filings.toolsItem 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
For purposes of this Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") section, we use the terms "Hewlett Packard Enterprise", "HPE", the "Company", "we", "us" and "our" to refer to Hewlett Packard Enterprise Company. References in the MD&A section to "former Parent" refer to HP Inc.
We intend the discussion of our financial condition and results of operations that follows to provide information that will assist the reader in understanding our Condensed Consolidated Financial Statements, changes in certain key items in these financial statements from period-to-period and the primary factors that accounted for these changes, as well as how certain accounting principles, policies, and estimates affect our Condensed Consolidated Financial Statements. This discussion should be read in conjunction with our Condensed Consolidated Financial Statements and the related notes that appear elsewhere in this document.
The financial discussion and analysis in the following MD&A compares the three and nine months ended July 31, 2022 to the comparable prior-year periods and where appropriate, as of July 31, 2022, unless otherwise noted.
This MD&A is organized as follows:
- Trends and Uncertainties. A discussion of material events and uncertainties known to management, such as an update to our COVID-19 response, our managed exit from Russia and Belarus, and other events.
*•*Executive Overview. A discussion of our business and a summary analysis of our financial performance and other highlights, including non-GAAP financial measures, affecting the Company to provide context to the remainder of the MD&A.
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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.
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Results of Operations. A discussion of the results of operations at the consolidated level is followed by a discussion of the results of operations at the segment level.
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Liquidity and Capital Resources. An analysis of changes in our cash flows and a discussion of our financial condition and liquidity.
*•*Contractual Cash and Other Obligations. An overview of contractual cash obligations, retirement and post-retirement benefit plan funding, restructuring plans, uncertain tax positions, and off-balance sheet arrangements.
*•*GAAP to Non-GAAP Reconciliations. Each non-GAAP financial measure has been reconciled to the most directly comparable GAAP financial measure therein. This section also includes a discussion of the usefulness of non-GAAP financial measures, and material limitations associated with the use of non-GAAP financial measures.
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
TRENDS AND UNCERTAINTIES
The overall demand environment continues to improve but remains impacted by industry-wide supply constraints which have contributed to a challenging supply chain environment, even as the impact of recent pandemic-related lockdowns in China alleviated somewhat in the current quarter, which along with inflationary pressures are driving up material and logistic costs. The challenging supply chain environment has moderated our revenue growth, elevated costs, and delayed certain unit shipments, resulting in a higher level of backlog and related inventory at the end of the period. We expect this trend to continue in the near term.
Russia/Ukraine Conflict
The conflict between Russia and Ukraine and the related sanctions imposed by the U.S., European Union (E.U.), and other countries in response have negatively impacted our operations in both countries and increased economic and political uncertainty across the world. In response to the sanctions imposed, in February 2022, we suspended all new sales and shipments to Russia and Belarus and implemented compliance measures to address the continuously changing regulatory landscape. Based on a further assessment of business risks and needs, in June 2022, we determined that it is no longer tenable to maintain operations in Russia and Belarus and are proceeding with an orderly, managed exit of our remaining business in these countries.
In fiscal 2021, our operations in Russia and Belarus accounted for approximately 2% of our total net revenues. During the three months ended July 31, 2022, we recorded total pre-tax charges of $36 million primarily related to employee severance and abandoned assets, $6 million of which was included in Cost of services and $30 million in Disaster charges in the Condensed Consolidated Statement of Earnings. We also recorded $16 million of net income tax charges, primarily as a result of recording a valuation allowance on deferred taxes, in the Provision for taxes in the Condensed Consolidated Statement of Earnings in connection with these charges. During the nine months ended July 31, 2022, we recorded total pre-tax charges of $162 million primarily related to expected credit losses of financing and trade receivables, employee severance and abandoned assets, $99 million of which was included in Financing cost, $12 million in Cost of services and $51 million in Disaster charges in the Condensed Consolidated Statements of Earnings. We recorded $9 million of net income tax benefit in the Provision for taxes in the Condensed Consolidated Statement of Earnings related to these charges.
We will continue monitoring the social, political, regulatory, and economic environment in Russia and Ukraine, and will consider further actions as appropriate. More broadly, there could be additional adverse impacts to our net revenues, earnings and cash flows should the situation escalate beyond its current scope, including, among other potential impacts, economic recessions in certain neighboring countries or globally due to inflationary pressures and supply chain cost increases or the geographic proximity of the war relative to the rest of Europe.
Recent U.S. Tax Legislation
On August 16, 2022, the U.S. government enacted the Inflation Reduction Act of 2022 (the “Inflation Reduction Act”) into law. The Inflation Reduction Act includes a new corporate alternative minimum tax (the “Corporate AMT”) of 15% on the adjusted financial statement income (“AFSI”) of corporations with average AFSI exceeding $1.0 billion over a three-year period. The Corporate AMT is effective for the Company beginning in fiscal 2024. We are evaluating the Corporate AMT and its potential impact on our future U.S. tax expense, cash taxes, and effective tax rate. Additionally, the Inflation Reduction Act imposes an excise tax of 1% tax on the fair market value of net stock repurchases made after December 31, 2022. The impact of this provision will be dependent on the extent of share repurchases made in future periods.
COVID-19 Update
Given the effectiveness and broad access of vaccines along with their acceptance by a high percentage of our U.S. workforce, as of September 6, 2022, we will lift our vaccination requirement for access to sites, travel, and events in the U.S. However, any team member or contingent worker working at or visiting customer or third-party sites must continue to comply with those parties' rules and provide proof of vaccination or a negative test.
Outside of the U.S., sites are open at varying capacities based on local pandemic conditions and risk mitigation strategies enacted by country leadership. We maintain compliance with all local laws and regulations with respect to office attendance and safety protocols.
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
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 customers range from small-and-medium size businesses to large global enterprises and governmental entities. Our legacy dates to a partnership founded in 1939 by William R. Hewlett and David Packard, and we strive every day to uphold and enhance that legacy through our dedication to providing innovative technological solutions to our customers.
Our operations are organized into six reportable segments for financial reporting purposes: Compute, High Performance Computing and Artificial Intelligence ("HPC & AI"), Storage, Intelligent Edge, HPE Financial Services ("FS"), and Corporate Investments and Other.
The global pandemic has brought a renewed focus on digital transformation as businesses rethink everything from remote work and collaboration to business continuity and data insights. Businesses are looking ahead, beyond the demands of the pandemic, and treating digital transformation as a strategic imperative. Additionally, the pandemic has accelerated several trends relevant to the company: the exponential increase of data at the edge; the need for a cloud experience everywhere to manage the growth of data at the edge; and the need to quickly extract value from the captured data. Enterprises have embraced multi-cloud strategies, employing different cloud environments for different types of data and workloads. Increasingly, customers want to digitally transform, while preserving capital and eliminating operating expense, by paying only for the IT they use.
In response, we are accelerating our development and innovation efforts in areas of strategic focus, including the Intelligent Edge and HPC & AI businesses, while at the same time, strengthening our core Compute and Storage businesses, by investing in key areas of growth and accelerating our as-a-service pivot to become the edge-to-cloud company for our customers and partners with our HPE GreenLake edge-to-cloud platform.
On March 22, 2022, we announced significant advancements to our HPE GreenLake edge-to-cloud platform, our flagship hybrid offering that enables organizations to modernize all their applications and data, from edge to cloud. The platform advancements include a unified operating experience with one view of all services edge to cloud along with convergence with the Aruba Central cloud service, twelve new cloud services including network as-a-service, data services, high performance computing functions, and compute operations management, and availability of HPE GreenLake platform in the online marketplaces of several leading distributors. These updates strengthen the HPE GreenLake platform and help customers drive their data modernization needs.
The following table summarizes our condensed consolidated financial results for the periods presented:
| For the three months ended July 31, | For the nine months ended July 31, | ||||||||||||||||||||||||||||||||||
| 2022 | 2021 | Change | 2022 | 2021 | Change | ||||||||||||||||||||||||||||||
| Dollars in millions, except per share amounts | Dollars in millions, except per share amounts | ||||||||||||||||||||||||||||||||||
| Net revenue | $ | 6,951 | $ | 6,897 | 0.8% | $ | 20,625 | $ | 20,430 | 1.0% | |||||||||||||||||||||||||
| Gross profit | $ | 2,396 | $ | 2,382 | 0.6% | $ | 6,913 | $ | 6,957 | (0.6)% | |||||||||||||||||||||||||
| Gross profit margin | 34.5 | % | 34.5 | % | —pts | 33.5 | % | 34.1 | % | (0.6)pts | |||||||||||||||||||||||||
| Earnings from operations | $ | 466 | $ | 282 | 65.2% | $ | 1,121 | $ | 782 | 43.4% | |||||||||||||||||||||||||
| Operating profit margin | 6.7 | % | 4.1 | % | 2.6pts | 5.4 | % | 3.8 | % | 1.6pts | |||||||||||||||||||||||||
| Net earnings | $ | 409 | $ | 392 | 4.3% | $ | 1,172 | $ | 874 | 34.1% | |||||||||||||||||||||||||
| Diluted net earnings per share | $ | 0.31 | $ | 0.29 | $0.02 | $ | 0.88 | $ | 0.66 | $0.22 | |||||||||||||||||||||||||
| Cash flow from operations | $ | 1,254 | $ | 1,130 | $124 | $ | 1,557 | $ | 2,915 | $(1,358) |
Three months ended July 31, 2022 compared with the three months ended July 31, 2021
Net revenue of $7.0 billion represented an increase of 0.8% (increased 4.3% on a constant currency basis) as robust demand reflected by a high beginning order backlog was moderated by a combination of unfavorable currency fluctuations, ongoing supply chain constraints, and lower revenue from Russia. The net revenue increase was driven by the introduction of the Frontier supercomputer from HPE Cray and strong demand for our networking products. The gross profit margin of 34.5%
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
(or $2.4 billion) was unchanged from the prior-year period as the combination of pricing discipline in server and storage products and a mix shift to higher margin software rich offerings was offset by supply chain constraints and related cost increases in HPC & AI and Intelligent Edge. The operating profit margin was 6.7%, up 2.6 percentage points due primarily to lower transformation costs and lower selling, general & administrative expense, the positive impact of which was moderated by expenses related to exiting our Russia and Belarus businesses.
