Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of Hewlett Packard Enterprise Company
Opinion on Internal Control over Financial Reporting
We have audited Hewlett Packard Enterprise Company and subsidiaries' internal control over financial reporting as of October 31, 2020, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, Hewlett Packard Enterprise Company and subsidiaries (the Company) maintained, in all material respects, effective internal control over financial reporting as of October 31, 2020, based on the COSO criteria.
As indicated in the accompanying Management's Report on Internal Control Over Financial Reporting, management's assessment of and conclusion on the effectiveness of internal control over financial reporting did not include the internal controls of Silver Peak Systems, Inc., which is included in the 2020 consolidated financial statements of the Company and constituted less than 1% of total assets as of October 31, 2020 and less than 1% and 1% of net revenue and net earnings, respectively, for the year then ended. Our audit of internal control over financial reporting of the Company also did not include an evaluation of the internal control over financial reporting of Silver Peak Systems, Inc.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of October 31, 2020 and 2019, the related consolidated statements of earnings, comprehensive income, stockholders' equity and cash flows for each of the three years in the period ended October 31, 2020, and the related notes and our report dated December 10, 2020 expressed an unqualified opinion thereon.
Basis for Opinion
The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management's Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Ernst & Young LLP
San Jose, California
December 10, 2020
Management's Report on Internal Control Over Financial Reporting
Hewlett Packard Enterprise's management is responsible for establishing and maintaining adequate internal control over financial reporting for Hewlett Packard Enterprise. Hewlett Packard Enterprise's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles. Hewlett Packard Enterprise's internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of Hewlett Packard Enterprise; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of Hewlett Packard Enterprise are being made only in accordance with authorizations of management and directors of Hewlett Packard Enterprise; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of Hewlett Packard Enterprise's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Hewlett Packard Enterprise's management assessed the effectiveness of Hewlett Packard Enterprise's internal control over financial reporting as of October 31, 2020, utilizing the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework (2013 framework). Management's evaluation of internal control over financial reporting excluded the internal control activities of Silver Peak Systems, Inc. which is included in the 2020 consolidated financial statements of Hewlett Packard Enterprise and constituted less than 1% of total assets as of October 31, 2020 and less than 1% and 1% of net revenue and net earnings, respectively, for the year then ended. Based on the assessment by Hewlett Packard Enterprise's management, we determined that Hewlett Packard Enterprise's internal control over financial reporting was effective as of October 31, 2020. The effectiveness of Hewlett Packard Enterprise's internal control over financial reporting as of October 31, 2020 has been audited by Ernst & Young LLP, Hewlett Packard Enterprise's independent registered public accounting firm, as stated in their report which appears on page 67 of this Annual Report on Form 10-K.
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/s/ ANTONIO F. NERI
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/s/ TAREK A. ROBBIATI
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Antonio F. Neri
President and Chief Executive Officer
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Tarek A. Robbiati
Executive Vice President and Chief Financial Officer
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December 10, 2020
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December 10, 2020
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HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Consolidated Statements of Earnings
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For the fiscal years ended October 31,
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2020
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2019
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2018
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In millions, except per share amounts
|
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Net revenue:
|
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|
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|
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Products
|
$
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16,264
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$
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18,170
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$
|
19,504
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Services
|
10,249
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10,507
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10,901
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Financing income
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469
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458
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447
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Total net revenue
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26,982
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29,135
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30,852
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Costs and expenses:
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Cost of products
|
11,698
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12,533
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14,090
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Cost of services
|
6,544
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6,812
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7,253
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Financing interest
|
271
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297
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278
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Research and development
|
1,874
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1,842
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|
1,667
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Selling, general and administrative
|
4,624
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4,907
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4,921
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Amortization of intangible assets
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379
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267
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294
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Impairment of goodwill
|
865
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—
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88
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Restructuring charges
|
—
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—
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19
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Transformation costs
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950
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453
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414
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Disaster charges (recoveries)
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26
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(7)
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—
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Acquisition, disposition and other related charges
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80
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757
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82
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Separation costs
|
—
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—
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9
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Total costs and expenses
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27,311
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27,861
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29,115
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Earnings (loss) from continuing operations
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(329)
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1,274
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1,737
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Interest and other, net
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(215)
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(177)
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(274)
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Tax indemnification adjustments
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(101)
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377
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(1,354)
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Non-service net periodic benefit credit
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136
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59
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121
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Earnings from equity interests
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67
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20
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38
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Earnings (loss) from continuing operations before taxes
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(442)
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1,553
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268
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(Provision) benefit for taxes
|
120
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(504)
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1,744
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Net earnings (loss) from continuing operations
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(322)
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1,049
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|
2,012
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Net loss from discontinued operations
|
—
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|
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—
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(104)
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Net earnings (loss)
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$
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(322)
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|
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$
|
1,049
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|
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$
|
1,908
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|
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Net earnings (loss) per share:
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Basic
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Continuing operations
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$
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(0.25)
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$
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0.78
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$
|
1.32
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Discontinued operations
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—
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—
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(0.07)
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Total basic net earnings (loss) per share
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$
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(0.25)
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$
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0.78
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$
|
1.25
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Diluted
|
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Continuing operations
|
$
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(0.25)
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$
|
0.77
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|
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$
|
1.30
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Discontinued operations
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—
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—
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(0.07)
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Total diluted net earnings (loss) per share
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$
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(0.25)
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$
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0.77
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$
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1.23
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Weighted-average shares used to compute net earnings (loss) per share:
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Basic
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1,294
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1,353
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1,529
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Diluted
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1,294
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1,366
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1,553
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The accompanying notes are an integral part of these Consolidated Financial Statements.
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
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|
|
|
|
|
|
|
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|
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For the fiscal years ended October 31,
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2020
|
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2019
|
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2018
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In millions
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Net earnings (loss)
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$
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(322)
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$
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1,049
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$
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1,908
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Other comprehensive loss before taxes:
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Change in net unrealized gains (losses) on available-for-sale securities:
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Net unrealized gains (losses) arising during the period
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(1)
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9
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(3)
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(Gains) losses reclassified into earnings
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(4)
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(3)
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(9)
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(5)
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6
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(12)
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Change in net unrealized gains (losses) on cash flow hedges:
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Net unrealized gains (losses) arising during the period
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(40)
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308
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169
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Net (gains) losses reclassified into earnings
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(21)
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(371)
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8
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(61)
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(63)
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177
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|
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Change in unrealized components of defined benefit plans:
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Net unrealized gains (losses) arising during the period
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(358)
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(701)
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(423)
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Amortization of net actuarial loss and prior service benefit
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249
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216
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191
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Curtailments, settlements and other
|
10
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|
|
15
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|
22
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|
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(99)
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(470)
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(210)
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Change in cumulative translation adjustment:
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Cumulative translation adjustment arising during the period
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(12)
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(18)
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(70)
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Release of cumulative translation adjustment as a result of divestitures and country exits
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—
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|
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—
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20
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(12)
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(18)
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(50)
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Other comprehensive loss before taxes
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(177)
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|
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(545)
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(95)
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(Provision) benefit for taxes
|
8
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|
|
36
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|
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(42)
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|
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Other comprehensive loss, net of taxes
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(169)
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|
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(509)
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(137)
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Comprehensive income (loss)
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$
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(491)
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$
|
540
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$
|
1,771
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The accompanying notes are an integral part of these Consolidated Financial Statements.
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Consolidated Balance Sheets
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As of October 31,
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2020
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2019
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In millions, except par value
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ASSETS
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Current assets:
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Cash and cash equivalents
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$
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4,233
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$
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3,753
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Accounts receivable, net of allowance for doubtful accounts
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3,386
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2,957
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Financing receivables, net of allowance for doubtful accounts
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3,794
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3,572
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Inventory
|
2,674
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|
|
2,387
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|
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Assets held for sale
|
77
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|
|
46
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|
|
Other current assets
|
2,392
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|
|
2,428
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|
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Total current assets
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16,556
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15,143
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Property, plant and equipment
|
5,625
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6,054
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Long-term financing receivables and other assets
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10,544
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8,918
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|
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Investments in equity interests
|
2,170
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|
|
2,254
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|
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Goodwill
|
18,017
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|
|
18,306
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Intangible assets
|
1,103
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|
|
1,128
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Total assets
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$
|
54,015
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$
|
51,803
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LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
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|
|
Current liabilities:
|
|
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|
|
Notes payable and short-term borrowings
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$
|
3,755
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|
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$
|
4,425
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|
|
Accounts payable
|
5,383
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|
|
5,595
|
|
|
Employee compensation and benefits
|
1,391
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|
|
1,522
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|
|
Taxes on earnings
|
148
|
|
|
186
|
|
|
Deferred revenue
|
3,430
|
|
|
3,234
|
|
|
Accrued restructuring
|
366
|
|
|
195
|
|
|
Other accrued liabilities
|
4,265
|
|
|
4,002
|
|
|
Total current liabilities
|
18,738
|
|
|
19,159
|
|
|
Long-term debt
|
12,186
|
|
|
9,395
|
|
|
Other non-current liabilities
|
6,995
|
|
|
6,100
|
|
|
Commitments and contingencies
|
|
|
|
|
Stockholders' equity
|
|
|
|
|
HPE stockholders' equity:
|
|
|
|
|
Preferred stock, $0.01 par value (300 shares authorized; none issued)
|
—
|
|
|
—
|
|
|
Common stock, $0.01 par value (9,600 shares authorized; 1,287 and 1,294 issued and outstanding at October 31, 2020 and October 31, 2019, respectively)
|
13
|
|
|
13
|
|
|
Additional paid-in capital
|
28,350
|
|
|
28,444
|
|
|
Accumulated deficit
|
(8,375)
|
|
|
(7,632)
|
|
|
Accumulated other comprehensive loss
|
(3,939)
|
|
|
(3,727)
|
|
|
Total HPE stockholders' equity
|
16,049
|
|
|
17,098
|
|
|
Non-controlling interests
|
47
|
|
|
51
|
|
|
Total stockholders' equity
|
16,096
|
|
|
17,149
|
|
|
Total liabilities and stockholders' equity
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$
|
54,015
|
|
|
$
|
51,803
|
|
The accompanying notes are an integral part of these Consolidated Financial Statements.
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Consolidated Statements of Cash Flows
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|
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the fiscal years ended October 31,
|
|
|
2020
|
|
2019
|
|
2018
|
|
|
In millions
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
Net earnings (loss)
|
$
|
(322)
|
|
|
$
|
1,049
|
|
|
$
|
1,908
|
|
|
Adjustments to reconcile net earnings (loss) to net cash provided by operating activities:
|
|
|
|
|
|
|
Depreciation and amortization
|
2,625
|
|
|
2,535
|
|
|
2,576
|
|
|
Impairment of goodwill
|
865
|
|
|
—
|
|
|
88
|
|
|
Stock-based compensation expense
|
274
|
|
|
268
|
|
|
286
|
|
|
Provision for inventory and doubtful accounts
|
308
|
|
|
240
|
|
|
198
|
|
|
Restructuring charges
|
769
|
|
|
221
|
|
|
550
|
|
|
Deferred taxes on earnings
|
(294)
|
|
|
1,079
|
|
|
2,229
|
|
|
Earnings from equity interests
|
(67)
|
|
|
(20)
|
|
|
(38)
|
|
|
Dividends received from equity investee
|
165
|
|
|
156
|
|
|
164
|
|
|
Other, net
|
163
|
|
|
204
|
|
|
(158)
|
|
|
Changes in operating assets and liabilities, net of acquisitions:
|
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|
|
|
|
|
Accounts receivable
|
(461)
|
|
|
374
|
|
|
(220)
|
|
|
Financing receivables
|
(487)
|
|
|
(410)
|
|
|
(366)
|
|
|
Inventory
|
(527)
|
|
|
46
|
|
|
(260)
|
|
|
Accounts payable
|
(225)
|
|
|
(525)
|
|
|
(27)
|
|
|
Taxes on earnings
|
(122)
|
|
|
(1,093)
|
|
|
(4,516)
|
|
|
Restructuring
|
(478)
|
|
|
(331)
|
|
|
(647)
|
|
|
Other assets and liabilities
|
54
|
|
|
204
|
|
|
1,197
|
|
|
Net cash provided by operating activities
|
2,240
|
|
|
3,997
|
|
|
2,964
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
Investment in property, plant and equipment
|
(2,383)
|
|
|
(2,856)
|
|
|
(2,956)
|
|
|
Proceeds from sale of property, plant and equipment
|
703
|
|
|
597
|
|
|
1,094
|
|
|
Purchases of available-for-sale securities and other investments
|
(101)
|
|
|
(39)
|
|
|
(33)
|
|
|
Maturities and sales of available-for-sale securities and other investments
|
48
|
|
|
26
|
|
|
98
|
|
|
Financial collateral posted
|
(644)
|
|
|
(403)
|
|
|
(1,625)
|
|
|
Financial collateral received
|
665
|
|
|
744
|
|
|
1,736
|
|
|
Payments made in connection with business acquisitions, net of cash acquired
|
(866)
|
|
|
(1,526)
|
|
|
(207)
|
|
|
Proceeds from business divestitures, net
|
—
|
|
|
—
|
|
|
13
|
|
|
Net cash used in investing activities
|
(2,578)
|
|
|
(3,457)
|
|
|
(1,880)
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
Short-term borrowings with original maturities less than 90 days, net
|
(9)
|
|
|
(53)
|
|
|
5
|
|
|
Proceeds from debt, net of issuance costs
|
7,007
|
|
|
3,517
|
|
|
2,457
|
|
|
Payment of debt
|
(5,099)
|
|
|
(2,203)
|
|
|
(4,138)
|
|
|
Net proceeds (payments) related to stock-based award activities
|
(36)
|
|
|
48
|
|
|
116
|
|
|
Repurchase of common stock
|
(355)
|
|
|
(2,249)
|
|
|
(3,568)
|
|
|
Net transfer of cash and cash equivalents to Everett
|
—
|
|
|
—
|
|
|
(41)
|
|
|
Net transfer of cash and cash equivalents from Seattle
|
—
|
|
|
—
|
|
|
156
|
|
|
Cash dividends paid to non-controlling interests, net of contributions
|
(7)
|
|
|
—
|
|
|
(9)
|
|
|
Cash dividends paid
|
(618)
|
|
|
(608)
|
|
|
(570)
|
|
|
Net cash provided by (used in) financing activities
|
883
|
|
|
(1,548)
|
|
|
(5,592)
|
|
|
Increase (decrease) in cash, cash equivalents and restricted cash
|
545
|
|
|
(1,008)
|
|
|
(4,508)
|
|
|
Cash, cash equivalents and restricted cash at beginning of period
|
4,076
|
|
|
5,084
|
|
|
9,592
|
|
|
Cash, cash equivalents and restricted cash at end of period
|
$
|
4,621
|
|
|
$
|
4,076
|
|
|
$
|
5,084
|
|
|
Supplemental cash flow disclosures:
|
|
|
|
|
|
|
Income taxes paid, net of refunds
|
$
|
297
|
|
|
$
|
518
|
|
|
$
|
538
|
|
|
Interest expense paid
|
$
|
574
|
|
|
$
|
593
|
|
|
$
|
609
|
|
The accompanying notes are an integral part of these Consolidated Financial Statements.
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Shares
|
|
Par Value
|
|
Additional Paid-in Capital
|
|
(Accumulated Deficit) Retained Earnings
|
|
Accumulated
Other
Comprehensive
Loss
|
|
Equity
Attributable
to the
Company
|
|
Non-
controlling
Interests
|
|
Total
Equity
|
|
|
In millions, except number of shares in thousands
|
|
Balance at October 31, 2017
|
1,595,161
|
|
|
$
|
16
|
|
|
$
|
33,583
|
|
|
$
|
(7,238)
|
|
|
$
|
(2,895)
|
|
|
$
|
23,466
|
|
|
$
|
39
|
|
|
$
|
23,505
|
|
|
Activity related to separation and merger transactions
|
|
|
|
|
|
|
164
|
|
|
(186)
|
|
|
(22)
|
|
|
|
|
(22)
|
|
|
Net earnings (loss)
|
|
|
|
|
|
|
1,908
|
|
|
|
|
1,908
|
|
|
(4)
|
|
|
1,904
|
|
|
Other comprehensive loss
|
|
|
|
|
|
|
|
|
(137)
|
|
|
(137)
|
|
|
—
|
|
|
(137)
|
|
|
Comprehensive income (loss)
|
|
|
|
|
|
|
|
|
|
|
1,771
|
|
|
(4)
|
|
|
1,767
|
|
|
Stock-based compensation expense
|
|
|
|
|
309
|
|
|
|
|
|
|
309
|
|
|
|
309
|
|
Tax withholding related to vesting of employee stock plans
|
|
|
|
|
(175)
|
|
|
|
|
|
|
(175)
|
|
|
|
|
(175)
|
|
|
Issuance of common stock in connection with employee stock plans and other
|
50,369
|
|
|
|
|
202
|
|
|
|
|
|
|
202
|
|
|
|
202
|
|
Repurchases of common stock
|
(222,227)
|
|
|
(2)
|
|
|
(3,577)
|
|
|
|
|
|
|
(3,579)
|
|
|
|
|
(3,579)
|
|
|
Cash dividends declared ($0.4875 per common share)
|
|
|
|
|
|
|
(733)
|
|
|
|
|
(733)
|
|
|
|
|
(733)
|
|
|
Balance at October 31, 2018
|
1,423,303
|
|
|
$
|
14
|
|
|
$
|
30,342
|
|
|
$
|
(5,899)
|
|
|
$
|
(3,218)
|
|
|
$
|
21,239
|
|
|
$
|
35
|
|
|
$
|
21,274
|
|
|
Net earnings
|
|
|
|
|
|
|
1,049
|
|
|
|
1,049
|
|
16
|
|
1,065
|
|
Other comprehensive loss
|
|
|
|
|
|
|
|
|
(509)
|
|
|
(509)
|
|
|
—
|
|
|
(509)
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
540
|
|
|
16
|
|
|
556
|
|
|
Stock-based compensation expense
|
|
|
|
|
270
|
|
|
|
|
|
|
270
|
|
|
|
|
270
|
|
|
Tax withholding related to vesting of employee stock plans
|
|
|
|
|
(61)
|
|
|
|
|
|
|
(61)
|
|
|
|
|
(61)
|
|
|
Issuance of common stock in connection with employee stock plans and other
|
19,093
|
|
|
|
|
113
|
|
|
|
|
|
|
113
|
|
|
|
|
113
|
|
|
Repurchases of common stock
|
(148,027)
|
|
|
(1)
|
|
|
(2,220)
|
|
|
|
|
|
|
(2,221)
|
|
|
|
|
(2,221)
|
|
|
Cash dividends declared ($0.4575 per common share)
|
|
|
|
|
|
|
(601)
|
|
|
|
|
(601)
|
|
|
|
|
(601)
|
|
|
Effects of adoption of accounting standard updates (1)
|
|
|
|
|
|
|
(2,181)
|
|
|
|
|
(2,181)
|
|
|
|
|
(2,181)
|
|
|
Balance at October 31, 2019
|
1,294,369
|
|
|
$
|
13
|
|
|
$
|
28,444
|
|
|
$
|
(7,632)
|
|
|
$
|
(3,727)
|
|
|
$
|
17,098
|
|
|
$
|
51
|
|
|
$
|
17,149
|
|
|
Net earnings (loss)
|
|
|
|
|
|
|
(322)
|
|
|
|
|
(322)
|
|
|
11
|
|
|
(311)
|
|
|
Other comprehensive loss
|
|
|
|
|
|
|
|
|
(169)
|
|
|
(169)
|
|
|
—
|
|
|
(169)
|
|
|
Comprehensive income (loss)
|
|
|
|
|
|
|
|
|
|
|
(491)
|
|
|
11
|
|
|
(480)
|
|
|
Stock-based compensation expense
|
|
|
|
|
278
|
|
|
|
|
|
|
278
|
|
|
|
|
278
|
|
|
Tax withholding related to vesting of employee stock plans
|
|
|
|
|
(89)
|
|
|
|
|
|
|
(89)
|
|
|
|
|
(89)
|
|
|
Issuance of common stock in connection with employee stock plans and other
|
17,397
|
|
|
|
|
63
|
|
|
|
|
|
|
63
|
|
|
1
|
|
|
64
|
|
|
Repurchases of common stock
|
(24,756)
|
|
|
|
|
(346)
|
|
|
|
|
|
|
(346)
|
|
|
|
|
(346)
|
|
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends declared ($0.36 per common share)
|
|
|
|
|
|
|
(464)
|
|
|
|
|
(464)
|
|
|
(16)
|
|
|
(480)
|
|
|
Effects of adoption of accounting standard updates (2)
|
|
|
|
|
|
|
43
|
|
|
(43)
|
|
|
—
|
|
|
|
|
—
|
|
|
Balance at October 31, 2020
|
1,287,010
|
|
$
|
13
|
|
|
$
|
28,350
|
|
|
$
|
(8,375)
|
|
|
$
|
(3,939)
|
|
|
$
|
16,049
|
|
|
$
|
47
|
|
|
$
|
16,096
|
|
(1) For fiscal 2019, includes $2.3 billion related to an addition to accumulated deficit as a result of the adoption of an accounting standard update for Income Taxes and $124 million related to a reduction to accumulated deficit as a result of the adoption of the new revenue accounting standard.
(2) For fiscal 2020, $43 million represents the impact of the adoption of an accounting standard update that allows for the reclassification of stranded tax effects from accumulated other comprehensive loss to accumulated deficit.
The accompanying notes are an integral part of these Consolidated Financial Statements.
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
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 ("SMBs") to large global enterprises and governmental entities.
On November 1, 2015, the Company became an independent publicly-traded company through a pro rata distribution by HP Inc. ("former Parent" or "HPI"), formerly known as Hewlett-Packard Company ("HP Co."), of 100% of the outstanding shares of Hewlett Packard Enterprise Company to HP Inc.'s stockholders (the "Separation").
On April 1, 2017, the Company completed the separation and merger of our Enterprise Services business with DXC Technology Company ("DXC", "the Everett Transaction" or "Everett").
On September 1, 2017, the Company completed the separation and merger of our Software business segment with Micro Focus International plc ("Micro Focus", "the Seattle Transaction" or "Seattle" ).
Acquisitions
On September 21, 2020, the Company completed the acquisition of Silver Peak Systems Inc. ("Silver Peak"), an SD-WAN (Software-Defined Wide Area Network) leader, for a fair value consideration of $879 million. Silver Peak's results of operations are included within the Intelligent Edge segment.
On September 25, 2019, the Company completed the acquisition of Cray Inc. ("Cray"), a global supercomputer leader, for a fair value consideration of $1.5 billion. Cray's results of operations are included within the High Performance Compute & Mission-Critical Systems ("HPC & MCS") segment.
For more details on acquisitions, see Note 10, "Acquisitions".
Transformation Programs
Transformation programs are comprised of the cost optimization and prioritization plan, and the HPE Next initiative.
During the third quarter of fiscal 2020, the Company launched the cost optimization and prioritization plan which focuses on realigning the workforce to areas of growth, including a new hybrid workforce model called Edge-to-Office, real estate strategies and simplifying and evolving our product portfolio strategy. The implementation period of the cost optimization and prioritization plan is through fiscal 2023. During this time the Company expects to incur transformation costs predominantly related to labor restructuring, non-labor restructuring, IT investments and design and execution charges.
During the third quarter of fiscal 2017, the Company launched an initiative called HPE Next to put in place a purpose-built company designed to compete and win in the markets where it participates. Through this program the Company is simplifying the operating model, streamlining our offerings, business processes and business systems to improve our execution. The implementation period of the HPE Next initiative is now extended through fiscal 2023. During the remaining implementation period, the Company expects to incur transformation costs predominantly related to IT infrastructure costs for streamlining, upgrading and simplifying back-end operations, and real estate initiatives. These costs are expected to be partially offset by gains from real estate sales.
For more details on cost optimization and prioritization plan and HPE Next, see Note 3, "Transformation Programs".
Basis of Presentation and Principles of Consolidation
The Consolidated Financial Statements are prepared in accordance with U.S. generally accepted accounting principles.
The accompanying Consolidated Financial Statements include the accounts of the Company and its 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.
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
The Company consolidates a Variable Interest Entity ("VIE") where it has been determined that the Company is the primary beneficiary of the entity's operation. The primary beneficiary is the party that has both the power to direct the activities that most significantly impact the VIE's economic performance and the obligation to absorb losses or the right to receive benefits of the VIE that could potentially be significant to the VIE. In evaluating whether the Company is the primary beneficiary, the Company evaluates its power to direct the most significant activities of the VIE by considering the purpose and design of the entity and the risks the entity was designed to create and pass through to its variable interest holders. The Company also evaluates its economic interests in the VIE.
The Company accounts for investments in companies over which it has the ability to exercise significant influence but does not hold a controlling interest under the equity method of accounting, and the Company records its proportionate share of income or losses in Earnings (loss) from equity interests in the Consolidated Statements of Earnings.
Non-controlling interests are presented as a separate component within Total stockholders' equity in the Consolidated Balance Sheets. Net earnings attributable to non-controlling interests are recorded within Interest and other, net in the Consolidated Statements of Earnings and are not presented separately, as they were not material for any periods presented.
Segment Realignment
Effective at the beginning of the first quarter of fiscal 2020, HPE implemented certain organizational changes to align its segment financial reporting more closely with its current business structure. As a result of these organizational changes, HPE replaced the Hybrid IT reportable segment (and the Compute, Storage and HPE Pointnext business units within it) with four new financial reporting segments: Compute, High Performance Compute & Mission-Critical Systems ("HPC & MCS"), Storage, and Advisory and Professional Services ("A & PS").
The Compute segment combines the general purpose server and certain workload optimized server portfolios that were previously a part of the Hybrid IT-Compute business unit and the related operational services business that was previously a part of the Hybrid IT-HPE Pointnext business unit. The HPC & MCS segment consists of high performance compute, mission-critical systems, and edge compute offerings that were previously a part of the Hybrid IT-Compute business unit and the related operational services business that was previously a part of the Hybrid IT-HPE Pointnext business unit. The Storage segment combines the former Hybrid IT-Storage business unit, the related operational services business that was previously a part of the Hybrid IT-HPE Pointnext business unit and the hyperconverged infrastructure products that were previously a part of the Hybrid IT-Compute business unit. Finally, the A & PS segment consists of the consultative-led services that were previously a part of the Hybrid IT-HPE Pointnext business unit.
In addition, the Intelligent Edge segment now includes the Data Center Networking ("DC Networking") operational services business that was previously a part of the Hybrid IT-HPE Pointnext business unit. The DC Networking business, other than operational services, had been transferred to the Intelligent Edge segment in a prior realignment.
The Company reflected these changes to its segment information retrospectively to the earliest period presented, which primarily resulted in the realignment of net revenue, operating profit and total assets for each of the businesses 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. See Note 2, "Segment Information", for a further discussion of the Company's segment.
Use of Estimates
The preparation of financial statements requires management to make estimates, judgements and assumptions that affect the amounts reported in the Company's Consolidated Financial Statements and accompanying notes. Estimates are assessed each period and updated to reflect current information, such as the economic considerations related to the impact that the novel coronavirus pandemic ("COVID-19") could have on our significant accounting estimates. Significant estimates that are based on a forecast include inventory reserves, provision for taxes, valuation allowance for deferred taxes, and impairment assessments of goodwill, intangible assets and other long lived assets. The Company believes that these estimates, judgements and assumptions are reasonable under the circumstances, and are subject to significant uncertainties, some of which are beyond the Company's control. Should any of these estimates change, it could adversely affect the Company's results of operations. Additionally, as the extent and duration of the impacts from COVID-19 remain unclear, the Company's estimates, judgements and assumptions may evolve as conditions change. Actual results could differ materially from these estimates under different assumptions or conditions.
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Foreign Currency Translation
The Company predominately uses the U.S. dollar as its functional currency. Assets and liabilities denominated in non-U.S. currencies are remeasured into U.S. dollars at current exchange rates for monetary assets and liabilities and at historical exchange rates for non-monetary assets and liabilities. Net revenue, costs and expenses denominated in non-U.S. currencies are recorded in U.S. dollars at the average rates of exchange prevailing during the period. The Company includes gains or losses from foreign currency remeasurement in Interest and other, net in the Consolidated Statements of Earnings and gains and losses from cash flow hedges in Net revenue as the hedged revenue is recognized. Certain non-U.S. subsidiaries designate the local currency as their functional currency, and the Company records the translation of their assets and liabilities into U.S. dollars at the balance sheet date as translation adjustments and includes them as a component of Accumulated other comprehensive loss in the Consolidated Balance Sheets. The effect of foreign currency exchange rates on cash and cash equivalents was not material for any of the fiscal years presented.
