,935 | 1,956 | |||||
| | | | | | | |
| | | | | | | |
The accompanying notes are an integral part of these Consolidated Condensed Financial Statements.
4
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Consolidated Condensed Statements of Comprehensive Income
(Unaudited)
|
Three months ended January 31 |
||||||
---|---|---|---|---|---|---|---|
|
2014 | 2013 | |||||
|
In millions |
||||||
Net earnings |
$ | 1,425 | $ | 1,232 | |||
| | | | | | | |
Other comprehensive income (loss) before tax: |
|||||||
Change in unrealized (losses) gains on available-for-sale securities: |
|||||||
Unrealized (losses) gains arising during the period |
(1 | ) | 3 | ||||
(Gains) losses reclassified into earnings |
(1 | ) | | ||||
| | | | | | | |
|
(2 | ) | 3 | ||||
| | | | | | | |
Change in unrealized gains (losses) on cash flow hedges: |
|||||||
Unrealized gains (losses) arising during the period |
70 | (314 | ) | ||||
Losses (gains) reclassified into earnings |
109 | 64 | |||||
| | | | | | | |
|
179 | (250 | ) | ||||
| | | | | | | |
Change in unrealized components of defined benefit plans: |
|||||||
Amortization of actuarial loss and prior service benefit |
63 | 83 | |||||
Curtailments, settlements and other |
| 13 | |||||
| | | | | | | |
|
63 | 96 | |||||
| | | | | | | |
Change in cumulative translation adjustment |
(24 | ) | (26 | ) | |||
| | | | | | | |
Other comprehensive income (loss) before taxes |
216 | (177 | ) | ||||
(Provision) benefit for taxes |
(105 | ) | 64 | ||||
| | | | | | | |
Other comprehensive income (loss), net of tax |
111 | (113 | ) | ||||
| | | | | | | |
Comprehensive income |
$ | 1,536 | $ | 1,119 | |||
| | | | | | | |
| | | | | | | |
The accompanying notes are an integral part of these Consolidated Condensed Financial Statements.
5
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Consolidated Condensed Balance Sheets
|
As of | ||||||
---|---|---|---|---|---|---|---|
|
January 31, 2014 |
October 31, 2013 |
|||||
|
In millions, except par value |
||||||
|
(Unaudited) |
|
|||||
ASSETS |
|||||||
Current assets: |
|||||||
Cash and cash equivalents |
$ | 16,165 | $ | 12,163 | |||
Accounts receivable |
13,492 | 15,876 | |||||
Financing receivables |
3,054 | 3,144 | |||||
Inventory |
6,004 | 6,046 | |||||
Other current assets |
11,969 | 13,135 | |||||
| | | | | | | |
Total current assets |
50,684 | 50,364 | |||||
| | | | | | | |
Property, plant and equipment |
11,259 | 11,463 | |||||
Long-term financing receivables and other assets |
9,131 | 9,556 | |||||
Goodwill |
31,131 | 31,124 | |||||
Intangible assets |
2,820 | 3,169 | |||||
| | | | | | | |
Total assets |
$ | 105,025 | $ | 105,676 | |||
| | | | | | | |
| | | | | | | |
LIABILITIES AND STOCKHOLDERS' EQUITY |
|||||||
Current liabilities: |
|||||||
Notes payable and short-term borrowings |
$ | 6,621 | $ | 5,979 | |||
Accounts payable |
12,640 | 14,019 | |||||
Employee compensation and benefits |
3,171 | 4,436 | |||||
Taxes on earnings |
1,224 | 1,203 | |||||
Deferred revenue |
6,754 | 6,477 | |||||
Accrued restructuring |
630 | 901 | |||||
Other accrued liabilities |
12,571 | 12,506 | |||||
| | | | | | | |
Total current liabilities |
43,611 | 45,521 | |||||
| | | | | | | |
Long-term debt |
17,971 | 16,608 | |||||
Other liabilities |
15,294 | 15,891 | |||||
Commitments and contingencies |
|||||||
Stockholders' equity: |
|||||||
HP stockholders' equity |
|||||||
Preferred stock, $0.01 par value (300 shares authorized; none issued) |
| | |||||
Common stock, $0.01 par value (9,600 shares authorized; 1,899 and 1,908 shares issued and outstanding, respectively) |
19 | 19 | |||||
Additional paid-in capital |
4,966 | 5,465 | |||||
Retained earnings |
26,436 | 25,563 | |||||
Accumulated other comprehensive loss |
(3,667 | ) | (3,778 | ) | |||
| | | | | | | |
Total HP stockholders' equity |
27,754 | 27,269 | |||||
Non-controlling interests |
395 | 387 | |||||
| | | | | | | |
Total stockholders' equity |
28,149 | 27,656 | |||||
| | | | | | | |
Total liabilities and stockholders' equity |
$ | 105,025 | $ | 105,676 | |||
| | | | | | | |
| | | | | | | |
The accompanying notes are an integral part of these Consolidated Condensed Financial Statements.
6
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Consolidated Condensed Statements of Cash Flows
(Unaudited)
|
Three months ended January 31 |
||||||
---|---|---|---|---|---|---|---|
|
2014 | 2013 | |||||
|
In millions |
||||||
Cash flows from operating activities: |
|||||||
Net earnings |
$ | 1,425 | $ | 1,232 | |||
Adjustments to reconcile net earnings to net cash provided by operating activities: |
|||||||
Depreciation and amortization |
1,117 | 1,163 | |||||
Stock-based compensation expense |
170 | 184 | |||||
Provision for doubtful accounts |
(4 | ) | 32 | ||||
Provision for inventory |
61 | 92 | |||||
Restructuring charges |
114 | 130 | |||||
Deferred taxes on earnings |
9 | 500 | |||||
Excess tax benefit from stock-based compensation |
(27 | ) | | ||||
Other, net |
(33 | ) | 167 | ||||
Changes in operating assets and liabilities: |
|||||||
Accounts receivable |
2,391 | 2,148 | |||||
Financing receivables |
296 | 98 | |||||
Inventory |
(19 | ) | (149 | ) | |||
Accounts payable |
(1,165 | ) | (1,690 | ) | |||
Taxes on earnings |
170 | (423 | ) | ||||
Restructuring |
(381 | ) | (237 | ) | |||
Other assets and liabilities |
(1,134 | ) | (685 | ) | |||
| | | | | | | |
Net cash provided by operating activities |
2,990 | 2,562 | |||||
| | | | | | | |
Cash flows from investing activities: |
|||||||
Investment in property, plant and equipment |
(997 | ) | (633 | ) | |||
Proceeds from sale of property, plant and equipment |
450 | 127 | |||||
Purchases of available-for-sale securities and other investments |
(135 | ) | (299 | ) | |||
Maturities and sales of available-for-sale securities and other investments |
465 | 161 | |||||
| | | | | | | |
Net cash used in investing activities |
(217 | ) | (644 | ) | |||
| | | | | | | |
Cash flows from financing activities: |
|||||||
Issuance (repayment) of commercial paper and notes payable, net |
2 | (105 | ) | ||||
Issuance of debt |
2,005 | 45 | |||||
Payment of debt |
(45 | ) | (114 | ) | |||
Issuance of common stock under employee stock plans |
83 | 55 | |||||
Repurchase of common stock |
(565 | ) | (253 | ) | |||
Excess tax benefit from stock-based compensation |
27 | | |||||
Cash dividends paid |
(278 | ) | (258 | ) | |||
| | | | | | | |
Net cash provided by (used in) financing activities |
1,229 | (630 | ) | ||||
| | | | | | | |
Increase in cash and cash equivalents |
4,002 | 1,288 | |||||
Cash and cash equivalents at beginning of period |
12,163 | 11,301 | |||||
| | | | | | | |
Cash and cash equivalents at end of period |
$ | 16,165 | $ | 12,589 | |||
| | | | | | | |
| | | | | | | |
Supplemental schedule of non-cash investing and financing activities: |
|||||||
Purchase of assets under capital leases |
$ | 95 | $ | 2 |
The accompanying notes are an integral part of these Consolidated Condensed Financial Statements.
7
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements
(Unaudited)
Note 1: Basis of Presentation
In the opinion of management, the accompanying unaudited Consolidated Condensed Financial Statements of Hewlett-Packard Company and its consolidated subsidiaries ("HP") contain all adjustments, including normal recurring adjustments, necessary to present fairly HP's financial position as of January 31, 2014 and October 31, 2013 and its results of operations and cash flows for the three months ended January 31, 2014 and January 31, 2013.
The results of operations and cash flows for the three months ended January 31, 2014 are not necessarily indicative of the results to be expected for the full year. The information included in this Quarterly Report on Form 10-Q should be read in conjunction with HP's Annual Report on Form 10-K for the fiscal year ended October 31, 2013, including "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Quantitative and Qualitative Disclosures About Market Risk" and the Consolidated Financial Statements and notes thereto included in Items 7, 7A and 8, respectively, included therein.
The accompanying unaudited Consolidated Condensed Financial Statements include the accounts of HP and other subsidiaries and affiliates in which HP has a controlling financial interest. Non-controlling interests are presented as a separate component within Total stockholder's equity in the Consolidated Condensed Balance Sheets. Net earnings attributable to the non-controlling interests are eliminated within Interest and other, net in the Consolidated Condensed Statements of Earnings and are not presented separately as they were not material for any period presented. HP has eliminated all significant intercompany accounts and transactions.