Nine months ended July 31, 2022 compared with the nine months ended July 31, 2021
Net revenue of $20.6 billion represented an increase of 1.0% (increased 2.6% on a constant currency basis) as robust demand reflected by a high beginning order backlog was moderated by a combination of ongoing supply chain constraints, lower revenue from Russia, and unfavorable currency fluctuations. The net revenue increase was led by strong demand for networking products, the introduction of the Frontier supercomputer from HPE Cray and effective pricing management in server products. The gross profit margin of 33.5% (or $6.9 billion) represents a decrease of 0.6 percentage points due primarily to supply chain constraints and related cost increases in HPC & AI, Intelligent Edge, and Storage, with expected credit losses related to exiting our Russia and Belarus businesses adding to the overall decline. Moderating the decrease was pricing discipline and strong cost management in server products. The operating profit margin was 5.4%, up 1.6 percentage points due primarily to lower transformation costs.
For the nine months ended July 31, 2022, we generated $1.6 billion of cash flow from operations and used $201 million of free cash flows primarily due to the impact of supply chain constraints on working capital, which moderated cash generation, and increased capital investments.
The following table summarizes our condensed consolidated non-GAAP financial results for the periods presented:
| For the three months ended July 31, | For the nine months ended July 31, | ||||||||||||||||||||||||||||||||||
| 2022 | 2021 | Change | 2022 | 2021 | Change | ||||||||||||||||||||||||||||||
| Dollars in millions, except per share amounts | Dollars in millions, except per share amounts | ||||||||||||||||||||||||||||||||||
| Net revenue adjusted for currency | $ | 7,194 | $ | 6,897 | 4.3% | $ | 20,957 | $ | 20,430 | 2.6% | |||||||||||||||||||||||||
| Non-GAAP gross profit | $ | 2,412 | $ | 2,393 | 0.8% | $ | 7,065 | $ | 6,996 | 1.0% | |||||||||||||||||||||||||
| Non-GAAP gross profit margin | 34.7 | % | 34.7 | % | —pts | 34.3 | % | 34.2 | % | 0.1pts | |||||||||||||||||||||||||
| Non-GAAP earnings from operations | $ | 729 | $ | 673 | 8.3% | $ | 2,124 | $ | 2,131 | (0.3)% | |||||||||||||||||||||||||
| Non-GAAP operating profit margin | 10.5 | % | 9.8 | % | 0.7pts | 10.3 | % | 10.4 | % | (0.1)pts | |||||||||||||||||||||||||
| Non-GAAP net earnings | $ | 629 | $ | 623 | 1.0% | $ | 1,909 | $ | 1,914 | (0.3)% | |||||||||||||||||||||||||
| Non-GAAP diluted net earnings per share | $ | 0.48 | $ | 0.47 | $0.01 | $ | 1.44 | $ | 1.44 | $— | |||||||||||||||||||||||||
| Free cash flow | $ | 587 | $ | 526 | $61 | $ | (201) | $ | 1,457 | $(1,658) |
Each non-GAAP financial measure has been reconciled to the most directly comparable GAAP financial measure herein. Please refer to the section "GAAP to Non-GAAP Reconciliations" at the end of this MD&A for these reconciliations, along with a discussion of the usefulness of these non-GAAP financial measures, and material limitations associated with the use of these non-GAAP financial measures.
Annualized revenue run-rate ("ARR")
ARR represents the annualized revenue of all net HPE GreenLake edge-to-cloud platform services revenue, related financial services revenue (which includes rental income from operating leases and interest income from capital leases) and software-as-a-service, software consumption revenue, and other as-a-service offerings, recognized during a quarter and multiplied by four. We use ARR as a performance metric. ARR should be viewed independently of net revenue and is not intended to be combined with it.
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
The following presents our ARR performance for the periods presented:
| For the three months ended July 31, | |||||||||||||||||||||||
| 2022 | 2021 | ||||||||||||||||||||||
| Dollars in millions | |||||||||||||||||||||||
| ARR | $ | 858 | $ | 705 | |||||||||||||||||||
| year-over-year growth rate | 22% | 34% |
The 22% increase in ARR was due to growth in our HPE GreenLake edge-to-cloud platform and related financial services due to an expanding customer installed base. The increase was adversely impacted by unfavorable currency fluctuations, supply chain constraints and related installation delays. At the segment level, ARR growth was led by strength in Storage as-a-service including Zerto and Intelligent Edge as-a-service activity.
Returning capital to our shareholders remains an important part of our capital allocation framework that consists of capital returns to shareholders and strategic investments. During the third quarter of fiscal 2022, we paid a quarterly dividend of $0.12 per share to our shareholders. On August 30, 2022, we declared our fiscal 2022 fourth quarterly dividend of $0.12 per share, payable on October 7, 2022, to stockholders of record as of the close of business on September 12, 2022. During the first nine months of fiscal 2022, we repurchased and settled an aggregate amount of $384 million in connection with our share repurchase program. As of July 31, 2022, we had a remaining authorization of $1.5 billion for future share repurchases.
We believe our existing balance of cash and cash equivalents, along with commercial paper and other short-term liquidity arrangements, are sufficient to satisfy our working capital needs, capital asset purchases, dividends, debt repayments, and other liquidity requirements associated with our existing operations. As of July 31, 2022 and October 31, 2021, our cash, cash equivalents and restricted cash were $4.4 billion and $4.3 billion, respectively. In December 2021, we terminated our prior senior unsecured revolving credit facility and entered into a new senior unsecured revolving credit facility with an aggregate lending commitment of $4.75 billion for a period of five years. As of July 31, 2022, no borrowings were outstanding under this credit facility.
RESULTS OF OPERATIONS
Revenue from our international operations has historically represented, and we expect will continue to represent, a majority of our overall net revenue. As a result, our revenue growth has been impacted, and we expect will continue to be impacted, by fluctuations in foreign currency exchange rates. In order to provide a framework for assessing performance excluding the impact of foreign currency fluctuations, we present the year-over-year percentage change in revenue on a constant currency basis, which assumes no change in foreign currency exchange rates from the prior-year period and does not adjust for any repricing or demand impacts from changes in foreign currency exchange rates. This change in revenue on a constant currency basis is calculated as the quotient of (a) current year revenue converted to U.S. dollars using the prior-year period's foreign currency exchange rates divided by (b) the prior-year period revenue. This information is provided so that revenue can be viewed without the effect of fluctuations in foreign currency exchange rates, which is consistent with how management evaluates our revenue results and trends. This constant currency disclosure is provided in addition to, and not as a substitute for, the year-over-year percentage change in revenue on a GAAP basis. Other companies may calculate and define similarly labeled items differently, which may limit the usefulness of this measure for comparative purposes.
