filings.toolsItem 1. Financial Statements.
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Item 1. Financial Statements.
Index
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Condensed Consolidated Statements of Earnings
(Unaudited)
| For the three months ended July 31, | For the nine months ended July 31, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| In millions, except per share amounts | |||||||||||||||||||||||
| Net Revenue: | |||||||||||||||||||||||
| Products | $ | 4,231 | $ | 4,314 | $ | 13,587 | $ | 12,597 | |||||||||||||||
| Services | 2,629 | 2,516 | 7,802 | 7,663 | |||||||||||||||||||
| Financing income | 142 | 121 | 395 | 365 | |||||||||||||||||||
| Total net revenue | 7,002 | 6,951 | 21,784 | 20,625 | |||||||||||||||||||
| Costs and Expenses: | |||||||||||||||||||||||
| Cost of products | 2,744 | 2,966 | 8,942 | 8,816 | |||||||||||||||||||
| Cost of services | 1,646 | 1,535 | 4,892 | 4,648 | |||||||||||||||||||
| Financing cost | 102 | 54 | 270 | 248 | |||||||||||||||||||
| Research and development | 578 | 509 | 1,771 | 1,530 | |||||||||||||||||||
| Selling, general and administrative | 1,302 | 1,229 | 3,828 | 3,679 | |||||||||||||||||||
| Amortization of intangible assets | 72 | 73 | 216 | 220 | |||||||||||||||||||
| Transformation costs | 65 | 80 | 227 | 289 | |||||||||||||||||||
| Disaster charges | 1 | 30 | 5 | 49 | |||||||||||||||||||
| Acquisition, disposition and other related charges | 21 | 9 | 51 | 25 | |||||||||||||||||||
| Total costs and expenses | 6,531 | 6,485 | 20,202 | 19,504 | |||||||||||||||||||
| Earnings from operations | 471 | 466 | 1,582 | 1,121 | |||||||||||||||||||
| Interest and other, net | (50) | (74) | (129) | (79) | |||||||||||||||||||
| Tax indemnification and related adjustments | 45 | (30) | 50 | (47) | |||||||||||||||||||
| Non-service net periodic benefit (cost) credit | (3) | 34 | (2) | 106 | |||||||||||||||||||
| Earnings from equity interests | 73 | 68 | 180 | 132 | |||||||||||||||||||
| Earnings before provision for taxes | 536 | 464 | 1,681 | 1,233 | |||||||||||||||||||
| Provision for taxes | (72) | (55) | (298) | (61) | |||||||||||||||||||
| Net earnings | $ | 464 | $ | 409 | $ | 1,383 | $ | 1,172 | |||||||||||||||
| Net Earnings Per Share: | |||||||||||||||||||||||
| Basic | $ | 0.36 | $ | 0.31 | $ | 1.06 | $ | 0.90 | |||||||||||||||
| Diluted | $ | 0.35 | $ | 0.31 | $ | 1.05 | $ | 0.88 | |||||||||||||||
| Weighted-average Shares Used to Compute Net Earnings Per Share: | |||||||||||||||||||||||
| Basic | 1,299 | 1,305 | 1,300 | 1,306 | |||||||||||||||||||
| Diluted | 1,316 | 1,323 | 1,317 | 1,326 |
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Condensed Consolidated Statements of Comprehensive Income
(Unaudited)
| For the three months ended July 31, | For the nine months ended July 31, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| In millions | |||||||||||||||||||||||
| Net earnings | $ | 464 | $ | 409 | $ | 1,383 | $ | 1,172 | |||||||||||||||
| Other Comprehensive Income (Loss) Before Taxes: | |||||||||||||||||||||||
| Change in Net Unrealized (Losses) Gains on Available-for-sale Securities: | |||||||||||||||||||||||
| Net unrealized (losses) gains arising during the period | (1) | (3) | 4 | (11) | |||||||||||||||||||
| (1) | (3) | 4 | (11) | ||||||||||||||||||||
| Change in Net Unrealized Gains (Losses) on Cash Flow Hedges: | |||||||||||||||||||||||
| Net unrealized (losses) gains arising during the period | (25) | 163 | (525) | 723 | |||||||||||||||||||
| Net losses (gains) reclassified into earnings | 60 | (215) | 346 | (680) | |||||||||||||||||||
| 35 | (52) | (179) | 43 | ||||||||||||||||||||
| Change in Unrealized Components of Defined Benefit Plans: | |||||||||||||||||||||||
| Net unrealized (losses) gains arising during the period | (2) | — | (2) | 6 | |||||||||||||||||||
| Amortization of net actuarial loss and prior service benefit | 37 | 39 | 108 | 120 | |||||||||||||||||||
| Curtailments, settlements and other | 3 | — | 3 | 2 | |||||||||||||||||||
| 38 | 39 | 109 | 128 | ||||||||||||||||||||
| Change in Cumulative Translation Adjustment | (30) | (45) | (11) | (81) | |||||||||||||||||||
| Other Comprehensive Income (Loss) Before Taxes | 42 | (61) | (77) | 79 | |||||||||||||||||||
| (Provision) Benefit for Taxes | (13) | 8 | 26 | (26) | |||||||||||||||||||
| Other Comprehensive Income (Loss), Net of Taxes | 29 | (53) | (51) | 53 | |||||||||||||||||||
| Comprehensive Income | $ | 493 | $ | 356 | $ | 1,332 | $ | 1,225 |
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
| As of | |||||||||||
| July 31, 2023 | October 31, 2022 | ||||||||||
| (Unaudited) | (Audited) | ||||||||||
| In millions, except par value | |||||||||||
| ASSETS | |||||||||||
| Current Assets: | |||||||||||
| Cash and cash equivalents | $ | 2,919 | $ | 4,163 | |||||||
| Accounts receivable, net of allowances | 3,448 | 4,101 | |||||||||
| Financing receivables, net of allowances | 3,718 | 3,522 | |||||||||
| Inventory | 4,541 | 5,161 | |||||||||
| Other current assets | 3,029 | 3,559 | |||||||||
| Total current assets | 17,655 | 20,506 | |||||||||
| Property, plant and equipment | 6,089 | 5,784 | |||||||||
| Long-term financing receivables and other assets | 11,659 | 10,537 | |||||||||
| Investments in equity interests | 2,293 | 2,160 | |||||||||
| Goodwill | 17,994 | 17,403 | |||||||||
| Intangible assets | 725 | 733 | |||||||||
| Total assets | $ | 56,415 | $ | 57,123 | |||||||
| LIABILITIES AND STOCKHOLDERS' EQUITY | |||||||||||
| Current Liabilities: | |||||||||||
| Notes payable and short-term borrowings | $ | 4,486 | $ | 4,612 | |||||||
| Accounts payable | 5,604 | 8,717 | |||||||||
| Employee compensation and benefits | 1,570 | 1,401 | |||||||||
| Taxes on earnings | 215 | 176 | |||||||||
| Deferred revenue | 3,654 | 3,451 | |||||||||
| Accrued restructuring | 149 | 192 | |||||||||
| Other accrued liabilities | 4,492 | 4,625 | |||||||||
| Total current liabilities | 20,170 | 23,174 | |||||||||
| Long-term debt | 8,866 | 7,853 | |||||||||
| Other non-current liabilities | 6,702 | 6,187 | |||||||||
| Commitments and Contingencies | |||||||||||
| Stockholders' Equity | |||||||||||
| HPE Stockholders' Equity: | |||||||||||
| Common stock, $0.01 par value (9,600 shares authorized; 1,283 and 1,281 shares issued and outstanding as of July 31, 2023 and October 31, 2022, respectively) | 13 | 13 | |||||||||
| Additional paid-in capital | 28,191 | 28,299 | |||||||||
| Accumulated deficit | (4,433) | (5,350) | |||||||||
| Accumulated other comprehensive loss | (3,149) | (3,098) | |||||||||
| Total HPE stockholders' equity | 20,622 | 19,864 | |||||||||
| Non-controlling interests | 55 | 45 | |||||||||
| Total stockholders' equity | 20,677 | 19,909 | |||||||||
| Total liabilities and stockholders' equity | $ | 56,415 | $ | 57,123 |
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (Unaudited)
| For the nine months ended July 31, | |||||||||||
| 2023 | 2022 | ||||||||||
| In millions | |||||||||||
| Cash Flows from Operating Activities: | |||||||||||
| Net earnings | $ | 1,383 | $ | 1,172 | |||||||
| Adjustments to Reconcile Net Earnings to Net Cash Provided by Operating Activities: | |||||||||||
| Depreciation and amortization | 1,961 | 1,862 | |||||||||
| Stock-based compensation expense | 357 | 306 | |||||||||
| Provision for inventory and credit losses | 189 | 237 | |||||||||
| Restructuring charges | 133 | 102 | |||||||||
| Deferred taxes on earnings | (2) | (61) | |||||||||
| Earnings from equity interests | (180) | (132) | |||||||||
| Dividends received from equity investees | 34 | 38 | |||||||||
| Other, net | (7) | (6) | |||||||||
| Changes in Operating Assets and Liabilities, Net of Acquisitions: | |||||||||||
| Accounts receivable | 623 | 557 | |||||||||
| Financing receivables | (870) | 573 | |||||||||
| Inventory | 491 | (1,100) | |||||||||
| Accounts payable | (3,146) | (171) | |||||||||
| Taxes on earnings | 26 | 39 | |||||||||
| Restructuring | (201) | (267) | |||||||||
| Other assets and liabilities | 794 | (1,592) | |||||||||
| Net cash provided by operating activities | 1,585 | 1,557 | |||||||||
| Cash Flows from Investing Activities: | |||||||||||
| Investment in property, plant and equipment | (2,153) | (2,122) | |||||||||
| Proceeds from sale of property, plant and equipment | 347 | 364 | |||||||||
| Purchases of investments | (10) | (54) | |||||||||
| Proceeds from maturities and sales of investments | 8 | 254 | |||||||||
| Financial collateral posted | (1,410) | (40) | |||||||||
| Financial collateral received | 793 | 374 | |||||||||
| Payments made in connection with business acquisitions, net of cash acquired | (761) | — | |||||||||
| Net cash used in investing activities | (3,186) | (1,224) | |||||||||
| Cash Flows from Financing Activities: | |||||||||||
| Short-term borrowings with original maturities less than 90 days, net | (54) | 114 | |||||||||
| Proceeds from debt, net of issuance costs | 3,886 | 2,508 | |||||||||
| Payment of debt | (3,062) | (1,941) | |||||||||
| Cash settlement for derivative hedging debt | (7) | — | |||||||||
| Net payments related to stock-based award activities | (100) | (46) | |||||||||
| Repurchase of common stock | (366) | (384) | |||||||||
| Cash dividends paid to shareholders | (465) | (467) | |||||||||
| Net cash used in financing activities | (168) | (216) | |||||||||
| Effect of exchange rate changes on cash, cash equivalents, and restricted cash | 138 | — | |||||||||
| (Decrease) increase in cash, cash equivalents and restricted cash | (1,631) | 117 | |||||||||
| Cash, cash equivalents and restricted cash at beginning of period | 4,763 | 4,332 | |||||||||
| Cash, cash equivalents and restricted cash at end of period | $ | 3,132 | $ | 4,449 |
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Condensed Consolidated Statements of Stockholders' Equity (Unaudited)
| Common Stock | |||||||||||||||||||||||||||||||||||||||||||||||
| For the three months ended July 31, 2023 | Number of Shares | Par Value | Additional Paid-in Capital | Accumulated Deficit | Accumulated Other Comprehensive Loss | Equity Attributable to the Company | Non- controlling Interests | Total Equity | |||||||||||||||||||||||||||||||||||||||
| In millions, except number of shares in thousands | |||||||||||||||||||||||||||||||||||||||||||||||
| Balance as of April 30, 2023 | 1,291,503 | $ | 13 | $ | 28,274 | $ | (4,743) | $ | (3,178) | $ | 20,366 | $ | 55 | $ | 20,421 | ||||||||||||||||||||||||||||||||
| Net earnings | 464 | 464 | — | 464 | |||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income | 29 | 29 | 29 | ||||||||||||||||||||||||||||||||||||||||||||
| Comprehensive income | 493 | — | 493 | ||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation expense | 91 | 91 | 91 | ||||||||||||||||||||||||||||||||||||||||||||
| Tax withholding related to vesting of employee stock plans | (11) | (11) | (11) | ||||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock in connection with employee stock plans and other | 3,288 | 22 | 22 | 22 | |||||||||||||||||||||||||||||||||||||||||||
| Repurchases of common stock | (12,053) | (185) | (185) | (185) | |||||||||||||||||||||||||||||||||||||||||||
| Cash dividends declared ($0.12 per share) | (154) | (154) | (154) | ||||||||||||||||||||||||||||||||||||||||||||
| Balance as of July 31, 2023 | 1,282,738 | $ | 13 | $ | 28,191 | $ | (4,433) | $ | (3,149) | $ | 20,622 | $ | 55 | $ | 20,677 |
) Represents the impact of the adoption of the accounting standard on the s on financial instruments.