Use of Estimates
The preparation of financial statements in accordance with U.S. generally accepted accounting principles ("GAAP") requires management to make estimates and assumptions that affect the amounts reported in HP's Consolidated Condensed Financial Statements and accompanying notes. Actual results could differ materially from those estimates.
Segment Reorganization
HP has implemented certain segment and business unit realignments in order to align its segment financial reporting more closely with its current business structure. Prior year segment and business unit financial information have been made to conform to the current-year presentation. None of the changes impacts HP's previously reported consolidated net revenue, earnings from operations, net earnings or net earnings per share. See Note 16 for a further discussion of HP's segment reorganization.
Accounting Pronouncements
In July 2013, the Financial Accounting Standards Board ("FASB") issued a new accounting standard requiring the presentation of certain unrecognized tax benefits as reductions to deferred tax assets rather than as liabilities in the Consolidated Condensed Balance Sheets when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. HP will be required to adopt this new standard on a prospective basis in the first quarter of fiscal 2015; however, early adoption is
8
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements (Continued)
(Unaudited)
Note 1: Basis of Presentation (Continued)
permitted as is retrospective application. HP is currently evaluating the timing, transition method and impact of this new standard on its Consolidated Condensed Financial Statements.
Note 2: Stock-Based Compensation
HP's stock-based compensation plans include HP's principal equity plans as well as various equity plans assumed through business combinations. HP's principal equity plans permit the issuance of restricted stock awards, stock options and performance-based awards.
Stock-based compensation expense and the resulting tax benefits were as follows:
|
Three months ended January 31, 2014 |
Three months ended January 31, 2013 |
|||||
---|---|---|---|---|---|---|---|
|
In millions |
||||||
Stock-based compensation expense |
$ | 170 | $ | 184 | |||
Income tax benefit |
(53 | ) | (57 | ) | |||
| | | | | | | |
Stock-based compensation expense, net of tax |
$ | 117 | $ | 127 | |||
| | | | | | | |
| | | | | | | |
Restricted Stock Awards
Restricted stock awards are non-vested stock awards that include grants of restricted stock and grants of restricted stock units. For the three months ended January 31, 2014, HP granted only restricted stock units.
Non-vested restricted stock awards as of January 31, 2014, and changes during the three months ended January 31, 2014 were as follows:
|
Three months ended January 31, 2014 |
||||||
---|---|---|---|---|---|---|---|
|
Shares | Weighted- Average Grant Date Fair Value Per Share |
|||||
|
In thousands |
|
|||||
Outstanding at beginning of period |
32,262 | $ | 21 | ||||
Granted |
21,013 | $ | 27 | ||||
Vested |
(11,918 | ) | $ | 24 | |||
Forfeited |
(557 | ) | $ | 21 | |||
| | | | | | | |
Outstanding at end of period |
40,800 | $ | 23 | ||||
| | | | | | | |
| | | | | | | |
At January 31, 2014, there was $692 million of unrecognized pre-tax stock-based compensation expense related to non-vested restricted stock awards, which HP expects to recognize over the remaining weighted-average vesting period of 1.6 years.
9
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements (Continued)
(Unaudited)
Note 2: Stock-Based Compensation (Continued)
Stock Options
HP utilizes the Black-Scholes-Merton option pricing formula to estimate the fair value of stock options subject to service-based vesting conditions that are granted under its principal equity plans. HP estimates the fair value of stock options subject to performance-contingent vesting conditions using a combination of a Monte Carlo simulation model and a lattice model, as these awards contain market conditions. The weighted-average fair value and the assumptions used to measure fair value were as follows:
|
Three months ended January 31 |
||||||
---|---|---|---|---|---|---|---|
|
2014 | 2013 | |||||
Weighted-average fair value of grants per option(1) |
$ | 7.45 | $ | 4.01 | |||
Expected volatility(2) |
34 | % | 42 | % | |||
Risk-free interest rate(3) |
1.79 | % | 0.98 | % | |||
Expected dividend yield(4) |
2.15 | % | 3.77 | % | |||
Expected term in months(5) |
69 | 70 |
10
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements (Continued)
(Unaudited)
Note 2: Stock-Based Compensation (Continued)
Option activity as of January 31, 2014, and changes during the three months ended January 31, 2014 were as follows:
|
Three months ended January 31, 2014 | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Shares | Weighted- Average Exercise Price |
Weighted- Average Remaining Contractual Term |
Aggregate Intrinsic Value |
|||||||||
|
In thousands |
|
In years |
In millions |
|||||||||
Outstanding at beginning of period |
84,042 | $ | 27 | ||||||||||
Granted |
8,600 | $ | 27 | ||||||||||
Exercised |
(2,240 | ) | $ | 17 | |||||||||
Forfeited/cancelled/expired |
(18,362 | ) | $ | 32 | |||||||||
| | | | | | | | | | | | | |
Outstanding at end of period |
72,040 | $ | 26 | 5.0 | $ | 481 | |||||||
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Vested and expected to vest at end of period |
66,593 | $ | 26 | 4.8 | $ | 432 | |||||||
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Exercisable at end of period |
34,307 | $ | 33 | 2.9 | $ | 138 | |||||||
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value that option holders would have received had all option holders exercised their options on January 31, 2014. The aggregate intrinsic value is the difference between HP's closing stock price on the last trading day of the first quarter of fiscal 2014 and the exercise price, multiplied by the number of in-the-money options. Total intrinsic value of options exercised for the three months ended January 31, 2014 was $24 million.
At January 31, 2014, there was $135 million of unrecognized pre-tax, stock-based compensation expense related to stock options, which HP expects to recognize over the remaining weighted-average vesting period of 2.2 years.
Note 3: Net Earnings Per Share
HP calculates basic net earnings per share ("EPS") using net earnings and the weighted-average number of shares outstanding during the reporting period. Diluted net EPS includes any dilutive effect of restricted stock, stock options and performance-based restricted units.
11
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements (Continued)
(Unaudited)
Note 3: Net Earnings Per Share (Continued)
The reconciliations of the numerators and denominators of each of the basic and diluted net EPS calculations were as follows:
|
Three months ended January 31 |
||||||
---|---|---|---|---|---|---|---|
|
2014 | 2013 | |||||
|
In millions, except per share amounts |
||||||
Numerator: |
|||||||
Net earnings(1) |
$ | 1,425 | $ | 1,232 | |||
| | | | | | | |
| | | | | | | |
Denominator: |
|||||||
Weighted-average shares used to compute basic net EPS |
1,907 | 1,953 | |||||
Dilutive effect of employee stock plans |
28 | 3 | |||||
| | | | | | | |
Weighted-average shares used to compute diluted net EPS |
1,935 | 1,956 | |||||
| | | | | | | |
| | | | | | | |
Net earnings per share: |
|||||||
Basic |
$ | 0.75 | $ | 0.63 | |||
Diluted |
$ | 0.74 | $ | 0.63 |
HP excludes options with exercise prices that are greater than the average market price from the calculation of diluted net EPS because their effect would be anti-dilutive. In the three months ended January 31, 2014 and 2013, HP excluded from the calculation of diluted net EPS options to purchase 30 million shares and 74 million shares, respectively. In addition, HP also excluded from the calculation of diluted net EPS options to purchase an additional 7 million shares and 12 million shares, respectively, as their combined exercise price, unamortized fair value and excess tax benefits were greater in each of those periods than the average market price for HP's stock.
Note 4: Balance Sheet Details
Balance sheet details were as follows:
Accounts Receivable, Net
|
January 31, 2014 |
October 31, 2013 |
|||||
---|---|---|---|---|---|---|---|
|
In millions |
||||||
Accounts receivable |
$ | 13,760 | $ | 16,208 | |||
Allowance for doubtful accounts |
(268 | ) | (332 | ) | |||
| | | | | | | |
|
$ | 13,492 | $ | 15,876 | |||
| | | | | | | |
| | | | | | | |
12
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements (Continued)
(Unaudited)
Note 4: Balance Sheet Details (Continued)
|
Three months ended January 31, 2014 |
|||
---|---|---|---|---|
|
In millions |
|||
Allowance for doubtful accountsaccounts receivable: |
||||
Balance at beginning of period |
$ | 332 | ||
Provision for doubtful accounts |
(11 | ) | ||
Deductions, net of recoveries |
(53 | ) | ||
| | | | |
Balance at end of period |
$ | 268 | ||
| | | | |
| | | | |
HP has third-party financing arrangements consisting of revolving short-term financing intended to facilitate the working capital requirements of certain customers. These financing arrangements, which in one case provides for partial recourse, result in a transfer of HP's trade receivables and risk to the third party. As these transfers qualify for sales accounting treatment, the trade receivables are derecognized from the Consolidated Condensed Balance Sheets upon transfer, and HP receives a payment for the trade receivables from the third party within a mutually agreed upon time period. For the arrangement involving an element of recourse, the recourse obligation is measured using market data from similar transactions and reported as a current liability in the Consolidated Condensed Balance Sheets. The recourse obligations as of January 31, 2014 and October 31, 2013 were not material.