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
Results of operations in dollars and as a percentage of net revenue were as follows:
| For the three months ended July 31, | For the nine months ended July 31, | ||||||||||||||||||||||||||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||||||||||||||||||||||||||
| Dollars | % of Revenue | Dollars | % of Revenue | Dollars | % of Revenue | Dollars | % of Revenue | ||||||||||||||||||||||||||||||||||||||||
| Dollars in millions | |||||||||||||||||||||||||||||||||||||||||||||||
| Net revenue | $ | 6,951 | 100.0 | % | $ | 6,897 | 100.0 | % | $ | 20,625 | 100.0 | % | $ | 20,430 | 100.0 | % | |||||||||||||||||||||||||||||||
| Cost of sales | 4,555 | 65.5 | 4,515 | 65.5 | 13,712 | 66.5 | 13,473 | 65.9 | |||||||||||||||||||||||||||||||||||||||
| Gross profit | 2,396 | 34.5 | 2,382 | 34.5 | 6,913 | 33.5 | 6,957 | 34.1 | |||||||||||||||||||||||||||||||||||||||
| Research and development | 509 | 7.3 | 506 | 7.3 | 1,530 | 7.4 | 1,477 | 7.2 | |||||||||||||||||||||||||||||||||||||||
| Selling, general and administrative | 1,229 | 17.7 | 1,291 | 18.7 | 3,679 | 17.8 | 3,649 | 17.9 | |||||||||||||||||||||||||||||||||||||||
| Amortization of intangible assets | 73 | 1.1 | 82 | 1.2 | 220 | 1.2 | 276 | 1.4 | |||||||||||||||||||||||||||||||||||||||
| Transformation costs | 80 | 1.2 | 213 | 3.1 | 289 | 1.4 | 733 | 3.6 | |||||||||||||||||||||||||||||||||||||||
| Disaster charges | 30 | 0.4 | 5 | 0.1 | 49 | 0.2 | 6 | — | |||||||||||||||||||||||||||||||||||||||
| Acquisition, disposition and other related charges | 9 | 0.1 | 3 | — | 25 | 0.1 | 34 | 0.2 | |||||||||||||||||||||||||||||||||||||||
| Earnings from operations | 466 | 6.7 | 282 | 4.1 | 1,121 | 5.4 | 782 | 3.8 | |||||||||||||||||||||||||||||||||||||||
| Interest and other, net | (74) | (1.1) | (50) | (0.8) | (79) | (0.3) | (105) | (0.5) | |||||||||||||||||||||||||||||||||||||||
| Tax indemnification and related adjustments | (30) | (0.4) | 76 | 1.2 | (47) | (0.2) | 60 | 0.3 | |||||||||||||||||||||||||||||||||||||||
| Non-service net periodic benefit credit | 34 | 0.5 | 19 | 0.3 | 106 | 0.5 | 53 | 0.3 | |||||||||||||||||||||||||||||||||||||||
| Earnings from equity interests | 68 | 1.0 | 79 | 1.1 | 132 | 0.6 | 109 | 0.5 | |||||||||||||||||||||||||||||||||||||||
| Earnings before provision for taxes | 464 | 6.7 | 406 | 5.9 | 1,233 | 6.0 | 899 | 4.4 | |||||||||||||||||||||||||||||||||||||||
| Provision for taxes | (55) | (0.8) | (14) | (0.2) | (61) | (0.3) | (25) | (0.1) | |||||||||||||||||||||||||||||||||||||||
| Net earnings | $ | 409 | 5.9 | % | $ | 392 | 5.7 | % | $ | 1,172 | 5.7 | % | $ | 874 | 4.3 | % |
Stock-based compensation expense is included within costs and expenses presented in the table above as follows:
| For the three months ended July 31, | For the nine months ended July 31, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| In millions | |||||||||||||||||||||||
| Cost of sales | $ | 9 | $ | 9 | $ | 38 | $ | 33 | |||||||||||||||
| Research and development | 31 | 28 | 113 | 96 | |||||||||||||||||||
| Selling, general and administrative | 24 | 49 | 155 | 165 | |||||||||||||||||||
| Acquisition, disposition and other related charges | — | — | — | 10 | |||||||||||||||||||
| Total | $ | 64 | $ | 86 | $ | 306 | $ | 304 |
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
On April 14, 2021 (the "Approval Date"), shareholders of the Company approved the Hewlett Packard Enterprise Company 2021 Stock Incentive Plan (the "2021 Plan") that replaced the Company’s 2015 Stock Incentive Plan (the “2015 Plan”). The 2021 Plan provides for the grant of various types of awards including restricted stock awards, stock options, and performance-based awards. These awards generally vest over 3 years from the grant date. The maximum number of shares as of the Approval Date that may be delivered to the participants under the 2021 Plan shall not exceed 7 million shares, plus 35.8 million shares that were available for grant under the 2015 Plan and any awards granted under the 2015 Plan prior to the Approval Date that were cash-settled, forfeited, terminated, or lapsed after the Approval Date. On April 5, 2022, shareholders of the Company approved an amendment to the 2021 Plan thereby increasing the overall number of shares available for issuance by 15 million shares. As of July 31, 2022, the Company had remaining authorization of 38.6 million shares under the 2021 Plan.
Three and nine months ended July 31, 2022 compared with the three and nine months ended July 31, 2021
Net revenue
For the three months ended July 31, 2022, total net revenue of $7.0 billion represented an increase of $54 million, or 0.8% (increased 4.3% on a constant currency basis). U.S. net revenue increased by $24 million, or 1.1% to $2.3 billion, and net revenue from outside of the U.S. increased by $30 million, or 0.6%, to $4.7 billion.
For the nine months ended July 31, 2022, total net revenue of $20.6 billion represented an increase of $195 million, or 1.0% (increased 2.6% on a constant currency basis). U.S. net revenue increased by $304 million, or 4.7% to $6.7 billion, and net revenue from outside of the U.S. decreased by $109 million, or 0.8%, to $13.9 billion.
From a segment perspective, for the three months ended July 31, 2022, net revenue increased 12% and 8% in HPC & AI and Intelligent Edge, respectively, and decreased 10%, 3%, 3%, and 2% in Corporate Investments and Other, Financial Services, Compute, and Storage, respectively. For the nine months ended July 31, 2022, net revenue increased 9% and 7% in Intelligent Edge and HPC & AI, respectively, and decreased 5%, 3%, 2%, and 1% in Corporate Investments and Other, Storage, Financial Services, and Compute, respectively.
The components of the weighted net revenue change by segment were as follows:
| For the three months ended July 31, 2022 | For the nine months ended July 31, 2022 | ||||||||||
| Percentage points | |||||||||||
| Compute | (1.4) | (0.2) | |||||||||
| HPC & AI | 1.3 | 0.7 | |||||||||
| Storage | (0.3) | (0.5) | |||||||||
| Intelligent Edge | 1.0 | 1.1 | |||||||||
| Financial Services | (0.4) | (0.3) | |||||||||
| Corporate Investments | (0.5) | (0.2) | |||||||||
| Total Segment | (0.3) | 0.6 | |||||||||
| Elimination of Intersegment net revenue and Other | 1.1 | 0.4 | |||||||||
| Total HPE | 0.8 | 1.0 |
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
Please refer to the section "Segment Information" further below for a discussion of our results of operations for each reportable segment.
Gross profit
For the three months ended July 31, 2022, the total gross profit margin of 34.5% remained unchanged compared to the prior year period as the combination of pricing discipline in server and storage products and a mix shift to higher margin software-rich offerings was offset by supply chain constraints and related cost increases in HPC & AI and Intelligent Edge. For the nine months ended July 31, 2022, the total gross profit margin of 33.5%, represents a decrease of 0.6 percentage points compared to the prior year period. The decrease was primarily driven by supply chain constraints and related cost increases across many of our segments, with costs from expected credit losses related to exiting our Russia and Belarus businesses adding to the overall decline. Moderating the gross profit decrease was pricing discipline and strong cost management in server products.
Operating expenses
Research and development ("R&D")
For the three months ended July 31, 2022, R&D expense increased by $3 million, or 1% due primarily to higher IT and software expenditures, mostly offset by lower employee cost driven by lower variable compensation expense.
For the nine months ended July 31, 2022, R&D expense increased by $53 million, or 4% due primarily to higher overall employee compensation expense, which contributed 1.9 percentage points to the change and a combination of higher facilities, training and travel expenses, which in total contributed 1.1 percentage points to the change.
Selling, general and administrative
For the three months ended July 31, 2022, selling, general and administrative expense decreased by $62 million, or 5% due primarily to a combination of lower employee cost driven by lower variable compensation expense, which contributed 2.9 percentage points to the change, and continued cost savings resulting from our transformation programs, which contributed 2.4 percent points to the change.
For the nine months ended July 31, 2022, selling, general and administrative expense increased by $30 million, or 1% due primarily to higher travel expense as the economy reopens and COVID-19 restrictions ease, which contributed 1.4 percentage points to the change, partially offset by a combination of lower employee cost driven by lower variable compensation expense and continued cost savings from our transformation programs, which in total contributed 0.5 percentage points to the change.
Amortization of intangible assets
For the three and nine months ended July 31, 2022, amortization of intangible assets decreased by $9 million, or 11% and $56 million, or 20%, respectively, due to certain intangible assets associated with prior acquisitions reaching the end of their amortization periods moderated by an increase in amortization expense in the current periods resulting from recent acquisitions. Additionally, the decrease for the nine-month period was due to certain write-offs taken in the prior period.
Transformation programs and costs
Our transformation programs consist of the cost optimization and prioritization plan (launched in 2020) and the HPE Next initiative (launched in 2017).
For the three and nine months ended July 31, 2022, transformation costs decreased by $133 million, or 62% and $444 million, or 61%, respectively, due primarily to lower restructuring charges recorded in the current periods as restructuring actions related to employee severance, infrastructure and other under the HPE Next program are substantially complete. For a further discussion, refer to Note 3, "Transformation Programs" to the Condensed Consolidated Financial Statements in Item 1 of Part I.
Interest and other, net
For the three months ended July 31, 2022, interest and other, net expense increased by $24 million due primarily to a combination of unfavorable currency fluctuations, the prior period containing interest income from the recovery of social contribution taxes in Brazil, and losses on equity investments in the current period. The increase was moderated by increased
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
interest income from higher interest rates, lower interest expense from lower average borrowings, and higher gains from the sale of certain assets in the current period.
For the nine months ended July 31, 2022, interest and other, net expense decreased by $26 million due primarily to lower interest expense from lower average borrowings and increased interest income from higher interest rates. The decrease was moderated by unfavorable currency fluctuations.
Tax indemnification and related adjustments
We recorded tax indemnification expense of $30 million and tax indemnification income of $76 million for the three months ended July 31, 2022 and 2021, respectively, and tax indemnification expense of $47 million and tax indemnification income of $60 million for the nine months ended July 31, 2022 and 2021, respectively.
For the three months ended July 31, 2022, the amount primarily included changes in tax liabilities for which we shared joint and several liability with HP Inc. and for which we were indemnified by HP Inc. The nine months ended July 31, 2022 also included changes to certain pre-divestiture tax liabilities and tax receivables. For the three months ended July 31, 2021, the amount primarily included the impacts of a Brazilian Supreme Court decision received regarding the base on which social contribution taxes are imposed. The nine months ended July 31, 2021 also included changes in tax liabilities for which we shared joint and several liability with HP Inc., for which we were indemnified by HP Inc., and changes to certain pre-divestiture tax liabilities and tax receivables.
Non-service net periodic benefit credit
For the three and nine months ended July 31, 2022, non-service net periodic benefit credit increased by $15 million and $53 million, respectively, due primarily to lower amortized actuarial losses, partially offset by higher interest cost due to higher discount rates and lower expected returns on assets in the current periods.