| For the nine months ended July 31, 2023 | Number of Shares | Par Value | Additional Paid-in Capital | Accumulated Deficit | Accumulated Other Comprehensive Loss | Equity Attributable to the Company | Non- controlling Interests | Total Equity | |||||||||||||||||||||||||||||||||||||||
| In millions, except number of shares in thousands | |||||||||||||||||||||||||||||||||||||||||||||||
| Balance as of October 31, 2022 | 1,281,037 | $ | 13 | $ | 28,299 | $ | (5,350) | $ | (3,098) | $ | 19,864 | $ | 45 | $ | 19,909 | ||||||||||||||||||||||||||||||||
| Net earnings | 1,383 | 1,383 | 10 | 1,393 | |||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive loss | (51) | (51) | (51) | ||||||||||||||||||||||||||||||||||||||||||||
| Comprehensive income | 1,332 | 10 | 1,342 | ||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation expense | 357 | 357 | 357 | ||||||||||||||||||||||||||||||||||||||||||||
| Tax withholding related to vesting of employee stock plans | (151) | (151) | (151) | ||||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock in connection with employee stock plans and other | 25,423 | 48 | (1) | 47 | 47 | ||||||||||||||||||||||||||||||||||||||||||
| Repurchases of common stock | (23,722) | (362) | (362) | (362) | |||||||||||||||||||||||||||||||||||||||||||
| Cash dividends declared ($0.36 per share) | (465) | (465) | (465) | ||||||||||||||||||||||||||||||||||||||||||||
| Balance as of July 31, 2023 | 1,282,738 | $ | 13 | $ | 28,191 | $ | (4,433) | $ | (3,149) | $ | 20,622 | $ | 55 | $ | 20,677 |
| Common Stock | |||||||||||||||||||||||||||||||||||||||||||||||
| For the three months ended July 31, 2022 | Number of Shares | Par Value | Additional Paid-in Capital | Accumulated Deficit | Accumulated Other Comprehensive Loss | Equity Attributable to the Company | Non- controlling Interests | Total Equity | |||||||||||||||||||||||||||||||||||||||
| In millions, except number of shares in thousands | |||||||||||||||||||||||||||||||||||||||||||||||
| Balance as of April 30, 2022 | 1,298,924 | $ | 13 | $ | 28,473 | $ | (5,145) | $ | (2,809) | $ | 20,532 | $ | 50 | $ | 20,582 | ||||||||||||||||||||||||||||||||
| Net earnings | 409 | 409 | 3 | 412 | |||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive loss | (53) | (53) | (53) | ||||||||||||||||||||||||||||||||||||||||||||
| Comprehensive income | 356 | 3 | 359 | ||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation expense | 64 | 64 | 64 | ||||||||||||||||||||||||||||||||||||||||||||
| Tax withholding related to vesting of employee stock plans | (10) | (10) | (10) | ||||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock in connection with employee stock plans and other | 3,370 | 23 | 1 | 24 | 24 | ||||||||||||||||||||||||||||||||||||||||||
| Repurchases of common stock | (14,075) | (199) | (199) | (199) | |||||||||||||||||||||||||||||||||||||||||||
| Cash dividends declared ($0.12 per share) | (156) | (156) | (156) | ||||||||||||||||||||||||||||||||||||||||||||
| Balance as of July 31, 2022 | 1,288,219 | $ | 13 | $ | 28,351 | $ | (4,891) | $ | (2,862) | $ | 20,611 | $ | 53 | $ | 20,664 |
| For the nine months ended July 31, 2022 | Number of Shares | Par Value | Additional Paid-in Capital | Accumulated Deficit | Accumulated Other Comprehensive Loss | Equity Attributable to the Company | Non- controlling Interests | Total Equity | |||||||||||||||||||||||||||||||||||||||
| In millions, except number of shares in thousands | |||||||||||||||||||||||||||||||||||||||||||||||
| Balance as of October 31, 2021 | 1,294,634 | $ | 13 | $ | 28,470 | $ | (5,597) | $ | (2,915) | $ | 19,971 | $ | 46 | $ | 20,017 | ||||||||||||||||||||||||||||||||
| Net earnings | 1,172 | 1,172 | 7 | 1,179 | |||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income | 53 | 53 | 53 | ||||||||||||||||||||||||||||||||||||||||||||
| Comprehensive income | 1,225 | 7 | 1,232 | ||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation expense | 306 | 306 | 306 | ||||||||||||||||||||||||||||||||||||||||||||
| Tax withholding related to vesting of employee stock plans | (100) | (100) | (100) | ||||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock in connection with employee stock plans and other | 19,014 | 52 | 1 | 53 | 53 | ||||||||||||||||||||||||||||||||||||||||||
| Repurchases of common stock | (25,429) | (377) | (377) | (377) | |||||||||||||||||||||||||||||||||||||||||||
| Cash dividends declared ($0.36 per share) | (467) | (467) | (467) | ||||||||||||||||||||||||||||||||||||||||||||
| Balance as of July 31, 2022 | 1,288,219 | $ | 13 | $ | 28,351 | $ | (4,891) | $ | (2,862) | $ | 20,611 | $ | 53 | $ | 20,664 |
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 1: Overview and Summary of Significant Accounting Policies
Background
Hewlett Packard Enterprise Company ("Hewlett Packard Enterprise," "HPE," or the "Company") is a global technology leader focused on developing intelligent solutions that allow customers to capture, analyze and act upon data seamlessly from edge-to-cloud. Hewlett Packard Enterprise enables customers to accelerate business outcomes by driving new business models, creating new customer and employee experiences, and increasing operational efficiency today and into the future. Hewlett Packard Enterprise's customers range from small- and medium-sized businesses to large global enterprises and governmental entities.
Basis of Presentation and Consolidation
The Condensed Consolidated Financial Statements of the Company were prepared in accordance with United States ("U.S.") Generally Accepted Accounting Principles ("GAAP"). The Company’s unaudited Condensed Consolidated Financial Statements include the accounts of the Company and all subsidiaries and affiliates in which the Company has a controlling financial interest or is the primary beneficiary. All intercompany transactions and accounts within the consolidated businesses of the Company have been eliminated. In the opinion of management, the accompanying unaudited Condensed Consolidated Financial Statements of Hewlett Packard Enterprise contain all adjustments, including normal recurring adjustments, necessary to present fairly the Company's financial position as of July 31, 2023 and October 31, 2022, its results of operations for the three and nine months ended July 31, 2023 and 2022, its cash flows for the nine months ended July 31, 2023 and 2022, and its statements of stockholders' equity for the three and nine months ended July 31, 2023 and 2022.
The results of operations for the three and nine months ended July 31, 2023 and the cash flows for the nine months ended July 31, 2023 are not necessarily indicative of the results to be expected for the full year. The information included in this Quarterly Report on Form 10-Q should be read in conjunction with the Company's Annual Report on Form 10-K for the fiscal year ended October 31, 2022, as filed with the U.S. Securities and Exchange Commission ("SEC") on December 8, 2022.
Segment Realignment
Effective as of the beginning of the first quarter of fiscal 2023, in order to align its segment financial reporting more closely with its current business structure, the Company implemented an organizational change with the transfer of certain storage networking products, previously reported within the Storage reportable segment, to the Compute reportable segment.
The Company reflected these changes to its segment information retrospectively to the earliest period presented, which primarily resulted in the realignment of net revenue and operating profit for each of the segments as described above. These changes had no impact on Hewlett Packard Enterprise’s previously reported consolidated net revenue, net earnings, net earnings per share ("EPS") or total assets.
Significant Accounting Policies
There have been no changes to the Company's significant accounting policies described in Part II, Item 8, Note 1, "Overview and Summary of Significant Accounting Policies," of the Company's Annual Report on Form 10-K for the fiscal year ended October 31, 2022.
Russia/Ukraine Conflict
In June 2022, the Company determined that it is no longer tenable to maintain its operations in Russia and Belarus and announced its decision to execute an orderly, managed exit of its remaining business in these countries. For the three months ended July 31, 2022, the Company 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 Statements of Earnings. The Company 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. For the nine months ended July 31, 2022, the Company 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. The Company recorded $9 million of net income tax benefit in the Provision for taxes in the Condensed Consolidated Statement of Earnings related to these charges.
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
Recently Enacted Accounting Pronouncements
Although there are new accounting pronouncements issued by the Financial Accounting Standards Board ("FASB") that the Company will adopt, as applicable, the Company does not believe any of these accounting pronouncements will have a material impact on its Condensed Consolidated Financial Statements.
Note 2: Segment Information
Hewlett Packard Enterprise's operations are organized into six segments for financial reporting purposes: Compute, High Performance Computing & Artificial Intelligence ("HPC & AI"), Storage, Intelligent Edge, Financial Services ("FS"), and Corporate Investments and Other. Hewlett Packard Enterprise's organizational structure is based on a number of factors that the Chief Operating Decision Maker, who is the Chief Executive Officer, uses to evaluate, view, and run the Company's business operations, which include, but are not limited to, customer base and homogeneity of products, services and technology. The six segments are based on this organizational structure and information reviewed by Hewlett Packard Enterprise's management to evaluate segment results. A summary description of each segment follows:
Compute includes both general purpose servers for multi-workload computing and workload optimized servers to deliver the best performance and value for demanding applications. This portfolio of products includes the HPE ProLiant Compute rack and tower servers and HPE Synergy servers. Compute offerings also include operational and support services and HPE GreenLake for Compute that provides flexible compute as-a-service ("aaS") IT infrastructure on a consumption basis through the HPE GreenLake edge-to-cloud platform.
HPC & AI offers integrated systems comprised of software and hardware designed to address HPC, AI, data analytics, and transaction processing workloads for government and commercial customers globally. The solutions are segmented into HPC and data solutions. The HPC portfolio of products includes HPE Cray Supercomputing, HPE Cray XD (formerly known as HPE Apollo) and converged edge systems (formerly known as Edge Compute) hardware, software, and data management appliances that are often sold as supercomputing systems, including exascale supercomputers. The data solutions portfolio includes the mission critical compute portfolio and HPE NonStop. The mission critical compute portfolio includes the HPE Superdome Flex and HPE Integrity product lines for critical applications including large enterprise software applications and data analytics platforms. The HPE NonStop portfolio includes high-availability, fault-tolerant software and appliances that power applications such as credit-card transaction processing that require large scale and high availability. HPC & AI offerings also include operational and support services sold with its systems and as standalone services, and also offers various of its solutions aaS on a consumption basis through the HPE GreenLake edge-to-cloud platform.
Storage provides data storage and management offerings, which include cloud-native primary storage with the HPE Alletra Storage portfolio, self-service private cloud on-demand with HPE GreenLake for Private Cloud Business Edition, data storage and management services with HPE GreenLake for Block Storage and HPE GreenLake for File Storage, disaster recovery and ransomware recovery with Zerto, data protection services with HPE GreenLake for Backup and Recovery, and big data solutions running on HPE Alletra 4000 Data Storage Servers. Storage also provides solutions for unstructured data and analytics workloads and traditional tape, storage networking, and disk products, such as HPE MSA and HPE XP. Storage also provides data-driven intelligence with HPE InfoSight and HPE CloudPhysics along with operational and support services and data management solutions delivered through the HPE GreenLake edge-to-cloud platform.
Intelligent Edge offers wired and wireless local area network, campus and data center switching, software-defined wide-area-network, network security, and associated services to enable secure connectivity for businesses of any size. The HPE Aruba Networking product portfolio includes hardware products such as Wi-Fi access points, switches and gateways. The HPE Aruba Networking software and services portfolio includes cloud-based management, network management, network access control, analytics and assurance, location services software, and professional and support services, as well as aaS and consumption models through the HPE GreenLake edge-to-cloud platform for the Intelligent Edge portfolio of products. Intelligent Edge offerings are consolidated in the edge service platform which takes a cloud-native approach that provides customers a unified framework to meet their connectivity, security, and financial needs across campus, branch, data center, and remote worker environments.
Financial Services provides flexible investment solutions, such as leasing, financing, IT consumption, utility programs, and asset management services, for customers that facilitate unique technology deployment models and the acquisition of complete IT solutions, including hardware, software, and services from Hewlett Packard Enterprise and others. FS also supports financial solutions for on-premise flexible consumption models, such as the HPE GreenLake edge-to-cloud platform.
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
Corporate Investments and Other includes the Advisory and Professional Services ("A & PS") business, which primarily offers consultative-led services, HPE and partner technology expertise and advice, implementation services as well as complex solution engagement capabilities; the Communications and Media Solutions business ("CMS"), which primarily offers software and related services to the telecommunications industry and Athonet, which provides private mobile core networks to enterprises and communication services providers; the HPE Software business, which offers the HPE Ezmeral Software Container Platform and HPE Ezmeral Software Data Fabric; OpsRamp which provides a SaaS platform for managed service providers and enterprise IT teams to monitor and manage their cloud and on-premises (“hybrid”) infrastructure; and Hewlett Packard Labs, which is responsible for research and development.