Revenue Recognition
General
The Company accounts for a contract with a customer when both parties have provided written approval and are committed to perform, each party's rights including payment terms are identified, the contract has commercial substance, and collection of consideration is probable.
The Company enters into contracts with customers that may include combinations of products and services, resulting in arrangements containing multiple performance obligations for hardware and software products and/or various services. The Company determines whether each product or service is distinct in order to identify the performance obligations in the contract and allocate the contract transaction price among the distinct performance obligations. Arrangements are distinct based on whether the customer can benefit from the product or service on its own or together with other resources that are readily available and whether the commitment to transfer the product or service to the customer is separately identifiable from other obligations in the contract. The Company classifies its hardware, perpetual software licenses, and software-as-a-service ("SaaS") as distinct performance obligations. Term software licenses represent multiple obligations, which include software licenses and software maintenance. In transactions where the Company delivers hardware or software, it is typically the principal and records revenue and costs of goods sold on a gross basis.
The majority of the Company's revenue is derived from sales of product and the associated support and maintenance which is recognized when, or as, control of promised products or services is transferred to the customer, in an amount that reflects the consideration to which the Company expects to be entitled, in exchange for those products or services. Variable consideration offered in contracts with customers, partners and distributors may include rebates, volume-based discounts, cooperative marketing, price protection, and other incentive programs. Variable consideration is estimated at contract inception and updated at the end of each reporting period as additional information becomes available and recognized only to the extent that it is probable that a significant reversal of revenue will not occur.
Transfer of control occurs once the customer has the contractual right to use the product, generally upon shipment or once delivery and risk of loss has transferred to the customer. Transfer of control can also occur over time for maintenance and services as the customer receives the benefit over the contract term. The Company's hardware and perpetual software licenses are distinct performance obligations where revenue is recognized upfront upon transfer of control. Term software licenses include multiple performance obligations where the term licenses are recognized upfront upon transfer of control, with the associated software maintenance revenue recognized ratably over the contract term as services and software updates are provided. SaaS arrangements have one distinct performance obligation which is satisfied over time with revenue recognized ratably over the contract term as the customer consumes the services. On its product sales, the Company records consideration from shipping and handling on a gross basis within net product sales. Revenue is recorded net of any associated sales taxes.
Significant Judgments
The Company allocates the transaction price for the contract among the performance obligations on a relative standalone selling price basis. The standalone selling price ("SSP") is the price at which an entity would sell a promised product or service separately to a customer. The Company establishes SSP for most of its products and services based on the observable price of the products or services when sold separately in similar circumstances to similar customers. When the SSP is not directly observable, the Company estimates SSP based on management judgment by considering available data such as internal margin objectives, pricing strategies, market/competitive conditions, historical profitability data, as well as other observable inputs. The Company establishes SSP ranges for its products and services and reassesses them periodically.
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Judgment is applied in determining the transaction price as the Company may be required to estimate variable consideration when determining the amount of revenue to recognize. Variable consideration may include various rebates, volume-based discounts, cooperative marketing, price protection, and other incentive programs that are offered to customers, partners and distributors. When determining the amount of revenue to recognize, the Company estimates the expected usage of these programs, applying the expected value or most likely estimate and updates the estimate at each reporting period as actual utilization becomes available. The Company also considers the customers' right of return in determining the transaction price, where applicable.
Contract Balances
Accounts receivable and contract assets
A receivable is a right to consideration in exchange for products or services the Company has transferred to a customer that is unconditional. A contract asset is a right to consideration in exchange for products or services transferred to a customer that is conditional on something other than the passage of time. A receivable is recorded when the right to consideration becomes unconditional.
The Company's contract assets include unbilled receivables which are recorded when the Company recognizes revenue in advance of billings. Unbilled receivables generally relate to services contracts where a service has been performed and control has transferred, but invoicing to the customer is subject to future milestone billings or other contractual payment schedules. The Company classifies unbilled receivables as Accounts receivable.
Contract liabilities
A contract liability is an obligation to transfer products or services to a customer for which the Company has received consideration, or the amount is due, from the customer. The Company's contract liabilities primarily consist of deferred revenue. Deferred revenue is recorded when amounts invoiced to customers are in excess of revenue that can be recognized because performance obligations have not been satisfied and control of the promised products or services has not transferred to the customer. Deferred revenue largely represents amounts invoiced in advance for product (hardware/software) support contracts, consulting projects and product sales where revenue cannot be recognized yet.
Costs to obtain a contract with a customer
The Company capitalizes the incremental costs of obtaining a contract with a customer, primarily sales commissions, if the Company expects to recover those costs. The Company has elected, as a practical expedient, to expense the costs of obtaining a contract as incurred for contracts with terms of one year or less. The typical amortization periods used range from three to six years. The Company periodically reviews the capitalized sales commission costs for possible impairment losses. As of October 31, 2020, the current and non-current portions of the capitalized costs to obtain a contract were $54 million and $76 million, respectively. As of October 31, 2019, the current and non-current portions of the capitalized costs to obtain a contract were which were $49 million and $74 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 Consolidated Balance Sheet. For fiscal 2020 and 2019, the Company amortized $58 million and $48 million, respectively, of the capitalized costs to obtain a contract which are included in Selling, general and administrative expense.
Shipping and Handling
The Company includes costs related to shipping and handling in Cost of products.
Stock-Based Compensation
Stock-based compensation expense is based on the measurement date fair value of the award and is recognized only for those awards expected to meet the service and performance vesting conditions. Stock-based compensation expense for stock options and restricted stock units with only a service condition is recognized on a straight-line basis over the requisite service period of the award. For stock options and restricted stock units with both a service condition and a performance or market condition, the expense is recognized on a graded vesting basis over the requisite service period of the award. Stock-based compensation expense is determined at the aggregate grant level for service-based awards and at the individual vesting tranche level for awards with performance and/or market conditions. The forfeiture rate is estimated based on historical experience.
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Notes to Consolidated Financial Statements (Continued)
Retirement and Post-Retirement Plans
The Company has various defined benefit, other contributory and noncontributory, retirement and post-retirement plans. The Company generally amortizes unrecognized actuarial gains and losses on a straight-line basis over the average remaining estimated service life or, in the case of closed plans, life expectancy of participants. In limited cases, actuarial gains and losses are amortized using the corridor approach. See Note 4, "Retirement and Post-Retirement Benefit Plans" for a full description of these plans and the accounting and funding policies.
Advertising
Costs to produce advertising are expensed as incurred during production. Costs to communicate advertising are expensed when the advertising is first run. Advertising expense totaled approximately $143 million in fiscal 2020, $188 million in fiscal 2019, and $193 million in fiscal 2018.
Restructuring
The Company's transformation programs include charges to approved restructuring plans. Restructuring charges can include severance costs to eliminate a specified number of employees, infrastructure charges to vacate facilities and consolidate operations, and contract cancellation costs. The Company records restructuring charges based on estimated employee terminations and site closure and consolidation plans. The Company accrues for severance and other employee separation costs under these actions when it is probable that benefits will be paid and the amount is reasonably estimable. The rates used in determining severance accruals are based on existing plans, historical experiences and negotiated settlements.
Taxes on Earnings
The Company recognizes deferred tax assets and liabilities for the expected tax consequences of temporary differences between the tax bases of assets and liabilities and their reported amounts using enacted tax rates in effect for the year the differences are expected to reverse.
The Company records a valuation allowance to reduce deferred tax assets to the amount that is more likely than not to be realized. In determining the need for a valuation allowance, the Company considers future market growth, forecasted earnings, future sources of taxable income, the mix of earnings in the jurisdictions in which the Company operates, and prudent and feasible tax planning strategies. In the event the Company were to determine that it is more likely than not that the Company will be unable to realize all or part of its deferred tax assets in the future, the Company would increase the valuation allowance and recognize a corresponding charge to earnings in the period in which such a determination was made. Likewise, if the Company later determines that the deferred tax assets are more likely than not to be realized, the Company would reverse the applicable portion of the previously recognized valuation allowance. In order for the Company to realize deferred tax assets, the Company must be able to generate sufficient taxable income in the jurisdictions in which the deferred tax assets are located.
The Company records accruals for uncertain tax positions when the Company believes that it is not more likely than not that the tax position will be sustained on examination by the taxing authorities based on the technical merits of the position. The Company makes adjustments to these accruals when facts and circumstances change, such as the closing of a tax audit or the refinement of an estimate. The provision for income taxes includes the effects of adjustments for uncertain tax positions, effects of settlement of certain pre-Separation Hewlett-Packard Company income tax liabilities, as well as any related interest and penalties.
The Company is subject to the Global Intangible Low Taxed Income ("GILTI") tax in the U.S. The Company elected to treat taxes on future GILTI inclusions in U.S. taxable income as a current period expense when incurred.
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Notes to Consolidated Financial Statements (Continued)
Allowance for Doubtful Accounts
Accounts Receivable
The Company establishes an allowance for doubtful accounts for accounts receivable. The Company may record a specific reserve for individual accounts when the Company becomes aware of specific customer circumstances, such as in the case of a bankruptcy filing or deterioration in the customer's operating results or financial position. If there are additional changes in circumstances related to the specific customer, the Company further adjusts estimates of the recoverability of receivables. The Company maintains bad debt reserves for all other customers based on a variety of factors, including the use of third-party credit risk models that generate quantitative measures of default probabilities based on market factors, the financial condition of customers, the length of time receivables are past due, trends in the weighted-average risk rating for the portfolio, macroeconomic conditions, information derived from competitive benchmarking, significant one-time events, and historical experience. The past due or delinquency status of a receivable is based on the contractual payment terms of the receivable.
Financing Receivable
The allowance for doubtful accounts for financing receivables is comprised of a general reserve and a specific reserve. The Company maintains general reserve percentages on a regional basis and bases such percentages on several factors, including consideration of historical credit losses and portfolio delinquencies, trends in the overall weighted-average risk rating of the portfolio, current economic conditions and information derived from competitive benchmarking. The Company excludes accounts evaluated as part of the specific reserve from the general reserve analysis. The Company establishes a specific reserve for financing receivables with identified exposures, such as customer defaults, bankruptcy or other events, that make it unlikely the Company will recover its investment. For individually evaluated receivables, the Company determines the expected cash flow for the receivable, which includes consideration of estimated proceeds from disposition of the collateral, and calculates an estimate of the potential loss and the probability of loss. For those accounts where a loss is considered probable, the Company records a specific reserve. The Company generally writes off a receivable or records a specific reserve when a receivable becomes 180 days past due, or sooner if the Company determines that the receivable is not collectible.
Non-Accrual and Past-Due Financing Receivables
The Company considers a financing receivable to be past due when the minimum payment is not received by the contractually specified due date. The Company generally places financing receivables on non-accrual status, which is the suspension of interest accrual, and considers such receivables to be non-performing at the earlier of the time at which full payment of principal and interest becomes doubtful or the receivable becomes 90 days past due. Subsequently, the Company may recognize revenue on non-accrual financing receivables as payments are received, which is on a cash basis, if the Company deems the recorded financing receivable to be fully collectible; however, if there is doubt regarding the ultimate collectability of the recorded financing receivable, all cash receipts are applied to the carrying amount of the financing receivable, which is the cost recovery method. In certain circumstances, such as when the Company deems a delinquency to be of an administrative nature, financing receivables may accrue interest after becoming 90 days past due. The non-accrual status of a financing receivable may not impact a customer's risk rating. After all of a customer's delinquent principal and interest balances are settled, the Company may return the related financing receivable to accrual status.
Concentrations of Risk
Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of cash, cash equivalents and restricted cash, investments, receivables from trade customers and contract manufacturers, financing receivables and derivatives.
The Company maintains cash, cash equivalents and restricted cash, investments, derivatives, and certain other financial instruments with various financial institutions. These financial institutions are located in many different geographic regions, and the Company's policy is designed to limit exposure from any particular institution. As part of its risk management processes, the Company performs periodic evaluations of the relative credit standing of these financial institutions. The Company has not sustained material credit losses from instruments held at these financial institutions. The Company utilizes derivative contracts to protect against the effects of foreign currency and interest rate exposures. Such contracts involve the risk of non-performance by the counterparty, which could result in a material loss. For more details on the collateral program, see Note 13, "Financial Instruments".
Credit risk with respect to accounts receivable from trade customers and financing receivables is generally diversified due to the large number of entities comprising the Company's customer base and their dispersion across many different industries
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Notes to Consolidated Financial Statements (Continued)
and geographic regions. The Company performs ongoing credit evaluations of the financial condition of its customers and may require collateral, such as letters of credit and bank guarantees, in certain circumstances. As of October 31, 2020 and 2019 no single customer accounted for more than 10% of the Company's receivable from trade customers and financing receivables.
The Company utilizes outsourced manufacturers around the world to manufacture company-designed products. The Company may purchase product components from suppliers and sell those components to its outsourced manufacturers thereby creating receivable balances from the outsourced manufacturers. The three largest outsourced manufacturer receivable balances collectively represented 89% and 92% of the Company's manufacturer receivables of $687 million and $635 million at October 31, 2020 and 2019, respectively. The Company includes the manufacturer receivables in Other current assets in the Consolidated Balance Sheets on a gross basis. The Company's credit risk associated with these receivables is mitigated wholly or in part by the amount the Company owes to these outsourced manufacturers, as the Company generally has the legal right to offset its payables to the outsourced manufacturers against these receivables. The Company does not reflect the sale of these components in revenue and does not recognize any profit on these component sales until the manufactured products are sold by the Company, at which time any profit is recognized as a reduction to cost of sales. The Company obtains certain components from single source suppliers due to technology, availability, price, quality or other considerations. The loss of a single source supplier, the deterioration of the Company's relationship with a single source supplier, or any unilateral modification to the contractual terms under which the Company is supplied components by a single source supplier could adversely affect the Company's revenue and gross margins.
Inventory
The Company values inventory at the lower of cost or net realizable value. Cost is computed using standard cost which approximates actual cost on a first-in, first-out basis. At each reporting period, the Company assesses the value of its inventory and writes down the cost of inventory to its net realizable value, if required, for estimated excess or obsolescence determined primarily by future demand forecasts and market conditions. The write down for excess or obsolescence is charged to the provision of inventory, which is a component of Cost of Products and Cost of Services in the Consolidated Statement of Earnings. At the point of the loss recognition, a new, lower cost basis for that inventory is established, and subsequent changes in facts and circumstances do not result in the restoration or increase in that newly established cost basis.
Property, Plant and Equipment
The Company states property, plant and equipment at cost less accumulated depreciation. The Company capitalizes additions and improvements and expenses maintenance and repairs as incurred. Depreciation expense is recognized on a straight-line basis over the estimated useful lives of the assets. Estimated useful lives are five to 40 years for buildings and improvements and three to 15 years for machinery and equipment. The Company depreciates leasehold improvements over the life of the lease or the asset, whichever is shorter. The Company depreciates equipment held for lease over the initial term of the lease to the equipment's estimated residual value. The estimated useful lives of assets used solely to support a customer services contract generally do not exceed the term of the customer contract. On retirement or disposition, the asset cost and related accumulated depreciation are removed from the Consolidated Balance Sheets with any gain or loss recognized in the Consolidated Statements of Earnings.
The Company capitalizes certain internal and external costs incurred to acquire or create internal use software, principally related to software coding, designing system interfaces and installation and testing of the software. The Company amortizes capitalized internal use software costs using the straight-line method over the estimated useful lives of the software, generally from three to five years.
Leases
Lessee Accounting
As a result of adopting the new leasing standard ("ASC 842"), the Company now recognizes a lease liability and a right-of-use ("ROU") asset for the lease term in a lease contract.
The Company enters into various leases as a lessee for assets including office buildings, data centers, vehicles, and aviation. The Company determines if an arrangement is a lease at inception. An arrangement contains a lease when the arrangement conveys the right to control the use of an identified asset over the lease term. Upon lease commencement, the Company records a lease liability for the obligation to make lease payments and ROU asset for the right to use the underlying asset for the lease term in the Consolidated Balance Sheet. The lease liability is measured at commencement date based on the present value of lease payments not yet paid over the lease term and the Company's incremental borrowing rate. As most of the Company's leases do not provide an implicit rate, the Company uses an incremental borrowing rate which approximates the rate
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Notes to Consolidated Financial Statements (Continued)
at which the Company would borrow, on a secured basis, in the country where the lease was executed. The ROU asset is based on the lease liability, adjusted for lease prepayments, lease incentives received, and the lessee's initial direct costs. Fixed payments are included in the recognition of ROU assets and liabilities, while non-lease components, such as maintenance or utility charges are expensed as incurred. The Company has agreements with lease and non-lease components that are accounted for separately and not included in its leased assets and corresponding liabilities for the majority of the Company's lease agreements. The Company allocates consideration to the lease and non-lease components using their relative standalone values.
For finance leases, the ROU asset is amortized on a straight-line basis over the shorter of the useful life of the asset or the lease term. Interest expense on the lease liability is recorded separately using the interest method. For operating leases, lease expense is generally recognized on a straight-line basis over the lease term.
Lessor Accounting
The Company's lease offerings are non-cancelable and the payment schedule primarily consists of fixed payments. Variable payments that are based on an index are included in lease receivables. The Company allocates consideration amongst lease components and non-lease components on a relative standalone selling price basis, when lease arrangements include multiple performance obligations. At the end of the lease term, the Company allows the client to either return the equipment, purchase the equipment or renew the lease based on mutually agreed upon terms.
The Company retains a residual position in equipment through lease and finance agreements which is equivalent to an estimated market value. The residual amount is established prior to lease inception, based upon estimated equipment values at end of lease using product road map trends, historical analysis, future projections and remarketing experience. The Company's residual amounts are evaluated at least annually to assess the appropriateness of our carrying values. Any anticipated declines in specific future residual values that are considered to be other-than-temporary would be recorded in current earnings. The Company is able to optimize the recovery of residual values by selling equipment in place, extending lease arrangements on a fixed term basis, entering into a monthly usage rental term beyond the initial lease term, and selling lease returned equipment in the secondary market. The contractual lease agreement also identifies return conditions that ensures the leased equipment will be in good operating condition upon return minus any normal wear and tear. During the residual review process, product changes, product updates, as well as market conditions are reviewed and adjustments if other than temporary are made to residual values in accordance with the impact of any such changes. The remarketing sales organization closely manages the sale of equipment lease returns to optimize the recovery of outstanding residual by product.
Business Combinations
The Company includes the results of operations of acquired businesses in the Company's consolidated results prospectively from the date of acquisition. The Company allocates the fair value of purchase consideration to the assets acquired including in-process research and development ("IPR&D"), liabilities assumed, and non-controlling interests in the acquired entity based on their fair values at the acquisition date. IPR&D is initially capitalized at fair value as an intangible asset with an indefinite life and assessed for impairment thereafter. The excess of the fair value of purchase consideration over the fair value of the assets acquired, liabilities assumed and non-controlling interests in the acquired entity is recorded as goodwill. The primary items that generate goodwill include the value of the synergies between the acquired company and the Company and the value of the acquired assembled workforce, neither of which qualifies for recognition as an intangible asset. Acquisition-related expenses and post-acquisition restructuring costs are recognized separately from the business combination and are expensed as incurred.
Goodwill
The Company reviews goodwill for impairment annually and whenever events or changes in circumstances indicate the carrying amount of goodwill may not be recoverable. The Company performs a quantitative test for all of its reporting units as part of its annual goodwill impairment test in the fourth quarter of each fiscal year.
The Company estimates the fair value of its reporting units using a weighting of fair values derived most significantly from the income approach, and to a lesser extent, the market approach. Under the income approach, the Company estimates the fair value of a reporting unit based on the present value of estimated future cash flows covering discrete forecast periods as well as terminal value determinations. The Company prepares cash flow projections based on management's estimates of revenue growth rates and operating margins, taking into consideration industry and market conditions. The Company bases the discount rate on the weighted-average cost of capital adjusted for the relevant risk associated with business-specific characteristics and the uncertainty related to the reporting unit's ability to execute on the projected cash flows. Under the market approach, the Company estimates fair value based on market multiples of revenue and earnings derived from comparable publicly traded
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Notes to Consolidated Financial Statements (Continued)
companies with similar operating and investment characteristics as the reporting unit. The Company weights the fair value derived from the market approach commensurate with the level of comparability of these publicly traded companies to the reporting unit. When market comparables are not meaningful or not available, the Company estimates the fair value of a reporting unit using only the income approach.
If the fair value of a reporting unit exceeds the carrying amount of the net assets assigned to that reporting unit, goodwill is not impaired and no further testing is required. If the fair value of the reporting unit is less than its carrying amount, goodwill is impaired. The goodwill impairment loss is measured as the excess of the reporting unit's carrying value over its fair value (not to exceed the total goodwill allocated to that reporting unit).
Intangible Assets and Long-Lived Assets
The Company reviews intangible assets with finite lives and long-lived assets for impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. The Company assesses the recoverability of assets based on the estimated undiscounted future cash flows expected to result from the use and eventual disposition of the asset. If the undiscounted future cash flows are less than the carrying amount, the asset is impaired. The Company measures the amount of impairment loss, if any, as the difference between the carrying amount of the asset and its fair value using an income approach or, when available and appropriate, using a market approach. The Company amortizes intangible assets with finite lives using the straight-line method over the estimated economic lives of the assets, ranging from one to ten years.
Assets Held for Sale
The Company classifies its long-lived assets to be sold as held for sale in the period (i) it has approved and committed to a plan to sell the asset, (ii) the asset is available for immediate sale in its present condition, (iii) an active program to locate a buyer and other actions required to sell the asset have been initiated, (iv) the sale of the asset is probable, (v) the asset is being actively marketed for sale at a price that is reasonable in relation to its current fair value, and (vi) it is unlikely that significant changes to the plan will be made or that the plan will be withdrawn. The Company initially measures a long-lived asset that is classified as held for sale at the lower of its carrying value or fair value less any costs to sell. Any loss resulting from this measurement is recognized in the period in which the held for sale criteria are met. Conversely, gains are not recognized on the sale of a long-lived asset until the date of sale. Upon designation as an asset held for sale, the Company stops recording depreciation expense on the asset. The Company assesses the fair value of a long-lived asset less any costs to sell at each reporting period and until the asset is no longer classified as held for sale.
Equity Method Investments
Investments and ownership interests are accounted for under equity method accounting if the Company has the ability to exercise significant influence, but does not have a controlling financial interest. The Company records its interest in the net earnings of its equity method investees, along with adjustments for unrealized profits or losses on intra-entity transactions and amortization of basis differences, within earnings or loss from equity interests in the Consolidated Statements of Earnings. Profits or losses related to intra-entity sales with its equity method investees are eliminated until realized by the investor or investee. Basis differences represent differences between the cost of the investment and the underlying equity in net assets of the investment and are generally amortized over the lives of the related assets that gave rise to them. Equity method goodwill is not amortized or tested for impairment; instead the equity method investment is tested for impairment. The Company records its interest in the net earnings of its equity method investments based on the most recently available financial statements of the investees.
The carrying amount of the investment in equity interests is adjusted to reflect the Company's interest in net earnings, dividends received and other-than-temporary impairments. The Company reviews for impairment whenever factors indicate that the carrying amount of the investment might not be recoverable. In such a case, the decrease in value is recognized in the period the impairment occurs in the Consolidated Statement of Earnings.
Equity Securities Investments
Equity securities investments with readily determinable fair values (other than those accounted for under the equity method or those that result in consolidation of the investee) are measured at fair value and any changes in fair value are recognized in Interest and other, net in the Consolidated Statement of Earnings. For equity investments without readily determinable fair values, the Company has elected to apply the measurement alternative, under which investments are measured at cost, less impairment, and adjusted for qualifying observable price changes on a prospective basis. The Company reviews for impairment at each reporting period, assessing factors such as deterioration of earnings, adverse change in market/industry
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Notes to Consolidated Financial Statements (Continued)
conditions, the ability to operate as a going concern, and other factors which indicate that the carrying amount of the investment might not be recoverable. In such a case, the decrease in value is recognized in the period the impairment occurs in the Consolidated Statement of Earnings.
Debt Securities Investments
Debt securities are generally considered available-for-sale and are reported at fair value with unrealized gains and losses, net of applicable taxes, recorded in Accumulated other comprehensive loss in the Consolidated Balance Sheets. Realized gains and losses for available-for-sale securities are calculated based on the specific identification method and included in Interest and other, net in the Consolidated Statements of Earnings. The Company monitors its investment portfolio for potential impairment on a quarterly basis. When the carrying amount of an investment in debt securities exceeds its fair value and the decline in value is determined to be other-than-temporary, the Company records an impairment charge to Interest and other, net in the amount of the credit loss and the balance, if any, is recorded in Accumulated other comprehensive loss in the Consolidated Balance Sheets.
Derivatives
The Company uses derivative financial instruments, primarily forwards, swaps, and, at times, options, to hedge certain foreign currency and interest rate exposures. The Company does not use derivative financial instruments for speculative purposes. See Note 13, "Financial Instruments", for a full description of the Company's derivative financial instrument activities and related accounting policies.
Loss Contingencies
The Company is involved in various lawsuits, claims, investigations, and proceedings that arise in the ordinary course of business. The Company records a liability for contingencies when it believes it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. See Note 17, "Litigation and Contingencies", for a full description of the Company's loss contingencies.
Warranties
The Company accrues the estimated cost of product warranties at the time of recognizing revenue. The Company evaluates its warranty obligations on a product group basis. The Company's standard product warranty terms generally include post-sales support and repairs or replacement of a product at no additional charge for a specified period of time. The Company engages in extensive product quality programs and processes, including actively monitoring and evaluating the quality of its component suppliers. The estimated warranty obligation is based on contractual warranty terms, repair costs, product call rates, average cost per call, current period product shipments and ongoing product failure rates, as well as specific product class failure outside of the Company's baseline experience. Warranty terms generally range from one to five years for parts and labor, depending upon the product. For certain networking products, the Company offers a lifetime warranty. Over the last three fiscal years, the annual warranty expense has averaged approximately 1.5% of annual net product revenue. Refer to Note 17, "Guarantees, Indemnifications and Warranties" for additional information.
Recently Adopted Accounting Pronouncements
In March 2020, the FASB issued guidance to provide temporary optional expedients and exceptions through December 31, 2022 to the U.S. GAAP guidance on contract modifications and hedge accounting to ease the financial reporting burdens of the expected market transition from the London Interbank Offered Rate (LIBOR) and other interbank offered rates to alternative reference rates, such as the Secured Overnight Financing Rate (SOFR). This guidance was effective upon issuance. As a result the Company adopted the guidance in the second quarter of fiscal 2020 and there was no financial impact on the Consolidated Financial Statements upon adoption.
In February 2018, the FASB issued guidance that allows companies to reclassify stranded tax effects resulting from U.S. tax reform from accumulated other comprehensive income (loss) to retained earnings. The guidance also allows the reclassification of these stranded tax effects to be recorded upon adoption of the guidance rather than at the actual cessation date. The Company adopted the guidance in the first quarter of fiscal 2020 and elected not to reclassify prior periods. As a result, $43 million of tax benefit was reclassified from accumulated other comprehensive loss into accumulated deficit, primarily comprised of amounts related to currency translation adjustments and net unrealized gains (losses) on cash flow hedges.
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Notes to Consolidated Financial Statements (Continued)
In August 2017, the FASB amended the existing accounting standards for hedge accounting. The amendments expand an entity's ability to hedge non-financial and financial risk components and reduce complexity in fair value hedges of interest rate risk. The new guidance eliminates the requirement to separately measure and report hedge ineffectiveness and requires the entire change in the fair value of a hedging instrument to be presented in the same income statement line as the hedged item. The guidance also simplifies certain documentation and assessment requirements and modifies the accounting for components excluded from the assessment of hedge effectiveness. In April 2019, the FASB issued certain clarifications to address partial term fair value hedges, fair value hedge basis adjustments and certain transition requirements. The Company adopted the guidance effective November 1, 2019 and there was no financial impact on the Consolidated Financial Statements upon adoption.