Earnings from equity interests
Earnings from equity interests primarily represents our 49% interest in H3C Technologies and the amortization of our interest in basis difference. For the three months ended July 31, 2022, earnings from equity interests decreased by $11 million due primarily to gains from certain venture investments in the prior period partially offset by lower amortization expense from basis difference and higher net income earned by H3C in the current period.
For the nine months ended July 31, 2022, earnings from equity interests increased by $23 million due primarily to lower amortization expense from basis difference and higher net income earned by H3C in the current period partially offset by gains from certain venture investments in the prior period.
Provision for taxes
For the three months ended July 31, 2022 and 2021, we recorded income tax expense of $55 million and $14 million, respectively, which reflects an effective tax rate of 11.9% and 3.4%, respectively. For the nine months ended July 31, 2022 and 2021, we recorded income tax expense of $61 million and $25 million, respectively, which reflects an effective tax rate of 5.0% and 2.8%, respectively. Our effective tax rate generally differs from the U.S. federal statutory rate of 21% due to favorable tax rates associated with certain earnings from our operations in lower tax jurisdictions throughout the world but are also impacted by discrete tax adjustments during each fiscal period.
For further discussion, refer to Note 5, "Taxes on Earnings" to the Condensed Consolidated Financial Statements in Item 1 of Part I.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our Consolidated Financial Statements are prepared in accordance with U.S. Generally Accepted Accounting Principles ("GAAP"), which requires us to make estimates, judgments, and assumptions that affect the reported amounts of assets, liabilities, net revenue, and expenses, and the disclosure of contingent liabilities. An accounting policy is deemed to be critical if the nature of the estimate or assumption it incorporates is subject to a material level of judgment related to matters that are highly uncertain, and changes in those estimates and assumptions are reasonably likely to materially impact our Condensed Consolidated Financial Statements.
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
Estimates and judgments are based on historical experience, forecasted events, and various other assumptions that we believe to be reasonable under the circumstances. Estimates and judgments may vary under different assumptions or conditions. We evaluate our estimates and judgments on an ongoing basis. Accounting policies that are critical in the portrayal of our financial condition and results of operations and require management’s most difficult, subjective, or complex judgements include revenue recognition, taxes on earnings, business combinations, impairment assessment of goodwill and intangible assets, and contingencies.
There have been no significant changes during the nine months ended July 31, 2022, to the items that we disclosed as our "Critical Accounting Policies and Estimates" in Management's Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the fiscal year ended October 31, 2021. A summary of significant accounting policies and a summary of recent accounting pronouncements applicable to our Condensed Consolidated Financial Statements are included in Note 1, "Overview and Summary of Significant Accounting Policies", to the Condensed Consolidated Financial Statements in Item 1 of Part I.
Segment Information
Hewlett Packard Enterprise's organizational structure is based on a number of factors that the Chief Operating Decision Maker ("CODM"), who is the Chief Executive Officer ("CEO"), uses to evaluate, view, and run our business operations, which include, but are not limited to, customer base and homogeneity of products and technology. The segments are based on this organizational structure and information reviewed by Hewlett Packard Enterprise's management to evaluate segment results.
A description of the products and services for each segment, along with other pertinent information related to our segments can be found in Note 2, "Segment Information", to the Condensed Consolidated Financial Statements in Item 1 of Part I.
Segment Results
The following table and ensuing discussion provide an overview of our key financial metrics by segment for the three months ended July 31, 2022, as compared to the prior-year period:
| HPE Consolidated | Compute | HPC & AI | Storage | Intelligent Edge | Financial Services | Corporate Investments | ||||||||||||||||||||||||||||||||||||||
| Dollars in millions | ||||||||||||||||||||||||||||||||||||||||||||
| Net revenue(1) | $ | 6,951 | $ | 3,004 | $ | 830 | $ | 1,152 | $ | 941 | $ | 817 | $ | 300 | ||||||||||||||||||||||||||||||
| Year-over-year change % | 0.8 | % | (3.2) | % | 12.2 | % | (2.0) | % | 8.0 | % | (3.2) | % | (9.6) | % | ||||||||||||||||||||||||||||||
| Earnings from operations(2) | $ | 466 | $ | 400 | $ | 28 | $ | 169 | $ | 155 | $ | 96 | $ | (31) | ||||||||||||||||||||||||||||||
| Earnings from operations as a % of net revenue | 6.7 | % | 13.3 | % | 3.4 | % | 14.7 | % | 16.5 | % | 11.8 | % | (10.3) | % | ||||||||||||||||||||||||||||||
| Year-over-year change percentage points | 2.6 | pts | 2.1 | pts | (0.4) | pts | (0.4) | pts | 0.4 | pts | 0.7 | pts | (1.9) | pts |
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
The following table and ensuing discussion provide an overview of our key financial metrics by segment for the nine months ended July 31, 2022, as compared to the prior-year period:
| HPE Consolidated | Compute | HPC & AI | Storage | Intelligent Edge | Financial Services | Corporate Investments | ||||||||||||||||||||||||||||||||||||||
| Dollars in millions | ||||||||||||||||||||||||||||||||||||||||||||
| Net revenue(1) | $ | 20,625 | $ | 9,005 | $ | 2,330 | $ | 3,406 | $ | 2,709 | $ | 2,482 | $ | 952 | ||||||||||||||||||||||||||||||
| Year-over-year change % | 1.0 | % | (0.6) | % | 6.6 | % | (2.8) | % | 9.1 | % | (2.4) | % | (5.1) | % | ||||||||||||||||||||||||||||||
| Earnings from operations(2) | $ | 1,121 | $ | 1,231 | $ | (19) | $ | 475 | $ | 421 | $ | 304 | $ | (66) | ||||||||||||||||||||||||||||||
| Earnings from operations as a % of net revenue | 5.4 | % | 13.7 | % | (0.8) | % | 13.9 | % | 15.5 | % | 12.2 | % | (6.9) | % | ||||||||||||||||||||||||||||||
| Year-over-year change percentage points | 1.6 | pts | 2.4 | pts | (4.9) | pts | (3.3) | pts | (1.4) | pts | 1.6 | pts | 1.5 | 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, amortization of initial direct costs, amortization of intangible assets, transformation costs, disaster charges, and acquisition, disposition and other related charges.
C****ompute
| For the three months ended July 31, | For the nine months ended July 31 | ||||||||||||||||||||||||||||||||||
| 2022 | 2021 | % Change | 2022 | 2021 | % Change | ||||||||||||||||||||||||||||||
| Dollars in millions | Dollars in millions | ||||||||||||||||||||||||||||||||||
| Net revenue | $ | 3,004 | $ | 3,102 | (3.2) | % | $ | 9,005 | $ | 9,060 | (0.6) | % | |||||||||||||||||||||||
| Earnings from operations | $ | 400 | $ | 346 | 15.6 | % | $ | 1,231 | $ | 1,021 | 20.6 | % | |||||||||||||||||||||||
| Earnings from operations as a % of net revenue | 13.3 | % | 11.2 | % | 13.7 | % | 11.3 | % |
Three months ended July 31, 2022 compared with three months ended July 31, 2021
Compute net revenue decreased by $98 million, or 3.2% (decreased 0.5% on a constant currency basis), primarily due to unfavorable currency fluctuations and a decline in unit shipments resulting from supply constraints due to the challenging supply chain environment. As a result, Compute exited the quarter with a high level of order backlog. The net revenue decline was moderated by higher average unit prices resulting from a combination of disciplined pricing actions and higher sales of server configurations with more complex component architectures in our next generation products.
From a product perspective, Compute experienced revenue growth in the rack server category moderated by a revenue decline across our other product categories resulting from supply constraints. Services net revenue declined primarily due to lower revenue from Russia and the impact of delayed hardware shipments on services contracts.
Compute earnings from operations as a percentage of net revenue increased 2.1 percentage points due to decreases in costs of products and services as a percentage of net revenue and operating expense as a percentage of net revenue. The decrease in costs of products and services as a percentage of net revenue was primarily due to pricing discipline partially offset by supply chain constraints and related costs and unfavorable currency fluctuations. The decrease in operating expense as a percentage of net revenue was primarily due to lower variable compensation expense.
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
Nine months ended July 31, 2022 compared with nine months ended July 31, 2021
Compute net revenue decreased by $55 million, or 0.6% (increased 0.4% on a constant currency basis), primarily due to unfavorable currency fluctuations and lower unit shipments resulting from supply constraints due to the challenging supply chain environment. The net revenue decline was moderated by higher average unit prices resulting from a combination of disciplined pricing actions and higher sales of server configurations with more complex component architectures in our next generation products.
From a product perspective, Compute experienced revenue growth in the rack server category moderated by a revenue decline due to certain products approaching their end-of-life. Services net revenue declined primarily due to lower revenue from Russia and the impact of delayed hardware shipments on services contracts.
Compute earnings from operations as a percentage of net revenue increased 2.4 percentage points due to decreases in costs of products and services as a percentage of net revenue and operating expense as a percentage of net revenue. The decrease in costs of products and services as a percentage of net revenue was primarily due to pricing discipline and strong cost management partially offset by supply chain constraints and related costs. The decrease in operating expense as a percentage of net revenue was primarily due to lower variable compensation expense.