Segment Policy
Hewlett Packard Enterprise does not allocate to its segments certain operating expenses, which it manages at the corporate level. These unallocated operating costs include certain corporate costs and eliminations, stock-based compensation expense, amortization of initial direct costs, amortization of intangible assets, transformation costs, disaster recovery (charges), and acquisition, disposition and other related charges.
Segment Operating Results
Segment net revenue and operating results were as follows:
| Compute | HPC & AI | Storage | Intelligent Edge | Financial Services | Corporate Investments and Other | Total | |||||||||||||||||||||||||||||||||||
| In millions | |||||||||||||||||||||||||||||||||||||||||
| Three months ended July 31, 2023: | |||||||||||||||||||||||||||||||||||||||||
| Net revenue | $ | 2,557 | $ | 804 | $ | 1,040 | $ | 1,412 | $ | 871 | $ | 318 | $ | 7,002 | |||||||||||||||||||||||||||
| Intersegment net revenue | 67 | 32 | 34 | 3 | 2 | — | 138 | ||||||||||||||||||||||||||||||||||
| Total segment net revenue | $ | 2,624 | $ | 836 | $ | 1,074 | $ | 1,415 | $ | 873 | $ | 318 | $ | 7,140 | |||||||||||||||||||||||||||
| Segment earnings (loss) from operations | $ | 285 | $ | (7) | $ | 115 | $ | 420 | $ | 73 | $ | (38) | $ | 848 | |||||||||||||||||||||||||||
| Three months ended July 31, 2022: | |||||||||||||||||||||||||||||||||||||||||
| Net revenue | $ | 2,978 | $ | 806 | $ | 1,114 | $ | 940 | $ | 813 | $ | 300 | $ | 6,951 | |||||||||||||||||||||||||||
| Intersegment net revenue | 49 | 24 | 15 | 1 | 4 | — | 93 | ||||||||||||||||||||||||||||||||||
| Total segment net revenue | $ | 3,027 | $ | 830 | $ | 1,129 | $ | 941 | $ | 817 | $ | 300 | $ | 7,044 | |||||||||||||||||||||||||||
| Segment earnings (loss) from operations | $ | 408 | $ | 28 | $ | 161 | $ | 155 | $ | 96 | $ | (31) | $ | 817 | |||||||||||||||||||||||||||
| Nine months ended July 31, 2023: | |||||||||||||||||||||||||||||||||||||||||
| Net revenue | $ | 8,600 | $ | 2,624 | $ | 3,229 | $ | 3,834 | $ | 2,590 | $ | 907 | $ | 21,784 | |||||||||||||||||||||||||||
| Intersegment net revenue | 241 | 108 | 75 | 12 | 14 | — | 450 | ||||||||||||||||||||||||||||||||||
| Total segment net revenue | $ | 8,841 | $ | 2,732 | $ | 3,304 | $ | 3,846 | $ | 2,604 | $ | 907 | $ | 22,234 | |||||||||||||||||||||||||||
| Segment earnings (loss) from operations | $ | 1,314 | $ | (8) | $ | 339 | $ | 1,018 | $ | 239 | $ | (140) | $ | 2,762 | |||||||||||||||||||||||||||
| Nine months ended July 31, 2022: | |||||||||||||||||||||||||||||||||||||||||
| Net revenue | $ | 8,941 | $ | 2,269 | $ | 3,286 | $ | 2,704 | $ | 2,474 | $ | 951 | $ | 20,625 | |||||||||||||||||||||||||||
| Intersegment net revenue | 141 | 61 | 43 | 5 | 8 | 1 | 259 | ||||||||||||||||||||||||||||||||||
| Total segment net revenue | $ | 9,082 | $ | 2,330 | $ | 3,329 | $ | 2,709 | $ | 2,482 | $ | 952 | $ | 20,884 | |||||||||||||||||||||||||||
| Segment earnings (loss) from operations | $ | 1,261 | $ | (19) | $ | 445 | $ | 421 | $ | 304 | $ | (66) | $ | 2,346 |
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
The reconciliation of segment operating results to Condensed Consolidated Statements of Earnings was as follows:
| For the three months ended July 31, | For the nine months ended July 31, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| In millions | |||||||||||||||||||||||
| Net Revenue: | |||||||||||||||||||||||
| Total segments | $ | 7,140 | $ | 7,044 | $ | 22,234 | $ | 20,884 | |||||||||||||||
| Eliminations of intersegment net revenue | (138) | (93) | (450) | (259) | |||||||||||||||||||
| Total consolidated net revenue | $ | 7,002 | $ | 6,951 | $ | 21,784 | $ | 20,625 | |||||||||||||||
| Earnings Before Taxes: | |||||||||||||||||||||||
| Total segment earnings from operations | $ | 848 | $ | 817 | $ | 2,762 | $ | 2,346 | |||||||||||||||
| Unallocated corporate costs and eliminations | (130) | (88) | (327) | (222) | |||||||||||||||||||
| Stock-based compensation expense | (91) | (64) | (357) | (306) | |||||||||||||||||||
| Amortization of initial direct costs | — | (1) | — | (3) | |||||||||||||||||||
| Amortization of intangible assets | (72) | (73) | (216) | (220) | |||||||||||||||||||
| Transformation costs | (65) | (80) | (227) | (289) | |||||||||||||||||||
| Disaster recovery (charges) | 2 | (36) | (2) | (160) | |||||||||||||||||||
| Acquisition, disposition and other related charges | (21) | (9) | (51) | (25) | |||||||||||||||||||
| Interest and other, net | (50) | (74) | (129) | (79) | |||||||||||||||||||
| Tax indemnification and related adjustments | 45 | (30) | 50 | (47) | |||||||||||||||||||
| Non-service net periodic benefit (cost) credit | (3) | 34 | (2) | 106 | |||||||||||||||||||
| Earnings from equity interests | 73 | 68 | 180 | 132 | |||||||||||||||||||
| Total earnings before provision for taxes | $ | 536 | $ | 464 | $ | 1,681 | $ | 1,233 |
Segment Assets
Hewlett Packard Enterprise allocates assets to its business segments based on the segments primarily benefiting from the assets. Total assets by segment and the reconciliation of segment assets to total assets as per Condensed Consolidated Balance Sheets were as follows:
| As of | |||||||||||
| July 31, 2023 | October 31, 2022 | ||||||||||
| In millions | |||||||||||
| Compute | $ | 15,334 | $ | 16,881 | |||||||
| HPC & AI | 5,536 | 5,997 | |||||||||
| Storage | 7,023 | 7,484 | |||||||||
| Intelligent Edge | 5,113 | 4,594 | |||||||||
| Financial Services | 14,804 | 14,837 | |||||||||
| Corporate Investments and Other | 1,327 | 1,110 | |||||||||
| Corporate and unallocated assets | 7,278 | 6,220 | |||||||||
| Total assets | $ | 56,415 | $ | 57,123 |
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
Geographic Information
Net revenue by geographic region was as follows:
| For the three months ended July 31, | For the nine months ended July 31, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| In millions | |||||||||||||||||||||||
| Americas: | |||||||||||||||||||||||
| United States | $ | 2,433 | $ | 2,261 | $ | 7,713 | $ | 6,737 | |||||||||||||||
| Americas excluding U.S. | 539 | 481 | 1,628 | 1,409 | |||||||||||||||||||
| Total Americas | 2,972 | 2,742 | 9,341 | 8,146 | |||||||||||||||||||
| Europe, Middle East and Africa | 2,434 | 2,512 | 7,605 | 7,550 | |||||||||||||||||||
| Asia Pacific and Japan | 1,596 | 1,697 | 4,838 | 4,929 | |||||||||||||||||||
| Total consolidated net revenue | $ | 7,002 | $ | 6,951 | $ | 21,784 | $ | 20,625 |
Note 3: Transformation Programs
Transformation programs are comprised of the Cost Optimization and Prioritization Plan and the HPE Next Plan. During the third quarter of fiscal 2020, the Company launched the Cost Optimization and Prioritization Plan, which focuses on realigning the workforce to areas of growth, a new hybrid workforce model called Edge-to-Office, real estate strategies, and simplifying and evolving our product portfolio strategy. The implementation period of the primary elements of the Cost Optimization and Prioritization Plan is anticipated to be through fiscal 2023. During the remaining implementation period, the Company expects to incur transformation costs predominantly related to labor restructuring, non-labor restructuring, IT investments, design and execution charges and real estate initiatives.
During the third quarter of fiscal 2017, the Company launched the HPE Next Plan to put in place a purpose-built company designed to compete and win in the markets where it participates. Through this program, the Company is simplifying the operating model, and streamlining its offerings, business processes and business systems to improve its strategy execution. The implementation period of the primary elements of the HPE Next Plan is anticipated to be through fiscal 2023. During the remaining implementation period, the Company expects to incur predominantly IT infrastructure costs for streamlining, upgrading, and simplifying back-end operations, and real estate initiatives. These costs are expected to be offset by gains from real estate sales and sublease income from inactive office space.
Cost Optimization and Prioritization Plan
The components of transformation costs relating to the Cost Optimization and Prioritization Plan were as follows:
| For the three months ended July 31, | For the nine months ended July 31, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| In millions | |||||||||||||||||||||||
| Program management | $ | 2 | $ | 9 | $ | 4 | $ | 18 | |||||||||||||||
| IT costs | — | 1 | 16 | 19 | |||||||||||||||||||
| Restructuring charges | 38 | 33 | 127 | 94 | |||||||||||||||||||
| Total | $ | 40 | $ | 43 | $ | 147 | $ | 131 |
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
HPE Next Plan
The components of transformation costs relating to HPE Next Plan were as follows:
| For the three months ended July 31, | For the nine months ended July 31, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| In millions | |||||||||||||||||||||||
| Program management | $ | — | $ | 1 | $ | — | $ | 6 | |||||||||||||||
| IT costs | 25 | 31 | 74 | 130 | |||||||||||||||||||
| Restructuring charges | — | 2 | 6 | 8 | |||||||||||||||||||
| Gain on real estate sales | — | — | — | (8) | |||||||||||||||||||
| Impairment of real estate assets | — | — | — | 11 | |||||||||||||||||||
| Other | — | 3 | 1 | 11 | |||||||||||||||||||
| Total | $ | 25 | $ | 37 | $ | 81 | $ | 158 |
Restructuring Plan
Restructuring activities related to the Company's employees and infrastructure under the Cost Optimization and Prioritization Plan and HPE Next Plan are presented in the table below:
| Cost Optimization and Prioritization Plan | HPE Next Plan | ||||||||||||||||||||||
| Employee Severance | Infrastructure and other | Employee Severance | Infrastructure and other | ||||||||||||||||||||
| In millions | |||||||||||||||||||||||
| Liability as of October 31, 2022 | $ | 185 | $ | 122 | $ | 11 | $ | 25 | |||||||||||||||
| Charges | 75 | 52 | 4 | 2 | |||||||||||||||||||
| Cash payments | (135) | (48) | (10) | (7) | |||||||||||||||||||
| Non-cash items | 11 | (7) | 1 | — | |||||||||||||||||||
| Liability as of July 31, 2023 | $ | 136 | $ | 119 | $ | 6 | $ | 20 | |||||||||||||||
| Total costs incurred to date, as of July 31, 2023 | $ | 720 | $ | 535 | $ | 1,265 | $ | 262 | |||||||||||||||
| Total expected costs to be incurred as of July 31, 2023 | $ | 750 | $ | 550 | $ | 1,265 | $ | 265 |
The current restructuring liability related to the transformation programs, reported in the Condensed Consolidated Balance Sheets as of July 31, 2023 and October 31, 2022, was $149 million and $191 million, respectively, in Accrued restructuring, and $26 million and $28 million, respectively, in Other accrued liabilities. The non-current restructuring liability related to the transformation programs, reported in Other non-current liabilities in the Condensed Consolidated Balance Sheets as of July 31, 2023 and October 31, 2022, was $106 million and $124 million, respectively.
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
Note 4: Retirement Benefit Plans
The Company's net pension benefit cost (credit) for defined benefit plans recognized in the Condensed Consolidated Statements of Earnings was as follows:
| For the three months ended July 31, | For the nine months ended July 31, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| In millions | |||||||||||||||||||||||
| Service cost | $ | 13 | $ | 19 | $ | 39 | $ | 60 | |||||||||||||||
| Interest cost(1) | 98 | 38 | 288 | 118 | |||||||||||||||||||
| Expected return on plan assets(1) | (138) | (110) | (402) | (346) | |||||||||||||||||||
| Amortization and Deferrals(1): | |||||||||||||||||||||||
| Actuarial loss | 41 | 41 | 120 | 128 | |||||||||||||||||||
| Prior service benefit | (3) | (3) | (8) | (8) | |||||||||||||||||||
| Net periodic benefit cost (credit) | 11 | (15) | 37 | (48) | |||||||||||||||||||
| Settlement loss and special termination benefits(1) | 3 | — | 4 | 2 | |||||||||||||||||||
| Total net benefit cost (credit) | $ | 14 | $ | (15) | $ | 41 | $ | (46) |
(1)These non-service components of net periodic benefit cost (credit) were included in Non-service net periodic benefit (cost) credit in the Condensed Consolidated Statements of Earnings.
