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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________________________________________________________________________
FORM 10-Q

(Mark One)    
☒   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: July 31, 2021
Or
☐   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from            to            
Commission file number 001-37483
______________________________________________________________________________
HEWLETT PACKARD ENTERPRISE COMPANY
(Exact name of registrant as specified in its charter)
Delaware   47-3298624
(State or other jurisdiction of
incorporation or organization) 		  (I.R.S. employer
identification no.)
11445 Compaq Center West Drive, Houston, Texas 77070
(Address of principal executive offices) (Zip code)
(650) 687-5817
(Registrant's telephone number, including area code)
______________________________________________________________________________
Securities registered pursuant to Section 12(b) of the Exchange Act:
Title of each class Trading Symbol(s) Name of each exchange on which registered
Common stock, par value $0.01 per share HPE New York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 (the "Exchange Act") during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer", "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act.
1


Large accelerated filer ☒ Accelerated filer ☐
Non-accelerated filer ☐ Smaller reporting company ☐
Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
The number of shares of Hewlett Packard Enterprise Company common stock outstanding as of August 30, 2021 was 1,308,050,014 shares, par value $0.01.
2


HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Form 10-Q
For the Quarterly Period Ended July 31, 2021


3


Forward-Looking Statements
This Quarterly Report on Form 10-Q, including "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Item 2 of Part I, contains forward-looking statements within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Such statements involve risks, uncertainties and assumptions. If the risks or uncertainties ever materialize or the assumptions prove incorrect, the results of Hewlett Packard Enterprise Company and its consolidated subsidiaries ("Hewlett Packard Enterprise") may differ materially from those expressed or implied by such forward-looking statements and assumptions. The words "believe", "expect", "anticipate", "optimistic", "intend", "aim", "will", "should" and similar expressions are intended to identify such forward-looking statements. All statements other than statements of historical fact are statements that could be deemed forward-looking statements, including but not limited to the scope and duration of the novel coronavirus pandemic ("COVID-19") and its impact on our business, operations, liquidity and capital resources, employees, customers, partners, supply chain, financial results and the world economy; any projections of revenue, margins, expenses, investments, effective tax rates, interest rates, the impact of the U.S. Tax Cuts and Jobs Act of 2017 and related guidance or regulations, net earnings, net earnings per share, cash flows, liquidity and capital resources, inventory, goodwill, impairment charges, hedges and derivatives and related offsets, order backlog, benefit plan funding, deferred tax assets, share repurchases, currency exchange rates, repayments of debts including our asset-backed debt securities, or other financial items; any projections of the amount, execution, timing and results of any transformation or impact of cost savings, restructuring plans, including estimates and assumptions related to the anticipated benefits, cost savings, or charges of implementing transformation and restructuring plans; any statements of the plans, strategies and objectives of management for future operations, as well as the execution of corporate transactions or contemplated acquisitions, research and development expenditures, and any resulting benefit, cost savings, charges, or revenue or profitability improvements; any statements concerning the expected development, performance, market share or competitive performance relating to products or services; any statements regarding current or future macroeconomic trends or events and the impact of those trends and events on Hewlett Packard Enterprise and its financial performance; any statements regarding pending investigations, claims or disputes; any statements of expectation or belief; and any statements of assumptions underlying any of the foregoing. Risks, uncertainties and assumptions include the need to address the many challenges facing Hewlett Packard Enterprise's businesses; the competitive pressures faced by Hewlett Packard Enterprise's businesses; risks associated with executing Hewlett Packard Enterprise's strategy; the impact of macroeconomic and geopolitical trends and events; the need to manage third-party suppliers, the distribution of Hewlett Packard Enterprise's products and the delivery of Hewlett Packard Enterprise's services effectively; the protection of Hewlett Packard Enterprise's intellectual property assets, including intellectual property licensed from third parties and intellectual property shared with its former parent; risks associated with Hewlett Packard Enterprise's international operations (including pandemics and public health problems, such as the outbreak of COVID-19); the development and transition of new products and services and the enhancement of existing products and services to meet customer needs and respond to emerging technological trends; the execution and performance of contracts by Hewlett Packard Enterprise and its suppliers, customers, clients and partners, including any impact thereon resulting from events such as the COVID-19 pandemic; the hiring and retention of key employees; the execution, integration, and other risks associated with business combination and investment transactions; the impact of changes to environmental, global trade, and other governmental regulations; changes in our product, lease, intellectual property or real estate portfolio; the payment or non-payment of a dividend for any period; the efficacy of using non-GAAP, rather than GAAP, financial measures in business projections and planning; the judgments required in connection with determining revenue recognition; impact of company policies and related compliance; utility of segment realignments; allowances for recovery of receivables and warranty obligations; provisions for, and resolution of, pending investigations, claims and disputes; and other risks that are described herein, including but not limited to the items discussed in "Risk Factors" in Item 1A of Part II of this Quarterly Report on Form 10-Q and that are otherwise described or updated from time to time in Hewlett Packard Enterprise's reports filed with the Securities and Exchange Commission. Hewlett Packard Enterprise assumes no obligation and does not intend to update these forward-looking statements, except as required by applicable law.

4


Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Index
  Page
6
7
8
9
10
12
12
15
18
20
20
21
23
27
28
29
34
35
35
36

5


HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Condensed Consolidated Statements of Earnings
(Unaudited)
  Three Months Ended July 31, Nine Months Ended July 31,
  2021 2020 2021 2020
  In millions, except per share amounts
Net revenue:    
Products $ 4,230  $ 4,193  $ 12,365  $ 11,760 
Services 2,542  2,508  7,694  7,671 
Financing income 125  115  371  343 
Total net revenue 6,897  6,816  20,430  19,774 
Costs and expenses:    
Cost of products 2,908  3,088  8,567  8,376 
Cost of services 1,556  1,596  4,742  4,926 
Financing interest 51  65  164  209 
Research and development 506  455  1,477  1,390 
Selling, general and administrative 1,291  1,131  3,649  3,458 
Amortization of intangible assets 82  95  276  299 
Impairment of goodwill —  —  —  865 
Transformation costs 213  357  733  646 
Disaster charges 5  2  6  24 
Acquisition, disposition and other related charges 3  15  34  55 
Total costs and expenses 6,615  6,804  19,648  20,248 
Earnings (loss) from operations 282  12  782  (474)
Interest and other, net (50) (71) (105) (158)
Tax indemnification and related adjustments 76  (30) 60  (86)
Non-service net periodic benefit credit 19  28  53  101 
Earnings from equity interests 79  27  109  50 
Earnings (loss) before taxes 406  (34) 899  (567)
(Provision) benefit for taxes (14) 43  (25) 88 
Net earnings (loss) $ 392  $ 9  $ 874  $ (479)
Net earnings (loss) per share:    
Basic $ 0.30  $ 0.01  $ 0.67  $ (0.37)
Diluted $ 0.29  $ 0.01  $ 0.66  $ (0.37)
Weighted-average shares used to compute net earnings (loss) per share:    
Basic 1,314  1,292  1,308  1,294 
Diluted 1,338  1,300  1,328  1,294 


The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
6


HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Condensed Consolidated Statements of Comprehensive Income
(Unaudited)
  Three Months Ended
July 31, 		Nine Months Ended
July 31,
  2021 2020 2021 2020
  In millions
Net earnings (loss) $ 392  $ 9  $ 874  $ (479)
Other comprehensive income (loss) before taxes:    
Change in net unrealized gains (losses) on available-for-sale securities:    
Net unrealized gains (losses) arising during the period 1  6  (1) — 
(Gains) losses reclassified into earnings —  (1) —  (8)
1  5  (1) (8)
Change in net unrealized gains (losses) on cash flow hedges:    
Net unrealized gains (losses) arising during the period 101  (456) (183) (85)
Net (gains) losses reclassified into earnings (36) 242  262  (41)
65  (214) 79  (126)
Change in unrealized components of defined benefit plans:    
Net unrealized gains (losses) arising during the period 6  (19) 29  (10)
Amortization of net actuarial loss and prior service benefit 70  61  212  183 
Curtailments, settlements and other —  7  2  8 
76  49  243  181 
Change in cumulative translation adjustment 2  1  20  (46)
Other comprehensive income (loss) before taxes 144  (159) 341  1 
(Provision) benefit for taxes (13) 28  (33) 13 
Other comprehensive income (loss), net of taxes 131  (131) 308  14 
Comprehensive income (loss) $ 523  $ (122) $ 1,182  $ (465)


The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
7


HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
  As of
  July 31, 2021 October 31, 2020
(Unaudited) (Audited)
  In millions, except par value
ASSETS    
Current assets:    
Cash and cash equivalents $ 5,293  $ 4,233 
Accounts receivable, net of allowances 3,297  3,386 
Financing receivables, net of allowances 3,814  3,794 
Inventory 3,942  2,674 
Assets held for sale 1  77 
Other current assets 2,398  2,392 
Total current assets 18,745  16,556 
Property, plant and equipment 5,510  5,625 
Long-term financing receivables and other assets 10,912  10,544 
Investments in equity interests 2,286  2,170 
Goodwill 18,092  18,017 
Intangible assets 892  1,103 
Total assets $ 56,437  $ 54,015 
LIABILITIES AND STOCKHOLDERS' EQUITY    
Current liabilities:    
Notes payable and short-term borrowings $ 3,736  $ 3,755 
Accounts payable 6,526  5,383 
Employee compensation and benefits 1,585  1,391 
Taxes on earnings 152  148 
Deferred revenue 3,434  3,430 
Accrued restructuring 267  366 
Other accrued liabilities 3,941  4,265 
Total current liabilities 19,641  18,738 
Long-term debt 12,489  12,186 
Other non-current liabilities 7,234  6,995 
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; 1,307 and 1,287 shares issued and outstanding at July 31, 2021 and October 31, 2020, respectively)
13  13 
Additional paid-in capital 28,632  28,350 
Accumulated deficit (7,994) (8,375)
Accumulated other comprehensive loss (3,631) (3,939)
Total HPE stockholders' equity 17,020  16,049 
Non-controlling interests 53  47 
Total stockholders' equity 17,073  16,096 
Total liabilities and stockholders' equity $ 56,437  $ 54,015 
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
8


HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (Unaudited)
  Nine Months Ended July 31,
  2021 2020
  In millions
Cash flows from operating activities:    
Net earnings (loss) $ 874  $ (479)
Adjustments to reconcile net earnings (loss) to net cash provided by operating activities:    
Depreciation and amortization 1,956  1,973 
Impairment of goodwill —  865 
Stock-based compensation expense 304  215 
Provision for inventory and doubtful accounts 149  208 
Restructuring charges 492  553 
Deferred taxes on earnings (loss) (156) (214)
Earnings from equity interests (109) (50)
Dividends received from equity investees 38  35 
Other, net 117  115 
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable 61  69 
Financing receivables 26  (411)
Inventory (1,352) (1,253)
Accounts payable 1,150  431 
Taxes on earnings (6) (85)
Restructuring (426) (350)
Other assets and liabilities (203) (129)
Net cash provided by operating activities 2,915  1,493 
Cash flows from investing activities:    
Investment in property, plant and equipment (1,732) (1,779)
Proceeds from sale of property, plant and equipment 274  623 
Purchases of available-for-sale securities and other investments (44) (78)
Maturities and sales of available-for-sale securities and other investments 11  29 
Financial collateral posted (873) (573)
Financial collateral received 780  637 
Payments made in connection with business acquisitions, net of cash acquired (133) (13)
Net cash used in investing activities (1,717) (1,154)
Cash flows from financing activities:    
Short-term borrowings with original maturities less than 90 days, net (30) 36 
Proceeds from debt, net of issuance costs 2,698  6,745 
Payment of debt (2,341) (1,399)
Payments related to stock-based award activities, net (18) (34)
Repurchase of common stock —  (355)
Cash dividends paid to non-controlling interests (8) (7)
Cash dividends paid to shareholders (468) (464)
Net cash (used in) provided by financing activities (167) 4,522 
Increase in cash, cash equivalents and restricted cash 1,031  4,861 
Cash, cash equivalents and restricted cash at beginning of period 4,621  4,076 
Cash, cash equivalents and restricted cash at end of period $ 5,652  $ 8,937 
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
9


Condensed Consolidated Statements of Stockholders' Equity (Unaudited)
Common Stock
Three Months Ended July 31, 2021 Number of Shares Par Value Additional Paid-in Capital Accumulated Deficit Accumulated
Other
Comprehensive
Loss 		Equity
Attributable
to the
Company 		Non-
controlling
Interests 		Total
Equity
  In millions, except number of shares in thousands
Balance at April 30, 2021 1,304,138  $ 13  $ 28,538  $ (8,229) $ (3,762) $ 16,560  $ 51  $ 16,611 
Net earnings 392  392  2  394 
Other comprehensive income 131  131  131 
Comprehensive income 523  2  525 
Stock-based compensation expense 86  86  86 
Tax withholding related to vesting of employee stock plans (11) (11) (11)
Issuance of common stock in connection with employee stock plans and other 2,925  19  19  19 
Cash dividends declared ($0.12 per share)
(157) (157) (157)
Balance at July 31, 2021 1,307,063  $ 13  $ 28,632  $ (7,994) $ (3,631) $ 17,020  $ 53  $ 17,073 
) Represents the impact of the adoption of the accounting standard on the measurement of credit losses on financial instruments.
Common Stock
Nine Months Ended July 31, 2021 Number of Shares Par Value Additional Paid-in Capital Accumulated Deficit Accumulated
Other
Comprehensive
Loss 		Equity
Attributable
to the
Company 		Non-
controlling
Interests 		Total
Equity
  In millions, except number of shares in thousands
Balance at October 31, 2020 1,287,010  $ 13  $ 28,350  $ (8,375) $ (3,939) $ 16,049  $ 47  $ 16,096 
Net earnings 874  874  6  880 
Other comprehensive income 308  308  308 
Comprehensive income 1,182  6  1,188 
Stock-based compensation expense 304  304  304 
Tax withholding related to vesting of employee stock plans (72) (72) (72)
Issuance of common stock in connection with employee stock plans and other 20,053  50  50  50 
Cash dividends declared ($0.36 per share)
(468) (468) (468)
Effects of adoption of accounting standard updates (1)
(25) (25) (25)
Balance at July 31, 2021 1,307,063  $ 13  $ 28,632  $ (7,994) $ (3,631) $ 17,020  $ 53  $ 17,073 
(1) Represents the impact of the adoption of the accounting standard on the measurement of credit losses on financial assets.