HPC & AI
| For the three months ended July 31, | For the nine months ended July 31, | ||||||||||||||||||||||||||||||||||
| 2022 | 2021 | % Change | 2022 | 2021 | % Change | ||||||||||||||||||||||||||||||
| Dollars in millions | Dollars in millions | ||||||||||||||||||||||||||||||||||
| Net revenue | $ | 830 | $ | 740 | 12.2 | % | $ | 2,330 | $ | 2,185 | 6.6 | % | |||||||||||||||||||||||
| Earnings from operations | $ | 28 | $ | 28 | — | % | $ | (19) | $ | 89 | (121.3) | % | |||||||||||||||||||||||
| Earnings from operations as a % of net revenue | 3.4 | % | 3.8 | % | (0.8) | % | 4.1 | % |
Three months ended July 31, 2022 compared with three months ended July 31, 2021
HPC & AI net revenue increased by $90 million, or 12.2% (increased 14.9% on a constant currency basis) as a result of strong demand, led by the introduction of the Frontier supercomputer from HPE Cray and growth in Data Solutions. The increase was moderated by supply chain constraints, delayed customer acceptances, challenges with HPE Apollo products, and lower services revenue due primarily to unfavorable currency fluctuations.
HPC & AI earnings from operations as a percentage of net revenue decreased 0.4 percentage points due to increases 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 due primarily to the impact of delayed customer acceptances, supply chain constraints and related cost increases, lower revenue from higher-margin products and a lower mix of revenue from services. The decrease in operating expenses as a percentage of net revenue was primarily due to lower variable compensation expense.
Nine months ended July 31, 2022 compared with nine months ended July 31, 2021
HPC & AI net revenue increased by $145 million, or 6.6% (increased 7.7% on a constant currency basis) as a result of strong demand, led by the introduction of the Frontier supercomputer from HPE Cray and growth in Data Solutions. The increase was moderated by supply chain constraints, delayed customer acceptances, and lower services revenue due primarily to an unfavorable portfolio mix of service offerings and unfavorable currency fluctuations.
HPC & AI earnings from operations as a percentage of net revenue decreased 4.9 percentage points due to increases 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 due primarily to lower revenue from higher-margin products, a lower mix of revenue from services, supply chain constraints and related cost increases, and the impact of delayed customer acceptances. The decrease in operating expenses as a percentage of net revenue was primarily due to lower variable compensation expense, partially offset by higher investments in research and development to focus on high-performance computing and AI solutions, including integrating such solutions into our HPE GreenLake edge-to-cloud platform.
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
Storage
| For the three months ended July 31, | For the nine months ended July 31, | ||||||||||||||||||||||||||||||||||
| 2022 | 2021 | % Change | 2022 | 2021 | % Change | ||||||||||||||||||||||||||||||
| Dollars in millions | Dollars in millions | ||||||||||||||||||||||||||||||||||
| Net revenue | $ | 1,152 | $ | 1,175 | (2.0) | % | $ | 3,406 | $ | 3,503 | (2.8) | % | |||||||||||||||||||||||
| Earnings from operations | $ | 169 | 177 | (4.5) | % | $ | 475 | 602 | (21.1) | % | |||||||||||||||||||||||||
| Earnings from operations as a % of net revenue | 14.7 | % | 15.1 | % | 13.9 | % | 17.2 | % |
Three months ended July 31, 2022 compared with three months ended July 31, 2021
Storage net revenue decreased by $23 million or 2.0% (increased 1.2% on a constant currency basis) due primarily to unfavorable currency fluctuations, lower revenue from Russia, and supply chain constraints. Net revenue declined in Storage products while Storage services was largely unchanged from the prior-year period. The decrease in Storage products was led by declines in the traditional storage and Big Data product portfolios, partially offset by higher revenue from HPE Primera and HPE Alletra products as we transition to our next generation product platforms. As a result of strong demand and the challenging supply chain environment, Storage exited the quarter with a high order backlog.
Storage earnings from operations as a percentage of net revenue decreased 0.4 percentage points due to an increase in operating expenses as a percentage of net revenue, partially offset by a decrease in 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 a favorable mix of higher-margin products and pricing actions, the effects of which were partially offset by supply chain constraints and related costs. The increase in operating expenses as a percentage of net revenue was due primarily to higher investments in research and development focused on as-a-service offerings and higher field selling costs, partially offset by lower variable compensation expense.
Nine months ended July 31, 2022 compared with nine months ended July 31, 2021
Storage net revenue decreased by $97 million or 2.8% (decreased 1.6% on a constant currency basis) due primarily to supply chain constraints and unfavorable currency fluctuations. Net revenue declined in Storage products moderated by an increase in Storage services. The decline in Storage products was led by declines in HPE 3PAR, as we transition to its next generation product platforms, such as HPE Alletra and Primera products, and lower traditional storage revenue. The increase in Storage services was led by Zerto Services as we continue our transition to more services-intensive, and software-rich offerings.
Storage earnings from operations as a percentage of net revenue decreased 3.3 percentage point due to increases in cost of products and services as a percentage of net revenue and operating expenses as a percentage of net revenue. The increase in cost of products and services as a percentage of net revenue was due primarily to supply chain constraints and related costs, which unfavorably impacted the mix of certain higher-margin products, partially offset by increased sales of higher margin Zerto products. The increase in operating expenses as a percentage of net revenue was due primarily to higher investments in research and development focused on as-a-service offerings and higher field selling costs, partially offset by lower variable compensation expense.
Intelligent Edge
| For the three months ended July 31, | For the nine months ended July 31, | ||||||||||||||||||||||||||||||||||
| 2022 | 2021 | % Change | 2022 | 2021 | % Change | ||||||||||||||||||||||||||||||
| Dollars in millions | Dollars in millions | ||||||||||||||||||||||||||||||||||
| Net revenue | $ | 941 | $ | 871 | 8.0 | % | $ | 2,709 | $ | 2,484 | 9.1 | % | |||||||||||||||||||||||
| Earnings from operations | $ | 155 | $ | 140 | 10.7 | % | $ | 421 | $ | 420 | 0.2 | % | |||||||||||||||||||||||
| Earnings from operations as a % of net revenue | 16.5 | % | 16.1 | % | 15.5 | % | 16.9 | % |
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
Three months ended July 31, 2022 compared with three months ended July 31, 2021
Intelligent Edge net revenue increased by $70 million, or 8.0% (increased 12.2% on a constant currency basis) as a robust demand environment, reflected in a high beginning backlog, continues to be impacted by supply constraints resulting from a challenging supply chain environment. Net revenue increased in both Intelligent Edge products and services but was moderated by unfavorable currency fluctuations. The increase in product revenue was primarily driven by the WLAN business, partially offset by declines in the Switching business due to material constraints. Growth in services revenue was led by attached support services and our as-a-service offerings.
Intelligent Edge earnings from operations as a percentage of net revenue increased 0.4 percentage points 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 primarily due to supply chain constraints and related costs, and unfavorable currency fluctuations. Operating expenses as a percentage of net revenue decreased primarily due to lower variable compensation expense.
Nine months ended July 31, 2022 compared with nine months ended July 31, 2021
Intelligent Edge net revenue increased by $225 million, or 9.1% (increased 11.0% on a constant currency basis) as a robust demand environment, reflected in a high beginning backlog, continues to be impacted by supply constraints resulting from a challenging supply chain environment. Net revenue increased in both Intelligent Edge products and services. The increase in product revenue was primarily driven by the WLAN business. Growth in services revenue was led by higher attached support solutions and our as-a-service offerings.
Intelligent Edge earnings from operations as a percentage of net revenue decreased 1.4 percentage points due primarily to an increase in cost of products and services as a percentage of net revenue, partially offset by a decrease in operating expenses as a percentage of net revenue. The increase in cost of product and services as a percentage of net revenue was primarily due to supply chain constraints and related costs. Operating expenses as a percentage of net revenue decreased primarily due to lower variable compensation expense.
Financial Services
| For the three months ended July 31, | For the nine months ended July 31, | ||||||||||||||||||||||||||||||||||
| 2022 | 2021 | % Change | 2022 | 2021 | % Change | ||||||||||||||||||||||||||||||
| Dollars in millions | Dollars in millions | ||||||||||||||||||||||||||||||||||
| Net revenue | $ | 817 | $ | 844 | (3.2) | % | $ | 2,482 | $ | 2,543 | (2.4) | % | |||||||||||||||||||||||
| Earnings from operations | $ | 96 | $ | 94 | 2.1 | % | $ | 304 | $ | 269 | 13.0 | % | |||||||||||||||||||||||
| Earnings from operations as a % of net revenue | 11.8 | % | 11.1 | % | 12.2 | % | 10.6 | % |
Three months ended July 31, 2022 compared with three months ended July 31, 2021
Financial Services net revenue decreased by $27 million, or 3.2% (increased 1.4% on a constant currency basis) due primarily to unfavorable currency fluctuations partially offset by higher asset management revenue from remarketing and pre-owned equipment sales.
Financial Services earnings from operations as a percentage of net revenue increased 0.7 percentage points due to decreases in cost of services as a percentage of net revenue and operating expenses as a percentage of net revenue. The decrease to cost of services as a percentage of net revenue resulted primarily from a combination of lower depreciation expense and bad debt expense, partially offset by higher borrowing costs. The decrease in operating expenses as a percentage of net revenue was due primarily to lower employee cost driven by lower variable compensation expense.
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
Nine months ended July 31, 2022 compared with nine months ended July 31, 2021
Financial Services net revenue decreased by $61 million, or 2.4% (increased 0.4% on a constant currency basis) due primarily to unfavorable currency fluctuations and a decrease in rental revenue due to lower average operating leases, partially offset by higher asset management revenue from remarketing and pre-owned equipment sales.
