| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended July 31, | | | | Nine Months Ended July 31, | | |
| 2020 | | 2019 | | 2020 | | 2019 |
| In millions, except per share amounts | | | | | | |
Numerator: | | | | | | | |
Net earnings (loss) | $ | 9 | | | $ | (27) | | | $ | (479) | | | $ | 569 | |
Denominator: | | | | | | | |
Weighted-average shares used to compute basic net EPS | 1,292 | | | 1,334 | | | 1,294 | | | 1,367 | |
Dilutive effect of employee stock plans | 8 | | | 0 | | | 0 | | | 13 | |
Weighted-average shares used to compute diluted net EPS | 1,300 | | | 1,334 | | | 1,294 | | | 1,380 | |
Net earnings (loss) per share: | | | | | | | |
Basic | $ | 0.01 | | | $ | (0.02) | | | $ | (0.37) | | | $ | 0.42 | |
Diluted | $ | 0.01 | | | $ | (0.02) | | | $ | (0.37) | | | $ | 0.41 | |
Anti-dilutive weighted-average stock awards(1) | 21 | | | 44 | | | 48 | | | 4 | |
Contents
(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.
Note 15: Litigation and Contingencies
Hewlett Packard Enterprise is involved in various lawsuits, claims, investigations and proceedings including those consisting of Intellectual Property ("IP"), 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, Hewlett Packard Enterprise and HP Inc. (formerly known as "Hewlett-Packard Company") 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 July 31, 2020, 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
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Notes to Condensed Consolidated Financial Statements (Continued)
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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., 7 HP India employees and 1 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 so as 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 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 and April 11, 2016, but were canceled at the request of the Customs Tribunal. The hearing was rescheduled for January 15, 2019 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 3 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 five 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 the decision to be issued in 2020 and any subsequent appeal 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 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 aged 40 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. On September 20, 2017, the court granted the defendants'
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motion to compel arbitration and administratively closed the case pending resolution of the arbitration proceedings. On November 30, 2017, 3 named plaintiffs filed a single arbitration demand. NaN additional plaintiffs later joined the arbitration. On December 22, 2017, defendants filed a motion to (1) stay the case pending arbitrations and (2) enjoin the demanded arbitration and require each plaintiff to file a separate arbitration demand. On February 6, 2018, the court granted the motion to stay and denied the motion to enjoin. The claims of these 16 arbitration named plaintiffs have been resolved. Additional opt-in plaintiffs were added to the litigation and these claims also were resolved as part of the arbitration process. The stay of the Forsyth class action has been lifted and a Third Amended Complaint was filed on January 7, 2020. Defendants filed a motion to dismiss the Third Amended Complaint on February 6, 2020. On May 18, 2020, the court issued an order granting in part and denying in part Defendants’ motion to dismiss. The court granted Plaintiffs leave to amend their complaint. On July 9, 2020, Plaintiffs filed a Fourth Amended Complaint.
Wall v. Hewlett Packard Enterprise Company and HP Inc. This certified California class action and Private Attorney General Act action was filed against Hewlett-Packard Company on January 17, 2012 and the fifth amended (and operative) complaint was filed against HP Inc. and Hewlett Packard Enterprise on June 28, 2016 in the Superior Court of California, County of Orange. The complaint alleges that the defendants paid earned incentive compensation late and failed to timely pay final wages in violation of the California Labor Code. On August 9, 2016, the court ordered the class certified without prejudice to a future motion to amend or modify the class certification order or to decertify. The scheduled January 22, 2018 trial date was vacated following the parties’ notification to the court that they had reached a preliminary agreement to resolve the dispute. The parties subsequently finalized and executed a settlement agreement and, on May 9, 2018, plaintiff filed a motion seeking preliminary approval of the settlement. On July 2, 2018, the court issued an order granting preliminary approval of the settlement. On December 21, 2018, the court issued an order granting final approval. A Qualified Settlement Fund has been fully funded and distributed to class members. On March 5, 2020, the Court signed an Amendment to Final Approval Order and Judgment, directing that the matter be closed.
Jackson, et al. v. HP Inc. and Hewlett Packard Enterprise. This putative nationwide class action was filed on July 24, 2017 in the United States District Court for the Northern District of California, San Jose Division. Plaintiffs purport to bring the lawsuit on behalf of themselves and other similarly situated African-Americans and individuals over the age of forty. Plaintiffs allege that defendants engaged in a pattern and practice of racial and age discrimination in lay-offs and promotions. Plaintiffs filed an amended complaint on September 29, 2017. Plaintiffs seek damages, attorneys’ fees and costs, and declaratory and injunctive relief. On January 12, 2018, defendants moved to transfer the matter to the federal district court in the Northern District of Georgia. Defendants also moved to dismiss the claims on various grounds and to strike certain aspects of the proposed class definition. On July 11, 2018, the court granted defendants' motion to dismiss this action for improper venue, and also partially dismissed and struck certain claims without prejudice to re-filing in the appropriate venue. On July 23, 2018, plaintiffs re-filed their lawsuit in the United States District Court for the Northern District of Georgia. On August 9, 2018, Plaintiffs filed a notice of appeal of the dismissal of the Northern District of California action with the Ninth Circuit Court of Appeals. On August 15, 2018, Plaintiffs filed a motion to stay their lawsuit in the Northern District of Georgia, which was granted by the court. On February 7, 2020, Defendants resolved the claims of the individual plaintiffs and the matters were dismissed.
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 2 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 now accruing at $1 million and will be recorded upon receipt. The parties have completed appellate briefing in the California Court of Appeal and are awaiting the scheduling of oral argument. Pursuant to the terms of the Separation and Distribution
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
Agreement, HP Inc. and Hewlett Packard Enterprise will share equally in any recovery from Oracle once Hewlett Packard Enterprise has been reimbursed for all costs incurred in the prosecution of the action prior to the HP Inc. /Hewlett Packard Enterprise separation on November 1, 2015.
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 June 14, 2018, the court heard oral argument on HPE's and Oracle's cross-motions for summary judgment. On January 29, 2019, the court granted HPE’s Motion for Summary Judgment as to all of Oracle’s claims and vacated the trial date. On February 20, 2019, the court entered judgment in favor of HPE, dismissing Oracle’s claims in their entirety. Oracle has 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. The matter will be remanded back to the United States District Court for the Northern District of California for further proceedings consistent with the ruling from the United States Court of Appeals for the Ninth Circuit.
Network-1 Technologies, Inc. v. Alcatel-Lucent USA Inc., et al. This patent infringement action was filed on September 15, 2011 in the United States District Court for the Eastern District of Texas, alleging that various Hewlett Packard Enterprise switches and access points infringe Network-1’s patent relating to the 802.3af and 802.3at “Power over Ethernet” standards. Network-1 seeks damages, attorneys’ fees and costs, and declaratory and injunctive relief. The Network-1 patent at issue expires in 2020. A jury trial was conducted beginning on November 6, 2017. On November 13, 2017, the jury returned a verdict in favor of HPE, finding that HPE did not infringe Network-1’s patent and that the patent was invalid. On August 29 2018, the court denied Network-1's motion for a new trial on infringement and entered the jury's verdict finding that HPE does not infringe the relevant Network-1 patent. The court also granted Network-1's motion for Judgment as a Matter of Law on validity. Network-1 has appealed the jury verdict of non-infringement to the United States Court of Appeals for the Federal Circuit. HPE has cross-appealed the court’s decision to grant Network-1's motion for Judgment as a Matter of Law on validity. Appellate briefing has been completed. The Federal Circuit Court of Appeal held oral argument on November 4, 2019.
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 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 or if its products become non-compliant with 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.
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Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
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.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
This Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") is organized as follows:
•COVID-19 Update. A discussion of our response to the novel coronavirus pandemic (“COVID-19”), including our efforts to protect the health and well-being of our workforce, community and customers.
•Executive Overview. A discussion of our business and summary analysis of financial and other highlights, including non-GAAP financial measures, affecting the Company in order to provide context to the remainder of the MD&A, financial statements and footnotes. The Overview analysis compares the three and nine months ended July 31, 2020 to the prior-year periods.&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. An analysis of our financial results comparing the three and ninesix months ended July 31, 2020April 30, 2021 to the prior-year periods.period. 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 and Other Obligations. An overview of contractual obligations, retirement and post-retirement benefit plan funding, restructuring plans, uncertain tax positions, cross-indemnifications with HP Inc. (formerly known as "Hewlett-Packard Company"), DXC Technology Company ("DXC"), and Micro Focus International plc ("Micro Focus") and off-balance sheet arrangements.
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, the changes in certain key items in those financial statements from year-to-year,period-to-period, and the primary factors that accounted for those 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 following Executive Overview, Results of Operations and Liquidity discussions and analysis compare the three and ninesix months ended July 31, 2020April 30, 2021 to the prior-year periods,period, unless otherwise noted. The Capital Resources and Contractual and Other Obligations discussions present information as of July 31, 2020,April 30, 2021, unless otherwise noted.
For purposes of this MD&A section, we use the terms "Hewlett Packard Enterprise", "HPE", the "Company", "we", "us" and "our" to refer to Hewlett Packard Enterprise Company.
COVID-19 UPDATE
COVID-19 continues to have an impact on our financial performance as the pandemic endures and affects global economic activity including ongoing worldwide travel restrictions, prohibitions of non-essential work activities in some markets, disruption and shutdown of businesses in some markets and greater uncertainty in global financial markets. We are currently unable to predict the extent to which COVID-19 may adversely impact our future business operations, financial performance and results of operations. The full extent of the impact of COVID-19 on the Company’s operational and financial performance is currently uncertain and will depend on many factors outside the Company’s control, including, without limitation, the timing, extent, trajectory and duration of the pandemic, the development and availability of effective treatments and vaccines, the imposition of protective public safety measures, and the impact of the pandemic on the global economy and
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
demand for our enterprise technology solutions. For a further discussion of the risks, uncertainties and actions taken in response to COVID-19, see risks identified in the section entitled “ Risk Factors” in Part II, Item 1A.
The Company believes its existing balances of cash, cash equivalents and marketable securities, along with commercial paper and other short-term liquidity arrangements, will be sufficient to satisfy its working capital needs, capital asset purchases, dividends, debt repayments and other liquidity requirements associated with its existing operations.
The Company also believes that COVID-19 has forced fundamental changes in businesses and communities that are aligned with the Company's edge-to-cloud platform delivered as-a-service strategy. Navigating through the pandemic and planning for a post-COVID world have increased customers' needs for as-a-service offerings, secure connectivity, remote work capabilities and analytics to unlock insights from data. Our solutions are aligned to these needs, and we see opportunity to help our customers drive digital transformations as they continue to adapt to operate in a new world.
We have prioritized protecting the health and safety of our team members, supporting the global communities in which we live and work and supporting our customers and partners to help them adjust to new and emerging needs.
In response to the COVID-19 pandemic and to ensure the safety of our employees, we have implemented a global work-from-home policy until further notice that applies to a significant majority of our employees, with the exception of those performing essential activities. Our employees may elect to return to the office in jurisdictions where both local requirements and our own health and safety standards have been met. If such instances occur, employees would return to the office in a phased process. We have also made additional education and support resources and personal protective supplies available to team members. In the event of a confirmed or probable case of COVID-19 among our team members and contractors, we have implemented a confidential reporting process to trace and notify close contacts—including third parties—that maintains the anonymity of all involved.
In the third quarter of fiscal 2020 we announced new return-to-work solutions to help customers accelerate business recovery and reopening plans. The solutions combine expertise from HPE operational services for a fast, seamless transition, with HPE servers for the edge, Aruba AI-powered network infrastructure, and technologies from HPE’s rich ecosystem of partners. Customers that have implemented these solutions include large international airports, global food processing and packaging plants, retail stores, and corporate offices.
While we are actively working to mitigate the impact on our business and operations to address the near-term uncertainty, we have taken and are taking a number of actions to ensure HPE is well positioned to emerge stronger, more agile and digitally enabled for a post-COVID-19 world.
•On May 19, 2020, the Board of Directors of HPE (the "Board") approved a cost optimization and prioritization plan in order to focus our investments, realign our workforce to areas of growth and simplify and evolve our product portfolio strategy, go-to-market configurations, supply chain structures, digital customer support model, marketing experiences, and real estate strategies. We expect that this plan will be implemented through fiscal 2022 and estimate that it will include gross savings of at least $1.0 billion as a result of changes to our workforce, business model and business process, with this plan being expected to deliver annualized net run-rate savings of at least $800 million by the end of fiscal 2022, in both cases relative to our fiscal 2019 exit. In order to achieve this level of cost savings, we estimate related cash funding payments of $1.3 billion over the next three years of which approximately $0.8 billion will relate to labor restructuring, $0.2 billion will relate to non-labor restructuring and $0.3 billion will relate to IT investments and design and execution charges.
•On July 14, 2020, we issued $1.75 billion and on April 9, 2020, we issued $2.25 billion of aggregate principal amount of unsecured Senior Notes. The net proceeds from these offerings were used primarily for the redemption in August 2020 of the $3.0 billion outstanding principal amount of the 3.6% registered Senior Notes that were originally due in October 2020.
•On May 19, 2020, the Board approved temporary base salary adjustments or unpaid leave for certain employees beginning July 1, 2020 through the remainder of fiscal 2020. In addition, we implemented cost containment measures across the Company, including restrictions on external hiring and salary increases through the end of our fiscal year.
•On April 6, 2020, we announced that we suspended purchases under our share repurchase program in response to the global economic uncertainty that resulted from the worldwide spread of COVID-19.
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
•During the first three quarters of fiscal 2020, we paid a quarterly dividend of $0.12 per share to our shareholders. On August 25, 2020 we declared a quarterly dividend of $0.12 per share, payable on or about October 7, 2020, to stockholders of record as of the close of business on September 9, 2020.
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 business models, creating new customer and employee experiences, and increasing operational efficiency today and into the future. Our legacy dates back 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.
The global pandemic has brought a renewed focus on digital transformation as businesses are rethinking everything from remote work and collaboration to business continuity and data insight. While we are making great progress in the fight against the novel coronavirus pandemic ("COVID-19"), the macro economic uncertainties remain a global challenge as new variants emerge. We continue to remain cautiously optimistic as COVID-19 vaccines are now being broadly distributed and administered. The overall demand environment is improving and we are seeing traction across our portfolio. Accelerating digital transformation is at the forefront of our customers’ strategic initiatives and businesses are starting to look ahead beyond the immediate demands of COVID-19. Customers are looking for the agility and simplicity of the cloud native world with the flexibility and control of a hybrid business model. Our edge to cloud architecture, software and services is designed to help customers formulate a hybrid strategy as they look to transform, optimize their apps and data across an increasingly distributed world, and be prepared for tomorrow’s challenges.
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
Our operations are organized into six reportable segments for financial reporting purposes: Compute; High Performance Computing & Mission-Critical Solutions ("HPC & MCS"); Storage; Intelligent Edge; HPE Financial Services ("FS"); and Corporate Investments and Other. Our Fiscal 2021 second quarter total net revenue of $6.7 billion was up 11.5% or up 9.0% when adjusted for currency, due primarily to improvement in the overall demand environment. We delivered a strong gross profit margin and operating profit margin during the second quarter of fiscal 2021. Our GAAP gross margin was 34.1%, up 2.2 percentage points and non-GAAP gross profit margin was 34.3%, up 2.1 percentage points due primarily to pricing discipline, cost savings from our transformation programs, and continued mix shift towards higher-margin software-rich offerings. Our GAAP operating margin was 4.1%, up 18.0 percentage points compared to prior-year period due primarily to a non-cash goodwill impairment charge of $865 million recorded in the second quarter of fiscal 2020. Our non-GAAP operating profit margin was 10.2%, up 3.0 percentage points from the prior year period resulting from operating efficiencies, partially offset by planned hiring increases along with Research and development ("R&D") and go-to market investments. For the first half of fiscal 2021, we generated $1.8 billion of cash flow from operations and $931 million of free cash flows through disciplined execution, strong expense management and working capital benefits.
Financial Results
The following table summarizes our consolidated GAAP financial results:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended April 30, | | | | Six Months Ended April 30, | | |
| 2021 | | 2020 | | Change | | 2021 | | 2020 | | Change |
| In millions, except per share amounts | | | In millions, except per share amounts | | |
Net revenue | $ | 6,700 | | | $ | 6,009 | | | 11.5% | | $ | 13,533 | | | $ | 12,958 | | | 4.4% |
Gross profit | $ | 2,287 | | | $ | 1,914 | | | 19.5% | | $ | 4,575 | | | $ | 4,196 | | | 9.0% |
Gross profit margin | 34.1 | % | | 31.9 | % | | 2.2 pts | | 33.8 | % | | 32.4 | % | | 1.4 pts |
Earnings (loss) from operations | $ | 278 | | | $ | (834) | | | 133.3% | | $ | 500 | | | $ | (486) | | | 202.9% |
Operating profit margin | 4.1 | % | | (13.9) | % | | 18 pts | | 3.7 | % | | (3.8) | % | | 7.5 pts |
Net earnings (loss) | $ | 259 | | | $ | (821) | | | 131.5% | | $ | 482 | | | $ | (488) | | | 198.8% |
Diluted net earnings (loss) per share | $ | 0.19 | | | $ | (0.64) | | | $0.83 | | $ | 0.36 | | | $ | (0.38) | | | $0.74 |
Cash flow from operations | $ | 822 | | | $ | 100 | | | $722 | | $ | 1,785 | | | $ | 21 | | | $1,764 |
The following table summarizes our consolidated Non-GAAP financial results:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended April 30, | | | | Six Months Ended April 30, | | |
| 2021 | | 2020 | | Change | | 2021 | | 2020 | | Change |
| In millions, except per share amounts | | | In millions, except per share amounts | | |
Net revenue adjusted for currency | $ | 6,551 | | | $ | 6,009 | | | 9.0% | | $ | 13,324 | | | $ | 12,958 | | | 2.8% |
Non-GAAP gross profit | $ | 2,300 | | | $ | 1,933 | | | 19.0% | | $ | 4,603 | | | $ | 4,251 | | | 8.3% |
Non-GAAP gross profit margin | 34.3 | % | | 32.2 | % | | 2.1 pts | | 34.0 | % | | 32.8 | % | | 1.2 pts |
Non-GAAP earnings from operations | $ | 685 | | | $ | 432 | | | 58.6% | | $ | 1,458 | | | $ | 1,127 | | | 29.4% |
Non-GAAP operating profit margin | 10.2 | % | | 7.2 | % | | 3.0 pts | | 10.8 | % | | 8.7 | % | | 2.1 pts |
Non-GAAP net earnings | $ | 612 | | | $ | 344 | | | 77.9% | | $ | 1,291 | | | $ | 1,001 | | | 29.0% |
Non-GAAP diluted net earnings per share | $ | 0.46 | | | $ | 0.27 | | | $0.19 | | $ | 0.98 | | | $ | 0.77 | | | $0.21 |
Free cash flow | $ | 368 | | | $ | (402) | | | $770 | | $ | 931 | | | $ | (587) | | | $1,518 |
Each non-GAAP measure has been reconciled to the most directly comparable GAAP measure herein. Please refer to the section "GAAP to Non-GAAP Reconciliations" included in this MD&A for these reconciliations, usefulness of non-GAAP financial measures, and material limitations associated with the use of non-GAAP financial measures.