For both periods ended January 31, 2014 and 2013, $1.5 billion of trade receivables were sold under these facilities, which approximates the amount of cash received. The resulting costs associated with the sales of trade accounts receivable for both periods were not material. The maximum program capacity and available program capacity under these arrangements were as follows:
|
January 31, 2014 |
October 31, 2013 |
|||||
---|---|---|---|---|---|---|---|
|
In millions |
||||||
Non-recourse arrangements: |
|||||||
Aggregate maximum program capacity |
$ | 759 | $ | 764 | |||
Aggregate available capacity |
$ | 451 | $ | 450 | |||
Aggregate utilized capacity |
$ | 308 | $ | 314 | |||
Partial-recourse arrangement: |
|||||||
Maximum program capacity |
$ | 637 | $ | 631 | |||
Available capacity |
$ | 172 | $ | 177 | |||
Utilized capacity |
$ | 465 | $ | 454 | |||
Total arrangements: |
|||||||
Aggregate maximum program capacity |
$ | 1,396 | $ | 1,395 | |||
Aggregate available capacity |
$ | 623 | $ | 627 | |||
Aggregate utilized capacity |
$ | 773 | $ | 768 |
13
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements (Continued)
(Unaudited)
Note 4: Balance Sheet Details (Continued)
Inventory
|
January 31, 2014 |
October 31, 2013 |
|||||
---|---|---|---|---|---|---|---|
|
In millions |
||||||
Finished goods |
$ | 3,757 | $ | 3,847 | |||
Purchased parts and fabricated assemblies |
2,247 | 2,199 | |||||
| | | | | | | |
|
$ | 6,004 | $ | 6,046 | |||
| | | | | | | |
| | | | | | | |
Property, Plant and Equipment
|
January 31, 2014 |
October 31, 2013 |
|||||
---|---|---|---|---|---|---|---|
|
In millions |
||||||
Land |
$ | 553 | $ | 626 | |||
Buildings and leasehold improvements |
8,876 | 8,942 | |||||
Machinery and equipment, including equipment held for lease |
16,737 | 16,565 | |||||
| | | | | | | |
|
26,166 | 26,133 | |||||
| | | | | | | |
Accumulated depreciation |
(14,907 | ) | (14,670 | ) | |||
| | | | | | | |
|
$ | 11,259 | $ | 11,463 | |||
| | | | | | | |
| | | | | | | |
For the three months ended January 31, 2014, the change in gross property, plant and equipment was due primarily to investments of $878 million, which were partially offset by sales and retirements totaling $766 million. Accumulated depreciation associated with assets sold or retired was $560 million.
Note 5: Goodwill and Intangible Assets
Goodwill
Goodwill allocated to HP's reportable segments as of January 31, 2014 and changes in the carrying amount of goodwill during the three months ended January 31, 2014 are as follows:
|
Personal Systems |
Printing | Enterprise Group |
Enterprise Services(2) |
Software | HP Financial Services |
Corporate Investments |
Total | |||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
In millions |
||||||||||||||||||||||||
Balance at beginning of period(1) |
$ | 2,588 | $ | 2,591 | $ | 16,864 | $ | 97 | $ | 8,840 | $ | 144 | $ | | $ | 31,124 | |||||||||
Goodwill adjustments |
| | 8 | (1 | ) | | | | 7 | ||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | |
Balance at end of period(1) |
$ | 2,588 | $ | 2,591 | $ | 16,872 | $ | 96 | $ | 8,840 | $ | 144 | $ | | $ | 31,131 | |||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
14
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements (Continued)
(Unaudited)
Note 5: Goodwill and Intangible Assets (Continued)
Effective at the beginning of its first quarter of fiscal 2014, HP implemented certain organizational changes to align its segment financial reporting more closely with its current business structure. As a result of the organizational realignments, which are described in detail in Note 16, goodwill has been reclassified to the respective segments as of the beginning of the period using a relative fair value approach.
Goodwill is tested for impairment at the reporting unit level. At the beginning of its first quarter of fiscal 2014, HP made a change to its reporting units. In connection with continued operational synergies and interdependencies between the Enterprise Servers, Storage and Networking reporting unit and the Technology Services ("TS") reporting unit within the Enterprise Group ("EG") segment, HP combined these reporting units to create the EG reporting unit. As of January 31, 2014 our reporting units are consistent with the reportable segments identified in Note 16, except for ES, which includes two reporting units: MphasiS Limited; and the remainder of ES.
HP will continue to evaluate the recoverability of goodwill on an annual basis as of the beginning of its fourth fiscal quarter and whenever events or changes in circumstances indicate there may be a potential impairment.
Intangible Assets
HP's intangible assets associated with completed acquisitions are composed of:
|
January 31, 2014 | October 31, 2013 | |||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Gross | Accumulated Amortization |
Accumulated Impairment Loss |
Net | Gross | Accumulated Amortization |
Accumulated Impairment Loss |
Net | |||||||||||||||||
|
In millions |
||||||||||||||||||||||||
Customer contracts, customer lists and distribution agreements |
$ | 5,321 | $ | (2,847 | ) | $ | (856 | ) | $ | 1,618 | $ | 5,321 | $ | (2,709 | ) | $ | (856 | ) | $ | 1,756 | |||||
Developed and core technology and patents |
5,265 | (2,089 | ) | (2,138 | ) | 1,038 | 5,331 | (1,966 | ) | (2,138 | ) | 1,227 | |||||||||||||
Trade name and trade marks |
1,730 | (233 | ) | (1,336 | ) | 161 | 1,730 | (211 | ) | (1,336 | ) | 183 | |||||||||||||
In-process research and development |
3 | | | 3 | 3 | | | 3 | |||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | |
Total intangible assets |
$ | 12,319 | $ | (5,169 | ) | $ | (4,330 | ) | $ | 2,820 | $ | 12,385 | $ | (4,886 | ) | $ | (4,330 | ) | $ | 3,169 | |||||
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
For the first three months of fiscal 2014, the majority of the decrease in gross intangible assets was related to the sale of a portfolio of intellectual property.
15
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements (Continued)
(Unaudited)
Note 5: Goodwill and Intangible Assets (Continued)
Estimated future amortization expense related to finite-lived intangible assets at January 31, 2014 is as follows:
Fiscal year:
|
In millions | |||
---|---|---|---|---|
2014 (remaining 9 months) |
$ | 715 | ||
2015 |
864 | |||
2016 |
645 | |||
2017 |
237 | |||
2018 |
145 | |||
2019 |
110 | |||
Thereafter |
101 | |||
| | | | |
Total |
$ | 2,817 | ||
| | | | |
| | | | |
Note 6: Restructuring Charges
Summary of Restructuring Plans
HP's restructuring activities summarized by plan for the three months ended January 31, 2014 were as follows:
|
|
|
|
|
|
As of January 31, 2014 |
||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
|
Three months ended January 31, 2014 Charges |
|
|
|
|||||||||||||||||
|
Balance, October 31, 2013 |
Cash Payments |
Other Adjustments and Non-Cash Settlements |
Balance, January 31, 2014 |
Total Costs Incurred to Date |
Total Expected Costs to Be Incurred |
||||||||||||||||
|
In millions |
|||||||||||||||||||||
Fiscal 2012 Plan: |
||||||||||||||||||||||
Severance and EER |
$ | 945 | $ | 59 | $ | (333 | ) | $ | 4 | $ | 675 | $ | 3,095 | $ | 3,500 | |||||||
Infrastructure and other |
40 | 56 | (35 | ) | | 61 | 303 | 600 | ||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | |
Total 2012 Plan |
985 | 115 | (368 | ) | 4 | 736 | 3,398 | 4,100 | ||||||||||||||
Other Plans: |
||||||||||||||||||||||
Severance |
10 | | (2 | ) | | 8 | 2,629 | 2,629 | ||||||||||||||
Infrastructure |
122 | (1 | ) | (11 | ) | | 110 | 1,438 | 1,443 | |||||||||||||
| | | | | | | | | | | | | | | | | | | | | | |
Total Other Plans |
132 | (1 | ) | (13 | ) | | 118 | 4,067 | 4,072 | |||||||||||||
| | | | | | | | | | | | | | | | | | | | | | |
Total restructuring plans |
$ | 1,117 | $ | 114 | $ | (381 | ) | $ | 4 | $ | 854 | $ | 7,465 | $ | 8,172 | |||||||
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | |
At January 31, 2014 and October 31, 2013, HP included the short-term portion of the restructuring liability of $630 million and $901 million, respectively, in Accrued restructuring, and the long-term portion of $224 million and $216 million, respectively, in Other liabilities in the accompanying Consolidated Condensed Balance Sheets. The timing of associated cash payments is dependent upon the type of restructuring charge and can extend over a multi-year period.
16
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements (Continued)
(Unaudited)
Note 6: Restructuring Charges (Continued)
Fiscal 2012 Restructuring Plan
On May 23, 2012, HP adopted a multi-year restructuring plan (the "2012 Plan") designed to simplify business processes, accelerate innovation and deliver better results for customers, employees and stockholders. HP estimates that it will eliminate approximately 34,000 positions in connection with the 2012 Plan through fiscal year 2014, with a portion of those employees exiting the company as part of voluntary enhanced early retirement ("EER") programs in the United States and in certain other countries. HP estimates it will recognize approximately $4.1 billion in aggregate charges in connection with the 2012 Plan. HP expects to record these charges through the end of HP's 2014 fiscal year as the accounting recognition criteria are met. HP expects approximately $3.5 billion to relate to workforce reductions, including the EER programs, and approximately $0.6 billion to relate to infrastructure, including data center and real estate consolidation, and other items. As of January 31, 2014, HP had eliminated approximately 28,300 positions for which a severance payment has been or will be made as part of the 2012 Plan. The severance and infrastructure related cash payments associated with the 2012 Plan are expected to be paid out through fiscal 2021.