In February 2016, with amendments in 2018 and 2019, the FASB issued guidance which changes the accounting standards for leases. The Company adopted the guidance in the first quarter of fiscal 2020, beginning November 1, 2019, using the modified retrospective transition method whereby prior comparative periods will not be restated in the Consolidated Financial Statements. Accordingly, results and related disclosures for the reporting periods beginning after November 1, 2019 are presented under the new lease standard, while comparative prior period results and related disclosures are not adjusted and continue to be reported in accordance with the historic accounting standards. The primary objective of this update is to increase transparency and comparability among organizations by requiring lessees to recognize a lease liability and an ROU asset for the lease term. The Company elected the package of practical expedients which did not require the reassessment of prior conclusions related to contracts containing leases, lease classification and initial direct costs ("IDC"). As a lessee, the adoption of the new lease standard on November 1, 2019 resulted in the recognition of $1.0 billion of right-of-use assets and $1.1 billion of lease liabilities on the Company's Consolidated Balance Sheet. As a lessor, no transition adjustments were recorded from the adoption of ASC 842.
The adoption of the accounting standard for leases had no impact on the Company's Consolidated Statements of Earnings and Consolidated Statements of Cash Flows or debt-covenant compliance under its current agreements. Refer to Note 8 "Accounting for Leases as a Lessee" for accounting policy and additional information.
Recently Enacted Accounting Pronouncements
In January 2020, the FASB issued guidance to clarify certain interactions between the guidance to account for equity securities, the guidance to account for investments under the equity method of accounting, and the guidance to account for derivatives and hedging. The new guidance clarifies the application of measurement alternatives and the accounting for certain forward contracts and purchased options to acquire investments. The Company is required to adopt the guidance in the first quarter of fiscal 2022, though early adoption is permitted. The Company does not expect the guidance to have a material impact on its Consolidated Financial Statements.
In December 2019, the FASB amended the existing accounting standards for income taxes. The amendments clarify and simplify the accounting for income taxes by eliminating certain exceptions to the general principles. The Company plans to adopt the guidance in the first quarter of fiscal 2021. The Company does not expect the guidance to have a material impact on its Consolidated Financial Statements.
In August 2018, the FASB issued guidance on a customer's accounting for implementation costs incurred in cloud-computing arrangements that are hosted by a vendor. Certain types of implementation costs should be capitalized and amortized over the term of the hosting arrangement. The Company is required to adopt the guidance in the first quarter of fiscal 2021, though early adoption is permitted. The Company does not expect the guidance to have a material impact on its Consolidated Financial Statements.
In August 2018, the FASB issued guidance which changes the disclosure requirements for fair value measurements and defined benefit pension plans. The Company is required to adopt the guidance in the first quarter of fiscal 2021. The Company does not expect the guidance to have an impact on its Consolidated Financial Statements, however expects to have additional disclosures relating to retirement and post-retirement benefit plans.
In June 2016, the FASB amended the existing accounting standards for the measurement of credit losses. The amendments require an entity to estimate its lifetime expected credit loss for most financial instruments, including trade and financing receivables, and record an allowance for the portion of the amortized cost the entity does not expect to collect. The estimate of expected credit losses should consider historical information, current information, and reasonable and supportable forecasts, including estimates of prepayments. In April 2019, the FASB further clarified the scope of the credit losses standard and addressed issues related to accrued interest receivable balances, recoveries, variable interest rates and prepayments. In May 2019, the FASB issued further guidance to provide entities with an option to irrevocably elect the fair value option applied on
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Notes to Consolidated Financial Statements (Continued)
an instrument-by-instrument basis for eligible financial instruments. In November 2019, the FASB issued several amendments to the new credit losses standard, including an amendment requiring entities to include certain expected recoveries of the amortized cost basis in the allowance for credit losses for purchased credit deteriorated assets. In March 2020, the FASB issued clarifications relating to the measurement of credit losses. The Company will adopt this standard, beginning November 1, 2020, on a modified retrospective basis. The adoption of this standard will not have a material impact on the consolidated financial statements.
Note 2: Segment Information
Hewlett Packard Enterprise's operations are now organized into seven segments for financial reporting purposes: Compute, HPC & MCS, Storage, A & PS, Intelligent Edge, Financial Services ("FS"), and Corporate Investments. Hewlett Packard Enterprise's organizational structure is based on a number of factors that the Chief Operating Decision Maker ("CODM"), who is the Chief Executive Officer ("CEO"), uses to evaluate, view and run the Company's business operations, which include, but are not limited to, customer base and homogeneity of products and technology. The seven segments are based on this organizational structure and information reviewed by Hewlett Packard Enterprise's management to evaluate segment results. A summary of types of products and services of each segment follows.
Compute portfolio offers both general purpose servers for multi-workload computing and workload optimized servers to offer the best performance and value for demanding applications. This portfolio of products includes the HPE Proliant rack and tower servers; HPE BladeSystem, and HPE Synergy. Compute offerings also include operational and support services.
High Performance Compute & Mission-Critical Systems portfolio offers specialized compute servers designed to support specific use cases. The HPC portfolio of products includes the HPE Apollo and Cray products that are sold as supercomputing systems, including exascale supercomputers. The MCS portfolio includes the HPE Superdome Flex, HPE Nonstop and HPE Integrity product lines. The HPC & MCS segment also includes the Edge Compute business which consists of the HPE Moonshot and HPE Edgeline products. HPC & MCS offerings also include operational and support services.
Storage portfolio offers workload optimized storage product and service offerings which include an intelligent hyperconverged infrastructure ("HCI") with HPE Nimble Storage dHCI and HPE SimpliVity. The portfolio also includes HPE Primera, HPE Nimble Storage and HPE 3PAR Storage for mission-critical and general purpose workloads, HPE Recovery Manager Central, HPE StoreOnce, HPE Cloud Volumes Backup and Big Data solutions with BlueData and MapR technology. Storage also provides solutions for secondary workloads and traditional tape, storage networking and disk products, such as HPE Modular Storage Arrays ("MSA") and HPE XP. Storage offerings also include services and support services.
Advisory and Professional Services provides consultative-led services, HPE and partner technology expertise and advice, implementation services as well as complex solution engagement capabilities. A & PS is also a provider of on-premises flexible consumption models that enable IT agility, simplify operations, and align cost to value.
Intelligent Edge portfolio offers wired and wireless local area network "(LAN"), campus and data center switching, software-defined wide-area-networking, security, and associated services to enable secure connectivity for businesses of any size. The HPE Aruba product portfolio includes products such as Wi-Fi access points, switches, routers, and sensors. The HPE Aruba software and services portfolio includes software products for cloud-based management, network management, network access control, analytics and assurance, location services software and professional and support services, as well as as-a Service ("aaS") and consumption models for the Intelligent Edge portfolio of products.
Financial Services provides flexible investment solutions, such as leasing, financing, IT consumption, and 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.
Corporate Investments includes Hewlett Packard Labs which is responsible for research and development, and the Communications and Media Solutions ("CMS") business and also hosts certain business incubation projects.
Segment Policy
Hewlett Packard Enterprise derives the results of its business segments directly from its internal management reporting system. The accounting policies that Hewlett Packard Enterprise uses to derive segment results are substantially the same as those the consolidated company uses. The CODM measures the performance of each segment based on several metrics, including earnings from operations. The CODM uses these results, in part, to evaluate the performance of, and to allocate resources to each of the segments.
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Segment revenue includes revenues from sales to external customers and intersegment revenues that reflect transactions between the segments on an arm's-length basis. Intersegment revenues primarily consist of sales of hardware and software that are sourced internally and, in the majority of the cases, are financed as operating leases by FS to our customers. Hewlett Packard Enterprise's consolidated net revenue is derived and reported after the elimination of intersegment revenues from such arrangements.
Financing interest in the Consolidated Statements of Earnings reflects interest expense on borrowing and funding-related activity associated with FS and its subsidiaries, and debt issued by Hewlett Packard Enterprise for which a portion of the proceeds benefited FS.
Hewlett Packard Enterprise does not allocate to its segments certain operating expenses, which it manages at the corporate level. These unallocated costs include certain corporate costs and eliminations, stock-based compensation expense related to corporate and certain global functions, amortization of initial direct costs, amortization of intangible assets, impairment of goodwill, transformation costs, disaster charges (recovery), acquisition, disposition and other related charges.
Segment Operating Results
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compute
|
|
HPC & MCS
|
|
Storage
|
|
A & PS
|
|
Intelligent Edge
|
|
Financial Services
|
|
Corporate Investments
|
|
Total
|
|
|
In millions
|
|
2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
$
|
11,821
|
|
|
$
|
2,965
|
|
|
$
|
4,583
|
|
|
$
|
946
|
|
|
$
|
2,837
|
|
|
$
|
3,340
|
|
|
$
|
490
|
|
|
$
|
26,982
|
|
|
Intersegment net revenue
|
394
|
|
|
71
|
|
|
98
|
|
|
5
|
|
|
18
|
|
|
12
|
|
|
—
|
|
|
598
|
|
|
Total segment net revenue
|
$
|
12,215
|
|
|
$
|
3,036
|
|
|
$
|
4,681
|
|
|
$
|
951
|
|
|
$
|
2,855
|
|
|
$
|
3,352
|
|
|
$
|
490
|
|
|
$
|
27,580
|
|
|
Segment earnings (loss) from operations
|
$
|
893
|
|
|
$
|
237
|
|
|
$
|
719
|
|
|
$
|
(5)
|
|
|
$
|
281
|
|
|
$
|
278
|
|
|
$
|
(100)
|
|
|
$
|
2,303
|
|
|
2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
$
|
13,250
|
|
|
$
|
2,786
|
|
|
$
|
5,114
|
|
|
$
|
1,004
|
|
|
$
|
2,904
|
|
|
$
|
3,570
|
|
|
$
|
507
|
|
|
$
|
29,135
|
|
|
Intersegment net revenue
|
392
|
|
|
124
|
|
|
71
|
|
|
8
|
|
|
9
|
|
|
11
|
|
|
—
|
|
|
615
|
|
|
Total segment net revenue
|
$
|
13,642
|
|
|
$
|
2,910
|
|
|
$
|
5,185
|
|
|
$
|
1,012
|
|
|
$
|
2,913
|
|
|
$
|
3,581
|
|
|
$
|
507
|
|
|
$
|
29,750
|
|
|
Segment earnings (loss) from operations
|
$
|
1,550
|
|
|
$
|
320
|
|
|
$
|
924
|
|
|
$
|
(54)
|
|
|
$
|
159
|
|
|
$
|
305
|
|
|
$
|
(108)
|
|
|
$
|
3,096
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
$
|
14,616
|
|
|
$
|
2,875
|
|
|
$
|
5,054
|
|
|
$
|
1,111
|
|
|
$
|
2,997
|
|
|
$
|
3,656
|
|
|
$
|
543
|
|
|
$
|
30,852
|
|
|
Intersegment net revenue
|
526
|
|
|
112
|
|
|
104
|
|
|
7
|
|
|
16
|
|
|
15
|
|
|
—
|
|
|
780
|
|
|
Total segment net revenue
|
$
|
15,142
|
|
|
$
|
2,987
|
|
|
$
|
5,158
|
|
|
$
|
1,118
|
|
|
$
|
3,013
|
|
|
$
|
3,671
|
|
|
$
|
543
|
|
|
$
|
31,632
|
|
|
Segment earnings (loss) from operations
|
$
|
1,306
|
|
|
$
|
384
|
|
|
$
|
830
|
|
|
$
|
(79)
|
|
|
$
|
339
|
|
|
$
|
286
|
|
|
$
|
(91)
|
|
|
$
|
2,975
|
|
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
The reconciliation of segment operating results to Hewlett Packard Enterprise consolidated results was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the fiscal years ended October 31,
|
|
|
2020
|
|
2019
|
|
2018
|
|
|
In millions
|
|
Net revenue:
|
|
|
|
|
|
|
Total segments
|
$
|
27,580
|
|
|
$
|
29,750
|
|
|
$
|
31,632
|
|
|
Elimination of intersegment net revenue
|
(598)
|
|
|
(615)
|
|
|
(780)
|
|
|
Total Hewlett Packard Enterprise consolidated net revenue
|
$
|
26,982
|
|
|
$
|
29,135
|
|
|
$
|
30,852
|
|
|
Earnings before taxes:
|
|
|
|
|
|
|
Total segment earnings from operations
|
$
|
2,303
|
|
|
$
|
3,096
|
|
|
$
|
2,975
|
|
|
Unallocated corporate costs and eliminations
|
(238)
|
|
|
(286)
|
|
|
(259)
|
|
|
Unallocated stock-based compensation expense
|
(57)
|
|
|
(59)
|
|
|
(73)
|
|
|
Amortization of initial direct costs
|
(10)
|
|
|
—
|
|
|
—
|
|
|
Amortization of intangible assets
|
(379)
|
|
|
(267)
|
|
|
(294)
|
|
|
Impairment of goodwill
|
(865)
|
|
|
—
|
|
|
(88)
|
|
|
Restructuring charges
|
—
|
|
|
—
|
|
|
(19)
|
|
|
Transformation costs
|
(950)
|
|
|
(453)
|
|
|
(414)
|
|
|
Disaster (charge) recovery
|
(26)
|
|
|
7
|
|
|
—
|
|
|
Acquisition, disposition and other related charges
|
(107)
|
|
|
(764)
|
|
|
(82)
|
|
|
Separation costs
|
—
|
|
|
—
|
|
|
(9)
|
|
|
Interest and other, net
|
(215)
|
|
|
(177)
|
|
|
(274)
|
|
|
Tax indemnification adjustments
|
(101)
|
|
|
377
|
|
|
(1,354)
|
|
|
Non-service net periodic benefit credit
|
136
|
|
|
59
|
|
|
121
|
|
|
Earnings from equity interests
|
67
|
|
|
20
|
|
|
38
|
|
|
Total Hewlett Packard Enterprise consolidated earnings (loss) from continuing operations before taxes
|
$
|
(442)
|
|
|
$
|
1,553
|
|
|
$
|
268
|
|
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
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 Hewlett Packard Enterprise consolidated assets were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of October 31,
|
|
|
2020
|
|
2019
|
|
|
In millions
|
|
Compute
|
$
|
14,858
|
|
|
$
|
14,066
|
|
|
HPC & MCS
|
6,192
|
|
|
6,819
|
|
|
Storage
|
6,796
|
|
|
7,214
|
|
|
A&PS
|
477
|
|
|
440
|
|
|
Intelligent Edge
|
4,343
|
|
|
3,318
|
|
|
Financial Services
|
14,765
|
|
|
14,700
|
|
|
Corporate Investments
|
467
|
|
|
461
|
|
|
Corporate and unallocated assets
|
6,117
|
|
|
4,785
|
|
|
Total Hewlett Packard Enterprise consolidated assets
|
$
|
54,015
|
|
|
$
|
51,803
|
|
Major Customers
No single customer represented 10% or more of Hewlett Packard Enterprise's total net revenue in any fiscal year presented.
Geographic Information
Net revenue by country is based upon the sales location that predominately represents the customer location. For each of the fiscal years of 2020, 2019 and 2018, other than the U.S., no country represented more than 10% of Hewlett Packard Enterprise's net revenue.
Net revenue by country in which Hewlett Packard Enterprise operates was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the fiscal years ended October 31,
|
|
|
2020
|
|
2019
|
|
2018
|
|
|
In millions
|
|
Americas
|
|
|
|
|
|
|
U.S.
|
$
|
9,162
|
|
|
$
|
9,582
|
|
|
$
|
10,192
|
|
|
Americas excluding U.S.
|
1,700
|
|
|
1,922
|
|
|
2,135
|
|
|
Total Americas
|
10,862
|
|
|
11,504
|
|
|
12,327
|
|
|
Europe, Middle East and Africa
|
9,745
|
|
|
10,828
|
|
|
11,295
|
|
|
Asia Pacific and Japan
|
6,375
|
|
|
6,803
|
|
|
7,230
|
|
|
Total Hewlett Packard Enterprise consolidated net revenue
|
$
|
26,982
|
|
|
$
|
29,135
|
|
|
$
|
30,852
|
|
Net property, plant and equipment by country in which Hewlett Packard Enterprise operates was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of October 31,
|
|
|
2020
|
|
2019
|
|
|
In millions
|
|
U.S.
|
$
|
2,762
|
|
|
$
|
2,894
|
|
|
Other countries
|
2,863
|
|
|
3,160
|
|
|
Total net property, plant and equipment
|
$
|
5,625
|
|
|
$
|
6,054
|
|
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 3: Transformation Programs
Transformation Costs
Cost Optimization and Prioritization Plan
During fiscal 2020, the Company incurred $384 million of charges related to the cost optimization and prioritization plan which is recorded within Transformation costs in the Consolidated Statements of Earnings, the components of which were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal year ended October 31,
|
|
|
2020
|
|
|
|
|
|
|
In millions
|
|
Program management
|
$
|
55
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring charges
|
329
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Transformation Costs
|
$
|
384
|
|
|
|
|
|
HPE Next
During fiscal 2020, 2019 and 2018 the Company incurred $569 million, $462 million and $445 million, respectively, in net charges associated with HPE Next. For fiscal 2020, 2019 and 2018, $566 million, $453 million and $414 million were recorded within Transformation costs, and $3 million, $9 million and $11 million were recorded within Non-service net periodic benefit credit in the Consolidated Statements of Earnings, respectively. In fiscal 2018 the Company also incurred $20 million of transformation costs related to cumulative translation adjustments as a result of country exits associated with HPE Next which was recorded within Interest and other, net in the Consolidated Statements of Earnings.
The components of Transformation costs relating to HPE Next were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal years ended October 31,
|
|
|
2020
|
|
2019
|
|
2018
|
|
|
In millions
|
|
Program management
|
$
|
35
|
|
|
$
|
29
|
|
|
$
|
95
|
|
|
IT costs
|
100
|
|
|
134
|
|
|
148
|
|
|
Restructuring charges
|
440
|
|
|
219
|
|
|
531
|
|
|
Gains on real estate sales
|
(45)
|
|
|
(7)
|
|
|
(405)
|
|
|
Impairment on real estate assets
|
10
|
|
|
47
|
|
|
—
|
|
|
Other
|
29
|
|
|
40
|
|
|
76
|
|
|
Total Transformation Costs
|
$
|
569
|
|
|
$
|
462
|
|
|
$
|
445
|
|
Restructuring Plan
On May 19, 2020, the Company's Board of Directors approved a restructuring plan in connection with the cost optimization and prioritization plan. As of October 31, 2020, the Company estimates that it will incur aggregate charges of approximately $1.3 billion, through fiscal 2023 in connection with the cost optimization and prioritization plan which relates to labor restructuring and non-labor restructuring, primarily relating to real estate site exits. The changes to the workforce will vary by country, based on business needs, local legal requirements and consultations with employee works councils and other employee representatives, as appropriate.
On October 16, 2017, the Company's Board of Directors approved a restructuring plan in connection with the HPE Next (the "HPE Next Plan") and on September 20, 2018, the Company's Board of Directors approved a revision to that restructuring plan. As of October 31, 2020, the headcount exits under HPE Next Plan are complete. The Company estimates that it will incur charges through fiscal 2023, relating to non-labor restructuring, primarily from real estate site exits.
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
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
|
|
In millions
|
|
Liability as of October 31, 2017
|
$
|
—
|
|
$
|
—
|
|
|
$
|
296
|
|
$
|
—
|
|
|
Charges
|
—
|
|
—
|
|
|
470
|
|
61
|
|
|
Cash payments
|
—
|
|
—
|
|
|
(452)
|
|
(14)
|
|
|
Non-cash items
|
—
|
|
—
|
|
|
(23)
|
|
(14)
|
|
|
Liability as of October 31, 2018
|
$
|
—
|
|
$
|
—
|
|
|
$
|
291
|
|
$
|
33
|
|
|
Charges
|
—
|
|
—
|
|
|
154
|
|
65
|
|
|
Cash payments
|
—
|
|
—
|
|
|
(256)
|
|
(37)
|
|
|
Non-cash items
|
—
|
|
—
|
|
|
(11)
|
|
(19)
|
|
|
Liability as of October 31, 2019
|
$
|
—
|
|
$
|
—
|
|
|
$
|
178
|
|
$
|
42
|
|
|
Charges
|
230
|
|
99
|
|
|
341
|
|
99
|
|
|
Cash payments
|
(18)
|
|
(3)
|
|
|
(383)
|
|
(50)
|
|
|
Non-cash items
|
(2)
|
|
(60)
|
|
|
8
|
|
(56)
|
|
|
Liability as of October 31, 2020
|
$
|
210
|
|
$
|
36
|
|
|
$
|
144
|
|
$
|
35
|
|
|
Total costs incurred to date as of October 31, 2020
|
$
|
230
|
|
$
|
99
|
|
|
$
|
1,261
|
|
$
|
225
|
|
|
Total expected costs to be incurred as of October 31, 2020
|
$
|
700
|
|
$
|
610
|
|
|
$
|
1,261
|
|
$
|
248
|
|
The current restructuring liability related to the transformation programs, reported in Accrued restructuring in the Consolidated Balance Sheets at October 31, 2020 and 2019, was $359 million and $164 million, respectively. The non-current restructuring liability related to the transformation programs, reported in Other non-current liabilities in the Consolidated Balance Sheets as of October 31, 2020 and 2019 was $66 million and $56 million, respectively.
Note 4: Retirement and Post-Retirement Benefit Plans
Defined Benefit Plans
The Company sponsors defined benefit pension plans worldwide, the most significant of which are the United Kingdom ("UK") and Germany. The pension plan in the UK is closed to new entrants, however, members continue to earn benefit accruals. This plan provides benefits based on final pay and years of service and generally requires contributions from members. The German pension program that is open to new hires consists of cash balance plans that provide employer credits as a percentage of pay, certain employee pay deferrals and employer matching contributions. There also are previously closed German pension programs that include cash balance and final average pay plans. These previously closed pension programs comprise the majority of the pension obligations in Germany.
Post-Retirement Benefit Plans
The Company sponsors retiree health and welfare benefit plans, the most significant of which is in the U.S. Generally, employees hired before August 2008 are eligible for employer credits under the Hewlett Packard Enterprise Retirement Medical Savings Account Plan ("RMSA") upon attaining age 45. Employer credits to the RMSA available after September 2008 are provided in the form of matching credits on employee contributions made to a voluntary employee beneficiary association. Upon retirement, employees may use these employer credits for the reimbursement of certain eligible medical expenses.
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Defined Contribution Plans
The Company offers various defined contribution plans for U.S. and non-U.S. employees. The Company's defined contribution expense was approximately $160 million in fiscal 2020, $181 million in fiscal 2019 and $158 million in fiscal 2018. U.S. employees are automatically enrolled in the Hewlett Packard Enterprise Company 401(k) Plan ("HPE 401(k) Plan"), when they meet eligibility requirements, unless they decline participation. Effective January 1, 2018, the HPE 401(k) Plan's quarterly employer matching contributions are 100% of an employee's contributions, up to a maximum of 4% of eligible compensation. Due to cost containment measures put in place in response to COVID-19, the Company suspended the employer match for U.S. employees from July 1, 2020 through the end of the calendar year with the expectation that the match will resume in 2021.
Pension Benefit Expense
The Company's net pension and post-retirement benefit costs that were directly attributable to the eligible employees, retirees and other former employees of Hewlett Packard Enterprise and recognized in the Consolidated Statements of Earnings for fiscal 2020, 2019 and 2018 are presented in the table below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of October 31,
|
|
|
2020
|
|
2019
|
|
2018
|
|
2020
|
|
2019
|
|
2018
|
|
|
Defined
Benefit Plans
|
|
Post-Retirement
Benefit Plans
|
|
|
In millions
|
|
Service cost
|
$
|
94
|
|
|
$
|
85
|
|
|
$
|
105
|
|
|
$
|
1
|
|
|
$
|
1
|
|
|
$
|
1
|
|
|
Interest cost(1)
|
143
|
|
|
215
|
|
|
225
|
|
|
5
|
|
|
7
|
|
|
7
|
|
|
Expected return on plan assets(1)
|
(544)
|
|
|
(511)
|
|
|
(567)
|
|
|
(1)
|
|
|
(1)
|
|
|
(1)
|
|
|
Amortization and deferrals(1):
|
|
|
|
|
|
|
|
|
|
|
|
|
Actuarial loss (gain)
|
264
|
|
|
235
|
|
|
211
|
|
|
(1)
|
|
|
(4)
|
|
|
(3)
|
|
|
Prior service benefit
|
(14)
|
|
|
(15)
|
|
|
(17)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Net periodic benefit cost
|
(57)
|
|
|
9
|
|
|
(43)
|
|
|
4
|
|
|
3
|
|
|
4
|
|
|
Curtailment gain(1)
|
—
|
|
|
—
|
|
|
(1)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Settlement loss(1)
|
10
|
|
|
13
|
|
|
20
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Special termination benefits(1)
|
2
|
|
|
2
|
|
|
6
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net benefit (credit) cost
|
(45)
|
|
|
24
|
|
|
(18)
|
|
|
4
|
|
|
3
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)These non-service components of net periodic benefit cost are included in Non-service net periodic benefit credit in the Consolidated Statements of Earnings.
The weighted-average assumptions used to calculate the net benefit (credit) cost in the table above for fiscal 2020, 2019 and 2018 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of October 31,
|
|
|
2020
|
|
2019
|
|
2018
|
|
2020
|
|
2019
|
|
2018
|
|
|
Defined
Benefit Plans
|
|
Post-Retirement
Benefit Plans
|
|
Discount rate used to determine benefit obligation
|
1.2
|
%
|
|
2.1
|
%
|
|
2.0
|
%
|
|
3.4
|
%
|
|
4.9
|
%
|
|
4.5
|
%
|
|
Discount rate used to determine service cost
|
1.6
|
%
|
|
2.3
|
%
|
|
2.4
|
%
|
|
3.0
|
%
|
|
4.4
|
%
|
|
3.7
|
%
|
|
Discount rate used to determine interest cost
|
1.0
|
%
|
|
1.8
|
%
|
|
1.7
|
%
|
|
3.2
|
%
|
|
4.7
|
%
|
|
4.2
|
%
|
|
Expected increase in compensation levels
|
2.5
|
%
|
|
2.5
|
%
|
|
2.3
|
%
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Expected long-term return on plan assets
|
4.1
|
%
|
|
4.3
|
%
|
|
4.4
|
%
|
|
2.3
|
%
|
|
2.6
|
%
|
|
2.6
|
%
|
To estimate the service and interest cost components of net periodic benefit cost for defined benefit plans that use the yield curve approach, which represent substantially all of the Company's defined benefit plans, the Company has elected to use
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
a full yield curve approach in the estimation of these components of benefit cost by applying the specific spot rates along the yield curve used in the determination of the benefit obligation to the relevant projected cash flows.
Funded Status
The funded status of the plans was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of October 31,
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
|
Defined
Benefit Plans
|
|
Post-Retirement
Benefit Plans
|
|
|
In millions
|
|
Change in fair value of plan assets:
|
|
|
|
|
|
|
|
|
Fair value—beginning of year
|
$
|
13,434
|
|
|
$
|
12,167
|
|
|
$
|
54
|
|
|
$
|
52
|
|
|
Transfers
|
—
|
|
|
(5)
|
|
|
—
|
|
|
—
|
|
|
Addition/deletion of plans(1)
|
5
|
|
|
(14)
|
|
|
—
|
|
|
—
|
|
|
Actual return on plan assets
|
557
|
|
|
1,542
|
|
|
—
|
|
|
1
|
|
|
Employer contributions
|
167
|
|
|
166
|
|
|
5
|
|
|
5
|
|
|
Participant contributions
|
24
|
|
|
24
|
|
|
5
|
|
|
4
|
|
|
Benefits paid
|
(410)
|
|
|
(387)
|
|
|
(7)
|
|
|
(8)
|
|
|
Settlement
|
(51)
|
|
|
(67)
|
|
|
—
|
|
|
—
|
|
|
Currency impact
|
401
|
|
|
8
|
|
|
—
|
|
|
—
|
|
|
Fair value—end of year
|
$
|
14,127
|
|
|
$
|
13,434
|
|
|
$
|
57
|
|
|
$
|
54
|
|
|
Change in benefit obligation:
|
|
|
|
|
|
|
|
|
Projected benefit obligation—beginning of year
|
$
|
14,225
|
|
|
$
|
12,668
|
|
|
$
|
179
|
|
|
$
|
160
|
|
|
Transfers
|
—
|
|
|
(7)
|
|
|
—
|
|
|
—
|
|
|
Addition/deletion of plans(1)
|
5
|
|
|
(12)
|
|
|
—
|
|
|
—
|
|
|
Service cost
|
94
|
|
|
85
|
|
|
1
|
|
|
1
|
|
|
Interest cost
|
143
|
|
|
215
|
|
|
5
|
|
|
7
|
|
|
Participant contributions
|
24
|
|
|
24
|
|
|
5
|
|
|
4
|
|
|
Actuarial (gain) loss
|
368
|
|
|
1,710
|
|
|
(9)
|
|
|
17
|
|
|
Benefits paid
|
(410)
|
|
|
(387)
|
|
|
(7)
|
|
|
(8)
|
|
|
Plan amendments
|
(3)
|
|
|
12
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
Settlement
|
(51)
|
|
|
(67)
|
|
|
—
|
|
|
—
|
|
|
Special termination benefits
|
2
|
|
|
2
|
|
|
—
|
|
|
—
|
|
|
Currency impact
|
448
|
|
|
(18)
|
|
|
(7)
|
|
|
(2)
|
|
|
Projected benefit obligation—end of year
|
$
|
14,845
|
|
|
$
|
14,225
|
|
|
$
|
167
|
|
|
$
|
179
|
|
|
Funded status at end of year
|
$
|
(718)
|
|
|
$
|
(791)
|
|
|
$
|
(110)
|
|
|
$
|
(125)
|
|
|
Accumulated benefit obligation
|
$
|
14,619
|
|
|
$
|
13,995
|
|
|
$
|
—
|
|
|
$
|
—
|
|
(1)Includes the addition/deletion of plans resulting from acquisitions.
