HEWLETT PACKARD ENTERPRISE CO
10-Qs and 10-Ks
PROXIES
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________________________________________________________________________
FORM
10-Q
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||||
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||||
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______________________________________________________________________________
(Exact name of registrant as specified in its charter)
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(State or other jurisdiction of
incorporation or organization) |
(I.R.S. employer
identification no.) |
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______________________________________________________________________________
| Securities registered pursuant to Section 12(b) of the Exchange Act: | ||||||||||||||
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||||||||
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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
☒
No
☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Yes
☒
No
☐
1
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer", "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act.
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☒ | Accelerated filer | ☐ | |||||||||||
| Non-accelerated filer | ☐ | Smaller reporting company |
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| Emerging growth company |
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
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No
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The number of shares of Hewlett Packard Enterprise Company common stock outstanding as of May 30, 2022 was
1,299,330,455
shares, par value $0.01.
2
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Form 10-Q
For the Quarterly Period Ended April 30, 2022
Table of Contents
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3
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 within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Such statements involve risks, uncertainties, and assumptions. If the risks or uncertainties ever materialize or the assumptions prove incorrect, the results of Hewlett Packard Enterprise Company and its consolidated subsidiaries ("Hewlett Packard Enterprise") may differ materially from those expressed or implied by such forward-looking statements and assumptions. The words "believe", "expect", "anticipate", "optimistic", "intend", "aim", "will", "should" and similar expressions are intended to identify such forward-looking statements. All statements other than statements of historical fact are statements that could be deemed forward-looking statements, including but not limited to the scope and duration of the novel coronavirus pandemic ("COVID-19"), our actions in response thereto, and its and their impacts on our business, operations, liquidity and capital resources, employees, customers, partners, supply chain, financial results, and the world economy; any projections of revenue, margins, expenses, investments, effective tax rates, interest rates, the impact of tax law changes and related guidance and regulations, net earnings, net earnings per share, cash flows, liquidity and capital resources, inventory, goodwill, impairment charges, hedges and derivatives and related offsets, order backlog, benefit plan funding, deferred tax assets, share repurchases, currency exchange rates, repayments of debts including our asset-backed debt securities, or other financial items; any projections of the amount, execution, timing, and results of any transformation or impact of cost savings, restructuring plans, including estimates and assumptions related to the anticipated benefits, cost savings, or charges of implementing transformation and restructuring plans; any statements of the plans, strategies, and objectives of management for future operations, as well as the execution of corporate transactions or contemplated acquisitions, research and development expenditures, and any resulting benefit, cost savings, charges, or revenue or profitability improvements; any statements concerning the expected development, performance, market share, or competitive performance relating to products or services; any statements regarding current or future macroeconomic trends or events and the impact of those trends and events on Hewlett Packard Enterprise 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 Hewlett Packard Enterprise's businesses; the competitive pressures faced by Hewlett Packard Enterprise's businesses; risks associated with executing Hewlett Packard Enterprise's strategy; the impact of macroeconomic and geopolitical trends and events, including but not limited to supply chain constraints and the ongoing conflict between Russia and Ukraine; the need to effectively manage third-party suppliers, distribute Hewlett Packard Enterprise's products, and deliver Hewlett Packard Enterprise's services; the protection of Hewlett Packard Enterprise's intellectual property assets, including intellectual property licensed from third parties and intellectual property shared with its former parent; risks associated with Hewlett Packard Enterprise's international operations (including pandemics and public health problems, such as the outbreak of COVID-19); the development of and transition to 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 Hewlett Packard Enterprise and its suppliers, customers, clients, and partners, including any impact thereon resulting from events such as the COVID-19 pandemic; the hiring and retention of key employees; the execution, integration, and other risks associated with business combination and investment transactions; the impact of changes to environmental, global trade, and other governmental regulations; changes in our product, lease, intellectual property, or real estate portfolio; the payment or non-payment of a dividend for any period; the efficacy of using non-GAAP, rather than GAAP, financial measures in business projections and planning; the judgments required in connection with determining revenue recognition; impact of company policies and related compliance; utility of segment realignments; allowances for recovery of receivables and warranty obligations; provisions for, and 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 Quarterly Report on Form 10-Q and that are otherwise described or updated from time to time in Hewlett Packard Enterprise's reports filed with the Securities and Exchange Commission. Hewlett Packard Enterprise assumes no obligation and does not intend to update these forward-looking statements, except as required by applicable law.
4
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Index
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5
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Condensed Consolidated Statements of Earnings
(Unaudited)
| For the three months ended April 30, | For the six months ended April 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| In millions, except per share amounts | |||||||||||||||||||||||
| Net revenue: | |||||||||||||||||||||||
| Products | $ |
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$ |
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$ |
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$ |
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| Services |
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| Financing income |
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| Total net revenue |
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| Costs and expenses: | |||||||||||||||||||||||
| Cost of products |
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| Cost of services |
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Financing cost
(1)
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| Research and development |
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| Selling, general and administrative |
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| Amortization of intangible assets |
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| Transformation costs |
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| Disaster charges |
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| Acquisition, disposition and other related charges |
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| Total costs and expenses |
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| Earnings from operations |
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| Interest and other, net |
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(
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(
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| Tax indemnification and related adjustments |
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| Non-service net periodic benefit credit |
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| Earnings from equity interests |
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| Earnings before provision for taxes |
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| Provision for taxes |
(
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(
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(
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| Net earnings | $ |
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$ |
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$ |
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$ |
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| Net earnings per share: | |||||||||||||||||||||||
| Basic | $ |
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$ |
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$ |
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$ |
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| Diluted | $ |
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$ |
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$ |
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$ |
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| Weighted-average shares used to compute net earnings per share: | |||||||||||||||||||||||
| Basic |
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| Diluted |
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(1)
The three and six months ended April 30, 2022 include $
99
million of expected credit loss reserves. Refer to Note 1, "Overview and Summary of Significant Accounting Policies", for further information.
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
6
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Condensed Consolidated Statements of Comprehensive Income
(Unaudited)
| For the three months ended April 30, | For the six months ended April 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| In millions | |||||||||||||||||||||||
| Net earnings | $ |
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$ |
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$ |
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$ |
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| Other comprehensive income before taxes: | |||||||||||||||||||||||
| Change in net unrealized gains (losses) on available-for-sale securities: | |||||||||||||||||||||||
| Net unrealized gains (losses) arising during the period |
(
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(
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(
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(
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(
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(
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(
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(
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| Change in net unrealized gains (losses) on cash flow hedges: | |||||||||||||||||||||||
| Net unrealized gains (losses) arising during the period |
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(
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| Net (gains) losses reclassified into earnings |
(
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| Change in unrealized components of defined benefit plans: | |||||||||||||||||||||||
| Net unrealized gains (losses) arising during the period |
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| Amortization of net actuarial loss and prior service benefit |
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| Curtailments, settlements and other |
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| Change in cumulative translation adjustment |
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| Other comprehensive income before taxes |
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| Provision for taxes |
(
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| Other comprehensive income, net of taxes |
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| Comprehensive income | $ |
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$ |
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$ |
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$ |
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The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
7
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
| As of | |||||||||||
| April 30, 2022 | October 31, 2021 | ||||||||||
| (Unaudited) | (Audited) | ||||||||||
| In millions, except par value | |||||||||||
| ASSETS | |||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ |
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$ |
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| Accounts receivable, net of allowances |
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| Financing receivables, net of allowances |
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| Inventory |
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| Other current assets |
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| Total current assets |
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| Property, plant and equipment |
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| Long-term financing receivables and other assets |
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| Investments in equity interests |
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| Goodwill |
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| Intangible assets |
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| Total assets | $ |
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$ |
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| LIABILITIES AND STOCKHOLDERS' EQUITY | |||||||||||
| Current liabilities: | |||||||||||
| Notes payable and short-term borrowings | $ |
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$ |
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| Accounts payable |
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| Employee compensation and benefits |
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| Taxes on earnings |
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| Deferred revenue |
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| Accrued restructuring |
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| Other accrued liabilities |
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| Total current liabilities |
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| Long-term debt |
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| Other non-current liabilities |
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| Commitments and contingencies |
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| Stockholders' equity | |||||||||||
| HPE stockholders' equity: | |||||||||||
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Common stock, $
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| Additional paid-in capital |
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| Accumulated deficit |
(
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| Accumulated other comprehensive loss |
(
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(
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| Total HPE stockholders' equity |
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| Non-controlling interests |
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| Total stockholders' equity |
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| Total liabilities and stockholders' equity | $ |
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$ |
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The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
8
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (Unaudited)
| For the six months ended April 30, | |||||||||||
| 2022 | 2021 | ||||||||||
| In millions | |||||||||||
| Cash flows from operating activities: | |||||||||||
| Net earnings | $ |
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$ |
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| Adjustments to reconcile net earnings to net cash provided by operating activities: | |||||||||||
| Depreciation and amortization |
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| Stock-based compensation expense |
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| Provision for inventory and doubtful accounts |
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| Restructuring charges |
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| Deferred taxes on earnings |
(
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(
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| Earnings from equity interests |
(
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(
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| Other, net |
(
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| Changes in operating assets and liabilities, net of acquisitions: | |||||||||||
| Accounts receivable |
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| Financing receivables |
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(
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| Inventory |
(
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(
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| Accounts payable |
(
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| Taxes on earnings |
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| Restructuring |
(
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| Other assets and liabilities |
(
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| Net cash provided by operating activities |
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| Cash flows from investing activities: | |||||||||||
| Investment in property, plant and equipment |
(
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(
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| Proceeds from sale of property, plant and equipment |
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| Purchases of investments |
(
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(
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| Proceeds from maturities and sales of investments |
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| Financial collateral posted |
(
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(
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| Financial collateral received |
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| Payments made in connection with business acquisitions, net of cash acquired |
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(
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| Net cash used in investing activities |
(
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(
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| Cash flows from financing activities: | |||||||||||
| Short-term borrowings with original maturities less than 90 days, net |
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| Proceeds from debt, net of issuance costs |
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| Payment of debt |
(
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(
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| Payments related to stock-based award activities, net |
(
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(
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| Repurchase of common stock |
(
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| Cash dividends paid to non-controlling interests |
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(
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| Cash dividends paid to shareholders |
(
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(
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| Net cash used in financing activities |
(
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(
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| (Decrease) increase in cash, cash equivalents and restricted cash |
(
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| Cash, cash equivalents and restricted cash at beginning of period |
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| Cash, cash equivalents and restricted cash at end of period | $ |
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$ |
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The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
9
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Condensed Consolidated Statements of Stockholders' Equity (Unaudited)
| Common Stock | |||||||||||||||||||||||||||||||||||||||||||||||
| For the three months ended April 30, 2022 | Number of Shares | Par Value | Additional Paid-in Capital | Accumulated Deficit |
Accumulated
Other Comprehensive Loss |
Equity
Attributable to the Company |
Non-
controlling Interests |
Total
Equity |
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| In millions, except number of shares in thousands | |||||||||||||||||||||||||||||||||||||||||||||||
| Balance at January 31, 2022 |
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$ |
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$ |
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$ |
(
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$ |
(
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$ |
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$ |
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$ |
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| Net earnings |
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| Other comprehensive income |
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| Comprehensive income |
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| Stock-based compensation expense |
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| Tax withholding related to vesting of employee stock plans |
(
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(
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| Issuance of common stock in connection with employee stock plans and other |
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| Repurchases of common stock |
(
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(
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(
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(
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Cash dividends declared ($
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(
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(
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(
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| Balance at April 30, 2022 |
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$ |
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$ |
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$ |
(
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$ |
(
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$ |
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$ |
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$ |
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||||||||||||||||||||||||||||||||
) Represents the impact of the adoption of the accounting standard on the s on financial instruments.
| Common Stock | |||||||||||||||||||||||||||||||||||||||||||||||
| For the six months ended April 30, 2022 | Number of Shares | Par Value | Additional Paid-in Capital | Accumulated Deficit |
Accumulated
Other Comprehensive Loss |
Equity
Attributable to the Company |
Non-
controlling Interests |
Total
Equity |
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| In millions, except number of shares in thousands | |||||||||||||||||||||||||||||||||||||||||||||||
| Balance at October 31, 2021 |
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$ |
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$ |
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$ |
(
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$ |
(
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$ |
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$ |
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$ |
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| Net earnings |
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| Other comprehensive income |
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| Comprehensive income |
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| Stock-based compensation expense |
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| Tax withholding related to vesting of employee stock plans |
(
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(
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| Issuance of common stock in connection with employee stock plans and other |
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| Repurchases of common stock |
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Cash dividends declared ($
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| Balance at April 30, 2022 |
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$ |
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$ |
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$ |
(
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$ |
(
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$ |
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$ |
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$ |
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10
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Condensed Consolidated Statements of Stockholders' Equity (Unaudited)
| Common Stock | |||||||||||||||||||||||||||||||||||||||||||||||
| For the three months ended April 30, 2021 | Number of Shares | Par Value | Additional Paid-in Capital | Accumulated Deficit |
Accumulated
Other Comprehensive Loss |
Equity
Attributable to the Company |
Non-
controlling Interests |
Total
Equity |
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| In millions, except number of shares in thousands | |||||||||||||||||||||||||||||||||||||||||||||||
| Balance at January 31, 2021 |
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$ |
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$ |
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$ |
(
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$ |
(
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$ |
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$ |
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$ |
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| Net earnings |
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| Other comprehensive income |
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| Comprehensive income |
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| Stock-based compensation expense |
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| Tax withholding related to vesting of employee stock plans |
(
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(
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(
|
||||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock in connection with employee stock plans and other |
|
|
|
|
|||||||||||||||||||||||||||||||||||||||||||
|
Cash dividends declared ($
|
(
|
(
|
(
|
||||||||||||||||||||||||||||||||||||||||||||
| Balance at April 30, 2021 |
|
$ |
|
$ |
|
$ |
(
|
$ |
(
|
$ |
|
$ |
|
$ |
|
||||||||||||||||||||||||||||||||
| Common Stock | |||||||||||||||||||||||||||||||||||||||||||||||
| For the six months ended April 30, 2021 | Number of Shares | Par Value | Additional Paid-in Capital | Accumulated Deficit |
Accumulated
Other Comprehensive Loss |
Equity
Attributable to the Company |
Non-
controlling Interests |
Total
Equity |
|||||||||||||||||||||||||||||||||||||||
| In millions, except number of shares in thousands | |||||||||||||||||||||||||||||||||||||||||||||||
| Balance at October 31, 2020 |
|
$ |
|
$ |
|
$ |
(
|
$ |
(
|
$ |
|
$ |
|
$ |
|
||||||||||||||||||||||||||||||||
| Net earnings |
|
|
|
|
|||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income |
|
|
|
||||||||||||||||||||||||||||||||||||||||||||
| Comprehensive income |
|
|
|
||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation expense |
|
|
|
||||||||||||||||||||||||||||||||||||||||||||
| Tax withholding related to vesting of employee stock plans |
(
|
(
|
(
|
||||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock in connection with employee stock plans and other |
|
|
|
|
|||||||||||||||||||||||||||||||||||||||||||
|
Cash dividends declared ($
|
(
|
(
|
(
|
||||||||||||||||||||||||||||||||||||||||||||
|
(
|
(
|
(
|
|||||||||||||||||||||||||||||||||||||||||||||
| Balance at April 30, 2021 |
|
$ |
|
$ |
|
$ |
(
|
$ |
(
|
$ |
|
$ |
|
$ |
|
||||||||||||||||||||||||||||||||
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
11
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 1:
Overview and Summary of Significant Accounting Policies
Background
Hewlett Packard Enterprise Company ("Hewlett Packard Enterprise", "HPE", or the "Company") is a global technology leader focused on developing intelligent solutions that allow customers to capture, analyze and act upon data seamlessly from edge to cloud. Hewlett Packard Enterprise enables customers to accelerate business outcomes by driving new business models, creating new customer and employee experiences, and increasing operational efficiency today and into the future. Hewlett Packard Enterprise's customers range from small- and medium-sized businesses to large global enterprises and governmental entities.
Basis of Presentation and Consolidation
The Condensed Consolidated Financial Statements of the Company were prepared in accordance with United States ("U.S.") Generally Accepted Accounting Principles ("GAAP"). The Company’s unaudited Condensed Consolidated Financial Statements include the accounts of the Company and all subsidiaries and affiliates in which the Company has a controlling financial interest or is the primary beneficiary. All intercompany transactions and accounts within the consolidated businesses of the Company have been eliminated. In the opinion of management, the accompanying unaudited Condensed Consolidated Financial Statements of Hewlett Packard Enterprise contain all adjustments, including normal recurring adjustments, necessary to present fairly the Company's financial position as of April 30, 2022 and October 31, 2021, its results of operations for the three and six months ended April 30, 2022 and 2021, its cash flows for the six months ended April 30, 2022 and 2021, and its statements of stockholders' equity for the three and six months ended April 30, 2022 and 2021.
The results of operations for the three and six months ended April 30, 2022 and the cash flows for the six months ended April 30, 2022 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 the Company's Annual Report on Form 10-K for the fiscal year ended October 31, 2021, as filed with the U.S. Securities and Exchange Commission (“SEC”) on December 10, 2021.
Significant Accounting Policies
As of November 1, 2021, the Company increased its expected useful life of new servers and storage equipment assets from
four years
to
five years
. Concurrently, the Company completed an assessment of its existing server and storage equipment assets and extended the remaining useful lives of such assets by
one year
. The effects of this change in estimate reduced depreciation expense and increased net income and basic and diluted earnings per share by immaterial amounts for the six months ended April 30, 2022, and is expected to have an immaterial impact on net income and basic and diluted earnings per share for fiscal 2022.
There have been no other changes to the Company's significant accounting policies described in PART II, Item 8, Note 1, "Overview and Summary of Significant Accounting Policies", of the Company's Annual Report on Form 10-K for the fiscal year ended October 31, 2021.
Subsequent Event
In May 2022, the Company issued $
747
million of asset-backed debt securities in
six
tranches at a weighted average price of
99.99
% and a weighted average interest rate of
3.68
%, payable monthly from July 2022 with a stated final maturity date of March 2030.
Russia/Ukraine Conflict
The conflict between Russia and Ukraine and the related sanctions imposed by the U.S., European Union (E.U.) and other countries in response have negatively impacted the Company's operations in both countries and increased economic and political uncertainty across the world. In response to the sanctions imposed, in February 2022, the Company suspended all new sales and shipments to Russia and Belarus and implemented compliance measures to address the continuously changing regulatory landscape. Based on a further assessment of business risks and needs, in June 2022, the Company determined that it is no longer tenable to maintain its operations in Russia and Belarus and announced it is proceeding with an orderly, managed exit of its remaining business in these countries.
In the second quarter of fiscal 2022, the Company recorded total pre-tax charges of $
126
million primarily related to expected
credit losses of financing and trade receivables,
$
99
million of which was included in Financing cost, $
6
million in
12
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
Cost of services and $
21
million in Disaster charges in the Condensed Consolidated Statements of Earnings. Due to the decision to exit Russia and Belarus, the Company expects to incur additional charges related to a deferred tax asset valuation allowance, abandoned assets and employee severance in the third quarter of fiscal 2022.
The Company continues to monitor the social, political, regulatory and economic environment in Russia and Ukraine, and will consider further actions as appropriate.
Recently Adopted Accounting Pronouncements
In July 2021, the Financial Accounting Standards Board ("FASB") issued guidance that requires lessors to classify and account for a lease with variable lease payments that do not depend on a reference index or a rate as an operating lease, if the lease would have been classified as a sales-type lease or a direct financing lease and the lessor would have otherwise recognized a day-one loss. The Company adopted the guidance in the first quarter of fiscal 2022 on a prospective basis, and there was no material impact on the Company’s Condensed Consolidated Financial Statements.
In January 2020, the FASB issued guidance to clarify certain interactions between the guidance to account for equity securities, the guidance to account for investments under the equity method of accounting, and the guidance to account for derivatives and hedging. The new guidance clarifies the application of measurement alternatives and the accounting for certain forward contracts and purchased options to acquire investments. The Company adopted the guidance in the first quarter of fiscal 2022, and there was no material impact on the Company's Condensed Consolidated Financial Statements.
Recently Enacted Accounting Pronouncements
In March 2022, the FASB issued guidance related to troubled debt restructurings (“TDRs”) and vintage disclosures for financing receivables. The amendments eliminate current recognition and measurement guidance for TDRs by creditors while enhancing disclosure requirements for certain loan refinancing and restructurings by creditors when a borrower is experiencing financial difficulty. The amendments also require disclosure of current-period gross write-offs by year of origination for financing receivables and net investments in leases. The Company is required to adopt the guidance in the first quarter of fiscal 2024, though early adoption is permitted. The Company is currently evaluating the impact of these amendments on its Condensed Consolidated Financial Statements.
In November 2021, the FASB issued guidance to increase the transparency of government assistance received by an entity by requiring disclosures relating to accounting policy, nature of the assistance, and the effect of the assistance on the financial statements. The Company is required to adopt the guidance in the first quarter of fiscal 2023, though early adoption is permitted. The Company is currently evaluating the impact of these amendments on its Condensed Consolidated Financial Statements.
Note 2:
Segment Information
Hewlett Packard Enterprise's operations are organized into
six
reportable segments for financial reporting purposes: Compute, High Performance Computing & Artificial Intelligence ("HPC & AI"), Storage, Intelligent Edge, Financial Services ("FS"), and Corporate Investments and Other. Hewlett Packard Enterprise's organizational structure is based on a number of factors that the Chief Operating Decision Maker ("CODM"), who is the Chief Executive Officer ("CEO"), uses to evaluate, view, and run the Company's business operations, which include, but are not limited to, customer base and homogeneity of products and technology. The
six
segments are based on this organizational structure and information reviewed by Hewlett Packard Enterprise's management to evaluate segment results. A summary description of each segment follows.
Compute
includes both general purpose servers for multi-workload computing and workload optimized servers to offer the best performance and value for demanding applications. This portfolio of products includes the HPE Proliant rack and tower servers, HPE Synergy, and HPE BladeSystems. Compute offerings also include operational and support services and HPE GreenLake for Compute.
High Performance Computing & Artificial Intelligence
offers standard and custom hardware and software solutions designed to address customer workloads to power innovation. The HPC hardware solutions are segmented into several categories: HPC, Data Solutions, and Edge Compute. The HPC portfolio of products includes the HPE Apollo and HPE Cray products that are often sold as supercomputing systems, including exascale supercomputers. The Data Solutions portfolio (formerly named Mission Critical Solutions) includes the HPE Superdome Flex, HPE NonStop, and HPE Integrity product
13
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
lines. Edge compute primarily offers HPE Edgeline products. HPC & AI offerings also include operational and support services and solutions delivered as-a-service through HPE GreenLake edge-to-cloud platform.
Storage
provides workload optimized storage product and service offerings, which include an intelligent hyperconverged infrastructure ("HCI") with HPE Nimble Storage dHCI and HPE SimpliVity; primary storage with HPE Alletra, HPE Primera, HPE Nimble Storage, and HPE 3PAR Storage for mission-critical and general-purpose workloads; data protection services and software with HPE Backup and Recovery Service; and Zerto. The portfolio also includes HPE Recovery Manager Central, HPE StoreOnce, HPE Cloud Volumes Backup and Big Data solutions running on Apollo servers. Storage also provides solutions for secondary workloads and traditional tape, storage networking and disk products, such as HPE Modular Storage Arrays ("MSA") and HPE XP. Storage offerings also include operational and support services, software subscription services, and solutions delivered as-a-service through HPE GreenLake edge-to-cloud platform.