Other Plans
Restructuring plans initiated by HP in fiscal 2008 and 2010 have been substantially completed as of January 31, 2014, with $5 million of restructuring charges anticipated in future periods. HP estimates it will recognize approximately $4.1 billion in aggregate charges in connection with these plans. The severance and infrastructure-related cash payments associated with the other plans are expected to be paid out through fiscal 2019.
Note 7: Fair Value
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the measurement date.
Fair Value Hierarchy
Valuation techniques used by HP are based upon observable and unobservable inputs. Observable or market inputs reflect market data obtained from independent sources, while unobservable inputs reflect HP's assumptions about market participant assumptions based on the best information available. Assets and liabilities are classified in the fair value hierarchy based on the lowest level input that is significant to the fair value measurement:
Level 1Quoted prices (unadjusted) in active markets for identical assets or liabilities.
Level 2Quoted prices in active markets for similar assets or liabilities, quoted prices for identical or similar assets or liabilities in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3Unobservable inputs for the asset or liability.
The fair value hierarchy gives the highest priority to observable inputs and lowest priority to unobservable inputs.
17
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements (Continued)
(Unaudited)
Note 7: Fair Value (Continued)
The following table presents HP's assets and liabilities that are measured at fair value on a recurring basis:
|
As of January 31, 2014 | As of October 31, 2013 | |||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Fair Value Measured Using |
|
Fair Value Measured Using |
|
|||||||||||||||||||||
|
Total Balance |
Total Balance |
|||||||||||||||||||||||
|
Level 1 | Level 2 | Level 3 | Level 1 | Level 2 | Level 3 | |||||||||||||||||||
|
In millions |
||||||||||||||||||||||||
Assets |
|||||||||||||||||||||||||
Time deposits |
$ | | $ | 3,385 | $ | | $ | 3,385 | $ | | $ | 2,221 | $ | | $ | 2,221 | |||||||||
Money market funds |
9,627 | | | 9,627 | 6,819 | | | 6,819 | |||||||||||||||||
Mutual funds |
| 359 | | 359 | | 313 | | 313 | |||||||||||||||||
Marketable equity securities |
8 | 7 | | 15 | 10 | 5 | | 15 | |||||||||||||||||
Foreign bonds |
9 | 385 | | 394 | 9 | 387 | | 396 | |||||||||||||||||
Other debt securities |
| 2 | 46 | 48 | | 2 | 47 | 49 | |||||||||||||||||
Derivatives: |
|||||||||||||||||||||||||
Interest rate contracts |
| 141 | | 141 | | 156 | | 156 | |||||||||||||||||
Foreign exchange contracts |
| 556 | | 556 | | 284 | 3 | 287 | |||||||||||||||||
Other derivatives |
| 3 | | 3 | | 9 | | 9 | |||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | |
Total assets |
$ | 9,644 | $ | 4,838 | $ | 46 | $ | 14,528 | $ | 6,838 | $ | 3,377 | $ | 50 | $ | 10,265 | |||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Liabilities |
|||||||||||||||||||||||||
Derivatives: |
|||||||||||||||||||||||||
Interest rate contracts |
$ | | $ | 116 | $ | | $ | 116 | $ | | $ | 107 | $ | | $ | 107 | |||||||||
Foreign exchange contracts |
| 447 | 5 | 452 | | 547 | 2 | 549 | |||||||||||||||||
Other derivatives |
| 4 | | 4 | | | | | |||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | |
Total liabilities |
$ | | $ | 567 | $ | 5 | $ | 572 | $ | | $ | 654 | $ | 2 | $ | 656 | |||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
For the three months ended January 31, 2014, there were no transfers between levels within the fair value hierarchy.
Valuation Techniques
Cash Equivalents and Investments: HP holds time deposits, money market funds, mutual funds, other debt securities primarily consisting of corporate and foreign government notes and bonds, and common stock and equivalents. HP values cash equivalents and equity investments using quoted market prices, alternative pricing sources, including net asset value, or models utilizing market observable inputs. The fair value of debt instruments were based on quoted market prices or model driven valuations using inputs primarily derived from or corroborated by observable market data, and in certain instances internally developed valuation models that utilize assumptions which cannot be corroborated with observable market data.
Derivative Instruments: As discussed in Note 8, HP holds forwards, swaps and options to hedge certain foreign currency and interest rate exposures. When prices in active markets are not available for the identical asset or liability, HP uses industry standard valuation models to measure fair value. Where
18
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements (Continued)
(Unaudited)
Note 7: Fair Value (Continued)
applicable, these models project future cash flows and discount the future amounts to present value using market-based observable inputs, including interest rate curves, HP and counterparty credit risk, foreign exchange rates, and forward and spot prices for currencies and interest rates.
Other Fair Value Disclosures
Short- and Long-Term Debt: HP estimates the fair value of its debt primarily using an expected present value technique, which is based upon observable market inputs using interest rates currently available to companies of similar credit standing for similar terms and remaining maturities, and considering its own credit risk. The portion of HP's debt that is hedged is reflected in the Consolidated Condensed Balance Sheets as an amount equal to the debt's carrying amount and a fair value adjustment representing changes in the fair value of the hedged debt obligations arising from movements in benchmark interest rates. The estimated fair value of HP's short-and long-term debt was approximately $24.8 billion at January 31, 2014, compared to its carrying value of $24.6 billion at that date. The estimated fair value of HP's short- and long-term debt was approximately $22.7 billion at October 31, 2013, compared to its carrying value of $22.6 billion at that date. If measured at fair value in the Consolidated Condensed Balance Sheets, short- and long-term debt would be classified in Level 2 of the fair value hierarchy.
Other Financial Instruments: For the balance of HP's financial instruments, primarily accounts receivable, accounts payable and financial liabilities in other accrued liabilities, the carrying amounts approximate fair value due to their short maturities. If measured at fair value in the Consolidated Condensed Balance Sheets, these other financial instruments would be classified in Level 3 of the fair value hierarchy.
Non-Marketable Equity Investments and Non-Financial Assets: HP's non-marketable equity investments and non-financial assets, such as intangible assets, goodwill and property, plant and equipment, are recorded at fair value in the period an impairment charge is recognized.
19
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements (Continued)
(Unaudited)
Note 8: Financial Instruments
Cash Equivalents and Available-for-Sale Investments
Cash equivalents and available-for-sale investments as of January 31, 2014 and October 31, 2013 were as follows:
|
January 31, 2014 | October 31, 2013 | |||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Cost | Gross Unrealized Gain |
Gross Unrealized Loss |
Fair Value |
Cost | Gross Unrealized Gain |
Gross Unrealized Loss |
Fair Value |
|||||||||||||||||
|
In millions |
||||||||||||||||||||||||
Cash Equivalents |
|||||||||||||||||||||||||
Time deposits |
$ | 3,338 | $ | | $ | | $ | 3,338 | $ | 2,207 | $ | | $ | | $ | 2,207 | |||||||||
Money market funds |
9,627 | | | 9,627 | 6,819 | | | 6,819 | |||||||||||||||||
Mutual funds |
261 | | | 261 | 13 | | | 13 | |||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | |
Total cash equivalents |
13,226 | | | 13,226 | 9,039 | | | 9,039 | |||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | |
Available-for-Sale Investments |
|||||||||||||||||||||||||
Debt securities: |
|||||||||||||||||||||||||
Time deposits |
47 | | | 47 | 14 | | | 14 | |||||||||||||||||
Foreign bonds |
307 | 87 | | 394 | 310 | 86 | | 396 | |||||||||||||||||
Other debt securities |
63 | | (15 | ) | 48 | 64 | | (15 | ) | 49 | |||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | |
Total debt securities |
417 | 87 | (15 | ) | 489 | 388 | 86 | (15 | ) | 459 | |||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | |
Equity securities: |
|||||||||||||||||||||||||
Mutual funds |
98 | | | 98 | 300 | | | 300 | |||||||||||||||||
Equity securities in public companies |
8 | 3 | | 11 | 5 | 6 | | 11 | |||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | |
Total equity securities |
106 | 3 | | 109 | 305 | 6 | | 311 | |||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | |
Total available-for-sale investments |
523 | 90 | (15 | ) | 598 | 693 | 92 | (15 | ) | 770 | |||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | |
Total cash equivalents and available-for-sale investments |
$ | 13,749 | $ | 90 | $ | (15 | ) | $ | 13,824 | $ | 9,732 | $ | 92 | $ | (15 | ) | $ | 9,809 | |||||||
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
All highly liquid investments with original maturities of three months or less at the date of acquisition are considered cash equivalents. As of January 31, 2014 and October 31, 2013, the carrying value of cash equivalents approximates fair value due to the short period of time to maturity. Time deposits were primarily issued by institutions outside the United States as of January 31, 2014 and October 31, 2013. The estimated fair value of the available-for-sale investments may not be representative of values that will be realized in the future.
The gross unrealized loss of $15 million as of January 31, 2014 and October 31, 2013 was due primarily to a decline in the fair value of a debt security that has been in a continuous loss position for more than twelve months. HP does not intend to sell this debt security, and it is not likely that HP will be required to sell this debt security prior to the recovery of the amortized cost.