Financial Services earnings from operations as a percentage of net revenue increased 1.6 percentage points due to decreases in cost of services as a percentage of net revenue and operating expenses as a percentage of net revenue. The decrease to cost of services as a percentage of net revenue resulted primarily from a combination of lower depreciation expense, bad debt expense and borrowing costs. The decrease in operating expenses as a percentage of net revenue was due primarily to lower employee cost driven by lower variable compensation expense.
The provision for expected credit losses due to the Company's exit from its Russia and Belarus businesses for the nine months ended July 31, 2022, was excluded from segment operating results.
Financing Volume
| For the three months ended July 31, | For the nine months ended July 31, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| In millions | |||||||||||||||||||||||
| Financing volume | $ | 1,559 | $ | 1,575 | $ | 4,420 | $ | 4,271 |
Financing volume, which represents the amount of financing provided to customers for equipment and related software and services, including intercompany activity, decreased by 1.0% and increased by 3.5% for the three and nine months ended July 31, 2022, respectively, as compared to the prior-year periods. For the three months ended July 31, 2022, the decrease was primarily driven by unfavorable currency fluctuations. For the nine months ended July 31, 2022, the increase was primarily related to higher financing of third-party product sales and services, partially offset by unfavorable currency fluctuations.
Portfolio Assets and Ratios
The portfolio assets and ratios derived from the segment balance sheets for FS were as follows:
| As of | |||||||||||
| July 31, 2022 | October 31, 2021 | ||||||||||
| Dollars in millions | |||||||||||
| Financing receivables, gross | $ | 8,551 | $ | 9,198 | |||||||
| Net equipment under operating leases | 3,969 | 4,001 | |||||||||
| Capitalized profit on intercompany equipment transactions(1) | 240 | 275 | |||||||||
| Intercompany leases(1) | 80 | 96 | |||||||||
| Gross portfolio assets | 12,840 | 13,570 | |||||||||
| Allowance for credit losses(2) | 229 | 228 | |||||||||
| Operating lease equipment reserve | 43 | 39 | |||||||||
| Total reserves | 272 | 267 | |||||||||
| Net portfolio assets | $ | 12,568 | $ | 13,303 | |||||||
| Reserve coverage | 2.1 | % | 2.0 | % | |||||||
| Debt-to-equity ratio(3) | 7.0x | 7.0x |
(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 Financial Services consists of intercompany equity that is treated as debt for segment reporting purposes, intercompany debt, and borrowing- and funding-related activity associated with Financial Services and its subsidiaries. Debt benefiting Financial Services totaled $11.7 billion and $11.9 billion at both July 31, 2022 and October 31, 2021, respectively, and was determined by applying an assumed debt-to-equity ratio, which management believes to be comparable to that of other similar financing companies. Financial Services equity at both July 31, 2022 and October 31, 2021 was $1.7 billion.
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
As of July 31, 2022 and October 31, 2021, Financial Services net cash and cash equivalents balances were approximately $984 million and $898 million, respectively.
Net portfolio assets as of July 31, 2022 decreased 5.5% from October 31, 2021. The decrease generally resulted from unfavorable currency fluctuations, along with portfolio runoff exceeding new financing volume during the period.
Financial Services bad debt expense includes charges to general reserves, specific reserves, and write-offs for sales-type, direct-financing, and operating leases. For the three and nine months ended July 31, 2022, Financial Services recorded net bad debt expense of $17 million and $62 million, respectively. For the three and nine months ended July 31, 2021, Financial Services recorded net bad debt expense of $30 million and $89 million, respectively.
As of July 31, 2022, Financial Services experienced a decrease in billed finance receivables compared to October 31, 2021, which included a limited impact to collections from customers as a result of the pandemic, and customers from Russia. We are currently unable to fully predict the extent to which the pandemic and our exit from Russia and Belarus businesses may adversely impact future collections of our receivables.
Corporate Investments and Other
| For the three months ended July 31, | For the nine months ended July 31, | |||||||||||||||||||||||||||||||||||||
| 2022 | 2021 | % Change | 2022 | 2021 | % Change | |||||||||||||||||||||||||||||||||
| Dollars in millions | Dollars in millions | |||||||||||||||||||||||||||||||||||||
| Net revenue | $ | 300 | $ | 332 | (9.6) | % | $ | 952 | $ | 1,003 | (5.1) | % | ||||||||||||||||||||||||||
| Loss from operations | $ | (31) | $ | (28) | (10.7) | % | $ | (66) | $ | (84) | 21.4 | % | ||||||||||||||||||||||||||
| Loss from operations as a % of net revenue | (10.3) | % | (8.4) | % | (6.9) | % | (8.4) | % |
Three months ended July 31, 2022 compared with three months ended July 31, 2021
Corporate Investments and Other net revenue decreased by $32 million, or 9.6% (decreased 0.9% on a constant currency basis) due primarily to unfavorable currency fluctuations.
Corporate Investments and Other loss from operations as a percentage of net revenue increased by 1.9 percentage points due primarily to an increase in cost of services as a percentage of net revenue moderated by a decrease in operating expenses as a percentage of net revenue. The increase in cost of services as a percentage of net revenue was primarily due to the scale of the net revenue decline and the related impact of fixed overhead costs, and a lower mix of higher margin license revenue in Software. The decrease in operating expenses as a percentage of net revenue was primarily due to lower variable compensation expense.
Nine months ended July 31, 2022 compared with nine months ended July 31, 2021
Corporate Investments and Other net revenue decreased by $51 million, or 5.1% (increased 0.8% on a constant currency basis) due primarily to unfavorable currency fluctuations.
Corporate Investments and Other loss from operations as a percentage of net revenue decreased 1.5 percentage points due primarily to lower cost of services as a percentage of net revenue and 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 improved service delivery efficiencies in A & PS which includes lower variable compensation expense. The decrease in operating expenses as a percentage of net revenue was primarily due to lower variable compensation expense.
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
LIQUIDITY AND CAPITAL RESOURCES
Current Overview
We use cash generated by operations as our primary source of liquidity. We believe that internally generated cash flows will be generally sufficient to support our operating businesses, capital expenditures, product development initiatives, acquisitions, and disposal activities including legal settlements, restructuring activities, transformation costs, indemnifications, maturing debt, interest payments, and income tax payments, in addition to any future investments, share repurchases, and stockholder dividend payments. We expect to supplement this short-term liquidity, if necessary, by accessing the capital markets, issuing commercial paper, and borrowing under credit facilities made available by various domestic and foreign financial institutions. However, our access to capital markets may be constrained and our cost of borrowing may increase under certain business, market, and economic conditions. We anticipate that the funds made available and cash generated from operations, along with our access to capital markets, will be sufficient to meet our liquidity requirements for at least the next twelve months and for the foreseeable future thereafter. We continue to monitor the severity and duration of the COVID-19 pandemic and its impact on the U.S. and other global economies, the capital markets, consumer behavior, our businesses, results of operations, financial condition, and cash flows. Our liquidity is subject to various risks including the risks identified in the section entitled "Risk Factors" in Item 1A of Part II and market risks identified in the section entitled "Quantitative and Qualitative Disclosures about Market Risk" in Item 3 of Part I.
Our cash balances are held in numerous locations throughout the world, with a substantial amount held outside the U.S. as of July 31, 2022. We utilize a variety of planning and financing strategies in an effort to ensure that our worldwide cash is available when and where it is needed.
Amounts held outside of the U.S. are generally utilized to support our non-U.S. liquidity needs. Repatriations of amounts held outside the U.S. generally will not be taxable from a U.S. federal tax perspective, but may be subject to state income or foreign withholding tax. Where local restrictions prevent an efficient intercompany transfer of funds, our intent is to keep cash balances outside of the U.S. and to meet liquidity needs through ongoing cash flows, external borrowings, or both. We do not expect restrictions or potential taxes incurred on repatriation of amounts held outside of the U.S. to have a material effect on our overall liquidity, financial condition, or results of operations.
In connection with the share repurchase program previously authorized by our Board of Directors, during the first nine months of fiscal 2022, we repurchased and settled an aggregate amount of $384 million. As of July 31, 2022, we had a remaining authorization of $1.5 billion for future share repurchases. For more information on our share repurchase program, refer to the section entitled "Unregistered Sales of Equity Securities and Use of Proceeds" in Item 2 of Part II.
On April 22, 2022, we entered into an amendment with Unisplendour Corporation (“UNIS”) and H3C Technologies Co. Limited (“H3C”) to the Shareholder Agreement previously entered into between the parties as of May 21, 2015. The amendment extends the Shareholder Agreement to October 31, 2022, the latest date upon which we may put to UNIS all or part of the H3C shares held by us, at a price of 15.0 times the last twelve months net income of H3C.
Liquidity
Our cash, cash equivalents, restricted cash, total debt, and available borrowing resources were as follows:
| As of | |||||||||||
| July 31, 2022 | October 31, 2021 | ||||||||||
| In millions | |||||||||||
| Cash, cash equivalents and restricted cash | $ | 4,449 | $ | 4,332 | |||||||
| Total debt | $ | 13,880 | $ | 13,448 | |||||||
| Available borrowing resources | |||||||||||
| Commercial paper programs(1) | $ | 5,115 | $ | 5,045 | |||||||
| Uncommitted lines of credit | $ | 948 | $ | 972 |
(1) The maximum aggregate borrowing amount of the commercial paper programs and revolving credit facility is $5.75 billion.