Note 5: Taxes on Earnings
Provision for Taxes
For the three months ended July 31, 2023 and 2022, the Company recorded income tax expense of $72 million and $55 million, respectively, which reflects an effective tax rate of 13.4% and 11.9%, respectively. For the nine months ended July 31, 2023 and 2022, the Company recorded income tax expense of $298 million and $61 million, respectively, which reflects an effective tax rate of 17.7% and 5.0%, respectively. The effective tax rate generally differs from the U.S. federal statutory rate of 21% due to favorable tax rates associated with certain earnings from the Company’s operations in lower tax jurisdictions throughout the world but are also impacted by discrete tax adjustments during each fiscal period.
For the three and nine months ended July 31, 2023, the Company recorded $8 million of net income tax charges and $17 million of net income tax benefits, respectively, related to various items discrete to the period. For the three months ended July 31, 2023, this amount primarily included $15 million of net income tax charges related to U.S. and foreign provision to tax return changes and $11 million of net income tax charges related to tax audit settlements and changes in uncertain tax positions, partially offset by $19 million of net income tax benefits related to transformation costs, and acquisition, disposition and other related charges. For the nine months ended July 31, 2023, this amount primarily included $55 million of income tax benefits related to transformation costs, and acquisition, disposition and other related charges and $15 million of net excess tax benefits related to stock-based compensation, partially offset by $32 million of net income tax charges related to tax audit settlements and changes in uncertain tax positions and $20 million of net income tax charges related to U.S. and foreign provision to tax return changes.
For the three and nine months ended July 31, 2022, the Company recorded $71 million and $192 million of net income tax benefits, respectively, related to various items discrete to the period. For the three months ended July 31, 2022, this amount primarily included $30 million of income tax benefits related to tax liabilities for which the Company shared joint and several liability with HP Inc. and for which the Company was indemnified by HP Inc., $18 million of income tax benefits related to transformation costs, and acquisition, disposition and other related charges, $12 million of income tax benefits as a result of the fiscal 2021 U.S. tax return filing primarily from the decrease in Global Intangible Low Taxed Income (“GILTI”), and $6 million of net income tax benefits related to the settlement of foreign tax audit matters, partially offset by $16 million of net income tax charges related to the Company’s exit from its Russia and Belarus businesses, primarily as a result of recording a valuation allowance on deferred taxes. For the nine months ended July 31, 2022, this amount primarily included $64 million of income tax benefits related to transformation costs, and acquisition, disposition and other related charges, $43 million of net income tax benefits related to the settlement of U.S. tax audit matters, $30 million of income tax benefits related to tax liabilities for which the Company shared joint and several liability with HP Inc. and for which the Company was indemnified
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
by HP Inc., $12 million of net income tax benefits related to the settlement of foreign tax audit matters, $12 million of income tax benefits as a result of the fiscal 2021 U.S. tax return filing primarily from the decrease in GILTI, and $9 million of net income tax benefits on pre-tax charges incurred related to the Company’s exit from its Russia and Belarus businesses.
Uncertain Tax Positions
As of July 31, 2023 and October 31, 2022, the amount of unrecognized tax benefits was $711 million and $674 million, respectively, of which up to $421 million and $386 million, respectively, would affect the Company's effective tax rate if realized as of their respective periods.
For tax liabilities pertaining to unrecognized tax benefits, the Company recognizes interest income from favorable settlements and interest expense and penalties in Provision for taxes in the Condensed Consolidated Statements of Earnings. The Company recognized interest expense of $5 million and interest income of $4 million for the three months ended July 31, 2023 and 2022, respectively. The Company recognized interest income of $5 million and $41 million for the nine months ended July 31, 2023 and 2022, respectively. The Company recognized interest income in the first quarter of fiscal 2022 due to the release of reserves as a result of the effective settlement of the Internal Revenue Service (“IRS”) audit for fiscal 2016. As of July 31, 2023 and October 31, 2022, the Company had accrued $76 million and $81 million, respectively, for interest and penalties in the Condensed Consolidated Balance Sheets.
The Company engages in continuous discussion and negotiation with tax authorities regarding tax matters in various jurisdictions. The IRS is conducting an audit of the Company's fiscal 2017, 2018, and 2019 U.S. federal income tax returns. The IRS may conclude its examination in the coming quarters and issue notices of proposed adjustments, the effect of which we would evaluate for financial statement purposes when received. Additionally, it is reasonably possible that certain foreign and state tax issues may be concluded in the next 12 months, including issues involving resolution of certain intercompany transactions and other matters; accordingly, the Company believes it is reasonably possible that its existing unrecognized tax benefits for these matters may be reduced by an amount up to $36 million within the next 12 months.
Deferred Tax Assets and Liabilities
Deferred tax assets and liabilities included in the Condensed Consolidated Balance Sheets were as follows:
| As of | |||||||||||
| July 31, 2023 | October 31, 2022 | ||||||||||
| In millions | |||||||||||
| Deferred tax assets | $ | 2,251 | $ | 2,127 | |||||||
| Deferred tax liabilities | (383) | (320) | |||||||||
| Deferred tax assets net of deferred tax liabilities | $ | 1,868 | $ | 1,807 |
Note 6: Balance Sheet Details
Cash, Cash Equivalents and Restricted Cash
| As of | |||||||||||
| July 31, 2023 | October 31, 2022 | ||||||||||
| In millions | |||||||||||
| Cash and cash equivalents | $ | 2,919 | $ | 4,163 | |||||||
| Restricted cash(1) | 213 | 600 | |||||||||
| Total | $ | 3,132 | $ | 4,763 |
(1) The Company included restricted cash in Other current assets in the accompanying Condensed Consolidated Balance Sheets.
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
Inventory
| As of | |||||||||||
| July 31, 2023 | October 31, 2022 | ||||||||||
| In millions | |||||||||||
| Finished goods | $ | 2,001 | $ | 2,187 | |||||||
| Purchased parts and fabricated assemblies | 2,540 | 2,974 | |||||||||
| Total | $ | 4,541 | $ | 5,161 |
Property, Plant and Equipment
| As of | |||||||||||
| July 31, 2023 | October 31, 2022 | ||||||||||
| In millions | |||||||||||
| Land | $ | 74 | $ | 74 | |||||||
| Buildings and leasehold improvements | 1,531 | 1,503 | |||||||||
| Machinery and equipment, including equipment held for lease | 10,433 | 9,729 | |||||||||
| Gross property, plant and equipment | 12,038 | 11,306 | |||||||||
| Accumulated depreciation | (5,949) | (5,522) | |||||||||
| Net property, plant and equipment | $ | 6,089 | $ | 5,784 |
Warranties
The Company's aggregate product warranty liability and changes thereto were as follows:
| In millions | |||||
| Balance as of October 31, 2022 | $ | 360 | |||
| Charges | 140 | ||||
| Adjustments related to pre-existing warranties | (11) | ||||
| Settlements made | (157) | ||||
| Balance as of July 31, 2023 | $ | 332 |
Contract Balances
The Company’s contract balances consist of contract assets, contract liabilities, and costs to obtain a contract with a customer.
Contract Assets
A summary of accounts receivable, net, including unbilled receivables was as follows:
| As of | |||||||||||
| July 31, 2023 | October 31, 2022 | ||||||||||
| In millions | |||||||||||
| Unbilled receivables | $ | 306 | $ | 245 | |||||||
| Accounts receivable | 3,172 | 3,881 | |||||||||
| Allowances | (30) | (25) | |||||||||
| Total | $ | 3,448 | $ | 4,101 |
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
The allowances for credit losses related to accounts receivable and changes for the nine months ended July 31, 2023, and the fiscal year ended October 31, 2022 were as follows:
| As of | |||||||||||
| July 31, 2023 | October 31, 2022 | ||||||||||
| In millions | |||||||||||
| Balance at beginning of period | $ | 25 | $ | 23 | |||||||
| Provision for credit losses | 16 | 25 | |||||||||
| Adjustments to existing allowances, including write offs | (11) | (23) | |||||||||
| Balance at end of period | $ | 30 | $ | 25 |
Sale of Trade Receivables
The Company has third-party revolving short-term financing arrangements intended to facilitate the working capital requirements of certain customers. For the three and nine months ended July 31, 2023, the Company sold $1.0 billion and $3.1 billion of trade receivables, respectively. For the fiscal year ended October 31, 2022, the Company sold $4.1 billion of trade receivables. The Company recorded an obligation of $90 million and $88 million within Notes payable and short-term borrowings in its Condensed Consolidated Balance Sheets as of July 31, 2023 and October 31, 2022 respectively, related to the trade receivables sold and collected from the third-party for which the revenue recognition was deferred.
Contract Liabilities and Remaining Performance Obligations
As of July 31, 2023 and October 31, 2022, current deferred revenue of $3.6 billion and $3.4 billion, respectively, were recorded in Deferred revenue, and non-current deferred revenue of $3.2 billion and $3.0 billion, respectively, were recorded in Other non-current liabilities in the Condensed Consolidated Balance Sheets. For the nine months ended July 31, 2023, approximately $2.8 billion of revenue was recognized relating to contract liabilities recorded as of October 31, 2022.
Revenue allocated to remaining performance obligations represents contract work that has not yet been performed and does not include contracts where the customer is not committed. Remaining performance obligations estimates are subject to change and are affected by several factors, including contract terminations, changes in the scope of contracts, adjustments for revenue that has not materialized and adjustments for currency. As of July 31, 2023, the aggregate amount of remaining performance obligations, or deferred revenue, was $6.8 billion. The Company expects to recognize approximately 23% of this balance over fiscal 2023 with the remainder to be recognized thereafter.
Costs to Obtain a Contract
As of July 31, 2023, the current and non-current portions of the capitalized costs to obtain a contract were $82 million and $131 million, respectively. As of October 31, 2022, the current and non-current portions of the capitalized costs to obtain a contract were $76 million and $124 million, respectively. The current and non-current portions of the capitalized costs to obtain a contract were included in Other current assets, and Long-term financing receivables and other assets, respectively, in the Condensed Consolidated Balance Sheets. For the three and nine months ended July 31, 2023 the Company amortized $24 million and $69 million respectively, of capitalized costs to obtain a contract. For the three and nine months ended July 31, 2022 the Company amortized $21 million and $62 million respectively, of capitalized costs to obtain a contract. The amortized capitalized costs to obtain a contract are included in Selling, general and administrative expense in the Condensed Consolidated Statements of Earnings.
Note 7: Accounting for Leases as a Lessor
Financing receivables represent sales-type and direct-financing leases of the Company and third-party products. These receivables typically have terms ranging from two to five years and are usually collateralized by a security interest in the underlying assets. Financing receivables also include billed receivables from operating leases. The allowance for credit losses represents future expected credit losses over the life of the receivables based on past experience, current information and forward-looking economic considerations. The components of financing receivables were as follows:
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
| As of | |||||||||||
| July 31, 2023 | October 31, 2022 | ||||||||||
| In millions | |||||||||||
| Minimum lease payments receivable | $ | 9,575 | $ | 8,686 | |||||||
| Unguaranteed residual value | 442 | 380 | |||||||||
| Unearned income | (947) | (707) | |||||||||
| Financing receivables, gross | 9,070 | 8,359 | |||||||||
| Allowance for credit losses | (268) | (325) | |||||||||
| Financing receivables, net | 8,802 | 8,034 | |||||||||
| Less: current portion | (3,718) | (3,522) | |||||||||
| Amounts due after one year, net | $ | 5,084 | $ | 4,512 |
Sale of Financing Receivables
The Company enters into arrangements to transfer the contractual payments due under certain financing receivables to third party financial institutions. For the nine months ended July 31, 2023 and the fiscal year ended October 31, 2022, the Company sold $179 million and $183 million of financing receivables, respectively.
Credit Quality Indicators
Due to the homogeneous nature of its leasing transactions, the Company manages its financing receivables on an aggregate basis when assessing and monitoring credit risk. Credit risk is generally diversified due to the large number of entities comprising the Company's customer base and their dispersion across many different industries and geographic regions. The Company evaluates the credit quality of an obligor at lease inception and monitors that credit quality over the term of a transaction. The Company assigns risk ratings to each lease based on the creditworthiness of the obligor and other variables that augment or mitigate the inherent credit risk of a particular transaction and periodically updates the risk ratings when there is a change in the underlying credit quality. Such variables include the underlying value and liquidity of the collateral, the essential use of the equipment, the term of the lease, and the inclusion of credit enhancements, such as guarantees, letters of credit or security deposits.