20
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements (Continued)
(Unaudited)
Note 8: Financial Instruments (Continued)
Contractual maturities of short- and long-term investments in available-for-sale debt securities were as follows:
|
January 31, 2014 |
||||||
---|---|---|---|---|---|---|---|
|
Cost | Fair Value |
|||||
|
In millions |
||||||
Due in one to five years |
$ | 34 | $ | 34 | |||
Due in more than five years |
383 | 455 | |||||
| | | | | | | |
|
$ | 417 | $ | 489 | |||
| | | | | | | |
| | | | | | | |
Equity securities in privately held companies include cost basis and equity method investments. These amounted to $49 million and $50 million at January 31, 2014 and October 31, 2013, respectively, and are included in Long-term financing receivables and other assets in the Consolidated Condensed Balance Sheets.
Derivative Instruments
HP is a global company exposed to foreign currency exchange rate fluctuations and interest rate changes in the normal course of its business. As part of its risk management strategy, HP uses derivative instruments, primarily forward contracts, option contracts, interest rate swaps, and total return swaps, to hedge certain foreign currency, interest rate and, to a lesser extent, equity exposures. HP's objective is to offset gains and losses resulting from these exposures with losses and gains on the derivative contracts used to hedge them, thereby reducing volatility of earnings or protecting fair values of assets and liabilities. HP does not have any leveraged derivatives and does not use derivative contracts for speculative purposes. HP designates its derivatives as fair value hedges, cash flow hedges or hedges of the foreign currency exposure of a net investment in a foreign operation ("net investment hedges"). Additionally, for derivatives not designated as hedging instruments, HP categorizes those economic hedges as other derivatives. HP recognizes all derivative instruments at fair value in the Consolidated Condensed Balance Sheets. HP classifies cash flows from its derivative programs as operating activities in the Consolidated Condensed Statements of Cash Flows.
As a result of its use of derivative instruments, HP is exposed to the risk that its counterparties will fail to meet their contractual obligations. To mitigate counterparty credit risk, HP has a policy of only entering into contracts with carefully selected major financial institutions based upon their credit ratings and other factors, and HP maintains dollar risk limits that correspond to each institution's credit rating and other factors. HP's established policies and procedures for mitigating credit risk include reviewing and establishing limits for credit exposure and periodically re-assessing the creditworthiness of counterparties. Master netting agreements mitigate credit exposure to counterparties by permitting HP to net amounts due from HP to a counterparty against amounts due to HP from the same counterparty under certain conditions.
To further mitigate credit exposure to counterparties, HP has collateral security agreements that allow HP to hold collateral from or require HP to post collateral to counterparties when aggregate derivative fair values exceed contractually established thresholds which are generally based on the credit
21
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements (Continued)
(Unaudited)
Note 8: Financial Instruments (Continued)
ratings of HP and its counterparties. If HP's or the counterparty's credit rating falls below a specified credit rating, either party has the right to request full collateralization on the derivatives' net liability position. Such funds are generally transferred within two business days of the due date.
Under HP's derivative contracts, the counterparty can terminate all outstanding trades following a covered change of control event affecting HP that results in the surviving entity being rated below a specified credit rating. This credit contingent provision did not affect HP's financial position as of January 31, 2014 and October 31, 2013.
Fair Value Hedges
HP issues long-term debt in U.S. dollars based on market conditions at the time of financing. HP may enter into fair value hedges, such as interest rate swaps, to reduce the exposure of its debt portfolio to interest rate risk and achieve a primarily U.S. dollar LIBOR-based floating interest expense. The swap transactions generally involve principal and interest obligations for U.S. dollar-denominated amounts. Alternatively, HP may choose not to swap fixed for floating interest payments or may terminate a previously executed swap if it believes a larger proportion of fixed-rate debt would be beneficial.
When investing in fixed-rate instruments, HP may enter into interest rate swaps that convert the fixed interest payments into variable interest payments and may designate these swaps as fair value hedges.
For derivative instruments that are designated and qualify as fair value hedges, HP recognizes the gain or loss on the derivative instrument, as well as the offsetting loss or gain on the hedged item, in Interest and other, net in the Consolidated Condensed Statements of Earnings in the period of change.
Cash Flow Hedges
HP uses a combination of forward contracts and options designated as cash flow hedges to protect against the foreign currency exchange rate risks inherent in its forecasted net revenue and, to a lesser extent, cost of sales, operating expenses, and intercompany loans denominated in currencies other than the U.S. dollar. HP's foreign currency cash flow hedges mature generally within twelve months; however, certain leasing revenue-related forward contracts and intercompany loan forward contracts extend for the duration of the lease or loan term, which can be up to five years.
For derivative instruments that are designated and qualify as cash flow hedges, HP initially records the effective portion of the gain or loss on the derivative instrument in Accumulated other comprehensive loss as a separate component of stockholders' equity in the Consolidated Condensed Balance Sheets and subsequently reclassifies these amounts into earnings in the period during which the hedged transaction is recognized in earnings. HP reports the effective portion of its cash flow hedges in the same financial statement line item as changes in the fair value of the hedged item. During the three months ended January 31, 2014, HP did not discontinue any cash flow hedge for which it was probable that a forecasted transaction would not occur. During the three months ended January 31, 2013 there was no significant impact to results of operations as a result of discontinued cash flow hedges.
22
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements (Continued)
(Unaudited)
Note 8: Financial Instruments (Continued)
Net Investment Hedges
HP uses forward contracts designated as net investment hedges to hedge net investments in certain foreign subsidiaries whose functional currency is the local currency. These derivative instruments are designated as net investment hedges and, as such, HP records the effective portion of the gain or loss on the derivative instrument together with changes in the fair value of the hedged items in Cumulative translation adjustment as a separate component of stockholders' equity in the Consolidated Condensed Balance Sheets.
Other Derivatives
Other derivatives not designated as hedging instruments consist primarily of forward contracts HP uses to hedge foreign currency-denominated balance sheet exposures. HP also uses total return swaps and, to a lesser extent, interest rate swaps, based on equity or fixed income indices, to hedge its executive deferred compensation plan liability.
For derivative instruments not designated as hedging instruments, HP recognizes changes in fair value in earnings in the period of change. HP recognizes the gain or loss on foreign currency forward contracts used to hedge balance sheet exposures in Interest and other, net in the Consolidated Condensed Statements of Earnings in the same period as the remeasurement gain and loss of the related foreign currency-denominated assets and liabilities. HP recognizes the gain or loss on the total return swaps and interest rate swaps in Interest and other, net in the same period as the gain or loss from changes in the fair value of amounts owed to participants in the executive deferred compensation plan.
Hedge Effectiveness
For interest rate swaps designated as fair value hedges, HP measures effectiveness by offsetting the change in fair value of the hedged instrument with the change in fair value of the derivative. For foreign currency options and forward contracts designated as cash flow or net investment hedges, HP measures effectiveness by comparing the cumulative change in the hedge contract with the cumulative change in the hedged item, both of which are based on forward rates. HP recognizes any ineffective portion of the hedge in the Consolidated Condensed Statements of Earnings in the same period in which ineffectiveness occurs. Amounts excluded from the assessment of effectiveness are recognized in the Consolidated Condensed Statements of Earnings in the period they arise.