Intelligent Edge
offers wired and wireless local area network ("LAN"), campus and data center switching, software-defined wide-area-network (from the Silver Peak acquisition), network security, and associated services to enable secure connectivity for businesses of any size. The HPE Aruba product portfolio includes products such as Wi-Fi access points, switches, routers, and sensors. The HPE Aruba software and services portfolio includes cloud-based management, network management, network access control, analytics and assurance, location services software, and professional and support services, as well as as-a-service and consumption models through HPE GreenLake edge-to-cloud platform for the Intelligent Edge portfolio of products. Intelligence Edge also offers an Edge Service Platform ("Aruba ESP") to help customers meet their connectivity, security, and financial requirements across campus, branch, data center, and remote worker environments, covering all aspects of wired, wireless LAN, and wide area networking.
Financial Services
provides flexible investment solutions, such as leasing, financing, IT consumption, utility programs, and asset management services, for customers that facilitate unique technology deployment models and the acquisition of complete IT solutions, including hardware, software, and services from Hewlett Packard Enterprise and others. FS also supports financial solutions for on-premise flexible consumption models, such as HPE GreenLake platform.
Corporate Investments and Other
includes the Advisory and Professional Services ("A & PS") business which primarily offers consultative-led services, HPE and partner technology expertise and advice, implementation services as well as complex solution engagement capabilities; the Communications and Media Solutions business ("CMS"), which primarily offers software and related services to the telecommunications industry; the HPE Software business which offers the HPE Ezmeral container platform and HPE Ezmeral Data Fabric; and Hewlett Packard Labs which is responsible for research and development.
Segment Policy
Hewlett Packard Enterprise does not allocate certain operating expenses to its segments, which it manages at the corporate level. These unallocated operating costs include certain corporate costs and eliminations, stock-based compensation expense, amortization of initial direct costs, amortization of intangible assets, transformation costs, disaster charges and acquisition, disposition and other related charges.
14
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
Segment Operating Results
Segment net revenue and operating results were as follows:
| Compute | HPC & AI | Storage | Intelligent Edge |
Financial
Services |
Corporate
Investments and Other |
Total | |||||||||||||||||||||||||||||||||||
| In millions | |||||||||||||||||||||||||||||||||||||||||
| Three months ended April 30, 2022 | |||||||||||||||||||||||||||||||||||||||||
| Net revenue | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||||||||||||||
| Intersegment net revenue |
|
|
|
|
|
|
|
||||||||||||||||||||||||||||||||||
| Total segment net revenue | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||||||||||||||
| Segment earnings (loss) from operations | $ |
|
$ |
(
|
$ |
|
$ |
|
$ |
|
$ |
(
|
$ |
|
|||||||||||||||||||||||||||
| Three months ended April 30, 2021 | |||||||||||||||||||||||||||||||||||||||||
|
Net revenue
(1)
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||||||||||||||
| Intersegment net revenue |
|
|
|
|
|
|
|
||||||||||||||||||||||||||||||||||
| Total segment net revenue | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||||||||||||||
|
Segment earnings (loss) from operations
(1)
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
(
|
$ |
|
|||||||||||||||||||||||||||
| Six months ended April 30, 2022 | |||||||||||||||||||||||||||||||||||||||||
| Net revenue | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||||||||||||||
| Intersegment net revenue |
|
|
|
|
|
|
|
||||||||||||||||||||||||||||||||||
| Total segment net revenue | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||||||||||||||
| Segment earnings (loss) from operations | $ |
|
$ |
(
|
$ |
|
$ |
|
$ |
|
$ |
(
|
$ |
|
|||||||||||||||||||||||||||
| Six months ended April 30, 2021 | |||||||||||||||||||||||||||||||||||||||||
|
Net revenue
(1)
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||||||||||||||
| Intersegment net revenue |
|
|
|
|
|
|
|
||||||||||||||||||||||||||||||||||
| Total segment net revenue | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||||||||||||||
|
Segment earnings (loss) from operations
(1)
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
(
|
$ |
|
|||||||||||||||||||||||||||
(1) Effective at the beginning of the first quarter of fiscal 2022, the Company implemented minor organizational changes to align its segment financial reporting more closely with its current business structure resulting in immaterial changes to certain prior period segment revenue and segment earnings (loss) from operations amounts. These changes had no impact to the Company’s previously reported consolidated earnings from operations.
15
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
The reconciliation of segment operating results to Condensed Consolidated Financial statements was as follows:
| For the three months ended April 30, | For the six months ended April 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| In millions | |||||||||||||||||||||||
| Net Revenue: | |||||||||||||||||||||||
| Total segments | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
| Eliminations of intersegment net revenue |
(
|
(
|
(
|
(
|
|||||||||||||||||||
| Total consolidated net revenue | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
| Earnings before taxes: | |||||||||||||||||||||||
| Total segment earnings from operations | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
| Unallocated corporate costs and eliminations |
(
|
(
|
(
|
(
|
|||||||||||||||||||
| Stock-based compensation expense |
(
|
(
|
(
|
(
|
|||||||||||||||||||
| Amortization of initial direct costs |
(
|
(
|
(
|
(
|
|||||||||||||||||||
| Amortization of intangible assets |
(
|
(
|
(
|
(
|
|||||||||||||||||||
| Transformation costs |
(
|
(
|
(
|
(
|
|||||||||||||||||||
|
Disaster charges
(1)
|
(
|
(
|
(
|
(
|
|||||||||||||||||||
| Acquisition, disposition and other related charges |
(
|
(
|
(
|
(
|
|||||||||||||||||||
| Interest and other, net |
|
(
|
(
|
(
|
|||||||||||||||||||
| Tax indemnification and related adjustments |
|
|
(
|
(
|
|||||||||||||||||||
| Non-service net periodic benefit credit |
|
|
|
|
|||||||||||||||||||
| Earnings from equity interests |
|
|
|
|
|||||||||||||||||||
| Total earnings before provision for taxes | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
(1) In the second quarter of fiscal 2022, the Company recorded total pre-tax charges of $
126
million primarily related to expected credit losses of financing and trade receivables, $
99
million of which was included in Financing cost, $
6
million in Cost of sales and $
21
million in Disaster charges in the Condensed Consolidated Statements of Earnings. Refer to Note 1, "Overview and Summary of Significant Accounting Policies", for further information. During the three and six months ended April 30, 2022, Disaster charges also included a recovery of $
1
million and $
2
million, respectively, related to COVID-19. Disaster charges were excluded from segment operating results.
Segment Assets
Hewlett Packard Enterprise allocates assets to its business segments based on the segments primarily benefiting from the assets. Total assets by segment and the reconciliation of segment assets to total assets as per Condensed Consolidated Balance Sheets were as follows:
| As of | |||||||||||
| April 30, 2022 | October 31, 2021 | ||||||||||
| In millions | |||||||||||
| Compute | $ |
|
$ |
|
|||||||
| HPC & AI |
|
|
|||||||||
| Storage |
|
|
|||||||||
| Intelligent Edge |
|
|
|||||||||
| Financial Services |
|
|
|||||||||
| Corporate Investments and Other |
|
|
|||||||||
| Corporate and unallocated assets |
|
|
|||||||||
| Total assets | $ |
|
$ |
|
|||||||
16
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
Geographic Information
| For the three months ended April 30, | For the six months ended April 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| In millions | |||||||||||||||||||||||
| Americas: | |||||||||||||||||||||||
| United States | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
| Americas excluding U.S. |
|
|
|
|
|||||||||||||||||||
| Total Americas |
|
|
|
|
|||||||||||||||||||
| Europe, Middle East and Africa |
|
|
|
|
|||||||||||||||||||
| Asia Pacific and Japan |
|
|
|
|
|||||||||||||||||||
| Total consolidated net revenue | $ |
|
$ |
|
|
$ |
|
||||||||||||||||
Note 3:
Transformation Programs
Transformation programs are comprised of the cost optimization and prioritization plan and the HPE Next initiative. During the third quarter of fiscal 2020, the Company launched the cost optimization and prioritization plan, which focuses on realigning the workforce to areas of growth, a new hybrid workforce model called Edge-to-Office, real estate strategies, and simplifying and evolving our product portfolio strategy. The implementation period of the cost optimization and prioritization plan is through fiscal 2023. During the remaining implementation period, the Company expects to incur transformation costs predominantly related to labor restructuring, non-labor restructuring, IT investments, design and execution charges and real estate initiatives.
During the third quarter of fiscal 2017, the Company launched an initiative called HPE Next to put in place a purpose-built company designed to compete and win in the markets where it participates. Through this program, the Company is simplifying the operating model, and streamlining our offerings, business processes and business systems to improve our execution. The implementation period of the HPE Next initiative is through fiscal 2023. During the remaining implementation period, the Company expects to incur predominantly IT infrastructure costs for streamlining, upgrading, and simplifying back-end operations, and real estate initiatives. These costs are expected to be partially offset by gains from real estate sales.
Cost Optimization and Prioritization Plan
During the three and six months ended April 30, 2021, $
151
million and $
403
million were recorded within Transformation costs, and $
2
million and $
2
million, respectively, were recorded within Non-service net periodic benefit credit in the Condensed Consolidated Statements of Earnings.
The components of the expense relating to the cost optimization and prioritization plan were as follows:
| For the three months ended April 30, | For the six months ended April 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| In millions | |||||||||||||||||||||||
| Program management | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
| IT costs |
|
|
|
|
|||||||||||||||||||
| Restructuring charges |
|
|
|
|
|||||||||||||||||||
| Total | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
17
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
HPE Next
The components of transformation costs relating to HPE Next during the three and six months ended April 30, 2022 and 2021 were as follows:
| For the three months ended April 30, | For the six months ended April 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| In millions | |||||||||||||||||||||||
| Program management | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
| IT costs |
|
|
|
|
|||||||||||||||||||
| Restructuring charges |
|
|
|
|
|||||||||||||||||||
| Gain on real estate sales |
|
(
|
(
|
(
|
|||||||||||||||||||
| Impairment of real estate assets |
|
|
|
|
|||||||||||||||||||
| Other |
|
|
|
|
|||||||||||||||||||
| Total | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
Restructuring Plan
Restructuring activities related to the Company's employees and infrastructure under the cost optimization and prioritization plan and HPE Next plan are presented in the table below:
| Cost Optimization and Prioritization Plan | HPE Next Plan | ||||||||||||||||||||||
|
Employee
Severance |
Infrastructure
and other |
Employee
Severance |
Infrastructure
and other |
||||||||||||||||||||
| In millions | |||||||||||||||||||||||
| Liability as of October 31, 2021 | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
| Charges |
|
|
|
|
|||||||||||||||||||
| Cash payments |
(
|
(
|
(
|
(
|
|||||||||||||||||||
| Non-cash items |
(
|
(
|
(
|
|
|||||||||||||||||||
|
Liability as of April 30, 2022
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
|
Total costs incurred to date, as of April 30, 2022
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
|
Total expected costs to be incurred as of April 30, 2022
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
The current restructuring liability related to the transformation programs, reported in Condensed Consolidated Balance Sheets as of April 30, 2022 and October 31, 2021, was $
181
million and $
287
million, respectively, in accrued restructuring, and $
25
million and $
27
million, respectively, in Other accrued liabilities. The non-current restructuring liability related to the transformation programs, reported in Other non-current liabilities in the Condensed Consolidated Balance Sheets as of April 30, 2022 and October 31, 2021, was $
138
million and $
180
million, respectively.
18
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
Note 4:
Retirement Benefit Plans
The Company's net pension benefit (credit) cost for defined benefit plans recognized in the Condensed Consolidated Statements of Earnings was as follows:
| For the three months ended April 30, | For the six months ended April 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| In millions | |||||||||||||||||||||||
| Service cost | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
|
Interest cost
(1)
|
|
|
|
|
|||||||||||||||||||
|
Expected return on plan assets
(1)
|
(
|
(
|
(
|
(
|
|||||||||||||||||||
|
Amortization and deferrals
(1)
:
|
|||||||||||||||||||||||
| Actuarial loss |
|
|
|
|
|||||||||||||||||||
| Prior service benefit |
(
|
(
|
(
|
(
|
|||||||||||||||||||
| Net periodic benefit (credit) cost |
(
|
|
(
|
|
|||||||||||||||||||
|
Settlement loss and special termination benefits
(1)
|
|
|
|
|
|||||||||||||||||||
| Total net benefit (credit) cost | $ |
(
|
$ |
|
$ |
(
|
$ |
|
|||||||||||||||
(1)
These non-service components of net periodic benefit cost were included in Non-service net periodic benefit credit in the Condensed Consolidated Statements of Earnings.
Note 5:
Taxes on Earnings
Provision for Taxes
For the three months ended April 30, 2022 and 2021, the Company recorded income tax expense of $
26
million and $
29
million, respectively, which reflect an effective tax rate of
9.4
% and
10.1
%, respectively. For the six months ended April 30, 2022 and 2021, the Company recorded income tax expense of $
6
million and $
11
million, respectively, which reflects an effective tax rate of
0.8
% and
2.2
%, respectively. The effective tax rate generally differs from the U.S. federal statutory rate of 21% due to favorable tax rates associated with certain earnings from the Company’s operations in lower tax jurisdictions throughout the world but are also impacted by discrete tax adjustments during each fiscal period.
For the three and six months ended April 30, 2022, the Company recorded $
38
million and $
121
million of net income tax benefits, respectively, related to various items discrete to the period. For the three months ended April 30, 2022, this amount primarily included $
25
million of income tax benefits on pre-tax charges incurred related to the Russia/Ukraine conflict and $
22
million of income tax benefits related to transformation costs and acquisition, disposition and other related charges, partially offset by $
10
million of net income tax charges related to the settlement of foreign tax audit matters. For the six months ended April 30, 2022, this amount primarily included $
46
million of income tax benefits related to transformation costs and acquisition, disposition and other related charges, $
43
million of net income tax benefits related to the settlement of U.S. tax audit matters, $
25
million of income tax benefits on pre-tax charges incurred related to the Russia/Ukraine conflict, and $
6
million of net income tax benefits related to the settlement of foreign tax audit matters.
In the third quarter of fiscal 2022, the Company determined it will make an orderly, managed exit from Russia and Belarus. As a result, the Company expects to record a full valuation allowance against the $
20
million deferred tax asset recorded in connection with the Russia charges incurred during the second quarter of fiscal 2022. Other income tax adjustments could be necessary as the Company reviews the overall impacts of the exit process.
For the three and six months ended April 30, 2021, the Company recorded $
33
million and $
124
million of net income tax benefits, respectively, related to various items discrete to the period. For the three months ended April 30, 2021, this amount primarily included $
41
million of income tax benefits related to transformation costs, and acquisition, disposition and other related charges. For the six months ended April 30, 2021, this amount primarily included $
107
million of income tax benefits related to transformation costs, and acquisition, disposition and other related charges and $
30
million of income tax benefits related to tax liabilities for which the Company shared joint and several liability with HP Inc. and for which the Company was indemnified by HP Inc.
19
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
Uncertain Tax Positions
As of April 30, 2022 and October 31, 2021, the amount of unrecognized tax benefits was $
590
million and $
2.1
billion, respectively, of which up to $
332
million and $
688
million, respectively, would affect the Company's effective tax rate if realized as of their respective periods. During the first quarter of the current year, the Company effectively settled with the U.S. Internal Revenue Service ("IRS") for fiscal 2016, primarily contributing to the reduction in the Company's unrecognized tax benefits of $
1.5
billion, which was predominantly related to the timing of intercompany royalty revenue recognition which does not affect the Company’s effective tax rate.
For tax liabilities pertaining to unrecognized tax benefits, the Company recognizes interest income from favorable settlements and interest expense and penalties in Provision for taxes in the Condensed Consolidated Statements of Earnings. The Company recognized interest expense of $
3
million and $
10
million for the three months ended April 30, 2022 and 2021, respectively, and interest income of $
37
million and interest expense of $
2
million for the six months ended April 30, 2022 and 2021, respectively. The increase in interest income in the current year resulted from the release of reserves as a result of the effective settlement of the IRS audit for fiscal 2016 during the first fiscal quarter. As of April 30, 2022 and October 31, 2021, the Company had accrued $
99
million and $
136
million, respectively, for interest and penalties in the Condensed Consolidated Balance Sheets.
The Company engages in continuous discussion and negotiation with tax authorities regarding tax matters in various jurisdictions. The Company does not expect complete resolution of any IRS audit cycle within the next
12
months. However, it is reasonably possible that certain federal, foreign, and state tax issues may be concluded in the next
12
months, including issues involving resolution of certain intercompany transactions, joint and several tax liabilities, and other matters. Accordingly, the Company believes it is reasonably possible that its existing unrecognized tax benefits may be reduced by an amount up to $
48
million within the next 12 months.
Deferred Tax Assets and Liabilities
| As of | |||||||||||
| April 30, 2022 | October 31, 2021 | ||||||||||
| In millions | |||||||||||
| Deferred tax assets | $ |
|
$ |
|
|||||||
| Deferred tax liabilities |
(
|
(
|
|||||||||
| Deferred tax assets net of deferred tax liabilities | $ |
|
$ |
|
|||||||
Note 6:
Balance Sheet Details
Balance sheet details were as follows:
Cash, cash equivalents and restricted cash
| As of | |||||||||||
| April 30, 2022 | October 31, 2021 | ||||||||||
| In millions | |||||||||||
| Cash and cash equivalents | $ |
|
$ |
|
|||||||
|
Restricted cash
(1)
|
|
|
|||||||||
| Total | $ |
|
$ |
|
|||||||
(1) The Company includes restricted cash in Other current assets in the accompanying Condensed Consolidated Balance Sheets.
20
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
| As of | |||||||||||
| April 30, 2022 | October 31, 2021 | ||||||||||
| In millions | |||||||||||
| Finished goods | $ |
|
$ |
|
|||||||
| Purchased parts and fabricated assemblies |
|
|
|||||||||
| Total | $ |
|
$ |
|
|||||||
| As of | |||||||||||
| April 30, 2022 | October 31, 2021 | ||||||||||
| In millions | |||||||||||
| Land | $ |
|
$ |
|
|||||||
| Buildings and leasehold improvements |
|
|
|||||||||
| Machinery and equipment, including equipment held for lease |
|
|
|||||||||
|
|
|
||||||||||
| Accumulated depreciation |
(
|
(
|
|||||||||
| Total | $ |
|
$ |
|
|||||||
Warranties
| For the six months ended April 30, 2022 | |||||
| In millions | |||||
| Balance at beginning of period | $ |
|
|||
| Charges |
|
||||
| Adjustments related to pre-existing warranties |
(
|
||||
| Settlements made |
(
|
||||
| Balance at end of period | $ |
|
|||
Contract balances
The Company’s contract balances consist of contract assets, contract liabilities, and costs to obtain a contract with a customer.
Contract Assets
| As of | |||||||||||
| April 30, 2022 | October 31, 2021 | ||||||||||
| In millions | |||||||||||
| Accounts receivable | $ |
|
$ |
|
|||||||
| Unbilled receivables |
|
|
|||||||||
| Allowances |
(
|
(
|
|||||||||
| Total | $ |
|
$ |
|
|||||||
21
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
| As of | |||||||||||
| April 30, 2022 | October 31, 2021 | ||||||||||
| In millions | |||||||||||
| Balance at beginning of period | $ |
|
$ |
|
|||||||
| Provision for credit losses |
|
|
|||||||||
| Write off's, net of recoveries |
(
|
(
|
|||||||||
| Balance at end of period | $ |
|
$ |
|
|||||||
Sale of Trade Receivables
The Company has third-party revolving short-term financing arrangements intended to facilitate the working capital requirements of certain customers. During the three months ended April 30, 2022 and the fiscal year ended October 31, 2021, the Company sold $
1
billion and $
4.2
billion of trade receivables, respectively. The Company recorded an obligation of $
108
million and $
65
million within Notes payable and short-term borrowings in its Condensed Consolidated Balance Sheets as of April 30, 2022 and October 31, 2021 respectively, related to the trade receivables sold and collected from the third-party for which the revenue recognition was deferred.
Contract Liabilities
Contract liabilities consist of deferred revenue. The aggregate balance of current and non-current deferred revenue was $
6.3
billion and $
6.4
billion as of April 30, 2022 and October 31, 2021, respectively. During the six months ended April 30, 2022, approximately $
1.9
billion of the deferred revenue as of October 31, 2021 was recognized as revenue.
Remaining Performance Obligations
Revenue allocated to remaining performance obligations represents contract work that has not yet been performed and does not include contracts where the customer is not committed. Remaining performance obligations estimates are subject to change and are affected by several factors, including contract terminations, changes in the scope of contracts, adjustments for revenue that has not materialized and adjustments for currency.
Remaining performance obligations consist of deferred revenue. As of April 30, 2022, the aggregate amount of remaining performance obligations was $
6.3
billion. The Company expects to recognize approximately
32
% of this amount as revenue over the remainder of the fiscal year.
Costs to Obtain a Contract
As of April 30, 2022, the current and non-current portions of the capitalized costs to obtain a contract were $
69
million and $
106
million, respectively. As of October 31, 2021, the current and non-current portions of the capitalized costs to obtain a contract were $
64
million and $
95
million, respectively. The current and non-current portions of the capitalized costs to obtain a contract were included in Other current assets, and Long-term financing receivables and other assets, respectively, in the Condensed Consolidated Balance Sheet. For the three and six months ended April 30, 2022, the Company amortized $
21
million and $
41
million respectively, of capitalized costs to obtain a contract. For the three and six months ended April 30, 2021 the Company amortized $
16
million and $
32
million respectively, of capitalized costs to obtain a contract. The amortized capitalized costs to obtain a contract are included in Selling, general and administrative expense in the Condensed Consolidated Statement of Earnings.
Note 7:
Accounting for Leases as a Lessor
22
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
| As of | |||||||||||
| April 30, 2022 | October 31, 2021 | ||||||||||
| In millions | |||||||||||
| Minimum lease payments receivable | $ |
|
$ |
|
|||||||
| Unguaranteed residual value |
|
|
|||||||||
| Unearned income |
(
|
(
|
|||||||||
| Financing receivables, gross |
|
|
|||||||||
|
Allowance for credit losses
|
(
|
(
|
|||||||||
| Financing receivables, net |
|
|
|||||||||
| Less: current portion |
(
|
(
|
|||||||||
| Amounts due after one year, net | $ |
|
$ |
|
|||||||
As of April 30, 2022 and October 31, 2021, scheduled maturities of the Company's minimum lease payments receivable were as follows:
| As of | |||||||||||
| April 30, 2022 | October 31, 2021 | ||||||||||
| Fiscal year | In millions | ||||||||||
| Remainder of fiscal 2022 | $ |
|
$ |
|
|||||||
| 2023 |
|
|
|||||||||
| 2024 |
|
|
|||||||||
| 2025 |
|
|
|||||||||
| 2026 |
|
|
|||||||||
| Thereafter |
|
|
|||||||||
| Total undiscounted cash flows | $ |
|
$ |
|
|||||||
| Present value of lease payments (recognized as finance receivables) | $ |
|
$ |
|
|||||||
| Unearned income | $ |
|
$ |
|
|||||||
Sale of Financing Receivables
The Company enters into arrangements to transfer the contractual payments due under certain financing receivables to third party financial institutions. During the six months ended April 30, 2022, the Company sold $
31
million of financing receivables. During the fiscal year ended October 31, 2021, the Company sold $
142
million of financing receivables.
Credit Quality Indicators
Due to the homogeneous nature of its leasing transactions, the Company 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 the Company's customer base and their dispersion across many different industries and geographic regions. The Company evaluates the credit quality of an obligor at lease inception and monitors that credit quality over the term of a transaction. The Company 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 and periodically updates the risk ratings when there is a change in the underlying credit quality. 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 credit enhancements, such as guarantees, letters of credit or security deposits.