The weighted-average assumptions used to calculate the projected benefit obligations were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of October 31,
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
|
Defined Benefit Plans
|
|
Post-Retirement Benefit Plans
|
|
Discount rate
|
1.0
|
%
|
|
1.2
|
%
|
|
2.8
|
%
|
|
3.4
|
%
|
|
Expected increase in compensation levels
|
2.5
|
%
|
|
2.5
|
%
|
|
—
|
|
|
—
|
|
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
The net amounts recognized for defined benefit and post-retirement benefit plans in the Company's Consolidated Balance Sheets were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of October 31,
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
|
Defined Benefit Plans
|
|
Post-Retirement Benefit Plans
|
|
|
In millions
|
|
Non-current assets
|
$
|
1,046
|
|
|
$
|
864
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Current liabilities
|
(49)
|
|
|
(45)
|
|
|
(6)
|
|
|
(6)
|
|
|
Non-current liabilities
|
(1,715)
|
|
|
(1,610)
|
|
|
(104)
|
|
|
(119)
|
|
|
Funded status at end of year
|
$
|
(718)
|
|
|
$
|
(791)
|
|
|
$
|
(110)
|
|
|
$
|
(125)
|
|
The following table summarizes the pre-tax net actuarial loss and prior service benefit recognized in accumulated other comprehensive loss for the defined benefit plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of October 31, 2020
|
|
|
Defined
Benefit Plans
|
|
Post-Retirement
Benefit Plans
|
|
|
In millions
|
|
Net actuarial loss
|
$
|
3,633
|
|
|
$
|
6
|
|
|
Prior service benefit
|
(28)
|
|
|
—
|
|
|
Total recognized in accumulated other comprehensive loss
|
$
|
3,605
|
|
|
$
|
6
|
|
The following table summarizes the net actuarial loss and prior service benefit for plans that are expected to be amortized from accumulated other comprehensive loss and recognized as components of net periodic benefit cost (credit) during the next fiscal year.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of October 31, 2020
|
|
|
Defined
Benefit Plans
|
|
Post-Retirement
Benefit Plans
|
|
|
In millions
|
|
Net actuarial loss (gain)
|
$
|
290
|
|
|
$
|
(2)
|
|
|
Prior service benefit
|
(13)
|
|
|
—
|
|
|
Total expected to be recognized in net periodic benefit cost (credit)
|
$
|
277
|
|
|
$
|
(2)
|
|
Defined benefit plans with projected benefit obligations exceeding the fair value of plan assets were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of October 31,
|
|
|
2020
|
|
2019
|
|
|
In millions
|
|
Aggregate fair value of plan assets
|
$
|
4,160
|
|
|
$
|
3,585
|
|
|
Aggregate projected benefit obligation
|
$
|
5,924
|
|
|
$
|
5,238
|
|
Defined benefit plans with accumulated benefit obligations exceeding the fair value of plan assets were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of October 31,
|
|
|
2020
|
|
2019
|
|
|
In millions
|
|
Aggregate fair value of plan assets
|
$
|
4,094
|
|
|
$
|
3,574
|
|
|
Aggregate accumulated benefit obligation
|
$
|
5,723
|
|
|
$
|
5,088
|
|
Fair Value of Plan Assets
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
The Company pays the U.S. defined benefit plan obligations when they come due since these plans are unfunded. The table below sets forth the fair value of non-U.S. defined benefit plan assets by asset category within the fair value hierarchy as of October 31, 2020 and 2019. Reclassifications of certain prior year investment balances in asset categories have been made to conform to the current-year presentation.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
October 31, 2020
|
|
As of
October 31, 2019
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
|
In millions
|
|
Asset Category:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
|
$
|
155
|
|
|
$
|
117
|
|
|
$
|
—
|
|
|
$
|
272
|
|
|
$
|
172
|
|
|
$
|
8
|
|
|
$
|
—
|
|
|
$
|
180
|
|
|
Non-U.S.
|
955
|
|
|
217
|
|
|
—
|
|
|
1,172
|
|
|
836
|
|
|
222
|
|
|
—
|
|
|
1,058
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
|
—
|
|
|
1,778
|
|
|
—
|
|
|
1,778
|
|
|
—
|
|
|
1,502
|
|
|
—
|
|
|
1,502
|
|
|
Government(1)
|
—
|
|
|
6,007
|
|
|
—
|
|
|
6,007
|
|
|
—
|
|
|
5,344
|
|
|
—
|
|
|
5,344
|
|
|
Government at NAV(2)
|
|
|
|
|
|
|
875
|
|
|
|
|
|
|
|
|
897
|
|
|
Other(3)
|
—
|
|
|
683
|
|
|
555
|
|
|
1,238
|
|
|
—
|
|
|
361
|
|
|
401
|
|
|
762
|
|
|
Alternative investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Private Equity
|
—
|
|
|
4
|
|
|
35
|
|
|
39
|
|
|
—
|
|
|
2
|
|
|
42
|
|
|
44
|
|
|
Hybrids(4)
|
18
|
|
|
1,486
|
|
|
90
|
|
|
1,594
|
|
|
—
|
|
|
1,343
|
|
|
71
|
|
|
1,414
|
|
|
Hybrids at NAV(5)
|
|
|
|
|
|
|
504
|
|
|
|
|
|
|
|
|
491
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Contractual Funds at NAV(6)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equities at NAV
|
|
|
|
|
|
|
1,393
|
|
|
|
|
|
|
|
|
1,398
|
|
|
Fixed Income at NAV
|
|
|
|
|
|
|
782
|
|
|
|
|
|
|
|
|
724
|
|
|
Emerging Markets at NAV
|
|
|
|
|
|
|
362
|
|
|
|
|
|
|
|
|
318
|
|
|
Alternative investments at NAV
|
|
|
|
|
|
|
350
|
|
|
|
|
|
|
|
|
379
|
|
|
Real Estate Funds
|
27
|
|
|
229
|
|
|
39
|
|
|
295
|
|
|
8
|
|
|
203
|
|
|
39
|
|
|
250
|
|
|
Insurance Group Annuity Contracts
|
—
|
|
|
56
|
|
|
36
|
|
|
92
|
|
|
—
|
|
|
54
|
|
|
37
|
|
|
91
|
|
|
Cash and Cash Equivalents
|
241
|
|
|
176
|
|
|
—
|
|
|
417
|
|
|
252
|
|
|
310
|
|
|
—
|
|
|
562
|
|
|
Other(7)
|
24
|
|
|
95
|
|
|
1
|
|
|
120
|
|
|
30
|
|
|
51
|
|
|
1
|
|
|
82
|
|
|
Obligation to return cash received from repurchase agreements(1)
|
—
|
|
|
(3,163)
|
|
|
—
|
|
|
(3,163)
|
|
|
—
|
|
|
(2,062)
|
|
|
—
|
|
|
(2,062)
|
|
|
Total
|
$
|
1,420
|
|
|
$
|
7,685
|
|
|
$
|
756
|
|
|
$
|
14,127
|
|
|
$
|
1,298
|
|
|
$
|
7,338
|
|
|
$
|
591
|
|
|
$
|
13,434
|
|
(1)Repurchase agreements, primarily in the UK, represent the plans' short-term borrowing to hedge against interest rate and inflation risks. Investments in approximately $5 billion and $4 billion of government bonds collateralize this short-term borrowing at October 31, 2020 and 2019, respectively. The plans have an obligation to return the cash after the term of the agreements. Due to the short-term nature of the agreements, the outstanding balance of the obligation approximates fair value.
(2)Includes a fund that invests in various government bonds issued by worldwide governments, interest rate swaps, and cash, to match or slightly outperform the benchmark of the future liabilities of the fund. While the fund is not publicly traded, the custodian strikes a net asset value daily. There are no redemption restrictions or future commitments on these investments.
(3)Includes funds that invest primarily in asset-backed securities, mortgage backed securities, collateralized loan obligations, and/or private debt investments.
(4)Includes funds, primarily in the UK, that invest in both private and public equities, as well as emerging markets across all sectors. The funds also hold fixed income and derivative instruments to hedge interest rate and inflation risk. In addition, the funds include units in transferable securities, collective investment schemes, money market funds, asset-backed income, cash, and deposits.
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
(5)Includes a pooled fund in the UK, that seeks a rate of return with direct or indirect linkage to UK inflation by investing in vehicles including bonds, long lease property, income strips, asset-backed securities, and index linked assets. Units are available for subscription on the first day of each calendar month at net asset value. There are no redemption restrictions or future commitments on these investments.
(6)HPE Invest Common Contractual Funds (CCFs) are investment arrangements in which institutional investors pool their assets. Units may be acquired in four different sub-funds focused on equities, fixed income, alternative investments, and emerging markets. Each sub-fund is invested in accordance with the fund's investment objective and units are issued in relation to each sub-fund. While the sub-funds are not publicly traded, the custodian strikes a net asset value either once or twice a month, depending on the sub-fund. There are no redemption restrictions or future commitments on these investments.
(7)Includes international insured contracts, derivative instruments, and unsettled transactions.
As of October 31, 2020 post-retirement benefit plan assets of $57 million were invested in publicly traded registered investment entities of which $46 million are classified within Level 1 and $11 million within Level 2 of the fair value hierarchy. As of October 2019, post-retirement benefit plan assets of $54 million were invested in publicly traded registered investment entities, classified within Level 1 of the fair value hierarchy.
Changes in fair value measurements of Level 3 investments for the non-U.S. defined benefit plans were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal year ended October 31, 2020
|
|
|
|
|
Alternative
Investments
|
|
|
|
|
|
|
|
|
|
|
Debt-Other
|
|
Private
Equity
|
Hybrids
|
|
Real
Estate
Funds
|
|
Insurance
Group
Annuities
|
|
Other
|
|
Total
|
|
|
|
|
In millions
|
|
Balance at beginning of year
|
$
|
401
|
|
|
$
|
42
|
|
$
|
71
|
|
|
$
|
39
|
|
|
$
|
37
|
|
|
$
|
1
|
|
|
$
|
591
|
|
|
Actual return on plan assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Relating to assets held at the reporting date
|
(25)
|
|
|
(3)
|
|
(3)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(31)
|
|
|
Relating to assets sold during the period
|
—
|
|
|
4
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
4
|
|
|
Purchases, sales, and settlements
|
179
|
|
|
(8)
|
|
22
|
|
|
—
|
|
|
(1)
|
|
|
—
|
|
|
192
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year
|
$
|
555
|
|
|
$
|
35
|
|
$
|
90
|
|
|
$
|
39
|
|
|
$
|
36
|
|
|
$
|
1
|
|
|
$
|
756
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal year ended October 31, 2019
|
|
|
|
|
Alternative
Investments
|
|
|
|
|
|
|
|
|
|
|
Debt-Other
|
|
Private
Equity
|
Hybrids
|
|
Real
Estate
Funds
|
|
Insurance
Group
Annuities
|
|
Other
|
|
Total
|
|
|
In millions
|
|
Balance at beginning of year
|
$
|
102
|
|
|
$
|
40
|
|
$
|
30
|
|
|
$
|
37
|
|
|
$
|
38
|
|
|
$
|
1
|
|
|
$
|
248
|
|
|
Actual return on plan assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Relating to assets held at the reporting date
|
69
|
|
|
1
|
|
—
|
|
|
2
|
|
|
—
|
|
|
—
|
|
|
72
|
|
|
Relating to assets sold during the period
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Purchases, sales, and settlements
|
230
|
|
|
1
|
|
41
|
|
|
—
|
|
|
(1)
|
|
|
—
|
|
|
271
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year
|
$
|
401
|
|
|
$
|
42
|
|
$
|
71
|
|
|
$
|
39
|
|
|
$
|
37
|
|
|
$
|
1
|
|
|
$
|
591
|
|
The following is a description of the valuation methodologies used to measure plan assets at fair value.
Investments in publicly traded equity securities are valued using the closing price on the measurement date as reported on the stock exchange on which the individual securities are traded. For corporate, government backed debt securities, and some other investments, fair value is based on observable inputs of comparable market transactions. The valuation of certain real estate funds, insurance group annuity contracts and alternative investments, such as limited partnerships and joint ventures, may require significant management judgment. The valuation is generally based on fair value as reported by the asset manager and adjusted for cash flows, if necessary. In making such an assessment, a variety of factors are reviewed by management,
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
including, but are not limited to, the timeliness of fair value as reported by the asset manager and changes in general economic and market conditions subsequent to the last fair value reported by the asset manager. Cash and cash equivalents includes money market funds, which are valued based on cost, which approximates fair value. Other than those assets that have quoted prices from an active market, investments are generally classified in Level 2 or Level 3 of the fair value hierarchy based on the lowest level input that is significant to the fair value measure in its entirety. Investments measured using net asset value as a practical expedient are not categorized within the fair value hierarchy.
Plan Asset Allocations
The weighted-average target and actual asset allocations across the benefit plans at the respective measurement dates for the non-U.S. defined benefit plans were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Defined
Benefit Plans
|
|
|
|
|
Plan Assets
|
|
Asset Category
|
2020
Target
Allocation
|
|
2020
|
|
2019
|
|
Public equity securities
|
|
|
22.6
|
%
|
|
22.0
|
%
|
|
Private/hybrid equity securities
|
|
|
17.6
|
%
|
|
17.3
|
%
|
|
Real estate and other
|
|
|
2.9
|
%
|
|
2.5
|
%
|
|
Equity-related investments
|
44.1
|
%
|
|
43.1
|
%
|
|
41.8
|
%
|
|
Debt securities
|
54.4
|
%
|
|
53.9
|
%
|
|
54.0
|
%
|
|
Cash and cash equivalents
|
1.5
|
%
|
|
3.0
|
%
|
|
4.2
|
%
|
|
Total
|
100.0
|
%
|
|
100.0
|
%
|
|
100.0
|
%
|
For the Company's post-retirement benefit plans, approximately 80% of the plan assets are invested in cash and cash equivalents and approximately 20% in multi-asset credit investments which consists primarily of investment grade credit, emerging market debt and high yield bonds.
Investment Policy
The Company's investment strategy is to seek a competitive rate of return relative to an appropriate level of risk depending on the funded status of each plan and the timing of expected benefit payments. The majority of the plans' investment managers employ active investment management strategies with the goal of outperforming the broad markets in which they invest. Risk management practices include diversification across asset classes and investment styles and periodic rebalancing toward asset allocation targets. A number of the plans' investment managers are authorized to utilize derivatives for investment or liability exposures, and the Company may utilize derivatives to effect asset allocation changes or to hedge certain investment or liability exposures.
Asset allocation decisions are typically made by an independent board of trustees for the specific plan. Investment objectives are designed to generate returns that will enable the plan to meet its future obligations. In some countries, local regulations may restrict asset allocations, typically leading to a higher percentage of investment in fixed income securities than would otherwise be deployed. The Company reviews the investment strategy and provides a recommended list of investment managers for each country plan, with final decisions on asset allocation and investment managers made by the board of trustees or investment committees for the specific plan.
Basis for Expected Long-Term Rate of Return on Plan Assets
The expected long-term rate of return on plan assets reflects the expected returns for each major asset class in which the plan invests and the weight of each asset class in the target mix. Expected asset returns reflect the current yield on government bonds, risk premiums for each asset class and expected real returns, which considers each country's specific inflation outlook. Because the Company's investment policy is to employ primarily active investment managers who seek to outperform the broader market, the expected returns are adjusted to reflect the expected additional returns, net of fees.
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Employer Contributions and Funding Policy
During fiscal 2020, the Company contributed approximately $167 million to its non-U.S. pension plans and paid $5 million to cover benefit claims under the Company's post-retirement benefit plans.
During fiscal 2021, the Company expects to contribute approximately $192 million to its non-U.S. pension plans and an additional $2 million to cover benefit payments to U.S. non-qualified plan participants. In addition, the Company expects to pay approximately $6 million to cover benefit claims for its post-retirement benefit plans. The Company's policy is to fund its pension plans so that it makes at least the minimum contribution required by various authorities including local government and taxing authorities.
Estimated Future Benefits Payments
As of October 31, 2020, estimated future benefits payments for the Company's retirement plans were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal year
|
Defined
Benefit Plans
|
|
Post-Retirement
Benefit Plans
|
|
|
In millions
|
|
2021
|
$
|
483
|
|
|
$
|
10
|
|
|
2022
|
481
|
|
|
11
|
|
|
2023
|
496
|
|
|
11
|
|
|
2024
|
509
|
|
|
11
|
|
|
2025
|
533
|
|
|
11
|
|
|
Next five fiscal years to October 31, 2030
|
2,842
|
|
|
55
|
|
Note 5: Stock-Based Compensation
The total number of shares of the Company's common stock authorized under the Hewlett Packard Enterprise Company 2015 Stock Incentive Plan (the "Plan") is 277 million. The Plan provides for the grant of various types of awards including restricted stock awards, stock options, and performance-based awards. These awards generally vest over three years from the grant date. The Company's stock-based incentive compensation program also includes various replacement awards through acquisitions under which stock-based awards are outstanding.
Stock-Based Compensation Expense
Stock-based compensation expense and the resulting tax benefits were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal years ended October 31,
|
|
|
2020
|
|
2019
|
|
2018
|
|
|
In millions
|
|
Stock-based compensation expense
|
$
|
278
|
|
|
$
|
270
|
|
|
$
|
309
|
|
|
Income tax benefit
|
(51)
|
|
|
(50)
|
|
|
(56)
|
|
|
Stock-based compensation expense, net of tax
|
$
|
227
|
|
|
$
|
220
|
|
|
$
|
253
|
|
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Stock-based compensation expense as presented in the table above is recorded within the following cost and expense lines in the Consolidated Statement of Earnings.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the fiscal years ended October 31,
|
|
|
2020
|
|
2019
|
|
2018
|
|
|
In millions
|
|
Cost of sales
|
$
|
37
|
|
|
$
|
37
|
|
|
$
|
39
|
|
|
Research and development
|
81
|
|
|
70
|
|
|
73
|
|
|
Selling, general and administrative
|
156
|
|
|
161
|
|
|
174
|
|
|
Transformation costs
|
—
|
|
|
2
|
|
|
3
|
|
|
Acquisition, disposition and other related charges
|
4
|
|
|
—
|
|
|
10
|
|
|
Separation costs
|
—
|
|
|
—
|
|
|
10
|
|
|
Stock-based compensation expense
|
$
|
278
|
|
|
$
|
270
|
|
|
$
|
309
|
|
Employee Stock Purchase Plan
Effective November 1, 2015, the Company adopted the Hewlett Packard Enterprise Company 2015 Employee Stock Purchase Plan ("ESPP"). The total number of shares of Company's common stock authorized under the ESPP was 80 million. The ESPP allows eligible employees to contribute up to 10% of their eligible compensation to purchase Hewlett Packard Enterprise's common stock. The ESPP provides for a discount not to exceed 15% and an offering period up to 24 months. The Company currently offers 6-month offering periods during which employees have the ability to purchase shares at 95% of the closing market price on the purchase date. No stock-based compensation expense was recorded in connection with those purchases, as the criteria of a non-compensatory plan were met.
Restricted Stock Units
Restricted stock units have forfeitable dividend equivalent rights equal to the dividend paid on common stock. Restricted stock units do not have the voting rights of common stock, and the shares underlying restricted stock units are not considered issued and outstanding upon grant. The fair value of the restricted stock units is the closing price of the Company's common stock on the grant date of the award. The Company expenses the fair value of restricted stock units ratably over the period during which the restrictions lapse.
The following table summarizes restricted stock unit activity for the year ended October 31, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
Weighted-
Average
Grant Date
Fair Value
Per Share
|
|
|
In thousands
|
|
|
|
Outstanding at beginning of year
|
39,700
|
|
|
$
|
14
|
|
|
Granted and replacement awards for acquisition
|
25,221
|
|
|
$
|
13
|
|
|
|
|
|
|
|
Vested
|
(18,469)
|
|
|
$
|
15
|
|
|
Forfeited/canceled
|
(4,127)
|
|
|
$
|
15
|
|
|
Outstanding at end of year
|
42,325
|
|
|
$
|
13
|
|
The total grant date fair value of restricted stock awards vested for Company employees in fiscal 2020, 2019 and 2018 was $254 million, $182 million and $355 million, respectively. As of October 31, 2020, there was $274 million of unrecognized pre-tax stock-based compensation expense related to unvested restricted stock units, which the Company expects to recognize over the remaining weighted-average vesting period of 1.4 years.
Performance Restricted Units
The Company issues performance stock units ("PSU") that vest on the satisfaction of service and performance conditions. The fair value of the PSUs is the closing price of the Company's common stock on the grant date of the award. The Company also issues performance-adjusted restricted stock units ("PARSU") that vest only on the satisfaction of service, performance and market conditions. The Company estimates the fair value of PARSUs subject to performance-contingent
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
vesting conditions using the Monte Carlo simulation model. The expenses associated with these performance restricted units were not material for any of the periods presented.
Stock Options
Stock options granted under the Plan are generally non-qualified stock options, but the Plan permits some options granted to qualify as incentive stock options under the U.S. Internal Revenue Code. The exercise price of a stock option is equal to the closing price of the Company's common stock on the option grant date. The majority of the stock options issued by the Company contain only service vesting conditions. The Company has also issued performance-contingent stock options that vest only on the satisfaction of both service and market conditions. In fiscal 2020, the Company did not issue stock options other than those that were replacement awards through the acquisition of Silver Peak.
The Company utilizes the Black-Scholes-Merton option pricing formula to estimate the fair value of stock options subject to service-based vesting conditions. The Company estimates the fair value of stock options subject to performance-contingent vesting conditions using a combination of a Monte Carlo simulation model and a lattice model, as these awards contain market conditions.
The following table summarizes stock option activity for the year ended October 31, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
Weighted-
Average
Exercise
Price
|
|
Weighted-
Average
Remaining
Contractual
Term
|
|
Aggregate
Intrinsic
Value
|
|
|
In thousands
|
|
|
|
In years
|
|
In millions
|
|
Outstanding at beginning of year
|
10,162
|
|
|
$
|
11
|
|
|
|
|
|
|
Replacement awards for acquisition(1)
|
10,340
|
|
|
$
|
2
|
|
|
|
|
|
|
Exercised
|
(1,454)
|
|
|
$
|
8
|
|
|
|
|
|
|
Forfeited/canceled/expired
|
(403)
|
|
|
$
|
9
|
|
|
|
|
|
|
Outstanding at end of year
|
18,645
|
|
|
$
|
6
|
|
|
5.1
|
|
$
|
64
|
|
|
Vested and expected to vest at end of year
|
17,547
|
|
|
$
|
7
|
|
|
5.0
|
|
$
|
58
|
|
|
Exercisable at end of year
|
8,586
|
|
|
$
|
11
|
|
|
2.8
|
|
$
|
6
|
|
(1)Fiscal 2020 represents replacement awards of stock options through acquisition of Silver Peak. The Company utilized a lattice model to estimate the fair value of outstanding replacement awards.
As of October 31, 2020, there was $41 million of unrecognized pre-tax stock-based compensation expense related to stock options, which the Company expects to recognize over the remaining weighted-average vesting period of 2.2 years.
The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value that option holders would have realized had all option holders exercised their options on the last trading day of fiscal 2020. The aggregate intrinsic value is the difference between the Company's closing common stock price on the last trading day of the respective fiscal year and the exercise price, multiplied by the number of in-the-money options. The total intrinsic value of options exercised in fiscal 2020, 2019 and 2018 was $9 million, $49 million and $200 million, respectively.
Cash received from option exercises and purchases under the Company's ESPP was $49 million, $112 million and $279 million in fiscal 2020, 2019 and 2018, respectively. The benefit realized for the tax deduction from option exercises in fiscal 2020, 2019 and 2018 was $2 million, $10 million and $61 million, respectively.
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 6: Taxes on Earnings
Provision for Taxes
The domestic and foreign components of Net earnings (loss) from continuing operations before taxes were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the fiscal years ended October 31,
|
|
|
2020
|
|
2019
|
|
2018
|
|
|
In millions
|
|
U.S.
|
$
|
(2,008)
|
|
|
$
|
(1,067)
|
|
|
$
|
(2,805)
|
|
|
Non-U.S.
|
1,566
|
|
|
2,620
|
|
|
3,073
|
|
|
|
$
|
(442)
|
|
|
$
|
1,553
|
|
|
$
|
268
|
|
The (Provision) benefit for taxes on Net earnings (loss) from continuing operations were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the fiscal years ended October 31,
|
|
|
2020
|
|
2019
|
|
2018
|
|
|
In millions
|
|
U.S. federal taxes:
|
|
|
|
|
|
|
Current
|
$
|
55
|
|
|
$
|
763
|
|
|
$
|
2,177
|
|
|
Deferred
|
149
|
|
|
(1,046)
|
|
|
(150)
|
|
|
Non-U.S. taxes:
|
|
|
|
|
|
|
Current
|
(284)
|
|
|
(246)
|
|
|
(419)
|
|
|
Deferred
|
133
|
|
|
(101)
|
|
|
188
|
|
|
State taxes:
|
|
|
|
|
|
|
Current
|
55
|
|
|
58
|
|
|
(52)
|
|
|
Deferred
|
12
|
|
|
68
|
|
|
—
|
|
|
|
$
|
120
|
|
|
$
|
(504)
|
|
|
$
|
1,744
|
|
The differences between the U.S. federal statutory income tax rate and the Company's effective tax rate were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the fiscal years ended October 31,
|
|
|
2020(1)
|
|
2019
|
|
2018
|
|
U.S. federal statutory income tax rate
|
21.0
|
%
|
|
21.0
|
%
|
|
23.3
|
%
|
|
State income taxes, net of federal tax benefit
|
0.9
|
%
|
|
(0.1)
|
%
|
|
4.3
|
%
|
|
Lower rates in other jurisdictions, net
|
13.6
|
%
|
|
(7.3)
|
%
|
|
(121.4)
|
%
|
|
Valuation allowance
|
20.8
|
%
|
|
5.8
|
%
|
|
(59.8)
|
%
|
|
U.S. permanent differences
|
(3.4)
|
%
|
|
6.0
|
%
|
|
39.3
|
%
|
|
U.S. R&D credit
|
8.4
|
%
|
|
(2.3)
|
%
|
|
(7.0)
|
%
|
|
Uncertain tax positions
|
7.6
|
%
|
|
(14.3)
|
%
|
|
(693.4)
|
%
|
|
Goodwill impairment
|
(41.2)
|
%
|
|
—
|
%
|
|
—
|
%
|
|
Impacts of the Tax Act
|
(0.4)
|
%
|
|
24.5
|
%
|
|
158.0
|
%
|
|
Other, net
|
(0.2)
|
%
|
|
(0.8)
|
%
|
|
6.0
|
%
|
|
|
27.1
|
%
|
|
32.5
|
%
|
|
(650.7)
|
%
|
(1)Positive numbers represent tax benefits and negative numbers represent tax expense as the Company recorded income tax benefit on a pretax loss.
The jurisdictions with favorable tax rates that had the most significant impact on the Company's effective tax rate in the periods presented include Puerto Rico and Singapore.
In fiscal 2020, the Company recorded $362 million of net income tax benefits related to items discrete to the year. These amounts primarily included $174 million of income tax benefits related to transformation costs, and acquisition, disposition and
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
other related charges, $66 million of income tax benefits related to the change in pre-Separation tax liabilities, primarily those for which the Company shares joint and several liability with HP Inc. and for which the Company is indemnified by HP Inc., $57 million of income tax benefits related to Indian distribution tax rate changes, and $40 million of income tax benefits related to tax rate changes on deferred taxes.