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
Returning capital to our shareholders remains an important part of capital allocation framework that consist of capital returns to shareholders and strategic investments. During the second quarter of fiscal 2021, we paid a quarterly dividend of $0.12 per share to our shareholders. On June 1, 2021 we declared our fiscal 2021 third quarterly dividend of $0.12 per share, payable on or about July 7, 2021, to stockholders of record as of the close of business on June 16, 2021. As describedof April 30, 2021, we had a remaining authorization of $2.1 billion for future share repurchases. As a result of increased uncertainty due to COVID-19, purchases under our share repurchase program previously authorized by our Board of Directors, continue to be suspended and as such, no purchases were made during the six months ended April 30, 2021.
We believe our existing balances of cash, cash equivalents and marketable securities, 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, 2021, our cash, cash equivalents and restricted cash were $4.8 billion, compared to the October 31, 2020 balance of $4.6 billion. We maintain a $4.75 billion five year senior unsecured committed credit facility that was entered into in August 2019. As of April 30, 2021 no borrowings were outstanding under this credit facility.
Trends and Uncertainties
We are in the process of addressing many challenges facing our business, including effects of COVID-19, a discussion of which is available in sections entitled "Risk Factors" in Item 1A of Part I and "Trends and Uncertainties" in Item 7 of our Annual Report on Form 10-K for the fiscal year ended October 31, 2020.
Updates to the COVID-19 response included in 10-K for the fiscal year ended October 31, 2020
COVID-19 vaccines are now broadly distributed and administered. While it is not possible at this time to broadly offer on-site vaccination opportunities to our workforce due to vaccine scarcity and storage requirements, we are monitoring developments and will evaluate opportunities to partner with governments, health authorities, and others as they arise. HPE is committed to help support costs for the vaccine through HPE health benefits or other programs, to the extent not covered by government programs, medical plans or other sources.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Management's Discussion and Analysis of Financial Condition and Results of Operations is based on our Condensed Consolidated Financial Statements, which have been prepared in accordance with United States ("U.S.") Generally Accepted Accounting Principles ("GAAP"). The preparation of these financial statements requires management to make estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, net revenues and expenses, and disclosure of contingent liabilities. Estimates are assessed each period and updated to reflect current information, such as the economic considerations related to the impact that COVID-19 could have on our significant accounting estimates. Significant estimates that are based on a forecast include inventory reserves, provision for taxes, valuation allowance for deferred taxes, and impairment assessment of goodwill, intangible assets and other long-lived assets. The Company believes that these estimates, judgements and assumptions are reasonable under the circumstances, and are subject to significant uncertainties, some of which are beyond the Company’s control. Should any of these estimates change, it could adversely affect Company’s results of operations. Additionally, as the extent and duration of the impacts from COVID-19 remain unclear, the Company’s estimates, judgements and assumptions may evolve as conditions change. Management believes that there have been no significant changes during the six months ended April 30, 2021, with the exception of certain accounting policies that were updated resulting from our adoption of the Current Expected Credit Losses standard (See Note 1 Notein Item 1, "Overview and Summary of Significant Accounting Policies"), effective atto the beginningitems 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, 2020.
ACCOUNTING PRONOUNCEMENTS
For a summary of recent accounting pronouncements applicable to our Condensed Consolidated Financial Statements, see Note 1 in Item 1, "Overview and Summary of Significant Accounting Policies".
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
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
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.
Results of operations in dollars and as a percentage of net revenue were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended April 30, | | Six Months Ended April 30, |
| 2021 | | 2020 | | 2021 | | 2020 |
| Dollars | | % of Revenue | | Dollars | | % of Revenue | | Dollars | | % of Revenue | | Dollars | | % of Revenue |
| Dollars in millions |
Net revenue | $ | 6,700 | | | 100.0 | % | | $ | 6,009 | | | 100.0 | % | | $ | 13,533 | | | 100.0 | % | | $ | 12,958 | | | 100.0 | % |
Cost of sales | 4,413 | | | 65.9 | | | 4,095 | | | 68.1 | | | 8,958 | | | 66.2 | | | 8,762 | | | 67.6 | |
Gross profit | 2,287 | | | 34.1 | | | 1,914 | | | 31.9 | | | 4,575 | | | 33.8 | | | 4,196 | | | 32.4 | |
Research and development | 503 | | | 7.5 | | | 450 | | | 7.5 | | | 971 | | | 7.2 | | | 935 | | | 7.2 | |
Selling, general and administrative | 1,199 | | | 17.9 | | | 1,109 | | | 18.4 | | | 2,358 | | | 17.4 | | | 2,327 | | | 17.9 | |
Amortization of intangible assets | 84 | | | 1.3 | | | 84 | | | 1.5 | | | 194 | | | 1.4 | | | 204 | | | 1.6 | |
Impairment of goodwill | — | | | — | | | 865 | | | 14.4 | | | — | | | — | | | 865 | | | 6.7 | |
Transformation costs | 209 | | | 3.1 | | | 200 | | | 3.3 | | | 520 | | | 3.9 | | | 289 | | | 2.3 | |
Disaster charges | 1 | | | — | | | 22 | | | 0.4 | | | 1 | | | — | | | 22 | | | 0.2 | |
Acquisition, disposition and other related charges | 13 | | | 0.2 | | | 18 | | | 0.3 | | | 31 | | | 0.2 | | | 40 | | | 0.3 | |
Earnings (loss) from operations | 278 | | | 4.1 | | | (834) | | | (13.9) | | | 500 | | | 3.7 | | | (486) | | | (3.8) | |
Interest and other, net | (11) | | | (0.2) | | | (68) | | | (1.1) | | | (55) | | | (0.4) | | | (87) | | | (0.7) | |
Tax indemnification adjustments | — | | | — | | | (35) | | | (0.6) | | | (16) | | | (0.1) | | | (56) | | | (0.4) | |
Non-service net periodic benefit credit | 17 | | | 0.3 | | | 36 | | | 0.6 | | | 34 | | | 0.2 | | | 73 | | | 0.6 | |
Earnings (loss) from equity interests | 4 | | | 0.1 | | | (10) | | | (0.2) | | | 30 | | | 0.2 | | | 23 | | | 0.2 | |
Earnings (loss) before taxes | 288 | | | 4.3 | | | (911) | | | (15.2) | | | 493 | | | 3.6 | | | (533) | | | (4.1) | |
(Provision) benefit for taxes | (29) | | | (0.4) | | | 90 | | | 1.5 | | | (11) | | | — | | | 45 | | | 0.3 | |
Net earnings (loss) | $ | 259 | | | 3.9 | % | | $ | (821) | | | (13.7) | % | | $ | 482 | | | 3.6 | % | | $ | (488) | | | (3.8) | % |
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
Stock-based compensation expense is included within costs and expenses presented in the table above as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended April 30, | | Six Months Ended April 30, |
| 2021 | | 2020 | | 2021 | | 2020 |
| In millions |
Cost of sales | $ | 11 | | | $ | 9 | | | $ | 24 | | | $ | 22 | |
Research and development | 31 | | | 19 | | | 68 | | | 46 | |
Selling, general and administrative | 56 | | | 39 | | | 116 | | | 92 | |
| | | | | | | |
Acquisition, disposition and other related charges | 7 | | | 1 | | | 10 | | | 1 | |
Total | $ | 105 | | | $ | 68 | | | $ | 218 | | | $ | 161 | |
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 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 as of the Approval Date 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. As of April 30, 2021, the company had remaining authorization of 42.9 million shares under the 2021 Plan.
Net Revenue
For the three months ended April 30, 2021, total net revenue was $6.7 billion, increased by $691 million, or 11.5% (increased 9.0% on a constant currency basis), as compared to the prior-year period. U.S. net revenue increased by $112 million, or 5.9%, to $2.0 billion, and net revenue from outside of the U.S. increased by $579 million, or 14.1%, to $4.7 billion. The net revenue increase for the three months ended April 30, 2021 was due to multiple factors which include improvement in overall demand environment, substantially reduced supply chain constraint compared to prior-year-period, and strong momentum of revenue growth in our WLAN and Switching product offerings. Additionally, the general weakening of the U.S. dollar relative to certain foreign currencies during the three months ended April 30, 2021 compared to the same period in 2020, had a favorable impact on net revenue.
For the six months ended April 30, 2021, total net revenue was $13.5 billion, increased by $575 million, or 4.4% (increased 2.8% on a constant currency basis), as compared to the prior-year period. U.S. net revenue decreased by $28 million, or 0.7%, to $4.2 billion, and net revenue from outside of the U.S. increased by $603 million, or 6.9%, to $9.3 billion. The net revenue increase for the six months ended April 30, 2021 was due to multiple factors as stated above for the three months ended April 30, 2021 period, the effects of which were partially offset by revenue decline during the first three months of fiscal 2021 resulting from a challenging macro-economic and highly competitive environment.
From a segment perspective, for the three months ended April 30, 2021, as compared to the prior-year period, we experienced net revenue increase in all the segments, primarily led by Compute and Intelligent Edge segments. The net revenue increase for the six months ended April 30, 2021, as compared to the prior-year period was driven by all segments, except HPC & MCS which was flat and Storage which slightly declined year over year. The components of the weighted net revenue change by segment were as follows:
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
| | | | | | | | | | | |
| Three Months Ended April 30, 2021 | | Six Months Ended April 30, 2021 |
| Percentage points |
Compute | 5.4 | | | 2.1 | |
HPC & MCS | 1.3 | | | — | |
Storage | 0.8 | | | (0.1) | |
Intelligent Edge | 2.2 | | | 1.7 | |
Financial Services | 0.1 | | | 0.1 | |
Corporate Investments and Other | 0.4 | | | 0.1 | |
Total Segment | 10.2 | | | 3.9 | |
Elimination of Intersegment net revenue | 1.3 | | | 0.5 | |
Total HPE | 11.5 | | | 4.4 | |
Please refer to the section "Segment Information" below for the discussion of the segment result on each of our reportable segments.
Gross Profit
For the three and six months ended April 30, 2021, as compared to the prior-year period, total gross profit margin increased 2.2 and 1.4 percentage points respectively. The gross profit margin increase for both periods were due primarily to lower supply chain and commodity costs, disciplined pricing, operational efficiency achieved through our transformation programs, and ongoing mix shift towards higher-margin, software-rich offerings, partially offset by competitive pricing pressures and higher variable compensation expense.
Research and Development
R&D expense increased by $53 million, or 12%, and by $36 million, or 4%, for the three and six months ended April 30, 2021, respectively, as compared to the prior-year periods, due primarily to higher employee compensation expense, partially offset by the cost savings achieved as we rationalize our R&D through transformation programs by focusing investment in growth areas.
Selling, General and Administrative
Selling, general and administrative expense increased by $90 million, or 8%, and by $31 million, or 1%, for the three and six months ended April 30, 2021, respectively, as compared to the prior-year periods, due primarily to the higher investment in sales and marketing, higher employee compensation expense and unfavorable currency fluctuations, partially offset by cost savings achieved through our transformation programs and lower travel expenses.
Impairment of Goodwill
The Company recorded a partial goodwill impairment charge of $865 million in the second quarter of fiscal 2020 as it was determined that the fair value of the HPC & MCS reporting unit was below the carrying value of its net assets.
We performed an interim quantitative goodwill impairment test for all of our reporting units as of November 1, 2020, which did not result in any goodwill impairment charges. The fair value of all reporting units continued to exceed the carrying value of their net assets and did not result in impairment. The excess of fair value over carrying value for our reporting units ranged from approximately 8% to 37% of the respective carrying values. In order to evaluate the sensitivity of the estimated fair value of our reporting units in the goodwill impairment test, we implementedapplied a hypothetical 10% decrease to the fair value of each reporting unit. Based on the results of this hypothetical 10% decrease all of the reporting units had an excess of fair value over carrying value, with the exception of HPC & MCS reporting unit. Should economic conditions deteriorate, estimates of future cash flows for each of our reporting units may be insufficient to support the carrying value and the goodwill assigned to them, requiring impairment charges. Further impairment charges, if any, may be material to the results of operations and financial position. We 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.
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
Transformation Costs
Transformation programs are comprised of the cost optimization and prioritization plan we introduced in May 2020, and the HPE Next Initiative.
Transformation costs increased by $231 million or 80%, for the six months ended April 30, 2021, as compared to the prior-year period, due primarily to higher restructuring charges and the program management charges recorded in the current year, partially offset by lower gains on real estate sales.
See Note 3, "Transformation Programs", for discussion on the Transformation Costs.
Disaster charges
Disaster charges for the three and six months ended April 30, 2020, represent direct costs resulting from COVID-19 for HPE hosted, co-hosted, or sponsored events which were converted to a virtual format or cancelled.
Interest and Other, Net
Interest and other, net expense decreased by $57 million and $32 million for the three and six months ended April 30, 2021, as compared to the prior-year period, due primarily to gains from equity investments and lower unfavorable currency fluctuations, partially offset by lower gain on the sale of certain organizationalassets in the current year period.
Tax Indemnification Adjustments
We recorded tax indemnification expense of $16 million for the six months ended April 30, 2021, and tax indemnification expense of $35 million and $56 million for the three and six months ended April 30, 2020, respectively. These amounts primarily resulted from changes in certain pre-Separation tax liabilities for which we share joint and several liability with HP Inc. and for which we are indemnified under the Termination and Mutual Release Agreement. For the six months ended April 30, 2021, the amount also included changes to aligncertain pre-divestiture tax liabilities related to our segment financial reporting more closelyEnterprise Services business spun off in 2017.
Non-service net periodic benefit
Non-service net periodic benefit credit decreased by $19 million and $39 million for the three and six months ended April 30, 2021, as compared to the prior-year periods, due primarily to lower expected returns on plan assets.
Earnings (loss) from Equity Interests
Earnings from equity interests primarily represents our 49% interest in H3C Technologies' ("H3C") earnings and the amortization of our interest in a basis difference. For the three and six months ended April 30, 2021, earnings from equity interests increased by $14 million and $7 million, respectively, as compared to the prior-year periods, due to higher net income earned by H3C.
Provision for Taxes
Our effective tax rate was 10.1% and 9.9% for the three months ended April 30, 2021 and 2020, respectively, and 2.2% and 8.4% for the six months ended April 30, 2021 and 2020, 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 current business structure. As a result, Hewlett Packard Enterprise's operations are now organized into seven segmentsin lower tax jurisdictions throughout the world but may also be materially impacted by discrete tax adjustments during the fiscal year.
See Note 5, "Taxes on Earnings", for financial reporting purposes: Compute, High Performance Compute & Mission-Critical Systems ("HPC & MCS"), Storage, Advisory and Professional Services ("A & PS"), Intelligent Edge, Financial Services ("FS"), and Corporate Investments. discussion on provision for taxes.
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.
As described in Item 1, Note 1, "Overview and Summary of Significant Accounting Policies", effective at the beginning of the first quarter of fiscal 2021, we (a) excluded stock-based compensation expense from our segment earnings from operations; and (b) implemented certain organizational changes to align our segment financial reporting more closely with our
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
current business structure. As a result of these organizational changes, our operations are now organized into six segments for financial reporting purposes: Compute, HPC & MCS, Storage, Intelligent Edge, FS, and Corporate Investments and Other. The Corporate Investments and Other Segment now includes the A & PS operating segment, the Communications and Media Solutions operating segment, the Software operating segment, and the Hewlett Packard Enterprise Labs which is responsible for research and development. We reflected these changes in our segment information retrospectively to the earliest period presented, which primarily resulted in the realignment of net revenue and operating profit for each of the segments. These changes had no impact on Hewlett Packard Enterprise's previously reported consolidated results.
Segment Results
The following provides an overview of our key financial metrics by segment for the three months ended July 31, 2020,April 30, 2021, as compared to the prior-year period:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| HPE Consolidated | | Compute | | HPC & MCS | | Storage | | A & PS | | Intelligent Edge | | Financial Services | | Corporate Investments |
| Dollars in millions, except for per share amounts | | | | | | | | | | | | | | |
Net revenue(1) | $ | 6,816 | | | $ | 3,389 | | | $ | 649 | | | $ | 1,128 | | | $ | 226 | | | $ | 684 | | | $ | 811 | | | $ | 119 | |
Year-over-year change % | (5.6) | % | | (0.3) | % | | 2.5 | % | | (10.1) | % | | (6.6) | % | | (12.4) | % | | (8.7) | % | | (8.5) | % |
Earnings (loss) from operations(2) | $ | 12 | | | $ | 288 | | | $ | 36 | | | $ | 145 | | | $ | (4) | | | $ | 59 | | | $ | 65 | | | $ | (27) | |
Earnings (loss) from operations as a % of net revenue | 0.2 | % | | 8.5 | % | | 5.5 | % | | 12.9 | % | | (1.8) | % | | 8.6 | % | | 8.0 | % | | (22.7) | % |
Year-over-year change percentage points | 1.3 pts | | (4.4) pts | | (2.6) pts | | (3.6) pts | | 1.9 pts | | 1.8 pts | | (0.7) pts | | (3.5) pts |
Net earnings | $ | 9 | | | | | | | | | | | | | | | |
Diluted net earnings per share | $ | 0.01 | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
Supplemental Non-GAAP information: | | | | | | | | | | | | | | | |
Non-GAAP earnings from operations | $ | 484 | | | | | | | | | | | | | | | |
Non-GAAP earnings from operations as a % of net revenue | 7.1 | % | | | | | | | | | | | | | | |
Non-GAAP net earnings | $ | 419 | | | | | | | | | | | | | | | |
Non-GAAP diluted net earnings per share | $ | 0.32 | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Compute | | HPC & MCS | | Storage | | | | Intelligent Edge | | Financial Services | | Corporate Investments and Other | | HPE Consolidated |
| | | |
Net revenue(1) | | $ | 2,976 | | | $ | 685 | | | $ | 1,137 | | | | | $ | 799 | | | $ | 839 | | | $ | 350 | | | $ | 6,700 | |
Year-over-year change % | | 12.1 | % | | 12.9 | % | | 4.7 | % | | | | 20.2 | % | | 0.7 | % | | 6.7 | % | | 11.5 | % |
Earnings (loss) from operations(2) | | $ | 335 | | | $ | 19 | | | $ | 191 | | | | | $ | 124 | | | $ | 91 | | | $ | (25) | | | $ | 278 | |
Earnings (loss) from operations as a % of net revenue | | 11.3 | % | | 2.8 | % | | 16.8 | % | | | | 15.5 | % | | 10.8 | % | | (7.1) | % | | 4.1 | % |
Year-over-year change percentage points | | 5.5 pts | | (4.8) pts | | 1.1 pts | | | | 3.2 pts | | 1.6 pts | | 8.4 pts | | 18.0 pts |
The following provides an overview of our key financial metrics by segment for the six months ended April 30, 2021, as compared to the prior-year period:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Compute | | HPC & MCS | | Storage | | | | Intelligent Edge | | Financial Services | | Corporate Investments and Other | | HPE Consolidated |
| | | |
Net revenue(1) | | $ | 5,962 | | | $ | 1,447 | | | $ | 2,330 | | | | | $ | 1,605 | | | $ | 1,699 | | | $ | 671 | | | $ | 13,533 | |
Year-over-year change % | | 4.9 | % | | 0.1 | % | | (0.3) | % | | | | 15.9 | % | | 0.4 | % | | 2.4 | % | | 4.4 | % |
Earnings (loss) from operations(2) | | $ | 677 | | | $ | 62 | | | $ | 426 | | | | | $ | 276 | | | $ | 175 | | | $ | (56) | | | $ | 500 | |
Earnings (loss) from operations as a % of net revenue | | 11.4 | % | | 4.3 | % | | 18.3 | % | | | | 17.2 | % | | 10.3 | % | | (8.3) | % | | 3.7 | % |
Year-over-year change percentage points | | 3.0 pts | | (3.2) pts | | 0.3 pts | | | | 5.0 pts | | 1.3 pts | | 7.6 pts | | 7.5 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, related to corporate and certain global functions, amortization of initial direct costs, amortization of intangible assets, transformation costs, disaster charges and acquisition, disposition and other related charges.