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
The following tables represent the way in which management reviews cash flows:
| For the nine months ended July 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| In millions | |||||||||||
| Net cash provided by operating activities | $ | 1,557 | $ | 2,915 | |||||||
| Net cash used in investing activities | (1,224) | (1,717) | |||||||||
| Net cash used in financing activities | (216) | (167) | |||||||||
| Net increase in cash, cash equivalents and restricted cash | $ | 117 | $ | 1,031 | |||||||
Operating Activities
For the nine months ended July 31, 2022, net cash from operating activities decreased by $1.4 billion, as compared to the corresponding period in fiscal 2021. The decrease was primarily due to the impact of supply chain constraints on working capital, lower cash generated from earnings, and lower variable compensation accruals as compared to the prior-year period.
Our working capital metrics and cash conversion impacts were as follows:
| As of | As of | ||||||||||||||||||||||||||||||||||||||||
| July 31, 2022 | October 31, 2021 | Change | July 31, 2021 | October 31, 2020 | Change | Y/Y Change | |||||||||||||||||||||||||||||||||||
| Days of sales outstanding in accounts receivable ("DSO") | 44 | 49 | (5) | 43 | 42 | 1 | 1 | ||||||||||||||||||||||||||||||||||
| Days of supply in inventory ("DOS") | 110 | 82 | 28 | 79 | 48 | 31 | 31 | ||||||||||||||||||||||||||||||||||
| Days of purchases outstanding in accounts payable ("DPO") | (136) | (128) | (8) | (130) | (97) | (33) | (6) | ||||||||||||||||||||||||||||||||||
| Cash conversion cycle | 18 | 3 | 15 | (8) | (7) | (1) | 26 |
The cash conversion cycle is the sum of DSO and DOS less DPO. Items which may cause the cash conversion cycle in a particular period to differ include, but are not limited to, changes in business mix, changes in payment terms (including extended payment terms to customers or from suppliers), early or late invoice payments from customers or to suppliers, the extent of receivables factoring, seasonal trends, the timing of the revenue recognition and inventory purchases within the period, the impact of commodity costs, and acquisition activity.
DSO measures the average number of days our receivables are outstanding. DSO is calculated by dividing ending accounts receivable, net of allowance for doubtful accounts, by a 90-day average of net revenue. Compared to the corresponding three-month period in fiscal 2021, the increase in DSO in the current period was primarily due to unfavorable billings linearity, partially offset by higher early collections and receivables factoring.
DOS measures the average number of days from procurement to sale of our products. DOS is calculated by dividing ending inventory by a 90-day average of cost of goods sold. Compared to the corresponding three-month period in fiscal 2021, the increase in DOS in the current period was primarily due to higher levels of inventory resulting from a combination of supply chain constraints, positioning of inventory to fulfill planned future shipments, and strategic purchases of certain key components.
DPO measures the average number of days our accounts payable balances are outstanding. DPO is calculated by dividing ending accounts payable by a 90-day average of cost of goods sold. Compared to the corresponding three-month period in fiscal 2021, the increase in DPO in the current period was primarily due to higher inventory purchases for planned future shipments.
Investing Activities
For the nine months ended July 31, 2022, net cash used in investing activities decreased by $0.5 billion, as compared to the corresponding period in fiscal 2021. The decrease was primarily due to lower cash utilized in net financial collateral activities of $0.4 billion, higher proceeds from the sale of investments, net of purchases of $0.3 billion, lower payments made in connection with business acquisitions of $0.1 billion, and higher cash utilized for investment in property, plant and equipment, net of sales proceeds of $0.3 billion, 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)
Financing Activities
For the nine months ended July 31, 2022, net cash used in financing activities was unchanged, as compared to the corresponding period in fiscal 2021. This was primarily due to lower net debt repayments of $0.4 billion and higher cash utilized for share repurchases and stock-based award activities of $0.4 billion, as compared to the prior-year period.
Free Cash Flow
| For the nine months ended July 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| In millions | |||||||||||
| Net cash provided by operating activities | $ | 1,557 | $ | 2,915 | |||||||
| Investment in property, plant and equipment | (2,122) | (1,732) | |||||||||
| Proceeds from sale of property, plant and equipment | 364 | 274 | |||||||||
| Total | $ | (201) | $ | 1,457 |
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 nine months ended July 31, 2022, free cash flow decreased by $1.7 billion, as compared to the corresponding period in fiscal 2021. The decrease was due to lower cash generated from operations of $1.4 billion due to the impact of supply chain constraints on working capital and higher cash utilized for investments in property, plant and equipment, net of sales proceeds of $0.3 billion, as compared to the prior-year period.
For more information on the impact of operating assets and liabilities to our cash flows, see Note 6, "Balance Sheet Details", to the Condensed Consolidated Financial Statements in Item 1 of Part I.
Capital Resources
We maintain debt levels that we establish through consideration of several factors, including cash flow expectations, cash requirements for operations, investment plans (including acquisitions), share repurchase activities, our cost of capital, and targeted capital structure. We maintain a revolving credit facility and two commercial paper programs, "the Parent Programs", and a wholly-owned subsidiary maintains a third program. In December 2021, we terminated our prior senior unsecured revolving credit facility and entered into a new senior unsecured revolving credit facility with an aggregate commitment of $4.75 billion for a period of five years. There have been no changes to our commercial paper and shelf registration statement since October 31, 2021. For further information on our capital resources, see Note 11, "Borrowings" to the Condensed Consolidated Financial Statements in Item 1 of Part I.
On August 15, 2022, we redeemed $1.35 billion of 4.40% Senior Notes with an original maturity date of October 15, 2022, utilizing the par call option on the debt which enabled net interest expense savings, with no redemption penalties.
In May 2022, we issued $747 million of asset-backed debt securities in six tranches at a weighted average price of 99.99% and a weighted average interest rate of 3.68%, payable monthly from July 2022 with a stated final maturity date of March 2030.
In January 2022, we issued $1.0 billion of asset-backed debt securities in six tranches at a weighted average price of 99.99% and a weighted average interest rate of 1.51%, payable monthly from March 2022 with a stated final maturity date of November 2029.
As of July 31, 2022 and October 31, 2021, no borrowings were outstanding under our revolving credit facility.
As of July 31, 2022 and October 31, 2021, no borrowings were outstanding under the Parent Programs, and $635 million and $705 million, respectively, were outstanding under our subsidiary’s program. During the first nine months of fiscal 2022, we issued $616 million and repaid $601 million of commercial paper.
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
CONTRACTUAL CASH AND OTHER OBLIGATIONS
Contractual Obligations
In addition to the previously mentioned early redemption of unsecured senior notes and issuance of asset-backed debt securities, our unconditional purchase obligations increased by $0.9 billion to $1.7 billion since October 31, 2021. For further information see Note 15, "Commitments", to the Condensed Consolidated Financial Statements in Item 1 of Part I of this Quarterly Report on Form 10-Q, and "Contractual Cash and Other Obligations" in Item 7 of Part II of our Annual Report on Form 10-K for the fiscal year ended October 31, 2021.
Retirement Benefit Plan Funding
For the remainder of fiscal 2022, we anticipate making contributions of approximately $51 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 July 31, 2022, we expect to make future cash payments of approximately $0.5 billion in connection with our approved restructuring plans, which includes $0.1 billion expected to be paid through the remainder of fiscal 2022 and $0.4 billion expected to be paid thereafter. For more information on our restructuring activities, see Note 3, "Transformation Programs" to the Condensed Consolidated Financial Statements in Item 1 of Part I.
Uncertain Tax Positions
As of July 31, 2022, we had approximately $299 million of recorded liabilities and related interest and penalties pertaining to uncertain tax positions. These liabilities and related interest and penalties include $32 million expected to be paid within one year. For the remaining amount, we are unable to make a reasonable estimate as to when cash settlement with the tax authorities might occur due to the uncertainties related to these tax matters. Payments of these obligations would result from settlements with taxing authorities. For more information on our uncertain tax positions, see Note 5, "Taxes on Earnings" to the Condensed Consolidated Financial Statements in Item 1 of Part I.
Off-Balance Sheet Arrangements
As part of our ongoing business, we have not participated in transactions that generate material relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.
We have third-party revolving short-term financing arrangements intended to facilitate the working capital requirements of certain customers. For more information on our third-party revolving short-term financing arrangements, see Note 6, "Balance Sheet Details", to the Condensed Consolidated Financial Statements in Item 1 of Part I.