The credit risk profile of gross financing receivables, based on internal risk ratings as of July 31, 2023, presented on amortized cost basis by year of origination was as follows:
| As of July 31, 2023 | |||||||||||||||||
| Risk Rating | |||||||||||||||||
| Low | Moderate | High | |||||||||||||||
| Fiscal Year | In millions | ||||||||||||||||
| 2023 | $ | 1,619 | $ | 963 | $ | 20 | |||||||||||
| 2022 | 1,886 | 1,194 | 55 | ||||||||||||||
| 2021 | 1,028 | 766 | 65 | ||||||||||||||
| 2020 | 456 | 360 | 52 | ||||||||||||||
| 2019 and prior | 199 | 291 | 116 | ||||||||||||||
| Total | $ | 5,188 | $ | 3,574 | $ | 308 |
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
The credit risk profile of gross financing receivables, based on internal risk ratings as of October 31, 2022, presented on amortized cost basis by year of origination was as follows:
| As of October 31, 2022 | |||||||||||||||||
| Risk Rating | |||||||||||||||||
| Low | Moderate | High | |||||||||||||||
| Fiscal Year | In millions | ||||||||||||||||
| 2022 | $ | 1,987 | $ | 1,277 | $ | 44 | |||||||||||
| 2021 | 1,338 | 1,071 | 42 | ||||||||||||||
| 2020 | 756 | 571 | 67 | ||||||||||||||
| 2019 | 328 | 336 | 69 | ||||||||||||||
| 2018 and prior | 143 | 234 | 96 | ||||||||||||||
| Total | $ | 4,552 | $ | 3,489 | $ | 318 |
Accounts rated low risk typically have the equivalent of a Standard & Poor's rating of BBB– or higher, while accounts rated moderate risk generally have the equivalent of BB+ or lower. The Company classifies accounts as high risk when it considers the financing receivable to be impaired or when management believes there is a significant near-term risk of impairment. The credit quality indicators do not reflect any mitigation actions taken to transfer credit risk to third parties.
Allowance for Credit Losses
The allowance for credit losses for financing receivables as of July 31, 2023 and October 31, 2022 and the respective changes for the nine and twelve months then ended were as follows:
| As of | |||||||||||
| July 31, 2023 | October 31, 2022 | ||||||||||
| In millions | |||||||||||
| Balance at beginning of period | $ | 325 | $ | 228 | |||||||
| Provision for credit losses(1) | 41 | 177 | |||||||||
| Adjustment to the existing allowance | — | (10) | |||||||||
| Write-offs | (98) | (70) | |||||||||
| Balance at end of period | $ | 268 | $ | 325 |
(1) Fiscal 2022 included a provision of $99 million related to expected credit losses due to the Company's exit from its Russia and Belarus businesses.
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
Non-Accrual and Past-Due Financing Receivables
The following table summarizes the aging and non-accrual status of gross financing receivables:
| As of | |||||||||||
| July 31, 2023 | October 31, 2022 | ||||||||||
| In millions | |||||||||||
| Billed:(1) | |||||||||||
| Current and past due 1-30 days | $ | 400 | $ | 372 | |||||||
| Past due 31-60 days | 37 | 32 | |||||||||
| Past due 61-90 days | 16 | 19 | |||||||||
| Past due > 90 days | 103 | 121 | |||||||||
| Unbilled sales-type and direct-financing lease receivables | 8,514 | 7,815 | |||||||||
| Total gross financing receivables | $ | 9,070 | $ | 8,359 | |||||||
| Gross financing receivables on non-accrual status(2) | $ | 258 | $ | 290 | |||||||
| Gross financing receivables 90 days past due and still accruing interest(2) | $ | 75 | $ | 72 |
(1)Includes billed operating lease receivables and billed sales-type and direct-financing lease receivables.
(2)Includes billed operating lease receivables and billed and unbilled sales-type and direct-financing lease receivables.
The following table presents amounts included in the Condensed Consolidated Statements of Earnings related to lessor activity:
| For the three months ended July 31, | For the nine months ended July 31, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| In millions | |||||||||||||||||||||||
| Interest income from sales-type leases and direct financing leases | $ | 142 | $ | 121 | $ | 395 | $ | 365 | |||||||||||||||
| Lease income from operating leases | 606 | 570 | 1,800 | 1,719 | |||||||||||||||||||
| Total lease income | $ | 748 | $ | 691 | $ | 2,195 | $ | 2,084 |
Variable Interest Entities
The Company has issued asset-backed debt securities under a fixed-term securitization program to private investors. The asset-backed debt securities are collateralized by the U.S. fixed-term financing receivables and leased equipment in the offering, which is held by a Special Purpose Entity ("SPE"). The SPE meets the definition of a Variable Interest Entity ("VIE") and is consolidated, along with the associated debt, into the Condensed Consolidated Financial Statements as the Company is the primary beneficiary of the VIE. The SPE is a bankruptcy-remote legal entity with separate assets and liabilities. The purpose of the SPE is to facilitate the funding of customer receivables and leased equipment in the capital markets.
The Company’s risk of loss related to securitized receivables and leased equipment is limited to the amount by which the Company’s right to receive collections for assets securitized exceeds the amount required to pay interest, principal, and fees and expenses related to the asset-backed securities.
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
The following table presents the assets and liabilities held by the consolidated VIE as of July 31, 2023 and October 31, 2022, which are included in the Condensed Consolidated Balance Sheets. The assets in the table below include those that can be used to settle the obligations of the VIE. Additionally, general creditors do not have recourse to the assets of the VIE.
| As of | |||||||||||
| July 31, 2023 | October 31, 2022 | ||||||||||
| Assets held by VIE: | In millions | ||||||||||
| Other current assets | $ | 167 | $ | 203 | |||||||
| Financing receivables | |||||||||||
| Short-term | 655 | 838 | |||||||||
| Long-term | 856 | 1,085 | |||||||||
| Property, plant and equipment | 1,123 | 1,323 | |||||||||
| Liabilities held by VIE: | |||||||||||
| Notes payable and short-term borrowings, net of unamortized debt issuance costs | 1,257 | 1,510 | |||||||||
| Long-term debt, net of unamortized debt issuance costs | $ | 984 | $ | 1,415 |
For the nine months ended July 31, 2023, financing receivables and leased equipment transferred via securitization through the SPE were $417 million and $391 million, respectively. For the fiscal year ended October 31, 2022, financing receivables and leased equipment transferred via securitization through the SPE were $1.6 billion and $1.2 billion, respectively.
Note 8: Acquisitions
For the nine months ended July 31, 2023, the Company completed five acquisitions. The purchase price allocations for the acquisitions described below reflect various preliminary fair value estimates and analysis, including preliminary work performed by third-party valuation specialists, of certain tangible assets and liabilities acquired, the valuation of intangible assets acquired, certain legal matters, income and non-income based taxes, and residual goodwill, which are subject to change within the measurement period. Measurement period adjustments are recorded in the reporting period in which the estimates are finalized and adjustment amounts are determined.
The pro forma results of operations, revenue and net income subsequent to the acquisition dates have not been presented as they are not material to the Company's consolidated results of operations, either individually or in the aggregate. Goodwill, which represents the excess of the purchase price over the net tangible and intangible assets acquired, is not deductible for tax purposes.
The following table presents the aggregate estimated fair value of the assets acquired and liabilities assumed, including those items that are still pending allocations, for the acquisitions completed during the first nine months of fiscal 2023:
| In millions | |||||
| Goodwill | $ | 591 | |||
| Amortizable intangible assets | 208 | ||||
| Net tangible assets assumed | 41 | ||||
| Total fair value consideration | $ | 840 |
On May 2, 2023, the Company completed the acquisition of OpsRamp, an IT operations management company that monitors, observes, automates and manages IT infrastructure, cloud resources, workloads and applications for hybrid and multi-cloud environments, including the leading hyperscalers. OpsRamp’s results of operations were included within the Corporate Investments and Other segment. The acquisition date fair value consideration of $307 million primarily consisted of cash paid for outstanding common stock. In connection with this acquisition, the Company recorded approximately $220 million of goodwill, and $84 million of intangible assets. The Company is amortizing the intangible assets on a straight-line basis over an estimated weighted-average useful life of five years.
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
On March 15, 2023, the Company completed the acquisition of Axis Security, a cloud security provider, enabling the Company to expand its edge-to-cloud security capabilities by offering a unified Secure Access Services Edge (“SASE”) solution to meet the increasing demand for integrated networking and security solutions delivered aaS. Axis Security's results of operations were included within the Intelligent Edge segment. The acquisition date fair value consideration of $412 million primarily consisted of cash paid for outstanding common stock. In connection with this acquisition, the Company recorded approximately $311 million of goodwill, and $71 million of intangible assets. The Company is amortizing the intangible assets on a straight-line basis over an estimated weighted-average useful life of five years.
Note 9: Goodwill
Goodwill is tested for impairment at the reporting unit level. As of July 31, 2023, the Company's reporting units are consistent with the reportable segments identified in Note 2, with the exception of Corporate Investments and Other, which contains five reporting units: A & PS, Athonet, legacy CMS, OpsRamp and Software. The following table represents the carrying value of goodwill, by reportable segment as of July 31, 2023 and October 31, 2022. There has been no change to the accumulated impairment loss from the Company's Annual Report on Form 10-K for the fiscal year ended October 31, 2022.
| Compute | HPC & AI | Storage | Intelligent Edge | Financial Services | Corporate Investments and Other | Total | |||||||||||||||||||||||||||||||||||
| In millions | |||||||||||||||||||||||||||||||||||||||||
| Balance as of October 31, 2022(1) | $ | 7,692 | $ | 2,889 | $ | 4,000 | $ | 2,555 | $ | 144 | $ | 123 | $ | 17,403 | |||||||||||||||||||||||||||
| Goodwill acquired during the period | — | 18 | — | 311 | — | 262 | 591 | ||||||||||||||||||||||||||||||||||
| Balance as of July 31, 2023 | $ | 7,692 | $ | 2,907 | $ | 4,000 | $ | 2,866 | $ | 144 | $ | 385 | $ | 17,994 |
(1) As a result of the organizational realignments which were effective as of November 1, 2022, (described in Note 1, "Overview and Summary of Significant Accounting Policies"), $160 million of goodwill was reallocated from the Storage segment to the Compute segment as of the beginning of the period using a relative fair value approach.
The Company evaluates the recoverability of goodwill on an annual basis as of the beginning of its fourth fiscal quarter and whenever events or changes in circumstances indicate there may be a potential impairment.
As of the annual test date in fiscal 2022, the HPC & AI reporting unit had goodwill of $2.9 billion and an excess of fair value over carrying value of net assets of 0%. The HPC & AI reporting unit relies significantly on the income approach which estimates the fair value based on the present value of future cash flows. The HPC & AI business continues to face challenges related to supply chain constraints of key components and other operational challenges impacting the Company’s ability to achieve certain customer acceptance milestones required for revenue recognition and resulting cost increases associated with fulfilling contracts over longer than originally anticipated timelines. The Company currently believes these challenges will be successfully addressed as the supply chain constraints continue to improve. If the global macroeconomic or geopolitical conditions worsen, projected revenue growth rates or operating margins decline, weighted average cost of capital increases, or if the Company has significant or sustained decline in its stock price, it is possible its estimates about the HPC & AI reporting unit's ability to successfully address the current challenges may change, which could result in the carrying value of the HPC & AI reporting unit exceeding its estimated fair value and potential impairment charges.
As of the annual test date in fiscal 2022, the Software reporting unit had goodwill of $123 million and an excess of fair value over carrying value of net assets of 0%. The Software reporting unit relies significantly on the market approach, which is impacted by market volatility. If global macroeconomic or geopolitical conditions worsen and cause a further decline in the equity market or if revenue expectations are not met, this could result in the carrying value of the Software reporting unit exceeding its estimated fair value and potential impairment charges.
Note 10: Fair Value
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the measurement date.
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
The Company uses valuation techniques that are based upon observable and unobservable inputs. Observable inputs are developed using market data such as publicly available information and reflect the assumptions market participants would use, while unobservable inputs are developed using the best information available about the assumptions market participants would use.