23
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
The credit risk profile of gross financing receivables, based on internal risk ratings as of April 30, 2022, presented on amortized cost basis by year of origination was as follows:
|
As of April 30, 2022
|
|||||||||||||||||
| Risk Rating | |||||||||||||||||
| Low | Moderate | High | |||||||||||||||
| Fiscal Year | In millions | ||||||||||||||||
| 2022 | $ |
|
$ |
|
$ |
|
|||||||||||
| 2021 |
|
|
|
||||||||||||||
| 2020 |
|
|
|
||||||||||||||
| 2019 |
|
|
|
||||||||||||||
| 2018 and prior |
|
|
|
||||||||||||||
| Total | $ |
|
$ |
|
$ |
|
|||||||||||
The credit risk profile of gross financing receivables, based on internal risk ratings as of October 31, 2021, presented on amortized cost basis by year of origination was as follows:
|
As of October 31, 2021
|
|||||||||||||||||
| Risk Rating | |||||||||||||||||
| Low | Moderate | High | |||||||||||||||
| Fiscal Year | In millions | ||||||||||||||||
| 2021 | $ |
|
$ |
|
$ |
|
|||||||||||
| 2020 |
|
|
|
||||||||||||||
| 2019 |
|
|
|
||||||||||||||
| 2018 |
|
|
|
||||||||||||||
| 2017 and prior |
|
|
|
||||||||||||||
| Total | $ |
|
$ |
|
$ |
|
|||||||||||
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. The Company classifies accounts as high risk when it considers the financing receivable to be impaired or when management believes there is a significant near-term risk of impairment. The credit quality indicators do not reflect any mitigation actions taken to transfer credit risk to third parties.
Allowance for Credit Losses
The allowance for credit losses for financing receivables as of April 30, 2022 and October 31, 2021 and the respective changes during the six and twelve months then ended were as follows.
| As of | |||||||||||
| April 30, 2022 | October 31, 2021 | ||||||||||
| In millions | |||||||||||
| Balance at beginning of period | $ |
|
$ |
|
|||||||
| Adjustment for adoption of the new credit loss standard |
|
|
|||||||||
| Provision for credit losses |
|
|
|||||||||
| Adjustment to the existing allowance |
|
|
|||||||||
| Write-offs |
(
|
(
|
|||||||||
| Balance at end of period | $ |
|
$ |
|
|||||||
In the second quarter of fiscal 2022, the Company recorded a provision of $
99
million related to expected credit losses due to the Russia/Ukraine conflict.
24
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
Non-Accrual and Past-Due Financing Receivables
The following table summarizes the aging and non-accrual status of gross financing receivables:
| As of | |||||||||||
| April 30, 2022 | October 31, 2021 | ||||||||||
| In millions | |||||||||||
|
Billed:
(1)
|
|||||||||||
| Current and past due 1-30 days | $ |
|
$ |
|
|||||||
| Past due 31-60 days |
|
|
|||||||||
| Past due 61-90 days |
|
|
|||||||||
| Past due > 90 days |
|
|
|||||||||
| Unbilled sales-type and direct-financing lease receivables |
|
|
|||||||||
| Total gross financing receivables | $ |
|
$ |
|
|||||||
|
Gross financing receivables on non-accrual status
(2)
|
$ |
|
$ |
|
|||||||
|
Gross financing receivables 90 days past due and still accruing interest
(2)
|
$ |
|
$ |
|
|||||||
(1)
Includes billed operating lease receivables and billed sales-type and direct-financing lease receivables.
(2)
Includes billed operating lease receivables and billed and unbilled sales-type and direct-financing lease receivables.
Operating Leases
| As of | |||||||||||
| April 30, 2022 | October 31, 2021 | ||||||||||
| In millions | |||||||||||
| Equipment leased to customers | $ |
|
$ |
|
|||||||
| Accumulated depreciation |
(
|
(
|
|||||||||
| Total | $ |
|
$ |
|
|||||||
| As of | |||||
| April 30, 2022 | |||||
| Fiscal year | In millions | ||||
| Remainder of fiscal 2022 | $ |
|
|||
| 2023 |
|
||||
| 2024 |
|
||||
| 2025 |
|
||||
| 2026 |
|
||||
| Thereafter |
|
||||
| Total | $ |
|
|||
If a lease is classified as an operating lease, the Company records lease revenue on a straight-line basis over the lease term. At commencement of an operating lease, initial direct costs are deferred and are expensed over the lease term on the same basis as the lease revenue is recorded.
25
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
The following table presents amounts included in the Condensed Consolidated
Statement of
Earnings related to lessor activity:
| For the three months ended April 30, | For the six months ended April 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| In millions | |||||||||||||||||||||||
| Interest income from sales-type leases and direct financing leases | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
| Lease income from operating leases |
|
|
|
|
|||||||||||||||||||
| Total lease income | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
Variable Interest Entities
The Company has issued asset-backed debt securities under a fixed-term securitization program to private investors. The asset-backed debt securities are collateralized by the U.S. fixed-term financing receivables and leased equipment in the offering, which is held by a Special Purpose Entity (“SPE”). The SPE meets the definition of a Variable Interest Entity ("VIE") and is consolidated, along with the associated debt, into the Condensed Consolidated Financial Statements as the Company is the primary beneficiary of the VIE. The SPE is a bankruptcy-remote legal entity with separate assets and liabilities. The purpose of the SPE is to facilitate the funding of customer receivables and leased equipment in the capital markets.
The Company’s risk of loss related to securitized receivables and leased equipment is limited to the amount by which the Company’s right to receive collections for assets securitized exceeds the amount required to pay interest, principal, and fees and expenses related to the asset-backed securities.
The following table presents the assets and liabilities held by the consolidated VIE as of April 30, 2022 and October 31, 2021, which are included in the Condensed Consolidated Balance Sheets.
The assets in the table below include those that can be used to settle the obligations of the VIE. Additionally, general creditors do not have recourse to the assets of the VIE.
| As of | |||||||||||
| April 30, 2022 | October 31, 2021 | ||||||||||
| Assets held by VIE | In millions | ||||||||||
| Other current assets | $ |
|
$ |
|
|||||||
| Financing receivables | |||||||||||
| Short-term | $ |
|
$ |
|
|||||||
| Long-term | $ |
|
$ |
|
|||||||
| Property, plant and equipment | $ |
|
$ |
|
|||||||
| Liabilities held by VIE | |||||||||||
| Notes payable and short-term borrowings, net of unamortized debt issuance costs | $ |
|
$ |
|
|||||||
| Long-term debt, net of unamortized debt issuance costs | $ |
|
$ |
|
|||||||
Financing receivables transferred via securitization through the SPE were $
664
million for the six months ended April 30, 2022 and $
1.1
billion for the fiscal year ended October 31, 2021. Leased equipment transferred via securitization through the SPE was $
445
million for the six months ended April 30, 2022 and $
720
million for the fiscal year ended October 31, 2021.
26
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
Note 8:
Goodwill
Goodwill is tested for impairment at the reporting unit level. As of April 30, 2022, the Company's reporting units are consistent with the reportable segments identified in Note 2, with the exception of Corporate Investments and Other, which contains three reporting units: A & PS, CMS, and Software.
The following table represents the carrying value of goodwill, by reportable segment as of April 30, 2022 and October 31, 2021. There has been no change to the accumulated impairment loss from the Company's Annual Report on Form 10-K for the fiscal year ended October 31, 2021.
| Compute | HPC & AI | Storage | Intelligent Edge | Financial Services | Corporate Investments and Other | Total | |||||||||||||||||||||||||||||||||||
| In millions | |||||||||||||||||||||||||||||||||||||||||
|
Balance at April 30, 2022 and October 31, 2021
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||||||||||||||
As of the annual test date in fiscal 2021, the HPC & AI reporting unit had a goodwill of $
3.7
billion and an excess of fair value over carrying value of net assets of
8
%. The HPC & AI business is facing challenges on the current and projected future results as the revenue growth is dependent on timing of delivery and related achievement of customer acceptance milestones. If the Company is not successful in addressing these challenges, or additional emerging global macroeconomic and geopolitical challenges intensify these challenges, the projected revenue growth rates or operating margins could decline resulting in a decrease in the fair value of the HPC & AI reporting unit. The fair value of the HPC & AI reporting unit could also be negatively impacted by changes in its weighted average cost of capital, changes in management's business strategy or significant and sustained declines in the stock price, which could result in an indicator of impairment. The Company 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. Further impairment charges, if any, may be material to our results of operations and financial position.
Note 9:
Fair Value
27
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
| As of April 30, 2022 | As of October 31, 2021 | ||||||||||||||||||||||||||||||||||||||||||||||
|
Fair Value
Measured Using |
Fair Value
Measured Using |
||||||||||||||||||||||||||||||||||||||||||||||
|
Quoted Prices in Active Markets for Identical Assets
(Level 1)
|
Significant Other Observable Remaining Inputs
(Level 2)
|
Significant Other Unobservable Remaining Inputs
(Level 3)
|
Total |
Quoted Prices in Active Markets for Identical Assets
(Level 1)
|
Significant Other Observable Remaining Inputs
(Level 2)
|
Significant Other Unobservable Remaining Inputs
(Level 3)
|
Total | ||||||||||||||||||||||||||||||||||||||||
| In millions | |||||||||||||||||||||||||||||||||||||||||||||||
| Assets | |||||||||||||||||||||||||||||||||||||||||||||||
| Cash Equivalents and Investments: | |||||||||||||||||||||||||||||||||||||||||||||||
| Time deposits | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||||||||||||||||||
| Money market funds |
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||||||||||||||||
| Equity securities |
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||||||||||||||||
| Foreign bonds |
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||||||||||||||||
| Other debt securities |
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||||||||||||||||
| Derivative Instruments: | |||||||||||||||||||||||||||||||||||||||||||||||
| Interest rate contracts |
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||||||||||||||||
| Foreign exchange contracts |
|
|
|
|
|
|
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|
|||||||||||||||||||||||||||||||||||||||
| Other derivatives |
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||||||||||||||||
| Total assets | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||||||||||||||||||
| Liabilities | |||||||||||||||||||||||||||||||||||||||||||||||
| Derivative Instruments: | |||||||||||||||||||||||||||||||||||||||||||||||
| Interest rate contracts | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||||||||||||||||||
| Foreign exchange contracts |
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||||||||||||||||
| Other derivatives |
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||||||||||||||||
| Total liabilities | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||||||||||||||||||
Other Fair Value Disclosures
Short-Term and Long-Term Debt: As of April 30, 2022 and October 31, 2021, the estimated fair value of the Company's short-term and long-term debt was $
13.7
billion and $
14.6
billion, respectively. As of April 30, 2022 and October 31, 2021, the carrying value of the Company's short-term and long-term debt was $
13.5
billion and $
13.4
billion, respectively. If measured at fair value in the Condensed Consolidated Balance Sheets, short-term and long-term debt would be classified in Level 2 of the fair value hierarchy.
Equity investments without readily determinable fair value: Equity Investments are recorded at cost and measured at fair value, when they are deemed to be impaired or when there is an adjustment from observable price changes. The Company recognized a gain of $
25
million in Interest and other, net in the Condensed Consolidated Statements of Earnings, for the three and six months ended April 30, 2021. If measured at fair value in the Condensed Consolidated Balance Sheets, these would generally be classified in Level 3 of the fair value hierarchy.
Other financial instruments, including accounts receivable and accounts payable, are carried at cost, which approximates their fair value due to their short term nature.
Non-Financial Assets: The Company's non-financial assets, such as intangible assets, goodwill, and property, plant and equipment, are recorded at cost. The Company records right-of-use ("ROU") assets based on the lease liability, adjusted for lease prepayments, lease incentives received, and the lessee's initial direct costs. Fair value adjustments are made to these non-financial assets in the period an impairment charge is recognized.
28
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
Note 10:
Financial Instruments
Cash Equivalents and Available-for-Sale Debt Investments
| As of April 30, 2022 | As of October 31, 2021 | ||||||||||||||||||||||||||||||||||
| Cost | Gross Unrealized Gain |
Fair
Value |
Cost | Gross Unrealized Gain |
Fair
Value |
||||||||||||||||||||||||||||||
| In millions | |||||||||||||||||||||||||||||||||||
| Cash Equivalents: | |||||||||||||||||||||||||||||||||||
| Time deposits | $ |
|
$ | — | $ |
|
$ |
|
$ | — | $ |
|
|||||||||||||||||||||||
| Money market funds |
|
— |
|
|
— |
|
|||||||||||||||||||||||||||||
| Total cash equivalents |
|
— |
|
|
— |
|
|||||||||||||||||||||||||||||
| Available-for-Sale Debt Investments: | |||||||||||||||||||||||||||||||||||
| Time Deposits |
|
|
|
|
|
|
|||||||||||||||||||||||||||||
| Foreign bonds |
|
|
|
|
|
|
|||||||||||||||||||||||||||||
| Other debt securities |
|
|
|
|
|
|
|||||||||||||||||||||||||||||
| Total available-for-sale debt investments |
|
|
|
|
|
|
|||||||||||||||||||||||||||||
| Total cash equivalents and available-for-sale debt investments | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||||||||||
As of April 30, 2022 and October 31, 2021, the carrying amount of cash equivalents approximated fair value due to the short period of time to maturity. Time deposits were primarily issued by institutions outside of the U.S. as of April 30, 2022 and October 31, 2021. The estimated fair value of the available-for-sale debt investments may not be representative of values that will be realized in the future.
| As of April 30, 2022 | |||||||||||
| Amortized Cost | Fair Value | ||||||||||
| In millions | |||||||||||
| Due in one year | $ |
|
$ |
|
|||||||
| Due in one to five years |
|
|
|||||||||
| Due in more than five years |
|
|
|||||||||
| $ |
|
$ |
|
||||||||
Non-marketable equity investments in privately held companies are included in Long-term financing receivables and other assets in the Condensed Consolidated Balance Sheets. These non-marketable equity investments are carried either at fair value or under the measurement alternative.
The carrying amount of those non-marketable equity investments accounted for under the measurement alternative was $
172
million and $
253
million as of April 30, 2022 and October 31, 2021, respectively. During the three and six months ended April 30, 2022, the Company recorded an immaterial impairment on these investments. During the three and six months ended April 30, 2021, the Company recorded an unrealized gain of $
25
million on these investments.
29
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
The carrying amount of those non-marketable equity investments accounted for under the fair value option was $
309
million and $
129
million as of April 30, 2022 and October 31, 2021, respectively. During the three and six months ended April 30, 2022, the Company recorded an unrealized gain of $
45
million and $
104
million, respectively, on these investments. During the three and six months ended April 30, 2021, the Company recorded an unrealized gain of $
34
million on these investments.
Equity investments with readily determinable fair values are included in Long-term financing receivables and other assets in the Condensed Consolidated Balance Sheets. The carrying amount of these investments was $
13
million as of April 30, 2022 and $
57
million as of October 31, 2021, respectively. During the three and six months ended April 30, 2022, the Company recorded an unrealized loss of $
9
million and $
23
million, respectively, on these investments. During the three and six months ended April 30, 2021, the Company recognized an immaterial unrealized loss on these investments.
Investments in equity securities that are accounted for using the equity method are included in Investments in equity interests in the Condensed Consolidated Balance Sheets. The carrying amount of these investments was $
2.3
billion and $
2.2
billion as of April 30, 2022 and October 31, 2021, respectively. During the three and six months ended April 30, 2022, the Company recorded earnings from equity interests of $
33
million and $
64
million, respectively, on these investments. During the three and six months ended April 30, 2021, the Company recorded earnings from equity interests of $
4
million and $
30
million, respectively, on these investments.
Fair Value of Derivative Instruments in the Condensed Consolidated Balance Sheets
The gross notional and fair value of derivative instruments in the Condensed Consolidated Balance Sheets were as follows:
| As of April 30, 2022 | As of October 31, 2021 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Fair Value | Fair Value | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
Outstanding
Gross Notional |
Other
Current Assets |
Long-Term
Financing Receivables and Other Assets |
Other
Accrued Liabilities |
Long-Term
Other Liabilities |
Outstanding
Gross Notional |
Other
Current Assets |
Long-Term
Financing Receivables and Other Assets |
Other
Accrued Liabilities |
Long-Term
Other Liabilities |
||||||||||||||||||||||||||||||||||||||||||||||||||
| In millions | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Derivatives designated as hedging instruments | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Fair value hedges: | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Interest rate contracts | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||||||||||||||||||||||||||
| Cash flow hedges: | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Foreign currency contracts |
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||||||||||||||||||||||||||
| Net investment hedges: | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Foreign currency contracts |
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||||||||||||||||||||||||||
| Total derivatives designated as hedging instruments |
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||||||||||||||||||||||||||
| Derivatives not designated as hedging instruments | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Foreign currency contracts |
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||||||||||||||||||||||||||
| Other derivatives |
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||||||||||||||||||||||||||
| Total derivatives not designated as hedging instruments |
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||||||||||||||||||||||||||
| Total derivatives | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||||||||||||||||||||||||||
Offsetting of Derivative Instruments
The Company recognizes all derivative instruments on a gross basis in the Condensed Consolidated Balance Sheets. The Company's derivative instruments are subject to master netting arrangements and collateral security arrangements. The Company does not offset the fair value of its derivative instruments against the fair value of cash collateral posted under
30
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
collateral security agreements.
The information related to the potential effect of the Company's use of the master netting agreements and collateral security agreements were as follows:
| As of April 30, 2022 | ||||||||||||||||||||||||||||||||||||||
| In the Condensed Consolidated 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 | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
(1)
|
$ |
|
|||||||||||||||||||||||||
| Derivative liabilities | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
(2)
|
$ |
|
|||||||||||||||||||||||||
| As of October 31, 2021 | ||||||||||||||||||||||||||||||||||||||
| In the Condensed Consolidated 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 | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
(1)
|
$ |
|
|||||||||||||||||||||||||
| Derivative liabilities | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
(2)
|
$ |
(
|
|||||||||||||||||||||||||
(1)
Represents the cash collateral posted by counterparties as of the respective reporting date for the Company's asset position, net of derivative amounts that could be offset, as of, generally,
two
business days prior to the respective reporting date.
The amounts recorded on the Condensed Consolidated Balance Sheets related to cumulative basis adjustments for fair value hedges were as follows:
| Carrying amount of the hedged assets/ (liabilities) | Cumulative amount of fair value hedging adjustment included in the carrying amount of the hedged assets/ (liabilities) | ||||||||||||||||||||||
| As of | As of | ||||||||||||||||||||||
| April 30, 2022 | October 31, 2021 | April 30, 2022 | October 31, 2021 | ||||||||||||||||||||
| In millions | In millions | ||||||||||||||||||||||
| Notes payable and short-term borrowings | $ |
(
|
$ |
(
|
$ |
|
$ |
(
|
|||||||||||||||
| Long-term debt | $ |
(
|
$ |
(
|
$ |
|
$ |
(
|
|||||||||||||||
31
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
The pre-tax effect of derivative instruments in cash flow and net investment hedging relationships recognized in Other Comprehensive Income ("OCI") were as follows:
| Gains (Losses) Recognized in OCI on Derivatives | |||||||||||||||||||||||
| For the three months ended April 30, | For the six months ended April 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| In millions | |||||||||||||||||||||||
| Derivatives in Cash Flow Hedging relationship | |||||||||||||||||||||||
| Foreign exchange contracts | $ |
|
$ |
|
$ |
|
$ |
(
|
|||||||||||||||
| Derivatives in Net Investment Hedging relationship | |||||||||||||||||||||||
| Foreign exchange contracts |
|
(
|
|
(
|
|||||||||||||||||||
| Total | $ |
|
$ |
|
$ |
|
$ |
(
|
|||||||||||||||
As of April 30, 2022, the Company expects to reclassify an estimated net accumulated other comprehensive gain of approximately $
167
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.
32
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
Effect of Derivative Instruments on the Condensed Consolidated Statements of Earnings
The pre-tax effect of derivative instruments on the Condensed Consolidated Statements of Earnings were as follows:
| Gains (Losses) Recognized in Income | |||||||||||||||||||||||||||||||||||||||||||||||
| For the three months ended April 30, | For the six months ended April 30, | ||||||||||||||||||||||||||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||||||||||||||||||||||||||
| Net revenue | Interest and other, net | Net revenue | Interest and other, net | Net revenue | Interest and other, net | Net revenue | Interest and other, net | ||||||||||||||||||||||||||||||||||||||||
| In millions | |||||||||||||||||||||||||||||||||||||||||||||||
| Total amounts of income and expense line items presented in the Condensed Consolidated Statements of Earnings in which the effects of fair value hedges, cash flow hedges and derivatives not designated as hedging instruments are recorded | $ |
|
$ |
|
$ |
|
$ |
(
|
$ |
|
$ |
(
|
$ |
|
$ |
(
|
|||||||||||||||||||||||||||||||
| Gains (losses) on derivatives in fair value hedging relationships | |||||||||||||||||||||||||||||||||||||||||||||||
| Interest rate contracts | |||||||||||||||||||||||||||||||||||||||||||||||
| Hedged items |
|
|
|
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||||||||||||||||||||||
| Derivatives designated as hedging instruments |
|
(
|
|
(
|
|
(
|
|
(
|
|||||||||||||||||||||||||||||||||||||||
| Gains (losses) on derivatives in cash flow hedging relationships | |||||||||||||||||||||||||||||||||||||||||||||||
| Foreign exchange contracts | |||||||||||||||||||||||||||||||||||||||||||||||
| Amount of gains (losses) reclassified from accumulated other comprehensive income into income |
|
|
(
|
|
|
|
(
|
(
|
|||||||||||||||||||||||||||||||||||||||
| Interest rate contracts | |||||||||||||||||||||||||||||||||||||||||||||||
| Amount of gains (losses) reclassified from accumulated other comprehensive income into income |
|
|
|
(
|
|
|
|
(
|
|||||||||||||||||||||||||||||||||||||||
| Gains (losses) on derivatives not designated as hedging instruments | |||||||||||||||||||||||||||||||||||||||||||||||
| Foreign exchange contracts |
|
|
|
|
|
|
|
(
|
|||||||||||||||||||||||||||||||||||||||
| Other derivatives |
|
(
|
|
|
|
(
|
|
|
|||||||||||||||||||||||||||||||||||||||
| Total gains (losses) | $ |
|
$ |
|
$ |
(
|
$ |
|
$ |
|
$ |
|
$ |
(
|
$ |
(
|
|||||||||||||||||||||||||||||||
33
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
Note 11:
Borrowings
Notes Payable, Short-Term Borrowings and Long-Term Debt
Notes payable, short-term borrowings, including the current portion of long-term debt, and long-terms debt were as follows:
| As of | |||||||||||
| April 30, 2022 | October 31, 2021 | ||||||||||
| In millions | |||||||||||
|
Current portion of long-term debt
(1)
|
$ |
|
$ |
|
|||||||
| Commercial paper |
|
|
|||||||||
| Notes payable to banks, lines of credit and other |
|
|
|||||||||
| Total notes payable and short-term borrowings | $ |
|
$ |
|
|||||||
| Long-term debt |
|
|
|||||||||
| Total Debt | $ |
|
$ |
|
|||||||
(1) As of April 30, 2022, the Current portion of long-term debt, net of discount and issuance costs, includes $
1.3
billion associated with the asset-backed debt securities issued by the Company.
Commercial Paper
Hewlett Packard Enterprise maintains
two
commercial paper programs, "the Parent Programs", and a wholly-owned subsidiary maintains a third program. The Parent Program in the U.S. provides for the issuance of U.S. dollar-denominated commercial paper up to a maximum aggregate principal amount of $
4.75
billion. The Parent Program outside the U.S. provides for the issuance of commercial paper 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
two
programs at any one time cannot exceed the $
4.75
billion as authorized by Hewlett Packard Enterprise's Board of Directors. In addition, the Hewlett Packard Enterprise subsidiary's euro Commercial Paper/Certificate of Deposit Program provides for the issuance of commercial paper in various currencies of up to a maximum aggregate principal amount of $
1.0
billion. As of April 30, 2022 and October 31, 2021,
no
borrowings were outstanding under the Parent Programs, and $
630
million and $
705
million, respectively, were outstanding under the subsidiary’s program.