10


Condensed Consolidated Statements of Stockholders' Equity (Unaudited)
Common Stock
Three Months Ended July 31, 2020 Number of Shares Par Value Additional Paid-in Capital  Accumulated Deficit Accumulated
Other
Comprehensive
Loss 		Equity
Attributable
to the
Company 		Non-
controlling
Interests 		Total
Equity
  In millions, except number of shares in thousands
Balance at April 30, 2020 1,282,253  $ 13  $ 28,207  $ (8,385) $ (3,625) $ 16,210  $ 48  $ 16,258 
Net earnings 9  9  3  12 
Other comprehensive loss (131) (131) (131)
Comprehensive income (loss) (122) 3  (119)
Stock-based compensation expense 55  55  55 
Tax withholding related to vesting of employee stock plans (7) (7) (7)
Issuance of common stock in connection with employee stock plans and other 3,753  20  (1) 19  19 
Balance at July 31, 2020 1,286,006  $ 13  $ 28,275  $ (8,377) $ (3,756) $ 16,155  $ 51  $ 16,206 
Common Stock
Nine Months Ended July 31, 2020 Number of Shares Par Value Additional Paid-in Capital Accumulated Deficit Accumulated
Other
Comprehensive
Loss 		Equity
Attributable
to the
Company 		Non-
controlling
Interests 		Total
Equity
In millions, except number of shares in thousands
Balance at October 31, 2019 1,294,369  $ 13  $ 28,444  $ (7,632) $ (3,727) $ 17,098  $ 51  $ 17,149 
Net loss (479) (479) 7  (472)
Other comprehensive income 14  14  14 
Comprehensive income (loss) (465) 7  (458)
Stock-based compensation expense 216  216  216 
Tax withholding related to vesting of employee stock plans (85) (85) (85)
Issuance of common stock in connection with employee stock plans and other 16,393  46  46  1  47 
Repurchases of common stock (24,756) (346) (346) (346)
Cash dividends declared ($0.24 per share)
(309) (309) (8) (317)
Effects of adoption of accounting standard updates (1)
43  (43) —  — 
Balance at July 31, 2020 1,286,006  $ 13  $ 28,275  $ (8,377) $ (3,756) $ 16,155  $ 51  $ 16,206 
(1) 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 Condensed Consolidated Financial Statements.
11

HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 1: Overview and Summary of Significant Accounting Policies
Background
Hewlett Packard Enterprise Company ("Hewlett Packard Enterprise", "HPE", or the "Company") is a global technology leader focused on developing intelligent solutions that allow customers to capture, analyze and act upon data seamlessly from edge to cloud. Hewlett Packard Enterprise enables customers to accelerate business outcomes by driving new business models, creating new customer and employee experiences, and increasing operational efficiency today and into the future. Hewlett Packard Enterprise's customers range from small- and medium-sized businesses ("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").
Acquisitions
On July 1, 2021, the Company entered into a definitive agreement to acquire Zerto Ltd., an industry leader in cloud data management and protection, in a transaction valued at $374 million. The transaction closed on August 31, 2021. Zerto's results of operations will be included within the Company's Storage segment. This acquisition expands HPE GreenLake and continues to deliver on Storage’s shift to a cloud-native, software-defined data services business.
During the third quarter of fiscal 2021, the Company completed the acquisitions of Determined AI Inc., a leading player in the evolving machine learning software ecosystem and Ampool Inc., an innovative developer of a data platform designed to deliver a cloud-native, high performance Structured Query Language (“SQL”) analytics engine, for a purchase consideration of $117 million, which has primarily been allocated to goodwill of $86 million and amortizable intangible assets of $24 million. Determined AI’s results of operations have been included with High Performance Computing & Mission-Critical Solutions (HPC & MCS) segment. HPE will combine Determined AI’s unique software solution with its world-leading artificial intelligence and high performance computing offerings to enable machine learning engineers to easily implement and train machine learning models to provide faster and more accurate insights from their data in almost every industry. Ampool's results of operations have been included in the HPE Ezmeral software organization within Corporate Investments and Other segment and will play a pivotal role in accelerating hybrid analytics for customers.
Subsequent event
On September 7, 2021, the Company expects to redeem all $500 million aggregate principal amount of its outstanding 3.5% Notes due October 2021, and all $800 million aggregate principal amount of its outstanding Floating Rate Notes due October 2021.
Basis of Presentation
The Condensed Consolidated Financial Statements of the Company were prepared in accordance with United States ("U.S.") Generally Accepted Accounting Principles ("GAAP"). In the opinion of management, the accompanying unaudited Condensed Consolidated Financial Statements of Hewlett Packard Enterprise contain all adjustments, including normal recurring adjustments, necessary to present fairly the Company's financial position as of July 31, 2021 and October 31, 2020, its results of operations for the three and nine months ended July 31, 2021 and 2020, its cash flows for the nine months ended July 31, 2021 and 2020, and its statements of stockholders' equity for the three and nine months ended July 31, 2021 and 2020.
The results of operations for the three and nine months ended July 31, 2021 and the cash flows for the nine months ended July 31, 2021 are not necessarily indicative of the results to be expected for the full year. The information included in this Quarterly Report on Form 10-Q should be read in conjunction with the Company's Annual Report on Form 10-K for the fiscal year ended October 31, 2020, including "Management's Discussion and Analysis of Financial Condition and Results of Operations", "Quantitative and Qualitative Disclosures About Market Risk" and the Consolidated Financial Statements and notes thereto included in Items 7, 7A and 8, respectively.
12
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
Principles of Consolidation
The accompanying unaudited Condensed Consolidated Financial Statements include the accounts of the Company and all subsidiaries and affiliates in which the Company has a controlling financial interest or is the primary beneficiary. All intercompany transactions and accounts within the consolidated businesses of the Company have been eliminated.
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. 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 from equity interests in the Condensed Consolidated Statements of Earnings.
Non-controlling interests are presented as a separate component within Total stockholders' equity in the Condensed Consolidated Balance Sheets. Net earnings attributable to non-controlling interests are recorded within Interest and other, net in the Condensed Consolidated Statements of Earnings and are not presented separately, as they were not material for any periods presented.
Segment Realignment and Reclassifications
Effective at the beginning of the first quarter of fiscal 2021, HPE implemented certain organizational changes to align its segment financial reporting more closely with its current business structure. These organizational changes are:
(i) the transfer of the lifecycle event services business, previously reported within the Advisory and Professional Services ("A & PS") reportable segment to Compute, Storage and HPC & MCS reportable segments; (ii) the transfer of certain software and related services business, previously reported within the Compute, Storage and A & PS reportable segments to the Corporate Investments and Other reportable segment, to form a new Software operating segment; and (iii) the transfer of the remaining A & PS operating segment, previously reported as a separate reportable segment, to the Corporate Investments and Other reportable segment. As a result of these changes, the Corporate Investments and Other Segment now includes the A & PS operating segment, the Communications and Media Solutions operating segment, the Software operating segment, and Hewlett Packard Enterprise Labs which is responsible for research and development.
Additionally, effective at the beginning of the first quarter of fiscal 2021, the Company has excluded stock-based compensation expense from its segment earnings from operations.
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 segments as described above. These changes had no impact on Hewlett Packard Enterprise’s previously reported consolidated net revenue, net earnings, net earnings per share ("EPS") or total assets.
Significant Accounting Policies
Except for the change in certain accounting policies upon adoption of the accounting standards described below, there have been no significant changes to the Company's significant accounting policies described in PART II, Item 8, Note 1, "Overview and Summary of Significant Accounting Policies", of the Company's Annual Report on Form 10-K for the fiscal year ended October 31, 2020.
Recently Adopted Accounting Pronouncements
In January 2021, the FASB issued guidance to clarify that all derivative instruments affected by changes to the interest rates used for discounting, margining or contract price alignment can apply certain optional expedients and exceptions mentioned in its reference rate reform guidance even though they do not reference to LIBOR or a rate being discontinued. This guidance was effective upon issuance. The Company adopted the guidance in the first quarter of fiscal 2021 and there was no impact on its Condensed Consolidated Financial Statements upon adoption.
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 adopted the
13
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
guidance in the first quarter of fiscal 2021 and there was no material impact on its Condensed 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 adopted the guidance in the first quarter of fiscal 2021 and there was no material impact on its Condensed 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 adopted the guidance in the first quarter of fiscal 2021 and there was no impact on its Condensed Consolidated Financial Statements. However, the Company expects to have additional disclosures relating to retirement and post-retirement benefit plans in its Annual Report on Form 10-K for the fiscal year ended October 31, 2021.
In June 2016, the FASB amended the existing accounting standards for the measurement of credit losses with additional amendments in 2018, 2019 and 2020. These amendments primarily require the measurement and recognition of current expected credit losses for financial assets held at amortized cost. The amended accounting standard replaces the existing incurred loss impairment model with an expected loss model, which requires the use of forward-looking information to calculate credit loss estimates. It also eliminates the concept of other-than-temporary impairment and requires credit losses related to available-for-sale debt securities to be recorded through an allowance for credit losses rather than as a reduction in the amortized cost basis of the securities. These changes will result in earlier recognition of credit losses. The Company adopted the Current Expected Credit Losses standard (the “CECL standard”) as of November 1, 2020 using the modified retrospective method, with the cumulative-effect adjustment recorded to the opening balance of Accumulated deficit within stockholders’ equity in the Condensed Consolidated Balance Sheets. The cumulative effect of adopting the CECL standard resulted in an increase of $28 million to the allowance for expected credit losses within financing receivables, and a corresponding increase of $25 million, net of $3 million of deferred taxes to Accumulated deficit as of November 1, 2020.
The allowance for expected credit losses related to accounts receivables is comprised of a general reserve and a specific reserve. 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 an allowance for credit losses 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 and the length of time receivables are past due. These qualitative factors are subjective and require a degree of management judgement. The past due or delinquency status of a receivable is based on the contractual payment terms of the receivable. The Company establishes an allowance for expected credit losses related to accounts receivable, including unbilled receivables.
The allowance for expected credit losses related to financing receivables is comprised of a general reserve and a specific reserve. 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 maintains a general reserve using a credit loss model 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 forward-looking information, including reasonable and supportable forecasts. The Company believes the economic forecasts employed represent reasonable and supportable forecasts, followed by a reversion to long term trends. The Company excludes accounts evaluated as part of the specific reserve from the general reserve analysis. 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.
The Company’s 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 Condensed 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 Condensed 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 due to credit-related factors, the Company recognizes the impairment by way of an allowance for credit loss in Interest and other, net in the Condensed Consolidated
14
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
Statement of Earnings while the impairment that is not credit related is recorded in Accumulated other comprehensive loss in the Condensed Consolidated Balance Sheets.
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 impact on adoption of these amendments on its Consolidated Financial Statements to be material.
Note 2: Segment Information
As described in Note 1, "Overview and Summary of Significant Accounting Policies", effective at the beginning of the first quarter of fiscal 2021, the Company implemented certain organizational changes to align its segment financial reporting more closely with its current business structure. Hewlett Packard Enterprise's operations are now organized into six reportable segments for financial reporting purposes: Compute, HPC & MCS, Storage, Intelligent Edge, Financial Services ("FS"), and Corporate Investments and Other. Hewlett Packard Enterprise's organizational structure is based on a number of factors that the Chief Operating Decision Maker ("CODM"), who is the Chief Executive Officer ("CEO"), uses to evaluate, view and run the Company's business operations, which include, but are not limited to, customer base and homogeneity of products and technology. The six segments are based on this organizational structure and information reviewed by Hewlett Packard Enterprise's management to evaluate segment results. A summary description of each segment follows.
Compute 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 related operational and support services.
High Performance Computing & Mission-Critical Solutions portfolio offers specialized compute servers designed to support specific workloads. The HPC portfolio of products includes the HPE Apollo and Cray high performance computing products that are often 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 Converged Edge Systems business which consists of the HPE Moonshot and HPE Edgeline products. HPC & MCS offerings also include related 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, HPE Alletra 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. 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 related operational and support services.
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 Intelligent Edge product portfolio includes products such as Wi-Fi access points, switches, routers, and sensors. The Intelligent Edge 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, 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 and Other includes the Communications and Media Solutions business ("CMS") which primarily offers software and related services to the telecommunications industry; the Software business which offers HPE Ezmeral Container Platform and HPE Ezmeral Data Fabric, and incubates other software related technology innovation; the A & PS business which primarily offers consultative-led services, HPE and partner technology expertise and advice, implementation services as well as complex solution engagement capabilities; and the Hewlett Packard Labs which is responsible for research and development.
15
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
Segment Policy
There have been no changes to the Company's segment accounting policies disclosed in the Company's Annual Report on Form 10-K for the fiscal year ended October 31, 2020, except for the organizational changes and the change in allocation of stock based compensation expense described in Note 1, "Overview and Summary of Significant Accounting Policies".
Hewlett Packard Enterprise does not allocate to its segments certain operating expenses, which it manages at the corporate level. These unallocated operating costs include certain corporate costs and eliminations, stock-based compensation expense, amortization of initial direct costs, amortization of intangible assets, impairment of goodwill, transformation costs, disaster charges, acquisition, disposition and other related charges.
Segment Operating Results
Segment net revenue and operating results were as follows:
  Compute HPC & MCS Storage Intelligent Edge Financial
Services 		Corporate
Investments and Other 		Total
  In millions
Three months ended July 31, 2021          
Net revenue $ 3,033  $ 671  $ 1,154  $ 865  $ 842  $ 332  $ 6,897 
Intersegment net revenue 71  70  22  2  2  —  167 
Total segment net revenue $ 3,104  $ 741  $ 1,176  $ 867  $ 844  $ 332  $ 7,064 
Segment earnings (loss) from operations $ 347  $ 29  $ 178  $ 137  $ 94  $ (28) $ 757 
Three months ended July 31, 2020          
Net revenue $ 3,265  $ 650  $ 1,109  $ 682  $ 807  $ 303  $ 6,816 
Intersegment net revenue 144  17  23  2  4  —  190 
Total segment net revenue $ 3,409  $ 667  $ 1,132  $ 684  $ 811  $ 303  $ 7,006 
Segment earnings (loss) from operations $ 318  $ 47  $ 170  $ 71  $ 66  $ (68) $ 604 
Nine months ended July 31, 2021
Net revenue $ 8,889  $ 2,081  $ 3,456  $ 2,465  $ 2,536  $ 1,003  $ 20,430 
Intersegment net revenue 177  107  50  7  7  —  348 
Total segment net revenue $ 9,066  $ 2,188  $ 3,506  $ 2,472  $ 2,543  $ 1,003  $ 20,778 
Segment earnings (loss) from operations $ 1,024  $ 91  $ 604  $ 413  $ 269  $ (84) $ 2,317 
Nine months ended July 31, 2020
Net revenue $ 8,796  $ 2,063  $ 3,406  $ 2,058  $ 2,494  $ 957  $ 19,774 
Intersegment net revenue 298  50  64  11  9  1  433 
Total segment net revenue $ 9,094  $ 2,113  $ 3,470  $ 2,069  $ 2,503  $ 958  $ 20,207 
Segment earnings (loss) from operations $ 797  $ 156  $ 592  $ 240  $ 218  $ (172) $ 1,831 