In fiscal 2019, the Company recorded $152 million of net income tax charges related to items discrete to the year. These amounts primarily included $488 million of net income tax charges related to changes in U.S. federal and state valuation allowances primarily as a result of impacts of the Tax Act and $40 million of income tax charges related to future withholding costs on potential intercompany distributions of earnings, the effects of which were partially offset by $274 million of income tax benefits related to the change in pre-Separation tax liabilities for which the Company shared joint and several liability with HP Inc., and $104 million of income tax benefits on transformation costs, and acquisition, disposition and other related charges.
In fiscal 2018, the Company recorded $2.0 billion of net income tax benefits related to items discrete to the year. These amounts primarily included $2.0 billion of income tax benefits related to the settlement of certain pre-Separation tax liabilities for which the Company shared joint and several liability with HP Inc. and for which the Company was partially indemnified by HP Inc. under the Tax Matters Agreement, $208 million of income tax benefits related to Everett pre-divestiture tax matters and valuation allowances, $125 million of income tax benefits on restructuring charges, separation costs, transformation costs and acquisition and other related charges and $65 million of net excess tax benefits related to stock-based compensation, the effects of which were partially offset by $422 million of income tax charges related to impacts of the Tax Act. In addition, in fiscal 2018, the Company recorded $5.0 billion of certain foreign loss carryforwards and U.S. domestic capital losses carryforwards against which a full valuation allowance was recorded; the effective tax rate above reflects this activity on a net basis.
As a result of certain employment actions and capital investments the Company has undertaken, income from manufacturing and services in certain countries is subject to reduced tax rates through 2024. The gross income tax benefits attributable to these actions and investments were $521 million ($0.40 diluted net EPS) in fiscal 2020, $837 million ($0.61 diluted net EPS) in fiscal 2019 and $792 million ($0.51 diluted net EPS) in fiscal 2018. Refer to Note 16, "Net Earnings Per Share" for details on shares used to compute diluted net EPS.
Uncertain Tax Positions
A reconciliation of unrecognized tax benefits is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of October 31,
|
|
|
2020
|
|
2019
|
|
2018
|
|
|
In millions
|
|
Balance at beginning of year
|
$
|
2,269
|
|
|
$
|
8,826
|
|
|
$
|
11,262
|
|
|
Increases:
|
|
|
|
|
|
|
For current year's tax positions
|
27
|
|
|
43
|
|
|
163
|
|
|
For prior years' tax positions
|
40
|
|
|
37
|
|
|
66
|
|
|
Decreases:
|
|
|
|
|
|
|
For prior years' tax positions
|
(71)
|
|
|
(17)
|
|
|
(82)
|
|
|
Statute of limitations expiration
|
(17)
|
|
|
(38)
|
|
|
(86)
|
|
|
Settlements with taxing authorities
|
(53)
|
|
|
(7)
|
|
|
(2)
|
|
|
Settlements related to joint and several positions of former Parent
|
(36)
|
|
|
(6,575)
|
|
|
(2,495)
|
|
|
Balance at end of year
|
$
|
2,159
|
|
|
$
|
2,269
|
|
|
$
|
8,826
|
|
Up to $731 million, $772 million and $1.1 billion of Hewlett Packard Enterprise's unrecognized tax benefits at October 31, 2020, 2019 and 2018, respectively, would affect the Company's effective tax rate if realized. The Company continues to record $62 million of pre-Separation unrecognized state tax positions, inclusive of interest and penalties, for which it is joint and severally liable and continues to be indemnified under the Termination and Mutual Release Agreement. The $69 million of joint and several income tax benefits recognized in the Company's effective tax rate includes interest, penalties, and offsetting benefits not included in the table above.
The $6.6 billion decrease in the amount of unrecognized tax benefits for the year ended October 31, 2019, is primarily related to the settlement of certain pre-Separation tax liabilities of HP Inc. for which the Company shared joint and several liability and for which the Company was partially indemnified by HP Inc.
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Hewlett Packard Enterprise recognizes interest income from favorable settlements and interest expense and penalties accrued on unrecognized tax benefits in (Provision) benefit for taxes in the Consolidated Statements of Earnings. The Company recognized $10 million, $13 million, and $161 million of interest income in fiscal 2020, 2019, and 2018, respectively. As of October 31, 2020 and 2019, the Company had accrued $119 million and $129 million, respectively, for interest and penalties in the Consolidated Balance Sheets.
Hewlett Packard Enterprise is subject to income tax in the U.S. and approximately 95 other countries and is subject to routine corporate income tax audits in many of these jurisdictions.
With the resolution of the 2013 through 2015 IRS tax audits of its former parent in fiscal 2019, Hewlett Packard Enterprise is no longer subject to U.S. federal tax audits for years prior to 2016. With respect to major state and foreign tax jurisdictions, HPE is no longer subject to tax authority examinations for years prior to 2005.
Hewlett Packard Enterprise is joint and severally liable for certain pre-Separation state tax liabilities of HP Inc. HP Inc. is subject to numerous ongoing audits by state tax authorities.
Hewlett Packard Enterprise engages in continuous discussion and negotiation with taxing authorities regarding tax matters in various jurisdictions. Hewlett Packard Enterprise does not expect complete resolution of any U.S. Internal Revenue Service ("IRS") audit cycle within the next 12 months. However, it is reasonably possible that certain federal, foreign and state tax issues may be concluded in the next 12 months, including issues involving resolution of certain intercompany transactions, joint and several tax liabilities and other matters. Accordingly, Hewlett Packard Enterprise believes it is reasonably possible that its existing unrecognized tax benefits may be reduced by an amount up to $79 million within the next 12 months.
Hewlett Packard Enterprise believes it has provided adequate reserves for all tax deficiencies or reductions in tax benefits that could result from federal, state and foreign tax audits. The Company regularly assesses the likely outcomes of these audits in order to determine the appropriateness of the Company's tax provision. The Company adjusts its uncertain tax positions to reflect the impact of negotiations, settlements, rulings, advice of legal counsel, and other information and events pertaining to a particular audit. However, income tax audits are inherently unpredictable and there can be no assurance that the Company will accurately predict the outcome of these audits. The amounts ultimately paid on resolution of an audit could be materially different from the amounts previously included in the (Provision) benefit for taxes and therefore the resolution of one or more of these uncertainties in any particular period could have a material impact on net earnings or cash flows.
Hewlett Packard Enterprise has not provided for U.S. federal and state income and foreign withholding taxes on $9.7 billion of undistributed earnings and basis differences from non-U.S. operations as of October 31, 2020 because the Company intends to reinvest such earnings indefinitely outside of the U.S. Determination of the amount of unrecognized deferred tax liability related to these earnings and basis differences is not practicable. The Company will remit non-indefinitely reinvested earnings of its non-U.S. subsidiaries for which deferred U.S. state income and foreign withholding taxes have been provided where excess cash has accumulated and the Company determines that it is advantageous for business operations, tax or cash management reasons.
Deferred Income Taxes
Deferred income taxes result from temporary differences between the amount of assets and liabilities recognized for financial reporting and tax purposes.
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
The significant components of deferred tax assets and deferred tax liabilities were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of October 31,
|
|
|
2020
|
|
2019
|
|
|
In millions
|
|
Deferred tax assets:
|
|
|
|
|
Loss and credit carryforwards
|
$
|
7,596
|
|
|
$
|
8,110
|
|
|
Inventory valuation
|
75
|
|
|
59
|
|
|
Intercompany prepayments
|
295
|
|
|
179
|
|
|
Other intercompany transactions
|
31
|
|
|
41
|
|
|
Warranty
|
69
|
|
|
72
|
|
|
Employee and retiree benefits
|
571
|
|
|
584
|
|
|
Restructuring
|
118
|
|
|
65
|
|
|
Deferred revenue
|
565
|
|
|
531
|
|
|
Intangible assets
|
94
|
|
|
130
|
|
|
Lease liabilities
|
166
|
|
|
—
|
|
|
Other
|
206
|
|
|
243
|
|
|
Total deferred tax assets
|
9,786
|
|
|
10,014
|
|
|
Valuation allowance
|
(7,724)
|
|
|
(8,225)
|
|
|
Total deferred tax assets net of valuation allowance
|
2,062
|
|
|
1,789
|
|
|
Deferred tax liabilities:
|
|
|
|
|
Unremitted earnings of foreign subsidiaries
|
(172)
|
|
|
(233)
|
|
|
ROU assets
|
(165)
|
|
|
—
|
|
|
Fixed assets
|
(237)
|
|
|
(352)
|
|
|
Total deferred tax liabilities
|
(574)
|
|
|
(585)
|
|
|
Net deferred tax assets and liabilities
|
$
|
1,488
|
|
|
$
|
1,204
|
|
Deferred tax assets and liabilities included in the Consolidated Balance Sheets are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of October 31,
|
|
|
2020
|
|
2019
|
|
|
In millions
|
|
Deferred tax assets
|
$
|
1,778
|
|
|
$
|
1,515
|
|
|
Deferred tax liabilities
|
(290)
|
|
|
(311)
|
|
|
Deferred tax assets net of deferred tax liabilities
|
$
|
1,488
|
|
|
$
|
1,204
|
|
As of October 31, 2020, the Company had $636 million, $2.7 billion and $20.4 billion of federal, state and foreign net operating loss carryforwards, respectively. Amounts included in federal, state and foreign net operating loss carryforwards will begin to expire in years 2030, 2021, and 2021, respectively. Hewlett Packard Enterprise has provided a valuation allowance of $138 million and $4.1 billion for deferred tax assets related to state and foreign net operating losses carryforwards, respectively. As of October 31, 2020, the Company also had $6.0 billion, $6.0 billion, and $38 million of federal, state, and foreign capital loss carryforwards, respectively. Amounts included in federal and state capital loss carryforwards will begin to expire in 2023; foreign capital losses can carry forward indefinitely. Hewlett Packard Enterprise has provided a valuation allowance of $1.3 billion, $191 million, and $10 million for deferred tax assets related to federal, state, and foreign capital loss carryforwards, respectively.
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
As of October 31, 2020, Hewlett Packard Enterprise had recorded deferred tax assets for various tax credit carryforwards as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carryforward
|
|
Valuation Allowance
|
|
Initial Year of Expiration
|
|
|
In millions
|
|
|
|
U.S. foreign tax credits
|
$
|
1,129
|
|
|
$
|
(1,119)
|
|
|
2026
|
|
U.S. research and development and other credits
|
194
|
|
|
(1)
|
|
|
2021
|
|
Tax credits in state and foreign jurisdictions
|
171
|
|
|
(142)
|
|
|
2021
|
|
Balance at end of year
|
$
|
1,494
|
|
|
$
|
(1,262)
|
|
|
|
Total valuation allowances decreased by $501 million in fiscal 2020, primarily as a result of the liquidation of certain foreign entities that had deferred tax assets on certain loss carryforwards against which valuation allowances were required.
Tax Matters Agreement and Other Income Tax Matters
In connection with the Separation, the Company entered into a Tax Matters Agreement with HP Inc., which was terminated with the Termination and Mutual Release Agreement in fiscal 2019. Pursuant to that termination, HP Inc. paid the Company $200 million in fiscal 2019 and $50 million in fiscal 2020 and will pay an additional $50 million on or before October 31, 2021. In connection with the Everett and Seattle Transactions, the Company entered into a DXC Tax Matters Agreement with DXC and a Micro Focus Tax Matters Agreement with Micro Focus, respectively. See Note 18, "Guarantees, Indemnifications and Warranties", for a description of the DXC Tax Matters Agreement and Micro Focus Tax Matters Agreement.
Note 7: Balance Sheet Details
Balance sheet details were as follows:
Cash, Cash Equivalents and Restricted Cash
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of October 31,
|
|
|
2020
|
|
2019
|
|
|
In millions
|
|
Cash and cash equivalents
|
$
|
4,233
|
|
|
$
|
3,753
|
|
|
Restricted cash
|
388
|
|
|
323
|
|
|
Total
|
$
|
4,621
|
|
|
$
|
4,076
|
|
Accounts Receivable, Net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of October 31,
|
|
|
2020
|
|
2019
|
|
|
In millions
|
|
Unbilled receivable
|
$
|
205
|
|
|
$
|
206
|
|
|
Accounts receivable
|
3,227
|
|
|
2,782
|
|
|
Allowance for doubtful accounts
|
(46)
|
|
|
(31)
|
|
|
Total
|
$
|
3,386
|
|
|
$
|
2,957
|
|
The allowance for doubtful accounts related to accounts receivable and changes therein were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of October 31,
|
|
|
2020
|
|
2019
|
|
2018
|
|
|
In millions
|
|
Balance at beginning of year
|
$
|
31
|
|
|
$
|
39
|
|
|
$
|
42
|
|
|
Provision for doubtful accounts
|
29
|
|
|
9
|
|
|
20
|
|
|
Deductions, net of recoveries
|
(14)
|
|
|
(17)
|
|
|
(23)
|
|
|
Balance at end of year
|
$
|
46
|
|
|
$
|
31
|
|
|
$
|
39
|
|
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
The Company has third-party revolving short-term financing arrangements intended to facilitate the working capital requirements of certain customers. These financing arrangements, which in certain cases provide for partial recourse, result in the transfer of the Company's trade receivables to a third party. The Company reflects amounts transferred to, but not yet collected from, the third party in Accounts receivable in the Consolidated Balance Sheets. When the Company has received payment from the third party for which revenue recognition has been deferred, the Company records the obligation for the amount received in Notes payable and short-term borrowings in its Consolidated Balance Sheets. For arrangements involving an element of recourse, the fair value of the recourse obligation is measured using market data from similar transactions and reported as a current liability in Other accrued liabilities in the Consolidated Balance Sheets.
The activity related to Hewlett Packard Enterprise's revolving short-term financing arrangements was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of October 31,
|
|
|
2020
|
|
2019
|
|
2018
|
|
|
In millions
|
|
Balance at beginning of period(1)
|
$
|
(10)
|
|
|
$
|
166
|
|
|
$
|
121
|
|
|
Trade receivables sold
|
3,897
|
|
|
4,533
|
|
|
4,844
|
|
|
Cash receipts
|
(3,768)
|
|
|
(4,710)
|
|
|
(4,794)
|
|
|
Foreign currency and other
|
3
|
|
|
1
|
|
|
(5)
|
|
|
Balance at end of period(1)
|
$
|
122
|
|
|
$
|
(10)
|
|
|
$
|
166
|
|
(1)Beginning and ending balances represent amounts for trade receivables sold but not yet collected. The ending credit balance as of October 31, 2019 represents credit memos issued but not applied to trade receivables prior to cash remittance.
Inventory
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of October 31,
|
|
|
2020
|
|
2019
|
|
|
In millions
|
|
Finished goods
|
$
|
1,197
|
|
|
$
|
1,198
|
|
|
Purchased parts and fabricated assemblies
|
1,477
|
|
|
1,189
|
|
|
Total
|
$
|
2,674
|
|
|
$
|
2,387
|
|
Property, Plant and Equipment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of October 31,
|
|
|
2020
|
|
2019
|
|
|
In millions
|
|
Land
|
$
|
89
|
|
|
$
|
241
|
|
|
Buildings and leasehold improvements
|
1,886
|
|
|
2,196
|
|
|
Machinery and equipment, including equipment held for lease
|
9,624
|
|
|
9,464
|
|
|
|
11,599
|
|
|
11,901
|
|
|
Accumulated depreciation
|
(5,974)
|
|
|
(5,847)
|
|
|
Total
|
$
|
5,625
|
|
|
$
|
6,054
|
|
Depreciation expense was $2.2 billion, $2.3 billion and $2.3 billion in fiscal 2020, 2019 and 2018, respectively.
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Long-Term Financing Receivables and Other Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of October 31,
|
|
|
2020
|
|
2019
|
|
|
In millions
|
|
Financing receivables, net
|
$
|
5,110
|
|
|
$
|
4,949
|
|
|
ROU assets
|
930
|
|
|
—
|
|
|
Deferred tax assets
|
1,778
|
|
|
1,515
|
|
|
Prepaid pension
|
1,046
|
|
|
864
|
|
|
Other
|
1,680
|
|
|
1,590
|
|
|
Total
|
$
|
10,544
|
|
|
$
|
8,918
|
|
Other Accrued Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of October 31,
|
|
|
2020
|
|
2019
|
|
|
In millions
|
|
Value-added and property taxes
|
$
|
842
|
|
|
$
|
806
|
|
|
Warranty
|
192
|
|
|
199
|
|
|
Sales and marketing programs
|
1,022
|
|
|
1,065
|
|
|
Operating lease liabilities
|
188
|
|
|
—
|
|
|
Other
|
2,021
|
|
|
1,932
|
|
|
Total
|
$
|
4,265
|
|
|
$
|
4,002
|
|
Other Non-Current Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of October 31,
|
|
|
2020
|
|
2019
|
|
|
In millions
|
|
Pension, post-retirement, and post-employment
|
$
|
1,856
|
|
|
$
|
1,772
|
|
|
Deferred revenue
|
2,785
|
|
|
2,751
|
|
|
Taxes on earnings
|
447
|
|
|
538
|
|
|
Operating lease liabilities
|
898
|
|
|
—
|
|
|
Other
|
1,009
|
|
|
1,039
|
|
|
Total
|
$
|
6,995
|
|
|
$
|
6,100
|
|
Contract Liabilities and Remaining Performance Obligations
Contract liabilities consist of deferred revenue. The aggregate balance of current and non-current deferred revenue was $6.2 billion and $6.0 billion as of October 31, 2020 and October 31, 2019, respectively. During the fiscal 2020, approximately $3.2 billion of the deferred revenue as of October 31, 2019 was recognized as revenue.
Revenue allocated to remaining performance obligations represents contract work that has not yet been performed and does not include contracts where the customer is not committed. Remaining performance obligations estimates are subject to change and are affected by several factors, including contract terminations, changes in the scope of contracts, adjustments for revenue that has not materialized and adjustments for currency.
Remaining performance obligations consist of deferred revenue. As of October 31, 2020, the aggregate amount of remaining performance obligations was $6.2 billion. The Company expect to recognize approximately 55% of amount as revenue next twelve months with the remainder to be recognized thereafter.
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 8: Accounting for Leases as a Lessee
Components of lease cost included in the Consolidated Statement of Earnings were as follows:
|
|
|
|
|
|
|
|
|
Fiscal year ended October 31, 2020
|
|
|
|
|
Operating lease cost
|
$
|
236
|
|
|
Finance lease cost
|
8
|
|
|
Sublease rental income
|
(61)
|
|
|
Total lease cost
|
$
|
183
|
|
During the fiscal year ended October 31, 2020, the Company recorded $41 million of net gain from sale and leaseback transactions.
The ROU assets and lease liabilities for operating and finance leases included on the Hewlett Packard Enterprise Consolidated Balance Sheet were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet Classification
|
|
As of
October 31, 2020
|
|
|
|
|
In millions
|
|
Operating Leases
|
|
|
|
|
ROU Assets
|
Long-term financing receivables and other assets
|
|
$
|
930
|
|
|
Lease Liabilities:
|
|
|
|
|
Operating lease liabilities – current
|
Other accrued liabilities
|
|
$
|
188
|
|
|
Operating lease liabilities – non-current
|
Other non-current liabilities
|
|
898
|
|
|
Total operating lease liabilities
|
|
|
$
|
1,086
|
|
|
|
|
|
|
|
Finance Leases
|
|
|
|
|
Finance lease ROU Assets:
|
Property, plant and equipment
|
|
|
|
Gross finance lease ROU assets
|
|
|
$
|
52
|
|
|
Less: Accumulated depreciation
|
|
|
(11)
|
|
|
Net finance lease ROU assets
|
|
|
$
|
41
|
|
|
Lease Liabilities:
|
|
|
|
|
Finance lease liabilities – current
|
Notes payable and short-term borrowings
|
|
$
|
5
|
|
|
Finance lease liabilities – non-current
|
Long-term debt
|
|
53
|
|
Total finance lease liabilities
|
|
|
$
|
58
|
|
|
|
|
|
|
|
Total ROU assets
|
|
|
$
|
971
|
|
|
Total lease liabilities
|
|
|
$
|
1,144
|
|
|
|
|
|
|
The weighted-average remaining lease term and the weighted-average discount rate for the operating and finance leases were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of October 31, 2020
|
|
|
Operating Leases
|
|
Finance Leases
|
|
Weighted-average remaining lease term (in years)
|
6.8
|
|
9.5
|
|
Weighted-average discount rate
|
2.6
|
%
|
|
3.5
|
%
|
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Supplemental cash flow information related to leases was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flow Statement Activity
|
|
Fiscal year ended October 31, 2020
|
|
|
|
|
In millions
|
|
Cash outflows from operating leases
|
Net cash used in operating activities
|
|
$
|
239
|
|
|
|
|
|
|
|
ROU assets obtained in exchange for new operating lease liabilities
|
Non-cash activities
|
|
$
|
298
|
|
The following tables shows the future payments on the Company's operating and finance leases:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of October 31, 2020
|
|
|
Operating Leases
|
|
Finance Leases
|
|
Fiscal year
|
In millions
|
|
2021
|
$
|
207
|
|
|
$
|
6
|
|
|
2022
|
188
|
|
|
6
|
|
|
2023
|
172
|
|
|
7
|
|
|
2024
|
147
|
|
|
7
|
|
|
2025
|
128
|
|
|
7
|
|
|
Thereafter
|
342
|
|
|
35
|
|
|
Total future lease payments
|
$
|
1,184
|
|
|
$
|
68
|
|
|
Less: imputed interest
|
(98)
|
|
|
(10)
|
|
|
Total lease liabilities
|
$
|
1,086
|
|
|
$
|
58
|
|
As of October 31, 2020, the Company entered into $225 million of operating leases that have not yet commenced and are not yet recorded on the Consolidated Balance Sheet. These operating leases are scheduled to commence between fiscal 2021 and 2022 and contain lease terms of 1 to 15 years.
Prior to the adoption of the new lease standard, the future minimum lease commitments on the Company's operating and finance leases were:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of October 31, 2019
|
|
|
Operating Leases
|
|
Finance Leases
|
|
|
In millions
|
|
Fiscal year
|
|
|
|
|
2020
|
$
|
233
|
|
|
$
|
6
|
|
|
2021
|
187
|
|
|
6
|
|
|
2022
|
164
|
|
|
7
|
|
|
2023
|
149
|
|
|
6
|
|
|
2024
|
127
|
|
|
7
|
|
|
Thereafter
|
541
|
|
|
41
|
|
|
Total
|
$
|
1,401
|
|
|
$
|
73
|
|
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 9: Accounting for Leases as a Lessor
Financing Receivables
Financing receivables represent sales-type and direct-financing leases of the Company and third-party products. The net investment in the lease is measured as the sum of the present value of lease receivable, the estimated unguaranteed residual value of the equipment less unearned income and allowance for credit losses. 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 components of financing receivables were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of October 31,
|
|
|
2020
|
|
2019
|
|
|
In millions
|
|
Minimum lease payments receivable
|
$
|
9,448
|
|
|
$
|
9,070
|
|
|
Unguaranteed residual value
|
364
|
|
|
336
|
|
|
Unearned income
|
(754)
|
|
|
(754)
|
|
|
Financing receivables, gross
|
9,058
|
|
|
8,652
|
|
|
Allowance for doubtful accounts
|
(154)
|
|
|
(131)
|
|
|
Financing receivables, net
|
8,904
|
|
|
8,521
|
|
|
Less: current portion(1)
|
(3,794)
|
|
|
(3,572)
|
|
|
Amounts due after one year, net(1)
|
$
|
5,110
|
|
|
$
|
4,949
|
|
(1)The Company includes the current portion in Financing receivables, net of allowance for doubtful accounts, and amounts due after one year, net, in Long-term financing receivables and other assets in the accompanying Consolidated Balance Sheets.
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
As of October 31, 2020, scheduled maturities of the Company's minimum lease payments receivable were as follows:
|
|
|
|
|
|
|
|
|
As of
|
|
|
October 31, 2020
|
|
Fiscal year
|
In millions
|
|
2021
|
$
|
4,182
|
|
|
2022
|
2,662
|
|
|
2023
|
1,572
|
|
|
2024
|
720
|
|
|
2025
|
252
|
|
|
Thereafter
|
60
|
|
|
Total undiscounted cash flows
|
$
|
9,448
|
|
|
Present value of lease payments (recognized as finance receivables)
|
$
|
8,694
|
|
|
Difference between undiscounted cash flows and discounted cash flows
|
$
|
754
|
|
Prior to the adoption of the new lease standard, scheduled maturities of the Company's minimum lease payments receivable were as follows:
|
|
|
|
|
|
|
|
|
As of
|
|
|
October 31, 2019
|
|
Fiscal year
|
In millions
|
|
2020
|
$
|
3,939
|
|
|
2021
|
2,449
|
|
|
2022
|
1,555
|
|
|
2023
|
752
|
|
|
2024
|
306
|
|
|
Thereafter
|
69
|
|
|
Total
|
$
|
9,070
|
|
Sale of Financing Receivables
During the fiscal years ended October 31, 2020 and 2019, the Company entered into arrangements to transfer the contractual payments due under certain financing receivables to third party financial institutions, which are accounted for as sales in accordance with Accounting Standards Codification ("ASC") 860 - Transfers and Servicing. The Company derecognizes the carrying value of the receivable transferred and recognizes a net gain or loss on the sale. During the fiscal years ended October 31, 2020 and 2019, the Company sold $103 million and $185 million, respectively, of financing receivables. The gains recognized on the sales of financing receivables were not material for the periods presented.
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. 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.
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
The credit risk profile of gross financing receivables, based on internal risk ratings, was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of October 31,
|
|
|
2020
|
|
2019
|
|
|
In millions
|
|
Risk Rating:
|
|
|
|
|
Low
|
$
|
4,590
|
|
|
$
|
4,432
|
|
|
Moderate
|
4,091
|
|
|
3,933
|
|
|
High
|
377
|
|
|
287
|
|
|
Total
|
$
|
9,058
|
|
|
$
|
8,652
|
|
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.
Allowance for Doubtful Accounts
The allowance for doubtful accounts related to financing receivables and changes therein were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of October 31,
|
|
|
2020
|
|
2019
|
|
2018
|
|
|
In millions
|
|
Balance at beginning of year
|
$
|
131
|
|
|
$
|
120
|
|
|
$
|
86
|
|
|
Provision for doubtful accounts
|
43
|
|
|
33
|
|
|
49
|
|
|
Write-offs
|
(20)
|
|
|
(22)
|
|
|
(15)
|
|
|
Balance at end of year
|
$
|
154
|
|
|
$
|
131
|
|
|
$
|
120
|
|
The gross financing receivables and related allowance evaluated for loss were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of October 31,
|
|
|
2020
|
|
2019
|
|
|
In millions
|
|
Gross financing receivables collectively evaluated for loss
|
$
|
8,620
|
|
|
$
|
8,255
|
|
|
Gross financing receivables individually evaluated for loss(1)
|
438
|
|
|
397
|
|
|
Total
|
$
|
9,058
|
|
|
$
|
8,652
|
|
|
Allowance for financing receivables collectively evaluated for loss
|
$
|
89
|
|
|
$
|
84
|
|
|
Allowance for financing receivables individually evaluated for loss
|
65
|
|
|
47
|
|
|
Total
|
$
|
154
|
|
|
$
|
131
|
|
(1)Includes billed operating lease receivables and billed and unbilled sales-type and direct-financing lease receivables.
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Non-Accrual and Past-Due Financing Receivables
The following table summarizes the aging and non-accrual status of gross financing receivables:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of October 31,
|
|
|
2020
|
|
2019
|
|
|
In millions
|
|
Billed:(1)
|
|
|
|
|
Current 1-30 days
|
$
|
340
|
|
|
$
|
301
|
|
|
Past due 31-60 days
|
43
|
|
|
62
|
|
|
Past due 61-90 days
|
22
|
|
|
15
|
|
|
Past due >90 days
|
140
|
|
|
88
|
|
|
Unbilled sales-type and direct-financing lease receivables
|
8,513
|
|
|
8,186
|
|
|
Total gross financing receivables
|
$
|
9,058
|
|
|
$
|
8,652
|
|
|
Gross financing receivables on non-accrual status(2)
|
$
|
364
|
|
|
$
|
276
|
|
|
Gross financing receivables 90 days past due and still accruing interest(2)
|
$
|
74
|
|
|
$
|
121
|
|
(1)Includes billed operating lease receivables and billed sales-type and direct-financing lease receivables.