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
Compute
| | | | | | | | | | | | | | | | | |
| Three months ended April 30, |
| 2021 | | 2020 | | % Change |
| Dollars in millions | | |
Net revenue | $ | 2,976 | | | $ | 2,655 | | | 12.1 | % |
Earnings from operations | $ | 335 | | | $ | 155 | | | 116.1 | % |
Earnings from operations as a % of net revenue | 11.3 | % | | 5.8 | % | | |
| | | | | | | | | | | | | | | | | |
| Six months ended April 30, |
| 2021 | | 2020 | | % Change |
| Dollars in millions | | |
Net revenue | $ | 5,962 | | | $ | 5,685 | | | 4.9 | % |
Earnings from operations | $ | 677 | | | $ | 479 | | | 41.3 | % |
Earnings from operations as a % of net revenue | 11.4 | % | | 8.4 | % | | |
| | | | | |
Three months ended April 30, 2021 compared with three months ended April 30, 2020
Compute net revenue increased by $321 million, or 12.1% (increased 9.8% on a constant currency basis), for the three months ended April 30, 2021 as compared to the prior-year period. Net revenue in Compute increased primarily due to an increase in unit shipments resulting from substantially reduced supply chain constraint impact of COVID-19, and higher average unit prices. Additionally, favorable currency fluctuations also contributed to the net revenue increase.
Compute earnings from operations as a percentage of net revenue increased 5.5 percentage points for the three months ended April 30, 2021, as compared to the prior-year period, primarily due to a decrease in costs of products and services and a decrease in 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 lower supply chain costs, disciplined pricing and favorable currency fluctuations, partially offset by unfavorable product mix. The decrease in operating expense as a percentage of net revenue was driven by the scale of the net revenue increase, while total operating expenses increased year-over-year primarily due to higher variable compensation expense partially offset by cost savings from our transformation programs.
Six months ended April 30, 2021 compared with six months ended April 30, 2020
Compute net revenue increased by $277 million, or 4.9% (increased 3.4% on a constant currency basis), for the six months ended April 30, 2021 as compared to the prior-year period. Net revenue in Compute increased primarily due to an increase in unit shipments resulting from substantially reduced supply chain constraint impact of COVID-19, and higher average unit prices. Additionally, favorable currency fluctuations also contributed to the net revenue increase.
Compute earnings from operations as a percentage of net revenue increased 3.0 percentage points for the six months ended April 30, 2021, as compared to the prior-year period, primarily due to a decrease in costs of products and services and a decrease in operating expense as a percentage of net revenue. The decrease in costs of products and services was primarily due to lower supply chain costs and disciplined pricing, partially offset by unfavorable product mix and higher variable compensation expense. The decrease in operating expense as a percentage of net revenue was driven by the scale of the net revenue increase, and cost savings from our transformation programs partially offset by higher variable compensation expense.
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
HPC & MCS
| | | | | | | | | | | | | | | | | |
| Three Months Ended April 30, |
| 2021 | | 2020 | | % Change |
| Dollars in millions | | |
Net revenue | $ | 685 | | | $ | 607 | | | 12.9 | % |
Earnings from operations | $ | 19 | | | $ | 46 | | | (58.7) | % |
Earnings from operations as a % of net revenue | 2.8 | % | | 7.6 | % | | |
| | | | | | | | | | | | | | | | | |
| Six Months Ended April 30, |
| 2021 | | 2020 | | % Change |
| Dollars in millions | | |
Net revenue | $ | 1,447 | | | $ | 1,446 | | | 0.1 | % |
Earnings from operations | $ | 62 | | | $ | 109 | | | (43.1) | % |
Earnings from operations as a % of net revenue | 4.3 | % | | 7.5 | % | | |
Three months ended April 30, 2021 compared with three months ended April 30, 2020
HPC & MCS net revenue increased by $78 million, or 12.9% (increased 11.4% on a constant currency basis), for the three months ended April 30, 2021, as compared to the prior-year period, as we achieved more customer acceptance milestones, and favorable foreign currency fluctuations, the effects of which were partially offset by competitive pricing pressures.
HPC & MCS earnings from operations as a percentage of net revenue decreased 4.8 percentage points for the three months ended April 30, 2021, as compared to the prior-year period, primarily due 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 products and services as a percentage of net revenue was primarily due to competitive pricing pressures, higher commodity costs and variable compensation expense partially offset by savings from our transformation programs. The decrease in operating expenses as a percentage of net revenue was primarily due to the scale of net revenue increase and cost savings from our transformation programs partially offset by higher field selling costs and variable compensation expense.
Six months ended April 30, 2021 compared with six months ended April 30, 2020
HPC & MCS net revenue remained flat (decreased 0.5% on a constant currency basis), for the six months ended April 30, 2021, as compared to the prior-year period, as the customer acceptance milestones challenges in the first quarter were achieved in the second quarter of fiscal 2021.
HPC & MCS earnings from operations as a percentage of net revenue decreased 3.2 percentage points for the six months ended April 30, 2021, as compared to the prior-year period, primarily due to increase in cost of products and services as a percentage of net revenue while operating expenses as a percentage of net revenue remained relatively flat. The increase in cost of products and services as a percentage of net revenue was primarily due to competitive pricing pressures, higher commodity costs and higher variable compensation expense partially offset by cost savings from our Transformation Programs. The operating expenses as a percentage of net revenue remained relatively flat, as the cost savings from our transformation programs were offset by higher variable compensation expense and field selling costs.
Storage
| | | | | | | | | | | | | | | | | |
| Three Months Ended April 30, |
| 2021 | | 2020 | | % Change |
| Dollars in millions | | |
Net revenue | $ | 1,137 | | | $ | 1,086 | | | 4.7 | % |
Earnings from operations | $ | 191 | | | 171 | | | 11.7 | % |
Earnings from operations as a % of net revenue | 16.8 | % | | 15.7 | % | | |
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
| | | | | | | | | | | | | | | | | |
| Six Months Ended April 30, |
| 2021 | | 2020 | | % Change |
| Dollars in millions | | |
Net revenue | $ | 2,330 | | | $ | 2,338 | | | (0.3) | % |
Earnings from operations | $ | 426 | | | $ | 422 | | | 0.9 | % |
Earnings from operations as a % of net revenue | 18.3 | % | | 18.0 | % | | |
Three months ended April 30, 2021 compared with three months ended April 30, 2020
Storage net revenue increased by $51 million or 4.7% (increased 2.7% on a constant currency basis), for the three months ended April 30, 2021 as compared to the prior-year period due primarily to favorable currency fluctuations and growth in software-defined offerings, partially offset by competitive pricing pressures. We experienced revenue growth in our Primary Storage products, Traditional Storage products and Storage Services.
Storage earnings from operations as a percentage of net revenue increased 1.1 percentage points for the three months ended April 30, 2021, as compared to the prior-year period, due to a decrease in cost of products and services as a percentage of net revenue, partially offset by an increase in operating expenses as a percentage of net revenue. The decrease in cost of products and services as a percentage of net revenue was due primarily to lower commodity cost, lower fixed overhead costs as a percentage of net revenue, and improved operational efficiencies achieved through our transformation programs, the effects of which were partially offset by competitive pricing pressures and higher variable compensation expense. The increase in operating expenses as a percentage of net revenue was due primarily to higher variable compensation expense and field selling costs.
Six months ended April 30, 2021 compared with six months ended April 30, 2020
Storage net revenue decreased by $8 million or 0.3% (decreased 1.8% on a constant currency basis), for the six months ended April 30, 2021 as compared to the prior-year period. The Storage segment was impacted by weaker demand environment in the first quarter of fiscal 2021, coupled with competitive pricing pressures, partially offset by favorable currency fluctuations. We experienced net revenue decline in Simplivity products and Traditional Storage products, partially offset by higher revenue from Primary Storage products and Storage Services.
Storage earnings from operations as a percentage of net revenue increased 0.3 percentage points for the six months ended April 30, 2021, as compared to the prior-year period, due to a decrease in cost of products and services as a percentage of net revenue, partially offset by an increase in operating expenses as a percentage of net revenue. The decrease in cost of products and services as a percentage of net revenue was due primarily to lower fixed overhead costs as a percentage of net revenue, improved operational efficiencies achieved through our transformation programs, favorable currency fluctuations, and lower commodity cost, the effects of which were partially offset by competitive pricing pressures and higher variable compensation expense. The increase in operating expenses as a percentage of net revenue was due primarily to higher variable compensation expense.
Intelligent Edge
| | | | | | | | | | | | | | | | | |
| Three Months Ended April 30, |
| 2021 | | 2020 | | % Change |
| Dollars in millions | | |
Net revenue | $ | 799 | | | $ | 665 | | | 20.2 | % |
Earnings from operations | $ | 124 | | | $ | 82 | | | 51.2 | % |
Earnings from operations as a % of net revenue | 15.5 | % | | 12.3 | % | | |
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
| | | | | | | | | | | | | | | | | |
| Six Months Ended April 30, |
| 2021 | | 2020 | | % Change |
| Dollars in millions | | |
Net revenue | $ | 1,605 | | | $ | 1,385 | | | 15.9 | % |
Earnings from operations | $ | 276 | | | $ | 169 | | | 63.3 | % |
Earnings from operations as a % of net revenue | 17.2 | % | | 12.2 | % | | |
Three months ended April 30, 2021 compared with three months ended April 30, 2020
The following provides an overview of our key financial metricsIntelligent Edge net revenue increased by segment$134 million, or 20.2% (increased 17.3% on a constant currency basis), for the ninethree months ended July 31, 2020,April 30, 2021, as compared to the prior-year period:period primarily due to revenue growth in WLAN and Switching products, additional revenue from the SilverPeak acquisition, and favorable foreign currency fluctuations.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| HPE Consolidated | | Compute | | HPC & MCS | | Storage | | A & PS | | Intelligent Edge | | Financial Services | | Corporate Investments |
| Dollars in millions, except for per share amounts | | | | | | | | | | | | | | |
Net revenue(1) | $ | 19,774 | | | $ | 9,040 | | | $ | 2,061 | | | $ | 3,464 | | | $ | 706 | | | $ | 2,069 | | | $ | 2,503 | | | $ | 364 | |
Year-over-year change % | (9.8) | % | | (12.2) | % | | (3.4) | % | | (11.8) | % | | (5.0) | % | | (4.7) | % | | (7.4) | % | | (2.4) | % |
(Loss) earnings from operations(2) | $ | (474) | | | $ | 699 | | | $ | 118 | | | $ | 516 | | | $ | (4) | | | $ | 202 | | | $ | 213 | | | $ | (82) | |
(Loss) earnings from operations as a % of net revenue | (2.4) | % | | 7.7 | % | | 5.7 | % | | 14.9 | % | | (0.6) | % | | 9.8 | % | | 8.5 | % | | (22.5) | % |
Year-over-year change percentage points | (6.1) pts | | (2.9) pts | | (5.6) pts | | (3.0) pts | | 6.8 pts | | 4.6 pts | | — pts | | (0.5) pts |
Net loss | $ | (479) | | | | | | | | | | | | | | | |
Diluted net loss per share | $ | (0.37) | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
Supplemental Non-GAAP information: | | | | | | | | | | | | | | | |
Non-GAAP earnings from operations | $ | 1,451 | | | | | | | | | | | | | | | |
Non-GAAP earnings from operations as a % of net revenue | 7.3 | % | | | | | | | | | | | | | | |
Non-GAAP net earnings | $ | 1,279 | | | | | | | | | | | | | | | |
Non-GAAP diluted net earnings per share | $ | 0.98 | | | | | | | | | | | | | | | |
Intelligent Edge earnings from operations as a percentage of net revenue increased 3.2 percentage points for the three months ended April 30, 2021 as compared to the prior year period due primarily to a decrease in operating expenses as a percentage of net revenue and a decrease in cost of products and services as a percentage of net revenue. The decrease in cost of product and services as a percentage of net revenue was primarily due to lower cost of switching products partially offset by lower mix of revenue from software and services, higher variable compensation expense and logistic costs. The decrease in operating expenses as a percentage of net revenue was primarily due to improved operational efficiencies including cost savings from transformation programs partially offset by higher variable compensation expense and additional expenses from the SilverPeak acquisition.
Six months ended April 30, 2021 compared with six months ended April 30, 2020 (1)HPE consolidatedIntelligent Edge net revenue excludes intersegment net revenue.increased by $220 million, or 15.9% (increased 13.8% on a constant currency basis), for the six months ended April 30, 2021, as compared to the prior-year period primarily due to revenue growth in WLAN and Switching products, additional revenue from the SilverPeak acquisition, and favorable foreign currency fluctuations.
(2)SegmentIntelligent Edge earnings from operations exclude certain unallocated corporate costsas a percentage of net revenue increased 5.0 percentage points for the six months ended April 30, 2021 as compared to the prior year period due primarily to a decrease in operating expenses as a percentage of net revenue and eliminations, stock-baseda decrease in cost of products and services as a percentage of net revenue. The decrease in cost of product and services as a percentage of net revenue was primarily due to lower cost of switching and WLAN product materials, and the impact of the SilverPeak acquisition partially offset by higher variable compensation expense relatedand logistic costs. The decrease in operating expenses as a percentage of net revenue was primarily due to corporateimproved operational efficiencies including cost savings from transformation programs partially offset by higher variable compensation expense and certain global functions, amortizationthe addition of initial direct costs, amortization of intangible assets, impairment of goodwill, transformation costs, disaster (recovery) charges and acquisition, disposition and other related charges.expenses from the SilverPeak acquisition.
Financial Services
| | | | | | | | | | | | | | | | | |
| Three Months Ended April 30, |
| 2021 | | 2020 | | % Change |
| Dollars in millions | | |
Net revenue | $ | 839 | | | $ | 833 | | | 0.7 | % |
Earnings from operations | $ | 91 | | | $ | 77 | | | 18.2 | % |
Earnings from operations as a % of net revenue | 10.8 | % | | 9.2 | % | | |
| | | | | | | | | | | | | | | | | |
| Six Months Ended April 30, |
| 2021 | | 2020 | | % Change |
| Dollars in millions | | |
Net revenue | $ | 1,699 | | | $ | 1,692 | | | 0.4 | % |
Earnings from operations | $ | 175 | | | $ | 152 | | | 15.1 | % |
Earnings from operations as a % of net revenue | 10.3 | % | | 9.0 | % | | |
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
Three months ended April 30, 2021 compared with three months ended April 30, 2020
FS net revenue increased by $6 million, or 0.7% (decreased 2.5% on a constant currency basis), for the three months ended April 30, 2021, as compared to the prior-year period. The increase in net revenue was due primarily to favorable currency fluctuations, largely offset by a decrease in rental revenue due to lower average operating lease assets.
FS earnings from operations as a percentage of net revenue increased 1.6 percentage points for the three months ended April 30, 2021, as compared to the prior-year period, due primarily to lower cost of services as a percentage of net revenue, partially offset by an increase in operating expenses as a percentage of net revenue. The following table provides reconciliationdecrease to cost of GAAPservices as a percentage of net revenue resulted from lower borrowing costs and lower depreciation expense, partially offset by higher bad debt expense. The increase in operating expenses as a percentage of net revenue was due primarily to non-GAAP measureshigher field selling costs.
Six months ended April 30, 2021 compared with six months ended April 30, 2020
FS net revenue increased by $7 million, or 0.4% (decreased 1.8% on a constant currency basis), for the six months ended April 30, 2021, as compared to the prior-year period. The increase in net revenue was due primarily to favorable currency fluctuations, largely offset by a decrease in rental revenue due to lower average operating lease assets, along with lower asset management revenue from lease buyouts.
FS earnings from operations as a percentage of net revenue increased 1.3 percentage points for the six months ended April 30, 2021, as compared to the prior-year period, due primarily to lower cost of services as a percentage of net revenue, partially offset by an increase in operating expenses as a percentage of net revenue. The decrease to cost of services as a percentage of net revenue resulted from lower borrowing costs and lower depreciation expense, partially offset by higher bad debt expense. The increase in operating expenses as a percentage of net revenue was due primarily to higher field selling costs.
Financing Volume
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended April 30, | | Six Months Ended April 30, |
| 2021 | | 2020 | | 2021 | | 2020 |
| In millions |
Financing volume | $ | 1,451 | | | $ | 1,493 | | | $ | 2,696 | | | $ | 2,901 | |
Financing volume, which represents the amount of financing provided to customers for equipment and related software and services, including intercompany activity, decreased by 2.8% and 7.1% for the three and ninesix months ended July 31, 2020.April 30, 2021 respectively, as compared to the prior-year periods. For both three and six months ended April 30, 2021, the decrease was primarily driven by lower financing associated with both third-party and HPE product sales and related service offerings, partially offset by favorable currency fluctuations.