Revolving Credit Facility
Note 12:
Stockholders' Equity
The components of Accumulated other comprehensive loss, net of taxes as of April 30, 2022, and changes during the six months ended April 30, 2022 were as follows:
|
Net unrealized
gains (losses) on available-for-sale securities |
Net unrealized
gains (losses) on cash flow hedges |
Unrealized
components of defined benefit plans |
Cumulative
translation adjustment |
Accumulated
other comprehensive loss |
|||||||||||||||||||||||||
| In millions | |||||||||||||||||||||||||||||
| Balance at beginning of period | $ |
|
$ |
|
$ |
(
|
$ |
(
|
$ |
(
|
|||||||||||||||||||
| Other comprehensive income (loss) before reclassifications |
(
|
|
|
(
|
|
||||||||||||||||||||||||
| Reclassifications of (gains) losses into earnings |
|
(
|
|
|
(
|
||||||||||||||||||||||||
| Tax provision |
|
(
|
(
|
(
|
(
|
||||||||||||||||||||||||
| Balance at end of period | $ |
|
$ |
|
$ |
(
|
$ |
(
|
$ |
(
|
|||||||||||||||||||
34
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
The components of Accumulated other comprehensive loss, net of taxes as of April 30, 2021, and changes during the six months ended April 30, 2021 were as follows:
|
Net unrealized
gains (losses) on available-for-sale securities |
Net unrealized
gains (losses) on cash flow hedges |
Unrealized
components of defined benefit plans |
Cumulative
translation adjustment |
Accumulated
other comprehensive loss |
|||||||||||||||||||||||||
| In millions | |||||||||||||||||||||||||||||
| Balance at beginning of period | $ |
|
$ |
(
|
$ |
(
|
$ |
(
|
$ |
(
|
|||||||||||||||||||
| Other comprehensive income (loss) before reclassifications |
(
|
(
|
|
|
(
|
||||||||||||||||||||||||
| Reclassifications of losses into earnings |
|
|
|
|
|
||||||||||||||||||||||||
| Tax provision |
|
(
|
(
|
(
|
(
|
||||||||||||||||||||||||
| Balance at end of period | $ |
|
$ |
|
$ |
(
|
$ |
(
|
$ |
(
|
|||||||||||||||||||
Share Repurchase Program
For the six months ended April 30, 2022, the Company repurchased and settled a total of
12
million shares under its share repurchase program through open market repurchases, which included
0.8
million shares that were unsettled open market repurchases as of October 31, 2021. Additionally, as of April 30, 2022, the Company had unsettled open market repurchases of
0.1
million shares. Shares repurchased during the six months ended April 30, 2022 were recorded as a $
178
million reduction to stockholders' equity. As of April 30, 2022, the Company had a remaining authorization of $
1.7
billion for future share repurchases.
Note 13:
Net Earnings Per Share
The Company 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 the weighted-average dilutive effect of outstanding restricted stock units, stock options, and performance-based awards.
The reconciliations of the numerators and denominators of each of the basic and diluted net EPS calculations were as follows:
| For the three months ended April 30, | For the six months ended April 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| In millions, except per share amounts | |||||||||||||||||||||||
| Numerator: | |||||||||||||||||||||||
| Net earnings | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
| Denominator: | |||||||||||||||||||||||
| Weighted-average shares used to compute basic net EPS |
|
|
|
|
|||||||||||||||||||
| Dilutive effect of employee stock plans |
|
|
|
|
|||||||||||||||||||
| Weighted-average shares used to compute diluted net EPS |
|
|
|
|
|||||||||||||||||||
| Net earnings per share: | |||||||||||||||||||||||
| Basic | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
| Diluted | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
|
Anti-dilutive weighted-average stock awards
(1)
|
|
|
|
|
|||||||||||||||||||
(1)
The Company excludes shares potentially issuable under employee stock plans that could dilute basic net EPS in the future from the calculation of diluted net earnings per share, as their effect, if included, would have been anti-dilutive for the periods presented.
35
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
Note 14:
Litigation and Contingencies
Hewlett Packard Enterprise is involved in various lawsuits, claims, investigations and proceedings including those consisting of intellectual property, commercial, securities, employment, employee benefits, and environmental matters, which arise in the ordinary course of business. In addition, as part of the Separation and Distribution Agreement (the "Separation and Distribution Agreement") entered into in connection with Hewlett Packard Enterprise's spin-off from HP Inc. (formerly known as "Hewlett-Packard Company") (the "Separation"), Hewlett Packard Enterprise and HP Inc. agreed to cooperate with each other in managing certain existing litigation related to both parties' businesses. The Separation and Distribution Agreement included provisions that allocate liability and financial responsibility for pending litigation involving the parties, as well as provide for cross-indemnification of the parties against liabilities to one party arising out of liabilities allocated to the other party. The Separation and Distribution Agreement also included provisions that assign to the parties responsibility for managing pending and future litigation related to the general corporate matters of HP Inc. arising prior to the Separation. Hewlett Packard Enterprise records a liability when it believes that it is both probable that a liability has been incurred and the amount of loss can be reasonably estimated. Significant judgment is required to determine both the probability of having incurred a liability and the estimated amount of the liability. Hewlett Packard Enterprise reviews these matters at least quarterly and adjusts these liabilities to reflect the impact of negotiations, settlements, rulings, advice of legal counsel, and other updated information and events pertaining to a particular matter. Litigation is inherently unpredictable. However, Hewlett Packard Enterprise believes it has valid defenses with respect to legal matters pending against us. Nevertheless, cash flows or results of operations could be materially affected in any particular period by the resolution of one or more of these contingencies. Hewlett Packard Enterprise believes it has recorded adequate provisions for any such matters and, as of April 30, 2022, it was not reasonably possible that a material loss had been incurred in connection with such matters in excess of the amounts recognized in its financial statements.
Litigation, Proceedings and Investigations
Ross and Rogus v. Hewlett Packard Enterprise Company.
On November 8, 2018, a putative class action complaint was filed in the Superior Court of California, County of Santa Clara alleging that HPE pays its California-based female employees “systemically lower compensation” than HPE pays male employees performing substantially similar work. The complaint alleges various California state law claims, including California’s Equal Pay Act, Fair Employment and Housing Act, and Unfair Competition Law, and seeks certification of a California-only class of female employees employed in certain “Covered Positions.” The complaint seeks damages, statutory and civil penalties, attorneys’ fees and costs. On April 2, 2019, HPE filed a demurrer to all causes of action and an alternative motion to strike portions of the complaint. On July 2, 2019, the court denied HPE’s demurrer as to the claims of the putative class and granted HPE’s demurrer as to the claims of the individual plaintiffs.
India Directorate of Revenue Intelligence Proceedings
.
On April 30 and May 10, 2010, the India Directorate of Revenue Intelligence (the "DRI") issued show cause notices to Hewlett-Packard India Sales Private Ltd ("HP India"), a subsidiary of HP Inc.,
seven
HP India employees and
one
former HP India employee alleging that HP India underpaid customs duties while importing products and spare parts into India and seeking to recover an aggregate of approximately $
370
million, plus penalties. Prior to the issuance of the show cause notices, HP India deposited approximately $
16
million with the DRI and agreed to post a provisional bond in exchange for the DRI's agreement to not seize HP India products and spare parts and to not interrupt the transaction of business by HP India.
On April 11, 2012, the Bangalore Commissioner of Customs issued an order on the products-related show cause notice affirming certain duties and penalties against HP India and the named individuals of approximately $
386
million, of which HP India had already deposited $
9
million. On December 11, 2012, HP India voluntarily deposited an additional $
10
million in connection with the products-related show cause notice. On April 20, 2012, the Commissioner issued an order on the parts-related show cause notice affirming certain duties and penalties against HP India and certain of the named individuals of approximately $
17
million, of which HP India had already deposited $
7
million. After the order, HP India deposited an additional $
3
million in connection with the parts-related show cause notice to avoid certain penalties.
HP India filed appeals of the Commissioner's orders before the Customs Tribunal along with applications for waiver of the pre-deposit of remaining demand amounts as a condition for hearing the appeals. The Customs Department has also filed cross-appeals before the Customs Tribunal. On January 24, 2013, the Customs Tribunal ordered HP India to deposit an additional $
24
million against the products order, which HP India deposited in March 2013. The Customs Tribunal did not order any additional deposit to be made under the parts order. In December 2013, HP India filed applications before the Customs Tribunal seeking early hearing of the appeals as well as an extension of the stay of deposit as to HP India and the individuals already granted until final disposition of the appeals. On February 7, 2014, the application for extension of the stay
36
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
of deposit was granted by the Customs Tribunal until disposal of the appeals. On October 27, 2014, the Customs Tribunal commenced hearings on the cross-appeals of the Commissioner's orders. The Customs Tribunal rejected HP India's request to remand the matter to the Commissioner on procedural grounds. The hearings were scheduled to reconvene on April 6, 2015, and again on November 3, 2015, April 11, 2016, and January 15, 2019, but were canceled at the request of the Customs Tribunal. The hearing was again rescheduled for January 20, 2021 but was postponed and has not yet been rescheduled.
ECT Proceedings
.
In January 2011, the postal service of Brazil, Empresa Brasileira de Correios e Telégrafos ("ECT"), notified a former subsidiary of HP Inc. in Brazil ("HP Brazil") that it had initiated administrative proceedings to consider whether to suspend HP Brazil's right to bid and contract with ECT related to alleged improprieties in the bidding and contracting processes whereby employees of HP Brazil and employees of several other companies allegedly coordinated their bids and fixed results for
three
ECT contracts in 2007 and 2008. In late July 2011, ECT notified HP Brazil it had decided to apply the penalties against HP Brazil and suspend HP Brazil's right to bid and contract with ECT for
five years
, based upon the evidence before it. In August 2011, HP Brazil appealed ECT's decision. In April 2013, ECT rejected HP Brazil's appeal, and the administrative proceedings were closed with the penalties against HP Brazil remaining in place. In parallel, in September 2011, HP Brazil filed a civil action against ECT seeking to have ECT's decision revoked. HP Brazil also requested an injunction suspending the application of the penalties until a final ruling on the merits of the case. The court of first instance has not issued a decision on the merits of the case, but it has denied HP Brazil's request for injunctive relief. HP Brazil appealed the denial of its request for injunctive relief to the intermediate appellate court, which issued a preliminary ruling denying the request for injunctive relief but reducing the length of the sanctions from
to
two years
. HP Brazil appealed that decision and, in December 2011, obtained a ruling staying enforcement of ECT's sanctions until a final ruling on the merits of the case. HP Brazil expects any appeal of the decision on the merits to last several years.
Forsyth, et al. vs. HP Inc. and Hewlett Packard Enterprise.
This purported class and collective action was filed on August 18, 2016 and an amended complaint was filed on December 19, 2016 in the United States District Court for the Northern District of California, against HP Inc. and Hewlett Packard Enterprise (collectively, “Defendants”) alleging Defendants violated the Federal Age Discrimination in Employment Act ("ADEA"), the California Fair Employment and Housing Act, California public policy and the California Business and Professions Code by terminating older workers and replacing them with younger workers. Plaintiffs seek to certify a nationwide collective action under the ADEA comprised of all individuals age
40
years and older who had their employment terminated by an HP entity pursuant to a work force reduction ("WFR") plan on or after December 9, 2014 for individuals terminated in deferral states and on or after April 8, 2015 in non-deferral states. Plaintiffs also seek to certify a Rule 23 class under California law comprised of all persons
40
years or older employed by Defendants in the state of California and terminated pursuant to a WFR plan on or after August 18, 2012. Following the filing of Plaintiffs' Fourth Amended Complaint, Plaintiffs filed a Motion for Preliminary Class Certification on December 30, 2020. On April 14, 2021, Plaintiffs’ Motion for Conditional Class Certification was granted. The conditionally certified collective action consists of all individuals who had their employment terminated by Defendants pursuant to a WFR Plan on or after November 1, 2015, and who were 40 years or older at the time of such termination. The collective action excludes all individuals who signed a Waiver and General Release Agreement or an Agreement to Arbitrate Claims. The Court-approved notice was issued to potential class members and the opt-in period is now closed.
Hewlett-Packard Company v. Oracle (Itanium).
On June 15, 2011, HP Inc. filed suit against Oracle in the Superior Court of California, County of Santa Clara in connection with Oracle's March 2011 announcement that it was discontinuing software support for HP Inc.’s Itanium-based line of mission critical servers. HP Inc. asserted, among other things, that Oracle’s actions breached the contract that was signed by the parties as part of the settlement of the litigation relating to Oracle’s hiring of Mark Hurd. Trial was bifurcated into
two
phases. HP Inc. prevailed in the first phase of the trial, in which the court ruled that the contract at issue required Oracle to continue to offer its software products on HP Inc.'s Itanium-based servers for as long as HP Inc. decided to sell such servers. Phase 2 of the trial was then postponed by Oracle’s appeal of the trial court’s denial of Oracle’s “anti-SLAPP” motion, in which Oracle argued that HP Inc.’s damages claim infringed on Oracle’s First Amendment rights. On August 27, 2015, the California Court of Appeal rejected Oracle’s appeal. The matter was remanded to the trial court for Phase 2 of the trial, which began on May 23, 2016, and was submitted to the jury on June 29, 2016. On June 30, 2016, the jury returned a verdict in favor of HP Inc., awarding HP Inc. approximately $
3
billion in damages: $
1.7
billion for past lost profits and $
1.3
billion for future lost profits. On October 20, 2016, the court entered judgment for this amount with interest accruing until the judgment is paid. Oracle’s motion for a new trial was denied on December 19, 2016, and Oracle filed its notice of appeal from the trial court’s judgment on January 17, 2017. On February 2, 2017, HP Inc. filed a notice of cross-appeal challenging the trial court’s denial of prejudgment interest. On May 16, 2019, HP Inc. filed its application to renew the judgment. As of May 16, 2019, the renewed judgment is approximately $
3.8
billion. Daily interest on the renewed judgment is
37
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
now accruing at $
1
million and will be recorded upon receipt. On June 14, 2021, the California Court of Appeal affirmed the judgment of the trial court. Oracle filed a Petition for Rehearing with the California Court of Appeal, which was denied on July 8, 2021. On July 26, 2021, Oracle filed a Petition for Review with the California Supreme Court. The California Supreme Court denied the petition on September 29, 2021, and the California Court of Appeal issued the remittitur on September 30, 2021. On October 12, 2021, Oracle paid $
4.66
billion, reflecting all amounts owed on the judgment plus accrued interest. Pursuant to the terms of the Separation and Distribution Agreement between HP Inc. and HPE, this amount was split evenly between the parties following the reimbursement of approximately $
48
million in pre-separation legal costs incurred by HPE in prosecution of the litigation. In total, HPE has received payment of approximately $
2.35
billion, which was recognized as a gain from litigation judgment during the year ended October 31, 2021. On October 27, 2021, HP Inc. filed an acknowledgement of full satisfaction of judgment. On January 27, 2022, Oracle filed a Petition for Writ of Certiorari asking the United States Supreme Court to grant review. On May 16, 2022, the United States Supreme Court denied Oracle's Petition. The matter is now closed.
Oracle America, Inc., et al. v. Hewlett Packard Enterprise Company (Terix copyright matter).
On March 22, 2016, Oracle filed a complaint against HPE in the United States District Court for the Northern District of California, alleging copyright infringement, interference with contract, intentional interference with prospective economic relations, and unfair competition. Oracle’s claims arise out of HPE’s prior use of a third-party maintenance provider named Terix Computer Company, Inc. (“Terix”). Oracle contends that in connection with HPE’s use of Terix as a subcontractor for certain customers of HPE’s multivendor support business, Oracle’s copyrights were infringed, and HPE is liable for vicarious and contributory infringement and related claims. The lawsuit against HPE follows a prior lawsuit brought by Oracle against Terix in 2013 relating to Terix’s alleged unauthorized provision of Solaris patches to customers on Oracle hardware. On January 29, 2019, the court granted HPE’s Motion for Summary Judgment as to all of Oracle’s claims. On February 20, 2019, the court entered judgment in favor of HPE, dismissing Oracle’s claims in their entirety. Oracle appealed the trial court’s ruling to the United States Court of Appeals for the Ninth Circuit. On August 20, 2020, the United States Court of Appeals for the Ninth Circuit issued its ruling, affirming in part and reversing in part the trial court’s decision granting summary judgment in favor of HPE. On October 6, 2020, the matter was remanded to the United States District Court for the Northern District of California. On June 4, 2021, the Court issued an order denying HPE’s motion for summary judgment and granting-in-part Oracle’s motion for partial summary judgment as to a certain of HPE’s defenses. Trial is scheduled to begin on May 23, 2022.
Q3 Networking Litigation.
On September 21 and September 22, 2020, Q3 Networking LLC filed complaints against HPE, Aruba Networks, Commscope and Netgear in the United States District Court for the District of Delaware and the United States International Trade Commission (“ITC”). Both complaints allege infringement of
four
patents, and the ITC complaint defines the “accused products” as “routers, access points, controllers, network management servers, other networking products, and hardware and software components thereof.” The ITC action was instituted on October 23, 2020. The District of Delaware action has been stayed pending resolution of the ITC action. The evidentiary hearing before the ITC has been completed. On December 7, 2021, the Administrative Law Judge issued his initial determination finding no violation of section 337 of the Tariff Act. On May 3, 2022, the ITC issued its Notice of Final Determination, affirming the initial determination and terminating the investigation.
Shared Litigation with HP Inc., DXC and Micro Focus
As part of the Separation and Distribution Agreements between Hewlett Packard Enterprise and HP Inc., Hewlett Packard Enterprise and DXC, and Hewlett Packard Enterprise and Seattle SpinCo, the parties to each agreement agreed to cooperate with each other in managing certain existing litigation related to both parties' businesses. The Separation and Distribution Agreements also included provisions that assign to the parties responsibility for managing pending and future litigation related to the general corporate matters of HP Inc. (in the case of the separation of Hewlett Packard Enterprise from HP Inc.) or of Hewlett Packard Enterprise (in the case of the separation of DXC from Hewlett Packard Enterprise and the separation of Seattle SpinCo from Hewlett Packard Enterprise), in each case arising prior to the applicable separation.
Environmental
The Company's operations and products are or may in the future become subject to various federal, state, local and foreign laws and regulations concerning environmental protection, including laws addressing the discharge of pollutants into the air and water, the management and disposal of hazardous substances and wastes, the clean-up of contaminated sites, the substances and materials used in the Company's products, the energy consumption of products, services and operations and the operational or financial responsibility for recycling, treatment and disposal of those products. This includes legislation that
38
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
makes producers of electrical goods, including servers and networking equipment, financially responsible for specified collection, recycling, treatment and disposal of past and future covered products (sometimes referred to as "product take-back legislation"). The Company could incur substantial costs, its products could be restricted from entering certain jurisdictions, and it could face other sanctions, if it were to violate or become liable under environmental laws, including those related to addressing climate change and other environmental, social, and governance-related issues, or if its products become non-compliant with such environmental laws. The Company's potential exposure includes impacts on revenue, fines and civil or criminal sanctions, third-party property damage or personal injury claims and clean-up costs. The amount and timing of costs to comply with environmental laws are difficult to predict.
In particular, the Company may become a party to, or otherwise involved in, proceedings brought by U.S. or state environmental agencies under the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA"), known as "Superfund," or other federal, state or foreign laws and regulations addressing the clean-up of contaminated sites, and may become a party to, or otherwise involved in, proceedings brought by private parties for contribution towards clean-up costs. The Company is also contractually obligated to make financial contributions to address actions related to certain environmental liabilities, both ongoing and arising in the future, pursuant to its Separation and Distribution Agreement with HP Inc.
39
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
For purposes of this Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") section, we use the terms "Hewlett Packard Enterprise", "HPE", the "Company", "we", "us" and "our" to refer to Hewlett Packard Enterprise Company. References in the MD&A section to "former Parent" refer to HP Inc.
We intend the discussion of our financial condition and results of operations that follows to provide information that will assist the reader in understanding our Condensed Consolidated Financial Statements, changes in certain key items in these financial statements from period-to-period and the primary factors that accounted for these changes, as well as how certain accounting principles, policies and estimates affect our Condensed Consolidated Financial Statements. This discussion should be read in conjunction with our Condensed Consolidated Financial Statements and the related notes that appear elsewhere in this document.
The financial discussion and analysis in the following MD&A compares the three and six months ended April 30, 2022 to the comparable prior-year periods and where appropriate, as of April 30, 2022, unless otherwise noted.
This MD&A is organized as follows:
•
Trends and Uncertainties
. A discussion of material events and uncertainties known to management, such as an update to our COVID-19 response and other events.
•
Executive Overview.
A discussion of our business and a summary analysis of our financial performance and other highlights, including non-GAAP financial measures, affecting the Company in order to provide context to the remainder of the MD&A.
•
Critical Accounting Policies and Estimates.
A discussion of accounting policies and estimates that we believe are important to understanding the assumptions and judgments incorporated in our reported financial results.
•
Results of Operations.
A discussion of the results of operations at the consolidated level is followed by a discussion of the results of operations at the segment level.
•
Liquidity and Capital Resources.
An analysis of changes in our cash flows and a discussion of our financial condition and liquidity.
•
Contractual Cash and Other Obligations.
An overview of contractual cash obligations, retirement and post-retirement benefit plan funding, restructuring plans, uncertain tax positions, and off-balance sheet arrangements.
•
GAAP to Non-GAAP Reconciliations
. Each non-GAAP financial measure has been reconciled to the most directly comparable GAAP financial measure therein. This section also includes a discussion of the usefulness of non-GAAP financial measures, and material limitations associated with the use of non-GAAP financial measures.
40
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
TRENDS AND UNCERTAINTIES
The overall demand environment continues to improve but remains impacted by industry-wide supply constraints which have contributed to a challenging supply chain environment, which in the second quarter of fiscal 2022 was exacerbated by pandemic related lockdowns in China and increasing inflationary pressures, which are driving up material and logistic costs. These supply chain constraints have moderated our revenue growth, elevated costs, and delayed certain unit shipments, resulting in a higher level of backlog and related inventory at the end of the period. We expect this trend to continue in the near term.
Russia/Ukraine Conflict
The conflict between Russia and Ukraine and the related sanctions imposed by the U.S., European Union (E.U.) and other countries in response have negatively impacted our operations in both countries and increased economic and political uncertainty across the world. We have approximately 500 team members in Russia and a smaller contingent workforce in Ukraine, whose safety and well-being remains our highest priority. We are offering emergency assistance and support to our impacted teams, including the families of Ukrainian nationals.
In response to the sanctions imposed, in February 2022, we suspended all new sales and shipments to Russia and Belarus and implemented compliance measures to address the continuously changing regulatory landscape. Based on a further assessment of business risks and needs, in June 2022, we determined that it is no longer tenable to maintain operations in Russia and Belarus, and are proceeding with an orderly, managed exit of our remaining business in these countries.
In fiscal 2021, our operations in Russia and Belarus accounted for approximately 2% of our total net revenues. In the second quarter of fiscal 2022, we recorded total pre-tax charges of
$126 million
primarily related to expected credit losses of financing and trade receivables, $99 million of which was included in Financing cost, $6 million in Cost of services and $21 million in Disaster charges in the Condensed Consolidated Statements of Earnings. These charges were excluded from our segment operating results. Due to the decision to exit Russia and Belarus, we expect to incur additional charges related to a deferred tax asset valuation allowance, abandoned assets and employee severance in the third quarter of fiscal 2022.
We will continue monitoring the social, political, regulatory and economic environment in Russia and Ukraine, and will consider further actions as appropriate. More broadly, there could be additional adverse impacts to our net revenues, earnings and cash flows should the situation escalate beyond its current scope, including, among other potential impacts, economic recessions in certain neighboring countries or globally due to inflationary pressures and supply chain cost increases or the geographic proximity of the war relative to the rest of Europe.