16
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
The reconciliation of segment operating results to Hewlett Packard Enterprise Condensed Consolidated Financial statements was as follows:
  Three Months Ended
July 31, 		Nine Months Ended
July 31,
  2021 2020 2021 2020
  In millions
Net Revenue:      
Total segments $ 7,064  $ 7,006  $ 20,778  $ 20,207 
Eliminations of intersegment net revenue (167) (190) (348) (433)
Total Hewlett Packard Enterprise consolidated net revenue $ 6,897  $ 6,816  $ 20,430  $ 19,774 
Earnings before taxes:        
Total segment earnings from operations $ 757  $ 604  $ 2,317  $ 1,831 
Unallocated corporate costs and eliminations (84) (65) (186) (165)
Stock-based compensation expense (86) (55) (294) (215)
Amortization of initial direct costs (2) (3) (6) (9)
Amortization of intangible assets (82) (95) (276) (299)
Transformation costs (213) (357) (733) (646)
Disaster charges (5) (2) (6) (24)
Acquisition, disposition and other related charges (3) (15) (34) (82)
Impairment of goodwill —  —  —  (865)
Interest and other, net (50) (71) (105) (158)
Tax indemnification and related adjustments 76  (30) 60  (86)
Non-service net periodic benefit credit 19  28  53  101 
Earnings from equity interests 79  27  109  50 
Total Hewlett Packard Enterprise consolidated earnings (loss) before taxes $ 406  $ (34) $ 899  $ (567)
Total assets by segment and the reconciliation of segment assets to Hewlett Packard Enterprise consolidated total assets were as follows:
As of
July 31, 2021 October 31, 2020
In millions
Compute $ 16,339  $ 14,962 
HPC & MCS 6,502  6,245 
Storage 6,674  6,438 
Intelligent Edge 4,473  4,352 
Financial Services 14,651  14,765 
Corporate Investments and Other 1,244  1,124 
Corporate and unallocated assets 6,554  6,129 
Total Hewlett Packard Enterprise consolidated total assets $ 56,437  $ 54,015 
17
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
The Company’s net revenue by geographic region was as follows:
Three Months Ended July 31, Nine Months Ended July 31,
2021 2020 2021 2020
In millions
Americas:
United States $ 2,237  $ 2,362  $ 6,433  $ 6,586 
Americas excluding U.S. 461  395  1,357  1,273 
Total Americas $ 2,698  $ 2,757  $ 7,790  $ 7,859 
Europe, Middle East and Africa 2,510  2,448  7,684  7,206 
Asia Pacific and Japan 1,689  1,611  4,956  4,709 
Total Hewlett Packard Enterprise consolidated net revenue $ 6,897  $ 6,816  $ 20,430  $ 19,774 

Note 3: Transformation Programs
Transformation programs are comprised of the cost optimization and prioritization plan, and the HPE Next initiative.
During the third quarter of fiscal 2020, the Company launched the cost optimization and prioritization plan which focuses on realigning the workforce to areas of growth, including a new hybrid workforce model called Edge-to-Office, real estate strategies and simplifying and evolving our product portfolio strategy. 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. 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, design and execution charges and real estate initiatives.
During the third quarter of fiscal 2017, the Company launched an initiative called HPE Next to put in place a purpose-built company designed to compete and win in the markets where it participates. Through this program, the Company is simplifying the operating model, and streamlining our offerings, business processes and business systems to improve our execution. The implementation period of the HPE Next initiative is through fiscal 2023. As of October 31, 2020, the headcount exits under HPE Next Plan are complete. 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.
Transformation Costs
During the three and nine months ended July 31, 2021, the Company incurred $147 million and $552 million, respectively, of charges related to the cost optimization and prioritization plan of which $146 million and $549 million were recorded within Transformation costs, and $1 million and $3 million, respectively, was recorded within Non-service net periodic benefit credit in the Condensed Consolidated Statements of Earnings. During the three and nine months ended July 31, 2020, the Company incurred $238 million of charges related to the cost optimization and prioritization plan which was recorded within Transformation costs in the Condensed Consolidated Statements of Earnings, the components of which were as follows:
  Three months ended July 31, Nine months ended July 31,
2021 2020 2021 2020
  In millions
Program management $ 17  $ 14  $ 72  $ 14 
IT Costs 6  4  9  4 
Restructuring charges 124  220  471  220 
Total $ 147  $ 238  $ 552  $ 238 


18
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
During the three and nine months ended July 31, 2021, the Company incurred $67 million and $184 million, respectively, and during the three and nine months ended July 31, 2020, the Company incurred $119 million and $408 million, respectively, of net charges associated with HPE Next which were recorded within Transformation costs in the Condensed Consolidated Statements of Earnings. The components of Transformation costs relating to HPE Next were as follows:
  Three months ended July 31, Nine months ended July 31,
2021 2020 2021 2020
  In millions
Program management $ 5  $ 10  $ 10  $ 28 
IT costs 54  25  126  71 
Restructuring charges 2  84  21  332 
Gain on real estate sales —  (7) (3) (44)
Impairment on real estate assets —  —  4  — 
Other 6  7  26  21 
Total $ 67  $ 119  $ 184  $ 408 
Restructuring Plan
Restructuring activities related to the Company's employees and infrastructure under the cost optimization and prioritization plan and HPE Next Plan, were presented in the table below:
Cost Optimization and Prioritization Plan HPE Next Plan
  Employee
Severance 		Infrastructure
and other 		Employee
Severance 		Infrastructure
and other
In millions
Liability as of October 31, 2020 $ 210  $ 68  $ 144  $ 52 
Charges 199  272  —  21 
Cash payments (214) (86) (94) (29)
Non-cash items 1  (68) 3  (4)
Liability as of July 31, 2021
$ 196  $ 186  $ 53  $ 40 
Total costs incurred to date, as of July 31, 2021
$ 429  $ 371  $ 1,261  $ 246 
Total expected costs to be incurred as of July 31, 2021
$ 700  $ 610  $ 1,261  $ 248 
The current restructuring liability related to the transformation programs, reported in Condensed Consolidated Balance Sheets as of July 31, 2021 and October 31, 2020, was $263 million and $359 million, respectively, in accrued restructuring, and $29 million and $24 million, respectively, in Other accrued liabilities. The non-current restructuring liability related to the transformation programs, reported in Other non-current liabilities in the Condensed Consolidated Balance Sheets as of July 31, 2021 and October 31, 2020, was $183 million and $91 million, respectively.
19
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
Note 4: Retirement Benefit Plans
The Company's net pension benefit (credit) cost for defined benefit plans recognized in the Condensed Consolidated Statements of Earnings was as follows:
  Three months ended July 31, Nine months ended July 31,
  2021 2020 2021 2020
  In millions
Service cost $ 24  $ 23  $ 73  $ 69 
Interest cost(1)
30  35  89  106 
Expected return on plan assets(1)
(121) (133) (360) (402)
Amortization and deferrals(1):
     
Actuarial loss 74  65  223  194 
Prior service benefit (3) (3) (10) (10)
Net periodic benefit (credit) cost 4  (13) 15  (43)
Settlement loss(1)
—  7  1  8 
Special termination benefits(1)
1  —  3  1 
Total net benefit (credit) cost $ 5  $ (6) $ 19  $ (34)
(1)These non-service components of net periodic benefit cost were included in Non-service net periodic benefit credit in the Condensed Consolidated Statements of Earnings.
Note 5: Taxes on Earnings
Provision for Taxes
For the three and nine months ended July 31, 2021, the Company recorded income tax expense of $14 million and $25 million, respectively, which reflect an effective tax rate of 3.4% and 2.8%, respectively. For the three and nine months ended July 31, 2020, the Company recorded income tax benefit of $43 million and $88 million, respectively, which reflect an effective tax rate of 126.5% and 15.5%, respectively. The effective tax rate generally differs from the U.S. federal statutory rate of 21% due to favorable tax rates associated with certain earnings from the Company’s operations in lower tax jurisdictions throughout the world but are also impacted by discrete tax adjustments during each fiscal period. The effective tax rate for the nine months ended July 31, 2020 also included the effects of the non-deductible goodwill impairment.
For the three and nine months ended July 31, 2021, the Company recorded $99 million and $222 million of net income tax benefits, respectively, related to various items discrete to the period. For the three months ended July 31, 2021, this amount primarily included $88 million of deferred income tax benefits related to tax law changes and $31 million of income tax benefits related to transformation costs, and acquisition, disposition and other related charges, partially offset by income tax charges related to the recovery of two social contribution taxes in Brazil ("PIS" and "COFINS") of $5 million and $23 million, respectively. For the nine months ended July 31, 2021, this amount primarily included $138 million of income tax benefits related to transformation costs, and acquisition, disposition and other related charges, $88 million of deferred income tax benefits related to tax law changes, and $30 million of income tax benefits related to the change in pre-Separation tax liabilities, primarily those for which we share joint and several liability with HP Inc. and for which we are indemnified by HP Inc., partially offset by income tax charges related to the recovery of PIS and COFINS of $5 million and $23 million, respectively.
For the three and nine months ended July 31, 2020, the Company recorded $86 million and $253 million of net income tax benefits, respectively, related to various items discrete to the period. For the three months ended July 31, 2020, the amount primarily included $72 million of income tax benefits related to transformation costs, and acquisition, disposition and other related charges and $30 million of income tax benefits related to tax rate changes on deferred taxes. For the nine months ended July 31, 2020, the amount primarily included $120 million of income tax benefits related to transformation costs, and acquisition, disposition and other related charges, $57 million of income tax benefits related to Indian distribution tax rate changes, $56 million of income tax benefits related to the change in pre-Separation tax liabilities for which the Company shares joint and several liability with HP Inc. and for which the Company is indemnified by HP Inc., and $30 million of income tax benefits related to tax rate changes on deferred taxes.