23
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements (Continued)
(Unaudited)
Note 8: Financial Instruments (Continued)
Fair Value of Derivative Instruments in the Consolidated Condensed Balance Sheets
The gross notional and fair value of derivative instruments in the Consolidated Condensed Balance Sheets were as follows:
|
As of January 31, 2014 | As of October 31, 2013 | |||||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Gross Notional(1) |
Other Current Assets |
Long-Term Financing Receivables and Other Assets |
Other Accrued Liabilities |
Long-Term Other Liabilities |
Gross Notional(1) |
Other Current Assets |
Long-Term Financing Receivables and Other Assets |
Other Accrued Liabilities |
Long-Term Other Liabilities |
|||||||||||||||||||||
|
In millions |
||||||||||||||||||||||||||||||
Derivatives designated as hedging instruments |
|||||||||||||||||||||||||||||||
Fair value hedges: |
|||||||||||||||||||||||||||||||
Interest rate contracts |
$ | 12,350 | $ | 14 | $ | 127 | $ | | $ | 116 | $ | 11,100 | $ | 31 | $ | 125 | $ | | $ | 107 | |||||||||||
Cash flow hedges: |
|||||||||||||||||||||||||||||||
Foreign exchange contracts |
22,035 | 226 | 60 | 234 | 106 | 22,463 | 79 | 40 | 341 | 80 | |||||||||||||||||||||
Net investment hedges: |
|||||||||||||||||||||||||||||||
Foreign exchange contracts |
1,957 | 60 | 67 | 7 | 9 | 1,920 | 30 | 40 | 20 | 12 | |||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total derivatives designated as hedging instruments |
36,342 | 300 | 254 | 241 | 231 | 35,483 | 140 | 205 | 361 | 199 | |||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Derivatives not designated as hedging instruments |
|||||||||||||||||||||||||||||||
Foreign exchange contracts |
12,652 | 98 | 45 | 64 | 32 | 16,048 | 72 | 26 | 76 | 20 | |||||||||||||||||||||
Other derivatives |
310 | 2 | 1 | 4 | | 344 | 8 | 1 | | | |||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total derivatives not designated as hedging instruments |
12,962 | 100 | 46 | 68 | 32 | 16,392 | 80 | 27 | 76 | 20 | |||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total derivatives |
$ | 49,304 | $ | 400 | $ | 300 | $ | 309 | $ | 263 | $ | 51,875 | $ | 220 | $ | 232 | $ | 437 | $ | 219 | |||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Offsetting of Derivative Instruments
HP recognizes all derivatives on a gross basis in the Consolidated Condensed Balance Sheets. HP does not offset the fair value of its derivative instruments against the fair value of cash collateral under its collateral security agreements. As of January 31, 2014 and October 31, 2013 information related to
24
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements (Continued)
(Unaudited)
Note 8: Financial Instruments (Continued)
the potential effect of HP's master netting agreements and collateral security agreements were as follows:
|
As of January 31, 2014 | ||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
In the Consolidated Condensed Balance Sheets | |
|||||||||||||||||
|
(i) |
(ii) |
(iii) = (i)-(ii) |
(iv) |
(v) |
(vi) = (iii)-(iv)-(v) |
|||||||||||||
|
|
|
|
Gross Amounts Not Offset | |
||||||||||||||
|
Gross Amount Recognized |
Gross Amount Offset |
Net Amount Presented |
Derivatives | Financial Collateral |
Net Amount | |||||||||||||
|
In millions |
||||||||||||||||||
Derivative assets |
$ | 700 | $ | | $ | 700 | $ | 363 | $ | 180 | $ | 157 | |||||||
Derivative liabilities |
$ | 572 | $ | | $ | 572 | $ | 363 | $ | 155 | (1) | $ | 54 |
|
As of October 31, 2013 | ||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
In the Consolidated Condensed Balance Sheets | |
|||||||||||||||||
|
(i) |
(ii) |
(iii) = (i)-(ii) |
(iv) |
(v) |
(vi) = (iii)-(iv)-(v) |
|||||||||||||
|
|
|
|
Gross Amounts Not Offset | |
||||||||||||||
|
Gross Amount Recognized |
Gross Amount Offset |
Net Amount Presented |
Derivatives | Financial Collateral |
Net Amount | |||||||||||||
|
In millions |
||||||||||||||||||
Derivative assets |
$ | 452 | $ | | $ | 452 | $ | 372 | $ | 30 | $ | 50 | |||||||
Derivative liabilities |
$ | 656 | $ | | $ | 656 | $ | 372 | $ | 283 | (1) | $ | 1 |
Effect of Derivative Instruments on the Consolidated Condensed Statements of Earnings
The pre-tax effect of derivative instruments and related hedged items in a fair value hedging relationship for the three months ended January 31, 2014 and 2013 were as follows:
|
Gain (Loss) Recognized in Earnings on Derivative and Related Hedged Item | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Derivative Instrument
|
Location | Three months ended January 31, 2014 |
Hedged Item | Location | Three months ended January 31, 2014 |
||||||||
|
|
In millions |
|
|
In millions |
||||||||
Interest rate contracts |
Interest and other, net | $ | (24 | ) | Fixed-rate debt | Interest and other, net | $ | 24 |
25
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements (Continued)
(Unaudited)
Note 8: Financial Instruments (Continued)
|
Gain (Loss) Recognized in Earnings on Derivative and Related Hedged Item | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Derivative Instrument
|
Location | Three months ended January 31, 2013 |
Hedged Item | Location | Three months ended January 31, 2013 |
||||||||
|
|
In millions |
|
|
In millions |
||||||||
Interest rate contracts |
Interest and other, net | $ | (99 | ) | Fixed-rate debt | Interest and other, net | $ | 98 |
The pre-tax effect of derivative instruments in cash flow and net investment hedging relationships for the three months ended January 31, 2014 and 2013 were as follows:
|
Gain (Loss) Recognized in Other Comprehensive Income ("OCI") on Derivatives (Effective Portion) |
Gain (Loss) Reclassified from Accumulated OCI into Earnings (Effective Portion) |
|||||||
---|---|---|---|---|---|---|---|---|---|
|
Three months ended January 31, 2014 |
Location | Three months ended January 31, 2014 |
||||||
|
In millions |
|
In millions |
||||||
Cash flow hedges: |
|||||||||
Foreign exchange contracts |
$ | 175 | Net revenue | $ | (63 | ) | |||
Foreign exchange contracts |
(87 | ) | Cost of products | (23 | ) | ||||
Foreign exchange contracts |
| Other operating expenses | (4 | ) | |||||
Foreign exchange contracts |
(18 | ) | Interest and other, net | (19 | ) | ||||
| | | | | | | | | |
Total cash flow hedges |
$ | 70 | $ | (109 | ) | ||||
| | | | | | | | | |
| | | | | | | | | |
Net investment hedges: |
|||||||||
Foreign exchange contracts |
$ | 66 | Interest and other, net | $ | | ||||
| | | | | | | | | |
| | | | | | | | | |
|
Gain (Loss) Recognized in OCI on Derivatives (Effective Portion) |
Gain (Loss) Reclassified from Accumulated OCI into Earnings (Effective Portion) |
|||||||
---|---|---|---|---|---|---|---|---|---|
|
Three months ended January 31, 2013 |
Location | Three months ended January 31, 2013 |
||||||
|
In millions |
|
In millions |
||||||
Cash flow hedges: |
|||||||||
Foreign exchange contracts |
$ | (199 | ) | Net revenue | $ | (57 | ) | ||
Foreign exchange contracts |
(125 | ) | Cost of products | (3 | ) | ||||
Foreign exchange contracts |
8 | Other operating expenses | 1 | ||||||
Foreign exchange contracts |
2 | Interest and other, net | (5 | ) | |||||
| | | | | | | | | |
Total cash flow hedges |
$ | (314 | ) | $ | (64 | ) | |||
| | | | | | | | | |
| | | | | | | | | |
Net investment hedges: |
|||||||||
Foreign exchange contracts |
$ | (15 | ) | Interest and other, net | $ | | |||
| | | | | | | | | |
| | | | | | | | | |
26
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements (Continued)
(Unaudited)
Note 8: Financial Instruments (Continued)
As of January 31, 2014, no portion of the hedging instruments gain or loss was excluded from the assessment of effectiveness for fair value, cash flow or net investment hedges. As of January 31, 2013, the portion of hedging instruments gain or loss excluded from the assessment of effectiveness was not material for fair value, cash flow or net investment hedges. Hedge ineffectiveness for fair value, cash flow and net investment hedges was not material in the three months ended January 31, 2014 and 2013.
As of January 31, 2014, HP expects to reclassify an estimated net Accumulated other comprehensive loss of approximately $28 million, net of taxes, to earnings in the next twelve months along with the earnings effects of the related forecasted transactions associated with cash flow hedges.
The pre-tax effect of derivative instruments not designated as hedging instruments on the Consolidated Condensed Statements of Earnings for the three months ended January 31, 2014 and 2013 were as follows:
|
Gain (Loss) Recognized in Earnings on Derivatives | |||||
---|---|---|---|---|---|---|
|
Location | Three months ended January 31, 2014 |
||||
|
|
In millions |
||||
Foreign exchange contracts |
Interest and other, net | $ | 190 | |||
Other derivatives |
Interest and other, net | (10 | ) | |||
Interest rate contracts |
Interest and other, net | | ||||
| | | | | | |
Total |
$ | 180 | ||||
| | | | | | |
| | | | | | |
|
Gain (Loss) Recognized in Earnings on Derivatives | |||||
---|---|---|---|---|---|---|
|
Location | Three months ended January 31, 2013 |
||||
|
|
In millions |
||||
Foreign exchange contracts |
Interest and other, net | $ | (40 | ) | ||
Other derivatives |
Interest and other, net | 7 | ||||
Interest rate contracts |
Interest and other, net | 2 | ||||
| | | | | | |
Total |
$ | (31 | ) | |||
| | | | | | |
| | | | | | |
Note 9: Financing Receivables and Operating Leases
Financing receivables represent sales-type and direct-financing leases resulting from the placement of HP and third-party products. These receivables typically have terms from two to five years and are usually collateralized by a security interest in the underlying assets. Financing receivables also include billed receivables from operating leases. The components of financing receivables, which are included
27
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements (Continued)
(Unaudited)
Note 9: Financing Receivables and Operating Leases (Continued)
in Financing receivables, net and Long-term financing receivables and other assets in the accompanying Consolidated Condensed Balance Sheets, were as follows:
|
January 31, 2014 |
October 31, 2013 |
|||||
---|---|---|---|---|---|---|---|
|
In millions |
||||||
Minimum lease payments receivable |
$ | 7,198 | $ | 7,505 | |||
Unguaranteed residual value |
249 | 252 | |||||
Unearned income |
(597 | ) | (604 | ) | |||
| | | | | | | |
Financing receivables, gross |
6,850 | 7,153 | |||||
Allowance for doubtful accounts |
(132 | ) | (131 | ) | |||
| | | | | | | |
Financing receivables, net |
6,718 | 7,022 | |||||
Less current portion |
(3,054 | ) | (3,144 | ) | |||
| | | | | | | |
Amounts due after one year, net |
$ | 3,664 | $ | 3,878 | |||
| | | | | | | |
| | | | | | | |
Credit Quality Indicators
Due to the homogenous nature of its leasing transactions, HP manages its financing receivables on an aggregate basis when assessing and monitoring credit risk. Credit risk is generally diversified due to the large number of entities comprising HP's customer base and their dispersion across many different industries and geographical regions. HP evaluates the credit quality of an obligor at lease inception and monitors that credit quality over the term of a transaction. HP assigns risk ratings to each lease based on the creditworthiness of the obligor and other variables that augment or mitigate the inherent credit risk of a particular transaction. Such variables include the underlying value and liquidity of the collateral, the essential use of the equipment, the term of the lease, and the inclusion of guarantees, letters of credit, security deposits or other credit enhancements.