COVID-19 Update
Our vaccination policy remains in effect; however, there have been modifications to our U.S. vaccine policy since first announced, as a result of the nationwide temporary injunction prohibiting enforcement of the U.S. Federal Executive Order requiring contractors and subcontractors performing work on or in connection with certain federal contracts to be fully vaccinated against COVID-19. As a result of this injunction, we will not be making vaccination a standard condition of employment in the U.S. at this time. However, vaccination is required for entering our sites, working at customer and third-party sites, and for travel and events, unless team members have an approved exemption through human resources and undergo routine testing. Outside of the U.S., we have implemented vaccination/risk strategies where they have been determined to be necessary by local leadership and/or to comply with government requirements. Such strategies differ from location to location, and can take the form of mandatory vaccinations and/or testing requirements; vaccine passports or related certificates; government reports indicating vaccination rates of company employees; or other government-mandated risk strategies.
After careful analysis of information and guidance provided by public health and government authorities regarding the pandemic, and due to the efforts we have taken to mitigate risk through our workplace vaccination policy, effective February 14, 2022, our sites in the U.S. reopened for employees who are fully vaccinated, with exemptions allowed in certain instances including routine testing as advised. Outside of the U.S., sites are open at varying capacities based on local pandemic conditions and risk mitigation strategies enacted by country leadership. We maintain compliance with all local laws and regulations with respect to office attendance and safety protocols.
EXECUTIVE OVERVIEW
We are a global technology leader focused on developing intelligent solutions that allow customers to capture, analyze, and act upon data seamlessly from edge to cloud. We enable customers to accelerate business outcomes by driving new
41
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
business models, creating new customer and employee experiences, and increasing operational efficiency today and into the future. Our customers range from small-and-medium size businesses to large global enterprises and governmental entities. Our legacy dates to a partnership founded in 1939 by William R. Hewlett and David Packard, and we strive every day to uphold and enhance that legacy through our dedication to providing innovative technological solutions to our customers.
Our operations are organized into six reportable segments for financial reporting purposes: Compute, High Performance Computing and Artificial Intelligence ("HPC & AI"), Storage, Intelligent Edge, HPE Financial Services ("FS"), and Corporate Investments and Other.
The global pandemic has brought a renewed focus on digital transformation as businesses rethink everything from remote work and collaboration to business continuity and data insights. Businesses are looking ahead, beyond the demands of the pandemic, and treating digital transformation as a strategic imperative. Additionally, the pandemic has accelerated several trends relevant to the company: the exponential increase of data at the edge; the need for a cloud experience everywhere to manage the growth of data at the edge; and the need to quickly extract value from the captured data. Enterprises have embraced multi-cloud strategies for different cloud environments for different types of data and workloads. Increasingly, customers want to digitally transform, while preserving capital and eliminating operating expense, by paying only for the IT they use.
In response, we are accelerating in our areas of strategic focus, including the Intelligent Edge and HPC & AI businesses, while at the same time, strengthening our core Compute and Storage businesses, investing in key areas of growth and accelerating our as-a-service pivot to become the edge-to-cloud company for our customers and partners with our HPE GreenLake edge-to-cloud platform.
On March 22, 2022, we announced significant advancements to our HPE GreenLake edge-to-cloud platform, our flagship hybrid offering that enables organizations to modernize all their applications and data, from edge to cloud. The platform advancements include a unified operating experience with one view of all services edge to cloud along with convergence with the Aruba Central cloud service, twelve new cloud services including network as-a-service, data services, high performance computing functions, and compute operations management, and availability of HPE GreenLake platform in the online marketplaces of several leading distributors. These updates strengthen the HPE GreenLake platform and help customers drive their data modernization needs.
The following table summarizes our condensed consolidated GAAP financial results for the periods presented:
| For the three months ended April 30, | For the six months ended April 30, | ||||||||||||||||||||||||||||||||||
| 2022 | 2021 | Change | 2022 | 2021 | Change | ||||||||||||||||||||||||||||||
| Dollars in millions, except per share amounts | Dollars in millions, except per share amounts | ||||||||||||||||||||||||||||||||||
| Net revenue | $ | 6,713 | $ | 6,700 | 0.2% | $ | 13,674 | $ | 13,533 | 1.0% | |||||||||||||||||||||||||
| Gross profit | $ | 2,173 | $ | 2,287 | (5.0)% | $ | 4,517 | $ | 4,575 | (1.3)% | |||||||||||||||||||||||||
| Gross profit margin | 32.4 | % | 34.1 | % | (1.7)pts | 33.0 | % | 33.8 | % | (0.8)pts | |||||||||||||||||||||||||
| Earnings from operations | $ | 207 | $ | 278 | (25.5)% | $ | 655 | $ | 500 | 31.0% | |||||||||||||||||||||||||
| Operating profit margin | 3.1 | % | 4.1 | % | (1.0)pts | 4.8 | % | 3.7 | % | 1.1pts | |||||||||||||||||||||||||
| Net earnings | $ | 250 | $ | 259 | (3.5)% | $ | 763 | $ | 482 | 58.3% | |||||||||||||||||||||||||
| Diluted net earnings per share | $ | 0.19 | $ | 0.19 | $— | $ | 0.57 | $ | 0.36 | $0.21 | |||||||||||||||||||||||||
| Cash flow from operations | $ | 379 | $ | 822 | $(443) | $ | 303 | $ | 1,785 | $(1,482) | |||||||||||||||||||||||||
Three months ended April 30, 2022 compared with the three months ended April 30, 2021
Net revenue of $6.7 billion represented an increase of 0.2% (increased 1.5% on a constant currency basis) as revenue growth resulting from a strong beginning order backlog was moderated by a combination of ongoing supply chain constraints, exacerbated by recent pandemic related lockdowns in China, unfavorable currency fluctuations and lower revenue from
Russia.
The net revenue increase was led by strong demand for our networking products, certain customer acceptances in the current period in HPC & AI
, and effective pricing management in server products. The gross profit margin of 32.4% (or $2.2 billion) represents a decrease of 1.7 percentage points and was primarily driven by expected credit losses due to the Russia/Ukraine conflict
,
increased costs with continued delayed customer acceptances in HPC & AI, and ongoing supply chain constraints. Moderating the gross profit margin decrease was pricing discipline and strong cost management in server products. The
42
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
operating profit margin was 3.1%, down 1.0 percentage points
due primarily to the gross profit margin decline and higher selling, general & administrative expense, the negative impact of both factors was moderated by lower transformation costs.
Six months ended April 30, 2022 compared with the six months ended April 30, 2021
Net revenue of $13.7 billion represented an increase of 1.0% (increased 1.7% on a constant currency basis) as revenue growth resulting from a strong beginning order backlog was moderated by ongoing supply chain constraints. As a result, we experienced double-digit revenue growth in networking products, growth in the Apollo product category and effective pricing management in server products. Moderating the revenue increase was ongoing supply chain constraints, lower revenue in
Russia, a
nd unfavorable currency fluctuations. The gross profit margin of 33.0% (or $4.5 billion) represents a decrease of 0.8 percentage points due primar
ily to increased
costs with continued delayed customer acceptances in
HPC & AI, expected credit losses due to the Russia/Ukraine conflict and ongoing supply chain constraints. Moderating the gross profit decrease was pricing discipline and strong cost management in server products. The operating profit margin was 4.8%, up 1.1 percentage points due primarily to a decrease in transformation costs.
For the six months ended April 30, 2022, we generated $303 million of cash flow from operations and used $788 million free cash flows primarily due to the impact of supply chain constraints on working capital, which moderated cash generation, and increased capital investments.
The following table summarizes our condensed consolidated non-GAAP financial results for the periods presented:
| For the three months ended April 30, | For the six months ended April 30, | ||||||||||||||||||||||||||||||||||
| 2022 | 2021 | Change | 2022 | 2021 | Change | ||||||||||||||||||||||||||||||
| Dollars in millions, except per share amounts | Dollars in millions, except per share amounts | ||||||||||||||||||||||||||||||||||
| Net revenue adjusted for currency | $ | 6,799 | $ | 6,700 | 1.5% | $ | 13,763 | $ | 13,533 | 1.7% | |||||||||||||||||||||||||
| Non-GAAP gross profit | $ | 2,293 | $ | 2,300 | (0.3)% | $ | 4,653 | $ | 4,603 | 1.1% | |||||||||||||||||||||||||
| Non-GAAP gross profit margin | 34.2 | % | 34.3 | % | (0.1)pts | 34.0 | % | 34.0 | % | —pts | |||||||||||||||||||||||||
| Non-GAAP earnings from operations | $ | 627 | $ | 685 | (8.5)% | $ | 1,395 | $ | 1,458 | (4.3)% | |||||||||||||||||||||||||
| Non-GAAP operating profit margin | 9.3 | % | 10.2 | % | (0.9)pts | 10.2 | % | 10.8 | % | (0.6)pts | |||||||||||||||||||||||||
| Non-GAAP net earnings | $ | 583 | $ | 612 | (4.7)% | $ | 1,280 | $ | 1,291 | (0.9)% | |||||||||||||||||||||||||
| Non-GAAP diluted net earnings per share | $ | 0.44 | $ | 0.46 | $(0.02) | $ | 0.96 | $ | 0.98 | $(0.02) | |||||||||||||||||||||||||
| Free cash flow | $ | (211) | $ | 368 | $(579) | $ | (788) | $ | 931 | $(1,719) | |||||||||||||||||||||||||
Each non-GAAP financial measure has been reconciled to the most directly comparable GAAP financial measure herein. Please refer to the section "GAAP to Non-GAAP Reconciliations" at the end of this MD&A for these reconciliations, along with a discussion of the usefulness of these non-GAAP financial measures, and material limitations associated with the use of these non-GAAP financial measures.
Annualized revenue run-rate ("ARR")
ARR represents the annualized revenue of all net HPE GreenLake edge-to-cloud platform services revenue, related financial services revenue (which includes rental income from operating leases and interest income from capital leases) and software-as-a-service, software consumption revenue, and other as-a-service offerings, recognized during a quarter and multiplied by four. We use ARR as a performance metric. ARR should be viewed independently of net revenue and is not intended to be combined with it.
43
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
The following presents our ARR performance for the periods presented:
| For the three months ended April 30, | |||||||||||||||||||||||
| 2022 | 2021 | ||||||||||||||||||||||
|
Dollars in millions
|
|||||||||||||||||||||||
|
ARR
|
$
|
829 |
$
|
678 | |||||||||||||||||||
|
year-over-year growth rate
|
22 | % | 30% | ||||||||||||||||||||
The 22% increase in ARR was due to growth in our HPE GreenLake edge-to-cloud platform and related financial services due to an expanding customer installed base. The increase was limited by supply chain constraints and related installation delays. At the segment level, ARR growth was led by strength in Storage as-a-service including Zerto and Intelligent Edge as-a-service activity.
Returning capital to our shareholders remains an important part of our capital allocation framework that consists of capital returns to shareholders and strategic investments. During the second quarter of fiscal 2022, we paid a quarterly dividend of $0.12 per share to our shareholders. On June 1, 2022, we declared our fiscal 2022 third quarterly dividend of $0.12 per share, payable on July 8, 2022, to stockholders of record as of the close of business on June 13, 2022. During the first six months of fiscal 2022, we repurchased and settled an aggregate amount of $187 million in connection with our share repurchase program. As of April 30, 2022, we had a remaining authorization of $1.7 billion for future share repurchases.
We believe our existing balance of cash and cash equivalents, along with commercial paper and other short-term liquidity arrangements, are sufficient to satisfy our working capital needs, capital asset purchases, dividends, debt repayments, and other liquidity requirements associated with our existing operations. As of April 30, 2022 and October 31, 2021, our cash, cash equivalents and restricted cash were $3.5 billion and $4.3 billion, respectively. In December 2021, we terminated our prior senior unsecured revolving credit facility and entered into a new senior unsecured revolving credit facility with an aggregate lending commitment of $4.75 billion for a period of five years. As of April 30, 2022, no borrowings were outstanding under this credit facility.
RESULTS OF OPERATIONS
Revenue from our international operations has historically represented, and we expect will continue to represent, a majority of our overall net revenue. As a result, our revenue growth has been impacted, and we expect will continue to be impacted, by fluctuations in foreign currency exchange rates. In order to provide a framework for assessing performance excluding the impact of foreign currency fluctuations, we present the year-over-year percentage change in revenue on a constant currency basis, which assumes no change in foreign currency exchange rates from the prior-year period and does not adjust for any repricing or demand impacts from changes in foreign currency exchange rates. This change in revenue on a constant currency basis is calculated as the quotient of (a) current year revenue converted to U.S. dollars using the prior-year period's foreign currency exchange rates divided by (b) the prior-year period revenue. This information is provided so that revenue can be viewed without the effect of fluctuations in foreign currency exchange rates, which is consistent with how management evaluates our revenue results and trends. This constant currency disclosure is provided in addition to, and not as a substitute for, the year-over-year percentage change in revenue on a GAAP basis. Other companies may calculate and define similarly labeled items differently, which may limit the usefulness of this measure for comparative purposes.
44
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
Results of operations in dollars and as a percentage of net revenue were as follows:
| For the three months ended April 30, | For the six months ended April 30, | ||||||||||||||||||||||||||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||||||||||||||||||||||||||
| Dollars | % of Revenue | Dollars | % of Revenue | Dollars |
% of
Revenue |
Dollars |
% of
Revenue |
||||||||||||||||||||||||||||||||||||||||
| Dollars in millions | |||||||||||||||||||||||||||||||||||||||||||||||
| Net revenue | $ | 6,713 | 100.0 | % | $ | 6,700 | 100.0 | % | $ | 13,674 | 100.0 | % | $ | 13,533 | 100.0 | % | |||||||||||||||||||||||||||||||
| Cost of sales | 4,540 | 67.6 | 4,413 | 65.9 | 9,157 | 67.0 | 8,958 | 66.2 | |||||||||||||||||||||||||||||||||||||||
| Gross profit | 2,173 | 32.4 | 2,287 | 34.1 | 4,517 | 33.0 | 4,575 | 33.8 | |||||||||||||||||||||||||||||||||||||||
| Research and development | 517 | 7.7 | 503 | 7.5 | 1,021 | 7.5 | 971 | 7.2 | |||||||||||||||||||||||||||||||||||||||
| Selling, general and administrative | 1,249 | 18.6 | 1,199 | 17.9 | 2,450 | 17.9 | 2,358 | 17.4 | |||||||||||||||||||||||||||||||||||||||
| Amortization of intangible assets | 74 | 1.2 | 84 | 1.3 | 147 | 1.1 | 194 | 1.4 | |||||||||||||||||||||||||||||||||||||||
| Transformation costs | 98 | 1.4 | 209 | 3.1 | 209 | 1.5 | 520 | 3.9 | |||||||||||||||||||||||||||||||||||||||
| Disaster charges | 20 | 0.3 | 1 | — | 19 | 0.1 | 1 | — | |||||||||||||||||||||||||||||||||||||||
| Acquisition, disposition and other related charges | 8 | 0.1 | 13 | 0.2 | 16 | 0.1 | 31 | 0.2 | |||||||||||||||||||||||||||||||||||||||
| Earnings from operations | 207 | 3.1 | 278 | 4.1 | 655 | 4.8 | 500 | 3.7 | |||||||||||||||||||||||||||||||||||||||
| Interest and other, net | — | — | (11) | (0.2) | (5) | — | (55) | (0.4) | |||||||||||||||||||||||||||||||||||||||
| Tax indemnification and related adjustments | — | — | — | — | (17) | (0.1) | (16) | (0.1) | |||||||||||||||||||||||||||||||||||||||
| Non-service net periodic benefit credit | 36 | 0.5 | 17 | 0.3 | 72 | 0.4 | 34 | 0.2 | |||||||||||||||||||||||||||||||||||||||
| Earnings from equity interests | 33 | 0.5 | 4 | 0.1 | 64 | 0.5 | 30 | 0.2 | |||||||||||||||||||||||||||||||||||||||
| Earnings before provision for taxes | 276 | 4.1 | 288 | 4.3 | 769 | 5.6 | 493 | 3.6 | |||||||||||||||||||||||||||||||||||||||
| Provision for taxes | (26) | (0.4) | (29) | (0.4) | (6) | — | (11) | — | |||||||||||||||||||||||||||||||||||||||
| Net earnings | $ | 250 | 3.7 | % | $ | 259 | 3.9 | % | $ | 763 | 5.6 | % | $ | 482 | 3.6 | % | |||||||||||||||||||||||||||||||
Stock-based compensation expense is included within costs and expenses presented in the table above as follows:
| For the three months ended April 30, | For the six months ended April 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| In millions | |||||||||||||||||||||||
| Cost of sales | $ | 14 | $ | 11 | $ | 29 | $ | 24 | |||||||||||||||
| Research and development | 38 | 31 | 82 | 68 | |||||||||||||||||||
| Selling, general and administrative | 62 | 56 | 131 | 116 | |||||||||||||||||||
| Acquisition, disposition and other related charges | — | 7 | — | 10 | |||||||||||||||||||
| Total | $ | 114 | $ | 105 | $ | 242 | $ | 218 | |||||||||||||||
45
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
On April 14, 2021 (the "Approval Date"), shareholders of the Company approved the Hewlett Packard Enterprise Company 2021 Stock Incentive Plan (the "2021 Plan") that replaced the Company’s 2015 Stock Incentive Plan (the “2015 Plan”). The 2021 Plan provides for the grant of various types of awards including restricted stock awards, stock options and performance-based awards. These awards generally vest over 3 years from the grant date. The maximum number of shares as of the Approval Date that may be delivered to the participants under the 2021 Plan shall not exceed 7 million shares, plus 35.8 million shares that were available for grant under the 2015 Plan and any awards granted under the 2015 Plan prior to the Approval Date that were cash-settled, forfeited, terminated, or lapsed after the Approval Date. On April 5, 2022, shareholders of the Company approved an amendment to the 2021 Plan thereby increasing the overall number of shares available for issuance by 15 million shares. As of April 30, 2022, the Company had remaining authorization of 38.3 million shares under the 2021 Plan.
Three and six months ended April 30, 2022 compared with the three and six months ended April 30, 2021
Net revenue
For the three months ended April 30, 2022, total net revenue of $6.7 billion represented an increase of $13 million, or 0.2% (increased 1.5% on a constant currency basis). U.S. net revenue increased by $141 million, or 7.0% to $2.2 billion, and net revenue from outside of the U.S. decreased by $128 million, or 2.7%, to $4.5 billion.
For the six months ended April 30, 2022, total net revenue of $13.7 billion represented an increase of $141 million, or 1.0% (increased 1.7% on a constant currency basis). U.S. net revenue increased by $280 million, or 6.7% to $4.5 billion, and net revenue from outside of the U.S. decreased by $139 million, or 1.5%, to $9.2 billion.
From a segment perspective, for the three months ended April 30, 2022, net revenue increased 8%, 4%, and 0.4% in Intelligent Edge, HPC & AI, and Compute, respectively, and decreased 7%, 3%, and 2% in Corporate Investments and Other, Storage and Financial Services, respectively. For the six months ended April 30, 2022, net revenue increased 10%, 4%, and 1% in Intelligent Edge, HPC & AI, and Compute, respectively, and decreased 3%, 3%, and 2% in Corporate Investments and Other, Storage, and Financial Services, respectively.
The components of the weighted net revenue change by segment were as follows:
| For the three months ended April 30, 2022 | For the six months ended April 30, 2022 | ||||||||||
| Percentage points | |||||||||||
| Compute | 0.2 | 0.3 | |||||||||
| HPC & AI | 0.4 | 0.4 | |||||||||
| Storage | (0.6) | (0.5) | |||||||||
| Intelligent Edge | 1.0 | 1.1 | |||||||||
| Financial Services | (0.2) | (0.3) | |||||||||
| Corporate Investments | (0.4) | (0.1) | |||||||||
| Total Segment | 0.4 | 0.9 | |||||||||
| Elimination of Intersegment net revenue and Other | (0.2) | 0.1 | |||||||||
| Total HPE | 0.2 | 1.0 | |||||||||
Please refer to the section "Segment Information" further below for a discussion of our results of operations for each reportable segment.
Gross profit
For the three and six months ended April 30, 2022, total gross profit margin of 32.4% and 33.0%, represents a decrease of 1.7 and 0.8 percentage points, respectively, compared to the respective prior year periods. The decrease in both periods was due to a combination of costs from expected credit losses due to the Russia/Ukraine conflict, increased costs with continued delayed customer acceptances in HPC & AI, and ongoing supply chain constraints. Moderating the gross profit decrease in both periods were pricing discipline and strong cost management in server products.
46
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
Operating expenses
Research and development ("R&D")
For the three and six months ended April 30, 2022, R&D expense increased by $14 million, or 3%, and by $50 million, or 5%, respectively, due primarily to higher
employee
compensation expense from additional headcount, which contributed 3.4 percentage points and 4.9 percentage points to the change, respectively, as each of our segments focused on developing an end-to-end cloud-native infrastructure foundation for our as-a-service or consumption service delivery models which are integrated into our overall HPE GreenLake platform
.
Selling, general and administrative
For the three months ended April 30, 2022, selling, general and administrative expense increased by $50 million, or 4% due primarily to a combination of higher software expenditures, which contributed 1.3 percentage points to the change, higher travel and marketing expenses as the economy reopens and COVID-19 restrictions ease, which contributed 1.2 and 1.0 percentage points to the change, respectively, and
higher employee compensation ex
pense from increased headcount, which contributed 0.5 percentage points to the change.
For the six months ended April 30, 2022, selling, general and administrative expense increased by $92 million, or 4% due primarily to a combination of
higher employee compensation ex
pense driven by increased headcount which contributed 1.3 percentage points to the change, and higher software expenditures, travel and marketing, each of which contributed 1.0 percentage points to the change.
Amortization of intangible assets
For the
three and six months ended April 30, 2022
, amortization of intangible assets decreased by $10 million, or 12% and $47 million, or 24%, respectively, due to
certain intangible assets associated with prior acquisitions reaching the end of their amortization periods and
write-offs of certain intangible assets in the prior-
year periods. The decrease was moderated by an increase in amortization expense in the current periods resulting from recent acquisitions.
Transformation programs and costs
Our transformation programs consist of the cost optimization and prioritization plan (launched in 2020) and the HPE Next initiative (launched in 2017).
For the three and six months ended April 30, 2022, transformation costs dec
reased by $111 million, or 53% and $311 million, or 60%, respectively, due primarily to lower restructuring charges recorded in the current per
iods. For a further discussion, refer to Note 3, "Transformation Programs" to the Condensed Consolidated Financial Statements in Item 1 of Part I.
Interest and other, net
For the three months ended April 30, 2022, interest and other, net expense decreased
by $11 million due primarily to a combination of favorable currency fluctuations, lower interest expense from lower average borrowings, and higher gains from the sale of certain assets in the current period. The decrease was partially moderated by lower gains from equity investments in the current period.
For the six months ended April 30, 2022, interest and other, net expense decreased by $50 million
due primarily to lower interest expense from lower average borrowings, higher gains from the sale of certain assets and higher gains from equity investments in the current period.
Tax indemnification and related adjustments
For the six months ended April 30, 2022 and 2021, we recorded tax indemnification expense of $17 million and $16 million, respectively, which included changes in certain pre-divestiture tax liabilities. For the six months ended April 30, 2021, the amount also included changes in tax liabilities for which we shared joint and several liability with HP Inc. and for which we were indemnified by HP Inc.
47
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
Non-service net periodic benefit credit
For the three and six months ended April 30, 2022, non-service net periodic benefit credit increased by $19 million and $38 million, respectively, due primarily to lower amortized actuarial losses, partially offset by higher interest cost due to higher discount rates in the current periods.