20
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
Uncertain Tax Positions
As of July 31, 2021 and October 31, 2020, the amount of unrecognized tax benefits was $2.1 billion and $2.2 billion, respectively, of which up to $709 million and $731 million, respectively, would affect the Company's effective tax rate if realized as of their respective periods.
For tax liabilities pertaining to unrecognized tax benefits, the Company recognizes interest income from favorable settlements and interest expense and penalties in (Provision) benefit for taxes in the Condensed Consolidated Statements of Earnings. As of July 31, 2021 and October 31, 2020, the Company had accrued $127 million and $119 million, respectively, for interest and penalties in the Condensed Consolidated Balance Sheets.
The Company engages in continuous discussions and negotiations with tax authorities regarding tax matters in various jurisdictions. The Company 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, the Company believes it is reasonably possible that its existing unrecognized tax benefits may be reduced by an amount up to $75 million within the next 12 months.
Deferred Tax Assets and Liabilities
Deferred tax assets and liabilities included in the Condensed Consolidated Balance Sheets were as follows:
  As of
  July 31, 2021 October 31, 2020
  In millions
Deferred tax assets $ 2,025  $ 1,778 
Deferred tax liabilities (384) (290)
Deferred tax assets net of deferred tax liabilities $ 1,641  $ 1,488 
Note 6: Balance Sheet Details
Balance sheet details were as follows:
Cash, cash equivalents and restricted cash
As of
July 31, 2021 October 31, 2020
In millions
Cash and cash equivalents $ 5,293  $ 4,233 
Restricted cash(1)
359  388 
Total $ 5,652  $ 4,621 
(1) Restricted cash is included within Other current assets in the accompanying Condensed Consolidated Balance Sheets and is primarily related to cash received under the Company's collateral securities agreements for its derivative instruments and cash restricted under the fixed-term securitization program for the issuance of asset-backed debt securities.
Inventory
  As of
  July 31, 2021 October 31, 2020
  In millions
Finished goods $ 1,373  $ 1,197 
Purchased parts and fabricated assemblies 2,569  1,477 
Total $ 3,942  $ 2,674 
21
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
Property, Plant and Equipment
  As of
  July 31, 2021 October 31, 2020
  In millions
Land $ 75  $ 89 
Buildings and leasehold improvements 1,697  1,886 
Machinery and equipment, including equipment held for lease 9,855  9,624 
11,627  11,599 
Accumulated depreciation (6,117) (5,974)
Total $ 5,510  $ 5,625 
Warranties
The Company's aggregate product warranty liability as of July 31, 2021, and changes were as follows:
  Nine Months Ended
July 31, 2021
  In millions
Balance at beginning of period $ 385 
Charges 159 
Adjustments related to pre-existing warranties (27)
Settlements made (180)
Balance at end of period $ 337 
Contract balances
The Company’s contract balances consist of contract assets, contract liabilities, and costs to obtain a contract with a customer.
Contract Assets
A summary of accounts receivable, net, including unbilled receivables was as follows:
As of
July 31, 2021 October 31, 2020
In millions
Accounts receivable, net
Accounts receivable $ 3,125  $ 3,227 
Unbilled receivables 214  205 
Allowances (42) (46)
Total $ 3,297  $ 3,386 
The allowances for credit losses related to accounts receivable and changes therein were as follows:
  As of
  July 31, 2021 October 31, 2020
  In millions
Balance at beginning of the period $ 46  $ 31 
Provision for credit losses 8  29 
Write off's, net of recoveries (12) (14)
Balance at end of the period $ 42  $ 46 
22
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
Sale of Trade Receivables
The Company has third-party revolving short-term financing arrangements intended to facilitate the working capital requirements of certain customers. During the three and nine months ended July 31, 2021, the Company sold $1 billion and $3.1 billion of trade receivables, respectively. During the fiscal year ended October 31, 2020, the Company sold $3.9 billion of trade receivables. The Company recorded an obligation of $66 million and $75 million in Notes payable and short-term borrowings in its Condensed Consolidated Balance Sheets as of July 31, 2021 and October 31, 2020 respectively, related to the trade receivables sold and collected from the third-party for which the revenue recognition was deferred.
Contract Liabilities
Contract liabilities consist of deferred revenue. The aggregate balance of current and non-current deferred revenue was $6.4 billion and $6.2 billion as of July 31, 2021 and October 31, 2020, respectively. During the nine months ended July 31, 2021, approximately $2.7 billion of the deferred revenue as of October 31, 2020 was recognized as revenue.
Remaining Performance Obligations
Revenue allocated to remaining performance obligations represents contract work that has not yet been performed and does not include contracts where the customer is not committed. Remaining performance obligations estimates are subject to change and are affected by several factors, including contract terminations, changes in the scope of contracts, adjustments for revenue that has not materialized and adjustments for currency.
Remaining performance obligations consist of deferred revenue. As of July 31, 2021, the aggregate amount of remaining performance obligations was $6.4 billion. The Company expects to recognize approximately 21% of this amount as revenue over the remainder of the fiscal year.
Costs to Obtain a Contract
As of July 31, 2021, the current and non-current portions of the capitalized costs to obtain a contract were $60 million and $86 million, respectively. 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. The current and non-current portions of the capitalized costs to obtain a contract were included in Other current assets, and Long-term financing receivables and other assets, respectively, in the Condensed Consolidated Balance Sheet. For the three and nine months ended July 31, 2021, the Company amortized $16 million and $48 million respectively, of capitalized costs to obtain a contract. For the three and nine months ended July 31, 2020, the Company amortized $15 million and $43 million respectively, of capitalized costs to obtain a contract. The amortized capitalized costs to obtain a contract are included in Selling, general and administrative expense in the Condensed Consolidated Statement of Earnings.
Note 7: Accounting for Leases as a Lessor
Financing receivables represent sales-type and direct-financing leases of the Company and third-party products. These receivables typically have terms ranging from two to five years and are usually collateralized by a security interest in the underlying assets. Financing receivables also include billed receivables from operating leases. The allowance for credit losses represents future expected credit losses over the life of the receivables based on past experience, current information and forward-looking economic considerations. The components of financing receivables were as follows:
  As of
  July 31, 2021 October 31, 2020
  In millions
Minimum lease payments receivable $ 9,346  $ 9,448 
Unguaranteed residual value 386  364 
Unearned income (725) (754)
Financing receivables, gross 9,007  9,058 
Allowance for credit losses
(234) (154)
Financing receivables, net 8,773  8,904 
Less: current portion (3,814) (3,794)
Amounts due after one year, net $ 4,959  $ 5,110 
23
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
As of July 31, 2021 and October 31, 2020, scheduled maturities of the Company's minimum lease payments receivable were as follows:
As of
July 31, 2021 October 31, 2020
Fiscal year In millions
Remainder of fiscal 2021 $ 1,496  $ 4,182 
2022 3,389  2,662 
2023 2,306  1,572 
2024 1,326  720 
2025 609  252 
Thereafter 220  60 
Total undiscounted cash flows $ 9,346  $ 9,448 
   Present value of lease payments (recognized as finance receivables) $ 8,621  $ 8,694 
   Unearned income $ 725  $ 754 
Sale of Financing Receivables
The Company enters into arrangements to transfer the contractual payments due under certain financing receivables to third party financial institutions. During the three and nine months ended July 31, 2021 the Company sold $30 million and $110 million of financing receivables, respectively. During the fiscal year ended October 31, 2020, the Company sold $103 million of financing receivables.
Credit Quality Indicators
Due to the homogeneous nature of its leasing transactions, the Company manages its financing receivables on an aggregate basis when assessing and monitoring credit risk. Credit risk is generally diversified due to the large number of entities comprising the Company's customer base and their dispersion across many different industries and geographic regions. The Company evaluates the credit quality of an obligor at lease inception and monitors that credit quality over the term of a transaction. The Company assigns risk ratings to each lease based on the creditworthiness of the obligor and other variables that augment or mitigate the inherent credit risk of a particular transaction and periodically updates the risk ratings when there is a change in the underlying credit quality. Such variables include the underlying value and liquidity of the collateral, the essential use of the equipment, the term of the lease, and the inclusion of credit enhancements, such as guarantees, letters of credit or security deposits.
The credit risk profile of financing receivables, based on internal risk ratings as of July 31, 2021, presented on amortized cost basis by year of origination was as follows:
 
As of July 31, 2021
Risk Rating
Low Moderate High
Fiscal Year In millions
2021 $ 1,341  $ 1,156  $ 40 
2020 1,607  1,203  94 
2019 965  880  95 
2018 469  491  88 
2017 and prior 198  271  109 
Total $ 4,580  $ 4,001  $ 426 
24
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
The credit risk profile of gross financing receivables, based on internal risk ratings as of October 31, 2020, was as follows:
  As of
  October 31, 2020
  In millions
Risk Rating:  
Low $ 4,590 
Moderate 4,091 
High 377 
Total $ 9,058 
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. Effective November 1, 2020, under the new guidance for credit losses, the Company discloses its credit quality by year of origination. The credit quality indicators do not reflect any mitigation actions taken to transfer credit risk to third parties.
Allowance for Credit Losses
The allowance for credit losses for financing receivables as of July 31, 2021 and October 31, 2020 and the respective changes during the nine and twelve months then ended were as follows:
  As of
  July 31, 2021 October 31, 2020
  In millions
Balance at beginning of period $ 154  $ 131 
Adjustment for adoption of the new credit loss standard 28  — 
Provision for credit losses 59  43 
Adjustment to the existing allowance 19  — 
Write-offs (26) (20)
Balance at end of period $ 234  $ 154 
Non-Accrual and Past-Due Financing Receivables
The following table summarizes the aging and non-accrual status of gross financing receivables:
  As of
  July 31, 2021 October 31, 2020
  In millions
Billed:(1)
   
Current 1-30 days $ 347  $ 340 
Past due 31-60 days 38  43 
Past due 61-90 days 17  22 
Past due > 90 days 121  140 
Unbilled sales-type and direct-financing lease receivables 8,484  8,513 
Total gross financing receivables $ 9,007  $ 9,058 
Gross financing receivables on non-accrual status(2)
$ 285  $ 364 
Gross financing receivables 90 days past due and still accruing interest(2)
$ 92  $ 74 
(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.
25
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
Operating Leases
Operating lease assets included in Property, plant and equipment in the Condensed Consolidated Balance Sheets were as follows:
  As of
  July 31, 2021 October 31, 2020
  In millions
Equipment leased to customers $ 7,166  $ 7,184 
Accumulated depreciation (3,223) (3,157)
Total $ 3,943  $ 4,027 
Minimum future rentals on non-cancelable operating leases related to leased equipment were as follows:
As of
July 31, 2021
Fiscal year In millions
Remainder of fiscal 2021 $ 510 
2022 1,524 
2023 873 
2024 300 
2025 44 
Thereafter 11 
Total $ 3,262 
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.
The following table presents amounts included in the Condensed Consolidated Statement of Earnings related to lessor activity:
Three Months Ended July 31, Nine Months Ended July 31,
2021 2020 2021 2020
In millions
Sales-type leases and direct financing leases:
Interest income $ 125  $ 115  $ 371  $ 343 
Lease income - operating leases 598  588  1,797  1,821 
Total lease income $ 723  $ 703  $ 2,168  $ 2,164 
Variable Interest Entities
The Company has issued asset-backed debt securities under a fixed-term securitization program to private investors. The asset-backed debt securities are collateralized by the U.S. fixed-term financing receivables and leased equipment in the offering, which is held by a Special Purpose Entity (“SPE”). The SPE meets the definition of a VIE and is consolidated, along with the associated debt, into the Condensed Consolidated Financial Statements as the Company is the primary beneficiary of the VIE. The SPE is a bankruptcy-remote legal entity with separate assets and liabilities. The purpose of the SPE is to facilitate the funding of customer receivables and leased equipment in the capital markets.
The Company’s risk of loss related to securitized receivables and leased equipment is limited to the amount by which the Company’s right to receive collections for assets securitized exceeds the amount required to pay interest, principal, and fees and expenses related to the asset-backed securities.
26
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
The following table presents the assets and liabilities held by the consolidated VIE as of July 31, 2021, which are included in the Condensed Consolidated Balance Sheets. The assets in the table below include those that can be used to settle the obligations of the VIE. Additionally, general creditors do not have recourse to the assets of the VIE.
As of
  July 31, 2021 October 31, 2020
Assets held by VIE In millions
Other current assets $ 179  $ 120 
Financing receivables
Short-term $ 805  $ 531 
Long-term $ 882  $ 584 
Property, plant and equipment $ 1,010  $ 665 
Liabilities held by VIE
Notes payable and short-term borrowings, net of unamortized debt issuance costs $ 1,389  $ 886 
Long-term debt, net of unamortized debt issuance costs $ 1,198  $ 834 
Note 8: Goodwill
The following table represents the carrying value of goodwill, by reportable segment as of October 31, 2020 and July 31, 2021:
  Compute HPC & MCS Storage Intelligent Edge Financial Services Corporate Investments and Other Total
  In millions
Balance at October 31, 2020 (1) (2)
$ 7,532  $ 3,616  $ 3,946  $ 2,566  $ 144  213 $ 18,017 
Goodwill from current period acquisitions —  86  —  —  —  —  86 
Goodwill adjustments —  —  —  (11) —  —  (11)
Balance at July 31, 2021 (2)
$ 7,532  $ 3,702  $ 3,946  $ 2,555  $ 144  $ 213  $ 18,092 
(1)As a result of the organizational realignments which were effective as of November 1, 2020, (described in Note 1, "Overview and Summary of Significant Accounting Policies"), $213 million of goodwill was reallocated from Storage segment to Corporate Investments and Other segment as of the beginning of the period using a relative fair value approach.
(2)Goodwill is net of accumulated impairment losses of $953 million. Of this amount, $865 million related to the HPC & MCS reporting unit was recorded during the second quarter of 2020 and $88 million related to the CMS reporting unit within Corporate Investments and Other was recorded during the fourth quarter of fiscal 2018. There is no goodwill remaining in the CMS reporting unit.
Effective at the beginning of the first quarter of fiscal 2021, the Company's operations were realigned into six segments for financial reporting purposes. The Company's reporting units containing goodwill are consistent with the reportable segments identified in Note 2, "Segment Information" with the exception of Corporate Investments and Other which is made up of three reporting units, A & PS, CMS, and Software, of which only Software has goodwill. As a result of this realignment, the Company performed an interim quantitative goodwill impairment test for all of its reporting units as of November 1, 2020, which did not result in any goodwill impairment charges. The fair value of all reporting units continued to exceed the carrying value of their net assets. The excess of fair value over carrying value for our reporting units ranged from approximately 8% to 37% of the respective carrying values. In order to evaluate the sensitivity of the estimated fair value of our reporting units in the goodwill impairment test, the Company applied a hypothetical 10% decrease to the fair value of each reporting unit. Based on the results of this hypothetical 10% decrease all of the reporting units had an excess of fair value over carrying value, with the exception of HPC & MCS reporting unit.
As of the interim test date, the HPC & MCS reporting unit has goodwill of $3.6 billion and an excess of fair value over carrying value of net assets of 8%. 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. The HPC & MCS business is facing challenges on the current and projected future results as the revenue growth is dependent on timing of delivery and related achievement of customer acceptance milestones. If the Company is not successful in addressing these challenges, the
27
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
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, should economic conditions deteriorate, 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. Further impairment charges, if any, may be material to the results of operations and financial position.
The Company will continue to evaluate the recoverability of goodwill on an annual basis as of the beginning of its fourth fiscal quarter and whenever events or changes in circumstances indicate there may be a potential impairment.
Note 9: 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.
The following table presents the Company's assets and liabilities that are measured at fair value on a recurring basis:
  As of July 31, 2021 As of October 31, 2020
  Fair Value
Measured Using 		Fair Value
Measured Using
 