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
GAAP to non-GAAP Reconciliations
The following tables provide a reconciliation of each non-GAAP financial measure to the most directly comparable GAAP financial measure for the periods presented:
Reconciliation of GAAP gross profit and gross profit margin to non-GAAP gross profit and gross profit margin.
| For the three months ended July 31, | For the nine months ended July 31, | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Dollars | % of Revenue | Dollars | % of Revenue | Dollars | % of Revenue | Dollars | % of Revenue | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Dollars in millions | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| GAAP Net revenue | $ | 6,951 | 100 | % | $ | 6,897 | 100 | % | $ | 20,625 | 100 | % | $ | 20,430 | 100 | % | |||||||||||||||||||||||||||||||||||||||||||
| GAAP Cost of sales | 4,555 | 65.5 | % | 4,515 | 65.5 | % | 13,712 | 66.5 | % | 13,473 | 65.9 | % | |||||||||||||||||||||||||||||||||||||||||||||||
| GAAP Gross profit | $ | 2,396 | 34.5 | % | $ | 2,382 | 34.5 | % | $ | 6,913 | 33.5 | % | $ | 6,957 | 34.1 | % | |||||||||||||||||||||||||||||||||||||||||||
| Non-GAAP adjustments | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Amortization of initial direct costs | 1 | — | % | 2 | — | % | 3 | — | % | 6 | — | % | |||||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation expense | 9 | 0.1 | % | 9 | 0.2 | % | 38 | 0.2 | % | 33 | 0.1 | % | |||||||||||||||||||||||||||||||||||||||||||||||
| Disaster charges(1) | 6 | 0.1 | % | — | — | % | 111 | 0.6 | % | — | — | % | |||||||||||||||||||||||||||||||||||||||||||||||
| Non-GAAP Gross Profit | $ | 2,412 | 34.7 | % | $ | 2,393 | 34.7 | % | $ | 7,065 | 34.3 | % | $ | 6,996 | 34.2 | % |
Reconciliation of GAAP earnings from operations and operating profit margin to non-GAAP earnings from operations and operating profit margin.
| For the three months ended July 31, | For the nine months ended July 31, | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Dollars | % of Revenue | Dollars | % of Revenue | Dollars | % of Revenue | Dollars | % of Revenue | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Dollars in millions | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| GAAP earnings from operations | $ | 466 | 6.7 | % | $ | 282 | 4.1 | % | 1,121 | 5.4 | % | $ | 782 | 3.8 | % | ||||||||||||||||||||||||||||||||||||||||||||
| Non-GAAP adjustments: | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Amortization of initial direct costs | 1 | — | % | 2 | — | % | 3 | — | % | 6 | — | % | |||||||||||||||||||||||||||||||||||||||||||||||
| Amortization of intangible assets | 73 | 1.1 | % | 82 | 1.2 | % | 220 | 1.1 | % | 276 | 1.4 | % | |||||||||||||||||||||||||||||||||||||||||||||||
| Transformation costs | 80 | 1.2 | % | 213 | 3.1 | % | 289 | 1.4 | % | 733 | 3.6 | % | |||||||||||||||||||||||||||||||||||||||||||||||
| Disaster charges(1) | 36 | 0.5 | % | 5 | 0.1 | % | 160 | 0.8 | % | 6 | — | % | |||||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation expense | 64 | 0.9 | % | 86 | 1.2 | % | 306 | 1.5 | % | 294 | 1.4 | % | |||||||||||||||||||||||||||||||||||||||||||||||
| Acquisition, disposition and other related charges | 9 | 0.1 | % | 3 | — | % | 25 | 0.1 | % | 34 | 0.2 | % | |||||||||||||||||||||||||||||||||||||||||||||||
| Non-GAAP earnings from operations | $ | 729 | 10.5 | % | $ | 673 | 9.8 | % | $ | 2,124 | 10.3 | % | $ | 2,131 | 10.4 | % |
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
Reconciliation of GAAP net earnings and diluted net earnings per share to non-GAAP net earnings and diluted net earnings per share.
| For the three months ended July 31, | For the nine months ended July 31, | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Dollars | Diluted net earnings per share | Dollars | Diluted net earnings per share | Dollars | Diluted net earnings per share | Dollars | Diluted net earnings per share | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Dollars in millions | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| GAAP net earnings | $ | 409 | $ | 0.31 | $ | 392 | $ | 0.29 | $ | 1,172 | $ | 0.88 | $ | 874 | $ | 0.66 | |||||||||||||||||||||||||||||||||||||||||||
| Non-GAAP adjustments: | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Amortization of initial direct costs | 1 | — | 2 | — | 3 | — | 6 | — | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Amortization of intangible assets | 73 | 0.05 | 82 | 0.06 | 220 | 0.17 | 276 | 0.21 | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Transformation costs | 80 | 0.06 | 213 | 0.16 | 289 | 0.22 | 733 | 0.56 | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Disaster charges(1) | 36 | 0.03 | 5 | — | 160 | 0.12 | 6 | 0.01 | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation expense | 64 | 0.05 | 86 | 0.06 | 306 | 0.22 | 294 | 0.22 | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Acquisition, disposition and other related charges | 9 | 0.01 | 3 | — | 25 | 0.02 | 34 | 0.02 | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Tax indemnification and related adjustments | 30 | 0.02 | (76) | (0.05) | 47 | 0.04 | (60) | (0.05) | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Non-service net periodic benefit credit | (34) | (0.03) | (19) | (0.01) | (106) | (0.08) | (53) | (0.04) | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Earnings from equity interests(2) | 8 | 0.01 | 23 | 0.02 | 42 | 0.03 | 91 | 0.07 | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Adjustments for taxes | (47) | (0.03) | (88) | (0.06) | (249) | (0.18) | (287) | (0.22) | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Non-GAAP net earnings | $ | 629 | $ | 0.48 | $ | 623 | $ | 0.47 | $ | 1,909 | $ | 1.44 | $ | 1,914 | $ | 1.44 |
(1) During the three and nine months ended July 31, 2022, the Company recorded total pre-tax charges of $36 million and $162 million, respectively, primarily related to the Company's exit from its Russia and Belarus businesses. During the nine months ended July 31, 2022, Disaster charges also included a recovery of $2 million, related to COVID-19. Refer to Note 1, "Overview and Summary of Significant Accounting Policies", for further information.
(2) Represents the amortization of basis difference adjustments related to the H3C divestiture.
Reconciliation of net cash provided by operating activities to free cash flow.
| For the three months ended July 31, | For the nine months ended July 31, | ||||||||||||||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||||||||||||||
| In millions | |||||||||||||||||||||||||||||||||||
| Net cash provided by operating activities | $ | 1,254 | $ | 1,130 | $ | 1,557 | $ | 2,915 | |||||||||||||||||||||||||||
| Investment in property, plant and equipment | (773) | (684) | (2,122) | (1,732) | |||||||||||||||||||||||||||||||
| Proceeds from sale of property, plant and equipment | 106 | 80 | 364 | 274 | |||||||||||||||||||||||||||||||
| Free cash flow | $ | 587 | $ | 526 | $ | (201) | $ | 1,457 |
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
Non-GAAP financial measures
The non-GAAP financial measures presented are net revenue on a constant currency basis, non-GAAP gross profit, non-GAAP gross profit margin, non-GAAP earnings from operations, non-GAAP operating profit margin (non-GAAP earnings from operations as a percentage of net revenue), non-GAAP net earnings, non-GAAP diluted net earnings per share, and free cash flow. These non-GAAP financial measures are used by management for purposes of evaluating our historical and prospective financial performance, as well as evaluating our performance relative to our competitors. These non-GAAP financial measures are not computed in accordance with, or as an alternative to, generally accepted accounting principles in the United States. The GAAP measure most directly comparable to net revenue on a constant currency basis is net revenue. The GAAP measure most directly comparable to non-GAAP gross profit is gross profit. The GAAP measure most directly comparable to non-GAAP gross profit margin is gross profit margin. The GAAP measure most directly comparable to non-GAAP earnings from operations is earnings from operations. The GAAP measure most directly comparable to non-GAAP operating profit margin (non-GAAP earnings from operations as a percentage of net revenue) is operating profit margin (earnings from operations as a percentage of net revenue). The GAAP measure most directly comparable to non-GAAP net earnings is net earnings. The GAAP measure most directly comparable to non-GAAP diluted net earnings per share is diluted net earnings per share. The GAAP measure most directly comparable to free cash flow is cash flow from operations.
Net revenue on a constant currency basis assumes no change in the foreign exchange rate from the prior-year period. Non-GAAP gross profit and non-GAAP gross profit margin are defined to exclude charges related to the amortization of initial direct costs, stock-based compensation expense and disaster charges. Non-GAAP earnings from operations and non-GAAP operating profit margin (non-GAAP earnings from operations as a percentage of net revenue) consist of earnings from operations excluding any charges related to the amortization of initial direct costs, amortization of intangible assets, transformation costs, stock-based compensation expense, disaster charges, and acquisition, disposition and other related charges. Non-GAAP net earnings and Non-GAAP diluted net earnings per share consist of net earnings or diluted net earnings per share excluding those same charges, as well as items such as tax indemnification and related adjustments, non-service net periodic benefit credit, earnings from equity interests, certain income tax valuation allowances and separation taxes, the impact of U.S. tax reform, structural rate adjustment and excess tax benefit from stock-based compensation. In addition, non-GAAP net earnings and non-GAAP diluted net earnings per share are adjusted by the amount of additional taxes or tax benefits associated with each non-GAAP item. We believe that excluding the items mentioned above from these non-GAAP financial measures allows management to better understand our consolidated financial performance in relation to the operating results of our segments. Management does not believe that the excluded items are reflective of ongoing operating results, and excluding them facilitates a more meaningful evaluation of our current operating performance in comparison to our peers. The excluded items can be inconsistent in amount and frequency and/or not reflective of the operational performance of the business.
These non-GAAP financial measures have limitations as analytical tools, and these measures should not be considered in isolation or as a substitute for analysis of our results as reported under GAAP. Some of the limitations in relying on these non-GAAP financial measures are that they can have a material impact on the equivalent GAAP earnings measures and cash flows, they may be calculated differently by other companies and may not reflect the full economic effect of the loss in value of certain assets.
We compensate for these limitations on the use of non-GAAP financial measures by relying primarily on our GAAP results and using non-GAAP financial measures only as a supplement. We also provide a reconciliation of each non-GAAP financial measure to its most directly comparable GAAP measure. We believe that providing net revenue on a constant currency basis, non-GAAP gross profit, non-GAAP gross profit margin, non-GAAP earnings from operations, non-GAAP operating profit margin, non-GAAP net earnings, non-GAAP diluted net earnings per share, and free cash flow, in addition to the related GAAP measures provides greater transparency to the information used in our financial and operational decision making and allows the reader of our Condensed Consolidated Financial Statements to see our financial results “through the eyes” of management.
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