Earnings from equity interests
Earnings from equity interests primarily represents our 49% interest in H3C Technologies and the amortization of our interest in basis difference. For the three and six months ended April 30, 2022, earnings from equi
ty interests increased by $29 million and $34 million, respectively, due primarily to lower amortization expense from basis difference and higher net income earned by H3C in the current periods.
Provision for taxes
For the three months ended April 30, 2022 and 2021, we recorded income tax provision of $26 million and $29 million, respectively, which reflect an effective tax rate of 9.4% and 10.1%, respectively. For the six months ended April 30, 2022 and 2021, we recorded income tax provision of $6 million and $11 million, respectively, which reflect an effective tax rate of 0.8% and 2.2%, respectively. Our effective tax rate generally differs from the U.S. federal statutory rate of 21% due to favorable tax rates associated with certain earnings from our operations in lower tax jurisdictions throughout the world but are also impacted by discrete tax adjustments during each fiscal period.
For further discussion, refer to Note 5, "Taxes on Earnings" to the Condensed Consolidated Financial Statements in Item 1 of Part I.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our Consolidated Financial Statements are prepared in accordance with U.S. Generally Accepted Accounting Principles ("GAAP"), which requires us to make estimates, judgments, and assumptions that affect the reported amounts of assets, liabilities, net revenue, and expenses, and the disclosure of contingent liabilities. An accounting policy is deemed to be critical if the nature of the estimate or assumption it incorporates is subject to a material level of judgment related to matters that are highly uncertain, and changes in those estimates and assumptions are reasonably likely to materially impact our Condensed Consolidated Financial Statements.
Estimates and judgments are based on historical experience, forecasted events, and various other assumptions that we believe to be reasonable under the circumstances. Estimates and judgments may vary under different assumptions or conditions. We evaluate our estimates and judgments on an ongoing basis. Accounting policies that are critical in the portrayal of our financial condition and results of operations and require management’s most difficult, subjective, or complex judgements include revenue recognition, taxes on earnings, business combinations, impairment assessment of goodwill and intangible assets and contingencies.
There have been no significant changes during the six months ended April 30, 2022, to the items that we disclosed as our "Critical Accounting Policies and Estimates" in Management's Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the fiscal year ended October 31, 2021. A summary of significant accounting policies and a summary of recent accounting pronouncements applicable to our Condensed Consolidated Financial Statements are included in Note 1, "Overview and Summary of Significant Accounting Policies", to the Condensed Consolidated Financial Statements in Item 1 of Part I.
Segment Information
Hewlett Packard Enterprise's organizational structure is based on a number of factors that the Chief Operating Decision Maker ("CODM"), who is the Chief Executive Officer ("CEO"), uses to evaluate, view, and run our business operations, which include, but are not limited to, customer base and homogeneity of products and technology. The segments are based on this organizational structure and information reviewed by Hewlett Packard Enterprise's management to evaluate segment results.
A description of the products and services for each segment, along with other pertinent information related to our segments can be found in Note 2, "Segment Information", to the Condensed Consolidated Financial Statements in Item 1 of Part I.
48
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
Segment Results
The following table and ensuing discussion provide an overview of our key financial metrics by segment for the three months ended April 30, 2022, as compared to the prior-year period:
| HPE Consolidated | Compute | HPC & AI | Storage | Intelligent Edge | Financial Services | Corporate Investments | ||||||||||||||||||||||||||||||||||||||
| Dollars in millions | ||||||||||||||||||||||||||||||||||||||||||||
|
Net revenue
(1)
|
$ | 6,713 | $ | 2,985 | $ | 710 | $ | 1,098 | $ | 867 | $ | 823 | $ | 327 | ||||||||||||||||||||||||||||||
| Year-over-year change % | 0.2 | % | 0.4 | % | 3.8 | % | (3.3) | % | 8.0 | % | (1.9) | % | (6.6) | % | ||||||||||||||||||||||||||||||
|
Earnings from operations
(2)
|
$ | 207 | $ | 415 | $ | (40) | $ | 138 | $ | 109 | $ | 104 | $ | (24) | ||||||||||||||||||||||||||||||
| Earnings from operations as a % of net revenue | 3.1 | % | 13.9 | % | (5.6) | % | 12.6 | % | 12.6 | % | 12.6 | % | (7.3) | % | ||||||||||||||||||||||||||||||
| Year-over-year change percentage points | (1.0) | pts | 2.7 | pts | (8.2) | pts | (4.2) | pts | (3.1) | pts | 1.8 | pts | (0.2) | pts | ||||||||||||||||||||||||||||||
The following table and ensuing discussion provide an overview of our key financial metrics by segment for the six months ended April 30, 2022, as compared to the prior-year period:
| HPE Consolidated | Compute | HPC & AI | Storage | Intelligent Edge | Financial Services | Corporate Investments | ||||||||||||||||||||||||||||||||||||||
| Dollars in millions | ||||||||||||||||||||||||||||||||||||||||||||
|
Net revenue
(1)
|
$ | 13,674 | $ | 6,001 | $ | 1,500 | $ | 2,254 | $ | 1,768 | $ | 1,665 | $ | 652 | ||||||||||||||||||||||||||||||
| Year-over-year change % | 1.0 | % | 0.7 | % | 3.8 | % | (3.2) | % | 9.6 | % | (2.0) | % | (2.8) | % | ||||||||||||||||||||||||||||||
|
Earnings from operations
(2)
|
$ | 655 | $ | 831 | $ | (47) | $ | 306 | $ | 266 | $ | 208 | $ | (35) | ||||||||||||||||||||||||||||||
| Earnings from operations as a % of net revenue | 4.8 | % | 13.8 | % | (3.1) | % | 13.6 | % | 15.0 | % | 12.5 | % | (5.4) | % | ||||||||||||||||||||||||||||||
| Year-over-year change percentage points | 1.1 | pts | 2.5 | pts | (7.3) | pts | (4.7) | pts | (2.4) | pts | 2.2 | pts | 2.9 | pts | ||||||||||||||||||||||||||||||
(1)
HPE consolidated net revenue excludes intersegment net revenue.
(2)
Segment earnings from operations exclude certain unallocated corporate costs and eliminations, stock-based compensation expense, amortization of initial direct costs, amortization of intangible assets, transformation costs, disaster charges and acquisition, disposition and other related charges.
C
ompute
| For the three months ended April 30, | For the six months ended April 30, | ||||||||||||||||||||||||||||||||||
| 2022 | 2021 | % Change | 2022 | 2021 | % Change | ||||||||||||||||||||||||||||||
| Dollars in millions | Dollars in millions | ||||||||||||||||||||||||||||||||||
| Net revenue | $ | 2,985 | $ | 2,974 | 0.4 | % | $ | 6,001 | $ | 5,958 | 0.7 | % | |||||||||||||||||||||||
| Earnings from operations | $ | 415 | $ | 334 | 24.3 | % | $ | 831 | $ | 675 | 23.1 | % | |||||||||||||||||||||||
| Earnings from operations as a % of net revenue | 13.9 | % | 11.2 | % | 13.8 | % | 11.3 | % | |||||||||||||||||||||||||||
Three months ended April 30, 2022 compared with three months ended April 30, 2021
Compute net revenue increased by $11 million, or 0.4% (increased 1.2% on a constant currency basis), due primarily to higher average unit prices resulting from a combination of disciplined pricing actions and higher sales of server configurations with more complex component architectures in our next generation products. The net revenue increase was moderated by lower unit shipments and unfavorable currency fluctuations. The decline in unit shipments resulted from supply constraints due to the challenging supply chain environment. As a result, Compute exited the quarter with a significantly high level of order backlog.
49
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
From a product perspective, Compute experienced revenue growth in the rack server category moderated by a revenue decline due to certain products approaching their end-of-life. Services net revenue declined primarily due to lower revenue from Russia and the impact of delayed hardware shipments on services contracts.
Compute earnings from operations as a percentage of net revenue increased 2.7 percentage points due to decreases in costs of products and services as a percentage of net revenue and operating expense as a percentage of net revenue. The decrease in costs of products and services as a percentage of net revenue was primarily due to pricing discipline and strong cost management. The decrease in operating expense as a percentage of net revenue was primarily due to lower variable compensation expense.
Six months ended April 30, 2022 compared with six months ended April 30, 2021
Compute net revenue increased by $43 million, or 0.7% (increased 0.8% on a constant currency basis), due primarily to higher average unit prices resulting from disciplined pricing actions and higher sales of server configurations with more complex component architectures in our next generation products. The net revenue increase was moderated by lower unit shipments resulting from supply constraints due to the challenging supply chain environment.
From a product perspective, Compute experienced revenue growth in the rack server category moderated by a revenue decline due to certain products approaching their end-of-life. Services net revenue declined primarily due to lower revenue from Russia and the impact of delayed hardware shipments on services contracts.
Compute earnings from operations as a percentage of net revenue increased 2.5 percentage points due to decreases in costs of products and services as a percentage of net revenue and operating expense as a percentage of net revenue. The decrease in costs of products and services as a percentage of net revenue was primarily due to pricing discipline and strong cost management and favorable currency fluctuations moderated by a lower mix of higher margin services. The decrease in operating expense as a percentage of net revenue was primarily due to lower variable compensation expense.
HPC & AI
| For the three months ended April 30, | For the six months ended April 30, | ||||||||||||||||||||||||||||||||||
| 2022 | 2021 | % Change | 2022 | 2021 | % Change | ||||||||||||||||||||||||||||||
| Dollars in millions | Dollars in millions | ||||||||||||||||||||||||||||||||||
| Net revenue | $ | 710 | $ | 684 | 3.8 | % | $ | 1,500 | $ | 1,445 | 3.8 | % | |||||||||||||||||||||||
| Earnings from operations | $ | (40) | $ | 18 | (322.2) | % | $ | (47) | $ | 61 | (177.0) | % | |||||||||||||||||||||||
| Earnings from operations as a % of net revenue | (5.6) | % | 2.6 | % | (3.1) | % | 4.2 | % | |||||||||||||||||||||||||||
Three months ended April 30, 2022 compared with three months ended April 30, 2021
HPC & AI net revenue increased by $26 million, or 3.8% (increased 4.7% on a constant currency basis) as a result of strong demand, led by higher revenue from HPE Cray driven by certain customer acceptances in the period. The increase was moderated by continued delayed customer acceptances and challenges with the HPE Apollo and Edge Compute product categories as a result of supply chain constraints and lower services revenue due primarily to an unfavorable portfolio mix of service offerings.
HPC & AI earnings from operations as a percentage of net revenue decreased 8.2 percentage points due to increases in cost of products and services as a percentage of net revenue and operating expenses as a percentage of net revenue. The increase in cost of products and services as a percentage of net revenue was due primarily to continued delayed customer acceptances, supply
chain constraints and related cost increases, lower revenue from higher-margin products and a lower mix of revenue from services. The increase in operating expenses as a percentage of net revenue was primarily due to higher investments in research and development to focus on high-performance computing and AI solutions, including integrating such solutions into our HPE GreenLake platform.
50
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
Six months ended April 30, 2022 compared with six months ended April 30, 2021
HPC & AI net revenue increased by $55 million, or 3.8% (increased 4.1% on a constant currency basis) as a result of strong demand with growth in HPC products led by the HPE Apollo and Edge Compute product categories and in Data Solutions. This increase was moderated by a decline in net revenue from HPE Cray products due to supply chain constraints and continued delayed customer acceptances, and a decline in services revenue due primarily to an unfavorable portfolio mix of service offerings.
HPC & AI earnings from operations as a percentage of net revenue decreased 7.3 percentage points due to increases in cost of products and services as a percentage of net revenue and operating expenses as a percentage of net revenue. The increase in cost of products and services as a percentage of net revenue was due primarily to continued delayed customer acceptances, supply chain constraints and related cost increases, lower revenue from higher-margin products and a lower mix of revenue from services. The increase in operating expenses as a percentage of net revenue was primarily due to higher investments in research and development to focus on high-performance computing and AI solutions, including integrating such solutions into our HPE GreenLake edge-to-cloud platform.
Storage
| For the three months ended April 30, | For the six months ended April 30, | ||||||||||||||||||||||||||||||||||
| 2022 | 2021 | % Change | 2022 | 2021 | % Change | ||||||||||||||||||||||||||||||
| Dollars in millions | Dollars in millions | ||||||||||||||||||||||||||||||||||
| Net revenue | $ | 1,098 | $ | 1,136 | (3.3) | % | $ | 2,254 | $ | 2,328 | (3.2) | % | |||||||||||||||||||||||
| Earnings from operations | $ | 138 | 191 | (27.7) | % | $ | 306 | 425 | (28.0) | % | |||||||||||||||||||||||||
| Earnings from operations as a % of net revenue | 12.6 | % | 16.8 | % | 13.6 | % | 18.3 | % | |||||||||||||||||||||||||||
Three months ended April 30, 2022 compared with three months ended April 30, 2021
Storage net revenue decreased by $38 million or 3.3% (decreased 2.5% on a constant currency basis) due primarily to supply chain constraints, particularly with our owned intellectual property products, which contain certain unique components and are hence subject to tighter supply constraints, and unfavorable currency fluctuations. Net revenue declined in Storage products moderated by an increase in Storage services. The decrease in Storage products was led by declines in HPE 3PAR, as we transition to next generation product platforms such as HPE Alletra, and in the traditional storage product portfolio, partially offset by higher revenue from the Hyperconverged and Big Data product portfolios. The increase in Storage services was led by Zerto as we continue our transition to more services, and software-rich offerings. As a result of strong demand and the challenging supply chain environment, Storage exited the quarter with a high order backlog.
Storage earnings from operations as a percentage of net revenue decreased 4.2 percentage points due to increases in cost of products and services as a percentage of net revenue and operating expenses as a percentage of net revenue. The increase in cost of products and services as a percentage of net revenue was due primarily to supply chain constraints which unfavorably impacted our higher-margin product mix and higher logistic costs, partially offset by the sale of higher margin Zerto products. The increase in operating expenses as a percentage of net revenue was due primarily to higher investments in research and development focused on as-a-service offerings and higher field selling costs.
Six months ended April 30, 2022 compared with six months ended April 30, 2021
Storage net revenue decreased by $74 million or 3.2% (decreased 3.0% on a constant currency basis) due primarily to supply chain constraints, particularly with our owned intellectual property products, which contain certain unique components. Net revenue declined in Storage products moderated by an increase in Storage services. The decline in Storage products was led by declines in HPE 3PAR, as we transition to its next generation product platforms such as HPE Alletra, partially offset by an increase in Big Data products. The increase in Storage services was led by Zerto and HPE Nimble Storage Services as we continue our transition to more services, and software-rich offerings.
51
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
Storage earnings from operations as a percentage of net revenue decreased 4.7 percentage point due to increases in cost of products and services as a percentage of net revenue and operating expenses as a percentage of net revenue. The increase in cost of products and services as a percentage of net revenue was due primarily to supply chain constraints which unfavorably impacted our higher-margin product mix and logistic costs, partially offset by the sale of higher margin Zerto products. The increase in operating expenses as a percentage of net revenue was due primarily to higher investments in research and development focused on as-a-service offerings.
Intelligent Edge
| For the three months ended April 30, | For the six months ended April 30, | ||||||||||||||||||||||||||||||||||
| 2022 | 2021 | % Change | 2022 | 2021 | % Change | ||||||||||||||||||||||||||||||
| Dollars in millions | Dollars in millions | ||||||||||||||||||||||||||||||||||
| Net revenue | $ | 867 | $ | 803 | 8.0 | % | $ | 1,768 | $ | 1,613 | 9.6 | % | |||||||||||||||||||||||
| Earnings from operations | $ | 109 | $ | 126 | (13.5) | % | $ | 266 | $ | 280 | (5.0) | % | |||||||||||||||||||||||
| Earnings from operations as a % of net revenue | 12.6 | % | 15.7 | % | 15.0 | % | 17.4 | % | |||||||||||||||||||||||||||
Three months ended April 30, 2022 compared with three months ended April 30, 2021
Intelligent Edge net revenue increased by $64 million, or 8.0% (increased 9.3% on a constant currency basis) as a robust demand environment, reflected in a historically high backlog, continues to be impacted by supply constraints resulting from a challenging supply chain environment. Net revenue increased in both Intelligent Edge products and services. The increase in product revenue was driven by the WLAN business and Silver Peak. The higher services revenue was led by attached support services and our as-a-service offerings.
Intelligent Edge earnings from operations as a percentage of net revenue decreased 3.1 percentage points due primarily to an increase in cost of products and services as a percentage of net revenue, partially offset by a decrease in operating expenses as a percentage of net revenue. The increase in cost of product and services as a percentage of net revenue was primarily due to higher supply chain costs and higher costs associated with our Services business. Operating expenses as a percentage of net revenue decreased primarily due to lower variable compensation expense.
Six months ended April 30, 2022 compared with six months ended April 30, 2021
Intelligent Edge net revenue increased by $155 million, or 9.6% (increased 10.4% on a constant currency basis) as a robust demand environment, reflected in a historically high backlog, continues to be impacted by supply constraints resulting from a challenging supply chain environment. Net revenue increased in both Intelligent Edge products and services. The increase in product revenue was driven by the WLAN business. The higher services revenue was led by attached support services and our as-a-service offerings.
Intelligent Edge earnings from operations as a percentage of net revenue decreased 2.4 percentage points due primarily to an increase in cost of products and services as a percentage of net revenue, partially offset by a decrease in operating expenses as a percentage of net revenue. The increase in cost of product and services as a percentage of net revenue was primarily due to higher supply chain costs and higher costs associated with our Services business. Operating expenses as a percentage of net revenue decreased primarily due to lower variable compensation expense.
Financial Services
| For the three months ended April 30, | For the six months ended April 30, | ||||||||||||||||||||||||||||||||||
| 2022 | 2021 | % Change | 2022 | 2021 | % Change | ||||||||||||||||||||||||||||||
| Dollars in millions | Dollars in millions | ||||||||||||||||||||||||||||||||||
| Net revenue | $ | 823 | $ | 839 | (1.9) | % | $ | 1,665 | $ | 1,699 | (2.0) | % | |||||||||||||||||||||||
| Earnings from operations | $ | 104 | $ | 91 | 14.3 | % | $ | 208 | $ | 175 | 18.9 | % | |||||||||||||||||||||||
| Earnings from operations as a % of net revenue | 12.6 | % | 10.8 | % | 12.5 | % | 10.3 | % | |||||||||||||||||||||||||||
52
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
Three months ended April 30, 2022 compared with three months ended April 30, 2021
Financial Services net revenue decreased by $16 million, or 1.9% (increased 0.2% on a constant currency basis) due primarily to unfavorable currency fluctuations, along with a decrease in rental revenue due primarily to lower average operating leases, partially offset by higher revenue from equipment remarketing sales.
Financial Services earnings from operations as a percentage of net revenue increased 1.8 percentage points due primarily to lower cost of services as a percentage of net revenue. The decrease to cost of services as a percentage of net revenue resulted primarily from a combination of lower depreciation expense, bad debt expense, and borrowing costs. The decrease in operating expenses as a percentage of net revenue was due primarily to lower compensation expense. The increase in the provision for expected credit losses related to the Russia/Ukraine conflict during the current quarter was excluded from segment operating results.
Six months ended April 30, 2022 compared with six months ended April 30, 2021
Financial Services net revenue decreased by $34 million, or 2.0% (decreased 0.2% on a constant currency basis) due primarily to unfavorable currency fluctuations, along with a decrease in rental revenue due to lower average operating leases, partially offset by higher asset management revenue from remarketing and pre-owned equipment sales.
Financial Services earnings from operations as a percentage of net revenue increased 2.2 percentage points due primarily to lower cost of services as a percentage of net revenue. The decrease to cost of services as a percentage of net revenue resulted primarily from a combination of lower depreciation expense, borrowing costs, and bad debt expense. The decrease in operating expenses as a percentage of net revenue was due primarily to lower compensation expense.
Financing Volume
| For the three months ended April 30, | For the six months ended April 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| In millions | |||||||||||||||||||||||
| Financing volume | $ | 1,473 | $ | 1,451 | $ | 2,861 | $ | 2,696 | |||||||||||||||
Financing volume, which represents the amount of financing provided to customers for equipment and related software and services, including intercompany activity, increased by 1.5% and 6.1% for the three and six months ended April 30, 2022, respectively, as compared to the prior-year periods, due primarily to higher financing of third-party product sales and services, partially offset by unfavorable currency fluctuations.
Portfolio Assets and Ratios
The portfolio assets and ratios derived from the segment balance sheets for FS were as follows:
| As of | |||||||||||
| April 30, 2022 | October 31, 2021 | ||||||||||
| Dollars in millions | |||||||||||
| Financing receivables, gross | $ | 8,666 | $ | 9,198 | |||||||
| Net equipment under operating leases | 3,917 | 4,001 | |||||||||
|
Capitalized profit on intercompany equipment transactions
(1)
|
252 | 275 | |||||||||
|
Intercompany leases
(1)
|
83 | 96 | |||||||||
| Gross portfolio assets | 12,918 | 13,570 | |||||||||
|
Allowance for credit losses
(2)
|
227 | 228 | |||||||||
| Operating lease equipment reserve | 44 | 39 | |||||||||
| Total reserves | 271 | 267 | |||||||||
| Net portfolio assets | $ | 12,647 | $ | 13,303 | |||||||
| Reserve coverage | 2.1 | % | 2.0 | % | |||||||
|
Debt-to-equity ratio
(3)
|
7.0x | 7.0x | |||||||||
(1)
Intercompany activity is eliminated in consolidation.
53
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
(2)
Allowance for credit losses for financing receivables includes both the short- and long-term portions.
(3)
Debt benefiting Financial Services consists of intercompany equity that is treated as debt for segment reporting purposes, intercompany debt, and borrowing- and funding-related activity associated with Financial Services and its subsidiaries. Debt benefiting Financial Services totaled $11.6 billion and $11.9 billion at both April 30, 2022 and October 31, 2021, respectively, and was determined by applying an assumed debt-to-equity ratio, which management believes to be comparable to that of other similar financing companies. Financial Services equity at both April 30, 2022 and October 31, 2021 was $1.7 billion.
As of April 30, 2022 and October 31, 2021, Financial Services net cash and cash equivalents balances were approximately $879 million and $898 million, respectively.
Net portfolio assets as of April 30, 2022 decreased 4.9% from October 31, 2021. The decrease generally resulted from unfavorable currency fluctuations, along with portfolio runoff exceeding new financing volume during the period.
Financial Services bad debt expense includes charges to general reserves, specific reserves, and write-offs for sales-type, direct-financing, and operating leases. For the three and six months ended April 30, 2022, Financial Services recorded net bad debt expense of $22 million and $45 million, respectively. For the three and six months ended April 30, 2021, Financial Services recorded net bad debt expense of $31 million and $59 million, respectively.
As of April 30, 2022, Financial Services experienced a decrease in billed finance receivables compared to October 31, 2021, which included a limited impact to collections from customers as a result of the pandemic, and customers from Russia. We are currently unable to fully predict the extent to which the pandemic and the Russia/Ukraine conflict may adversely impact future collections of our receivables.
Corporate Investments and Other
| For the three months ended April 30, | For the six months ended April 30, | |||||||||||||||||||||||||||||||||||||
| 2022 | 2021 | % Change | 2022 | 2021 | % Change | |||||||||||||||||||||||||||||||||
| Dollars in millions | Dollars in millions | |||||||||||||||||||||||||||||||||||||
| Net revenue | $ | 327 | $ | 350 | (6.6) | % | $ | 652 | $ | 671 | (2.8) | % | ||||||||||||||||||||||||||
| Loss from operations | $ | (24) | $ | (25) | 4.0 | % | $ | (35) | $ | (56) | 37.5 | % | ||||||||||||||||||||||||||
| Loss from operations as a % of net revenue | (7.3) | % | (7.1) | % | (5.4) | % | (8.3) | % | ||||||||||||||||||||||||||||||
Three months ended April 30, 2022 compared with three months ended April 30, 2021
Corporate Investments and Other net revenue decreased by $23 million, or 6.6% (decreased 2.0% on a constant currency basis) due primarily to unfavorable currency fluctuations, lower HPE Ezmeral revenue, and lower revenue from Russia in A & PS.