(2)Includes billed operating lease receivables and billed and unbilled sales-type and direct-financing lease receivables.
Operating Leases
Operating lease assets included in Property, plant and equipment in the Consolidated Balance Sheets were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of October 31,
|
|
|
2020
|
|
2019
|
|
|
In millions
|
|
Equipment leased to customers
|
$
|
7,184
|
|
|
$
|
7,185
|
|
|
Accumulated depreciation
|
(3,157)
|
|
|
(3,101)
|
|
|
Total
|
$
|
4,027
|
|
|
$
|
4,084
|
|
As of October 31, 2020, minimum future rentals on non-cancelable operating leases related to leased equipment were as follows:
|
|
|
|
|
|
|
|
|
As of
|
|
|
October 31, 2020
|
|
Fiscal year
|
In millions
|
|
2021
|
$
|
1,798
|
|
|
2022
|
1,049
|
|
|
2023
|
440
|
|
|
2024
|
78
|
|
|
2025
|
7
|
|
|
Thereafter
|
2
|
|
|
Total
|
$
|
3,374
|
|
If a lease is classified as an operating lease, the Company records lease revenue on a straight line basis over the lease term. At commencement of an operating lease, initial direct costs are deferred and are expensed over the lease term on the same basis as the lease revenue is recorded.
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
The following table presents amounts included in the Consolidated Statement of Earnings related to lessor activity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of October 31,
|
|
|
2020
|
|
2019
|
|
2018
|
|
|
In millions
|
|
Sales-type leases and direct financing leases:
|
|
|
|
|
|
|
Interest income
|
$
|
469
|
|
|
$
|
458
|
|
|
$
|
447
|
|
|
Lease income - operating leases
|
2,431
|
|
|
2,596
|
|
|
2,690
|
|
|
Total lease income
|
$
|
2,900
|
|
|
$
|
3,054
|
|
|
$
|
3,137
|
|
Variable Interest Entities
In June 2020, February 2020 and September 2019, the Company 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 VIE and is consolidated, along with the associated debt, into the Consolidated Financial Statements as the Company is the primary beneficiary of the VIE. The SPE is a bankruptcy-remote legal entity with separate assets and liabilities. The purpose of the SPE is to facilitate the funding of customer receivables and leased equipment in the capital markets.
The Company's risk of loss related to securitized receivables and leased equipment is limited to the amount by which the Company's right to receive collections for assets securitized exceeds the amount required to pay interest, principal, and fees and expenses related to the asset-backed securities.
The following table presents the assets and liabilities held by the consolidated VIE as of October 31, 2020, which are included in the Consolidated Balance Sheets. The assets in the table below includes 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 October 31,
|
|
|
2020
|
|
2019
|
|
Assets held by VIE
|
In millions
|
|
Other current assets
|
$
|
120
|
|
|
$
|
76
|
|
|
Financing receivables
|
|
|
|
|
Short-term
|
$
|
531
|
|
|
$
|
194
|
|
|
Long-term
|
$
|
584
|
|
|
$
|
229
|
|
|
Property, plant and equipment
|
$
|
665
|
|
|
$
|
303
|
|
|
Liabilities held by VIE
|
|
|
|
|
Notes payable and short-term borrowings, net of unamortized debt issuance costs
|
$
|
886
|
|
|
$
|
385
|
|
|
Long-term debt, net of unamortized debt issuance costs
|
$
|
834
|
|
|
$
|
370
|
|
Financing receivables transferred via securitization through the SPE was $1.2 billion and $465 million for the fiscal year ended October 31, 2020 and October 31, 2019, respectively. Leased equipment transferred via securitization through the SPE was $675 million and $327 million for the fiscal year ended October 31, 2020 and October 31, 2019, respectively.
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 10: Acquisitions
Acquisitions in Fiscal 2020
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 as valuations are finalized. Measurement period adjustments are recorded in the reporting period in which the estimates are finalized and adjustment amounts are determined. Pro forma results of operations for these acquisitions have not been presented because 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.
During fiscal 2020, the Company completed two acquisitions. The following table presents the aggregate purchase price allocation for the Company's acquisitions for the fiscal year ended October 31, 2020:
|
|
|
|
|
|
|
|
|
In millions
|
|
|
|
|
Goodwill
|
$
|
572
|
|
|
Amortizable intangible assets
|
354
|
|
|
Net tangible liabilities assumed
|
(40)
|
|
|
Total fair value consideration
|
$
|
886
|
|
On September 21, 2020, the Company completed the acquisition of Silver Peak, a Software-Defined Wide Area Network leader. Silver Peak's results of operations are included within the Intelligent Edge segment. The acquisition date fair value consideration of $879 million consisted of cash paid for outstanding common stock, amount attributable to pre-acquisition service of the replacement awards, and vested in-the-money stock awards. In connection with this acquisition, the Company recorded approximately $572 million of goodwill, and $348 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.
Acquisitions in Fiscal 2019
During fiscal 2019, the Company completed three acquisitions. The following table presents the aggregate purchase price allocation for the Company's acquisitions for the fiscal year ended October 31, 2019:
|
|
|
|
|
|
|
|
|
In millions
|
|
|
|
|
Goodwill
|
$
|
771
|
|
|
Amortizable intangible assets
|
465
|
|
|
In-process research and development
|
141
|
|
|
Net tangible assets assumed
|
235
|
|
|
Total fair value consideration
|
$
|
1,612
|
|
On September 25, 2019, the Company completed the acquisition of Cray, a global supercomputer leader. Cray's results of operations are included within the HPC & MCS segment. The acquisition date fair value consideration of $1.5 billion consisted of cash paid for outstanding common stock, vested in-the-money stock awards and amount attributable to pre-acquisition service of the replacement awards. In connection with this acquisition, the Company recorded approximately $702 million of goodwill, $425 million of intangible assets and $141 million of in-process research and development. The Company is amortizing the intangible assets on a straight-line basis over an estimated weighted-average useful life of four years.
Acquisitions in Fiscal 2018
During fiscal 2018, the Company completed three acquisitions, none of which were material, both individually and in the aggregate, to the Company's Consolidated Financial Statements.
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 11: Goodwill and Intangible Assets
Goodwill
Goodwill and related changes in the carrying amount by reportable segment were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compute
|
|
HPC & MCS
|
|
Storage
|
|
Intelligent Edge
|
|
Financial
Services
|
|
|
Total
|
|
|
In millions
|
|
Balance at October 31, 2018 (1)
|
$
|
7,530
|
|
|
$
|
3,779
|
|
|
$
|
4,090
|
|
|
$
|
1,994
|
|
|
144
|
|
|
|
$
|
17,537
|
|
|
Goodwill acquired during the period
|
—
|
|
|
699
|
|
|
68
|
|
|
—
|
|
|
—
|
|
|
|
767
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill adjustments
|
2
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
2
|
|
|
Balance at October 31, 2019 (1)
|
7,532
|
|
|
4,478
|
|
|
4,158
|
|
|
1,994
|
|
|
144
|
|
|
|
18,306
|
|
|
Goodwill acquired during the period
|
—
|
|
|
—
|
|
|
—
|
|
|
572
|
|
|
—
|
|
|
|
572
|
|
|
Impairment of goodwill
|
—
|
|
|
(865)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
(865)
|
|
|
Goodwill adjustments
|
—
|
|
|
3
|
|
|
1
|
|
|
—
|
|
|
—
|
|
|
|
4
|
|
|
Balance at October 31, 2020 (1)
|
$
|
7,532
|
|
|
$
|
3,616
|
|
|
$
|
4,159
|
|
|
$
|
2,566
|
|
|
$
|
144
|
|
|
|
$
|
18,017
|
|
(1)Goodwill is net of accumulated impairment losses of $953 million. Of this amount, $865 million related to HPC & MCS which was recorded during the second quarter of 2020 and $88 million relates to the Corporate Investments segment which was recorded during the fourth quarter of fiscal 2018. There is no remaining goodwill in the Corporate Investments segment.
Goodwill Impairments
Goodwill is tested for impairment at the reporting unit level. As of October 31, 2020, our reporting units with goodwill are consistent with the reportable segments identified in Note 2 "Segment Information" to the Consolidated Financial Statements.
On March 31, 2020, due to the macroeconomic impacts of COVID-19 on the Company's current and projected future results of operations, the Company determined that an indicator of potential impairment existed to require an interim quantitative goodwill impairment test for the reporting units.
Based on the results of this interim quantitative impairment test, the fair value of the HPC & MCS reporting unit was below the carrying value of net assets assigned to HPC & MCS. The decline in the fair value of the HPC & MCS reporting unit resulted from macroeconomic impacts of COVID-19 which lowered the projected revenue growth rates and profitability levels of the reporting unit. The fair value of the HPC & MCS reporting unit was based on a weighting of fair values derived most significantly from the income approach, and to a lesser extent, the market approach. Under the income approach, the Company estimates the fair value of a reporting unit based on the present value of estimated future cash flows which the Company considers to be a level 3 unobservable input in the fair value hierarchy. The Company prepares cash flow projections based on management's estimates of revenue growth rates and operating margins, taking into consideration the historical performance and the current macroeconomic industry and market conditions. The Company bases the discount rate on the weighted-average cost of capital adjusted for the relevant risk associated with business-specific characteristics and the uncertainty related to the reporting unit's ability to execute on the projected cash flows. Under the market approach, the Company estimates fair value based on market multiple earnings derived from comparable publicly traded companies with similar operating and investment characteristics as the reporting unit. The Company weights the fair value derived from the market approach commensurate with the level of comparability of these publicly traded companies to the reporting unit.
Prior to the quantitative goodwill impairment test, the Company tested the recoverability of long-lived assets and other assets of the HPC & MCS reporting unit and concluded that such assets were not impaired. The quantitative goodwill impairment test indicated that the carrying value of the HPC & MCS reporting unit exceeded its fair value by $865 million. As a result, the Company recorded a partial goodwill impairment charge of $865 million in the second quarter of fiscal 2020.
Based on the results of the Company's annual impairment test in fiscal 2020, performed at the beginning of the fourth quarter, the Company determined that no further impairment of goodwill existed. While all reporting units were negatively impacted by COVID-19, their fair values continued to exceed the carrying value of their net assets and did not result in impairment. The excess of fair value over carrying amount for our reporting units ranged from approximately 7% to 31% of the respective carrying amounts. In order to evaluate the sensitivity of the estimated fair value of our reporting units in the goodwill impairment test, the Company applied a hypothetical 10% decrease to the fair value of each reporting unit. Based on the results
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
of this hypothetical 10% decrease all of the reporting units had an excess of fair value over carrying amount, with the exception of HPC & MCS reporting unit.
As of the annual test date, subsequent to the impairment recognized in March, the HPC & MCS reporting unit has goodwill of $3.6 billion and an excess of fair value over carrying value of net assets of 7%. The fair value of the HPC & MCS reporting unit was based on the above described methodology used for the interim test, which was a weighting of fair values derived most significantly from the income approach, and to a lesser extent, the market approach. The HPC & MCS business is facing challenges as a result of the macroeconomic impacts of COVID-19 on the current and projected future results. If the Company is not successful in addressing these challenges, the projected revenue growth rates or operating margins could decline resulting in a decrease in the fair value of the HPC & MCS reporting unit. The fair value of the HPC & MCS reporting unit could also be negatively impacted by changes in its weighted average cost of capital, changes in management's business strategy or significant and sustained declines in the stock price, which could result in an indicator of impairment.
In addition, each of our reporting units has experienced a reduction of the excess of fair value over carrying value for the reporting unit, primarily as a result of COVID-19 impacts on our current and projected future results. Should economic conditions deteriorate further or remain depressed for a prolonged period of time, estimates of future cash flows for each of the Company's reporting units may be insufficient to support the carrying value and the goodwill assigned to them, requiring impairment charges, including additional impairment charges for the HPC & MCS reporting unit. Further impairment charges, if any, may be material to the results of operations and financial position.
Based on the results of the Company's interim impairment tests in fiscal 2018 it was concluded that the fair value of CMS was less than its carrying amount. Prior to calculating the goodwill impairment loss, the Company analyzed the recoverability of CMS long-lived assets other than goodwill and concluded that those assets were not impaired. As a result, the Company recorded a goodwill impairment charge of $88 million. There is no remaining goodwill in the CMS reporting unit as of October 31, 2018.
Intangible Assets
Intangible assets comprise:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of October 31, 2020
|
|
As of October 31, 2019
|
|
|
Gross
|
|
Accumulated
Amortization
|
|
Net
|
|
Gross
|
|
Accumulated
Amortization
|
|
Net
|
|
|
In millions
|
|
Customer contracts, customer lists and distribution agreements
|
$
|
429
|
|
|
$
|
(163)
|
|
|
$
|
266
|
|
|
$
|
312
|
|
|
$
|
(96)
|
|
|
$
|
216
|
|
|
Developed and core technology and patents
|
1,267
|
|
|
(627)
|
|
|
640
|
|
|
1,371
|
|
|
(719)
|
|
|
652
|
|
|
Trade name and trade marks
|
141
|
|
|
(50)
|
|
|
91
|
|
|
163
|
|
|
(44)
|
|
|
119
|
|
|
In-process research and development
|
106
|
|
|
—
|
|
|
106
|
|
|
141
|
|
|
—
|
|
|
141
|
|
|
Total intangible assets
|
$
|
1,943
|
|
|
$
|
(840)
|
|
|
$
|
1,103
|
|
|
$
|
1,987
|
|
|
$
|
(859)
|
|
|
$
|
1,128
|
|
For fiscal 2020, the decrease in gross intangible assets was due primarily to $363 million of intangible assets which became fully amortized and were eliminated from gross intangible assets and accumulated amortization and the write-off of $35 million of abandoned in-process research and development, partially offset by $354 million of purchases related to acquisitions.
For fiscal 2019, the increase in gross intangible assets was due primarily to $606 million of purchases related to acquisitions, partially offset by $117 million of intangible assets which became fully amortized and were eliminated from gross intangible assets and accumulated amortization.
For fiscal 2020, no in-process research and development assets were completed. For fiscal 2019, the Company reclassified in-process research and development assets acquired of $18 million to developed and core technology and patents as the projects were completed, and began amortization.
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
As of October 31, 2020, the weighted-average remaining useful lives of the Company's finite-lived intangible assets were as follows:
|
|
|
|
|
|
|
|
Finite-Lived Intangible Assets
|
Weighted-Average
Remaining
Useful Lives
|
|
|
In years
|
|
Customer contracts, customer lists and distribution agreements
|
3
|
|
Developed and core technology and patents
|
5
|
|
Trade name and trade marks
|
4
|
As of October 31, 2020, estimated future amortization expense related to finite-lived intangible assets was as follows:
|
|
|
|
|
|
|
|
Fiscal year
|
In millions
|
|
2021
|
$
|
313
|
|
|
2022
|
235
|
|
|
2023
|
200
|
|
|
2024
|
148
|
|
|
2025
|
41
|
|
|
Thereafter
|
60
|
|
|
Total
|
$
|
997
|
|
Note 12: Fair Value
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the measurement date.
Fair Value Hierarchy
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. Assets and liabilities are classified in the fair value hierarchy based on the lowest level input that is significant to the fair value measurement:
Level 1—Quoted prices (unadjusted) in active markets for identical assets or liabilities.
Level 2—Quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability and market-corroborated inputs.
Level 3—Unobservable inputs for the asset or liability.
The fair value hierarchy gives the highest priority to observable inputs and lowest priority to unobservable inputs.
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
The following table presents the Company's assets and liabilities that are measured at fair value on a recurring basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of October 31, 2020
|
|
As of October 31, 2019
|
|
|
Fair Value
Measured Using
|
|
|
|
Fair Value
Measured Using
|
|
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
|
In millions
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Equivalents and Investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Time deposits
|
$
|
—
|
|
|
$
|
939
|
|
|
$
|
—
|
|
|
$
|
939
|
|
|
$
|
—
|
|
|
$
|
803
|
|
|
$
|
—
|
|
|
$
|
803
|
|
|
Money market funds
|
1,167
|
|
|
—
|
|
|
—
|
|
|
1,167
|
|
|
859
|
|
|
—
|
|
|
—
|
|
|
859
|
|
|
Foreign bonds
|
—
|
|
|
125
|
|
|
—
|
|
|
125
|
|
|
7
|
|
|
126
|
|
|
—
|
|
|
133
|
|
|
Other debt securities
|
—
|
|
|
—
|
|
|
21
|
|
|
21
|
|
|
—
|
|
|
—
|
|
|
32
|
|
|
32
|
|
|
Derivative Instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate contracts
|
—
|
|
|
220
|
|
|
—
|
|
|
220
|
|
|
—
|
|
|
73
|
|
|
—
|
|
|
73
|
|
|
Foreign exchange contracts
|
—
|
|
|
290
|
|
|
—
|
|
|
290
|
|
|
—
|
|
|
392
|
|
|
—
|
|
|
392
|
|
|
Other derivatives
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
3
|
|
|
—
|
|
|
3
|
|
|
Total assets
|
$
|
1,167
|
|
|
$
|
1,574
|
|
|
$
|
21
|
|
|
$
|
2,762
|
|
|
$
|
866
|
|
|
$
|
1,397
|
|
|
$
|
32
|
|
|
$
|
2,295
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative Instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate contracts
|
$
|
—
|
|
|
$
|
2
|
|
|
$
|
—
|
|
|
$
|
2
|
|
|
$
|
—
|
|
|
$
|
11
|
|
|
$
|
—
|
|
|
$
|
11
|
|
|
Foreign exchange contracts
|
—
|
|
|
189
|
|
|
—
|
|
|
189
|
|
|
—
|
|
|
136
|
|
|
—
|
|
|
136
|
|
|
Other derivatives
|
—
|
|
|
3
|
|
|
—
|
|
|
3
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Total liabilities
|
$
|
—
|
|
|
$
|
194
|
|
|
$
|
—
|
|
|
$
|
194
|
|
|
$
|
—
|
|
|
$
|
147
|
|
|
$
|
—
|
|
|
$
|
147
|
|
For the fiscal years ended October 31, 2020 and 2019, there were no transfers between levels within the fair value hierarchy.
Valuation Techniques
Cash Equivalents and Investments: The Company holds time deposits, money market funds, debt securities primarily consisting of corporate and foreign government notes and bonds. The Company values cash equivalents using quoted market prices, alternative pricing sources, including net asset value, or models utilizing market observable inputs. The fair value of debt investments was based on quoted market prices or model-driven valuations using inputs primarily derived from or corroborated by observable market data, and, in certain instances, valuation models that utilize assumptions which cannot be corroborated with observable market data.
Derivative Instruments: The Company uses forward contracts, interest rate and total return swaps to hedge certain foreign currency and interest rate exposures. The Company uses industry standard valuation models to measure fair value. Where applicable, these models project future cash flows and discount the future amounts to present value using market-based observable inputs, including interest rate curves, the Company and counterparties' credit risk, foreign currency exchange rates, and forward and spot prices for currencies and interest rates. See Note 13, "Financial Instruments", for a further discussion of the Company's use of derivative instruments.
Other Fair Value Disclosures
Short- and Long-Term Debt: The Company estimates the fair value of its debt primarily using an expected present value technique, which is based on observable market inputs using interest rates currently available to companies of similar credit standing for similar terms and remaining maturities, and considering its own credit risk. The portion of the Company's debt that is hedged is reflected in the Consolidated Balance Sheets as an amount equal to the debt's carrying amount and a fair value adjustment representing changes in the fair value of the hedged debt obligations arising from movements in benchmark interest rates. At October 31, 2020, the estimated fair value of the Company's short-term and long-term debt was $17.1 billion and the carrying value was $15.9 billion. As of October 31, 2019, the estimated fair value of the Company's short-term and long-term
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
debt was $14.6 billion and the carrying value was $13.8 billion. If measured at fair value in the Consolidated Balance Sheets, short-term and long-term debt would be classified in Level 2 of the fair value hierarchy.
Other Financial Instruments: For the balance of the Company's financial instruments, primarily accounts receivable, accounts payable and financial liabilities included in other accrued liabilities, the carrying amounts approximate fair value due to their short maturities. If measured at fair value in the Consolidated Balance Sheets, these other financial instruments would be classified in Level 2 or Level 3 of the fair value hierarchy.
Non-Financial Assets and Equity Investments without readily determinable fair value: The Company's non-financial assets, such as intangible assets, goodwill and property, plant and equipment, are recorded at cost. Fair value adjustments are made to cost basis in the period an impairment charge is recognized.
In the second quarter of fiscal 2020, the Company recorded a goodwill impairment charge of $865 million associated with the HPC & MCS reporting unit. The fair value of the Company's reporting units was classified in Level 3 of the fair value hierarchy due to the significance of unobservable inputs developed using company-specific information. For more information on the goodwill impairment, see Note 11 "Goodwill and Intangible Assets".
Equity investments without readily determinable fair value 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 years ended October 31, 2020, 2019 and 2018, there were no material impairment charges relating to equity investments. For year ended October 31, 2020, the Company recognized a gain of $19 million in Interest and other, net in the Consolidated Statements of Earnings, based on observable price changes for certain equity investments without readily determinable fair value. If measured at fair value in the Consolidated Balance Sheets, these would generally be classified in Level 3 of the fair value hierarchy.
Note 13: Financial Instruments
Cash Equivalents and Available-for-Sale Investments
Cash equivalents and available-for-sale investments were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
October 31, 2020
|
|
As of
October 31, 2019
|
|
|
Cost
|
|
Gross
Unrealized
Gains
|
|
|
|
Fair
Value
|
|
Cost
|
|
Gross
Unrealized
Gains
|
|
|
|
Fair
Value
|
|
|
In millions
|
|
Cash Equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Time deposits
|
$
|
939
|
|
|
$
|
—
|
|
|
|
|
$
|
939
|
|
|
$
|
803
|
|
|
$
|
—
|
|
|
|
|
$
|
803
|
|
|
Money market funds
|
1,167
|
|
|
—
|
|
|
|
|
1,167
|
|
|
859
|
|
|
—
|
|
|
|
|
859
|
|
|
Total cash equivalents
|
2,106
|
|
|
—
|
|
|
|
|
2,106
|
|
|
1,662
|
|
|
—
|
|
|
|
|
1,662
|
|
|
Available-for-Sale Investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign bonds
|
108
|
|
|
17
|
|
|
|
|
125
|
|
|
110
|
|
|
23
|
|
|
|
|
133
|
|
|
Other debt securities
|
20
|
|
|
1
|
|
|
|
|
21
|
|
|
32
|
|
|
—
|
|
|
|
|
32
|
|
|
Total available-for-sale investments
|
128
|
|
|
18
|
|
|
|
|
146
|
|
|
142
|
|
|
23
|
|
|
|
|
165
|
|
|
Total cash equivalents and available-for-sale investments
|
$
|
2,234
|
|
|
$
|
18
|
|
|
|
|
$
|
2,252
|
|
|
$
|
1,804
|
|
|
$
|
23
|
|
|
|
|
$
|
1,827
|
|
All highly liquid investments with original maturities of three months or less at the date of acquisition are considered cash equivalents. As of October 31, 2020 and 2019, the carrying amount of cash equivalents approximated fair value due to the short period of time to maturity. Interest income related to cash, cash equivalents and debt securities was approximately $44 million in fiscal 2020, $64 million in fiscal 2019 and $104 million in fiscal 2018. Time deposits were primarily issued by institutions outside the U.S. as of October 31, 2020 and October 31, 2019. The estimated fair value of the available-for-sale investments may not be representative of values that will be realized in the future.
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Contractual maturities of investments in available-for-sale debt securities were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
October 31, 2020
|
|
|
Amortized Cost
|
|
Fair Value
|
|
|
In millions
|
|
Due in one year
|
$
|
1
|
|
|
$
|
1
|
|
|
Due in more than five years
|
127
|
|
|
145
|
|
|
|
$
|
128
|
|
|
$
|
146
|
|
Equity securities investments in privately held companies are included in Long-term financing receivables and other assets in the Consolidated Balance Sheets. The carrying amount of those without readily determinable fair values amounted to $295 million and $190 million at October 31, 2020 and 2019, respectively.
Investments in equity securities that are accounted for using the equity method are included in Investments in equity interests in the Consolidated Balance Sheets. These amounted to $2.2 billion and $2.3 billion at October 31, 2020 and 2019, respectively. For additional information, see Note 20, "Equity Method Investments".
Derivative Instruments
The Company is a global company exposed to foreign currency exchange rate fluctuations and interest rate changes in the normal course of its business. As part of its risk management strategy, the Company uses derivative instruments, primarily forward contracts, interest rate swaps and total return swaps to hedge certain foreign currency, interest rate and, to a lesser extent, equity exposures. The Company's objective is to offset gains and losses resulting from these exposures with losses and gains on the derivative contracts used to hedge them, thereby reducing volatility of earnings or protecting the fair value of assets and liabilities. The Company does not have any leveraged derivatives and does not use derivative contracts for speculative purposes. The Company may designate its derivative contracts as fair value hedges, cash flow hedges or hedges of the foreign currency exposure of a net investment in a foreign operation ("net investment hedges"). Additionally, for derivatives not designated as hedging instruments, the Company categorizes those economic hedges as other derivatives. Derivative instruments are recognized at fair value in the Consolidated Balance Sheets. The change in fair value of the derivative instruments is recognized in the Consolidated Statements of Earnings or Consolidated Statements of Comprehensive Income depending upon the type of hedge as further discussed below. The Company classifies cash flows from its derivative programs with the activities that correspond to the underlying hedged items in the Consolidated Statements of Cash Flows.
As a result of its use of derivative instruments, the Company is exposed to the risk that its counterparties will fail to meet their contractual obligations. To mitigate counterparty credit risk, the Company has a policy of only entering into derivative contracts with carefully selected major financial institutions based on their credit ratings and other factors, and the Company maintains dollar risk limits that correspond to each financial institution's credit rating and other factors. The Company's established policies and procedures for mitigating credit risk include reviewing and establishing limits for credit exposure and periodically reassessing the creditworthiness of its counterparties. Master netting agreements also mitigate credit exposure to counterparties by permitting the Company to net amounts due from the Company to a counterparty against amounts due to the Company from the same counterparty under certain conditions.
To further mitigate credit exposure to counterparties, the Company has collateral security agreements, which allows the Company to hold collateral from, or require the Company to post collateral to counterparties when aggregate derivative fair values exceed contractually established thresholds which are generally based on the credit ratings of the Company and its counterparties. If the Company's credit rating falls below a specified credit rating, the counterparty has the right to request full collateralization of the derivatives' net liability position. Conversely, if the counterparty's credit rating falls below a specified credit rating, the Company has the right to request full collateralization of the derivatives' net liability position. Collateral is generally posted within two business days. The fair value of the Company's derivatives with credit contingent features in a net liability position was $45 million and $18 million at October 31, 2020 and 2019, respectively, all of which were fully collateralized within two business days.
Under the Company's derivative contracts, the counterparty can terminate all outstanding trades following a covered change of control event affecting the Company that results in the surviving entity being rated below a specified credit rating. This credit contingent provision did not affect the Company's financial position or cash flows as of October 31, 2020 and 2019.
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Fair Value Hedges
The Company issues long-term debt in U.S. dollars based on market conditions at the time of financing. The Company may enter into fair value hedges, such as interest rate swaps, to reduce the exposure of its debt portfolio to changes in fair value resulting from changes in interest rates by achieving a primarily U.S. dollar LIBOR-based floating interest rate. The swap transactions generally involve principal and interest obligations for U.S. dollar-denominated amounts. Alternatively, the Company may choose not to swap fixed for floating interest payments or may terminate a previously executed swap if it believes a larger proportion of fixed-rate debt would be beneficial. When investing in fixed-rate instruments, the Company may enter into interest rate swaps that convert the fixed interest payments into variable interest payments and may designate these swaps as fair value hedges.
For derivative instruments that are designated and qualify as fair value hedges, the Company recognizes the change in fair value of the derivative instrument, as well as the offsetting change in the fair value of the hedged item, in Interest and other, net in the Consolidated Statements of Earnings in the period of change.
Cash Flow Hedges
The Company uses forward contracts designated as cash flow hedges to protect against the foreign currency exchange rate risks inherent in its forecasted net revenue and, to a lesser extent, cost of sales, operating expenses, and intercompany loans denominated in currencies other than the U.S. dollar. The Company's foreign currency cash flow hedges mature generally within twelve months; however, forward contracts associated with sales-type and direct-financing leases and intercompany loans extend for the duration of the lease or loan term, which can extend up to five years.