Quoted Prices in Active Markets for Identical Assets
(Level 1)
Significant Other Observable Remaining Inputs (Level 2)
Significant Other Unobservable Remaining Inputs
(Level 3)
Total
Quoted Prices in Active Markets for Identical Assets
(Level 1)
Significant Other Observable Remaining Inputs (Level 2)
Significant Other Unobservable Remaining Inputs
(Level 3)
Total
  In millions
Assets                
Cash Equivalents and Investments:                
Time deposits $ —  $ 1,398  $ —  $ 1,398  $ —  $ 939  $ —  $ 939 
Money market funds 2,003  —  —  2,003  1,167  —  —  1,167 
Equity securities 2  —  92  94  —  —  —  — 
Foreign bonds 1  125  —  126  —  125  —  125 
Other debt securities —  —  43  43  —  —  21  21 
Derivative Instruments:                
Interest rate contracts —  153  —  153  —  220  —  220 
Foreign exchange contracts —  211  —  211  —  290  —  290 
Other derivatives —  1  —  1  —  —  —  — 
Total assets $ 2,006  $ 1,888  $ 135  $ 4,029  $ 1,167  $ 1,574  $ 21  $ 2,762 
Liabilities                
Derivative Instruments:                
Interest rate contracts $ —  $ —  $ —  $ —  $ —  $ 2  $ —  $ 2 
Foreign exchange contracts —  190  —  190  —  189  —  189 
Other derivatives —  —  —  —  —  3  —  3 
Total liabilities $ —  $ 190  $ —  $ 190  $ —  $ 194  $ —  $ 194 
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.
28
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
Other Fair Value Disclosures
Short-Term and Long-Term Debt: As of July 31, 2021 and October 31, 2020, the estimated fair value of the Company's short-term and long-term debt was $17.6 billion and $17.1 billion, respectively. As of July 31, 2021 and October 31, 2020, the carrying value of the Company's short-term and long-term debt was $16.2 billion and $15.9 billion, respectively. 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.
Equity investments without readily determinable fair value: Equity Investments are recorded at cost and measured at fair value, when they are deemed to be impaired or when there is an adjustment from observable price changes. During the nine months ended July 31, 2021, the Company recognized a gain of $25 million, in Interest and other, net in the Condensed 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.
Non-Financial Assets: The Company's non-financial assets, such as intangible assets, goodwill and property, plant and equipment, are recorded at cost. The Company records right-of-use ("ROU") assets based on the lease liability, adjusted for lease prepayments, lease incentives received, and the lessee's initial direct costs. Fair value adjustments are made to these non-financial assets in the period an impairment charge is recognized.
During the three and nine months ended July 31, 2021, the Company recorded a ROU asset impairment charge of $4 million and $72 million, respectively in Transformation costs in the Condensed Consolidated Statements of Earnings as the carrying value of certain ROU assets exceeded its fair value. If measured at fair value in the Condensed Consolidated Balance Sheets, these would generally be classified in Level 3 of the fair value hierarchy.
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 8 "Goodwill".
Note 10: Financial Instruments
Cash Equivalents and Available-for-Sale Debt Investments
Cash equivalents and available-for-sale debt investments were as follows:
  As of July 31, 2021 As of October 31, 2020
  Cost Gross Unrealized Gain Fair
Value 		Cost Gross Unrealized Gain Fair
Value
  In millions
Cash Equivalents:            
Time deposits $ 1,398  $ —  $ 1,398  $ 939  $ —  $ 939 
Money market funds 2,003  —  2,003  1,167  —  1,167 
Total cash equivalents 3,401  —  3,401  2,106  —  2,106 
Available-for-Sale Debt Investments:            
Foreign bonds 110  16  126  108  17  125 
Other debt securities 42  1  43  20  1  21 
Total available-for-sale debt investments 152  17  169  128  18  146 
Total cash equivalents and available-for-sale debt investments $ 3,553  $ 17  $ 3,570  $ 2,234  $ 18  $ 2,252 
As of July 31, 2021 and October 31, 2020, the carrying amount of cash equivalents approximated fair value due to the short period of time to maturity. Time deposits were primarily issued by institutions outside of the U.S. as of July 31, 2021 and October 31, 2020. The estimated fair value of the available-for-sale debt investments may not be representative of values that will be realized in the future.
29
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
Contractual maturities of available-for-sale debt investments were as follows:
  July 31, 2021
  Amortized Cost Fair Value
  In millions
Due in one to five years $ 25  $ 25 
Due in more than five years 127  144 
$ 152  $ 169 
Non-marketable equity investments in privately held companies are included in Long-term financing receivables and other assets in the Condensed Consolidated Balance Sheets. These non-marketable equity investments are carried either at fair value or under the measurement alternative.
The carrying amount of those non-marketable equity investments accounted for under the measurement alternative amounted to $252 million and $295 million as of July 31, 2021 and October 31, 2020, respectively. During the nine months ended July 31, 2021, the Company recorded an unrealized gain of $25 million on these investments.
The carrying amount of those non-marketable equity investments accounted for under the fair value option amounted to $92 million as of July 31, 2021. During the nine months ended July 31, 2021, the Company recorded an unrealized gain of $34 million on these investments.
Investments in equity securities that are accounted for using the equity method are included in Investments in equity interests in the Condensed Consolidated Balance Sheets. These amounted to $2.3 billion and $2.2 billion as of July 31, 2021 and October 31, 2020. For the three and nine months ended July 31, 2021, the Company recorded earnings from equity interests of $79 million and $109 million, respectively.
Fair Value of Derivative Instruments in the Condensed Consolidated Balance Sheets
The gross notional and fair value of derivative instruments in the Condensed Consolidated Balance Sheets were as follows:
  As of July 31, 2021 As of October 31, 2020
    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  $ —  $ 153  $ —  $ —  $ 3,850  $ —  $ 220  $ —  $ — 
Cash flow hedges:                    
Foreign currency contracts 7,872  89  46  65  62  7,652  75  85  95  38 
Interest rate contracts —  —  —  —  —  500  —  —  2  — 
Net investment hedges:
Foreign currency contracts 1,821  25  24  18  20  1,804  34  44  11  9 
Total derivatives designated as hedging instruments 13,543  114  223  83  82  13,806  109  349  108  47 
Derivatives not designated as hedging instruments                    
Foreign currency contracts 5,923  20  7  23  2  6,157  43  9  35  1 
Other derivatives 113  1  —  —  —  105  —  —  3  — 
Total derivatives not designated as hedging instruments 6,036  21  7  23  2  6,262  43  9  38  1 
Total derivatives $ 19,579  $ 135  $ 230  $ 106  $ 84  $ 20,068  $ 152  $ 358  $ 146  $ 48 
30
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
Offsetting of Derivative Instruments
The Company recognizes all derivative instruments on a gross basis in the Condensed Consolidated Balance Sheets. The Company's derivative instruments are subject to master netting arrangements and collateral security arrangements. The Company does not offset the fair value of its derivative instruments against the fair value of cash collateral posted under collateral security agreements. The information related to the potential effect of the Company's use of the master netting agreements and collateral security agreements were as follows:
  As of July 31, 2021
  In the Condensed Consolidated Balance Sheets  
  (i) (ii) (iii) = (i)–(ii) (iv) (v) (vi) = (iii)–(iv)–(v)
        Gross Amounts Not Offset  
  Gross
Amount
Recognized 		Gross
Amount
Offset 		Net Amount
Presented 		Derivatives Financial
Collateral 		Net Amount
  In millions
Derivative assets $ 365  $ —  $ 365  $ 154  $ 203 
(1)
$ 8 
Derivative liabilities $ 190  $ —  $ 190  $ 154  $ 30 
(2)
$ 6 
  As of October 31, 2020
  In the Condensed Consolidated Balance Sheets  
  (i) (ii) (iii) = (i)–(ii) (iv) (v) (vi) = (iii)–(iv)–(v)
        Gross Amounts Not Offset  
  Gross
Amount
Recognized 		Gross
Amount
Offset 		Net Amount
Presented 		Derivatives Financial
Collateral 		Net Amount
  In millions
Derivative assets $ 510  $ —  $ 510  $ 137  $ 321 
(1)
$ 52 
Derivative liabilities $ 194  $ —  $ 194  $ 137  $ 55 
(2)
$ 2 
(1)Represents the cash collateral posted by counterparties as of the respective reporting date for the Company's asset position, net of derivative amounts that could be offset, as of, generally, two business days prior to the respective reporting date.
(2)Represents the collateral posted by the Company in cash or through the re-use of counterparty cash collateral as of the respective reporting date for the Company's liability position, net of derivative amounts that could be offset, as of, generally, two business days prior to the respective reporting date. As of July 31, 2021, of the $30 million of collateral posted, $5 million was in cash and $25 million was through re-use of counterparty collateral. As of October 31, 2020, $55 million of collateral posted was entirely by way of re-use of counterparty collateral.
The amounts recorded on the Condensed Consolidated Balance Sheets related to cumulative basis adjustments for fair value hedges were as follows:
Carrying amount of the hedged assets/ (liabilities) Cumulative amount of fair value hedging adjustment included in the carrying amount of the hedged assets/ (liabilities)
As of As of
July 31, 2021 October 31, 2020 July 31, 2021 October 31, 2020
In millions In millions
Long-term debt $ (3,994) $ (4,059) $ (153) $ (220)
31
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
The pre-tax effect of derivative instruments in cash flow and net investment hedging relationships recognized in Other Comprehensive Income ("OCI") were as follows:
Gains (Losses) Recognized in OCI on Derivatives
Three months ended July 31, 2021 Three months ended July 31, 2020 Nine months ended July 31, 2021 Nine months ended July 31, 2020
In millions
Derivatives in Cash Flow Hedging relationship
Foreign exchange contracts $ 101  $ (456) $ (183) $ (79)
Interest rate contracts —  —  (6)
Derivatives in Net Investment Hedging relationship
Foreign exchange contracts 16  (83) (61) 50 
Total $ 117  $ (539) $ (244) $ (35)
As of July 31, 2021, the Company expects to reclassify an estimated net accumulated other comprehensive gain of approximately $42 million, net of taxes, to earnings in the next twelve months along with the earnings effects of the related forecasted transactions associated with cash flow hedges.
32
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
Effect of Derivative Instruments on the Condensed Consolidated Statements of Earnings
The pre-tax effect of derivative instruments on the Condensed Consolidated Statements of Earnings were as follows:
Gains (Losses) Recognized in Income
Three months ended July 31, 2021 Three months ended July 31, 2020 Nine months ended July 31, 2021 Nine months ended July 31, 2020
Net revenue Interest and other, net Net revenue Interest and other, net Net revenue Interest and other, net Net revenue Interest and other, net
In millions
Total amounts of income and expense line items presented in the Condensed Consolidated Statements of Earnings in which the effects of fair value hedges, cash flow hedges and derivatives not designated as hedging instruments are recorded $ 6,897  $ (50) $ 6,816  $ (71) $ 20,430  $ (105) $ 19,774  $ (158)
Gains (losses) on derivatives in fair value hedging relationships
Interest rate contracts
Hedged items $ —  $ (3) $ —  $ (13) $ —  $ 67  $ —  $ (198)
Derivatives designated as hedging instruments —  3  —  13  —  (67) —  198 
Gains (losses) on derivatives in cash flow hedging relationships
Foreign exchange contracts
Amount of gains (losses) reclassified from accumulated other comprehensive income into income (14) 50  23  (264) (113) (147) 97  (55)
Interest rate contracts
Amount of gains (losses) reclassified from accumulated other comprehensive income into income —  —  —  (1) —  (2) —  (1)
Gains (losses) on derivatives not designated as hedging instruments
Foreign exchange contracts —  (33) —  8  —  (61) —  53 
Other derivatives —  (1) —  (6) —  3  —  (1)
Total gains (losses) $ (14) $ 16  $ 23  $ (263) $ (113) $ (207) $ 97  $ (4)