The following table presents the Company's assets and liabilities that are measured at fair value on a recurring basis:
| As of July 31, 2023 | As of October 31, 2022 | ||||||||||||||||||||||||||||||||||||||||||||||
| Fair Value Measured Using | Fair Value Measured Using | ||||||||||||||||||||||||||||||||||||||||||||||
| Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Remaining Inputs (Level 2) | Significant Other Unobservable Remaining Inputs (Level 3) | Total | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Remaining Inputs (Level 2) | Significant Other Unobservable Remaining Inputs (Level 3) | Total | ||||||||||||||||||||||||||||||||||||||||
| In millions | |||||||||||||||||||||||||||||||||||||||||||||||
| Assets | |||||||||||||||||||||||||||||||||||||||||||||||
| Cash Equivalents and Investments: | |||||||||||||||||||||||||||||||||||||||||||||||
| Time deposits | $ | — | $ | 1,143 | $ | — | $ | 1,143 | $ | — | $ | 1,516 | $ | — | $ | 1,516 | |||||||||||||||||||||||||||||||
| Money market funds | 366 | — | — | 366 | 744 | — | — | 744 | |||||||||||||||||||||||||||||||||||||||
| Equity investments | — | — | 131 | 131 | — | — | 126 | 126 | |||||||||||||||||||||||||||||||||||||||
| Foreign bonds | 1 | 103 | — | 104 | — | 91 | — | 91 | |||||||||||||||||||||||||||||||||||||||
| Other debt securities | — | — | 16 | 16 | — | — | 33 | 33 | |||||||||||||||||||||||||||||||||||||||
| Derivative Instruments: | |||||||||||||||||||||||||||||||||||||||||||||||
| Foreign exchange contracts | — | 253 | — | 253 | — | 840 | — | 840 | |||||||||||||||||||||||||||||||||||||||
| Other derivatives | — | 4 | — | 4 | — | 2 | — | 2 | |||||||||||||||||||||||||||||||||||||||
| Total assets | $ | 367 | $ | 1,503 | $ | 147 | $ | 2,017 | $ | 744 | $ | 2,449 | $ | 159 | $ | 3,352 | |||||||||||||||||||||||||||||||
| Liabilities | |||||||||||||||||||||||||||||||||||||||||||||||
| Derivative Instruments: | |||||||||||||||||||||||||||||||||||||||||||||||
| Interest rate contracts | $ | — | $ | 157 | $ | — | $ | 157 | $ | — | $ | 178 | $ | — | $ | 178 | |||||||||||||||||||||||||||||||
| Foreign exchange contracts | — | 351 | — | 351 | — | 128 | — | 128 | |||||||||||||||||||||||||||||||||||||||
| Other derivatives | — | — | — | — | — | 1 | — | 1 | |||||||||||||||||||||||||||||||||||||||
| Total liabilities | $ | — | $ | 508 | $ | — | $ | 508 | $ | — | $ | 307 | $ | — | $ | 307 |
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
Other Fair Value Disclosures
Short-Term and Long-Term Debt
As of July 31, 2023 and October 31, 2022, the estimated fair value of the Company's short-term and long-term debt was $13.5 billion and $12.2 billion, respectively. As of July 31, 2023 and October 31, 2022, the carrying value of the Company's short-term and long-term debt was $13.4 billion and $12.5 billion, respectively. If measured at fair value in the Condensed Consolidated Balance Sheets, short-term and long-term debt would be classified in Level 2 of the fair value hierarchy.
Other Financial Instruments
Financial instruments, including accounts receivable and accounts payable, are carried at cost, which approximates their fair value due to their short-term nature.
Non-Recurring Fair Value Measurements
Equity Investments without Readily Determinable Fair Value
Equity investments are recorded at cost and measured at fair value when they are deemed to be impaired or when there is an adjustment from observable price changes. For the three months ended July 31, 2023 and 2022, the Company recognized an immaterial unrealized net gain on these investments. For the nine months ended July 31, 2023, the Company recognized an unrealized net loss of $6 million on these investments which included an impairment of $10 million. For the nine months ended July 31, 2022, the Company recorded an immaterial impairment on these investments. If measured at fair value in the Condensed Consolidated Balance Sheets, these would generally be classified in Level 3 of the fair value hierarchy. For investments still held as of July 31, 2023, the cumulative upward adjustments for observable price changes was $33 million and cumulative downward adjustments for observable price changes and impairments was $40 million. Refer to Note 11 “Financial Instruments,” for further information about equity investments.
Non-Financial Assets
The Company's non-financial assets, such as intangible assets, goodwill, and property, plant and equipment, are recorded at cost. The Company records right-of-use assets based on the lease liability, adjusted for lease prepayments, lease incentives received, and the lessee's initial direct costs. Fair value adjustments are made to these non-financial assets in the period an impairment charge is recognized. There are no material impairment charges for three and nine months ended July 31, 2023 and 2022.
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
Note 11: Financial Instruments
Cash Equivalents and Available-for-Sale Debt Investments
Cash equivalents and available-for-sale debt investments were as follows:
| As of July 31, 2023 | As of October 31, 2022 | ||||||||||||||||||||||||||||||||||||||||||||||
| Cost | Gross Unrealized Gains | Fair Value | Cost | Gross Unrealized Gains (Losses) | Fair Value | ||||||||||||||||||||||||||||||||||||||||||
| In millions | |||||||||||||||||||||||||||||||||||||||||||||||
| Cash Equivalents: | |||||||||||||||||||||||||||||||||||||||||||||||
| Time deposits | $ | 1,143 | $ | — | $ | 1,143 | $ | 1,516 | $ | — | $ | 1,516 | |||||||||||||||||||||||||||||||||||
| Money market funds | 366 | — | 366 | 744 | — | 744 | |||||||||||||||||||||||||||||||||||||||||
| Total cash equivalents | 1,509 | — | 1,509 | 2,260 | — | 2,260 | |||||||||||||||||||||||||||||||||||||||||
| Available-for-sale Debt Investments: | |||||||||||||||||||||||||||||||||||||||||||||||
| Foreign bonds | 104 | — | 104 | 93 | (2) | 91 | |||||||||||||||||||||||||||||||||||||||||
| Other debt securities | 13 | 3 | 16 | 32 | 1 | 33 | |||||||||||||||||||||||||||||||||||||||||
| Total available-for-sale debt investments | 117 | 3 | 120 | 125 | (1) | 124 | |||||||||||||||||||||||||||||||||||||||||
| Total cash equivalents and available-for-sale debt investments | $ | 1,626 | $ | 3 | $ | 1,629 | $ | 2,385 | $ | (1) | $ | 2,384 |
As of July 31, 2023 and October 31, 2022, the carrying amount of cash equivalents approximated fair value due to the short period of time to maturity. Time deposits were primarily issued by institutions outside of the U.S. as of July 31, 2023 and October 31, 2022. The estimated fair value of the available-for-sale debt investments may not be representative of values that will be realized in the future.
Contractual maturities of available-for-sale debt investments were as follows:
| As of July 31, 2023 | |||||||||||||||||||||||
| Amortized Cost | Fair Value | ||||||||||||||||||||||
| In millions | |||||||||||||||||||||||
| Due in one year | $ | 2 | $ | 2 | |||||||||||||||||||
| Due in more than five years | 115 | 118 | |||||||||||||||||||||
| Total | $ | 117 | $ | 120 |
Equity Investments
Non-marketable equity investments in privately held companies are included in Long-term financing receivables and other assets in the Condensed Consolidated Balance Sheets. These non-marketable equity investments are carried either at fair value or under the measurement alternative. Measurement alternative equity investments are recorded at cost and measured at fair value when they are deemed to be impaired or when there is an adjustment from observable price changes.
The carrying amount of those non-marketable equity investments accounted for under the fair value option was $131 million and $126 million as of July 31, 2023 and October 31, 2022, respectively. For the three and nine months ended July 31, 2023, the Company recorded an unrealized gain of $2 million and $5 million, respectively, on these investments. For the three and nine months ended July 31, 2022, the Company recorded an unrealized loss of $7 million and unrealized net gain of $97 million, respectively, on these investments. These amounts are reflected in Interest and other, net in the Condensed Consolidated Statement of Earnings.
The carrying amount of those non-marketable equity investments accounted for under the measurement alternative was $185 million and $175 million as of July 31, 2023 and October 31, 2022, respectively. For the three months ended July 31, 2023 and 2022, the Company recognized an immaterial unrealized net gain on these investments. For the nine months ended July 31, 2023, the Company recognized an unrealized net loss of $6 million, which included an impairment of $10 million. For the nine months ended July 31, 2022, the Company recorded an immaterial impairment on these investments. These amounts are reflected in Interest and other, net in the Condensed Consolidated Statement of Earnings.
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
Fair Value of Derivative Instruments in the Condensed Consolidated Balance Sheets
The gross notional and fair value of derivative instruments in the Condensed Consolidated Balance Sheets were as follows:
| As of July 31, 2023 | As of October 31, 2022 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Fair Value | Fair Value | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Outstanding Gross Notional | Other Current Assets | Long-Term Financing Receivables and Other Assets | Other Accrued Liabilities | Long-Term Other Liabilities | Outstanding Gross Notional | Other Current Assets | Long-Term Financing Receivables and Other Assets | Other Accrued Liabilities | Long-Term Other Liabilities | ||||||||||||||||||||||||||||||||||||||||||||||||||
| In millions | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Derivatives Designated as Hedging Instruments | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Fair Value Hedges: | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Interest rate contracts | $ | 2,500 | $ | — | $ | — | $ | — | $ | 157 | $ | 2,500 | $ | — | $ | — | $ | — | $ | 178 | |||||||||||||||||||||||||||||||||||||||
| Cash Flow Hedges: | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Foreign currency contracts | 8,418 | 116 | 61 | 134 | 72 | 7,662 | 420 | 246 | 25 | 13 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Net Investment Hedges: | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Foreign currency contracts | 1,997 | 23 | 23 | 47 | 39 | 1,883 | 60 | 74 | 12 | 13 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Total derivatives designated as hedging instruments | 12,915 | 139 | 84 | 181 | 268 | 12,045 | 480 | 320 | 37 | 204 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Derivatives Not Designated as Hedging Instruments | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Foreign currency contracts | 5,037 | 27 | 3 | 24 | 35 | 7,780 | 36 | 4 | 53 | 12 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Other derivatives | 110 | 4 | — | — | — | 95 | 2 | — | 1 | — | |||||||||||||||||||||||||||||||||||||||||||||||||
| Total derivatives not designated as hedging instruments | 5,147 | 31 | 3 | 24 | 35 | 7,875 | 38 | 4 | 54 | 12 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Total derivatives | $ | 18,062 | $ | 170 | $ | 87 | $ | 205 | $ | 303 | $ | 19,920 | $ | 518 | $ | 324 | $ | 91 | $ | 216 |
Offsetting of Derivative Instruments
The Company recognizes all derivative instruments on a gross basis in the Condensed Consolidated Balance Sheets. The Company's derivative instruments are subject to master netting arrangements and collateral security arrangements. The Company does not offset the fair value of its derivative instruments against the fair value of cash collateral posted under collateral security agreements. The information related to the potential effect of the Company's use of the master netting agreements and collateral security agreements were as follows:
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
| As of July 31, 2023 | ||||||||||||||||||||||||||||||||||||||
| In the Condensed Consolidated Balance Sheets | ||||||||||||||||||||||||||||||||||||||
| (i) | (ii) | (iii) = (i)–(ii) | (iv) | (v) | (vi) = (iii)–(iv)–(v) | |||||||||||||||||||||||||||||||||
| Gross Amounts Not Offset | ||||||||||||||||||||||||||||||||||||||
| Gross Amount Recognized | Gross Amount Offset | Net Amount Presented | Derivatives | Financial Collateral | Net Amount | |||||||||||||||||||||||||||||||||
| In millions | ||||||||||||||||||||||||||||||||||||||
| Derivative assets | $ | 257 | $ | — | $ | 257 | $ | 186 | $ | 55 | (1) | $ | 16 | |||||||||||||||||||||||||
| Derivative liabilities | $ | 508 | $ | — | $ | 508 | $ | 186 | $ | 277 | (2) | $ | 45 |
| As of October 31, 2022 | ||||||||||||||||||||||||||||||||||||||
| In the Condensed Consolidated Balance Sheets | ||||||||||||||||||||||||||||||||||||||
| (i) | (ii) | (iii) = (i)–(ii) | (iv) | (v) | (vi) = (iii)–(iv)–(v) | |||||||||||||||||||||||||||||||||
| Gross Amounts Not Offset | ||||||||||||||||||||||||||||||||||||||
| Gross Amount Recognized | Gross Amount Offset | Net Amount Presented | Derivatives | Financial Collateral | Net Amount | |||||||||||||||||||||||||||||||||
| In millions | ||||||||||||||||||||||||||||||||||||||
| Derivative assets | $ | 842 | $ | — | $ | 842 | $ | 199 | $ | 508 | (1) | $ | 135 | |||||||||||||||||||||||||
| Derivative liabilities | $ | 307 | $ | — | $ | 307 | $ | 199 | $ | 113 | (2) | N/A |
(1)Represents the cash collateral posted by counterparties as of the respective reporting date for the Company's asset position, net of derivative amounts that could be offset, as of, generally, two business days prior to the respective reporting date.
(2)Represents the collateral posted by the Company in cash or through the re-use of counterparty cash collateral as of the respective reporting date for the Company's liability position, net of derivative amounts that could be offset, as of, generally, two business days prior to the respective reporting date. As of July 31, 2023, of the $277 million of collateral posted, $263 million was in cash and $14 million was through the re-use of counterparty collateral. As of October 31, 2022, the entire amount of the collateral posted of $113 million was through the re-use of counterparty collateral.