The Company uses interest rate contracts designated as cash flow hedges to hedge the variability of cash flows in the interest payments associated with its variable-rate debt due to changes in the U.S. dollar LIBOR-based floating interest rate. The swap transactions generally involve principal and interest obligations for U.S. dollar-denominated amounts.
For derivative instruments that are designated and qualify as cash flow hedges, and as long as they remain highly effective, the Company records the changes in fair value of the derivative instrument in Accumulated other comprehensive loss as a separate component of equity in the Consolidated Balance Sheets and subsequently reclassifies these amounts into earnings in the same financial statement line item when the hedged transaction is recognized.
Net Investment Hedges
The Company uses forward contracts designated as net investment hedges to hedge net investments in certain foreign subsidiaries whose functional currency is the local currency. The Company records the changes in the fair value of the hedged items in cumulative translation adjustment as a separate component of Equity in the Consolidated Balance Sheets.
Other Derivatives
Other derivatives not designated as hedging instruments consist primarily of forward contracts used to hedge foreign currency-denominated balance sheet exposures. The Company also uses total return swaps, based on equity or fixed income indices, to hedge its executive deferred compensation plan liability.
For derivative instruments not designated as hedging instruments, the Company recognizes changes in fair value of the derivative instrument, as well as the offsetting change in the fair value of the hedged item, in Interest and other, net in the Consolidated Statements of Earnings in the period of change.
Hedge Effectiveness
For interest rate swaps designated as fair value hedges, the Company measures hedge effectiveness by offsetting the change in fair value of the hedged items with the change in fair value of the derivative. For forward contracts designated as cash flow or net investment hedges, the Company measures hedge effectiveness by comparing the cumulative change in fair value of the hedge contract with the cumulative change in fair value of the hedged item, both of which are based on forward rates.
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Fair Value of Derivative Instruments in the Consolidated Balance Sheets
The gross notional and fair value of derivative instruments in the Consolidated Balance Sheets was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
October 31, 2020
|
|
As of
October 31, 2019
|
|
|
|
|
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
|
$
|
3,850
|
|
|
$
|
—
|
|
|
$
|
220
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
6,850
|
|
|
$
|
—
|
|
|
$
|
72
|
|
|
$
|
11
|
|
|
$
|
—
|
|
|
Cash flow hedges:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency contracts
|
7,652
|
|
|
75
|
|
|
85
|
|
|
95
|
|
|
38
|
|
|
8,578
|
|
|
164
|
|
|
141
|
|
|
45
|
|
|
27
|
|
|
Interest rate contracts
|
500
|
|
|
—
|
|
|
—
|
|
|
2
|
|
|
—
|
|
|
500
|
|
|
—
|
|
|
1
|
|
|
—
|
|
|
—
|
|
|
Net investment hedges:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency contracts
|
1,804
|
|
|
34
|
|
|
44
|
|
|
11
|
|
|
9
|
|
|
1,766
|
|
|
31
|
|
|
36
|
|
|
18
|
|
|
10
|
|
|
Total derivatives designated as hedging instruments
|
13,806
|
|
|
109
|
|
|
349
|
|
|
108
|
|
|
47
|
|
|
17,694
|
|
|
195
|
|
|
250
|
|
|
74
|
|
|
37
|
|
|
Derivatives not designated as hedging instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency contracts
|
6,157
|
|
|
43
|
|
|
9
|
|
|
35
|
|
|
1
|
|
|
6,398
|
|
|
17
|
|
|
3
|
|
|
33
|
|
|
3
|
|
|
Other derivatives
|
105
|
|
|
—
|
|
|
—
|
|
|
3
|
|
|
—
|
|
|
97
|
|
|
3
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Total derivatives not designated as hedging instruments
|
6,262
|
|
|
43
|
|
|
9
|
|
|
38
|
|
|
1
|
|
|
6,495
|
|
|
20
|
|
|
3
|
|
|
33
|
|
|
3
|
|
|
Total derivatives
|
$
|
20,068
|
|
|
$
|
152
|
|
|
$
|
358
|
|
|
$
|
146
|
|
|
$
|
48
|
|
|
$
|
24,189
|
|
|
$
|
215
|
|
|
$
|
253
|
|
|
$
|
107
|
|
|
$
|
40
|
|
Offsetting of Derivative Instruments
The Company recognizes all derivative instruments on a gross basis in the 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. As of October 31, 2020 and 2019, information related to the potential effect of the Company's use of the master netting agreements and collateral security agreements was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
October 31, 2020
|
|
|
In the 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
|
$
|
510
|
|
|
$
|
—
|
|
|
$
|
510
|
|
|
$
|
137
|
|
|
$
|
321
|
|
|
(1)
|
|
$
|
52
|
|
|
Derivative liabilities
|
$
|
194
|
|
|
$
|
—
|
|
|
$
|
194
|
|
|
$
|
137
|
|
|
$
|
55
|
|
|
(2)
|
|
$
|
2
|
|
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
October 31, 2019
|
|
|
In the 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
|
$
|
468
|
|
|
$
|
—
|
|
|
$
|
468
|
|
|
$
|
123
|
|
|
$
|
263
|
|
|
(1)
|
|
$
|
82
|
|
|
Derivative liabilities
|
$
|
147
|
|
|
$
|
—
|
|
|
$
|
147
|
|
|
$
|
123
|
|
|
$
|
19
|
|
|
(2)
|
|
$
|
5
|
|
(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 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 October 31, 2020, $55 million of collateral posted was entirely by way of re-use of counterparty collateral. As of October 31, 2019, $19 million of collateral posted was entirely by way of re-use of counterparty collateral.
The amounts recorded on the Consolidated Balance Sheets related to cumulative basis adjustments for fair value hedges were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying amount of the hedged assets/ (liabilities)
|
|
Cumulative amount of fair value hedging adjustment included in the carrying amount of the hedged assets/ (liabilities)
|
|
|
As of
|
|
As of
|
|
Balance Sheet Line Item of Hedged Item
|
October 31, 2020
|
|
October 31, 2019
|
|
October 31, 2020
|
|
October 31, 2019
|
|
|
In millions
|
|
In millions
|
|
Notes payable and short-term borrowings
|
$
|
—
|
|
|
$
|
(2,987)
|
|
|
$
|
—
|
|
|
$
|
11
|
|
|
Long-term debt
|
$
|
(4,059)
|
|
|
$
|
(3,908)
|
|
|
$
|
(220)
|
|
|
$
|
(72)
|
|
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
|
|
|
2020
|
|
2019
|
|
2018
|
|
|
In millions
|
|
Derivatives in Cash Flow Hedging relationship
|
|
|
|
|
|
|
Foreign exchange contracts
|
$
|
(34)
|
|
|
$
|
307
|
|
|
$
|
169
|
|
|
Interest rate contracts
|
(6)
|
|
|
1
|
|
|
—
|
|
|
Derivatives in Net Investment Hedging relationship
|
|
|
|
|
|
|
Foreign exchange contracts
|
56
|
|
|
2
|
|
|
81
|
|
Total
|
$
|
16
|
|
|
$
|
310
|
|
|
$
|
250
|
|
As of October 31, 2020, the Company expects to reclassify an estimated net accumulated other comprehensive loss of
approximately $30 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.
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Effect of Derivative Instruments on the Consolidated Statements of Earnings
The pre-tax effect of derivative instruments on the Consolidated Statements of Earnings were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gains (Losses) Recognized in Income
|
|
|
2020
|
|
2019
|
|
2018
|
|
|
Net revenue
|
|
Interest and other, net
|
|
Net revenue
|
|
Interest and other, net
|
|
Net revenue
|
|
Interest and other, net
|
|
|
In millions
|
|
Total amounts of income and expense line items presented in the Consolidated Statements of Earnings in which the effects of fair value hedges, cash flow hedges and derivatives not designated as hedging instruments are recorded
|
$
|
26,982
|
|
|
$
|
(215)
|
|
|
$
|
29,135
|
|
|
$
|
(177)
|
|
|
$
|
30,852
|
|
|
$
|
(274)
|
|
|
Gains (losses) on derivatives in fair value hedging relationships
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate contracts
|
|
|
|
|
|
|
|
|
|
|
|
|
Hedged items
|
$
|
—
|
|
|
$
|
(159)
|
|
|
$
|
—
|
|
|
$
|
(414)
|
|
|
$
|
—
|
|
|
$
|
211
|
|
|
Derivatives designated as hedging instruments
|
—
|
|
|
159
|
|
|
—
|
|
|
414
|
|
|
—
|
|
|
(211)
|
|
|
Gains (losses) on derivatives in cash flow hedging relationships
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of gains (losses) reclassified from accumulated other comprehensive income into income
|
38
|
|
|
(14)
|
|
|
233
|
|
|
138
|
|
|
(24)
|
|
|
16
|
|
|
Interest rate contracts
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of gains (losses) reclassified from accumulated other comprehensive income into income
|
—
|
|
|
(3)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Gains (losses) on derivatives not designated as hedging instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
—
|
|
|
44
|
|
|
—
|
|
|
(134)
|
|
|
—
|
|
|
301
|
|
|
Other derivatives
|
—
|
|
|
(5)
|
|
|
—
|
|
|
8
|
|
|
—
|
|
|
(6)
|
|
|
Total gains (losses)
|
$
|
38
|
|
|
$
|
22
|
|
|
$
|
233
|
|
|
$
|
12
|
|
|
$
|
(24)
|
|
|
$
|
311
|
|
Note 14: Borrowings
Notes Payable and Short-Term Borrowings
Notes payable and short-term borrowings, including the current portion of long-term debt, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of October 31,
|
|
|
2020
|
|
2019
|
|
|
Amount
Outstanding
|
|
Weighted-Average
Interest Rate
|
|
Amount
Outstanding
|
|
Weighted-Average
Interest Rate
|
|
|
Dollars in millions
|
|
Current portion of long-term debt(1)
|
$
|
2,768
|
|
|
2.0
|
%
|
|
$
|
3,441
|
|
|
4.1
|
%
|
|
FS Commercial paper
|
677
|
|
|
—
|
%
|
|
698
|
|
|
(0.1)
|
%
|
|
Notes payable to banks, lines of credit and other(2)
|
310
|
|
|
1.3
|
%
|
|
286
|
|
|
2.7
|
%
|
|
Total notes payable and short-term borrowings
|
$
|
3,755
|
|
|
|
|
$
|
4,425
|
|
|
|
(1)As of October 31, 2020, Current portion of long-term debt, net of discount and issuance costs, includes $886 million associated with the Company issued asset-backed debt securities.
(2)Notes payable to banks, lines of credit and other includes $219 million and $204 million at October 31, 2020 and 2019, respectively, of borrowing- and funding-related activity associated with FS and its subsidiaries.
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Long-Term Debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of October 31,
|
|
|
2020
|
|
2019
|
|
|
In millions
|
|
Hewlett Packard Enterprise Unsecured Senior Notes
|
|
|
|
|
$1,000 issued at discount to par at a price of 99.883% in July 2020 at 1.45% due April 1, 2024, interest payable semi-annually on April 1 and October 1 of each year
|
$
|
999
|
|
|
$
|
—
|
|
|
$750 issued at discount to par at a price of 99.820% in July 2020 at 1.75% due April 1, 2026, interest payable semi-annually on April 1 and October 1 of each year
|
749
|
|
|
—
|
|
|
$1,250 issued at discount to par at a price of 99.956% in April 2020 at 4.45% due October 2, 2023, interest payable semi-annually on April 2 and October 2 of each year
|
1,250
|
|
|
—
|
|
|
$1,000 issued at discount to par at a price of 99.817% in April 2020 at 4.65% due October 1, 2024, interest payable semi-annually on April 1 and October 1 of each year
|
998
|
|
|
—
|
|
|
$3,000 issued at discount to par at a price of 99.972% in October 2015 at 3.6% paid August 17, 2020, interest payable semi-annually on April 15 and October 15 of each year.
|
—
|
|
|
3,000
|
|
|
$500 issued at par in September 2019 at three-month USD LIBOR plus 0.68% due March 12, 2021, interest payable quarterly on March 12, June 12, September 12 and December 12 of each year
|
500
|
|
|
500
|
|
|
$500 issued at discount to par at a price of 99.861% in September 2018 at 3.5%, due October 5, 2021, interest payable semi-annually on April 5 and October 5 of each year
|
500
|
|
|
500
|
|
|
$800 issued at par in September 2018 at three-month USD LIBOR plus 0.72% due October 5, 2021, interest payable quarterly on January 5, April 5, July 5 and October 5 of each year
|
800
|
|
|
800
|
|
|
$1,350 issued at discount to par at a price of 99.802% in October 2015 at 4.4%, due October 15, 2022, interest payable semi-annually on April 15 and October 15 of each year
|
1,349
|
|
|
1,349
|
|
|
$1,000 issued at discount to par at a price of 99.979% in September 2019 at 2.25%, due April 1, 2023, interest payable semi-annually on April 1 and October 1 of each year
|
1,000
|
|
|
1,000
|
|
|
$2,500 issued at discount to par at a price of 99.725% in October 2015 at 4.9%, due October 15, 2025, interest payable semi-annually on April 15 and October 15 of each year
|
2,497
|
|
|
2,495
|
|
|
$750 issued at discount to par at a price of 99.942% in October 2015 at 6.2%, due October 15, 2035, interest payable semi-annually on April 15 and October 15 of each year
|
750
|
|
|
750
|
|
|
$1,500 issued at discount to par at a price of 99.932% in October 2015 at 6.35%, due October 15, 2045, interest payable semi-annually on April 15 and October 15 of each year
|
1,499
|
|
|
1,499
|
|
|
Hewlett Packard Enterprise Asset-Backed Debt Securities
|
|
|
|
|
$1,000 issued in June 2020, in six tranches at a weighted average price of 99.99% and a weighted average interest rate of 1.19%, payable monthly from August 2020
|
822
|
|
|
—
|
|
|
$755 issued in February 2020 of in six tranches at a weighted average price of 99.99% and a weighted average interest rate of 1.87%, payable monthly from April 2020
|
519
|
|
|
—
|
|
|
$763 issued in September 2019, in six tranches at a discount to par, at a weighted average price of 99.99% and a weighted average interest rate of 2.31%, payable monthly from November 2019
|
385
|
|
|
763
|
|
|
Other, including capital lease obligations, at 0.00%-9.00%, due in calendar years 2020-2030(1)
|
171
|
|
|
166
|
|
|
Fair value adjustment related to hedged debt
|
220
|
|
|
61
|
|
|
Unamortized debt issuance costs
|
(54)
|
|
|
(47)
|
|
|
Less: current portion
|
(2,768)
|
|
|
(3,441)
|
|
|
Total long-term debt
|
$
|
12,186
|
|
|
$
|
9,395
|
|
(1)Other, including capital lease obligations includes $98 million and $80 million as of October 31, 2020 and 2019, respectively, of borrowing- and funding-related activity associated with FS and its subsidiaries that are collateralized by receivables and underlying assets associated with the related capital and operating leases. For both the periods presented, the carrying amount of the assets approximated the carrying amount of the borrowings.
Interest expense on borrowings recognized in the Consolidated Statements of Earnings was as follows:
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal years ended October 31,
|
|
Expense
|
Location
|
|
2020
|
|
2019
|
|
2018
|
|
|
|
|
In millions
|
|
Financing interest
|
Financing interest
|
|
$
|
271
|
|
|
$
|
297
|
|
|
$
|
278
|
|
|
Interest expense
|
Interest and other, net
|
|
332
|
|
|
311
|
|
|
353
|
|
|
Total interest expense
|
|
|
$
|
603
|
|
|
$
|
608
|
|
|
$
|
631
|
|
Hewlett Packard Enterprise Unsecured Senior Notes
On August 17, 2020, the Company redeemed $3.0 billion of 3.60% Senior Notes with an original maturity date of October 15, 2020. These notes were fully hedged with interest rate swaps. As part of the transaction, the Company terminated and settled the related hedges and incurred make-whole premium provision charges of $7 million.
On July 17, 2020, the Company completed its offering of $1.0 billion of 1.45% Senior Notes due April 1, 2024 and $750 million of 1.75% Senior Notes due April 1, 2026. The net proceeds from this offerings, together with the cash on hand, were used to fund the redemption of the $3.0 billion outstanding principal amount of the 3.60% Notes due October 15, 2020.
On April 9, 2020, the Company completed its offering of $1.3 billion of 4.45% Senior Notes due October 2, 2023 and $1.0 billion of 4.65% Senior Notes due October 1, 2024. The net proceeds of the offering were used for general corporate purposes, including repayment of existing debt.
On September 13, 2019, the Company completed its offering of $1.0 billion of 2.25% Senior Notes due April 1, 2023 and $500 million floating rate Note at three month USD LIBOR plus 0.68% due March 12, 2021. The net proceeds from this offering were used to fund the repayment of the $1.1 billion outstanding principal amount of the 2.10% Senior Notes due in October 2019 and to fund the Company's acquisition of Cray Inc.
Asset-Backed Debt Securities
On June 30, 2020, the Company completed it offering of $1.0 billion of asset-backed debt securities in six tranches at a weighted average price of 99.99% and a weighted average interest rate of 1.19%, payable monthly from August 2020 with a stated final maturity date of July 2030.
On February 20, 2020, the Company completed its offering of $755 million of asset-backed debt securities in six tranches at a weighted average price of 99.99% and a weighted average interest rate of 1.87%, payable monthly from April 2020 with a stated final maturity date of February 2030.
On September 20, 2019, the Company completed its offering of $763 million asset-backed debt securities in six tranches at a weighted average price of 99.99% and a weighted average interest rate of 2.31%, payable monthly from November 2019 with a stated final maturity date of September 2029.
As disclosed in Note 13, "Financial Instruments", the Company uses interest rate swaps to mitigate the exposure of its fixed rate debt to changes in fair value resulting from changes in interest rates, or hedge the variability of cash flows in the interest payments associated with its variable-rate debt. Interest rates on long-term debt in the table above have not been adjusted to reflect the impact of any interest rate swaps.
Commercial Paper
Hewlett Packard Enterprise maintains two commercial paper programs, "the Parent Programs," and a wholly-owned subsidiary maintains a third program. Hewlett Packard Enterprise's U.S. program provides for the issuance of U.S. dollar-denominated commercial paper up to a maximum aggregate principal amount of $4.75 billion which was increased from $4.0 billion in March 2020. Hewlett Packard Enterprise's euro commercial paper program provides for the issuance of commercial paper outside of the U.S. denominated in U.S. dollars, euros or British pounds up to a maximum aggregate principal amount of $3.0 billion or the equivalent in those alternative currencies. The combined aggregate principal amount of commercial paper outstanding under those programs at any one time cannot exceed 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, which was increased from $500 million, by way of an amendment in April 2019. As of October 31, 2020 and 2019, no borrowings were outstanding under the Parent Programs, and $677 million and $698 million, respectively, were outstanding under the subsidiary's program.
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Revolving Credit Facility
We maintain a $4.75 billion five year senior unsecured committed credit facility that was entered into in August 2019. Loans under the revolving credit facility may be used for general corporate purposes, including support of the commercial paper program. Commitments under the Credit Agreement are available for a period of five years, which period may be extended, subject to satisfaction of certain conditions, by up to two one-year periods. Commitment fees, interest rates and other terms of borrowing under the credit facility vary based on Hewlett Packard Enterprise's external credit rating. As of October 31, 2020 and 2019, no borrowings were outstanding under the Credit Agreement.
Future Maturities of Long-term Debt
As of October 31, 2020, aggregate future maturities of the Company's long-term debt at face value (excluding a fair value adjustment related to hedged debt of $220 million and a net discount on debt issuance of $9 million), including capital lease obligations were as follows:
|
|
|
|
|
|
|
|
Fiscal year
|
In millions
|
|
2021
|
$
|
2,776
|
|
|
2022
|
1,962
|
|
|
2023
|
2,509
|
|
|
2024
|
2,010
|
|
|
2025
|
2,507
|
|
|
Thereafter
|
3,033
|
|
|
Total
|
$
|
14,797
|
|
Note 15: Stockholders' Equity
Taxes related to Other Comprehensive Loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal years ended October 31,
|
|
|
2020
|
|
2019
|
|
2018
|
|
|
In millions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxes on change in net unrealized gains (losses) on cash flow hedges:
|
|
|
|
|
|
|
Tax (provision) benefit on net unrealized gains (losses) arising during the period
|
(10)
|
|
|
(33)
|
|
|
(22)
|
|
|
Tax provision (benefit) on net (gains) losses reclassified into earnings
|
21
|
|
|
43
|
|
|
(1)
|
|
|
|
11
|
|
|
10
|
|
|
(23)
|
|
|
Taxes on change in unrealized components of defined benefit plans:
|
|
|
|
|
|
|
Tax (provision) benefit on net unrealized gains (losses) arising during the period
|
10
|
|
|
40
|
|
|
2
|
|
|
Tax provision on amortization of net actuarial loss and prior service benefit
|
(17)
|
|
|
(13)
|
|
|
(14)
|
|
|
Tax provision on curtailments, settlements and other
|
(1)
|
|
|
(1)
|
|
|
(10)
|
|
|
|
(8)
|
|
|
26
|
|
|
(22)
|
|
|
Taxes on change in cumulative translation adjustment:
|
|
|
|
|
|
|
Tax (provision) benefit on cumulative translation adjustment arising during the period
|
5
|
|
|
—
|
|
|
3
|
|
|
|
5
|
|
|
—
|
|
|
3
|
|
|
Tax (provision) benefit on other comprehensive loss
|
$
|
8
|
|
|
$
|
36
|
|
|
$
|
(42)
|
|
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Changes and reclassifications related to Other Comprehensive Loss, net of taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal years ended October 31,
|
|
|
2020
|
|
2019
|
|
2018
|
|
|
In millions
|
|
Other comprehensive loss, net of taxes:
|
|
|
|
|
|
|
Change in net unrealized gains (losses) on available-for-sale securities:
|
|
|
|
|
|
|
Net unrealized gains (losses) arising during the period
|
$
|
(1)
|
|
|
$
|
9
|
|
|
$
|
(3)
|
|
|
(Gains) losses reclassified into earnings
|
(4)
|
|
|
(3)
|
|
|
(9)
|
|
|
|
(5)
|
|
|
6
|
|
|
(12)
|
|
|
Change in net unrealized gains (losses) on cash flow hedges:
|
|
|
|
|
|
|
Net unrealized gains (losses) arising during the period
|
(50)
|
|
|
275
|
|
|
147
|
|
|
Net (gains) losses reclassified into earnings
|
—
|
|
|
(328)
|
|
|
7
|
|
|
|
(50)
|
|
|
(53)
|
|
|
154
|
|
|
Change in unrealized components of defined benefit plans:
|
|
|
|
|
|
|
Net unrealized gains (losses) arising during the period
|
(348)
|
|
|
(661)
|
|
|
(421)
|
|
|
Amortization of net actuarial loss and prior service benefit
|
232
|
|
|
203
|
|
|
177
|
|
|
Curtailments, settlements and other
|
9
|
|
|
14
|
|
|
12
|
|
|
|
(107)
|
|
|
(444)
|
|
|
(232)
|
|
|
Change in cumulative translation adjustment:
|
|
|
|
|
|
|
Cumulative translation adjustment arising during the period
|
(7)
|
|
|
(18)
|
|
|
(67)
|
|
|
Release of cumulative translation adjustment as a result of divestitures and country exits
|
—
|
|
|
—
|
|
|
20
|
|
|
|
(7)
|
|
|
(18)
|
|
|
(47)
|
|
|
Other comprehensive loss, net of taxes
|
$
|
(169)
|
|
|
$
|
(509)
|
|
|
$
|
(137)
|
|
The components of accumulated other comprehensive loss, net of taxes as of October 31, 2020 and changes during fiscal 2020 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
|
$
|
23
|
|
|
$
|
53
|
|
|
$
|
(3,366)
|
|
|
$
|
(437)
|
|
|
$
|
(3,727)
|
|
|
Effect of change in accounting principle (1)
|
—
|
|
|
(10)
|
|
|
—
|
|
|
(33)
|
|
|
(43)
|
|
|
Other comprehensive income (loss) before reclassifications
|
(1)
|
|
|
(50)
|
|
|
(348)
|
|
|
(7)
|
|
|
(406)
|
|
|
Reclassifications of (gains) losses into earnings
|
(4)
|
|
|
—
|
|
|
241
|
|
|
—
|
|
|
237
|
|
|
Balance at end of period
|
$
|
18
|
|
|
$
|
(7)
|
|
|
$
|
(3,473)
|
|
|
$
|
(477)
|
|
|
$
|
(3,939)
|
|
(1)Reflects the adoption of the FASB guidance on stranded tax effects. For more information, see Note 1 "Overview and Summary of Significant Accounting Policies".
Dividends
The stockholders of HPE common stock are entitled to receive dividends when and as declared by HPE's Board of Directors. On February 23, 2019, the Company announced an increase to the regular quarterly dividend from $0.1125 per share
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
to $0.12 per share, which was effective in the fourth quarter of fiscal 2019. Dividends declared were $0.36 per common share in fiscal 2020 and $0.4575 per common share in fiscal 2019.
On December 1, 2020, the Company declared a regular cash dividend of $0.12 per share on the Company's common stock, payable on January 6, 2021, to the stockholders of record as of the close of business on December 9, 2020.
Share Repurchase Program
On October 13, 2015, the Company's Board of Directors approved a share repurchase program with a $3.0 billion authorization, which was refreshed with additional share repurchase authorizations of $3.0 billion, $5.0 billion and $2.5 billion on May 24, 2016, October 16, 2017 and February 21, 2018, respectively. This program, which does not have a specific expiration date, authorizes repurchases in the open market or in private transactions. On April 6, 2020, the Company announced that it suspended purchases under its share repurchase program in response to the global economic uncertainty that resulted from the worldwide spread of COVID-19.
For fiscal 2020, the Company repurchased and settled a total of 25.3 million shares under its share repurchase program through open market repurchases, which included 0.5 million shares that were unsettled open market purchase as of October 31, 2019. As of October 31, 2020, the Company had no unsettled open market repurchases of shares. Shares repurchased during the fiscal 2020 were recorded as a $346 million reduction to stockholders' equity. As of October 31, 2020, the Company had a remaining authorization of $2.1 billion for future share repurchases.
For fiscal 2019, the Company repurchased and settled a total of 150 million shares under its share repurchase program through open market repurchases, which included 2.4 million shares that were unsettled open market purchase as of October 31, 2018. Additionally, the Company had unsettled open market repurchases of 0.5 million shares as of October 31, 2019. Shares repurchased during fiscal 2019 were recorded as a $2.2 billion reduction to stockholders' equity. As of October 31, 2019, the Company had a remaining authorization of $2.5 billion for future share repurchases.
Note 16: Net Earnings (Loss) Per Share
The Company calculates basic net earnings (loss) per share ("EPS") using net earnings or loss and the weighted-average number of shares outstanding during the reporting period. Diluted net EPS includes the weighted-average dilutive effect of restricted stock units, stock options, and performance-based awards.
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
The reconciliations of the numerators and denominators of each of the basic and diluted net EPS calculations were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal years ended October 31,
|
|
|
2020
|
|
2019
|
|
2018
|
|
|
In millions, except per share amounts
|
|
Numerator:
|
|
|
|
|
|
|
Net earnings (loss) from continuing operations
|
$
|
(322)
|
|
|
$
|
1,049
|
|
|
$
|
2,012
|
|
|
Net loss from discontinued operations
|
—
|
|
|
—
|
|
|
(104)
|
|
|
Net earnings (loss)
|
$
|
(322)
|
|
|
$
|
1,049
|
|
|
$
|
1,908
|
|
|
Denominator:
|
|
|
|
|
|
|
Weighted-average shares used to compute basic net EPS
|
1,294
|
|
|
1,353
|
|
|
1,529
|
|
|
Dilutive effect of employee stock plans
|
—
|
|
|
13
|
|
|
24
|
|
|
Weighted-average shares used to compute diluted net EPS
|
1,294
|
|
|
1,366
|
|
|
1,553
|
|
|
Basic net earnings (loss) per share:
|
|
|
|
|
|
|
Continuing operations
|
$
|
(0.25)
|
|
|
$
|
0.78
|
|
|
$
|
1.32
|
|
|
Discontinued operations
|
—
|
|
|
—
|
|
|
(0.07)
|
|
|
Basic net earnings (loss) per share
|
$
|
(0.25)
|
|
|
$
|
0.78
|
|
|
$
|
1.25
|
|
|
Diluted net earnings (loss) per share:
|
|
|
|
|
|
|
Continuing operations
|
$
|
(0.25)
|
|
|
$
|
0.77
|
|
|
$
|
1.30
|
|
|
Discontinued operations
|
—
|
|
|
—
|
|
|
(0.07)
|
|
|
Diluted net earnings (loss) per share
|
$
|
(0.25)
|
|
|
$
|
0.77
|
|
|
$
|
1.23
|
|
|
Anti-dilutive weighted-average stock awards(1)
|
49
|
|
|
4
|
|
|
2
|
|
(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 (loss) per share, as their effect, if included, would have been anti-dilutive for the periods presented.