33
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
Note 11: Borrowings
Notes Payable, Short-Term Borrowings and Long-Term Debt
Notes payable, short-term borrowings, including the current portion of long-term debt, and long-terms debt were as follows:
As of
July 31, 2021 October 31, 2020
In millions
Current portion of long-term debt $ 2,741  $ 2,768 
FS commercial paper 694  677 
Notes payable to banks, lines of credit and other 301  310 
Total notes payable and short-term borrowings $ 3,736  $ 3,755 
Long-term debt 12,489  12,186 
Total Debt $ 16,225  $ 15,941 
Unsecured Senior Notes
In March 2021, the Company repaid $500 million of three-month USD LIBOR plus 0.68% Senior Notes on their original maturity date.
Asset-backed Debt Securities
In June 2021, the Company issued $753 million of asset-backed debt securities in six tranches at a weighted average price of 99.99% and a weighted average interest rate of 0.58%, payable monthly from August 2021 with a stated final maturity date of March 2029.
In March 2021, the Company issued $1.0 billion of asset-backed debt securities in six tranches at a weighted average price of 99.99% and a weighted average interest rate of 0.49%, payable monthly from April 2021 with a stated final maturity date of March 2031.
Commercial Paper
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. 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 two programs at any one time cannot exceed the $4.75 billion as authorized by Hewlett Packard Enterprise's Board of Directors. In addition, the Hewlett Packard Enterprise subsidiary's euro Commercial Paper/Certificate of Deposit Program provides for the issuance of commercial paper in various currencies of up to a maximum aggregate principal amount of $1.0 billion. As of July 31, 2021 and October 31, 2020, no borrowings were outstanding under the Parent Programs, and $694 million and $677 million, respectively, were outstanding under the subsidiary’s program.
34
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
Note 12: Stockholders' Equity
The components of Accumulated other comprehensive loss, net of taxes as of July 31, 2021, and changes during the nine months ended July 31, 2021 were as follows:
  Net unrealized
gains (losses) on
available-for-sale
securities 		Net unrealized
gains (losses)
on cash
flow hedges 		Unrealized
components
of defined
benefit plans 		Cumulative
translation
adjustment 		Accumulated
other
comprehensive
loss
  In millions
Balance at beginning of period $ 18  $ (7) $ (3,473) $ (477) $ (3,939)
Other comprehensive income (loss) before reclassifications (1) (183) 29  20  (135)
Reclassifications of (gains) losses into earnings —  262  214  —  476 
Tax (provision) benefit —  (14) (15) (4) (33)
Balance at end of period $ 17  $ 58  $ (3,245) $ (461) $ (3,631)
The components of Accumulated other comprehensive loss, net of taxes as of July 31, 2020, and changes during the nine months ended July 31, 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 —  (85) (10) (46) (141)
Reclassifications of (gains) losses into earnings (8) (41) 191  —  142 
Tax (provision) benefit —  20  (11) 4  13 
Balance at end of period $ 15  $ (63) $ (3,196) $ (512) $ (3,756)
(1) Reflects 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.
Share Repurchase Program
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. As of July 31, 2021, the Company had a remaining authorization of $2.1 billion for future share repurchases.
Note 13: Net Earnings (Loss) Per Share
The Company calculates basic net EPS using net earnings and the weighted-average number of shares outstanding during the reporting period. Diluted net EPS includes the weighted-average dilutive effect of outstanding restricted stock units, stock options, and performance-based awards.
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HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
The reconciliations of the numerators and denominators of each of the basic and diluted net EPS calculations were as follows:
  Three Months Ended July 31, Nine Months Ended July 31,
  2021 2020 2021 2020
  In millions, except per share amounts
Numerator:    
Net earnings (loss) $ 392  $ 9  $ 874  $ (479)
Denominator:    
Weighted-average shares used to compute basic net EPS 1,314  1,292  1,308  1,294
Dilutive effect of employee stock plans 24  8  20  — 
Weighted-average shares used to compute diluted net EPS 1,338  1,300  1,328  1294
Net earnings (loss) per share:
Basic $ 0.30  $ 0.01  $ 0.67  $ (0.37)
Diluted $ 0.29  $ 0.01  $ 0.66  $ (0.37)
Anti-dilutive weighted-average stock awards(1)
1  21  7  48 
(1)The Company excludes shares potentially issuable under employee stock plans that could dilute basic net EPS in the future from the calculation of diluted net earnings per share, as their effect, if included, would have been anti-dilutive for the periods presented.
Note 14: Litigation and Contingencies
Hewlett Packard Enterprise is involved in various lawsuits, claims, investigations and proceedings including those consisting of intellectual property, commercial, securities, employment, employee benefits and environmental matters, which arise in the ordinary course of business. In addition, as part of the Separation and Distribution Agreement, Hewlett Packard Enterprise and HP Inc. (formerly known as "Hewlett-Packard Company") agreed to cooperate with each other in managing certain existing litigation related to both parties' businesses. The Separation and Distribution Agreement included provisions that allocate liability and financial responsibility for pending litigation involving the parties, as well as provide for cross-indemnification of the parties against liabilities to one party arising out of liabilities allocated to the other party. The Separation and Distribution Agreement also included provisions that assign to the parties responsibility for managing pending and future litigation related to the general corporate matters of HP Inc. arising prior to the Separation. Hewlett Packard Enterprise records a liability when it believes that it is both probable that a liability has been incurred and the amount of loss can be reasonably estimated. Significant judgment is required to determine both the probability of having incurred a liability and the estimated amount of the liability. Hewlett Packard Enterprise reviews these matters at least quarterly and adjusts these liabilities to reflect the impact of negotiations, settlements, rulings, advice of legal counsel and other updated information and events pertaining to a particular matter. Litigation is inherently unpredictable. However, Hewlett Packard Enterprise believes it has valid defenses with respect to legal matters pending against us. Nevertheless, cash flows or results of operations could be materially affected in any particular period by the resolution of one or more of these contingencies. Hewlett Packard Enterprise believes it has recorded adequate provisions for any such matters and, as of July 31, 2021, it was not reasonably possible that a material loss had been incurred in connection with such matters in excess of the amounts recognized in its financial statements.
Litigation, Proceedings and Investigations
Ross and Rogus v. Hewlett Packard Enterprise Company. On November 8, 2018, a putative class action complaint was filed in the Superior Court of California, County of Santa Clara alleging that HPE pays its California-based female employees “systemically lower compensation” than HPE pays male employees performing substantially similar work. The complaint alleges various California state law claims, including California’s Equal Pay Act, Fair Employment and Housing Act, and Unfair Competition Law, and seeks certification of a California-only class of female employees employed in certain “Covered Positions.” The complaint seeks damages, statutory and civil penalties, attorneys’ fees and costs. On April 2, 2019, HPE filed a demurrer to all causes of action and an alternative motion to strike portions of the complaint. On July 2, 2019, the court denied HPE’s demurrer as to the claims of the putative class and granted HPE’s demurrer as to the claims of the individual plaintiffs.
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HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
India Directorate of Revenue Intelligence Proceedings. On April 30 and May 10, 2010, the India Directorate of Revenue Intelligence (the "DRI") issued show cause notices to Hewlett-Packard India Sales Private Ltd ("HP India"), a subsidiary of HP Inc., seven HP India employees and one former HP India employee alleging that HP India underpaid customs duties while importing products and spare parts into India and seeking to recover an aggregate of approximately $370 million, plus penalties. Prior to the issuance of the show cause notices, HP India deposited approximately $16 million with the DRI and agreed to post a provisional bond in exchange for the DRI's agreement to not seize HP India products and spare parts and to not interrupt the transaction of business by HP India.
On April 11, 2012, the Bangalore Commissioner of Customs issued an order on the products-related show cause notice affirming certain duties and penalties against HP India and the named individuals of approximately $386 million, of which HP India had already deposited $9 million. On December 11, 2012, HP India voluntarily deposited an additional $10 million in connection with the products-related show cause notice. On April 20, 2012, the Commissioner issued an order on the parts-related show cause notice affirming certain duties and penalties against HP India and certain of the named individuals of approximately $17 million, of which HP India had already deposited $7 million. After the order, HP India deposited an additional $3 million in connection with the parts-related show cause notice to avoid certain penalties.
HP India filed appeals of the Commissioner's orders before the Customs Tribunal along with applications for waiver of the pre-deposit of remaining demand amounts as a condition for hearing the appeals. The Customs Department has also filed cross-appeals before the Customs Tribunal. On January 24, 2013, the Customs Tribunal ordered HP India to deposit an additional $24 million against the products order, which HP India deposited in March 2013. The Customs Tribunal did not order any additional deposit to be made under the parts order. In December 2013, HP India filed applications before the Customs Tribunal seeking early hearing of the appeals as well as an extension of the stay of deposit as to HP India and the individuals already granted until final disposition of the appeals. On February 7, 2014, the application for extension of the stay of deposit was granted by the Customs Tribunal until disposal of the appeals. On October 27, 2014, the Customs Tribunal commenced hearings on the cross-appeals of the Commissioner's orders. The Customs Tribunal rejected HP India's request to remand the matter to the Commissioner on procedural grounds. The hearings were scheduled to reconvene on April 6, 2015, and again on November 3, 2015, April 11, 2016, and January 15, 2019, but were canceled at the request of the Customs Tribunal. The hearing was again rescheduled for January 20, 2021 but was postponed and has not yet been rescheduled.
ECT Proceedings. In January 2011, the postal service of Brazil, Empresa Brasileira de Correios e Telégrafos ("ECT"), notified a former subsidiary of HP Inc. in Brazil ("HP Brazil") that it had initiated administrative proceedings to consider whether to suspend HP Brazil's right to bid and contract with ECT related to alleged improprieties in the bidding and contracting processes whereby employees of HP Brazil and employees of several other companies allegedly coordinated their bids and fixed results for three ECT contracts in 2007 and 2008. In late July 2011, ECT notified HP Brazil it had decided to apply the penalties against HP Brazil and suspend HP Brazil's right to bid and contract with ECT for five years, based upon the evidence before it. In August 2011, HP Brazil appealed ECT's decision. In April 2013, ECT rejected HP Brazil's appeal, and the administrative proceedings were closed with the penalties against HP Brazil remaining in place. In parallel, in September 2011, HP Brazil filed a civil action against ECT seeking to have ECT's decision revoked. HP Brazil also requested an injunction suspending the application of the penalties until a final ruling on the merits of the case. The court of first instance has not issued a decision on the merits of the case, but it has denied HP Brazil's request for injunctive relief. HP Brazil appealed the denial of its request for injunctive relief to the intermediate appellate court, which issued a preliminary ruling denying the request for injunctive relief but reducing the length of the sanctions from 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 any appeal of the decision on the merits to last several years.
Forsyth, et al. vs. HP Inc. and Hewlett Packard Enterprise. This purported class and collective action was filed on August 18, 2016 and an amended complaint was filed on December 19, 2016 in the United States District Court for the Northern District of California, against HP Inc. and Hewlett Packard Enterprise (collectively, “Defendants”) alleging Defendants violated the Federal Age Discrimination in Employment Act ("ADEA"), the California Fair Employment and Housing Act, California public policy and the California Business and Professions Code by terminating older workers and replacing them with younger workers. Plaintiffs seek to certify a nationwide collective action under the ADEA comprised of all individuals age 40 years and older who had their employment terminated by an HP entity pursuant to a work force reduction ("WFR") plan on or after December 9, 2014 for individuals terminated in deferral states and on or after April 8, 2015 in non-deferral states. Plaintiffs also seek to certify a Rule 23 class under California law comprised of all persons 40 years or older employed by Defendants in the state of California and terminated pursuant to a WFR plan on or after August 18, 2012. Following the filing of Plaintiffs' Fourth Amended Complaint, Plaintiffs filed a Motion for Preliminary Class Certification on December 30, 2020. On April 14, 2021, Plaintiffs’ Motion for Conditional Class Certification was granted. The conditionally
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HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
certified collective action consists of all individuals who had their employment terminated by Defendants pursuant to a WFR Plan on or after November 1, 2015, and who were 40 years or older at the time of such termination. The collective action excludes all individuals who signed a Waiver and General Release Agreement or an Agreement to Arbitrate Claims.
Hewlett-Packard Company v. Oracle (Itanium). On June 15, 2011, HP Inc. filed suit against Oracle in the Superior Court of California, County of Santa Clara in connection with Oracle's March 2011 announcement that it was discontinuing software support for HP Inc.’s Itanium-based line of mission critical servers. HP Inc. asserted, among other things, that Oracle’s actions breached the contract that was signed by the parties as part of the settlement of the litigation relating to Oracle’s hiring of Mark Hurd. Trial was bifurcated into two phases. HP Inc. prevailed in the first phase of the trial, in which the court ruled that the contract at issue required Oracle to continue to offer its software products on HP Inc.'s Itanium-based servers for as long as HP Inc. decided to sell such servers. Phase 2 of the trial was then postponed by Oracle’s appeal of the trial court’s denial of Oracle’s “anti-SLAPP” motion, in which Oracle argued that HP Inc.’s damages claim infringed on Oracle’s First Amendment rights. On August 27, 2015, the California Court of Appeal rejected Oracle’s appeal. The matter was remanded to the trial court for Phase 2 of the trial, which began on May 23, 2016, and was submitted to the jury on June 29, 2016. On June 30, 2016, the jury returned a verdict in favor of HP Inc., awarding HP Inc. approximately $3 billion in damages: $1.7 billion for past lost profits and $1.3 billion for future lost profits. On October 20, 2016, the court entered judgment for this amount with interest accruing until the judgment is paid. Oracle’s motion for a new trial was denied on December 19, 2016, and Oracle filed its notice of appeal from the trial court’s judgment on January 17, 2017. On February 2, 2017, HP Inc. filed a notice of cross-appeal challenging the trial court’s denial of prejudgment interest. On May 16, 2019, HP Inc. filed its application to renew the judgment. As of May 16, 2019, the renewed judgment is approximately $3.8 billion. Daily interest on the renewed judgment is now accruing at $1 million and will be recorded upon receipt. On June 14, 2021, the California Court of Appeal affirmed the judgment of the trial court. Oracle filed a Petition for Rehearing with the California Court of Appeal, which was denied on July 8, 2021. On July 26, 2021, Oracle filed a Petition for Review with the California Supreme Court. HP, Inc. filed an Answer to the Petition for Review on August 16, 2021. 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 January 29, 2019, the court granted HPE’s Motion for Summary Judgment as to all of Oracle’s claims. On February 20, 2019, the court entered judgment in favor of HPE, dismissing Oracle’s claims in their entirety. Oracle appealed the trial court’s ruling to the United States Court of Appeals for the Ninth Circuit. On August 20, 2020, the United States Court of Appeals for the Ninth Circuit issued its ruling, affirming in part and reversing in part the trial court’s decision granting summary judgment in favor of HPE. On October 6, 2020, the matter was remanded to the United States District Court for the Northern District of California. On June 4, 2021, the Court issued an order denying HPE’s motion for summary judgment and granting-in-part Oracle’s motion for partial summary judgment as to a certain of HPE’s defenses. The Court has set trial to begin on November 29, 2021.
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 appealed the jury verdict of non-infringement to the United States Court of Appeals for the Federal Circuit. HPE cross-appealed the court’s decision to grant Network-1's motion for Judgment as a Matter of Law on validity. 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. The matter has been remanded back to United States District Court for the Eastern District of Texas for further proceedings consistent with the Federal Circuit's ruling. On May 7, 2021, the District Court issued
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HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
an order granting Network-1's motion for a new trial. The parties have agreed to the terms of a settlement that resolves the litigation with no material financial statements impact. The lawsuit was dismissed on August 13, 2021 and the matter is now closed.
Q3 Networking Litigation. On September 21 and September 22, 2020, Q3 Networking LLC filed complaints against HPE, Aruba Networks, Commscope and Netgear in the United States District Court for the District of Delaware and the United States International Trade Commission (“ITC”). Both complaints allege infringement of four patents, and the ITC complaint defines the “accused products” as “routers, access points, controllers, network management servers, other networking products, and hardware and software components thereof.” The ITC action was instituted on October 23, 2020. The evidentiary hearing before the ITC has been completed and an initial determination is expected in 2021. The District of Delaware action has been stayed pending resolution of the ITC action.
Shared Litigation with HP Inc., DXC and Micro Focus
As part of the Separation and Distribution Agreements between Hewlett Packard Enterprise and HP Inc., Hewlett Packard Enterprise and DXC, and Hewlett Packard Enterprise and Seattle SpinCo, the parties to each agreement agreed to cooperate with each other in managing certain existing litigation related to both parties' businesses. The Separation and Distribution Agreements also included provisions that assign to the parties responsibility for managing pending and future litigation related to the general corporate matters of HP Inc. (in the case of the separation of Hewlett Packard Enterprise from HP Inc.) or of Hewlett Packard Enterprise (in the case of the separation of DXC from Hewlett Packard Enterprise and the separation of Seattle SpinCo from Hewlett Packard Enterprise), in each case arising prior to the applicable separation.
Environmental
The Company's operations and products are or may in the future become subject to various federal, state, local and foreign laws and regulations concerning environmental protection, including laws addressing the discharge of pollutants into the air and water, the management and disposal of hazardous substances and wastes, the clean-up of contaminated sites, the substances and materials used in the Company's products, the energy consumption of products, services and operations and the operational or financial responsibility for recycling, treatment and disposal of those products. This includes legislation that makes producers of electrical goods, including servers and networking equipment, financially responsible for specified collection, recycling, treatment and disposal of past and future covered products (sometimes referred to as "product take-back legislation"). The Company could incur substantial costs, its products could be restricted from entering certain jurisdictions, and it could face other sanctions, if it were to violate or become liable under environmental laws or if its products become non-compliant with environmental laws. The Company's potential exposure includes impacts on revenue, fines and civil or criminal sanctions, third-party property damage or personal injury claims and clean-up costs. The amount and timing of costs to comply with environmental laws are difficult to predict.
In particular, the Company may become a party to, or otherwise involved in, proceedings brought by U.S. or state environmental agencies under the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA"), known as "Superfund," or other federal, state or foreign laws and regulations addressing the clean-up of contaminated sites, and may become a party to, or otherwise involved in, proceedings brought by private parties for contribution towards clean-up costs. The Company is also contractually obligated to make financial contributions to address actions related to certain environmental liabilities, both ongoing and arising in the future, pursuant to its Separation and Distribution Agreement with HP Inc.
39
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES

This Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") is organized as follows:
•Executive Overview.  A discussion of our business and summary analysis of financial and other highlights, including non-GAAP financial measures, affecting the Company in order to provide context to the remainder of the MD&A.
•Critical Accounting Policies and Estimates.  A discussion of accounting policies and estimates that we believe are important to understanding the assumptions and judgments incorporated in our reported financial results.
•Results of Operations.  An analysis of our financial results comparing the three and nine months ended July 31, 2021 to the prior-year periods. A discussion of the results of operations at the consolidated level is followed by a discussion of the results of operations at the segment level.
•Liquidity and Capital Resources.  An analysis of changes in our cash flows and a discussion of our financial condition and liquidity.
•Contractual and Other Obligations.  An overview of contractual obligations, retirement benefit plan funding, restructuring plans, uncertain tax positions, and off-balance sheet arrangements.
We intend the discussion of our financial condition and results of operations that follows to provide information that will assist the reader in understanding our Condensed Consolidated Financial Statements, the changes in certain key items in those financial statements from period-to-period, and the primary factors that accounted for those changes, as well as how certain accounting principles, policies and estimates affect our Condensed Consolidated Financial Statements. This discussion should be read in conjunction with our Condensed Consolidated Financial Statements and the related notes that appear elsewhere in this document.
The following Executive Overview, Results of Operations and Liquidity discussions and analysis compare the three and nine months ended July 31, 2021 to the prior-year periods, unless otherwise noted. The Capital Resources and Contractual and Other Obligations discussions present information as of July 31, 2021, unless otherwise noted.
For purposes of this MD&A section, we use the terms "Hewlett Packard Enterprise", "HPE", the "Company", "we", "us" and "our" to refer to Hewlett Packard Enterprise Company.
EXECUTIVE OVERVIEW
We are a global technology leader focused on developing intelligent solutions that allow customers to capture, analyze and act upon data seamlessly from edge to cloud. We enable customers to accelerate business outcomes by driving new business models, creating new customer and employee experiences, and increasing operational efficiency today and into the future. Our legacy dates to a partnership founded in 1939 by William R. Hewlett and David Packard, and we strive every day to uphold and enhance that legacy through our dedication to providing innovative technological solutions to our customers.
The global pandemic brought a renewed focus on digital transformation as businesses had to rethink everything from remote work and collaboration to business continuity and data insight. Businesses are starting to look ahead, beyond the immediate demands of COVID-19, and treating digital transformation as a strategic imperative. The overall demand environment is improving and we are seeing traction across our portfolio. Customers are looking for secure connectivity, faster insights from data, and a cloud experience everywhere. Our edge-to-cloud platform and services help customers transform their businesses, optimize their applications, and extract insight from their data across an increasingly distributed world, so they are prepared for tomorrow’s challenges.
Our operations are organized into six reportable segments for financial reporting purposes: Compute; High Performance Computing & Mission-Critical Solutions ("HPC & MCS"); Storage; Intelligent Edge; HPE Financial Services ("FS"); and Corporate Investments and Other. Our Fiscal 2021 third quarter total net revenue of $6.9 billion was up 1.2% or down 1.9% when adjusted for currency compared to prior-year period, primarily due to improvement in the overall demand environment and favorable foreign currency fluctuations, partially offset by decrease in unit shipments resulting from material constraints.
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HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
We delivered strong gross profit margin and operating profit margin during the third quarter of fiscal 2021. Our GAAP gross margin was 34.5%, up 4.2 percentage points and non-GAAP gross profit margin was 34.7%, up 4.2 percentage points compared to the prior-year period, primarily due to pricing discipline, cost savings from our transformation programs, and continued mix shift towards higher-margin software-rich offerings. Our GAAP operating profit margin was 4.1%, up 3.9 percentage points compared to prior-year period and our non-GAAP operating profit margin was 9.8%, up 1.9 percentage points from the prior-year period, primarily due to strong operational execution during the current year period. For the nine months ended July 31, 2021, we generated $2.9 billion of cash flow from operations and $1.5 billion of free cash flows through disciplined execution, strong expense management and working capital benefits.
Financial Results
The following table summarizes our consolidated GAAP financial results:
Three Months Ended July 31, Nine Months Ended July 31,
2021 2020 Change 2021 2020 Change
In millions, except per share amounts In millions, except per share amounts
Net revenue $ 6,897  $ 6,816  1.2% $ 20,430  $ 19,774  3.3%
Gross profit $ 2,382  $ 2,067  15.2% $ 6,957  $ 6,263  11.1%
Gross profit margin 34.5  % 30.3  % 4.2pts 34.1  % 31.7  % 2.4pts
Earnings (loss) from operations $ 282  $ 12  2,250% $ 782  $ (474) 265%
Operating profit margin 4.1  % 0.2  % 3.9pts 3.8  % (2.4) % 6.2pts
Net earnings (loss) $ 392  $ 9  4,255.6% $ 874  $ (479) 282.5%
Diluted net earnings (loss) per share $ 0.29  $ 0.01  $0.28 $ 0.66  $ (0.37) $1.03
Cash flow from operations $ 1,130  $ 1,472  $(342) $ 2,915  $ 1,493  $1,422
The following table summarizes our consolidated Non-GAAP financial results:
Three Months Ended July 31, Nine Months Ended July 31,
2021 2020 Change 2021 2020 Change
In millions, except per share amounts In millions, except per share amounts
Net revenue adjusted for currency $ 6,688  $ 6,816  (1.9)% $ 20,012  $ 19,774  1.2%
Non-GAAP gross profit $ 2,393  $ 2,078  15.2% $ 6,996  $ 6,329  10.5%
Non-GAAP gross profit margin 34.7  % 30.5  % 4.2pts 34.2  % 32.0  % 2.2pts
Non-GAAP earnings from operations $ 673  $ 539  24.9% $ 2,131  $ 1,666  27.9%
Non-GAAP operating profit margin 9.8  % 7.9  % 1.9pts 10.4  % 8.4  % 2.0pts
Non-GAAP net earnings $ 623  $ 467  33.4% $ 1,914  $ 1,468  30.4%
Non-GAAP diluted net earnings per share $ 0.47  $ 0.36  $0.11 $ 1.44  $ 1.13  $0.31
Free cash flow $ 526  $ 924  $(398) $ 1,457  $ 337  $1,120
Each non-GAAP measure has been reconciled to the most directly comparable GAAP measure herein. Please refer to the section "GAAP to Non-GAAP Reconciliations" included in this MD&A for these reconciliations, usefulness of non-GAAP financial measures, and material limitations associated with the use of non-GAAP financial measures.
Returning capital to our shareholders remains an important part of capital allocation framework that consist of capital returns to shareholders and strategic investments. During the third quarter of fiscal 2021, we paid a quarterly dividend of $0.12 per share to our shareholders. On September 2, 2021 we declared our fiscal 2021 fourth quarterly dividend of $0.12 per share, payable on or about October 6, 2021, to stockholders of record as of the close of business on September 13, 2021. We temporarily suspended our share repurchases due to global economic uncertainty created by COVID-19, and as such, no purchases were made during the nine months ended July 31, 2021. However, we expect to resume share repurchase activity in the fourth quarter of fiscal 2021. As of July 31, 2021, we had a remaining authorization of $2.1 billion for future share repurchases.
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HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
We believe our existing balances of cash, cash equivalents and marketable securities, along with commercial paper and other short-term liquidity arrangements, are sufficient to satisfy our working capital needs, capital asset purchases, dividends, debt repayments and other liquidity requirements associated with our existing operations. As of July 31, 2021, our cash, cash equivalents and restricted cash were $5.7 billion, compared to the October 31, 2020 balance of $4.6 billion. We maintain a $4.75 billion five year senior unsecured committed credit facility that was entered into in August 2019. As of July 31, 2021 no borrowings were outstanding under this credit facility.
Trends and Uncertainties
We are in the process of addressing many challenges facing our business, including effects of COVID-19, a discussion of which is available in sections entitled "Risk Factors" in Item 1A of Part I and "Trends and Uncertainties" in Item 7 of our Annual Report on Form 10-K for the fiscal year ended October 31, 2020.
Updates to the COVID-19 response included in 10-K for the fiscal year ended October 31, 2020
COVID-19 vaccines are now broadly distributed and administered, and starting October 4, 2021, in the U.S., HPE will require proof of vaccination for team members, contingent workers, and guests returning to HPE sites, where permitted by local laws and regulations. This policy also applies to HPE-sponsored and third-party events. HPE is committed to help support costs for the vaccine through HPE health benefits or other programs, to the extent not covered by government programs, medical plans or other sources.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Management's Discussion and Analysis of Financial Condition and Results of Operations is based on our Condensed Consolidated Financial Statements, which have been prepared in accordance with United States ("U.S.") Generally Accepted Accounting Principles ("GAAP"). The preparation of these financial statements requires management to make estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, net revenues and expenses, and disclosure of contingent liabilities. Estimates are assessed each period and updated to reflect current information, such as the economic considerations related to the impact that COVID-19 could have on our significant accounting estimates. Significant estimates that are based on a forecast include inventory reserves, provision for taxes, valuation allowance for deferred taxes, and impairment assessment of goodwill, intangible assets and other long-lived assets. The Company believes that these estimates, judgements and assumptions are reasonable under the circumstances, and are subject to significant uncertainties, some of which are beyond the Company’s control. Should any of these estimates change, it could adversely affect Company’s results of operations. Additionally, as the extent and duration of the impacts from COVID-19 remain unclear, the Company’s estimates, judgements and assumptions may evolve as conditions change. Management believes that there have been no significant changes during the nine months ended July 31, 2021, with the exception of certain accounting policies that were updated resulting from our adoption of the Current Expected Credit Losses standard (See Note 1 in Item 1, "Overview and Summary of Significant Accounting Policies"), to the items that we disclosed as our critical accounting policies and estimates in Management's Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the fiscal year ended October 31, 2020.
ACCOUNTING PRONOUNCEMENTS
For a summary of recent accounting pronouncements applicable to our Condensed Consolidated Financial Statements, see Note 1 in Item 1, "Overview and Summary of Significant Accounting Policies".
RESULTS OF OPERATIONS
Revenue from our international operations has historically represented, and we expect will continue to represent, a majority of our overall net revenue. As a result, our revenue growth has been impacted, and we expect will continue to be impacted, by fluctuations in foreign currency exchange rates. In order to provide a framework for assessing performance excluding the impact of foreign currency fluctuations, we present the year-over-year percentage change in revenue on a constant currency basis, which assumes no change in foreign currency exchange rates from the prior-year period and does not adjust for any repricing or demand impacts from changes in foreign currency exchange rates. This change in revenue on a constant currency basis is calculated as the quotient of (a) current year revenue converted to U.S. dollars using the prior-year period's foreign currency exchange rates divided by (b) the prior-year period revenue. This information is provided so that revenue can be viewed without the effect of fluctuations in foreign currency exchange rates, which is consistent with how management evaluates our revenue results and trends. This constant currency disclosure is provided in addition to, and not as a
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HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
substitute for, the year-over-year percentage change in revenue on a GAAP basis. Other companies may calculate and define similarly labeled items differently, which may limit the usefulness of this measure for comparative purposes.
Results of operations in dollars and as a percentage of net revenue were as follows:
  Three Months Ended July 31, Nine Months Ended July 31,
  2021 2020 2021 2020
  Dollars % of
Revenue 		Dollars % of
Revenue 		Dollars % of
Revenue 		Dollars % of
Revenue
  Dollars in millions
Net revenue $ 6,897  100.0  % $ 6,816  100.0  % $ 20,430  100.0  % $ 19,774  100.0  %
Cost of sales 4,515  65.5  4,749  69.7  13,473  65.9  13,511  68.3 
Gross profit 2,382  34.5  2,067  30.3  6,957  34.1  6,263  31.7 
Research and development 506  7.3  455  6.7  1,477  7.2  1,390  7.0 
Selling, general and administrative 1,291  18.7  1,131  16.6  3,649  17.9  3,458  17.6 
Amortization of intangible assets 82  1.2  95  1.4  276  1.4  299  1.4 
Impairment of goodwill —  —  —  —  —  —  865  4.4 
Transformation costs 213  3.1  357  5.2  733  3.6  646  3.3 
Disaster charges 5  0.1  2  —  6  —  24  0.1 
Acquisition, disposition and other related charges 3  —  15  0.2  34  0.2  55  0.3 
Earnings (loss) from operations 282  4.1  12  0.2  782  3.8  (474) (2.4)
Interest and other, net (50) (0.8) (71) (1.0) (105) (0.5) (158) (0.8)
Tax indemnification and related adjustments 76  1.2  (30) (0.5) 60  0.3  (86) (0.5)
Non-service net periodic benefit credit 19  0.3  28  0.4  53  0.3  101  0.5 
Earnings from equity interests 79  1.1  27  0.4  109  0.5  50  0.3 
Earnings (loss) before taxes 406  5.9  (34) (0.5) 899  4.4  (567) (2.9)
(Provision) benefit for taxes (14) (0.2) 43  0.6  (25) (0.1) 88  0.5 
Net earnings (loss) $ 392  5.7  % $ 9  0.1  % $ 874  4.3  % $ (479) (2.4) %
Stock-based compensation expense is included within costs and expenses presented in the table above as follows:
Three Months Ended July 31, Nine Months Ended July 31,
2021 2020 2021 2020
In millions
Cost of sales $ 9  $ 8  $ 33  $ 30 
Research and development 28  16  96  62 
Selling, general and administrative 49  31  165  123 
Acquisition, disposition and other related charges —  —  10  1 
Total $ 86  $ 55  $ 304  $ 216 
On April 14, 2021 (the "Approval Date"), shareholders of the Company approved the Hewlett Packard Enterprise Company 2021 Stock Incentive Plan (the "2021 Plan") that replaced the Company’s 2015 Stock Incentive Plan (the “2015 Plan”). The 2021 Plan provides for the grant of various types of awards including restricted stock awards, stock options and performance-based awards. These awards generally vest over 3 years from the grant date. The maximum number of shares that may be delivered to the participants under the 2021 Plan shall not exceed 7 million shares, plus 35.8 million shares that were available for grant under the 2015 Plan as of the Approval Date and any awards granted under the 2015 Plan prior to the Approval Date that were cash-settled, forfeited, terminated or lapsed after the Approval Date. As of July 31, 2021, the Company had remaining authorization of 42.7 million shares under the 2021 Plan.