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended July 31, 2020 | | Diluted net earnings per share | | Nine Months Ended July 31, 2020 | | Diluted net earnings per share |
| In millions | | | | In millions | | |
GAAP net earnings (loss) | $ | 9 | | | $ | 0.01 | | | $ | (479) | | | $ | (0.37) | |
Non-GAAP adjustments: | | | | | | | |
Amortization of initial direct costs | 3 | | | — | | | 9 | | | 0.01 | |
Amortization of intangible assets | 95 | | | 0.07 | | | 299 | | | 0.23 | |
Impairment of goodwill | — | | | — | | | 865 | | | 0.67 | |
Transformation costs | 357 | | | 0.27 | | | 646 | | | 0.49 | |
| | | | | | | |
Disaster charges | 2 | | | — | | | 24 | | | 0.02 | |
Acquisition, disposition and other related charges | 15 | | | 0.01 | | | 82 | | | 0.06 | |
Tax indemnification adjustments | 30 | | | 0.03 | | | 86 | | | 0.07 | |
Non-service net periodic benefit credit | (28) | | | (0.02) | | | (101) | | | (0.08) | |
Loss from equity interests(1) | 36 | | | 0.03 | | | 110 | | | 0.09 | |
Adjustments for taxes | (100) | | | (0.08) | | | (262) | | | (0.21) | |
Non-GAAP net earnings | $ | 419 | | | $ | 0.32 | | | $ | 1,279 | | | $ | 0.98 | |
GAAP earnings (loss) from operations | $ | 12 | | | | | $ | (474) | | | |
Non-GAAP adjustments: | | | | | | | |
Amortization of initial direct costs | 3 | | | | | 9 | | | |
Amortization of intangible assets | 95 | | | | | 299 | | | |
Impairment of goodwill | — | | | | | 865 | | | |
Transformation costs | 357 | | | | | 646 | | | |
| | | | | | | |
Disaster charges | 2 | | | | | 24 | | | |
Acquisition, disposition and other related charges | 15 | | | | | 82 | | | |
Non-GAAP earnings from operations | $ | 484 | | | | | $ | 1,451 | | | |
| | | | | | | |
GAAP operating profit margin | 0.2 | % | | | | (2.4) | % | | |
Non-GAAP adjustments | 6.9 | % | | | | 9.7 | % | | |
Non-GAAP operating profit margin | 7.1 | % | | | | 7.3 | % | | |
| | | | | | | |
GAAP Net revenue | $ | 6,816 | | | | | $ | 19,774 | | | |
GAAP Cost of Sales | 4,749 | | | | | 13,511 | | | |
GAAP Gross profit | $ | 2,067 | | | | | $ | 6,263 | | | |
Non-GAAP adjustments | | | | | | | |
Amortization of initial direct costs | $ | 3 | | | | | $ | 9 | | | |
Acquisition, disposition and other related charges(2) | $ | — | | | | | $ | 27 | | | |
Non-GAAP Gross Profit | $ | 2,070 | | | | | $ | 6,299 | | | |
| | | | | | | |
GAAP gross profit margin | 30.3 | % | | | | 31.7 | % | | |
Non-GAAP adjustments | 0.1 | % | | | | 0.2 | % | | |
Non-GAAP gross profit margin | 30.4 | % | | | | 31.9 | % | | |
Portfolio Assets and Ratios
The portfolio assets and ratios derived from the segment balance sheets for FS were as follows:
| | | | | | | | | | | |
| As of |
| April 30, 2021 | | October 31, 2020 |
| Dollars in millions |
Financing receivables, gross | $ | 9,142 | | | $ | 9,058 | |
Net equipment under operating leases | 3,926 | | | 4,027 | |
Capitalized profit on intercompany equipment transactions(1) | 276 | | | 315 | |
Intercompany leases(1) | 87 | | | 92 | |
Gross portfolio assets | 13,431 | | | 13,492 | |
Allowance for credit losses(2) | 224 | | | 154 | |
Operating lease equipment reserve | 43 | | | 64 | |
Total reserves | 267 | | | 218 | |
Net portfolio assets | $ | 13,164 | | | $ | 13,274 | |
Reserve coverage | 2.0 | % | | 1.6 | % |
Debt-to-equity ratio(3) | 7.0x | | 7.0x |
(1) Represents the amortization of basis difference adjustments related to the H3C divestiture.
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
(1)Intercompany activity is eliminated in consolidation.
(2)Allowance for credit losses for financing receivables includes both the short- and long-term portions.
(3)Debt benefiting FS consists of intercompany equity that is treated as debt for segment reporting purposes, intercompany debt, and borrowing- and funding-related activity associated with FS and its subsidiaries. Debt benefiting FS totaled $11.6 billion and $11.7 billion at April 30, 2021 and October 31, 2020, 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. FS equity at both April 30, 2021 and October 31, 2020 was $1.7 billion.
As of April 30, 2021 and October 31, 2020, FS net cash and cash equivalents balances were approximately $679 million and $729 million, respectively.
Net portfolio assets as of April 30, 2021 decreased 0.8% from October 31, 2020. The decrease generally resulted from portfolio runoff exceeding new financing volume during the period, partially offset by favorable currency fluctuations.
FS 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, 2021, FS recorded net bad debt expense of $31 million and $59 million, respectively. For the three and six months ended April 30, 2020, FS recorded net bad debt expense of $19 million and $33 million, respectively.
As of April 30, 2021, FS experienced a decrease in billed finance receivables compared to October 31, 2020, which included limited impact to collections from customers as a result of COVID-19. We are currently unable to fully predict the extent to which COVID-19 may adversely impact future collections of our receivables.
Corporate Investments and Other
| | | | | | | | | | | | | | | | | |
| Three Months Ended April 30, |
| 2021 | | 2020 | | % Change |
| Dollars in millions | | |
Net revenue | $ | 350 | | | $ | 328 | | | 6.7 | % |
Loss from operations | $ | (25) | | | $ | (51) | | | 51.0 | % |
Loss from operations as a % of net revenue | (7.1) | % | | (15.5) | % | | |
| | | | | | | | | | | | | | | | | |
| Six Months Ended April 30, |
| 2021 | | 2020 | | % Change |
| Dollars in millions | | |
Net revenue | $ | 671 | | | $ | 655 | | | 2.4 | % |
Loss from operations | $ | (56) | | | $ | (104) | | | 46.2 | % |
Loss from operations as a % of net revenue | (8.3) | % | | (15.9) | % | | |
Three months ended April 30, 2021 compared with three months ended April 30, 2020
Corporate Investments and Other net revenue increased by $22 million, or 6.7% (increased 3.7% on a constant currency basis), for the three months ended April 30, 2021 as compared to the prior-year period. The increase in net revenue was due primarily to favorable currency fluctuations and revenue growth from Software, Communications and Media Solutions ("CMS") and A & PS businesses.
Corporate Investments and Other loss from operations as a percentage of net revenue decreased 8.4 percentage points for the three months ended April 30, 2021, as compared to the prior-year period. The decrease was due primarily to lower cost of services as a percentage of net revenue coupled with a decrease in operating expenses as a percentage of net revenue, as a result of the operational efficiency achieved through our transformation programs.
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
Six months ended April 30, 2021 compared with six months ended April 30, 2020
Corporate Investments and Other net revenue increased by $16 million, or 2.4% (decreased 0.2% on a constant currency basis), for the six months ended April 30, 2021 as compared to the prior-year period due to favorable currency fluctuations.
Corporate Investments and Other loss from operations as a percentage of net revenue decreased 7.6 percentage points for the six months ended April 30, 2021, as compared to the prior-year period. The decrease was due primarily to lower cost of services as a percentage of net revenue coupled with a decrease in operating expenses as a percentage of net revenue, as a result of the operational efficiency achieved through our transformation programs.
LIQUIDITY AND CAPITAL RESOURCES
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. 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.
COVID-19 has severely impacted global economic activity and caused significant volatility and negative pressure in the capital markets, which can increase the cost of capital and adversely impact access to capital. In addition, our businesses have been and may continue to be adversely affected, which may have a material adverse impact on our profitability and cash flows, and the timing and collectability of payments may be adversely affected as a result of the impact of COVID-19 on our customers. We continue to monitor the severity and duration of the pandemic and its impact on the U.S. and other global economies, consumer behavior, our businesses, results of operations, financial condition and cash flows.
Our cash and cash equivalent balances are held in numerous locations throughout the world, with a majority of the amount held outside the U.S. 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. Our cash position is strong and we expect that our cash and cash equivalent balances, anticipated cash flow generated from operations and access to capital markets will be sufficient to cover our expected near-term cash outlays.
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.
As a result of increased uncertainty due to COVID-19, purchases under our share repurchase program previously authorized by our Board of Directors, were suspended and as such, no purchases were made during the six months ended April 30, 2021. As of April 30, 2021, we had a remaining authorization of $2.1 billion for future share repurchases.
Liquidity
Our cash flow metrics were as follows:
| | | | | | | | | | | |
| Six months ended April 30, |
| 2021 | | 2020 |
| In millions |
Net cash provided by operating activities | $ | 1,785 | | | $ | 21 | |
Net cash used in investing activities | (1,231) | | | (104) | |
Net cash (used in) provided by financing activities | (419) | | | 1,997 | |
Net increase in cash, cash equivalents and restricted cash | $ | 135 | | | $ | 1,914 | |
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
Operating Activities
For the six months ended April 30, 2021, net cash from operating activities increased by $1.8 billion, as compared to the corresponding period in fiscal 2020. The increase was primarily due to higher cash generated from working capital and higher earnings.
Our working capital metrics and cash conversion impacts were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| As of | | | | As of | | | | |
| April 30, 2021 | | October 31, 2020 | | Change | | April 30, 2020 | | October 31, 2019 | | Change | | Y/Y Change |
Days of sales outstanding in accounts receivable ("DSO") | 39 | | | 42 | | | (3) | | | 39 | | | 37 | | | 2 | | | — | |
Days of supply in inventory ("DOS") | 64 | | | 48 | | | 16 | | | 76 | | | 45 | | | 31 | | | (12) | |
Days of purchases outstanding in accounts payable ("DPO") | (113) | | | (97) | | | (16) | | | (120) | | | (104) | | | (16) | | | 7 | |
Cash conversion cycle | (10) | | | (7) | | | (3) | | | (5) | | | (22) | | | 17 | | | (5) | |
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 from 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 2020, DSO is flat.
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 2020, the decrease in DOS was primarily driven by higher shipments in the current period. The corresponding three month period in fiscal 2020 was impacted by lower consumption of inventory due to constraints with accessing certain key components resulting from COVID-19.
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 2020, the decrease in DPO was primarily driven by higher consumption of inventory due to higher shipments in the current period.
Investing Activities
For the six months ended April 30, 2021, net cash used in investing activities increased by $1.1 billion, as compared to the corresponding period in fiscal 2020. The increase was primarily due to higher cash utilized in net financial collateral activities of $0.9 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.
Financing Activities
For the six months ended April 30, 2021, net cash generated from financing activities decreased by $2.4 billion, as compared to the corresponding period in fiscal 2020. The decrease was primarily due to lower proceeds from debt issuance of $1.9 billion, higher cash utilized for debt repayment of $0.8 billion and cash utilized for share repurchases of $0.4 billion in the prior year period.
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
Free Cash Flow
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, 2021, free cash flow increased by $1.5 billion, as compared to the corresponding period in fiscal 2020. The increase was due to higher cash generated from operations of $1.8 billion as compared to the prior year period, partially offset by higher cash utilized for investment in property, plant and equipment, net of sales proceeds of $0.2 billion.
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.
In December 2020, we filed a shelf registration statement with the Securities and Exchange Commission that allows us to sell, at any time and from time to time, in one or more offerings, debt securities, preferred stock, common stock, warrants, depository shares, purchase contracts, guarantees or units consisting of any of these securities.
In March 2021, the Company repaid $500 million of three-month USD LIBOR plus 0.68% Senior Notes on their original maturity date.
In March 2021, the Company 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 0.49%, payable monthly from April 2021 with a stated final maturity date of March 2031.
Commercial Paper
We maintain two commercial paper programs, "the Parent Programs", and a wholly-owned subsidiary maintains a third program. Our U.S. program provides for the issuance of U.S. dollar-denominated commercial paper up to a maximum aggregate principal amount of $4.75 billion. Our euro commercial paper program provides for the issuance of commercial paper outside of the U.S. 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 $4.75 billion. In addition, our 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, 2021 and October 31, 2020, no borrowings were outstanding under the Parent Programs, and $698 million and $677 million, respectively, were outstanding under our subsidiary’s program.
During the first six months of fiscal 2021, we issued $416 million and repaid $420 million of commercial paper.
Revolving Credit Facility
We maintain a $4.75 billion five year senior unsecured committed credit facility that was entered into in August 2019. Loans under the revolving credit facility may be used for general corporate purposes, including support of the commercial paper program. Commitments under the Credit Agreement are available for a period of five years, which period may be extended, subject to the satisfaction of certain conditions, by up to two, one-year periods. Commitment fees, interest rates and other terms of borrowing under the credit facility vary based on Hewlett Packard Enterprise's external credit rating. As of April 30, 2021 and October 31, 2020, no borrowings were outstanding under the Credit Agreement.
Available Borrowing Resources
We had the following additional liquidity resources available if needed:
| | | | | |
| As of April 30, 2021 |
| In millions |
Commercial paper programs | $ | 5,052 | |
Uncommitted lines of credit | $ | 1,134 | |
| |
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
CONTRACTUAL AND OTHER OBLIGATIONS
Contractual Obligations
In March 2021, we repaid $500 million of three-month USD LIBOR plus 0.68% Senior Notes on their original maturity date.
In March 2021, 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 0.49%, payable monthly from April 2021 with a stated final maturity date of March 2031.
Other than the above, our contractual obligations have not changed materially since October 31, 2020. For further information see "Contractual and Other Obligations" in Item 7 of Part II of our Annual Report on Form 10-K for the fiscal year ended October 31, 2020.
Retirement Benefit Plan Funding
For the remainder of fiscal 2021, we anticipate making contributions of approximately $103 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, 2021, we expect to make future cash payments of approximately $1.1 billion in connection with our approved restructuring plans, which includes $250 million expected to be paid through the remainder of fiscal 2021 and $840 million expected to be paid thereafter. For more information on our restructuring activities, see Note 3, "Transformation Programs".
Uncertain Tax Positions
As of April 30, 2021, we had approximately $427 million of recorded liabilities and related interest and penalties pertaining to uncertain tax positions. These liabilities and related interest and penalties include $33 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 tax authorities might occur due to the uncertainties related to these tax matters. Payments of these obligations would result from settlements with tax authorities. For more information on our uncertain tax positions, see Note 5, "Taxes on Earnings".
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 Consolidated Financial Statements in Item 1 of Part I, which is incorporated herein by reference.
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
GAAP to Non GAAP Reconciliations
Effective at the beginning of the first quarter of fiscal 2021, the Company excluded stock-based compensation expense from its segment earnings from operations results and excluded stock-based compensation expense from non-GAAP results. The Company has reflected this change retrospectively to its financial results for the earliest period presented. This change had no impact on Hewlett Packard Enterprise's previously reported consolidated GAAP results. However, the Company reflected the change resulting from the reclassification of its stock-based compensation expense by restating its consolidated non-GAAP gross profit, non-GAAP gross profit margin, non-GAAP earnings from operations, non-GAAP operating profit margin, non-GAAP net earnings and non-GAAP net earnings per share.
The following tables provide reconciliation of GAAP to non-GAAP measures for the three and six months ended April 30, 2021 and 2020:
Reconciliation of GAAP net earnings and diluted net earnings per share to non-GAAP net earnings and diluted net earnings per share.
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| Three Months Ended April 30, | | Six Months Ended April 30, | | | | |
| 2021 | | 2020 | | 2021 | | 2020 | | | | |
| Dollars in millions | | Diluted net earnings per share | | Dollars in millions | | Diluted net earnings per share | | Dollars in millions | | Diluted net earnings per share | | Dollars in millions | | Diluted net earnings per share | | | | |
| | | | | | | | | | | | | | | | | | | |
GAAP net earnings (loss) | $ | 259 | | | $ | 0.19 | | | $ | (821) | | | $ | (0.64) | | | $ | 482 | | | $ | 0.36 | | | $ | (488) | | | $ | (0.38) | | | | | |
Non-GAAP adjustments: | | | | | | | | | | | | | | | | | | | |
Amortization of initial direct costs | 2 | | | — | | | 3 | | | — | | | 4 | | | — | | | 6 | | | — | | | | | |
Amortization of intangible assets | 84 | | | 0.06 | | | 84 | | | 0.07 | | | 194 | | | 0.15 | | | 204 | | | 0.16 | | | | | |
Impairment of goodwill | — | | | — | | | 865 | | | 0.67 | | | — | | | — | | | 865 | | | 0.67 | | | | | |
Transformation costs | 209 | | | 0.15 | | | 200 | | | 0.15 | | | 520 | | | 0.40 | | | 289 | | | 0.22 | | | | | |
| | | | | | | | | | | | | | | | | | | |
Disaster charges | 1 | | | — | | | 22 | | | 0.02 | | | 1 | | | — | | | 22 | | | 0.02 | | | | | |
Stock-based compensation expense | 98 | | | 0.08 | | | 67 | | | 0.05 | | | 208 | | | 0.16 | | | 160 | | | 0.12 | | | | | |
Acquisition, disposition and other related charges | 13 | | | 0.01 | | | 25 | | | 0.02 | | | 31 | | | 0.02 | | | 67 | | | 0.05 | | | | | |
Tax indemnification adjustments | — | | | — | | | 35 | | | 0.03 | | | 16 | | | 0.01 | | | 56 | | | 0.04 | | | | | |
Non-service net periodic benefit credit | (17) | | | (0.01) | | | (36) | | | (0.03) | | | (34) | | | (0.03) | | | (73) | | | (0.06) | | | | | |
Earnings from equity interests(1) | 34 | | | 0.03 | | | 37 | | | 0.03 | | | 68 | | | 0.05 | | | 74 | | | 0.06 | | | | | |
Adjustments for taxes | (71) | | | (0.05) | | | (137) | | | (0.10) | | | (199) | | | (0.14) | | | (181) | | | (0.13) | | | | | |
Non-GAAP net earnings | $ | 612 | | | $ | 0.46 | | | $ | 344 | | | $ | 0.27 | | | $ | 1,291 | | | $ | 0.98 | | | $ | 1,001 | | | $ | 0.77 | | | | | |
(1) Represents the amortization of basis difference adjustments related to the H3C divestiture.
Reconciliation of GAAP earnings from operations and operating profit margin to non-GAAP earnings from operations and operating profit margin.