Note 17: Litigation and Contingencies
Hewlett Packard Enterprise is involved in various lawsuits, claims, investigations and proceedings including those consisting of intellectual property, commercial, securities, employment, employee benefits and environmental matters, which arise in the ordinary course of business. In addition, as part of the Separation and Distribution Agreement, Hewlett Packard Enterprise and HP Inc. (formerly known as "Hewlett-Packard Company") agreed to cooperate with each other in managing certain existing litigation related to both parties' businesses. The Separation and Distribution Agreement included provisions that allocate liability and financial responsibility for pending litigation involving the parties, as well as provide for cross-indemnification of the parties against liabilities to one party arising out of liabilities allocated to the other party. The Separation and Distribution Agreement also included provisions that assign to the parties responsibility for managing pending and future litigation related to the general corporate matters of HP Inc. arising prior to the Separation. Hewlett Packard Enterprise records a liability when it believes that it is both probable that a liability has been incurred and the amount of loss can be reasonably estimated. Significant judgment is required to determine both the probability of having incurred a liability and the estimated amount of the liability. Hewlett Packard Enterprise reviews these matters at least quarterly and adjusts these liabilities to reflect the impact of negotiations, settlements, rulings, advice of legal counsel and other updated information and events pertaining to a particular matter. Litigation is inherently unpredictable. However, Hewlett Packard Enterprise believes it has valid defenses with respect to legal matters pending against us. Nevertheless, cash flows or results of operations could be materially affected in any particular period by the resolution of one or more of these contingencies. Hewlett Packard Enterprise believes it has recorded adequate provisions for any such matters and, as of October 31, 2020, it was not reasonably possible that a material loss had been incurred in connection with such matters in excess of the amounts recognized in its financial statements.
Litigation, Proceedings and Investigations
Ross and Rogus v. Hewlett Packard Enterprise Company. On November 8, 2018, a putative class action complaint was filed in the Superior Court of California, County of Santa Clara alleging that HPE pays its California-based female employees "systemically lower compensation" than HPE pays male employees performing substantially similar work. The complaint
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
alleges various California state law claims, including California's Equal Pay Act, Fair Employment and Housing Act, and Unfair Competition Law, and seeks certification of a California-only class of female employees employed in certain "Covered Positions." The complaint seeks damages, statutory and civil penalties, attorneys' fees and costs. On April 2, 2019, HPE filed a demurrer to all causes of action and an alternative motion to strike portions of the complaint. On July 2, 2019, the court denied HPE’s demurrer as to the claims of the putative class and granted HPE's demurrer as to the claims of the individual plaintiffs.
India Directorate of Revenue Intelligence Proceedings. On April 30 and May 10, 2010, the India Directorate of Revenue Intelligence (the "DRI") issued show cause notices to Hewlett-Packard India Sales Private Ltd ("HP India"), a subsidiary of HP Inc., seven HP India employees and one former HP India employee alleging that HP India underpaid customs duties while importing products and spare parts into India and seeking to recover an aggregate of approximately $370 million, plus penalties. Prior to the issuance of the show cause notices, HP India deposited approximately $16 million with the DRI and agreed to post a provisional bond in exchange for the DRI's agreement to not seize HP India products and spare parts and to not interrupt the transaction of business by HP India.
On April 11, 2012, the Bangalore Commissioner of Customs issued an order on the products-related show cause notice affirming certain duties and penalties against HP India and the named individuals of approximately $386 million, of which HP India had already deposited $9 million. On December 11, 2012, HP India voluntarily deposited an additional $10 million in connection with the products-related show cause notice. On April 20, 2012, the Commissioner issued an order on the parts-related show cause notice affirming certain duties and penalties against HP India and certain of the named individuals of approximately $17 million, of which HP India had already deposited $7 million. After the order, HP India deposited an additional $3 million in connection with the parts-related show cause notice so as to avoid certain penalties.
HP India filed appeals of the Commissioner's orders before the Customs Tribunal along with applications for waiver of the pre-deposit of remaining demand amounts as a condition for hearing the appeals. The Customs Department has also filed cross-appeals before the Customs Tribunal. On January 24, 2013, the Customs Tribunal ordered HP India to deposit an additional $24 million against the products order, which HP India deposited in March 2013. The Customs Tribunal did not order any additional deposit to be made under the parts order. In December 2013, HP India filed applications before the Customs Tribunal seeking early hearing of the appeals as well as an extension of the stay of deposit as to HP India and the individuals already granted until final disposition of the appeals. On February 7, 2014, the application for extension of the stay of deposit was granted by the Customs Tribunal until disposal of the appeals. On October 27, 2014, the Customs Tribunal commenced hearings on the cross-appeals of the Commissioner's orders. The Customs Tribunal rejected HP India's request to remand the matter to the Commissioner on procedural grounds. The hearings were scheduled to reconvene on April 6, 2015, and again on November 3, 2015 and April 11, 2016, but were canceled at the request of the Customs Tribunal. The hearing was rescheduled for January 15, 2019 but was postponed and has not yet been rescheduled.
ECT Proceedings. In January 2011, the postal service of Brazil, Empresa Brasileira de Correios e Telégrafos ("ECT"), notified a former subsidiary of HP Inc. in Brazil ("HP Brazil") that it had initiated administrative proceedings to consider whether to suspend HP Brazil's right to bid and contract with ECT related to alleged improprieties in the bidding and contracting processes whereby employees of HP Brazil and employees of several other companies allegedly coordinated their bids and fixed results for three ECT contracts in 2007 and 2008. In late July 2011, ECT notified HP Brazil it had decided to apply the penalties against HP Brazil and suspend HP Brazil's right to bid and contract with ECT for five years, based upon the evidence before it. In August 2011, HP Brazil appealed ECT's decision. In April 2013, ECT rejected HP Brazil's appeal, and the administrative proceedings were closed with the penalties against HP Brazil remaining in place. In parallel, in September 2011, HP Brazil filed a civil action against ECT seeking to have ECT's decision revoked. HP Brazil also requested an injunction suspending the application of the penalties until a final ruling on the merits of the case. The court of first instance has not issued a decision on the merits of the case, but it has denied HP Brazil's request for injunctive relief. HP Brazil appealed the denial of its request for injunctive relief to the intermediate appellate court, which issued a preliminary ruling denying the request for injunctive relief but reducing the length of the sanctions from five to two years. HP Brazil appealed that decision and, in December 2011, obtained a ruling staying enforcement of ECT's sanctions until a final ruling on the merits of the case. HP Brazil expects the decision to be issued in 2021 and any subsequent appeal on the merits to last several years.
Forsyth, et al. vs. HP Inc. and Hewlett Packard Enterprise. This purported class and collective action was filed on August 18, 2016 and an amended complaint was filed on December 19, 2016 in the United States District Court for the Northern District of California, against HP Inc. and Hewlett Packard Enterprise alleging defendants violated the Federal Age Discrimination in Employment Act ("ADEA"), the California Fair Employment and Housing Act, California public policy and the California Business and Professions Code by terminating older workers and replacing them with younger workers. Plaintiffs seek to certify a nationwide collective action under the ADEA comprised of all individuals aged 40 and older who had their employment terminated by an HP entity pursuant to a work force reduction ("WFR") plan on or after December 9, 2014
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
for individuals terminated in deferral states and on or after April 8, 2015 in non-deferral states. Plaintiffs also seek to certify a Rule 23 class under California law comprised of all persons 40 years or older employed by defendants in the state of California and terminated pursuant to a WFR plan on or after August 18, 2012. On September 20, 2017, the court granted the defendants' motion to compel arbitration and administratively closed the case pending resolution of the arbitration proceedings. On November 30, 2017, three named plaintiffs filed a single arbitration demand. Thirteen additional plaintiffs later joined the arbitration. On December 22, 2017, defendants filed a motion to (1) stay the case pending arbitrations and (2) enjoin the demanded arbitration and require each plaintiff to file a separate arbitration demand. On February 6, 2018, the court granted the motion to stay and denied the motion to enjoin. The claims of these sixteen arbitration named plaintiffs have been resolved. Additional opt-in plaintiffs were added to the litigation and these claims also were resolved as part of the arbitration process. The stay of the Forsyth class action has been lifted and a Third Amended Complaint was filed on January 7, 2020. Defendants filed a motion to dismiss the Third Amended Complaint on February 6, 2020. On May 18, 2020, the court issued an order granting in part and denying in part Defendants' motion to dismiss. The court granted Plaintiffs leave to amend their complaint. On July 9, 2020, Plaintiffs filed a Fourth Amended Complaint. On October 15, 2020, Defendants' motion to dismiss the Fourth Amended Complaint was denied.
Wall v. Hewlett Packard Enterprise Company and HP Inc. This certified California class action and Private Attorney General Act action was filed against Hewlett-Packard Company on January 17, 2012 and the fifth amended (and operative) complaint was filed against HP Inc. and Hewlett Packard Enterprise on June 28, 2016 in the Superior Court of California, County of Orange. The complaint alleges that the defendants paid earned incentive compensation late and failed to timely pay final wages in violation of the California Labor Code. On August 9, 2016, the court ordered the class certified without prejudice to a future motion to amend or modify the class certification order or to decertify. The scheduled January 22, 2018 trial date was vacated following the parties' notification to the court that they had reached a preliminary agreement to resolve the dispute. The parties subsequently finalized and executed a settlement agreement and, on May 9, 2018, plaintiff filed a motion seeking preliminary approval of the settlement. On July 2, 2018, the court issued an order granting preliminary approval of the settlement. On December 21, 2018, the court issued an order granting final approval. A Qualified Settlement Fund has been fully funded and distributed to class members. On March 5, 2020, the Court signed an Amendment to Final Approval Order and Judgment, directing that the matter be closed.
Jackson, et al. v. HP Inc. and Hewlett Packard Enterprise. This putative nationwide class action was filed on July 24, 2017 in the United States District Court for the Northern District of California, San Jose Division. Plaintiffs purport to bring the lawsuit on behalf of themselves and other similarly situated African-Americans and individuals over the age of forty. Plaintiffs allege that defendants engaged in a pattern and practice of racial and age discrimination in lay-offs and promotions. Plaintiffs filed an amended complaint on September 29, 2017. Plaintiffs seek damages, attorneys' fees and costs, and declaratory and injunctive relief. On January 12, 2018, defendants moved to transfer the matter to the federal district court in the Northern District of Georgia. Defendants also moved to dismiss the claims on various grounds and to strike certain aspects of the proposed class definition. On July 11, 2018, the court granted defendants' motion to dismiss this action for improper venue, and also partially dismissed and struck certain claims without prejudice to re-filing in the appropriate venue. On July 23, 2018, plaintiffs re-filed their lawsuit in the United States District Court for the Northern District of Georgia. On August 9, 2018, Plaintiffs filed a notice of appeal of the dismissal of the Northern District of California action with the Ninth Circuit Court of Appeals. On August 15, 2018, Plaintiffs filed a motion to stay their lawsuit in the Northern District of Georgia, which was granted by the court. On February 7, 2020, Defendants resolved the claims of the individual plaintiffs and the matters were dismissed.
Hewlett-Packard Company v. Oracle (Itanium). On June 15, 2011, HP Inc. filed suit against Oracle in the Superior Court of California, County of Santa Clara in connection with Oracle's March 2011 announcement that it was discontinuing software support for HP Inc.'s Itanium-based line of mission critical servers. HP Inc. asserted, among other things, that Oracle's actions breached the contract that was signed by the parties as part of the settlement of the litigation relating to Oracle's hiring of Mark Hurd. Trial was bifurcated into two phases. HP Inc. prevailed in the first phase of the trial, in which the court ruled that the contract at issue required Oracle to continue to offer its software products on HP Inc.'s Itanium-based servers for as long as HP Inc. decided to sell such servers. Phase 2 of the trial was then postponed by Oracle's appeal of the trial court's denial of Oracle's "anti-SLAPP" motion, in which Oracle argued that HP Inc.'s damages claim infringed on Oracle's First Amendment rights. On August 27, 2015, the California Court of Appeal rejected Oracle's appeal. The matter was remanded to the trial court for Phase 2 of the trial, which began on May 23, 2016, and was submitted to the jury on June 29, 2016. On June 30, 2016, the jury returned a verdict in favor of HP Inc., awarding HP Inc. approximately $3.0 billion in damages: $1.7 billion for past lost profits and $1.3 billion for future lost profits. On October 20, 2016, the court entered judgment for this amount with interest accruing until the judgment is paid. Oracle's motion for a new trial was denied on December 19, 2016, and Oracle filed its notice of appeal from the trial court's judgment on January 17, 2017. On February 2, 2017, HP Inc. filed a notice of cross-appeal challenging the trial court's denial of prejudgment interest. On May 16, 2019, HP Inc. filed its application to renew the
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
judgment. As of May 16, 2019, the renewed judgment is approximately $3.8 billion. Daily interest on the renewed judgment is now accruing at $1 million and will be recorded upon receipt. The parties have completed appellate briefing in the California Court of Appeal and are awaiting the scheduling of oral argument. Pursuant to the terms of the Separation and Distribution Agreement, HP Inc. and Hewlett Packard Enterprise will share equally in any recovery from Oracle once Hewlett Packard Enterprise has been reimbursed for all costs incurred in the prosecution of the action prior to the HP Inc./Hewlett Packard Enterprise separation on November 1, 2015.
Oracle America, Inc., et al. v. Hewlett Packard Enterprise Company (Terix copyright matter). On March 22, 2016, Oracle filed a complaint against HPE in the United States District Court for the Northern District of California, alleging copyright infringement, interference with contract, intentional interference with prospective economic relations, and unfair competition. Oracle’s claims arise out of HPE's prior use of a third-party maintenance provider named Terix Computer Company, Inc. ("Terix"). Oracle contends that in connection with HPE's use of Terix as a subcontractor for certain customers of HPE's multivendor support business, Oracle's copyrights were infringed, and HPE is liable for vicarious and contributory infringement and related claims. The lawsuit against HPE follows a prior lawsuit brought by Oracle against Terix in 2013 relating to Terix's alleged unauthorized provision of Solaris patches to customers on Oracle hardware. On June 14, 2018, the court heard oral argument on HPE's and Oracle's cross-motions for summary judgment. On January 29, 2019, the court granted HPE's Motion for Summary Judgment as to all of Oracle's claims and vacated the trial date. On February 20, 2019, the court entered judgment in favor of HPE, dismissing Oracle's claims in their entirety. Oracle has appealed the trial court's ruling to the United States Court of Appeals for the Ninth Circuit. On August 20, 2020, the United States Court of Appeals for the Ninth Circuit issued its ruling, affirming in part and reversing in part the trial court's decision granting summary judgment in favor of HPE. On October 6, 2020, the matter was remanded to the United States District Court for the Northern District of California for further proceedings consistent with the ruling from the United States Court of Appeals for the Ninth Circuit.
Network-1 Technologies, Inc. v. Alcatel-Lucent USA Inc., et al. This patent infringement action was filed on September 15, 2011 in the United States District Court for the Eastern District of Texas, alleging that various Hewlett Packard Enterprise switches and access points infringe Network-1's patent relating to the 802.3af and 802.3at "Power over Ethernet" standards. Network-1 seeks damages, attorneys' fees and costs, and declaratory and injunctive relief. A jury trial was conducted beginning on November 6, 2017. On November 13, 2017, the jury returned a verdict in favor of HPE, finding that HPE did not infringe Network-1's patent and that the patent was invalid. On August 29, 2018, the court denied Network-1's motion for a new trial on infringement and entered the jury's verdict finding that HPE does not infringe the relevant Network-1 patent. The court also granted Network-1's motion for Judgment as a Matter of Law on validity. Network-1 has appealed the jury verdict of non-infringement to the United States Court of Appeals for the Federal Circuit. HPE has cross-appealed the court's decision to grant Network-1's motion for Judgment as a Matter of Law on validity. Appellate briefing has been completed. The Federal Circuit Court of Appeal held oral argument on November 4, 2019. On September 24, 2020, the Federal Circuit issued its ruling, affirming-in-part and reversing-in-part the jury's verdict, and finding that an erroneous claim construction was presented to the jury that prejudiced Network-1. HPE filed a petition for rehearing with the Federal Circuit that was denied on November 20, 2020. The matter will be remanded back to United States District Court for the Eastern District of Texas for further proceedings consistent with the Federal Circuit's ruling.
Shared Litigation with HP Inc., DXC and Micro Focus
As part of the Separation and Distribution Agreements between Hewlett Packard Enterprise and HP Inc., Hewlett Packard Enterprise and DXC, and Hewlett Packard Enterprise and Seattle SpinCo, the parties to each agreement agreed to cooperate with each other in managing certain existing litigation related to both parties' businesses. The Separation and Distribution Agreements also included provisions that assign to the parties responsibility for managing pending and future litigation related to the general corporate matters of HP Inc. (in the case of the separation of Hewlett Packard Enterprise from HP Inc.) or of Hewlett Packard Enterprise (in the case of the separation of DXC from Hewlett Packard Enterprise and the separation of Seattle SpinCo from Hewlett Packard Enterprise), in each case arising prior to the applicable separation.
Environmental
The Company's operations and products are or may in the future become subject to various federal, state, local and foreign laws and regulations concerning environmental protection, including laws addressing the discharge of pollutants into the air and water, the management and disposal of hazardous substances and wastes, the clean-up of contaminated sites, the substances and materials used in the Company's products, the energy consumption of products, services and operations and the operational or financial responsibility for recycling, treatment and disposal of those products. This includes legislation that makes producers of electrical goods, including servers and networking equipment, financially responsible for specified collection, recycling, treatment and disposal of past and future covered products (sometimes referred to as "product take-back legislation"). The Company could incur substantial costs, its products could be restricted from entering certain jurisdictions, and
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
it could face other sanctions, if it were to violate or become liable under environmental laws or if its products become non-compliant with environmental laws. The Company's potential exposure includes impacts on revenue, fines and civil or criminal sanctions, third-party property damage or personal injury claims and clean-up costs. The amount and timing of costs to comply with environmental laws are difficult to predict.
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.
Note 18: Guarantees, Indemnifications and Warranties
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.
General Cross-indemnification
In connection with the Separation, Everett and Seattle transactions, the Company entered into a Separation and Distribution Agreement with HP Inc., DXC and Micro Focus respectively, whereby the Company agreed to indemnify HP Inc., DXC and Micro Focus, each of its subsidiaries and each of their respective directors, officers and employees from and against all liabilities relating to, arising out of or resulting from, among other matters, the liabilities allocated to the Company as part of the Separation, Everett and Seattle transactions. Similarly, HP Inc., DXC and Micro Focus agreed to indemnify the Company, each of its subsidiaries and each of their respective directors, officers and employees from and against all claims and liabilities relating to, arising out of or resulting from, among other matters, the liabilities allocated to HP Inc., DXC and Micro Focus as part of the Separation, Everett and Seattle transactions.
Tax Matters Agreement with DXC/Micro Focus and Other Income Tax Matters
In connection with the Everett Transaction and the Seattle Transaction, the Company entered into a Tax Matters Agreement with DXC and Micro Focus respectively (the "DXC Tax Matters Agreement" and the "Micro Focus Tax Matters Agreement"). The DXC Tax Matters Agreement and the Micro Focus Tax Matters Agreement govern the rights and obligations of the Company and DXC/Micro Focus for certain pre-divestiture tax liabilities and tax receivables. The DXC Tax Matters Agreement and the Micro Focus Tax Matters Agreement generally provide that the Company will be responsible for pre-divestiture tax liabilities and will be entitled to pre-divestiture tax receivables that arise from adjustments made by tax authorities to the Company's and DXC's, or Micro Focus', as applicable, U.S. and certain non-U.S. tax returns. In certain
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
jurisdictions, the Company and DXC/Micro Focus have joint and several liability for past tax liabilities and accordingly, the Company could be legally liable under applicable tax law for such liabilities and required to make additional tax payments.
In addition, if the distribution of Everett's or Seattle's common shares to Hewlett Packard Enterprise's stockholders is determined to be taxable, the Company would generally bear the tax liability, unless the taxability of the distribution is the direct result of actions taken by DXC/Micro Focus, in which case DXC/Micro Focus would be responsible for any taxes imposed on the distribution.
As of October 31, 2020 and 2019, the Company's receivable and payable balances related to indemnified litigation matters and other contingencies, and income tax-related indemnification covered by these agreements were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of October 31,
|
|
|
2020
|
|
2019
|
|
|
In millions
|
|
Litigation matters and other contingencies
|
|
|
|
|
Receivable
|
$
|
70
|
|
|
$
|
85
|
|
|
Payable
|
$
|
53
|
|
|
$
|
55
|
|
|
|
|
|
|
|
Income tax-related indemnification(1)
|
|
|
|
|
Net indemnification receivable - long-term
|
$
|
62
|
|
|
$
|
202
|
|
|
Net indemnification receivable - short-term
|
$
|
65
|
|
|
$
|
63
|
|
|
Net indemnification payable - long-term
|
$
|
15
|
|
|
$
|
9
|
|
|
|
|
|
|
(1)The actual amount that the Company may receive or pay could vary depending upon the outcome of certain unresolved tax matters, which may not be resolved for several years.
Warranties
The Company's aggregate product warranty liabilities and changes therein were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal years ended October 31,
|
|
|
2020
|
|
2019
|
|
|
In millions
|
|
Balance at beginning of year
|
$
|
400
|
|
|
$
|
430
|
|
|
Accruals for warranties issued
|
238
|
|
|
239
|
|
|
Adjustments related to pre-existing warranties
|
(3)
|
|
|
6
|
|
|
Settlements made
|
(250)
|
|
|
(275)
|
|
|
Balance at end of year(1)
|
$
|
385
|
|
|
$
|
400
|
|
(1)The Company includes the current portion in Other accrued liabilities, and amounts due after one year in Other non-current liabilities in the accompanying Consolidated Balance Sheets.
Note 19: Commitments
Unconditional Purchase Obligations
At October 31, 2020, the Company had unconditional purchase obligations of approximately $544 million. These unconditional purchase obligations include agreements to purchase goods or services that are enforceable and legally binding on the Company and that specify all significant terms, including fixed or minimum quantities to be purchased, fixed, minimum or variable price provisions and the approximate timing of the transaction, as well as settlements that the Company has reached with third parties, requiring it to pay determined amounts over a specified period of time. These unconditional purchase obligations are related principally to inventory purchase, software maintenance and support services and other items. Unconditional purchase obligations exclude agreements that are cancellable without penalty.
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
As of October 31, 2020, future unconditional purchase obligations were as follows:
|
|
|
|
|
|
|
|
Fiscal Year
|
In millions
|
|
2021
|
$
|
231
|
|
|
2022
|
195
|
|
|
2023
|
69
|
|
|
2024
|
8
|
|
|
2025
|
9
|
|
|
Thereafter
|
32
|
|
|
Total
|
$
|
544
|
|
Note 20: Equity Method Investments
The Company includes investments which are accounted for using the equity method, under Investments in equity interests on the Company's Consolidated Balance Sheets. As of October 31, 2020 and October 31, 2019, the Company's Investments in equity interests were $2.2 billion and $2.3 billion, respectively, primarily related to a 49% equity interest in H3C Technologies ("H3C").
Investment in H3C
In the periods presented, the Company recorded its interest in the net earnings of H3C along with an adjustment to eliminate unrealized profits on intra-entity sales, and the amortization of basis difference, within Earnings from equity interests in the Consolidated Statements of Earnings.
During fiscals 2020 and 2019, the Company received a cash dividend of $165 million and $156 million, respectively, from H3C. This amount was accounted for as a return on investment and reflected as a reduction in the carrying balance of the Company's Investments in equity interests in its Consolidated Balance Sheets.
The difference between the sale date carrying value of the Company's investment in H3C and its proportionate share of the net assets fair value of H3C, created a basis difference of $2.5 billion, which was allocated as follows:
|
|
|
|
|
|
|
|
|
In millions
|
|
Equity method goodwill
|
$
|
1,674
|
|
|
Intangible assets
|
749
|
|
|
In-process research and development
|
188
|
|
|
Deferred tax liabilities
|
(152)
|
|
|
Other
|
75
|
|
|
Basis difference
|
$
|
2,534
|
|
The Company recorded earnings from equity interests of $67 million, $20 million and $38 million in fiscal 2020, 2019 and 2018, respectively, in the Consolidated Statements of Earnings, the components of which are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal years ended October 31,
|
|
|
2020
|
|
2019
|
|
2018
|
|
|
In millions
|
|
Earnings from equity interests, net of taxes
|
$
|
211
|
|
|
$
|
167
|
|
|
$
|
192
|
|
|
Basis difference amortization
|
(145)
|
|
|
(152)
|
|
|
(151)
|
|
|
Elimination of profit on intra-entity sales adjustment
|
1
|
|
|
5
|
|
|
(3)
|
|
|
Earnings from equity interests
|
$
|
67
|
|
|
$
|
20
|
|
|
$
|
38
|
|
The Company amortizes the basis difference over the estimated useful lives of the assets that gave rise to this difference. The weighted-average life of the H3C intangible assets is five years and is being amortized using the straight-line method. As of October 31, 2020 and 2019, the Company determined that no impairment of its equity method investments existed.
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
The Company also has commercial arrangements with H3C to buy and sell HPE branded servers, storage and networking products and HPE Pointnext services. During fiscals 2020, 2019 and 2018, HPE recorded approximately $737 million, $897 million and $1.3 billion of sales to H3C and $215 million, $202 million and $273 million of purchases from H3C, respectively. Payables due to H3C as of October 31, 2020 and 2019 were approximately $29 million and $39 million, respectively. Receivables due from H3C as of October 31, 2020 and 2019 were approximately $19 million and $32 million, respectively.
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Quarterly Summary
(Unaudited)
(In millions, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three-month periods
ended in fiscal 2020
|
|
|
January 31
|
|
April 30
|
|
July 31
|
|
October 31
|
|
Net revenue
|
$
|
6,949
|
|
|
$
|
6,009
|
|
|
$
|
6,816
|
|
|
$
|
7,208
|
|
|
Cost of sales
|
$
|
4,667
|
|
|
$
|
4,095
|
|
|
$
|
4,749
|
|
|
$
|
5,002
|
|
|
Earnings (loss) from operations
|
$
|
348
|
|
|
$
|
(834)
|
|
|
$
|
12
|
|
|
$
|
145
|
|
|
Net earnings (loss)
|
$
|
333
|
|
|
$
|
(821)
|
|
|
$
|
9
|
|
|
$
|
157
|
|
|
Net earnings (loss) per share - basic
|
$
|
0.26
|
|
|
$
|
(0.64)
|
|
|
$
|
0.01
|
|
|
$
|
0.12
|
|
|
Net earnings (loss) per share - diluted
|
$
|
0.25
|
|
|
$
|
(0.64)
|
|
|
$
|
0.01
|
|
|
$
|
0.12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three-month periods
ended in fiscal 2019
|
|
|
January 31
|
|
April 30
|
|
July 31
|
|
October 31
|
|
Net revenue
|
$
|
7,553
|
|
|
$
|
7,150
|
|
|
$
|
7,217
|
|
|
$
|
7,215
|
|
|
Cost of sales
|
$
|
5,207
|
|
|
$
|
4,845
|
|
|
$
|
4,768
|
|
|
$
|
4,822
|
|
|
Earnings (loss) from operations
|
$
|
456
|
|
|
$
|
434
|
|
|
$
|
(76)
|
|
|
$
|
460
|
|
|
Net earnings (loss)
|
$
|
177
|
|
|
$
|
419
|
|
|
$
|
(27)
|
|
|
$
|
480
|
|
|
Net earnings (loss) per share - basic
|
$
|
0.13
|
|
|
$
|
0.31
|
|
|
$
|
(0.02)
|
|
|
$
|
0.37
|
|
|
Net earnings (loss) per share - diluted
|
$
|
0.13
|
|
|
$
|
0.30
|
|
|
$
|
(0.02)
|
|
|
$
|
0.36
|
|