The amounts recorded on the Condensed Consolidated Balance Sheets related to cumulative basis adjustments for fair value hedges were as follows:
| Carrying Amount of the Hedged Liabilities | Cumulative Amount of Fair Value Hedging Adjustment Included in the Carrying Amount of the Hedged Assets/ (Liabilities) | ||||||||||||||||||||||
| As of | As of | ||||||||||||||||||||||
| July 31, 2023 | October 31, 2022 | July 31, 2023 | October 31, 2022 | ||||||||||||||||||||
| In millions | |||||||||||||||||||||||
| Long-term debt | $ | (2,339) | $ | (2,317) | $ | 157 | $ | 178 |
The pre-tax effect of derivative instruments in cash flow and net investment hedging relationships recognized in Other Comprehensive Income ("OCI") were as follows:
| Gains (Losses) Recognized in OCI on Derivatives | |||||||||||||||||||||||
| For the three months ended July 31, | For the nine months ended July 31, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| In millions | |||||||||||||||||||||||
| Derivatives in Cash Flow Hedging Relationship: | |||||||||||||||||||||||
| Foreign exchange contracts | $ | (25) | $ | 163 | $ | (525) | $ | 723 | |||||||||||||||
| Derivatives in Net Investment Hedging Relationship: | |||||||||||||||||||||||
| Foreign exchange contracts | (44) | 30 | (143) | 53 | |||||||||||||||||||
| Total | $ | (69) | $ | 193 | $ | (668) | $ | 776 |
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
As of July 31, 2023, the Company expects to reclassify an estimated net accumulated other comprehensive loss of approximately $34 million, net of taxes, to earnings in the next twelve months along with the earnings effects of the related forecasted transactions associated with cash flow hedges.
Effect of Derivative Instruments on the Condensed Consolidated Statements of Earnings
The following table represents the pre-tax effect of derivative instruments on total amounts of income and expense line items presented in the Condensed Consolidated Statements of Earnings in which the effects of fair value hedges and derivatives not designated as hedging instruments are recorded:
| Gains (Losses) Recognized in Income | |||||||||||||||||||||||||||||||||||||||||||||||
| For the three months ended July 31, | For the nine months ended July 31, | ||||||||||||||||||||||||||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||||||||||||||||||||||||||
| Net Revenue | Interest and Other, net | Net Revenue | Interest and Other, net | Net Revenue | Interest and Other, net | Net Revenue | Interest and Other, net | ||||||||||||||||||||||||||||||||||||||||
| In millions | |||||||||||||||||||||||||||||||||||||||||||||||
| Total net revenue and interest and other, net | $ | 7,002 | $ | (50) | $ | 6,951 | $ | (74) | $ | 21,784 | $ | (129) | $ | 20,625 | $ | (79) | |||||||||||||||||||||||||||||||
| Gains (Losses) on Derivatives in Fair Value Hedging Relationships: | |||||||||||||||||||||||||||||||||||||||||||||||
| Interest Rate Contracts | |||||||||||||||||||||||||||||||||||||||||||||||
| Hedged items | $ | — | $ | 33 | $ | — | $ | (18) | $ | — | $ | (21) | $ | — | $ | 169 | |||||||||||||||||||||||||||||||
| Derivatives designated as hedging instruments | — | (33) | — | 18 | — | 21 | — | (169) | |||||||||||||||||||||||||||||||||||||||
| Gains (Losses) on Derivatives in Cash Flow Hedging Relationships: | |||||||||||||||||||||||||||||||||||||||||||||||
| Foreign Exchange Contracts | |||||||||||||||||||||||||||||||||||||||||||||||
| Amount of gains (losses) reclassified from accumulated other comprehensive income into income | (16) | (44) | 114 | 101 | 11 | (357) | 236 | 444 | |||||||||||||||||||||||||||||||||||||||
| Gains (Losses) on Derivatives not Designated as Hedging Instruments: | |||||||||||||||||||||||||||||||||||||||||||||||
| Foreign exchange contracts | — | (36) | — | 53 | — | (226) | — | 155 | |||||||||||||||||||||||||||||||||||||||
| Other derivatives | — | (1) | — | 13 | — | (2) | — | 2 | |||||||||||||||||||||||||||||||||||||||
| Total (losses) gains | $ | (16) | $ | (81) | $ | 114 | $ | 167 | $ | 11 | $ | (585) | $ | 236 | $ | 601 |
Note 12: Borrowings
Notes Payable, Short-Term Borrowings and Long-Term Debt
Notes payable, short-term borrowings, including the current portion of long-term debt, and long-terms debt were as follows:
| As of | |||||||||||||||||
| July 31, 2023 | October 31, 2022 | ||||||||||||||||
| In millions | |||||||||||||||||
| Current portion of long-term debt(1) | $ | 3,666 | $ | 3,876 | |||||||||||||
| Commercial paper | 651 | 542 | |||||||||||||||
| Notes payable to banks, lines of credit and other | 169 | 194 | |||||||||||||||
| Total notes payable and short-term borrowings | 4,486 | 4,612 | |||||||||||||||
| Long-term debt | 8,866 | 7,853 | |||||||||||||||
| Total | $ | 13,352 | $ | 12,465 |
(1) As of July 31, 2023, the Current portion of long-term debt, net of discount and issuance costs, included $1.3 billion associated with the asset-backed debt securities issued by the Company.
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
Unsecured Senior Notes
In June 2023, the Company completed its offering of $250 million of 5.9% Senior Notes due October 1, 2024, at premium to par at a price of 100.452%. Interest is payable semi-annually on April 1 and October 1 of each year, beginning on October 1, 2023. These notes constitute a further issuance of, and are consolidated with, the $1.3 billion aggregate principal amount of 5.9% Senior Notes due 2024 issued on March 21, 2023. After giving effect to this issuance, there are $1.6 billion aggregate principal amount of 5.9% notes due 2024 outstanding.
In June 2023, the Company also completed its offering of $550 million of 5.25% Senior Notes due July 1, 2028, at discount to par at a price of 99.887%. Interest is payable semi-annually on January 1 and July 1 of each year, beginning on January 1, 2024.
In March 2023, the Company completed its offering of $1.3 billion of 5.9% Senior Notes due October 1, 2024, issued at discount to par at a price of 99.934% and $400 million of 6.102% Senior Notes due April 1, 2026, issued at discount to par at a price of 99.997%. Interest is payable semi-annually on April 1 and October 1 of each year, beginning on October 1, 2023.
In April 2023, the Company repaid $1.0 billion of 2.25% fixed rate Senior Notes on their original maturity date of April 1, 2023.
Asset-backed Debt Securities
In March and April 2023, the Company issued $643 million of asset-backed debt securities in five tranches at a weighted average price of 99.99% and a weighted average interest rate of 5.593%, payable monthly from April 2023 with a stated final maturity date of April 2028.
Commercial Paper
Hewlett Packard Enterprise maintains two commercial paper programs, "the Parent Programs", and a wholly-owned subsidiary maintains a third program. The Parent Program in the U.S. provides for the issuance of U.S. dollar-denominated commercial paper up to a maximum aggregate principal amount of $4.75 billion. The Parent Program outside the U.S. provides for the issuance of commercial paper denominated in U.S. dollars, euros, or British pounds up to a maximum aggregate principal amount of $3.0 billion or the equivalent in those alternative currencies. The combined aggregate principal amount of commercial paper outstanding under those two programs at any one time cannot exceed the $4.75 billion as authorized by Hewlett Packard Enterprise's Board of Directors. In addition, the Hewlett Packard Enterprise subsidiary's euro Commercial Paper/Certificate of Deposit Program provides for the issuance of commercial paper in various currencies of up to a maximum aggregate principal amount of $1.0 billion. As of July 31, 2023 and October 31, 2022, no borrowings were outstanding under the Parent Programs. As of July 31, 2023 and October 31, 2022, $651 million and $542 million, respectively, were outstanding under the subsidiary’s program.
Revolving Credit Facility
The Company maintains a senior unsecured revolving credit facility that was entered into in December 2021 with an aggregate lending commitment of $4.75 billion for a period of five years. As of July 31, 2023 and October 31, 2022, no borrowings were outstanding under this credit facility.
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
Note 13: Stockholders' Equity
The components of accumulated other comprehensive loss, net of taxes as of July 31, 2023, and changes for the nine months ended July 31, 2023 were as follows:
| Net Unrealized Gains (Losses) on Available-for-sale Securities | Net Unrealized Gains (Losses) on Cash Flow Hedges | Unrealized Components of Defined Benefit Plans | Cumulative Translation Adjustment | Accumulated Other Comprehensive Loss | |||||||||||||||||||||||||
| In millions | |||||||||||||||||||||||||||||
| Balance at beginning of period | $ | (1) | $ | 109 | $ | (2,596) | $ | (610) | $ | (3,098) | |||||||||||||||||||
| Other comprehensive income (loss) before reclassifications | 4 | (525) | (2) | (11) | (534) | ||||||||||||||||||||||||
| Reclassifications of losses into earnings | — | 346 | 111 | — | 457 | ||||||||||||||||||||||||
| Tax benefit (provision) | — | 34 | (10) | 2 | 26 | ||||||||||||||||||||||||
| Balance at end of period | $ | 3 | $ | (36) | $ | (2,497) | $ | (619) | $ | (3,149) |
The components of accumulated other comprehensive loss, net of taxes as of July 31, 2022, and changes for the nine months ended July 31, 2022 were as follows:
| Net Unrealized Gains (Losses) on Available-for-sale Securities | Net Unrealized Gains (Losses) on Cash Flow Hedges | Unrealized Components of Defined Benefit Plans | Cumulative Translation Adjustment | Accumulated Other Comprehensive Loss | |||||||||||||||||||||||||
| In millions | |||||||||||||||||||||||||||||
| Balance at beginning of period | $ | 15 | $ | 81 | $ | (2,545) | $ | (466) | $ | (2,915) | |||||||||||||||||||
| Other comprehensive (loss) income before reclassifications | (11) | 723 | 6 | (81) | 637 | ||||||||||||||||||||||||
| Reclassifications of (gains) losses into earnings | — | (680) | 122 | — | (558) | ||||||||||||||||||||||||
| Tax provision | — | (11) | (13) | (2) | (26) | ||||||||||||||||||||||||
| Balance at end of period | $ | 4 | $ | 113 | $ | (2,430) | $ | (549) | $ | (2,862) |
Share Repurchase Program
For the nine months ended July 31, 2023, the Company repurchased and settled a total of 23.9 million shares under its share repurchase program through open market repurchases, which included 0.3 million shares that were unsettled open market repurchases as of October 31, 2022. Additionally, as of July 31, 2023, the Company had unsettled open market repurchases of 0.1 million shares. Shares repurchased for the nine months ended July 31, 2023 were recorded as a $362 million reduction to stockholders' equity. As of July 31, 2023, the Company had a remaining authorization of $1.0 billion for future share repurchases.
Note 14: Net Earnings Per Share
The Company calculates basic net earnings per share ("EPS") using net earnings and the weighted-average number of shares outstanding during the reporting period. Diluted net EPS includes the weighted-average dilutive effect of outstanding restricted stock units, stock options, and performance-based awards.
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
The reconciliations of the numerators and denominators of each of the basic and diluted net EPS calculations were as follows:
| For the three months ended July 31, | For the nine months ended July 31, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| In millions, except per share amounts | |||||||||||||||||||||||
| Numerator: | |||||||||||||||||||||||
| Net earnings | $ | 464 | $ | 409 | $ | 1,383 | $ | 1,172 | |||||||||||||||
| Denominator: | |||||||||||||||||||||||
| Weighted-average shares used to compute basic net EPS | 1,299 | 1,305 | 1,300 | 1,306 | |||||||||||||||||||
| Dilutive effect of employee stock plans | 17 | 18 | 17 | 20 | |||||||||||||||||||
| Weighted-average shares used to compute diluted net EPS | 1,316 | 1,323 | 1,317 | 1,326 | |||||||||||||||||||
| Net Earnings per Share: | |||||||||||||||||||||||
| Basic | $ | 0.36 | $ | 0.31 | $ | 1.06 | $ | 0.90 | |||||||||||||||
| Diluted | $ | 0.35 | $ | 0.31 | $ | 1.05 | $ | 0.88 | |||||||||||||||
| Anti-dilutive weighted-average stock awards(1) | 12 | 15 | 11 | — |
(1)The Company excludes shares potentially issuable under employee stock plans that could dilute basic net EPS in the future from the calculation of diluted net earnings per share, as their effect, if included, would have been anti-dilutive for the periods presented.