Corporate Investments and Other loss from operations as a percentage of net revenue increased 0.2 percentage points due to the scale of the net revenue decline.
Six months ended April 30, 2022 compared with six months ended April 30, 2021
Corporate Investments and Other net revenue decreased by $19 million, or 2.8% (increased 1.6% on a constant currency basis) due primarily to unfavorable currency fluctuations.
Corporate Investments and Other loss from operations as a percentage of net revenue decreased 2.9 percentage points due primarily to decreases in cost of services as a percentage of net revenue while operating expenses as a percentage of net revenue remained relatively unchanged. The decrease in cost of services as a percentage of net revenue was primarily due to improved service delivery efficiencies in A & PS.
54
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
LIQUIDITY AND CAPITAL RESOURCES
Current Overview
We use cash generated by operations as our primary source of liquidity. We believe that internally generated cash flows will be generally sufficient to support our operating businesses, capital expenditures, product development initiatives, acquisitions, and disposal activities including legal settlements, restructuring activities, transformation costs, indemnifications, maturing debt, interest payments, and income tax payments, in addition to any future investments, share repurchases, and stockholder dividend payments. We expect to supplement this short-term liquidity, if necessary, by accessing the capital markets, issuing commercial paper, and borrowing under credit facilities made available by various domestic and foreign financial institutions. However, our access to capital markets may be constrained and our cost of borrowing may increase under certain business, market, and economic conditions. We anticipate that the funds made available and cash generated from operations along with our access to capital markets will be sufficient to meet our liquidity requirements for at least the next twelve months and for the foreseeable future thereafter. We continue to monitor the severity and duration of the COVID-19 pandemic and its impact on the U.S. and other global economies, the capital markets, consumer behavior, our businesses, results of operations, financial condition, and cash flows.
Our liquidity is subject to various risks including the risks identified in the section entitled "Risk Factors" in Item 1A of Part II and market risks identified in the section entitled "Quantitative and Qualitative Disclosures about Market Risk" in Item 3 of Part I.
Our cash balances are held in numerous locations throughout the world, with a substantial amount held outside the U.S. as of April 30, 2022. We utilize a variety of planning and financing strategies in an effort to ensure that our worldwide cash is available when and where it is needed.
Amounts held outside of the U.S. are generally utilized to support our non-U.S. liquidity needs. Repatriations of amounts held outside the U.S. generally will not be taxable from a U.S. federal tax perspective, but may be subject to state income or foreign withholding tax. Where local restrictions prevent an efficient intercompany transfer of funds, our intent is to keep cash balances outside of the U.S. and to meet liquidity needs through ongoing cash flows, external borrowings, or both. We do not expect restrictions or potential taxes incurred on repatriation of amounts held outside of the U.S. to have a material effect on our overall liquidity, financial condition, or results of operations.
In connection with the share repurchase program previously authorized by our Board of Directors, during the first six months of fiscal 2022, we repurchased and settled an aggregate amount of $187 million. As of April 30, 2022, we had a remaining authorization of $1.7 billion for future share repurchases. For more information on our share repurchase program, refer to the section entitled "Unregistered Sales of Equity Securities and Use of Proceeds" in Item 2 of Part II.
On April 22, 2022, we entered into an amendment with Unisplendour Corporation (“UNIS”) and H3C Technologies Co. Limited (“H3C”) to the Shareholder Agreement previously entered into between the parties as of May 21, 2015. The amendment extends to October 31, 2022, the latest date upon which we may put to UNIS all or part of the H3C shares held by us, at a price of 15.0 times the last twelve months net income of H3C.
Liquidity
Our cash, cash equivalents, restricted cash, total debt and available borrowing resources were as follows:
| As of | |||||||||||
| April 30, 2022 | October 31, 2021 | ||||||||||
| In millions | |||||||||||
| Cash, cash equivalents and restricted cash | $ | 3,548 | $ | 4,332 | |||||||
| Total debt | $ | 13,501 | $ | 13,448 | |||||||
| Available borrowing resources | |||||||||||
| Commercial paper programs | $ | 5,120 | $ | 5,045 | |||||||
| Uncommitted lines of credit | $ | 939 | $ | 972 | |||||||
55
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
The following tables represent the way in which management reviews cash flows:
| For the six months ended April 30, | |||||||||||
| 2022 | 2021 | ||||||||||
| In millions | |||||||||||
| Net cash provided by operating activities | $ | 303 | $ | 1,785 | |||||||
| Net cash used in investing activities | (827) | (1,231) | |||||||||
| Net cash used in financing activities | (260) | (419) | |||||||||
| Net (decrease) increase in cash, cash equivalents and restricted cash | $ | (784) | $ | 135 | |||||||
Operating Activities
For the six months ended April 30, 2022, net cash from operating activities decreased by $1.5 billion, as compared to the corresponding period in fiscal 2021. The decrease was primarily due to the impact of supply chain constraints on working capital, as compared to prior-year period.
Our working capital metrics and cash conversion impacts were as follows:
| As of | As of | ||||||||||||||||||||||||||||||||||||||||
| April 30, 2022 | October 31, 2021 | Change | April 30, 2021 | October 31, 2020 | Change | Y/Y Change | |||||||||||||||||||||||||||||||||||
| Days of sales outstanding in accounts receivable ("DSO") | 42 | 49 | (7) | 39 | 42 | (3) | 3 | ||||||||||||||||||||||||||||||||||
| Days of supply in inventory ("DOS") | 106 | 82 | 24 | 64 | 48 | 16 | 42 | ||||||||||||||||||||||||||||||||||
| Days of purchases outstanding in accounts payable ("DPO") | (112) | (128) | 16 | (113) | (97) | (16) | 1 | ||||||||||||||||||||||||||||||||||
| Cash conversion cycle | 36 | 3 | 33 | (10) | (7) | (3) | 46 | ||||||||||||||||||||||||||||||||||
The cash conversion cycle is the sum of DSO and DOS less DPO. Items which may cause the cash conversion cycle in a particular period to differ include, but are not limited to, changes in business mix, changes in payment terms (including extended payment terms to customers or from suppliers), early or late invoice payments from customers or to suppliers, the extent of receivables factoring, seasonal trends, the timing of the revenue recognition and inventory purchases within the period, the impact of commodity costs, and acquisition activity.
DSO measures the average number of days our receivables are outstanding. DSO is calculated by dividing ending accounts receivable, net of allowance for doubtful accounts, by a 90-day average of net revenue. Compared to the corresponding three month period in fiscal 2021, the increase in DSO in the current period was primarily due to lower customer participation in early payment programs and lower receivables factoring.
DOS measures the average number of days from procurement to sale of our products. DOS is calculated by dividing ending inventory by a 90-day average of cost of goods sold. Compared to the corresponding three month period in fiscal 2021, the increase in DOS in the current period was primarily due to higher levels of inventory resulting from a combination of supply chain constraints, positioning of inventory to fulfill planned future shipments and strategic purchases of certain key components.
DPO measures the average number of days our accounts payable balances are outstanding. DPO is calculated by dividing ending accounts payable by a 90-day average of cost of goods sold. Compared to the corresponding three month period in fiscal 2021, DPO was relatively unchanged.
Investing Activities
For the six months ended April 30, 2022, net cash used in investing activities decreased by $0.4 billion, as compared to the corresponding period in fiscal 2021. The decrease was primarily due to lower cash utilized in net financial collateral activities of $0.6 billion and higher cash utilized for investment in property, plant and equipment, net of sales proceeds of $0.2 billion, as compared to the prior-year period.
56
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
Financing Activities
For the six months ended April 30, 2022, net cash used in financing activities decreased by $0.2 billion, as compared to the corresponding period in fiscal 2021. The decrease was primarily due to lower debt repayments of $0.4 billion and higher cash utilized for share repurchases and stock-based award activities of $0.2 billion, as compared to the prior-year period.
Free Cash Flow
| For the six months ended April 30, | |||||||||||
| 2022 | 2021 | ||||||||||
| In millions | |||||||||||
| Net cash provided by operating activities | $ | 303 | $ | 1,785 | |||||||
| Investment in property, plant and equipment | (1,349) | (1,048) | |||||||||
| Proceeds from sale of property, plant and equipment | 258 | 194 | |||||||||
| Total | $ | (788) | $ | 931 | |||||||
Free cash flow is defined as cash flow from operations less investments in property, plant and equipment net of proceeds from the sale of property, plant and equipment. For the six months ended April 30, 2022, free cash flow decreased by $1.7 billion, as compared to the corresponding period in fiscal 2021. The decrease was due to lower cash generated from operations of $1.5 billion due to the impact of supply chain constraints on working capital and higher cash utilized for investments in property, plant and equipment, net of sales proceeds of $0.2 billion, as compared to the prior-year period.
For more information on the impact of operating assets and liabilities to our cash flows, see Note 6, "Balance Sheet Details", to the Condensed Consolidated Financial Statements in Item 1 of Part I.
Capital Resources
We maintain debt levels that we establish through consideration of a number of factors, including cash flow expectations, cash requirements for operations, investment plans (including acquisitions), share repurchase activities, our cost of capital, and targeted capital structure. We maintain a revolving credit facility and two commercial paper programs, "the Parent Programs", and a wholly-owned subsidiary maintains a third program. In December 2021, we terminated our prior senior unsecured revolving credit facility and entered into a new senior unsecured revolving credit facility with an aggregate commitment of $4.75 billion for a period of five years. There have been no changes to our commercial paper and shelf registration statement since October 31, 2021. For further information on our capital resources, see Note 11, "Borrowings" to the Condensed Consolidated Financial Statements in Item 1 of Part I.
In May 2022, we issued $747 million of asset-backed debt securities in six tranches at a weighted average price of 99.99% and a weighted average interest rate of 3.68%, payable monthly from July 2022 with a stated final maturity date of March 2030.
In January 2022, we issued $1.0 billion of asset-backed debt securities in six tranches at a weighted average price of 99.99% and a weighted average interest rate of 1.51%, payable monthly from March 2022 with a stated final maturity date of November 2029.
As of April 30, 2022 and October 31, 2021, no borrowings were outstanding under our revolving credit facility.
As of April 30, 2022 and October 31, 2021, no borrowings were outstanding under the Parent Programs, and $630 million and $705 million, respectively, were outstanding under our subsidiary’s program. During the first six months of fiscal 2022, we issued $473 million and repaid $485 million of commercial paper.
57
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
CONTRACTUAL CASH AND OTHER OBLIGATIONS
Contractual Obligations
Other than the previously mentioned issuance of asset-backed debt securities, our contractual obligations have not changed materially since October 31, 2021. For further information see "Contractual Cash and Other Obligations" in Item 7 of Part II of our Annual Report on Form 10-K for the fiscal year ended October 31, 2021.
Retirement Benefit Plan Funding
For the remainder of fiscal 2022, we anticipate making contributions of approximately $111 million to our non-U.S. pension plans. Our policy is to fund our pension plans so that we meet at least the minimum contribution requirements, as established by various authorities including local government and tax authorities.
Restructuring Plans
As of April 30, 2022, we expect to make future cash payments of approximately $0.6 billion in connection with our approved restructuring plans, which includes $0.2 billion expected to be paid through the remainder of fiscal 2022 and $0.4 billion expected to be paid thereafter. For more information on our restructuring activities, see Note 3, "Transformation Programs" to the Condensed Consolidated Financial Statements in Item 1 of Part I.
Uncertain Tax Positions
As of April 30, 2022, we had approximately $340 million of recorded liabilities and related interest and penalties pertaining to uncertain tax positions. These liabilities and related interest and penalties include $32 million expected to be paid within one year. For the remaining amount, we are unable to make a reasonable estimate as to when cash settlement with the tax authorities might occur due to the uncertainties related to these tax matters. Payments of these obligations would result from settlements with taxing authorities. For more information on our uncertain tax positions, see Note 5, "Taxes on Earnings" to the Condensed Consolidated Financial Statements in Item 1 of Part I.
Off-Balance Sheet Arrangements
As part of our ongoing business, we have not participated in transactions that generate material relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.
We have third-party revolving short-term financing arrangements intended to facilitate the working capital requirements of certain customers. For more information on our third-party revolving short-term financing arrangements, see Note 6, "Balance Sheet Details", to the Condensed Consolidated Financial Statements in Item 1 of Part I.
58
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
GAAP to non-GAAP Reconciliations
The following tables provide a reconciliation of each non-GAAP financial measure to the most directly comparable GAAP financial measure for the periods presented:
Reconciliation of GAAP gross profit and gross profit margin to non-GAAP gross profit and gross profit margin.
| For the three months ended April 30, | For the six months ended April 30, | ||||||||||||||||||||||||||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||||||||||||||||||||||||||
| Dollars |
% of
Revenue |
Dollars |
% of
Revenue |
Dollars |
% of
Revenue |
Dollars |
% of
Revenue |
||||||||||||||||||||||||||||||||||||||||
| Dollars in millions | |||||||||||||||||||||||||||||||||||||||||||||||
| GAAP Net revenue | $ | 6,713 | 100 | % | $ | 6,700 | 100 | % | $ | 13,674 | 100 | % | $ | 13,533 | 100 | % | |||||||||||||||||||||||||||||||
| GAAP Cost of sales | 4,540 | 67.6 | % | 4,413 | 65.9 | % | 9,157 | 67.0 | % | 8,958 | 66.2 | % | |||||||||||||||||||||||||||||||||||
| GAAP Gross profit | $ | 2,173 | 32.4 | % | $ | 2,287 | 34.1 | % | $ | 4,517 | 33.0 | % | $ | 4,575 | 33.8 | % | |||||||||||||||||||||||||||||||
| Non-GAAP adjustments | |||||||||||||||||||||||||||||||||||||||||||||||
| Amortization of initial direct costs | 1 | — | % | 2 | — | % | 2 | — | % | 4 | — | % | |||||||||||||||||||||||||||||||||||
| Stock-based compensation expense | 14 | 0.2 | % | 11 | 0.2 | % | 29 | 0.2 | % | 24 | 0.2 | % | |||||||||||||||||||||||||||||||||||
|
Disaster charges
(1)
|
105 | 1.6 | % | — | — | % | 105 | 0.8 | % | — | — | % | |||||||||||||||||||||||||||||||||||
| Non-GAAP Gross Profit | $ | 2,293 | 34.2 | % | $ | 2,300 | 34.3 | % | $ | 4,653 | 34.0 | % | $ | 4,603 | 34.0 | % | |||||||||||||||||||||||||||||||
Reconciliation of GAAP earnings from operations and operating profit margin to non-GAAP earnings from operations and operating profit margin.
| For the three months ended April 30, | For the six months ended April 30, | |||||||||||||||||||||||||||||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||||||||||||||||||||||||||||||
| Dollars |
% of
Revenue |
Dollars |
% of
Revenue |
Dollars |
% of
Revenue |
Dollars |
% of
Revenue |
|||||||||||||||||||||||||||||||||||||||||||
| Dollars in millions | ||||||||||||||||||||||||||||||||||||||||||||||||||
| GAAP earnings from operations | $ | 207 | 3.1 | % | $ | 278 | 4.1 | % | 655 | 4.8 | % | $ | 500 | 3.7 | % | |||||||||||||||||||||||||||||||||||
| Non-GAAP adjustments: | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Amortization of initial direct costs | 1 | — | % | 2 | — | % | 2 | — | % | 4 | — | % | ||||||||||||||||||||||||||||||||||||||
| Amortization of intangible assets | 74 | 1.1 | % | 84 | 1.3 | % | 147 | 1.1 | % | 194 | 1.4 | % | ||||||||||||||||||||||||||||||||||||||
| Transformation costs | 98 | 1.4 | % | 209 | 3.1 | % | 209 | 1.5 | % | 520 | 3.9 | % | ||||||||||||||||||||||||||||||||||||||
|
Disaster charges
(1)
|
125 | 1.9 | % | 1 | — | % | 124 | 0.9 | % | 1 | — | % | ||||||||||||||||||||||||||||||||||||||
| Stock-based compensation expense | 114 | 1.7 | % | 98 | 1.5 | % | 242 | 1.8 | % | 208 | 1.6 | % | ||||||||||||||||||||||||||||||||||||||
| Acquisition, disposition and other related charges | 8 | 0.1 | % | 13 | 0.2 | % | 16 | 0.1 | % | 31 | 0.2 | % | ||||||||||||||||||||||||||||||||||||||
| Non-GAAP earnings from operations | $ | 627 | 9.3 | % | $ | 685 | 10.2 | % | $ | 1,395 | 10.2 | % | $ | 1,458 | 10.8 | % | ||||||||||||||||||||||||||||||||||
59
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
Reconciliation of GAAP net earnings and diluted net earnings per share to non-GAAP net earnings and diluted net earnings per share.
| For the three months ended April 30, | For the six months ended April 30, | ||||||||||||||||||||||||||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||||||||||||||||||||||||||
| Dollars | Diluted net earnings per share | Dollars | Diluted net earnings per share | Dollars | Diluted net earnings per share | Dollars | Diluted net earnings per share | ||||||||||||||||||||||||||||||||||||||||
| Dollars in millions | |||||||||||||||||||||||||||||||||||||||||||||||
| GAAP net earnings | $ | 250 | $ | 0.19 | $ | 259 | $ | 0.19 | $ | 763 | $ | 0.57 | $ | 482 | $ | 0.36 | |||||||||||||||||||||||||||||||
| Non-GAAP adjustments: | |||||||||||||||||||||||||||||||||||||||||||||||
| Amortization of initial direct costs | 1 | — | 2 | — | 2 | — | 4 | — | |||||||||||||||||||||||||||||||||||||||
| Amortization of intangible assets | 74 | 0.06 | 84 | 0.06 | 147 | 0.11 | 194 | 0.15 | |||||||||||||||||||||||||||||||||||||||
| Transformation costs | 98 | 0.07 | 209 | 0.15 | 209 | 0.16 | 520 | 0.40 | |||||||||||||||||||||||||||||||||||||||
|
Disaster charges
(1)
|
125 | 0.09 | 1 | — | 124 | 0.09 | 1 | — | |||||||||||||||||||||||||||||||||||||||
| Stock-based compensation expense | 114 | 0.09 | 98 | 0.08 | 242 | 0.18 | 208 | 0.16 | |||||||||||||||||||||||||||||||||||||||
| Acquisition, disposition and other related charges | 8 | 0.01 | 13 | 0.01 | 16 | 0.01 | 31 | 0.02 | |||||||||||||||||||||||||||||||||||||||
| Tax indemnification and related adjustments | — | — | — | — | 17 | 0.01 | 16 | 0.01 | |||||||||||||||||||||||||||||||||||||||
| Non-service net periodic benefit credit | (36) | (0.03) | (17) | (0.01) | (72) | (0.05) | (34) | (0.03) | |||||||||||||||||||||||||||||||||||||||
|
Earnings from equity interests
(2)
|
17 | 0.01 | 34 | 0.03 | 34 | 0.03 | 68 | 0.05 | |||||||||||||||||||||||||||||||||||||||
| Adjustments for taxes | (68) | (0.05) | (71) | (0.05) | (202) | (0.15) | (199) | (0.14) | |||||||||||||||||||||||||||||||||||||||
| Non-GAAP net earnings | $ | 583 | $ | 0.44 | $ | 612 | $ | 0.46 | $ | 1,280 | $ | 0.96 | $ | 1,291 | $ | 0.98 | |||||||||||||||||||||||||||||||
(1) In the second quarter of fiscal 2022, the Company recorded total pre-tax charges of $126 million primarily related to expected credit losses of financing and trade receivables, $99 million of which was included in Financing cost, $6 million in Cost of services and $21 million in Disaster charges in the Condensed Consolidated Statements of Earnings. Refer to Note 1, "Overview and Summary of Significant Accounting Policies", for further information. During the three and six months ended April 30, 2022, Disaster charges also included a recovery of $1 million and $2 million, respectively, related to COVID-19.
(2) Represents the amortization of basis difference adjustments related to the H3C divestiture.
Reconciliation of net cash provided by operating activities to free cash flow.
| For the three months ended April 30, | For the six months ended April 30, | |||||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||||||
| In millions | ||||||||||||||||||||||||||
| Net cash provided by operating activities | $ | 379 | $ | 822 | $ | 303 | $ | 1,785 | ||||||||||||||||||
| Investment in property, plant and equipment | (725) | (535) | (1,349) | (1,048) | ||||||||||||||||||||||
| Proceeds from sale of property, plant and equipment | 135 | 81 | 258 | 194 | ||||||||||||||||||||||
| Free cash flow | $ | (211) | $ | 368 | $ | (788) | $ | 931 | ||||||||||||||||||
60
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
Non-GAAP financial measures
The non-GAAP financial measures presented are net revenue on a constant currency basis, non-GAAP gross profit, non-GAAP gross profit margin, non-GAAP earnings from operations, non-GAAP operating profit margin (non-GAAP earnings from operations as a percentage of net revenue), non-GAAP net earnings, non-GAAP diluted net earnings per share, and free cash flow. These non-GAAP financial measures are used by management for purposes of evaluating our historical and prospective financial performance, as well as evaluating our performance relative to our competitors. These non-GAAP financial measures are not computed in accordance with, or as an alternative to, generally accepted accounting principles in the United States. The GAAP measure most directly comparable to net revenue on a constant currency basis is net revenue. The GAAP measure most directly comparable to non-GAAP gross profit is gross profit. The GAAP measure most directly comparable to non-GAAP gross profit margin is gross profit margin. The GAAP measure most directly comparable to non-GAAP earnings from operations is earnings from operations. The GAAP measure most directly comparable to non-GAAP operating profit margin (non-GAAP earnings from operations as a percentage of net revenue) is operating profit margin (earnings from operations as a percentage of net revenue). The GAAP measure most directly comparable to non-GAAP net earnings is net earnings. The GAAP measure most directly comparable to non-GAAP diluted net earnings per share is diluted net earnings per share. The GAAP measure most directly comparable to free cash flow is cash flow from operations.
Net revenue on a constant currency basis assumes no change in the foreign exchange rate from the prior-year period. Non-GAAP gross profit and non-GAAP gross profit margin are defined to exclude charges related to the amortization of initial direct costs, stock-based compensation expense and disaster charges. Non-GAAP earnings from operations and non-GAAP operating profit margin (non-GAAP earnings from operations as a percentage of net revenue) consist of earnings from operations excluding any charges related to the amortization of initial direct costs, amortization of intangible assets, transformation costs, stock-based compensation expense, disaster charges and acquisition, disposition and other related charges. Non-GAAP net earnings and Non-GAAP diluted net earnings per share consist of net earnings or diluted net earnings per share excluding those same charges, as well as items such as tax indemnification and related adjustments, non-service net periodic benefit credit, earnings from equity interests, certain income tax valuation allowances and separation taxes, the impact of U.S. tax reform, structural rate adjustment and excess tax benefit from stock-based compensation. In addition, non-GAAP net earnings and non-GAAP diluted net earnings per share are adjusted by the amount of additional taxes or tax benefits associated with each non-GAAP item. We believe that excluding the items mentioned above from these non-GAAP financial measures allows management to better understand our consolidated financial performance in relation to the operating results of our segments. Management does not believe that the excluded items are reflective of ongoing operating results, and excluding them facilitates a more meaningful evaluation of our current operating performance in comparison to our peers. The excluded items can be inconsistent in amount and frequency and/or not reflective of the operational performance of the business.