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
(2) For the nine months ended July 31, 2020, amounts represent Acquisition, dispositionManagement's Discussion and other relatedAnalysis of
Financial Condition and Results of Operations (Continued)
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| Three Months Ended April 30, | | Six Months Ended April 30, | | | | |
| 2021 | | 2020 | | 2021 | | 2020 | | | | |
| Dollars | | % of Revenue | | Dollars | | % of Revenue | | Dollars | | % of Revenue | | Dollars | | % of Revenue | | | | |
| In millions | | In millions | | | | |
GAAP earnings (loss) from operations | $ | 278 | | | 4.1 | % | | $ | (834) | | | (13.9) | % | | $ | 500 | | | 3.7 | % | | $ | (486) | | | (3.8) | % | | | | |
Non-GAAP adjustments: | | | | | | | | | | | | | | | | | | | |
Amortization of initial direct costs | 2 | | | — | % | | 3 | | | — | % | | 4 | | | — | % | | 6 | | | — | % | | | | |
Amortization of intangible assets | 84 | | | 1.3 | % | | 84 | | | 1.4 | % | | 194 | | | 1.4 | % | | 204 | | | 1.6 | % | | | | |
Impairment of goodwill | — | | | — | % | | 865 | | | 14.4 | % | | — | | | — | % | | 865 | | | 6.7 | % | | | | |
Transformation costs | 209 | | | 3.1 | % | | 200 | | | 3.3 | % | | 520 | | | 3.9 | % | | 289 | | | 2.2 | % | | | | |
| | | | | | | | | | | | | | | | | | | |
Disaster charges | 1 | | | — | % | | 22 | | | 0.4 | % | | 1 | | | — | % | | 22 | | | 0.2 | % | | | | |
Stock-based compensation expense | 98 | | | 1.5 | % | | 67 | | | 1.1 | % | | 208 | | | 1.6 | % | | 160 | | | 1.2 | % | | | | |
Acquisition, disposition and other related charges | 13 | | | 0.2 | % | | 25 | | | 0.4 | % | | 31 | | | 0.2 | % | | 67 | | | 0.5 | % | | | | |
Non-GAAP earnings from operations | $ | 685 | | | 10.2 | % | | $ | 432 | | | 7.2 | % | | $ | 1,458 | | | 10.8 | % | | $ | 1,127 | | | 8.7 | % | | | | |
Reconciliation of GAAP gross profit and gross profit margin to non-GAAP gross profit and gross profit margin.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended April 30, | | Six Months Ended April 30, | | | | |
| 2021 | | 2020 | | 2021 | | 2020 | | | | |
| Dollars | | % of Revenue | | Dollars | | % of Revenue | | Dollars | | % of Revenue | | Dollars | | % of Revenue | | | | |
| In millions | | In millions | | | | |
GAAP Net revenue | $ | 6,700 | | | 100 | % | | $ | 6,009 | | | 100 | % | | $ | 13,533 | | | 100 | % | | $ | 12,958 | | | 100 | % | | | | |
GAAP Cost of sales | 4,413 | | | 65.9 | % | | 4,095 | | | 68.1 | % | | 8,958 | | | 66.2 | % | | 8,762 | | | 67.6 | % | | | | |
GAAP Gross profit | $ | 2,287 | | | 34.1 | % | | $ | 1,914 | | | 31.9 | % | | $ | 4,575 | | | 33.8 | % | | $ | 4,196 | | | 32.4 | % | | | | |
Non-GAAP adjustments | | | | | | | | | | | | | | | | | | | |
Amortization of initial direct costs | 2 | | | — | % | | 3 | | | — | % | | 4 | | | — | % | | 6 | | | — | % | | | | |
Stock-based compensation expense | 11 | | | 0.2 | % | | 9 | | | 0.1 | % | | 24 | | | 0.2 | % | | 22 | | | 0.2 | % | | | | |
Acquisition, disposition and other related charges(1) | — | | | — | % | | 7 | | | 0.2 | % | | — | | | — | % | | 27 | | | 0.2 | % | | | | |
Non-GAAP Gross Profit | $ | 2,300 | | | 34.3 | % | | $ | 1,933 | | | 32.2 | % | | $ | 4,603 | | | 34.0 | % | | $ | 4,251 | | | 32.8 | % | | | | |
(1) Represent charges related to a non-cash inventory fair value adjustment in connection with the acquisition of Cray, Inc., which was included in Cost of Sales.
Reconciliation of net cash provided by operating activities to free cash flow.
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended April 30, | | Six Months Ended April 30, | | | | |
| 2021 | | 2020 | | 2021 | | 2020 | | | | |
| In millions | | In millions | | | | |
Net cash provided by operating activities | $ | 822 | | | $ | 100 | | | $ | 1,785 | | | $ | 21 | | | | | |
Investment in property, plant and equipment | (535) | | | (591) | | | (1,048) | | | (1,159) | | | | | |
Proceeds from sale of property, plant and equipment | 81 | | | 89 | | | 194 | | | 551 | | | | | |
Free cash flow | $ | 368 | | | $ | (402) | | | $ | 931 | | | $ | (587) | | | | | |
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 operating profit margin (non-GAAP earnings from operations as a percentage of net revenue), non-GAAP net earnings, and non-GAAP diluted net earnings per share.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 is defined to exclude charges related to the amortization of initial direct costs, stock-based compensation expense and certain acquisition, disposition and other related 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, impairment of goodwill, transformation costs, disaster charges, (recovery)stock-based compensation expense 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 an adjustment to tax indemnification adjustments, non-service net periodic benefit credit, loss 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, 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 and non-GAAP diluted net earnings per share 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.
Three months ended July 31, 2020 compared with three months ended July 31, 2019
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
The three months ended July 31, 2020 represented our second full quarter of operating under COVID-19. Although we significantly improved our operational and supply chain execution in the third quarter of fiscal 2020, our financial results continued to be impacted by the global pandemic on the demand side of our business operations. Manufacturing partners throughout the supply chain are operating at nominal levels of capacity and resource. To mitigate the risk caused by the pandemic to our manufacturing operations, we worked with our suppliers and manufacturing partners to maintain the assurance of supply and to fulfill orders. As a result, backlog challenges caused by both material shortages and the COVID-19 pandemic continue to show improvement with significant reduction in backlog now being sustained due to our focus on order routing, capacity, resource, and inventory management measures put in place and monitored on a continual basis. The extent to which COVID-19 related events continue to affect our operational performance will depend primarily on the duration of lockdown actions taking place across the globe and access restrictions at customer sites, along with the time it takes for the demand environment to rebound.
Net revenue decreased by $0.4 billion, or 5.6% (decreased 4.1% on a constant currency basis), for the three months ended July 31, 2020, as compared to the prior-year period, as many of our segments experienced a net revenue decline. The net revenue decline was primarily driven by decreases in Storage, Intelligent Edge and Financial Services partially offset by a net revenue increase in HPC & MCS. The net revenue decline in Storage was due to COVID-19 related events including a weak and uncertain global demand environment and lower revenue from the expiration of a one-time legacy contract. Net revenue declined in Intelligent Edge due to declines in switching and WLAN products due to the weak and uncertain global demand environment resulting from COVID-19 and competitive pricing pressures. Net revenue declined in Financial Services due primarily to a decrease in rental revenue due to lower average operating lease assets and a decline in end-of-lease buyout activity. COVID-19 related constraints, including weak demand resulted in lower net revenue in A & PS.
In the first half of fiscal 2020, the Compute and HPC & MCS segments experienced a variety of challenges resulting from COVID-19 related lockdown restrictions including supply chain constraints, delays meeting customer acceptance milestones, performing on-site installations and processing order fulfillment. These challenges continued but moderated to some extent in the third quarter of fiscal 2020 given the mitigation actions mentioned previously and as lockdown actions eased somewhat in select global regions. As such, net revenue in Compute was largely unchanged from the prior-year period as the impact of unfavorable currency fluctuations and competitive pricing pressures were mostly offset by improved supply chain execution and net revenue increased in HPC & MCS due to incremental revenue from the Cray acquisition and the events highlighted previously.
Our gross profit margin was 30.3% ($2.1 billion) and 33.9% ($2.4 billion) for the three months ended July 31, 2020 and 2019, respectively, representing a decline of 3.6 percentage points. The decline in the gross profit margin was due to multiple factors led by higher commodity costs, competitive pricing pressures, higher supply chain costs as a result of COVID-19, and the net revenue decline which resulted in higher fixed overhead costs as a percentage of net revenue, partially offset by our continued shift to higher-margin products and services. Our operating profit margin was 0.2% and (1.1)% for the three months ended July 31, 2020 and 2019, respectively, representing an increase of 1.3 percentage points. The increase in our operating profit margin was due to a decrease in operating expenses as a percentage of net revenue partially offset by a decrease in gross profit margin. The decrease in operating expenses was due to the prior-year period containing higher acquisition, disposition and other related charges resulting from an arbitration settlement, along with a current year period decline in travel expenses due to cost containment measures we put in place in response to COVID-19, lower variable compensation expense and lower spend on outsourced services. These decreases were partially offset by increased costs due to our expansion of the transformation programs.
Nine months ended July 31, 2020 compared with nine months ended July 31, 2019
Net revenue decreased by $2.1 billion, or 9.8% (decreased 8.5% on a constant currency basis), for the nine months ended July 31, 2020, as compared to the prior-year period.
During the first nine months of fiscal 2020, we experienced a net revenue decline due to the impact of COVID-19 on our business operations and the global demand environment along with commodity and manufacturing capacity constraints in North America. The impact of COVID-19 and resulting lockdown restrictions introduced across the globe created challenges to our supply chain process with processing order fulfillment, brought delays with meeting customer acceptance milestones and limited our ability to perform and complete on-site installations. Manufacturing capacity constraints were in part due to the consolidation of certain locations in North America and also in part due to COVID-19 restrictions, both of which resulted in increased order backlog particularly during the first six months of fiscal 2020. Although we significantly improved operational and supply chain execution in the third quarter of fiscal 2020, our financial results continued to be impacted by a weak and uncertain global demand environment resulting from COVID-19 related restrictions.
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
From a segment perspective, the net revenue decrease for the first nine months ended July 31, 2020, as compared to the prior year period was primarily driven by declines in Compute, Storage, Financial Services and Intelligent Edge. The net revenue decline in Compute was pronounced as we experienced a combination of factors including the impact of COVID-19 and the resulting weak and uncertain global demand environment, competitive pricing pressures and commodity and manufacturing capacity constraints in North America. Storage net revenue was also impacted by COVID-19 and the resulting weak and uncertain global demand environment, commodity and manufacturing capacity constraints in North America and lower revenue from the expiration of a one-time legacy contract. Financial Services net revenue was impacted due to a decrease in rental revenue due to lower average operating lease assets and unfavorable foreign currency fluctuations. The decline in Intelligent Edge net revenue was primarily due to declines in switching and WLAN products due to the weak and uncertain global demand environment resulting from COVID-19. HPC & MCS experienced a net revenue decline as a result of COVID-19 related challenges, particularly with performing on-site installations and meeting customer acceptance milestones given lockdown constraints taking place across the globe, partially offset by the addition of revenue from the acquisition of Cray Inc. (“Cray”). COVID-19 related constraints also contributed to the net revenue decline in the A & PS segment.
Gross profit margin was 31.7% ($6.3 billion) and 32.4% ($7.1 billion) for the nine months ended July 31, 2020 and 2019, respectively. The 0.7 percentage point decrease to the gross profit margin was primarily driven by higher supply chain costs resulting from the impact of COVID-19, competitive pricing pressures, and the scale of net revenue decline, partially offset by our overall shift to higher-margin products and services along with lower variable compensation expense. Our operating profit margin was (2.4)% and 3.7% for the nine months ended July 31, 2020 and 2019, respectively, representing a decrease of 6.1 percentage points. The decrease was due to an increase in operating expenses as a percentage of net revenue coupled with a decrease in gross profit margin. The increase in operating expenses was due to the goodwill impairment charge impacting our HPC & MCS segment in the second quarter of fiscal 2020, in part due to market conditions and business trends caused by the impact of COVID-19 and higher transformation costs partially offset by the prior-year period containing higher acquisition, disposition and other related charges resulting from an arbitration settlement.
As of July 31, 2020, cash, cash equivalents and restricted cash were $8.9 billion, representing an increase of approximately $4.8 billion from the October 31, 2019 balance of $4.1 billion. The increase was due primarily to the following: proceeds from debt, net of repayments and issuance costs of $5.4 billion and net cash provided by operating activities of $1.5 billion partially offset by investments in property, plant and equipment, net of sales proceeds, of $1.2 billion, and cash dividend payments and share repurchases of $0.8 billion.
In August 2020, we redeemed $3.0 billion of outstanding principal amount of the 3.6% registered Notes that were originally due in October 2020.
Trends and Uncertainties
We are in the process of addressing many challenges facing our business, a discussion of which is available in our Annual Report on Form 10-K for the fiscal year ended October 31, 2019.
For a further discussion of trends, uncertainties and other factors that could impact our operating results, see the section entitled "Risk Factors" in Item 1A of Part II.
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Management's Discussion and Analysis of Financial Condition and Results of Operations is based on our Condensed Consolidated Financial Statements, which have been prepared in accordance with United States ("U.S.") Generally Accepted Accounting Principles ("GAAP"). The preparation of these financial statements requires management to make estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, net revenues and expenses, and disclosure of contingent liabilities. Estimates are assessed each period and updated to reflect current information, such as the economic considerations related to the impact that COVID-19 could have on our significant accounting estimates. Significant estimates that are based on a forecast include inventory reserves, provision for taxes, valuation allowance for deferred taxes, and impairment assessment of goodwill, intangible assets and other long lived assets. The Company believes that these estimates, judgements and assumptions are reasonable under the circumstances, and are subject to significant uncertainties, some of which are beyond the Company’s control. Should any of these estimates change, it could adversely affect Company’s results of operations. Additionally, as the extent and duration of the impacts from COVID-19 remain unclear, the Company’s estimates, judgements and assumptions may evolve as conditions change. Management believes that there have been no significant changes during the nine months ended July 31, 2020, with the exception of certain accounting policies that were updated resulting from our adoption of the new leasing standard (See Note 1 in Item 1, "Overview and Summary of Significant Accounting Policies"), 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, 2019.
ACCOUNTING PRONOUNCEMENTS
For a summary of recent accounting pronouncements applicable to our Condensed Consolidated Financial Statements, see Note 1 in Item 1, "Overview and Summary of Significant Accounting Policies".
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 doesn't 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.
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:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended July 31, | | | | | | | | Nine Months Ended July 31, | | | | | | |
| 2020 | | | | 2019 | | | | 2020 | | | | 2019 | | |
| Dollars | | % of Revenue | | Dollars | | % of Revenue | | Dollars | | % of Revenue | | Dollars | | % of Revenue |
| Dollars in millions | | | | | | | | | | | | | | |
Net revenue | $ | 6,816 | | | 100.0 | % | | $ | 7,217 | | | 100.0 | % | | $ | 19,774 | | | 100.0 | % | | $ | 21,920 | | | 100.0 | % |
Cost of sales | 4,749 | | | 69.7 | | | 4,768 | | | 66.1 | % | | 13,511 | | | 68.3 | % | | 14,820 | | | 67.6 | % |
Gross profit | 2,067 | | | 30.3 | | | 2,449 | | | 33.9 | % | | 6,263 | | | 31.7 | % | | 7,100 | | | 32.4 | % |
Research and development | 455 | | | 6.7 | | | 481 | | | 6.7 | % | | 1,390 | | | 7.0 | % | | 1,404 | | | 6.4 | % |
Selling, general and administrative | 1,131 | | | 16.6 | | | 1,253 | | | 17.3 | % | | 3,458 | | | 17.6 | % | | 3,678 | | | 16.8 | % |
Amortization of intangible assets | 95 | | | 1.4 | | | 58 | | | 0.9 | % | | 299 | | | 1.4 | % | | 199 | | | 0.9 | % |
Impairment of goodwill | — | | | — | | | — | | | — | % | | 865 | | | 4.4 | % | | — | | | — | % |
Transformation costs | 357 | | | 5.2 | | | 170 | | | 2.4 | % | | 646 | | | 3.3 | % | | 302 | | | 1.4 | % |
Disaster charges (recovery) | 2 | | | — | | | — | | | — | % | | 24 | | | 0.1 | % | | (7) | | | — | % |
Acquisition, disposition and other related charges | 15 | | | 0.2 | | | 563 | | | 7.7 | % | | 55 | | | 0.3 | % | | 710 | | | 3.2 | % |
Earnings (loss) from operations | 12 | | | 0.2 | | | (76) | | | (1.1) | % | | (474) | | | (2.4) | % | | 814 | | | 3.7 | |
Interest and other, net | (71) | | | (1.0) | | | (70) | | | (1.0) | % | | (158) | | | (0.8) | % | | (139) | | | (0.6) | |
Tax indemnification adjustments | (30) | | | (0.5) | | | (134) | | | (1.8) | % | | (86) | | | (0.5) | % | | 89 | | | 0.4 | |
Non-service net periodic benefit credit | 28 | | | 0.4 | | | 12 | | | 0.2 | % | | 101 | | | 0.5 | % | | 45 | | | 0.2 | |
Earnings from equity interests | 27 | | | 0.4 | | | 3 | | | — | % | | 50 | | | 0.3 | % | | 21 | | | 0.1 | |
(Loss) earnings before taxes | (34) | | | (0.5) | | | (265) | | | (3.7) | % | | (567) | | | (2.9) | % | | 830 | | | 3.8 | |
Benefit (provision) for taxes | 43 | | | 0.6 | | | 238 | | | 3.3 | % | | 88 | | | 0.5 | % | | (261) | | | (1.2) | |
Net earnings (loss) | $ | 9 | | | 0.1 | % | | $ | (27) | | | (0.4) | % | | $ | (479) | | | (2.4) | % | | $ | 569 | | | 2.6 | |
Stock-based compensation expense is included within costs and expenses presented in the table above as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended July 31, | | | | Nine Months Ended July 31, | | |
| 2020 | | 2019 | | 2020 | | 2019 |
| In millions | | | | | | |
Cost of sales | $ | 8 | | | $ | 7 | | | $ | 30 | | | $ | 30 | |
Research and development | 16 | | | 15 | | | 62 | | | 55 | |
Selling, general and administrative | 31 | | | 36 | | | 123 | | | 122 | |
Transformation costs | — | | | — | | | — | | | 2 | |
Acquisition, disposition and other related charges | — | | | — | | | 1 | | | — | |
Total | $ | 55 | | | $ | 58 | | | $ | 216 | | | $ | 209 | |
Net Revenue
For the three months ended July 31, 2020, as compared to the prior-year period, total net revenue decreased by $401 million, or5.6% (decreased 4.1% on a constant currency basis). U.S. net revenue decreased by $73 million, or 3.0%, to $2.4 billion, and net revenue from outside of the U.S. decreased by $328 million, or 6.9%, to $4.4 billion. For the nine months ended July 31, 2020, as compared to the prior-year period, total net revenue decreased by $2.1 billion, or 9.8% (decreased 8.5% on a constant currency basis). U.S. net revenue decreased by $534 million, or 7.5%, to $6.6 billion, and net revenue from outside of the U.S. decreased by $1.6 billion, or 10.9%, to $13.2 billion.