The credit risk profile of gross financing receivables, based on internally assigned ratings, was as follows:
|
January 31, 2014 |
October 31, 2013 |
|||||
---|---|---|---|---|---|---|---|
|
In millions |
||||||
Risk Rating |
|||||||
Low |
$ | 3,724 | $ | 3,948 | |||
Moderate |
3,000 | 3,084 | |||||
High |
126 | 121 | |||||
| | | | | | | |
Total |
$ | 6,850 | $ | 7,153 | |||
| | | | | | | |
| | | | | | | |
Accounts rated low risk typically have the equivalent of a Standard & Poor's rating of BBB- or higher, while accounts rated moderate risk generally have the equivalent of BB+ or lower. HP classifies accounts as high risk when it considers the financing receivable to be impaired or when management believes that there is a near-term risk of impairment.
28
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements (Continued)
(Unaudited)
Note 9: Financing Receivables and Operating Leases (Continued)
Allowance for Doubtful Accounts
The allowance for doubtful accounts for financing receivables is comprised of a general reserve and a specific reserve. HP maintains general reserve percentages on a regional basis and bases such percentages on several factors, including consideration of historical credit losses and portfolio delinquencies, trends in the overall weighted-average risk rating of the portfolio, current economic conditions and information derived from competitive benchmarking. HP excludes accounts evaluated as part of the specific reserve from the general reserve analysis. HP establishes a specific reserve for leases with identified exposures, such as customer defaults, bankruptcy or other events, that make it unlikely that HP will recover its investment in the lease. For individually evaluated receivables, HP determines the expected cash flow for the receivable, which includes consideration of estimated proceeds from disposition of the collateral, and calculates an estimate of the potential loss and the probability of loss. For those accounts where a loss is probable, HP records a specific reserve. HP generally records a write-off or specific reserve when an account reaches 180 days past due, or sooner if HP determines that the account is not collectible.
The allowance for doubtful accounts for financing receivables as of January 31, 2014, and changes during the three months ended January 31, 2014 were as follows:
|
Three months ended January 31, 2014 |
|||
---|---|---|---|---|
|
In millions |
|||
Balance at beginning of period |
$ | 131 | ||
Provision for doubtful accounts |
7 | |||
Deductions, net of recoveries |
(6 | ) | ||
| | | | |
Balance at end of period |
$ | 132 | ||
| | | | |
| | | | |
The allowance and related gross financing receivables collectively and individually evaluated for loss were as follows:
|
January 31, 2014 |
October 31, 2013 |
|||||
---|---|---|---|---|---|---|---|
|
In millions |
||||||
Allowance for financing receivables collectively evaluated for loss |
$ | 93 | $ | 95 | |||
Allowance for financing receivables individually evaluated for loss |
39 | 36 | |||||
| | | | | | | |
Total |
$ | 132 | $ | 131 | |||
| | | | | | | |
| | | | | | | |
Gross financing receivables collectively evaluated for loss |
$ | 6,510 | $ | 6,773 | |||
Gross financing receivables individually evaluated for loss |
340 | 380 | |||||
| | | | | | | |
Total |
$ | 6,850 | $ | 7,153 | |||
| | | | | | | |
| | | | | | | |
Non-Accrual and Past-Due Financing Receivables
HP considers a financing receivable to be past due when the minimum payment is not received by the contractually specified due date. HP generally places financing receivables on non-accrual status
29
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements (Continued)
(Unaudited)
Note 9: Financing Receivables and Operating Leases (Continued)
(suspension of interest accrual) and considers such receivables to be non-performing at the earlier of the time at which full payment of principal and interest becomes doubtful or the receivable becomes contractually 90 days past due. Subsequently, HP may recognize revenue on non-accrual financing receivables as payments are received (i.e., on a cash basis) if HP deems the recorded financing receivable to be fully collectible; however, if there is doubt regarding the ultimate collectability of the recorded financing receivable, HP applies all cash receipts to reduce the carrying amount of the financing receivable (i.e., the cost recovery method). In certain circumstances, such as when HP deems a delinquency to be of an administrative nature, financing receivables may accrue interest after they reach 90 days past due. The non-accrual status of a financing receivable may not impact a customer's risk rating. After all of a customer's delinquent principal and interest balances are settled, HP may return the related financing receivable to accrual status.
The following table summarizes the aging and non-accrual status of gross financing receivables:
|
January 31, 2014 |
October 31, 2013 |
|||||
---|---|---|---|---|---|---|---|
|
In millions |
||||||
Billed(1): |
|||||||
Current 1-30 days |
$ | 242 | $ | 217 | |||
Past due 31-60 days |
38 | 50 | |||||
Past due 61-90 days |
24 | 15 | |||||
Past due >90 days |
56 | 46 | |||||
Unbilled sales-type and direct-financing lease receivables |
6,490 | 6,825 | |||||
| | | | | | | |
Total gross financing receivables |
$ | 6,850 | $ | 7,153 | |||
| | | | | | | |
| | | | | | | |
Gross financing receivables on non-accrual status(2) |
$ | 191 | $ | 199 | |||
| | | | | | | |
| | | | | | | |
Gross financing receivables 90 days past due and still accruing interest(2) |
$ | 149 | $ | 181 | |||
| | | | | | | |
| | | | | | | |
Operating Leases
Operating lease assets included in machinery and equipment in the Consolidated Condensed Balance Sheets were as follows:
|
January 31, 2014 |
October 31, 2013 |
|||||
---|---|---|---|---|---|---|---|
|
In millions |
||||||
Equipment leased to customers |
$ | 3,751 | $ | 3,822 | |||
Accumulated depreciation |
(1,404 | ) | (1,452 | ) | |||
| | | | | | | |
Operating lease assets, net |
$ | 2,347 | $ | 2,370 | |||
| | | | | | | |
| | | | | | | |
30
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements (Continued)
(Unaudited)
Note 10: Guarantees
Guarantees
In the ordinary course of business, HP may issue performance guarantees to certain of its clients, customers and other parties pursuant to which HP has guaranteed the performance obligations of third parties. Some of those guarantees may be backed by standby letters of credit or surety bonds. In general, HP would be obligated to perform over the term of the guarantee in the event a specified triggering event occurs as defined by the guarantee. HP believes the likelihood of having to perform under a material guarantee is remote.
HP has entered into service contracts with certain of its clients that are supported by financing arrangements. If a service contract is terminated as a result of HP's non-performance under the contract or failure to comply with the terms of the financing arrangement, HP could, under certain circumstances, be required to acquire certain assets related to the service contract. HP believes the likelihood of it being required to acquire a material amount of assets under these arrangements is remote.
Indemnifications
In the ordinary course of business, HP enters into contractual arrangements under which HP may agree to indemnify the third party to such arrangement from any losses incurred relating to the services they perform on behalf of HP or for losses arising from certain events as defined within the particular contract, which may include, for example, litigation or claims relating to past performance. HP also provides indemnifications to certain vendors against claims of intellectual property infringement made by third parties arising from the vendor's use of HP's software products and certain other matters. Such indemnification obligations may not be subject to maximum loss clauses. Historically, payments made related to these indemnifications have been immaterial.
Warranty
HP accrues the estimated cost of product warranties at the time it recognizes revenue. HP engages in extensive product quality programs and processes, including actively monitoring and evaluating the quality of its component suppliers; however, contractual warranty terms, repair costs, product call rates, average cost per call, current period product shipments, ongoing product failure rates, as well as specific product class failures outside of HP's baseline experience, affect the estimated warranty obligation.