These non-GAAP financial measures have limitations as analytical tools, and these measures should not be considered in isolation or as a substitute for analysis of our results as reported under GAAP. Some of the limitations in relying on these non-GAAP financial measures are that they can have a material impact on the equivalent GAAP earnings measures and cash flows, they may be calculated differently by other companies and may not reflect the full economic effect of the loss in value of certain assets.
We compensate for these limitations on the use of non-GAAP financial measures by relying primarily on our GAAP results and using non-GAAP financial measures only as a supplement. We also provide a reconciliation of each non-GAAP financial measure to its most directly comparable GAAP measure. We believe that providing net revenue on a constant currency basis, non-GAAP gross profit, non-GAAP gross profit margin, non-GAAP earnings from operations, non-GAAP operating profit margin, non-GAAP net earnings, non-GAAP diluted net earnings per share, and free cash flow, in addition to the related GAAP measures provides greater transparency to the information used in our financial and operational decision making and allows the reader of our Condensed Consolidated Financial Statements to see our financial results “through the eyes” of management.
61
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
For quantitative and qualitative disclosures about market risk affecting HPE, see "Quantitative and Qualitative Disclosures About Market Risk" in Item 7A of Part II of our Annual Report on Form 10-K for the fiscal year ended October 31, 2021. There have been no material changes in our market risk exposures since October 31, 2021.
Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act as of the end of the period covered by this report (the "Evaluation Date"). Based on this evaluation, our principal executive officer and principal financial officer concluded as of the Evaluation Date that our disclosure controls and procedures were effective such that the information related to the Company, including our consolidated subsidiaries, required to be disclosed in our SEC reports (i) is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and (ii) is accumulated and communicated to the Company's management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control Over Financial Reporting
There were no changes to our internal control over financial reporting during the quarter ended April 30, 2022, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
62
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
Information with respect to this item may be found in Note 14, "Litigation and Contingencies".
Item 1A. Risk Factors.
Our operations and financial results are subject to various risks and uncertainties, including those described in Part I, Item 1A, "Risk Factors" in our Annual Report on Form 10-K for the fiscal period ended October 31, 2021, which could adversely affect our business, financial condition, results of operations, cash flows, and the trading price of our common stock, including certain risks, which have been modified as follows:
Due to the international nature of our business, political or economic changes and the laws and regulatory regimes applying to international transactions or other factors could harm our future revenue, costs and expenses, and financial condition.
Our business and financial performance depend significantly on worldwide economic conditions and the demand for technology hardware, software and services in the markets in which we compete. Economic weakness and uncertainty may adversely affect demand for our products, services and solutions, may result in increased expenses due to higher allowances for doubtful accounts and potential goodwill and asset impairment charges, and may make it more difficult for us to manage inventory and make accurate forecasts of revenue, gross margin, cash flows and expenses.
Economic weakness and uncertainty could cause our expenses to vary materially from our expectations. Any financial turmoil affecting the banking system and financial markets or any significant financial services institution failures could negatively impact our treasury operations, as the financial condition of such parties may deteriorate rapidly and without notice in times of market volatility and disruption. Poor financial performance of asset markets combined with lower interest rates and the adverse effects of fluctuating currency exchange rates could lead to higher pension and post-retirement benefit expenses. Interest and other expenses could vary materially from expectations depending on changes in interest rates, borrowing costs, currency exchange rates, and costs of hedging activities and the fair value of derivative instruments. Economic downturns also may lead to restructuring actions and associated expenses. Further, ongoing U.S. federal government spending priorities may limit demand for our products, services and solutions from organizations that receive funding from the U.S. government, and could negatively affect macroeconomic conditions in the United States, which could further reduce demand for our products, services and solutions.
Our business and financial performance also could be adversely affected by changes in U.S. trade policy, U.S. export controls and sanctions, and U.S. regulations concerning imports, as well as international laws and regulations relating to global trade. Current U.S. government trade policy includes the imposition of tariffs on certain foreign goods, including information and communication technology products. These measures have materially increased costs for certain goods imported into the United States. This in turn could require us to materially increase prices to our customers which may reduce demand, or, if we are unable to increase prices, result in lowering our margin on products sold. U.S. government trade policy has resulted in, and could result in more, U.S. trading partners adopting responsive trade policy making it more difficult or costly for us to export our products to those countries. Similarly, changes in regulations relating to exports could prevent us from exporting products to certain locations or customers entirely. In addition, changes in requirements relating to making foreign direct investments could increase our cost of doing business in certain jurisdictions, prevent us from shipping products to particular countries or markets, affect our ability to obtain favorable terms for components, increase our operating costs or lead to penalties or restrictions.
Sales outside the United States constituted approximately 68% of our net revenue in fiscal 2021. Our future business and financial performance could suffer due to a variety of international factors, including:
•
ongoing instability or changes in a country’s or region’s economic or political conditions, including inflation, recession, interest rate fluctuations and actual or anticipated military or political conflicts, including uncertainties and instability in economic and market conditions caused by the COVID-19 pandemic and the Russia/Ukraine conflict;
•
inflationary pressures, such as those the market is currently experiencing, which may increase costs for materials, supplies, and services;
•
network security, privacy and data sovereignty concerns, which could make foreign customers reluctant to purchase products and services from U.S.-based technology companies;
•
longer collection cycles and financial instability among customers;
63
•
local labor conditions and regulations, including local labor issues faced by specific suppliers and original equipment manufacturers (“OEMs”), or changes to immigration and labor law policies which may adversely impact our access to technical and professional talent;
•
managing our geographically dispersed workforce;
•
differing technology standards or customer requirements;
•
local content and manufacturing requirements, which could impact our ability to sell into those markets;
•
difficulties associated with repatriating earnings in restricted countries, and changes in tax laws; and
•
fluctuations in freight costs, limitations on shipping and receiving capacity, and other disruptions in the transportation and shipping infrastructure at important geographic points of exit and entry for our products and shipments.
The factors described above also could disrupt our product and component manufacturing and key suppliers located outside of the United States. For example, we rely on suppliers in Asia for product assembly and manufacture.
The Russia/Ukraine conflict has impacted business and financial performance in that region. HPE is proceeding with an exit of our remaining business in Russia and Belarus.
We implement policies, procedures and training designed to facilitate compliance with anti-corruption laws around the world, including the U.S. Foreign Corrupt Practices Act and the U.K. Bribery Act. But in many foreign countries, particularly in those with developing economies, people may engage in business practices prohibited by anti-corruption laws. Our employees and third parties we work with may take actions in violation of our policies, and those actions could have an adverse effect on our business and reputation.
The revenue and profitability of our operations have historically varied, which makes our future financial results less predictable.
Our revenue, gross margin and profit vary among our diverse products and services, customer groups and geographic markets and therefore will likely be different in future periods than our historical results. Our revenue depends on the overall demand for our products and services. Delays or reductions in IT spending by our customers or potential customers could have a material adverse effect on demand for our products and services, which could result in a significant decline in revenue. In addition, revenue declines in some of our businesses may affect revenue in our other businesses as we may lose cross-selling opportunities. Overall gross margins and profitability in any given period are dependent partially on the product, service, customer and geographic mix reflected in that period’s net revenue.
The conflict between Russia and Ukraine and the trade sanctions imposed by the U.S., European Union (E.U.) and other countries in response have negatively impacted our operations and financial performance in both countries. There could be additional negative impacts to our net revenues, earnings and cash flows should the situation escalate beyond its current scope, including, among other potential impacts, economic recessions in certain neighboring countries or globally, due to inflationary pressures and supply chain cost increases or the geographic proximity of the war relative to the rest of Europe.
Competition, lawsuits, investigations, increases in component and manufacturing costs that we are unable to pass on to our customers, component supply disruptions and other risks affecting our businesses may have a significant impact on our overall gross margin and profitability. Variations in fixed cost structure and gross margins across business units and product portfolios may lead to significant operating profit volatility on a quarterly or annual basis. In addition, newer geographic market opportunities may be relatively less profitable due to our investments associated with entering those markets and local pricing pressures, and we may have difficulty establishing and maintaining the operating infrastructure necessary to support the high growth rate associated with some of those markets. Market trends, industry shifts, competitive pressures, commoditization of products, increased component or shipping costs, regulatory impacts and other factors may result in reductions in revenue or pressure on gross margins of certain segments in a given period, which may lead to adjustments to our operations. Moreover, our efforts to address the challenges facing our business could increase the level of variability in our financial results because the rate at which we are able to realize the benefits from those efforts may vary from period to period.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Recent Sales of Unregistered Securities
There were no unregistered sales of equity securities during the period covered by this report.
Issuer Purchases of Equity Securities
64
| Period |
Total Number
of Shares Purchased and Settled |
Average
Price Paid per Share |
Total Number of
Shares Purchased and Settled as Part of Publicly Announced Plans or Programs |
Approximate Dollar Value of
Shares that May Yet Be Purchased under the Plans or Programs |
|||||||||||||||||||
| In thousands, except per share amounts | |||||||||||||||||||||||
| Month 1 (February 2022) | 886 | $ | 16.77 | 886 | $ | 1,752,552 | |||||||||||||||||
| Month 2 (March 2022) | 1,305 | $ | 16.48 | 1,305 | $ | 1,731,030 | |||||||||||||||||
| Month 3 (April 2022) | 1,335 | $ | 15.93 | 1,335 | $ | 1,709,766 | |||||||||||||||||
| Total | 3,526 | $ | 16.35 | 3,526 | |||||||||||||||||||
In connection with the share repurchase program previously authorized by our Board of Directors, during the three months ended April 30, 2022, the Company repurchased and settled a total of 3.5 million shares under its share repurchase program through open market repurchases, which included 0.1 million shares that were unsettled open market repurchases as of January 31, 2022. Additionally, as of April 30, 2022, the Company had unsettled open market repurchases of 0.1 million shares. Shares repurchased during the three months ended April 30, 2022 were recorded as a $58 million reduction to stockholders' equity. As of April 30, 2022, the Company had a remaining authorization of $1.7 billion for future share repurchases.
Item 5. Other Information.
The following disclosure is being made under Section 13(r) of the Exchange Act:
On March 2, 2021, the U.S. Secretary of State designated the Russian Federal Security Service (“FSB”) as a party subject to the provisions of U.S. Executive Order No. 13382 issued in 2005 (“Executive Order 13382”). On the same day, the U.S. Department of the Treasury’s Office of Foreign Assets Control updated General License 1B (“General License 1B”) which generally authorizes U.S. companies to engage in certain licensing, permitting, certification, notification and related transactions with the FSB as may be required for the importation, distribution or use of information technology products in the Russian Federation. Our local subsidiary may be required to engage with the FSB as a licensing authority and to file documents. There are no gross revenues or net profits directly associated with any such dealings by HPE with the FSB and all such dealings are explicitly authorized by General License 1B.
On April 15, 2021, the U.S. Government issued an executive order on Blocking Property with Respect to Specified Harmful Foreign Activities of the Government of the Russian Federation (“Executive Order 14024”), implementing additional U.S. sanctions against the Russian government and against Russian actors that threaten U.S. interests, including certain technology companies that support the Russian Intelligence Service. The U.S. Secretary of the Treasury designated Pozitiv Teknolodzhiz, AO (“Positive Technologies”) under Executive Order 14024 and Executive Order 13382. HPE’s local Russian subsidiary had dealings with Positive Technologies prior to its designation. Following the sanctions designation, our local subsidiary immediately initiated procedures to terminate its relationship with Positive Technologies. HPE does not plan to engage in any further transactions with this entity, except wind down activities that are authorized by OFAC going forward. In this reporting period, HPE did not have dealings with Positive Technologies, and there are no identifiable gross revenues or net profits associated with HPE’s relationship with Positive Technologies for this reporting period.
For a summary of our revenue recognition policies, see "Revenue Recognition" described in PART II, Item 8, Note 1, "Overview and Summary of Significant Accounting Policies", of our Annual Report on Form 10-K for the fiscal year ended October 31, 2021.
Item 6. Exhibits.
65
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
EXHIBIT INDEX
| Incorporated by Reference | ||||||||||||||||||||||||||||||||
|
Exhibit
Number |
Exhibit Description | Form | File No. | Exhibit(s) | Filing Date | |||||||||||||||||||||||||||
| 2.1 | 8-K | 001-37483 | 2.1 | November 5, 2015 | ||||||||||||||||||||||||||||
| 2.2 | 8-K | 001-37483 | 2.2 | November 5, 2015 | ||||||||||||||||||||||||||||
| 2.3 | 8-K | 001-37483 | 2.4 | November 5, 2015 | ||||||||||||||||||||||||||||
| 2.4 | 8-K | 001-37483 | 2.5 | November 5, 2015 | ||||||||||||||||||||||||||||
| 2.5 | 8-K | 001-37483 | 2.6 | November 5, 2015 | ||||||||||||||||||||||||||||
| 2.6 | 8-K | 001-37483 | 2.7 | November 5, 2015 | ||||||||||||||||||||||||||||
| 2.7 | 8-K | 001-37483 | 2.1 | May 26, 2016 | ||||||||||||||||||||||||||||
| 2.8 | 8-K | 001-37483 | 2.2 | May 26, 2016 | ||||||||||||||||||||||||||||
| 2.9 | 8-K | 001-37483 | 2.1 | September 7, 2016 | ||||||||||||||||||||||||||||
| 2.10 | 8-K | 001-37483 | 2.2 | September 7, 2016 | ||||||||||||||||||||||||||||
| 2.11 | 8-K | 001-37483 | 2.3 | September 7, 2016 | ||||||||||||||||||||||||||||
| 2.12 | 8-K | 001-37483 | 2.1 | November 2, 2016 | ||||||||||||||||||||||||||||
| 2.13 | 8-K | 001-37483 | 2.2 | November 2, 2016 | ||||||||||||||||||||||||||||
| 2.14 | 8-K | 001-37483 | 99.1 | March 7, 2017 | ||||||||||||||||||||||||||||
| 2.15 | 8-K | 001-37483 | 99.2 | March 7, 2017 | ||||||||||||||||||||||||||||
66
| 2.16 | 8-K | 001-38033 | 2.1 | April 6, 2017 | ||||||||||||||||||||||||||||
| 2.17 | 8-K | 001-38033 | 2.2 | April 6, 2017 | ||||||||||||||||||||||||||||
| 2.18 | 8-K | 001-38033 | 2.3 | April 6, 2017 | ||||||||||||||||||||||||||||
| 2.19 | 8-K | 001-38033 | 2.4 | April 6, 2017 | ||||||||||||||||||||||||||||
| 2.20 | 8-K | 001-38033 | 2.5 | April 6, 2017 | ||||||||||||||||||||||||||||
| 2.21 | 8-K | 001-38033 | 2.6 | April 6, 2017 | ||||||||||||||||||||||||||||
| 2.22 | 8-K | 001-37483 | 2.1 | September 1, 2017 | ||||||||||||||||||||||||||||
| 2.23 | 8-K | 001-37483 | 2.2 | September 1, 2017 | ||||||||||||||||||||||||||||
| 2.24 | 8-K | 001-37483 | 2.3 | September 1, 2017 | ||||||||||||||||||||||||||||
| 2.25 | 8-K | 001-37483 | 2.4 | September 1, 2017 | ||||||||||||||||||||||||||||
| 2.26 | 8-K | 001-37483 | 2.1 | May 17, 2019 | ||||||||||||||||||||||||||||
| 2.27 | 8-K | 001-37483 | 2.1 | July 13, 2020 | ||||||||||||||||||||||||||||
| 3.1 | 8-K | 001-37483 | 3.1 | November 5, 2015 | ||||||||||||||||||||||||||||
| 3.2 | 8-K | 001-37483 | 3.2 | November 5, 2015 | ||||||||||||||||||||||||||||
| 3.3 | 8-K | 001-37483 | 3.1 | March 20, 2017 | ||||||||||||||||||||||||||||
| 3.4 | 8-K | 001-37483 | 3.2 | March 20, 2017 | ||||||||||||||||||||||||||||
| 4.1 | 8-K | 001-37483 | 4.1 | October 13, 2015 | ||||||||||||||||||||||||||||
| 4.2 | 8-K | 001-37483 | 4.5 | October 13, 2015 | ||||||||||||||||||||||||||||
67
| 4.3 | 8-K | 001-37483 | 4.6 | October 13, 2015 | ||||||||||||||||||||||||||||
| 4.4 | 8-K | 001-37483 | 4.7 | October 13, 2015 | ||||||||||||||||||||||||||||
| 4.5 | 8-K | 001-37483 | 4.8 | October 13, 2015 | ||||||||||||||||||||||||||||
| 4.6 | 8-K | 001-37483 | 4.2 | September 13, 2019 | ||||||||||||||||||||||||||||
| 4.7 | 8-K | 001-37483 | 4.2 | April 9, 2020 | ||||||||||||||||||||||||||||
| 4.8 | 8-K | 001-37483 | 4.2 | July 17, 2020 | ||||||||||||||||||||||||||||
| 4.9 | 8-K | 001-37483 | 4.3 | July 17, 2020 | ||||||||||||||||||||||||||||
| 4.10 | 8-K | 001-37483 | 4.12 | October 13, 2015 | ||||||||||||||||||||||||||||
| 4.11 | S-3ASR | 333-222102 | 4.5 | December 15, 2017 | ||||||||||||||||||||||||||||
| 4.12 | 10-K | 001-37483 | 4.16 | December 10, 2020 | ||||||||||||||||||||||||||||
| 10.1 | 8-K | 001-37483 | 10.1 | January 30, 2017 | ||||||||||||||||||||||||||||
| 10.2 | S-8 | 333-255839 | 4.4 | May 6, 2021 | ||||||||||||||||||||||||||||
| 10.3 | S-8 | 333-265378 | 4.7 | June 2, 2022 | ||||||||||||||||||||||||||||
| 10.4 | 10-12B/A | 001-37483 | 10.4 | September 28, 2015 | ||||||||||||||||||||||||||||
| 10.5 | S-8 | 333-207679 | 4.4 | October 30, 2015 | ||||||||||||||||||||||||||||
| 10.6 | 8-K | 001-37483 | 10.4 | November 5, 2015 | ||||||||||||||||||||||||||||
| 10.7 | 8-K | 001-37483 | 10.8 | November 5, 2015 | ||||||||||||||||||||||||||||
68
| 10.8 | 8-K | 001-37483 | 10.9 | November 5, 2015 | ||||||||||||||||||||||||||||
| 10.9 | 8-K | 001-37483 | 10.10 | November 5, 2015 | ||||||||||||||||||||||||||||
| 10.10 | 10-Q | 001-37483 | 10.14 | March 10, 2016 | ||||||||||||||||||||||||||||
| 10.11 | 10-Q | 001-37483 | 10.15 | March 10, 2016 | ||||||||||||||||||||||||||||
| 10.12 | 8-K | 001-37483 | 10.1 | May 26, 2016 | ||||||||||||||||||||||||||||
| 10.13 | S-8 | 333-216481 | 4.3 | March 6, 2017 | ||||||||||||||||||||||||||||
| 10.14 | S-8 | 333-217349 | 4.3 | April 18, 2017 | ||||||||||||||||||||||||||||
| 10.15 | S-8 | 333-217438 | 4.3 | April 24, 2017 | ||||||||||||||||||||||||||||
| 10.16 | 10-K | 000-51333 | 10.3 | September 10, 2012 | ||||||||||||||||||||||||||||
| 10.17 | S-8 | 333-221254 | 4.3 | November 1, 2017 | ||||||||||||||||||||||||||||
| 10.18 | S-8 | 333-221254 | 4.4 | November 1, 2017 | ||||||||||||||||||||||||||||
| 10.19 | S-8 | 333-226181 | 4.3 | July 16, 2018 | ||||||||||||||||||||||||||||
| 10.20 | 10-Q | 001-37483 | 10.29 | September 4, 2018 | ||||||||||||||||||||||||||||
| 10.21 | 10-Q | 001-37483 | 10.30 | September 4, 2018 | ||||||||||||||||||||||||||||
| 10.22 | 10-K | 001-37483 | 10.27 | December 12, 2018 | ||||||||||||||||||||||||||||
| 10.23 | 10-K | 001-37483 | 10.29 | December 12, 2018 | ||||||||||||||||||||||||||||
| 10.24 | S-8 | 333-229449 | 4.3 | January 31, 2019 | ||||||||||||||||||||||||||||
| 10.25 | S-8 | 333-234033 | 4.3 | October 1, 2019 | ||||||||||||||||||||||||||||
| 10.26 | 10-K | 001-37483 | 10.31 | December 13, 2019 | ||||||||||||||||||||||||||||
| 10.27 | 10-Q | 001-37483 | 10.32 | March 9, 2020 | ||||||||||||||||||||||||||||
| 10.28 | S-8 | 333-249731 | 4.3 | October 29, 2020 | ||||||||||||||||||||||||||||
| 10.29 | S-8 | 333-249731 | 4.4 | October 29, 2020 | ||||||||||||||||||||||||||||
| 10.30 | 10-K | 001-37483 | 10.30 | December 10, 2021 | ||||||||||||||||||||||||||||
| 10.31 | 10-K | 001-37483 | 10.31 | December 10, 2021 | ||||||||||||||||||||||||||||
| 10.32 | 10-K | 001-37483 | 10.32 | December 10, 2021 | ||||||||||||||||||||||||||||
69
| 10.33 | 10-Q | 001-37483 | 10.33 | March 3, 2022 | ||||||||||||||||||||||||||||
| 31.1 | ||||||||||||||||||||||||||||||||
| 31.2 | ||||||||||||||||||||||||||||||||
| 32 | ||||||||||||||||||||||||||||||||
| 101.INS | Inline XBRL Instance Document‡ | |||||||||||||||||||||||||||||||
| 101.SCH | Inline XBRL Taxonomy Extension Schema Document‡ | |||||||||||||||||||||||||||||||
| 101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document‡ | |||||||||||||||||||||||||||||||
| 101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document‡ | |||||||||||||||||||||||||||||||
| 101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document‡ | |||||||||||||||||||||||||||||||
| 101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document‡ | |||||||||||||||||||||||||||||||
| 104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) | |||||||||||||||||||||||||||||||
* Indicates management contract or compensation plan, contract or arrangement
‡ Filed herewith
† Furnished herewith
The registrant agrees to furnish to the Commission supplementally upon request a copy of any instrument with respect to long-term debt not filed herewith as to which the total amount of securities authorized thereunder does not exceed 10% of the total assets of the registrant and its subsidiaries on a consolidated basis.
70
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| HEWLETT PACKARD ENTERPRISE COMPANY | ||||||||
| /s/ TAREK A. ROBBIATI | ||||||||
|
Tarek A. Robbiati
Executive Vice President and Chief Financial Officer
(Principal Financial Officer and Authorized
Signatory)
|
||||||||
Date: June 3, 2022
71
TABLE OF CONTENTS
Part I. Financial InformationprintItem 1. Financial StatementsprintNote 1: Overview and Summary Of Significant Accounting PoliciesprintNote 2: Segment InformationprintNote 3: Transformation ProgramsprintNote 4: Retirement Benefit PlansprintNote 5: Taxes on EarningsprintNote 6: Balance Sheet DetailsprintNote 7: Accounting For Leases As A LessorprintNote 8: GoodwillprintNote 9: Fair ValueprintNote 10: Financial InstrumentsprintNote 11: BorrowingsprintNote 12: Stockholders' EquityprintNote 13: Net Earnings Per ShareprintNote 14: Litigation and ContingenciesprintItem 2. Management's Discussion and Analysis Of Financial Condition and Results Of OperationsprintItem 3. Quantitative and Qualitative Disclosures About Market RiskprintItem 4. Controls and ProceduresprintPart II. Other InformationprintItem 1. Legal ProceedingsprintItem 1A. Risk FactorsprintItem 2. Unregistered Sales Of Equity Securities and Use Of ProceedsprintItem 5. Other InformationprintItem 6. Exhibitsprint