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
The components of the weighted net revenue change by segment were as follows:
| | | | | | | | | | | |
| Three Months Ended July 31, 2020 | | Nine Months Ended July 31, 2020 |
| Percentage points | | |
Compute | (0.2) | | | (5.7) | |
HPC & MCS | 0.2 | | | (0.3) | |
Storage | (1.8) | | | (2.1) | |
A & PS | (0.2) | | | (0.2) | |
Intelligent Edge | (1.3) | | | (0.5) | |
Financial Services | (1.1) | | | (0.9) | |
Corporate Investments | (0.1) | | | (0.1) | |
Total Segment | (4.5) | | | (9.8) | |
Elimination of Intersegment net revenue | (1.1) | | | — | |
Total HPE | (5.6) | | | (9.8) | |
Three Months Ended July 31, 2020 compared with three months ended July 31, 2019
From a segment perspective, the primary factors contributing to the change in total net revenue are summarized as follows:
•Compute net revenue declined due primarily to unfavorable foreign currency fluctuations and competitive pricing pressures;
•HPC & MCS net revenue increased due primarily to the addition of revenue resulting from the acquisition of Cray;
•Storage net revenue decreased due primarily to the weak and uncertain global demand environment resulting from COVID-19 related lockdown restrictions which include supply chain constraints, competitive pricing pressures, lower revenue from the expiration of a one-time legacy contract and unfavorable currency fluctuations;
•A & PS net revenue decreased due primarily to the weak and uncertain global demand environment resulting from COVID-19 related lockdown restrictions, including continued service delivery delays along with unfavorable foreign currency fluctuations;
•Intelligent Edge net revenue decreased due primarily to the weak and uncertain global demand environment resulting from COVID-19 related lockdown restrictions, lower revenue from WLAN and switching products, competitive pricing pressures, lower software net revenue and unfavorable foreign currency fluctuations; and
•Financial Services net revenue decreased due primarily to a decrease in rental revenue due to lower average operating lease assets, unfavorable currency fluctuations, along with lower asset management revenue from lease buyouts and lease extensions.
Nine Months Ended July 31, 2020 compared with nine months ended July 31, 2019
From a segment perspective, the primary factors contributing to the change in total net revenue are summarized as follows:
•Compute net revenue declined due to multiple factors including the weak and uncertain global demand environment resulting from COVID-19 related lock down restrictions, competitive pricing pressures, unfavorable foreign currency fluctuations, commodity and manufacturing capacity constraints in North America;
•HPC & MCS net revenue decreased due to challenges resulting from COVID-19 related lockdown restrictions including performing on-site product installations, meeting customer acceptance milestones, and the weak and uncertain global demand environment;
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
•Storage net revenue decreased due primarily to the weak and uncertain global demand environment predominantly resulting from COVID-19 related lockdown restrictions, commodity and North American manufacturing capacity constraints, and lower revenue from the expiration of a one-time legacy contract;
•A & PS net revenue decreased due primarily to the weak and uncertain global demand environment resulting from COVID-19 related lockdown restrictions, including service delivery delays along with unfavorable foreign currency fluctuations;
•Intelligent Edge net revenue decreased due primarily to lower revenue from switching and WLAN products predominantly driven by the weak and uncertain global demand environment resulting from COVID-19 related lockdown restrictions, lower software net revenue, and unfavorable foreign currency fluctuations; and
•Financial Services net revenue decreased due primarily to a decrease in rental revenue due to lower average operating lease assets, unfavorable currency fluctuation, and lower lease equipment buyout revenue.
A more detailed discussion of segment revenue is included under "Segment Information" below.
Gross Profit
For the three months ended July 31, 2020, as compared to the prior-year period, total gross profit margin decreased 3.6 percentage points. The decline in gross profit margin was due to multiple factors led by higher commodity costs, competitive pricing pressures, increased supply chain costs resulting from COVID-19, and the net revenue decline which resulted in higher fixed overhead costs as a percentage of net revenue, partially offset by our continued shift to higher margin products and services.
For the nine months ended July 31, 2020, as compared to the prior-year period, total gross margin decreased 0.7 percentage points. The gross margin decrease was primarily due to increased supply chain costs resulting from the impact of COVID-19, competitive pricing pressures, and the scale of net revenue decline, partially offset by our overall shift to higher-margin products and services along with lower variable compensation expense.
Research and Development
Research and development ("R&D") expense decreased by $26 million, or 5%, and by $14 million, or 1%, for the three and nine months ended July 31, 2020, respectively, as compared to the prior-year periods, due primarily to lower variable compensation expense and the impact of cost containment measures we put in place in response to COVID-19, partially offset by on-going expenses from business acquisitions.
Selling, General and Administrative
Selling, general and administrative expense decreased by $122 million, or 10%, and by $220 million, or 6%, for the three and nine months ended July 31, 2020, respectively, as compared to the prior-year periods, due primarily to lower variable compensation expense and the impact of cost containmentmeasures we put in place in response to COVID-19, favorable currency fluctuations, partially offset by on-going expenses from business acquisitions.
Amortization of Intangible Assets
Amortization of intangible assets increased by $37 million, or 64%, and by $100 million, or 50%, for the three and nine months ended July 31, 2020, respectively, as compared to the prior-year periods, due to an increase in the amortization of intangible assets from recent acquisitions and the write-off of certain intangible assets, partially offset by certain intangible assets associated with prior acquisitions reaching the end of their amortization period.
Impairment of Goodwill
Impairment of goodwill for the nine months ended July 31, 2020, represents a partial goodwill impairment charge of $865 million recorded in the second quarter of fiscal 2020, as it was determined that the fair value of the HPC & MCS reporting unit was below the carrying value of its net assets.
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
While the other reporting units were negatively impacted by COVID-19, their fair values continued to exceed the carrying value of their net assets and did not result in impairment. In order to evaluate the sensitivity of the estimated fair value of other reporting units for the quantitative goodwill impairment test, the Company applied a hypothetical 10% reduction to the estimated fair value of each of these other reporting units. Based on the results of this hypothetical 10% reduction to the estimated fair value, each of these other reporting units had an excess of fair value over carrying value of their net assets. However, should economic conditions deteriorate further or remain depressed for a prolonged period of time, estimates of future cash flows for each of our reporting units may be insufficient to support the carrying value and the goodwill assigned to them, requiring impairment charges, including additional impairment charges for the HPC & MCS reporting unit. Further impairment charges, if any, may be material to our results of operations and financial position. See Part II, Item 1A, Risk Factors for a discussion of the potential impacts of COVID-19 on the fair value of our assets.
We will continue to evaluate the recoverability of goodwill at the reporting unit level 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.
Transformation Costs
Transformation programs are comprised of the cost optimization and prioritization plan we introduced in May 2020, and the HPE Next Initiative.
Transformation costs increased by $187 million, or 110%, for the three months ended July 31, 2020, as compared to the prior-year period, due primarily to the restructuring costs recorded in the third quarter of fiscal 2020 in connection with our cost optimization and prioritization plan.
Transformation costs increased by $344 million, or 114%, for the nine months ended July 31, 2020, as compared to the prior-year period, due primarily to the restructuring charges recorded in the third quarter of fiscal 2020 in connection with our cost optimization and prioritization plan and higher restructuring charges from our HPE Next Initiative, partially offset by higher gains from the sale of real estate.
See Note 3, "Transformation Programs", for discussion of the Transformation Costs.
Disaster charges (recovery)
Disaster charges for the three and nine months ended July 31, 2020, represent direct costs resulting from COVID-19 and are primarily related to HPE hosted, co-hosted, or sponsored events which had to be converted to a virtual format or in some cases cancelled.
For the nine months ended July 31, 2019, disaster recovery amounts represent insurance recoveries in relation to damage to our facilities in Houston, Texas due to Hurricane Harvey in fiscal 2017.
Acquisition, Disposition and Other Related Charges
Acquisition, disposition and other related charges decreased by $548 million, or 97%, and by $655 million, or 92%, for the three and nine months ended July 31, 2020, respectively, as compared with the prior-year periods, due primarily to a charge related to a one-time arbitration settlement in the prior-year period, partially offset by recent business acquisition costs related to retention bonuses and integration activities.
Interest and Other, Net
Interest and other, net expense increased by $1 million for the three months ended July 31, 2020, as compared with the prior-year period, due primarily to higher net interest expense, partially offset by favorable currency fluctuations. Interest and other, net expense increased by $19 million for the nine months ended July 31, 2020, as compared with the prior-year period, due primarily to higher net interest expense and unfavorable currency fluctuations, partially offset by a gain on the sale of certain assets in the current year.
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
Tax Indemnification Adjustments
We recorded tax indemnification expense of $30 million and $134 million for the three months ended July 31, 2020 and 2019, respectively, and tax indemnification expense of $86 million and tax indemnification income of $89 million for the nine months ended July 31, 2020 and 2019, respectively. For the three and nine months ended July 31, 2020, the amount included tax audit activity at HP Inc. and DXC. The activity for the nine months ended July 31, 2020 also included changes in certain pre-Separation tax liabilities for which we share joint and several liability with HP Inc. and for which we are indemnified by HP Inc. For the three and nine months ended July 31, 2019, the amount was due primarily to the impacts of the effective settlement of the U.S. federal income tax audit of fiscal years 2013 through 2015 for HP Inc. The activity for the nine months ended July 31, 2019 also included the effects of U.S. tax reform on tax attributes related to fiscal periods prior to the Separation.
Non-service net periodic benefit
Non-service net periodic benefit credit increased by $16 million and $56 million for the three and nine months ended July 31, 2020, respectively, as compared with the prior-year periods, due primarily to lower interest rates.
Earnings from Equity Interests
Earnings from equity interests primarily represents our 49% interest in H3C Technologies' ("H3C") earnings and the amortization of our interest in a basis difference. For the three and nine months ended July 31, 2020, earnings from equity interests increased by $24 million and $29 million, respectively, as compared to the prior-year periods, due to higher net income earned by H3C.
Provision for Taxes
Our effective tax rate was 126.5% and 89.8% for the three months ended July 31, 2020 and 2019, respectively, and 15.5% and 31.4% for the nine months ended July 31, 2020, and 2019, respectively. The effective tax rates for the three and nine months ended July 31, 2020 were impacted by income tax benefits resulting from tax rate changes and differed from the statutory tax rate due to favorable tax rates associated with certain earnings from our operations in lower tax jurisdictions throughout the world. The effective tax rate for the nine months ended July 31, 2020 also included the effects of the non-deductible goodwill impairment. The effective tax rates for the three and nine months ended July 31, 2019 were significantly impacted by the Tax Act and the settlement of certain pre-Separation tax liabilities of HP Inc. Our effective tax rate is based on forecasted annual results which may fluctuate significantly through the remainder of fiscal 2020 due to the uncertain economic impact of COVID-19 on our operating results.
Segment Information
Effective in the first quarter of fiscal 2020, we implemented certain organizational changes to align our segment financial reporting more closely with our current business structure. We replaced the Hybrid IT segment with four new financial reporting segments, Compute, High Performance Compute & Mission-Critical Systems, Storage and Advisory and Professional Services as follows:
•we created the Compute segment consisting of the general purpose server and workload optimized server portfolios that were previously a part of the Hybrid IT-Compute business unit and the related operational services business that was previously a part of the Hybrid IT-HPE Pointnext business unit;
• we created the HPC & MCS segment consisting of the high performance compute, mission-critical systems and edge compute offerings that were previously a part of the Hybrid IT-Compute business unit and the related operational services business that was previously a part of the Hybrid IT-HPE Pointnext business unit;
•we created the Storage segment consisting of the former Hybrid IT-Storage business unit and the related operational services business that was previously a part of the Hybrid IT-HPE Pointnext business unit and the hyperconverged infrastructure products that were previously a part of the Hybrid IT-Compute business unit;
•we created the A & PS segment consisting of the consultative-led services that were previously a part of the Hybrid IT-HPE Pointnext business unit; and
•we transferred the DC Networking operational services business that was previously a part of the Hybrid IT-HPE Pointnext business unit to the Intelligent Edge segment.
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
As a result of these realignments, our operations are now organized into seven segments for financial reporting purposes: Compute, HPC & MCS, Storage, A & PS, Intelligent Edge, FS, and Corporate Investments.
For additional information related to these realignments and for a description of the products and services for each segment, see Note 2, "Segment Information".
Compute
| | | | | | | | | | | | | | | | | |
| Three months ended July 31, | | | | |
| 2020 | | 2019 | | % Change |
| Dollars in millions | | | | |
Net revenue | $ | 3,389 | | | $ | 3,400 | | | (0.3) | % |
Earnings from operations | $ | 288 | | | $ | 439 | | | (34.4) | % |
Earnings from operations as a % of net revenue | 8.5 | % | | 12.9 | % | | |
| | | | | | | | | | | | | | | | | |
| Nine months ended July 31, | | | | |
| 2020 | | 2019 | | % Change |
| Dollars in millions | | | | |
Net revenue | $ | 9,040 | | | $ | 10,293 | | | (12.2) | % |
Earnings from operations | $ | 699 | | | $ | 1,086 | | | (35.6) | % |
Earnings from operations as a % of net revenue | 7.7 | % | | 10.6 | % | | |
| | | | | |
Three months ended July 31, 2020 compared with three months ended July 31, 2019
Compute net revenue decreased by $11 million, or 0.3% (increased 1.1% on a constant currency basis), for the three months ended July 31, 2020 as compared to the prior-year period.
Net revenue in Compute decreased due primarily to unfavorable currency fluctuations and competitive pricing pressures, the effects of which were partially offset by improved supply chain performance. While Compute experienced an increase in unit shipments driven by improved supply chain execution, average unit selling prices declined due to competitive pricing pressures. Compute continues to be impacted by the weak and uncertain global demand environment resulting from COVID-19 related lockdown restrictions.
Compute earnings from operations as a percentage of net revenue decreased 4.4 percentage points for the three months ended July 31, 2020, as compared to the prior-year period, due to an increase in cost of products 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 products as a percentage of net revenue was due primarily to higher commodity costs, competitive pricing pressures, increased supply chain logistics costs resulting from COVID-19 and unfavorable currency fluctuations. The decrease in operating expense as a percentage of net revenue was due primarily to lower variable compensation expense and lower spending due to cost containment measures put in place in response to COVID-19. These declines were partially offset by higher field selling costs.
Nine months ended July 31, 2020 compared with nine months ended July 31, 2019
Compute net revenue decreased by $1.3 billion, or 12.2% (decreased 10.9% on a constant currency basis), for the nine months ended July 31, 2020, as compared to the prior-year period.
Net revenue in Compute was impacted by multiple factors including the weak and uncertain global demand environment resulting from COVID-19 related lock down restrictions, competitive pricing pressures, unfavorable currency fluctuations and commodity and manufacturing capacity constraints in North America. As a result, for the first nine months of fiscal 2020, as compared to the prior-year period, Compute experienced a decline in unit shipments and average unit selling prices.
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
Compute earnings from operations as a percentage of net revenue decreased 2.9 percentage points for the nine months ended July 31, 2020, as compared to the prior-year period due primarily to an increase in costs of products as a percentage of net revenue and an increase in operating expenses as a percentage of net revenue. The increase in cost of products as a percentage of net revenue was due primarily to competitive pricing pressures, increased supply chain logistics costs and unfavorable currency fluctuations which were partially offset by lower variable compensation expense. The increase in operating expense as a percentage of net revenue was due to the scale of the net revenue decline while total operating expenses declined year-over-year due primarily to lower variable compensation expense and lower spending due to cost containment measures put in place in response to COVID-19. These declines were partially offset by higher field selling costs.
HPC & MCS
| | | | | | | | | | | | | | | | | |
| Three Months Ended July 31, | | | | |
| 2020 | | 2019 | | % Change |
| Dollars in millions | | | | |
Net revenue | $ | 649 | | | $ | 633 | | | 2.5 | % |
Earnings from operations | $ | 36 | | | $ | 51 | | | (29.4) | % |
Earnings from operations as a % of net revenue | 5.5 | % | | 8.1 | % | | |
| | | | | | | | | | | | | | | | | |
| Nine Months Ended July 31, | | | | |
| 2020 | | 2019 | | % Change |
| Dollars in millions | | | | |
Net revenue | $ | 2,061 | | | $ | 2,133 | | | (3.4) | % |
Earnings from operations | $ | 118 | | | $ | 241 | | | (51.0) | % |
Earnings from operations as a % of net revenue | 5.7 | % | | 11.3 | % | | |
Three months ended July 31, 2020 compared with three months ended July 31, 2019
HPC & MCS net revenue increased by $16 million, or 2.5% (increased 3.3% on a constant currency basis), for the three months ended July 31, 2020, as compared to the prior-year period.
The increase in HPC & MCS net revenue was due primarily to the addition of revenue resulting from the acquisition of Cray. This increase was partially offset by unfavorable foreign currency fluctuations and challenges resulting from COVID-19 related lockdown restrictions including performing on-site product installations, meeting customer acceptance milestones and a weak and uncertain global demand environment.
HPC & MCS earnings from operations as a percentage of net revenue decreased 2.6 percentage points for the three months ended July 31, 2020, as compared to the prior-year period, due to an increase in operating expenses as a percentage of net revenue, partially offset by lower cost of products and services as a percentage of net revenue. The decrease in cost of products and services as a percentage of net revenue was due primarily to improved mix of products and services from the acquisition of Cray along with the prior-year period containing higher excess and obsolescence charges. The increase in operating expenses as a percentage of net revenue was due primarily to the addition of operating expenses from the acquisition of Cray.
Nine months ended July 31, 2020 compared with nine months ended July 31, 2019
HPC & MCS net revenue decreased by $72 million, or 3.4% (decreased 2.8% on a constant currency basis), for the nine months ended July 31, 2020, as compared to the prior-year period.
Net revenue in HPC & MCS decreased due to challenges resulting from COVID-19 related lockdown restrictions including performing on-site product installations, meeting customer acceptance milestones and a weak and uncertain global demand environment, partially offset by the addition of revenue resulting from Cray.
HPC & MCS earnings from operations as a percentage of net revenue decreased 5.6 percentage points for the nine months ended July 31, 2020, as compared to the prior-year period, due to an increase in operating expenses as a percentage of net revenue partially offset by lower cost of products and services as a percentage of net revenue. The decrease in cost of products and services as a percentage of net revenue was due primarily to an improved product mix from the acquisition of Cray and lower variable compensation expense. The increase in operating expenses as a percentage of net revenue was due to the addition of operating expenses resulting from the acquisition of Cray partially offset by lower variable compensation expense.
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
Storage
| | | | | | | | | | | | | | | | | |
| Three Months Ended July 31, | | | | |
| 2020 | | 2019 | | % Change |
| Dollars in millions | | | | |
Net revenue | $ | 1,128 | | | $ | 1,255 | | | (10.1) | % |
Earnings from operations | $ | 145 | | | $ | 207 | | | (30.0) | % |
Earnings from operations as a % of net revenue | 12.9 | % | | 16.5 | % | | |
| | | | | | | | | | | | | | | | | |
| Nine Months Ended July 31, | | | | |
| 2020 | | 2019 | | % Change |
| Dollars in millions | | | | |
Net revenue | $ | 3,464 | | | $ | 3,929 | | | (11.8) | % |
Earnings from operations | $ | 516 | | | $ | 705 | | | (26.8) | % |
Earnings from operations as a % of net revenue | 14.9 | % | | 17.9 | % | | |
Three months ended July 31, 2020 compared with three months ended July 31, 2019
Storage net revenue decreased by $127 million or 10.1% (decreased 8.8% on a constant currency basis), for the three months ended July 31, 2020 as compared to the prior-year period.