31
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements (Continued)
(Unaudited)
Note 10: Guarantees (Continued)
HP's aggregate product warranty liabilities as of January 31, 2014, and changes during the three months ended January 31, 2014 were as follows:
|
Three months ended January 31, 2014 |
|||
---|---|---|---|---|
|
In millions |
|||
Balance at beginning of period |
$ | 2,031 | ||
Accruals for warranties issued |
447 | |||
Adjustments related to pre-existing warranties (including changes in estimates) |
7 | |||
Settlements made (in cash or in kind) |
(481 | ) | ||
| | | | |
Balance at end of period |
$ | 2,004 | ||
| | | | |
| | | | |
Note 11: Borrowings
Notes Payable and Short-Term Borrowings
Notes payable and short-term borrowings, including the current portion of long-term debt, were as follows:
|
January 31, 2014 | October 31, 2013 | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Amount Outstanding |
Weighted- Average Interest Rate |
Amount Outstanding |
Weighted- Average Interest Rate |
|||||||||
|
In millions |
|
In millions |
|
|||||||||
Current portion of long-term debt |
$ | 5,882 | 2.7 | % | $ | 5,226 | 2.8 | % | |||||
Commercial paper(1) |
308 | 0.4 | % | 327 | 0.4 | % | |||||||
Notes payable to banks, lines of credit and other(1) |
431 | 3.7 | % | 426 | 1.7 | % | |||||||
| | | | | | | | | | | | | |
|
$ | 6,621 | $ | 5,979 | |||||||||
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
32
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements (Continued)
(Unaudited)
Note 11: Borrowings (Continued)
Long-Term Debt
Long-term debt was as follows:
|
January 31, 2014 |
October 31, 2013 |
|||||
---|---|---|---|---|---|---|---|
|
In millions |
||||||
U.S. Dollar Global Notes |
|||||||
2006 Shelf Registration Statement: |
|||||||
$500 issued at discount to par at a price of 99.694% in February 2007 at 5.4%, due March 2017 |
$ | 499 | $ | 499 | |||
$750 issued at discount to par at a price of 99.932% in March 2008 at 5.5%, due March 2018 |
750 | 750 | |||||
$2,000 issued at discount to par at a price of 99.561% in December 2008 at 6.125%, paid March 2014 |
2,000 | 1,999 | |||||
$1,500 issued at discount to par at a price of 99.993% in February 2009 at 4.75%, due June 2014 |
1,500 | 1,500 | |||||
2009 Shelf Registration Statement: |
|||||||
$1,100 issued at discount to par at a price of 99.887% in September 2010 at 2.125%, due September 2015 |
1,100 | 1,100 | |||||
$650 issued at discount to par at a price of 99.911% in December 2010 at 2.2%, due December 2015 |
650 | 650 | |||||
$1,350 issued at discount to par at a price of 99.827% in December 2010 at 3.75%, due December 2020 |
1,349 | 1,349 | |||||
$500 issued at par in May 2011 at three-month USD LIBOR plus 0.4%, due May 2014 |
500 | 500 | |||||
$500 issued at discount to par at a price of 99.971% in May 2011 at 1.55%, due May 2014 |
500 | 500 | |||||
$1,000 issued at discount to par at a price of 99.958% in May 2011 at 2.65%, due June 2016 |
1,000 | 1,000 | |||||
$1,250 issued at discount to par at a price of 99.799% in May 2011 at 4.3%, due June 2021 |
1,248 | 1,248 | |||||
$750 issued at discount to par at a price of 99.977% in September 2011 at 2.35%, due March 2015 |
750 | 750 | |||||
$1,300 issued at discount to par at a price of 99.784% in September 2011 at 3.0%, due September 2016 |
1,298 | 1,298 | |||||
$1,000 issued at discount to par at a price of 99.816% in September 2011 at 4.375%, due September 2021 |
999 | 999 | |||||
$1,200 issued at discount to par at a price of 99.863% in September 2011 at 6.0%, due September 2041 |
1,198 | 1,198 | |||||
$350 issued at par in September 2011 at three-month USD LIBOR plus 1.55%, due September 2014 |
350 | 350 | |||||
$650 issued at discount to par at a price of 99.946% in December 2011 at 2.625%, due December 2014 |
650 | 650 | |||||
$850 issued at discount to par at a price of 99.790% in December 2011 at 3.3%, due December 2016 |
849 | 849 | |||||
$1,500 issued at discount to par at a price of 99.707% in December 2011 at 4.65%, due December 2021 |
1,496 | 1,496 | |||||
$1,500 issued at discount to par at a price of 99.985% in March 2012 at 2.6%, due September 2017 |
1,500 | 1,500 | |||||
$500 issued at discount to par at a price of 99.771% in March 2012 at 4.05%, due September 2022 |
499 | 499 | |||||
2012 Shelf Registration Statement: |
|||||||
$750 issued at par in January 2014 at three-month USD LIBOR plus 0.94%, due January 2019 |
750 | | |||||
$1,250 issued at discount to par at a price of 99.954% in January 2014 at 2.75%, due January 2019 |
1,249 | | |||||
| | | | | | | |
|
22,684 | 20,684 | |||||
EDS Senior Notes |
|||||||
$300 issued October 1999 at 7.45%, due October 2029 |
314 | 314 | |||||
Other, including capital lease obligations, at 0.00%-8.50%, due in calendar years 2014-2024(1) |
740 | 689 | |||||
Fair value adjustment related to hedged debt |
115 | 147 | |||||
Less: current portion |
(5,882 | ) | (5,226 | ) | |||
| | | | | | | |
Total long-term debt |
$ | 17,971 | $ | 16,608 | |||
| | | | | | | |
| | | | | | | |
33
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements (Continued)
(Unaudited)
Note 11: Borrowings (Continued)
As disclosed in Note 8, HP uses interest rate swaps to mitigate interest rate risk in connection with certain fixed-rate global notes in order to achieve primarily U.S. dollar LIBOR-based floating interest expense. The interest rates in the table above have not been adjusted to reflect the impact of any interest rate swaps.
HP may redeem some or all of the fixed-rate U.S. Dollar Global Notes and EDS Senior Notes set forth in the above table at any time in accordance with the terms thereof. The U.S. Dollar Global Notes are senior unsecured debt.
In May 2012, HP filed a shelf registration statement (the "2012 Shelf Registration Statement") with the Securities Exchange Commission ("SEC") to enable the company to offer for sale, from time to time, in one or more offerings, an unspecified amount of debt securities, common stock, preferred stock, depositary shares and warrants. The 2012 Shelf Registration Statement replaced the registration statement filed in May 2009.
HP's Board of Directors has authorized the issuance of up to $16.0 billion in aggregate principal amount of commercial paper by HP. HP's subsidiaries are authorized to issue up to an additional $1.0 billion in aggregate principal amount of commercial paper. HP maintains two commercial paper programs, and a wholly-owned subsidiary maintains a third program. HP's U.S. program provides for the issuance of U.S. dollar-denominated commercial paper up to a maximum aggregate principal amount of $16.0 billion. HP's euro commercial paper program, which was established in September 2012, provides for the issuance of commercial paper outside of the United States denominated in U.S. dollars, euros or British pounds up to a maximum aggregate principal amount of $3.0 billion or the equivalent in those alternative currencies. The combined aggregate principal amount of commercial paper outstanding under those programs at any one time cannot exceed the $16.0 billion authorized by HP's Board of Directors. The HP subsidiary's Euro Commercial Paper/Certificate of Deposit Programme provides for the issuance of commercial paper in various currencies of up to a maximum aggregate principal amount of $500 million.
HP maintains senior unsecured committed credit facilities primarily to support the issuance of commercial paper. HP has a $3.0 billion five-year credit facility that expires in March 2017 and a $4.5 billion four-year credit facility that expires in February 2015. Both facilities support the U.S. commercial paper program and the euro commercial paper program. In addition, the five-year credit facility was amended in September 2012 to permit borrowings in euros and British pounds, with the amounts available in euros and pounds being limited to the U.S. dollar equivalent of $2.2 billion and $300 million, respectively. Commitment fees, interest rates and other terms of borrowing under the credit facilities vary based on HP's external credit ratings. HP's ability to have an outstanding U.S. commercial paper balance that exceeds the $7.5 billion supported by these credit facilities is subject to a number of factors, including liquidity conditions and business performance.
As of January 31, 2014, HP had the capacity to issue an unspecified amount of additional debt securities, common stock, preferred stock, depositary shares and warrants under the 2012 Shelf Registration Statement. As of that date, HP also had up to $17.6 billion of available borrowing resources, including $16.2 billion in available capacity under its commercial paper programs and $1.4 billion relating to uncommitted lines of credit. The extent to which HP is able to utilize the 2012 Shelf Registration Statement and the commercial paper programs as sources of liquidity at any given
34
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements (Continued)
(Unaudited)
Note 11: Borrowings (Continued)
time is subject to a number of factors, including market demand for HP securities and commercial paper, HP's financial performance, HP's credit ratings and market conditions generally.
Interest expense on borrowings recognized in the Consolidated Condensed Statements of Earnings was as follows:
|
|
Three months ended January 31 |
|||||||
---|---|---|---|---|---|---|---|---|---|
Expense
|
Location | 2014 | 2013 | ||||||
|
|
In millions |
|||||||
Financing interest |
Financing interest | $ | 72 | $ | 80 | ||||
Interest expense |
Interest and other, net | 99 | 122 | ||||||
| | | | | | | | | |
Total interest expense |
$ | 171 | $ | 202 | |||||
| | | | | | | | | |
| | | | | | | | | |
Note 12: Income Taxes
Provision for Taxes
HP's effective tax rate was 22.3% and 21.7% for the three months ended January 31, 2014 and 2013, respectively. HP's effective tax rate generally differs from the U.S. federal statutory tax rate of 35% due to favorable tax rates associated with certain earnings from HP's operations in lower-tax jurisdictions throughout the world. HP has not provided U.S. taxes for all foreign earnings because HP plans to reinvest some of those earnings indefinitely outside the United States.
In the three months ended January 31, 2014, HP recorded $22 million of net tax charges related to discrete items. These amounts included $37 million of various tax charges and $15 million of tax benefits on restructuring charges.
In the three months ended January 31, 2013, HP recorded $5 million of net tax charges related to discrete items. These amounts consisted primarily of a tax charge of $150 million related to a past uncertain tax position offset by approximately $50 million of various adjustments to estimated tax provisions of foreign jurisdictions as well as $45&nb