Note 15: Litigation, Contingencies, and Commitments
Litigation
Hewlett Packard Enterprise is involved in various lawsuits, claims, investigations and proceedings including those consisting of intellectual property, commercial, securities, employment, employee benefits, and environmental matters, which arise in the ordinary course of business. In addition, as part of the Separation and Distribution Agreement (the "Separation and Distribution Agreement") entered into in connection with Hewlett Packard Enterprise's spin-off from HP Inc. (formerly known as "Hewlett-Packard Company") (the "Separation"), Hewlett Packard Enterprise and HP Inc. agreed to cooperate with each other in managing certain existing litigation related to both parties' businesses. The Separation and Distribution Agreement included provisions that allocate liability and financial responsibility for pending litigation involving the parties, as well as provide for cross-indemnification of the parties against liabilities to one party arising out of liabilities allocated to the other party. The Separation and Distribution Agreement also included provisions that assign to the parties responsibility for managing pending and future litigation related to the general corporate matters of HP Inc. arising prior to the Separation. Hewlett Packard Enterprise records a liability when it believes that it is both probable that a liability has been incurred and the amount of loss can be reasonably estimated. Significant judgment is required to determine both the probability of having incurred a liability and the estimated amount of the liability. Hewlett Packard Enterprise reviews these matters at least quarterly and adjusts these liabilities to reflect the impact of negotiations, settlements, rulings, advice of legal counsel, and other updated information and events pertaining to a particular matter. Litigation is inherently unpredictable. However, Hewlett Packard Enterprise believes it has valid defenses with respect to legal matters pending against us. Nevertheless, cash flows or results of operations could be materially affected in any particular period by the resolution of one or more of these contingencies. Hewlett Packard Enterprise believes it has recorded adequate provisions for any such matters and, as of July 31, 2023, it was not reasonably possible that a material loss had been incurred in connection with such matters in excess of the amounts recognized in its financial statements.
Litigation, Proceedings, and Investigations
Ross and Rogus v. Hewlett Packard Enterprise Company. On November 8, 2018, a putative class action complaint was filed in the Superior Court of California, County of Santa Clara alleging that HPE pays its California-based female employees “systemically lower compensation” than HPE pays male employees performing substantially similar work. The complaint alleges various California state law claims, including California’s Equal Pay Act, Fair Employment and Housing Act, and Unfair Competition Law, and seeks certification of a California-only class of female employees employed in certain “Covered Positions.” The parties subsequently reached an agreement to resolve this class action. The terms of the settlement are reflected in Plaintiff’s Motion for Preliminary Approval of Class Action Settlement and Certification of Settlement Class, which was filed with the Court on September 26, 2022. On November 3, 2022, the Court granted Plaintiff’s motion and preliminarily
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
approved the terms of the class settlement, which defines the settlement class as all “[w]omen actively employed in California by Defendant at any point from November 1, 2015, through the date of Preliminary Approval” who were employed in a covered job code. The settlement class excludes certain individuals, including those who previously executed an arbitration agreement with HPE or an agreement that resulted in a release or waiver of claims. On April 28, 2023, the Court granted Plaintiffs’ Motion for Final Approval of the Class Action Settlement and Certification of the Settlement Class. The Court has scheduled a compliance hearing for September 28, 2023, to assess the distribution of the settlement fund to the class members.
India Directorate of Revenue Intelligence Proceedings*.* On April 30 and May 10, 2010, the India Directorate of Revenue Intelligence (the "DRI") issued notices to Hewlett-Packard India Sales Private Ltd ("HP India"), a subsidiary of HP Inc., seven HP India employees and one former HP India employee alleging that HP India underpaid customs duties while importing products and spare parts into India and seeking to recover an aggregate of approximately $370 million, plus penalties.
On April 11, 2012, the Bangalore Commissioner of Customs issued an order on the products-related notices affirming duties and penalties against HP India and the named individuals for approximately $386 million. On April 20, 2012, the Commissioner issued an order on the spare parts-related notice affirming duties and penalties against HP India and certain of the named individuals for approximately $17 million.
HP India filed appeals of the Commissioner's orders before the Customs Tribunal. The Customs Department filed cross-appeals before the Customs Tribunal. On October 27, 2014, the Customs Tribunal commenced hearings on the cross-appeals of the Commissioner's orders. The Customs Tribunal rejected HP India's request to return the matter to the Commissioner on procedural grounds. The hearings before the Customs Tribunal were subsequently delayed, have been postponed on several occasions since 2014, and have not yet been rescheduled.
ECT Proceedings*.* In January 2011, the postal service of Brazil, Empresa Brasileira de Correios e Telégrafos (“ECT”), notified a former subsidiary of HP Inc. in Brazil ("HP Brazil") that it had initiated administrative proceedings to consider whether to suspend HP Brazil's right to bid and contract with ECT related to alleged improprieties in the bidding and contracting processes whereby employees of HP Brazil and employees of several other companies allegedly coordinated their bids and fixed results for three ECT contracts in 2007 and 2008. In late July 2011, ECT notified HP Brazil it had decided to apply the penalties against HP Brazil and suspend HP Brazil's right to bid and contract with ECT for five years, based upon the evidence before it. In August 2011, HP Brazil appealed ECT's decision. In April 2013, ECT rejected HP Brazil's appeal, and the administrative proceedings were closed with the penalties against HP Brazil remaining in place. In parallel, in September 2011, HP Brazil filed a civil action against ECT seeking to have ECT's decision revoked. HP Brazil also requested an injunction suspending the application of the penalties until a final ruling on the merits of the case, which was denied. HP Brazil appealed the denial of its request for injunctive relief to the intermediate appellate court, which issued a preliminary ruling denying the request for injunctive relief but reducing the length of the sanctions from five to two years. HP Brazil appealed that decision and, in December 2011, obtained a ruling staying enforcement of ECT's sanctions until a final ruling on the merits of the case. HP Brazil expects a resolution of the decision on the merits to take several years.
Forsyth, et al. vs. HP Inc. and Hewlett Packard Enterprise. This purported class and collective action was filed on August 18, 2016 in the United States District Court for the Northern District of California, against HP Inc. and Hewlett Packard Enterprise (collectively, “Defendants”) alleging Defendants violated the Federal Age Discrimination in Employment Act (“ADEA”), the California Fair Employment and Housing Act, California public policy and the California Business and Professions Code by terminating older workers and replacing them with younger workers. Plaintiffs seek to certify a nationwide collective action under the ADEA comprised of individuals aged 40 years and older who had their employment terminated by an HP entity pursuant to a work force reduction (“WFR”) plan. Plaintiffs also seek to certify a class under California law consisting of all persons 40 years or older employed by Defendants in the state of California and terminated pursuant to a WFR plan on or after August 18, 2012. On April 14, 2021, Plaintiffs’ Motion for Conditional Class Certification was granted. The conditionally certified collective action consists of all individuals who had their employment terminated by Defendants pursuant to a WFR Plan on or after November 1, 2015, and who were 40 years or older at the time of such termination. The collective action excludes all individuals who signed a Waiver and General Release Agreement or an Agreement to Arbitrate Claims. The Court-approved notice was issued to potential class members and the opt-in period is now closed. The parties have reached an agreement in principle to resolve this matter. The parties are currently working to negotiate a formal settlement agreement that, if finalized, would be submitted to the Court for approval.
Oracle America, Inc., et al. v. Hewlett Packard Enterprise Company (Terix copyright matter). On March 22, 2016, Oracle filed a complaint against HPE in the United States District Court for the Northern District of California, alleging
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
copyright infringement, interference with contract, intentional interference with prospective economic relations, and unfair competition. Oracle’s claims arise out of HPE’s prior use of a third-party maintenance provider named Terix Computer Company, Inc. (“Terix”). Oracle contends that in connection with HPE’s use of Terix as a subcontractor for certain customers of HPE’s multivendor support business, Oracle’s copyrights were infringed, and HPE is liable for vicarious and contributory infringement and related claims. Trial began on May 23, 2022. On June 15, 2022, the jury returned its verdict, awarding $30 million in compensatory damages to Oracle and rejecting Oracle’s request for punitive damages. The parties have since reached an agreement to resolve this dispute. Pursuant to the terms of the settlement, the case has been dismissed and the matter is closed.
Q3 Networking Litigation. On September 21 and September 22, 2020, Q3 Networking LLC filed complaints against HPE, Aruba Networks, Commscope and Netgear in the United States District Court for the District of Delaware and the United States International Trade Commission (“ITC”). Both complaints allege infringement of four patents, and the ITC complaint defines the “accused products” as “routers, access points, controllers, network management servers, other networking products, and hardware and software components thereof.” The ITC action was instituted on October 23, 2020. The District of Delaware action has been stayed pending resolution of the ITC action. On December 7, 2021, the Administrative Law Judge issued his initial determination finding no violation of section 337 of the Tariff Act. On May 3, 2022, the ITC issued its Notice of Final Determination, affirming the initial determination and terminating the investigation. On June 18, 2022, Q3 Networking filed a petition for review of the ITC ruling with the United States Court of Appeals for the Federal Circuit.
Shared Litigation with HP Inc., DXC and Micro Focus
As part of the Separation and Distribution Agreements between Hewlett Packard Enterprise and HP Inc., Hewlett Packard Enterprise and DXC, and Hewlett Packard Enterprise and Seattle SpinCo, the parties to each agreement agreed to cooperate with each other in managing certain existing litigation related to both parties' businesses. The Separation and Distribution Agreements also included provisions that assign to the parties responsibility for managing pending and future litigation related to the general corporate matters of HP Inc. (in the case of the separation of Hewlett Packard Enterprise from HP Inc.) or of Hewlett Packard Enterprise (in the case of the separation of DXC from Hewlett Packard Enterprise and the separation of Seattle SpinCo from Hewlett Packard Enterprise), in each case arising prior to the applicable separation.
Environmental
The Company's operations and products are or may in the future become subject to various federal, state, local, and foreign laws and regulations concerning the environment, including laws addressing the discharge of pollutants into the air and water; the management, movement, and disposal of hazardous substances and wastes; the clean-up of contaminated sites; product safety and compliance; the energy consumption of products, services, and operations; and the operational or financial responsibility for recycling, treatment, and disposal of those products. This includes legislation that makes producers of electrical goods, including servers and networking equipment, financially responsible for specified collection, recycling, treatment, and disposal of past and future covered products (sometimes referred to as "product take-back legislation"). The Company could incur substantial costs, its products could be restricted from entering certain jurisdictions, and it could face other sanctions, if it were to violate or become liable under environmental laws, including those related to addressing climate change and other environmental related issues, or if its products become non-compliant with such environmental laws. The Company's potential exposure includes impacts on revenue, fines and civil or criminal sanctions, third-party property damage or personal injury claims and clean-up costs. The amount and timing of costs to comply with environmental laws are difficult to predict.
In particular, the Company may become a party to, or otherwise involved in, proceedings brought by U.S. or state environmental agencies under the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA"), known as "Superfund," or other federal, state or foreign laws and regulations addressing the clean-up of contaminated sites, and may become a party to, or otherwise involved in, proceedings brought by private parties for contribution towards clean-up costs. The Company is also contractually obligated to make financial contributions to address actions related to certain environmental liabilities, both ongoing and arising in the future, pursuant to its Separation and Distribution Agreement with HP Inc.
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
Guarantees
In the ordinary course of business, the Company may issue performance guarantees to certain of its clients, customers, and other parties pursuant to which the Company has guaranteed the performance obligations of third parties. Some of those guarantees may be backed by standby letters of credit or surety bonds. In general, the Company would be obligated to perform over the term of the guarantee in the event a specified triggering event occurs as defined by the guarantee. The Company believes the likelihood of having to perform under a material guarantee is remote.
The Company has entered into service contracts with certain of its clients that are supported by financing arrangements. If a service contract is terminated as a result of the Company's non-performance under the contract or failure to comply with the terms of the financing arrangement, the Company could, under certain circumstances, be required to acquire certain assets related to the service contract. The Company believes the likelihood of having to acquire a material amount of assets under these arrangements is remote.
Indemnifications
In the ordinary course of business, the Company enters into contractual arrangements under which the Company may agree to indemnify a third party to such arrangement from any losses incurred relating to the services they perform on behalf of the Company or for losses arising from certain events as defined within the particular contract, which may include, for example, litigation or claims relating to past performance. The Company also provides indemnifications to certain vendors and customers against claims of IP infringement made by third parties arising from the use by such vendors and customers of the Company's software products and support services and certain other matters. Some indemnifications may not be subject to maximum loss clauses. Historically, payments made related to these indemnifications have been immaterial.
Note 16: Equity Method Investments
Pursuant to the Shareholders' Agreement among the Company’s relevant subsidiaries, Unisplendour International Technology Limited ("UNIS"), and H3C Technologies Co., Limited ("H3C") dated as of May 1, 2016, as amended from time to time, and most recently on October 28, 2022, the Company delivered a notice to UNIS on December 30, 2022, to exercise its right to put to UNIS, for cash consideration, all of the H3C shares held by the Company, which represent 49% of the total issued share capital of H3C. On May 26, 2023, the Company’s relevant subsidiaries entered into a Put Share Purchase Agreement with UNIS, whereby UNIS has agreed to purchase all of the H3C shares held by the Company, through its subsidiaries, for total pre-tax cash consideration of $3.5 billion. The disposition remains subject to obtaining required regulatory approvals and completion of certain conditions necessary for closing.
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