Net revenue in Storage was impacted by the weak and uncertain global demand environment resulting from COVID-19 related lockdown restrictions which include supply chain constraints, competitive pricing pressures, lower revenue from the expiration of a one-time legacy contract and unfavorable currency fluctuations. Partially offsetting the net revenue decline was higher revenue from Big Data.
Storage earnings from operations as a percentage of net revenue decreased 3.6 percentage points for the three months ended July 31, 2020, as compared to the prior-year period, due to an increase in cost of products as a percentage of net revenue and an increase in operating expenses as a percentage of net revenue. The increase in cost of product as a percentage of net revenue was due primarily to competitive pricing pressures, unfavorable currency fluctuations, and the scale of the net revenue decline which resulted in higher fixed overhead costs as a percentage of net revenue, the effects of which were partially offset by lower cost of services. The increase in operating expenses as a percentage of net revenue was due primarily to the scale of the net revenue decline and increased investments in R&D, while total operating expenses declined during the period due to lower field selling costs as a result of lower spending due to cost containment measures put in place in response to COVID-19 and lower variable compensation expense.
Nine months ended July 31, 2020 compared with nine months ended July 31, 2019
Storage net revenue decreased by $465 million or 11.8% (decreased 10.6% on a constant currency basis), for the nine months ended July 31, 2020, as compared to the prior-year period.
Net revenue in Storage was impacted by the weak and uncertain global demand environment predominantly resulting from COVID-19 related lockdown restrictions, commodity and North American manufacturing capacity constraints in the first quarter of fiscal 2020, and lower revenue from the expiration of a one-time legacy contract. Partially offsetting the net revenue decrease was revenue growth from Big Data and Storage services.
Storage earnings from operations as a percentage of net revenue decreased 3.0 percentage points for the nine months ended July 31, 2020, as compared to the prior-year period, due to an increase in cost of product and services as a percentage of net revenue and an increase in operating expenses as a percentage of net revenue. The increase in the cost of product and services as a percentage of net revenue was due primarily to unfavorable currency fluctuations and higher fixed overhead costs as a percentage of net revenue, the effects of which were partially offset by lower variable compensation expense and lower cost of services. The increase in operating expenses as a percentage of net revenue was due primarily to higher investments in R&D and to the scale of the net revenue decline, while total operating expenses declined during the period due to lower variable compensation expense and lower spending due to cost containment measures put in place in response to COVID-19.
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
A & PS
| | | | | | | | | | | | | | | | | |
| Three Months Ended July 31, | | | | |
| 2020 | | 2019 | | % Change |
| Dollars in millions | | | | |
Net revenue | $ | 226 | | | $ | 242 | | | (6.6) | % |
Loss from operations | $ | (4) | | | $ | (9) | | | 55.6 | % |
Loss from operations as a % of net revenue | (1.8) | % | | (3.7) | % | | |
| | | | | | | | | | | | | | | | | |
| Nine Months Ended July 31, | | | | |
| 2020 | | 2019 | | % Change |
| Dollars in millions | | | | |
Net revenue | $ | 706 | | | $ | 743 | | | (5.0) | % |
Loss from operations | $ | (4) | | | $ | (55) | | | 92.7 | % |
Loss from operations as a % of net revenue | (0.6) | % | | (7.4) | % | | |
Three months ended July 31, 2020 compared with three months ended July 31, 2019
A & PS net revenue decreased by $16 million, or 6.6% (decreased 5.4% on a constant currency basis), for the three months ended July 31, 2020 as compared to the prior-year period.
The decrease in A & PS net revenue was primarily due to the weak and uncertain global demand environment resulting from COVID-19 related lockdown restrictions including continued service delivery delays along with unfavorable foreign currency fluctuations partially offset by strength in the Asia Pacific and Japan region.
A & PS earnings from operations as a percentage of net revenue improved 1.9 percentage points for the three months ended July 31, 2020, as compared to the prior-year period, due to lower operating expenses as a percentage of net revenue partially offset by an increase in cost of services as a percentage of net revenue. The increase in cost of services as a percentage of net revenue was primarily due to the impact of fixed compensation expense partially offset by a decrease in variable compensation expense. The lower operating expenses as a percentage of net revenue was primarily due to a reduction in field selling costs due to cost containment measures put in place in response to COVID-19.
Nine months ended July 31, 2020 compared with nine months ended July 31, 2019
A & PS net revenue decreased by $37 million, or 5.0% (decreased 4.3% on a constant currency basis), for the nine months ended July 31, 2020 as compared to the prior-year period.
The decrease in A & PS net revenue was primarily due to the weak and uncertain global demand environment during the second and third quarters, resulting from COVID-19 related lockdown restrictions including service delivery delays along with unfavorable foreign currency fluctuations partially offset by strength in the Asia Pacific and Japan
A & PS earnings from operations as a percentage of net revenue improved 6.8 percentage points for the nine months ended July 31, 2020, as compared to the prior-year period, due to lower cost of services as a percentage of net revenue coupled with a decrease in operating expenses as a percentage of net revenue. The decrease in cost of services as a percentage of net revenue was primarily due to service delivery and overhead efficiencies along with lower variable compensation expense. The decrease to operating expenses as a percentage of net revenue was primarily due to lower spending due to cost containment measures put in place in response to COVID-19.
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
Intelligent Edge
| | | | | | | | | | | | | | | | | |
| Three Months Ended July 31, | | | | |
| 2020 | | 2019 | | % Change |
| Dollars in millions | | | | |
Net revenue | $ | 684 | | | $ | 781 | | | (12.4) | % |
Earnings from operations | $ | 59 | | | $ | 53 | | | 11.3 | % |
Earnings from operations as a % of net revenue | 8.6 | % | | 6.8 | % | | |
| | | | | | | | | | | | | | | | | |
| Nine Months Ended July 31, | | | | |
| 2020 | | 2019 | | % Change |
| Dollars in millions | | | | |
Net revenue | $ | 2,069 | | | $ | 2,171 | | | (4.7) | % |
Earnings from operations | $ | 202 | | | $ | 113 | | | 78.8 | % |
Earnings from operations as a % of net revenue | 9.8 | % | | 5.2 | % | | |
Three months ended July 31, 2020 compared with three months ended July 31, 2019
Intelligent Edge net revenue decreased by $97 million, or 12.4% (decreased 11.4% on a constant currency basis), for the three months ended July 31, 2020, as compared to the prior-year period.
Net revenue declined in the Intelligent Edge due to the weak and uncertain global demand environment resulting from COVID-19 related lockdown restrictions. As a result, we experienced lower revenue from WLAN and switching products, with competitive pricing pressures also adding to the decline in WLAN net revenue. Lower software net revenue and unfavorable foreign currency fluctuations also added to the net revenue decline, partially offset by an increase in net revenue from service renewals.
Intelligent Edge earnings from operations as a percentage of net revenue increased 1.8 percentage points for the three months ended July 31, 2020 as compared to the prior year period due primarily to a decrease in operating expenses as a percentage of net revenue partially offset by an increase in cost of products and services as a percentage of net revenue. The increase in cost of product and services as a percentage of net revenue was due primarily to higher supply chain costs resulting from COVID-19 related lockdown restrictions partially offset by a higher mix of services. The decrease in operating expenses as a percentage of net revenue was due primarily lower spending due to cost containment measures put in place in response to COVID-19 and lower variable compensation expense.
Nine months ended July 31, 2020 compared with Nine months ended July 31, 2019
Intelligent Edge net revenue decreased by $102 million, or 4.7% (decreased 3.5% on a constant currency basis), for the nine months ended July 31, 2020, as compared to the prior-year period.
The decrease in Intelligent Edge net revenue was due primarily to lower revenue from switching and WLAN products predominantly driven by the weak and uncertain global demand environment resulting from COVID-19 related lockdown restrictions along with lower software net revenue and unfavorable foreign currency fluctuations, partially offset by higher revenue from service renewals.
Intelligent Edge earnings from operations as a percentage of net revenue increased 4.6 percentage points for the nine months ended July 31, 2020 as compared to the prior year period due primarily to lower operating expenses as a percentage of net revenue and lower cost of products and services as a percentage of net revenue. The decrease in cost of product and services as a percentage of net revenue was due primarily to a higher mix of services and lower mix of high-cost switching products. The decrease in operating expense as a percentage of net revenue was due primarily to lower field selling costs as a result of lower spending due to cost containment measures we put in place in response to COVID-19 and lower variable compensation expense.
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
Financial Services
| | | | | | | | | | | | | | | | | |
| Three Months Ended July 31, | | | | |
| 2020 | | 2019 | | % Change |
| Dollars in millions | | | | |
Net revenue | $ | 811 | | | $ | 888 | | | (8.7) | % |
Earnings from operations | $ | 65 | | | $ | 77 | | | (15.6) | % |
Earnings from operations as a % of net revenue | 8.0 | % | | 8.7 | % | | |
| | | | | | | | | | | | | | | | | |
| Nine Months Ended July 31, | | | | |
| 2020 | | 2019 | | % Change |
| Dollars in millions | | | | |
Net revenue | $ | 2,503 | | | $ | 2,703 | | | (7.4) | % |
Earnings from operations | $ | 213 | | | $ | 231 | | | (7.8) | % |
Earnings from operations as a % of net revenue | 8.5 | % | | 8.5 | % | | |
Three months ended July 31, 2020 compared with three months ended July 31, 2019
FS net revenue decreased by $77 million, or 8.7% (decreased 6.3% on a constant currency basis), for the three months ended July 31, 2020, as compared to the prior-year period.
The decrease in net revenue was due primarily to a decrease in rental revenue due to lower average operating lease assets, unfavorable currency fluctuations, along with lower asset management revenue from lease buyouts and lease extensions.
FS earnings from operations as a percentage of net revenue decreased 0.7 percentage points for the three months ended July 31, 2020, as compared to the prior-year period, due primarily to lower cost of services as a percentage of net revenue, partially offset by an increase to operating expenses as a percentage of net revenue. The decrease to cost of services as a percentage of net revenue resulted from lower borrowing costs and depreciation expense, partially offset by higher bad debt expense. The increase to operating expenses as a percentage of net revenue was due primarily to lower capitalized initial direct costs as a result of adopting the new lease accounting standard, along with the overall decrease in net revenue.
Nine months ended July 31, 2020 compared with nine months ended July 31, 2019
FS net revenue decreased by $200 million, or 7.4% (decreased 5.6% on a constant currency basis), for the nine months ended July 31, 2020, as compared to the prior-year period.
The decrease in net revenue was due primarily to a decrease in rental revenue due to lower average operating lease assets, unfavorable currency fluctuations, along with lower lease equipment buyout revenue, partially offset by higher revenue from lease extensions.
FS earnings from operations as a percentage of net revenue was flat for the nine months ended July 31, 2020, as compared to the prior-year period, due primarily to lower cost of services as a percentage of net revenue, offset by an increase to operating expenses as a percentage of net revenue. The decrease to cost of services as a percentage of net revenue resulted from lower depreciation expense and borrowing costs, partially offset by higher bad debt expense. The increase to operating expenses as a percentage of net revenue was due primarily to lower capitalized initial direct costs as a result of adopting the new lease accounting standard.
Financing Volume
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended July 31, | | | | Nine Months Ended July 31, | | |
| 2020 | | 2019 | | 2020 | | 2019 |
| In millions | | | | | | |
Financing volume | $ | 1,491 | | | $ | 1,696 | | | $ | 4,392 | | | $ | 4,480 | |
Financing volume, which represents the amount of financing provided to customers for equipment and related software and services, including intercompany activity, decreased by 12.1% and 2.0% for the three and nine months ended July 31, 2020
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
as compared to the prior-year periods. For the three months ended July 31, 2020, the decrease was primarily driven by lower financing associated with third-party and HPE product sales and related service offerings, along with unfavorable currency fluctuations. For the nine months ended July 31, 2020, the decrease was primarily driven 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 | | |
| July 31, 2020 | | October 31, 2019 |
| Dollars in millions | | |
Financing receivables, gross | $ | 9,043 | | | $ | 8,652 | |
Net equipment under operating leases | 4,026 | | | 4,084 | |
Capitalized profit on intercompany equipment transactions(1) | 322 | | | 382 | |
Intercompany leases(1) | 93 | | | 100 | |
Gross portfolio assets | 13,484 | | | 13,218 | |
Allowance for doubtful accounts(2) | 142 | | | 131 | |
Operating lease equipment reserve | 60 | | | 60 | |
Total reserves | 202 | | | 191 | |
Net portfolio assets | $ | 13,282 | | | $ | 13,027 | |
Reserve coverage | 1.5 | % | | 1.4 | % |
Debt-to-equity ratio(3) | 7.0x | | 7.0x |
(1)Intercompany activity is eliminated in consolidation.
(2)Allowance for doubtful accounts for financing receivables includes both the short- and long-term portions.
(3)Debt benefiting FS consists of intercompany equity that is treated as debt for segment reporting purposes, intercompany debt, and borrowing- and funding-related activity associated with FS and its subsidiaries. Debt benefiting FS totaled $11.8 billion and $11.4 billion at July 31, 2020 and October 31, 2019, 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. FS equity at July 31, 2020 and October 31, 2019 was $1.7 billion and $1.6 billion, respectively.
As of July 31, 2020 and October 31, 2019, FS net cash and cash equivalents balances were approximately $677 million and $711 million, respectively.
Net portfolio assets as of July 31, 2020 increased 2.0% from October 31, 2019. The increase generally resulted from new financing volume exceeding portfolio runoff during the period, along with favorable currency fluctuations.
FS 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 nine months ended July 31, 2020, FS recorded net bad debt expense of $25 million and $58 million, respectively. For the three and nine months ended July 31, 2019, FS recorded net bad debt expense of $19 million and $51 million, respectively.
As of July 31, 2020, FS experienced an increase in billed finance receivables compared to October 31, 2019, which included some impact to collections from customers as a result of COVID-19. We are currently unable to fully predict the extent to which COVID-19 may adversely impact future collections of our receivables.
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
Corporate Investments
| | | | | | | | | | | | | | | | | |
| Three Months Ended July 31, | | | | |
| 2020 | | 2019 | | % Change |
| Dollars in millions | | | | |
Net revenue | $ | 119 | | | $ | 130 | | | (8.5) | % |
Loss from operations | $ | (27) | | | $ | (25) | | | (8.0) | % |
Loss from operations as a % of net revenue | (22.7) | % | | (19.2) | % | | |
| | | | | | | | | | | | | | | | | |
| Nine Months Ended July 31, | | | | |
| 2020 | | 2019 | | % Change |
| Dollars in millions | | | | |
Net revenue | $ | 364 | | | $ | 373 | | | (2.4) | % |
Loss from operations | $ | (82) | | | $ | (82) | | | — | % |
Loss from operations as a % of net revenue | (22.5) | % | | (22.0) | % | | |
Three months ended July 31, 2020 compared with three months ended July 31, 2019
Corporate Investments net revenue decreased by $11 million, or 8.5% (decreased 6.2% on a constant currency basis), for the three months ended July 31, 2020 as compared to the prior-year period. The decrease in Corporate Investments net revenue was due primarily to lower services revenue from the Communications and Media Solutions ("CMS") business due to the weak and uncertain global demand environment resulting from COVID-19 related lockdown restrictions.
Corporate Investments loss from operations as a percentage of net revenue increased 3.5 percentage points for the three months ended July 31, 2020, as compared to the prior-year period. The increase was due primarily to a higher legal expense, partially offset by lower cost of services.
Nine Months Ended July 31, 2020 compared with nine months ended July 31, 2019
Corporate Investments net revenue decreased by $9 million, or 2.4% (decreased 1.1% on a constant currency basis), for the nine months ended July 31, 2020 as compared to the prior-year period. The decrease in Corporate Investments net revenue was due primarily to lower services revenue from the CMS business due to the weak and uncertain global demand environment resulting from COVID-19 related lockdown restrictions.
Corporate Investments loss from operations as a percentage of net revenue increased 0.5 percentage points for the nine months ended July 31, 2020, as compared to the prior-year period. The increase was due primarily to a higher legal expense, partially offset by lower cost of services.
LIQUIDITY AND CAPITAL RESOURCES
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. 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.
COVID-19 has severely impacted global economic activity and caused significant volatility and negative pressure in the capital markets, which can increase the cost of capital and adversely impact access to capital. In addition, our businesses has been and may continue to be adversely affected, which may have a material adverse impact on our profitability and cash flows, and the timing and collectability of payments may be adversely affected as a result of the impact of COVID-19 on our customers.
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
As a result of the continued uncertainty generated by COVID-19, in April 2020, we issued $2.25 billion and in July 2020, we issued $1.75 billion in aggregate principal amount of unsecured Senior Notes. The net proceeds from these offerings were used primarily for the redemption in August 2020 of the $3.0 billion outstanding principal amount of the 3.6% registered Senior Notes that were originally due in October 2020. The pricing on our undrawn $4.75 billion revolving credit facility, maturing in August 2024, remains unchanged. We continue to monitor the severity and duration of the pandemic and its impact on the U.S. and other global economies, consumer behavior, our businesses, results of operations, financial condition and cash flows.
In July 2020, we entered into a definitive agreement to acquire Silver Peak Systems, Inc. ("Silver Peak"), an SD-WAN (Software-Defined Wide Area Network) leader for approximately $925 million in cash. The transaction is expected to close during our fourth quarter of fiscal 2020, subject to regulatory approvals and other customary closing conditions.
In May 2020, our Board of Directors approved a cost optimization and prioritization plan in order to focus our investments and realign the workforce to areas of growth and measures to simplify and evolve our product portfolio strategy, go-to-market configurations, supply chain structures, digital customer support model, marketing experiences, and real estate strategies. We expect that the plan will be implemented through fiscal 2022 and we estimate related cash funding payments of $1.3 billion over the next three years of which approximately $0.8 billion will relate to labor restructuring, $0.2 billion will relate to non-labor restructuring and $0.3 billion will relate to IT investments and design and execution charges.
Our cash and cash equivalent balances are held in numerous locations throughout the world, with a majority of the amount held in the U.S. 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. Our cash position is strong and we expect that our cash and cash equivalent balances, anticipated cash flow generated from operations and access to capital markets will be sufficient to cover our expected near-term cash outlays.
Amounts held outside of the U.S. are generally utilized to support 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 nine months of fiscal 2020, we repurchased 25.3 million shares for an aggregate amount of $355 million. As of July 31, 2020, we had a remaining authorization of $2.1 billion for future share repurchases. As a result of increased uncertainty due to COVID-19, purchases under our share repurchase program were suspended and as such, no purchases were made during the three months ended July 31, 2020.
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.
Liquidity
Our cash flow metrics were as follows:
| | | | | | | | | | | |
| Nine months ended July 31, | | |
| 2020 | | 2019 |
| In millions | | |
Net cash provided by operating activities | $ | 1,493 | | | $ | 2,565 | |
Net cash used in investing activities | (1,154) | | | (1,399) | |
Net cash provided by (used in) financing activities | 4,522 | | | (2,239) | |
Net increase (decrease) in cash, cash equivalents and restricted cash | $ | 4,861 | | | $ | (1,073) | |
Operating Activities
For the nine months ended July 31, 2020, net cash from operating activities decreased by $1.1 billion, as compared to the prior-year period. The decrease was due primarily to lower earnings and higher usage of cash for working capital management, as compared to the prior-year period.
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
Working capital metrics for the three months ended July 31, 2020 compared with the three months July 31, 2019
| | | | | | | | | | | | | | | | | |
| Three months ended July 31, | | | | |
| 2020 | | 2019 | | Change |
Days of sales outstanding in accounts receivable ("DSO") | 38 | | | 37 | | | 1 | |
Days of supply in inventory ("DOS") | 66 | | | 42 | | | 24 | |
Days of purchases outstanding in accounts payable ("DPO") | (114) | | | (98) | | | (16) | |
Cash conversion cycle | (10) | | | (19) | | | 9 | |
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 from 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 2019, DSO increased due primarily to extended payment terms partially offset by favorable billing linearity.
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 2019, DOS increased due primarily to higher purchases of inventory as we position inventory to fulfill planned future shipments and longer inventory cycles in the Cray business.
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 2019, DPO increased due primarily to extended payment terms with our design manufacturing partners and higher inventory purchases in order to fulfill planned future shipments.
Investing Activities
For the nine months ended July 31, 2020, net cash used in investing activities decreased by $0.2 billion, as compared to the corresponding period in fiscal 2019. The decrease was due primarily to lower investment in and higher sales proceeds from property, plant and equipment partially offset by lower cash generated from net financial collateral activities as compared to the prior-year period.
Financing Activities
For the nine months ended July 31, 2020, net cash provided by financing activities increased by $6.8 billion, as compared to the corresponding period in fiscal 2019. The increase was due primarily to higher net cash generated from the issuance of debt, net of repayment and lower utilization of cash for share repurchases as compared to the prior-year period.
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.
Senior Notes
In fiscal 2020, we completed the offering of the following Senior Notes:
In July we issued $1.0 billion at discount to par at a price of 99.883% at an interest rate of 1.45% due April 1, 2024, interest payable semi-annually on April 1 and October 1 of each year beginning on April 1, 2021.
In July we issued $750 million at discount to par at a price of 99.820% at an interest rate of 1.75% due April 1, 2026, interest payable semi-annually on April 1 and October 1 of each year beginning on April 1, 2021.
In April we issued $1.25 billion at discount to par at a price of 99.956% at an interest rate of 4.45% due October 2, 2023, interest payable semi-annually on April 2 and October 2 of each year beginning on October 2, 2020.
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
In April we issued $1.0 billion at discount to par at a price of 99.817% at an interest rate of 4.65% due October 1, 2024, interest payable semi-annually on April 1 and October 1 of each year beginning on October 1, 2020.
The net proceeds from the above Senior Notes were used for the redemption in August 2020 of the $3.0 billion outstanding principal amount of the 3.6% registered Senior Notes that were originally due in October 2020. The remaining proceeds from the above Senior Notes will be used for general corporate purposes.
Asset-Backed Debt Securities
In June 2020, 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 1.19%, payable monthly from August 2020 with a stated final maturity date of July 2030. As of July 31, 2020, the outstanding balance of the asset-backed debt securities was $1.0 billion.
In February 2020, we issued $755 million of asset-backed debt securities in 6 tranches at a weighted average price of 99.99% and a weighted average interest rate of 1.87%, payable monthly from April 2020 with a stated final maturity date of February 2030. As of July 31, 2020, the outstanding balance of the asset-backed debt securities was $622 million.
In December 2017, we filed a shelf registration statement with the Securities and Exchange Commission that allows us to sell, at any time and from time to time, in one or more offerings, debt securities, preferred stock, common stock, warrants, depository shares, purchase contracts, guarantees or units consisting of any of these securities.
Commercial Paper
We maintain two commercial paper programs, "the Parent Programs", and a wholly-owned subsidiary maintains a third program. Our U.S. program provides for the issuance of U.S. dollar-denominated commercial paper up to a maximum aggregate principal amount of $4.75 billion which was increased from $4.0 billion in March 2020. Our euro commercial paper program provides for the issuance of commercial paper outside of the U.S. denominated in U.S. dollars, euros or British pounds up to a maximum aggregate principal amount of $3.0 billion or the equivalent in those alternative currencies. The combined aggregate principal amount of commercial paper outstanding under those programs at any one time cannot exceed $4.75 billion. In addition, our 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 July 31, 2020 and October 31, 2019, no borrowings were outstanding under the Parent Programs, and $737 million and $698 million, respectively, were outstanding under our subsidiary’s program.
During the first nine months of fiscal 2020, we issued $701 million and repaid $703 million of commercial paper.
Revolving Credit Facility
We maintain a $4.75 billion five year senior unsecured committed credit facility that was entered into in August 2019. Loans under the revolving credit facility may be used for general corporate purposes, including support of the commercial paper program. Commitments under the Credit Agreement are available for a period of five years, which period may be extended, subject to the satisfaction of certain conditions, by up to two, one-year periods. Commitment fees, interest rates and other terms of borrowing under the credit facility vary based on Hewlett Packard Enterprise's external credit rating. As of July 31, 2020 and October 31, 2019, no borrowings were outstanding under the Credit Agreement.
Available Borrowing Resources
We had the following additional liquidity resources available if needed:
| | | | | |
| As of July 31, 2020 |
| In millions |
Commercial paper programs | $ | 5,013 | |
Uncommitted lines of credit | $ | 1,279 | |
| |
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
CONTRACTUAL AND OTHER OBLIGATIONS
Contractual Obligations
In July 2020, we entered into a definitive agreement to acquire Silver Peak Systems, Inc. ("Silver Peak"), an SD-WAN (Software-Defined Wide Area Network) leader for approximately $925 million in cash. The transaction is expected to close by the fourth quarter of our fiscal 2020, subject to regulatory approvals and other customary closing conditions.
In fiscal 2020, we completed the offering of the following Senior Notes:
In July we issued $1.0 billion at discount to par at a price of 99.883% at an interest rate of 1.45% due April 1, 2024, interest payable semi-annually on April 1 and October 1 of each year beginning on April 1, 2021.
In July we issued $750 million at discount to par at a price of 99.820% at an interest rate of 1.75% due April 1, 2026, interest payable semi-annually on April 1 and October 1 of each year beginning on April 1, 2021.
In April we issued $1.25 billion at discount to par at a price of 99.956% at an interest rate of 4.45% due October 2, 2023, interest payable semi-annually on April 2 and October 2 of each year beginning on October 2, 2020.
In April we issued $1.0 billion at discount to par at a price of 99.817% at an interest rate of 4.65% due October 1, 2024, interest payable semi-annually on April 1 and October 1 of each year beginning on October 1, 2020.
The net proceeds from the above Senior Notes were used for the August 2020 redemption of the $3.0 billion outstanding principal amount of the 3.6% registered Senior Notes that was originally due in October 2020. The remaining proceeds from the above Senior Notes will be used for general corporate purposes.
In June 2020, 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 1.19%, payable monthly from August 2020 with a stated final maturity date of July 2030. As of July 31, 2020, the outstanding balance of the asset-backed debt securities was $1.0 billion.
In February 2020, we issued $755 million of asset-backed debt securities in 6 tranches at a weighted average price of 99.99% and a weighted average interest rate of 1.87%, payable monthly from April 2020 with a stated final maturity date of February 2030. As of July 31, 2020, the outstanding balance of the asset-backed debt securities was $622 million.
Our other contractual obligations have not changed materially since October 31, 2019. For further information see "Contractual and Other Obligations" in Item 7 of Part II of our Annual Report on Form 10-K for the fiscal year ended October 31, 2019.
Retirement Benefit Plan Funding
For the remainder of fiscal 2020, we anticipate making contributions of approximately $43 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 local government, funding and tax authorities.
Restructuring Plans
As of July 31, 2020, we expect to make future cash payments of approximately $1.2 billion in connection with our approved restructuring plans, which includes $0.1 billion expected to be paid through the remainder of fiscal 2020 and $1.1 billion expected to substantially be paid through fiscal 2022. Of the expected future payments of $1.2 billion, $980 million will relate to the cost optimization and prioritization plan, $223 million will relate to the HPE Next Plan, and $26 million will relate to other restructuring plans. For more information on our restructuring activities, see Note 3, "Transformation Programs".
Uncertain Tax Positions
As of July 31, 2020, we had approximately $499 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 tax authorities might occur due to the uncertainties related to these tax matters. Payments of these obligations would result from settlements with tax authorities. For more information on our uncertain tax positions, see Note 5, "Taxes on Earnings".
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
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 Consolidated Financial Statements in Item 1 of Part I, which is incorporated herein by reference.
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, 2019.2020. There have been no material changes in our market risk exposures since October 31, 2019.2020.
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 July 31, 2020,April 30, 2021, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. We have not experienced any material impact to our internal controls over financial reporting even though our global workforce continues to primarily work-from-home due to COVID-19. We are continually monitoring and assessing the COVID-19 situation and its impact on our internal controls.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
Information with respect to this item may be found in Note 15,14, "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, 2019,2020, 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:
We are unable to predict the extent to which the global COVID-19 pandemic may adversely impact our business operations, financial performance and results of operations.
The COVID-19 pandemic and efforts to control its spread have significantly curtailed the movement of people, goods and services worldwide, including in most or all of the regions in which we sell our products and services and conduct our business operations. The pandemic has resulted in a global slowdown of economic activity, including travel restrictions, prohibitions of non-essential activities in some cases, disruption and shutdown of businesses and greater uncertainty in global financial markets. Our operations have been affected by a range of external factors related to the COVID-19 pandemic that are not within our control, including the various restrictions imposed by cities, counties, states and countries on our employees, customers, partners and suppliers designed to limit the spread of COVID-19. The magnitude and duration of the disruption and resulting decline in business activity is highly uncertain and cannot currently be predicted.
In response to the COVID-19 pandemic and to ensure the safety of our employees, we have implemented a global work-from-home policy until further notice that applies to a significant majority of our employees, with the exception of those performing essential activities. Our employees may elect to return to the office in jurisdictions where both local requirements and our own health and safety standards have been met. If such instances occur, employees would return to the office in a phased process. Moreover, certain industry and customer events that we sponsor or at which we present have been canceled, postponed or moved to virtual-only experiences and we may deem it advisable to similarly alter, postpone or cancel entirely additional events in the future. However, work-from-home and other modified business practices introduce additional operational risks, including cybersecurity risks, which may result in inefficiencies or delays, and have affected the way we conduct our product development, sales, customer support and other activities. Unanticipated disruptions in services provided through our localized physical infrastructure caused by the COVID-19 pandemic can curtail the functioning of critical components of our IT systems, and adversely affect our ability to fulfill orders, provide services, respond to customer requests and maintain our worldwide business operations.
The pandemic has adversely affected, and could continue to adversely affect, our business, by negatively impacting the demand for our products and services; restricting our operations and sales, marketing and distribution efforts; disrupting the supply chains of hardware products; and disrupting our research and development capabilities, engineering, design and manufacturing processes and other important business activities. For example, we expect the conditions caused by the COVID-19 pandemic could affect the rate of IT spending, impact our customers’ ability or willingness to purchase our products and services, delay prospective customers’ purchasing decisions, delay the provisioning of our products and services, lengthen payment terms, reduce the value or duration of subscription contracts or affect attrition rates, all of which could adversely affect our sales, operating results and financial performance. There have been, and likely will continue to be, delays of components shipments from our vendors in China and other jurisdictions in which normal business operations are disrupted.
We expect the COVID-19 pandemic could continue to have a negative impact on our sales and our results of operations, the size and duration of which we are currently unable to predict. While such changes were factored into the forecast used to assess assets for reserves and impairment, including goodwill, and to calculate the annualized effective tax rate as of July 31, 2020, any further changes to the profitability for the remainder of the fiscal year could impact the realizability of assets and the annualized effective tax rate applied to earnings. Additionally, concerns over the economic impact of the COVID-19 pandemic have caused extreme volatility in financial and other capital markets which has and may continue to adversely impact our stock price, our ability to access capital markets and our ability to fund liquidity needs. In response, we announced our long-term cost optimization and prioritization plan to focus our investments and realign our workforce to areas of growth combined with short-term cost saving measures, including temporary base salary adjustments or unpaid leave for certain employees and hiring and salary freezes. Execution of the plan may not achieve the results and savings we anticipate and our temporary cost saving measures may negatively affect employee morale and our future recruiting efforts.
To the extent the COVID-19 pandemic adversely affects our business and financial results, it may also have the effect of heightening many of the other risks described in this “Risk Factors” section and those incorporated by reference herein, such as those related to our products and services, demand and distribution, financial performance, credit rating and debt obligations. Given that developments concerning the COVID-19 pandemic have been constantly evolving, additional impacts and risks may arise that we are not aware of or able to appropriately respond to at this time.
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.
On April 6, 2020, the Company announced that it suspended purchases under its share repurchase program in response to the global economic uncertainty that resulted from the worldwide spread of the novel coronavirus. coronavirus. As of July 31, 2020,April 30, 2021, the Company had no unsettled open market repurchases. During the nine months ended July 31, 2020, the Company repurchasedrepurchases and settled 25.3 million shares of the Company's common stock, which included 0.5 million shares that were unsettled open market purchases as of October 31, 2019. Shares repurchased during the nine months ended July 31, 2020 were recorded as a $346 million reduction to stockholder's equity. As of July 31, 2020, the Company had a remaining authorization of $2.1 billion for future share repurchases.
Item 5. Other Information.
None.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”). Our local subsidiary is required to engage on a regular basis with the FSB as a licensing authority and file documents in order to conduct business within the Russian Federation. There are no gross revenues or net profits directly associated with any such dealings by us with the FSB and all such dealings are explicitly authorized by General License 1B issued by the U.S. Department of the Treasury’s Office of Foreign Assets Control. We plan to continue these activities as required to continue to conduct business in the Russian Federation to the extent permitted by applicable law.
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. Prior to its designation, HPE’s local Russian subsidiary, occasionally through distributors and resellers, had sold equipment to and entered into service contracts with Positive Technologies. HPE’s local subsidiary had also entered into an original equipment manufacturing agreement with Positive Technologies and approved it as a reseller. 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. The total cash received, excluding sales tax, from our business with Positive Technologies since its designation was $31,687, of which $1,755 has been recognized as revenue and the remaining $29,932 has been recorded as deferred revenue. There are no identifiable net profits directly associated with our relationship with Positive Technologies.
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, 2020.
Item 6. Exhibits.
The Exhibit Index beginning on page 8063 of this report sets forth a list of exhibits.
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 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | 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 |
| 2.16 | 2.16 | | | | 8-K | | 001-38033 | | 2.1 | | April 6, 2017 | 2.16 | | | | 8-K | | 001-38033 | | 2.1 | | April 6, 2017 |
2.17 | 2.17 | | | | 8-K | | 001-38033 | | 2.2 | | April 6, 2017 | 2.17 | | | | 8-K | | 001-38033 | | 2.2 | | April 6, 2017 |
2.18 | 2.18 | | | | 8-K | | 001-38033 | | 2.3 | | April 6, 2017 | 2.18 | | | | 8-K | | 001-38033 | | 2.3 | | April 6, 2017 |
2.19 | 2.19 | | | | 8-K | | 001-38033 | | 2.4 | | April 6, 2017 | 2.19 | | | | 8-K | | 001-38033 | | 2.4 | | April 6, 2017 |
2.20 | 2.20 | | | | 8-K | | 001-38033 | | 2.5 | | April 6, 2017 | 2.20 | | | | 8-K | | 001-38033 | | 2.5 | | April 6, 2017 |
2.21 | 2.21 | | | | 8-K | | 001-38033 | | 2.6 | | April 6, 2017 | 2.21 | | | | 8-K | | 001-38033 | | 2.6 | | April 6, 2017 |
2.22 | 2.22 | | | | 8-K | | 001-37483
| | 2.1 | | September 1, 2017 | 2.22 | | | | 8-K | | 001-37483 | | 2.1 | | September 1, 2017 |
2.23 | 2.23 | | | | 8-K | | 001-37483
| | 2.2 | | September 1, 2017 | 2.23 | | | | 8-K | | 001-37483 | | 2.2 | | September 1, 2017 |
2.24 | 2.24 | | | | 8-K | | 001-37483
| | 2.3 | | September 1, 2017 | 2.24 | | | | 8-K | | 001-37483 | | 2.3 | | September 1, 2017 |
2.25 | 2.25 | | | | 8-K | | 001-37483
| | 2.4 | | September 1, 2017 | 2.25 | | | | 8-K | | 001-37483 | | 2.4 | | September 1, 2017 |
2.26 | 2.26 | | | | 8-K | | 001-37483
| | 2.1 | | May 17, 2019 | 2.26 | | | | 8-K | | 001-37483 | | 2.1 | | May 17, 2019 |
2.27 | 2.27 | | | | 8-K | | 001-37483 | | 2.1 | | July 13, 2020 | 2.27 | | | | 8-K | | 001-37483 | | 2.1 | | July 13, 2020 |
3.1 | 3.1 | | | | 8-K | | 001-37483 | | 3.1 | | November 5, 2015 | 3.1 | | | | 8-K | | 001-37483 | | 3.1 | | November 5, 2015 |
3.2 | 3.2 | | | | 8-K | | 001-37483 | | 3.2 | | November 5, 2015 | 3.2 | | | | 8-K | | 001-37483 | | 3.2 | | November 5, 2015 |
3.3 | 3.3 | | | | 8-K | | 001-37483 | | 3.1 | | March 20, 2017 | 3.3 | | | | 8-K | | 001-37483 | | 3.1 | | March 20, 2017 |
3.4 | 3.4 | |
| | 8-K | | 001-37483 | | 3.2 | | March 20, 2017 | 3.4 | | | | 8-K | | 001-37483 | | 3.2 | | March 20, 2017 |
4.1 | 4.1 | | | | 8-K | | 001-37483 | | 4.1 | | October 13, 2015 | 4.1 | | | | 8-K | | 001-37483 | | 4.1 | | October 13, 2015 |
4.2 | | 4.2 | | | | 8-K | | 001-37483 | | 4.5 | | October 13, 2015 |