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HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
Net Revenue
For the three months ended July 31, 2021, total net revenue was $6.9 billion, increased by $81 million, or 1.2% (decreased 1.9% on a constant currency basis), as compared to the prior-year period. U.S. net revenue decreased by $125 million, or 5.3%, to $2.2 billion, and net revenue from outside of the U.S. increased by $206 million, or 4.6%, to $4.7 billion. For the nine months ended July 31, 2021, total net revenue was $20.4 billion, increased by $656 million, or 3.3% (increased 1.2% on a constant currency basis), as compared to the prior-year period. U.S. net revenue decreased by $153 million, or 2.3%, to $6.4 billion, and net revenue from outside of the U.S. increased by $809 million, or 6.1%, to $14.0 billion.
The net revenue increase for the three and nine months ended July 31, 2021, as compared to the prior-year periods, was due to multiple factors which include strong momentum of revenue growth in our Switching product offerings, additional revenue from the Silver Peak acquisition, favorable demand environment, achievement of more customer acceptance milestones and growth in software-defined offerings, partially offset by decrease in unit shipments resulting from material constraints. Additionally, the general weakening of the U.S. dollar relative to certain foreign currencies during the three and nine months ended July 31, 2021 compared to prior-year periods, had a favorable impact on net revenue.
From a segment perspective, for the three months ended July 31, 2021, as compared to the prior-year period, we experienced net revenue increase in all the segments except Compute, primarily led by Intelligent Edge and HPC & MCS segments. The net revenue increase for the nine months ended July 31, 2021, as compared to the prior-year period was driven by all segments, except Compute which declined slightly year over year. The components of the weighted net revenue change by segment were as follows:
Three Months Ended July 31, 2021 Nine Months Ended July 31, 2021
Percentage points
Compute (4.5) (0.1)
HPC & MCS 1.1  0.4 
Storage 0.7  0.2 
Intelligent Edge 2.7  2.0 
Financial Services 0.5  0.2 
Corporate Investments and Other 0.4  0.2 
Total Segment 0.9  2.9 
Elimination of Intersegment net revenue 0.3  0.4 
  Total HPE 1.2  3.3 
Please refer to the section "Segment Information" below for the discussion of the segment result on each of our reportable segments.
Gross Profit
For the three and nine months ended July 31, 2021, as compared to the prior-year periods, total gross profit margin increased 4.2 and 2.4 percentage points respectively. The gross profit margin increase for both periods were due primarily to disciplined pricing, lower supply chain overhead costs, and favorable currency fluctuations, partially offset by higher variable compensation expense.
Research and Development
R&D expense increased by $51 million, or 11% for the three months ended July 31, 2021, as compared to the prior-year period, due primarily to on-going expenses from business acquisitions and higher employee compensation expense in the current year period.
R&D expense increased by $87 million, or 6% for the nine months ended July 31, 2021, as compared to the prior-year period, due primarily to higher employee compensation expense and on-going expenses from business acquisitions, partially offset by the cost savings achieved as we rationalize our R&D through transformation programs by focusing investment in growth areas.
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HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
Selling, General and Administrative
Selling, general and administrative expense increased by $160 million, or 14%, and by $191 million, or 6%, for the three and nine months ended July 31, 2021, respectively, as compared to the prior-year periods, due primarily to higher investment in sales and marketing, unfavorable currency fluctuations, on-going expenses from business acquisitions, and higher employee compensation expense, partially offset by cost savings achieved through our transformation programs. For the nine months ended July 31, 2021, the increase in expense is also partially offset by lower travel expenses as compared to the prior-year period.
Amortization of Intangible Assets
Amortization of intangible assets decreased by $13 million, or 14%, and by $23 million, or 8%, for the three and nine months ended July 31, 2020, respectively, as compared to the prior-year periods, due to certain intangible assets associated with prior acquisitions reaching the end of their amortization period and higher write-off of certain intangible assets in the prior-year period, partially offset by an increase in the amortization of intangible assets from recent acquisitions.
Impairment of Goodwill
Impairment of goodwill for the nine months ended July 31, 2020, represents a partial goodwill impairment charge of $865 million in the second quarter of fiscal 2020, as it was determined that the fair value of the HPC & MCS reporting unit was below the carrying value of its net assets.
We performed an interim quantitative goodwill impairment test for all of our reporting units as of November 1, 2020, which did not result in any goodwill impairment charges. The fair value of all reporting units continued to exceed the carrying value of their net assets and did not result in impairment. The excess of fair value over carrying value for our reporting units ranged from approximately 8% to 37% of the respective carrying values. In order to evaluate the sensitivity of the estimated fair value of our reporting units in the goodwill impairment test, we applied a hypothetical 10% decrease to the fair value of each reporting unit. Based on the results of this hypothetical 10% decrease all of the reporting units had an excess of fair value over carrying value, with the exception of the HPC & MCS reporting unit. Should economic conditions deteriorate, estimates of future cash flows for each of our reporting units may be insufficient to support the carrying value and the goodwill assigned to them, requiring impairment charges. Further impairment charges, if any, may be material to the results of operations and financial position. We will continue to evaluate the recoverability of goodwill on an annual basis as of the beginning of its fourth fiscal quarter and whenever events or changes in circumstances indicate there may be a potential impairment.
Transformation Costs
Transformation programs are comprised of the cost optimization and prioritization plan we introduced in May 2020, and the HPE Next Initiative.
Transformation costs decreased by $144 million, or 40%, for the three months ended July 31, 2021, as compared to the prior-year period, due primarily to lower restructuring charges recorded in the current year period, partially offset by higher IT costs in the current year period.
Transformation costs increased by $87 million or 13%, for the nine months ended July 31, 2021, as compared to the prior-year period, due primarily to higher IT costs and program management charges recorded in the current year, and lower gains on real estate sales, partially offset by lower restructuring charges.
See Note 3, "Transformation Programs", for discussion on the Transformation Costs.
Disaster Charges
Disaster charges decreased by $18 million, or 75%, for the nine months ended July 31, 2021, as compared with the prior-year period, due primarily to higher direct costs resulting from COVID-19 for HPE hosted, co-hosted, or sponsored events which were converted to a virtual format or cancelled in the prior-year period.
Acquisition, Disposition and Other Related Charges
Acquisition, disposition and other related charges decreased by $12 million, or 80%, and by $21 million, or 38%, for the three and nine months ended July 31, 2021, respectively, as compared with the prior-year periods, due primarily to lower business acquisition costs related to retention bonuses and integration activities in the current year periods.
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HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
Interest and Other, Net
Interest and other, net expense decreased by $21 million for the three months ended July 31, 2021, as compared to the prior-year period, due primarily to lower interest expense from lower average borrowings, higher gain on the sale of certain assets and interest income on the recovery of two Brazilian social contribution taxes, partially offset by unfavorable currency fluctuations in the current period.
Interest and other, net expense decreased by $53 million for the nine months ended July 31, 2021, as compared to the prior-year period, due primarily to higher gains from equity investments, lower unfavorable currency fluctuations, lower interest expense from lower average borrowings, and interest income on the recovery of two Brazilian social contribution taxes, partially offset by lower gain on the sale of certain assets in the current year period.
Tax Indemnification and Related Adjustments
We recorded changes in certain pre-Separation tax liabilities for which we shared joint and several liability with HP Inc. and for which we were indemnified under the Termination and Mutual Release Agreement within Tax Indemnification and related Adjustments. We also record changes to certain pre-Separation and pre-divestiture tax liabilities and tax receivables for which we remain liable on behalf of the separated or divested business, but which may not be subject to indemnification.
We recorded tax indemnification income of $76 million and tax indemnification expense of $30 million for the three months ended July 31, 2021 and 2020, respectively, and tax indemnification income of $60 million and tax indemnification expense of $86 million for the nine months ended July 31, 2021 and 2020, respectively.
For the three and nine months ended July 31, 2021, the amount primarily included the impacts of a Brazilian Supreme Court decision received regarding the base on which PIS and COFINS are imposed. As a result of this decision, the Company is entitled to recover credits and associated interest related to the overpayment of these transaction taxes imposed between 2005 and 2019 to be used to offset future Brazilian tax liabilities. As such, we have recorded benefits of $16 million and $72 million, both net of taxes, for the recovery of PIS and COFINS, respectively, during the third quarter of fiscal 2021, of which $26 million was included in Net revenue, $12 million related to interest income was included in Interest and other, net, and $78 million related to pre-Separation liabilities was included in Tax indemnification and related adjustments. The corresponding income taxes of $28 million as a result of this recovery were included in (Provision) benefit for taxes in the Condensed Consolidated Statement of Earnings.
For the nine months ended July 31, 2021 and 2020, these amounts also resulted from changes in certain pre-Separation tax liabilities for which we share joint and several liability with HP Inc. and for which we are indemnified under the Termination and Mutual Release Agreement and changes to certain pre-Separation and pre-divestiture tax liabilities and tax receivables.
Non-service Net Periodic Benefit
Non-service net periodic benefit credit decreased by $9 million and $48 million for the three and nine months ended July 31, 2021, as compared to the prior-year periods, due primarily to lower expected returns on plan assets.
Earnings from Equity Interests
Earnings from equity interests primarily represents our 49% interest in H3C Technologies' ("H3C") earnings and the amortization of our interest in a basis difference. For the three and nine months ended July 31, 2021, earnings from equity interests increased by $52 million and $59 million, respectively, as compared to the prior-year periods, due to higher net income earned by H3C and gains from certain venture investments.
(Provision) Benefit for Taxes
For the three and nine months ended July 31, 2021, we recorded income tax expense of $14 million and $25 million, respectively, which reflect an effective tax rate of 3.4% and 2.8%, respectively. For the three and nine months ended July 31, 2020, the Company recorded income tax benefit of $43 million and $88 million, respectively, which reflect an effective tax rate of 126.5% and 15.5%, respectively. Our effective tax rate generally differs from the U.S. federal statutory rate of 21% due to favorable tax rates associated with certain earnings from our operations in lower tax jurisdictions throughout the world but may also be materially impacted by discrete tax adjustments during the fiscal year. The effective tax rate for the nine months ended July 31, 2020 also included the effects of the non-deductible goodwill impairment.
See Note 5, "Taxes on Earnings", for discussion on provision for taxes.
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HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
Segment Information
Hewlett Packard Enterprise's organizational structure is based on a number of factors that the Chief Operating Decision Maker ("CODM"), who is the Chief Executive Officer ("CEO"), uses to evaluate, view and run our business operations, which include, but are not limited to, customer base and homogeneity of products and technology. The segments are based on this organizational structure and information reviewed by Hewlett Packard Enterprise's management to evaluate segment results.
As described in Item 1, Note 1, "Overview and Summary of Significant Accounting Policies", effective at the beginning of the first quarter of fiscal 2021, we (a) excluded stock-based compensation expense from our segment earnings from operations; and (b) implemented certain organizational changes to align our segment financial reporting more closely with our current business structure. As a result of these organizational changes, our operations are now organized into six segments for financial reporting purposes: Compute, HPC & MCS, Storage, Intelligent Edge, FS, and Corporate Investments and Other. The Corporate Investments and Other Segment now includes the A & PS operating segment, the Communications and Media Solutions operating segment, the Software operating segment, and the Hewlett Packard Enterprise Labs which is responsible for research and development. We reflected these changes in our segment information retrospectively to the earliest period presented, which primarily resulted in the realignment of net revenue and operating profit for each of the segments. These changes had no impact on Hewlett Packard Enterprise's previously reported consolidated results.
Segment Results
The following provides an overview of our key financial metrics by segment for the three months ended July 31, 2021, as compared to the prior-year period:
Compute HPC & MCS Storage Intelligent Edge Financial Services Corporate Investments and Other HPE Consolidated
Net revenue(1)
$ 3,104  $ 741  $ 1,176  $ 867  $ 844  $ 332  $ 6,897 
Year-over-year change % (8.9) % 11.1  % 3.9  % 26.8  % 4.1  % 9.6  % 1.2  %
Earnings (loss) from operations(2)
$ 347  $ 29  $ 178  $ 137  $ 94  $ (28) $ 282 
Earnings (loss) from operations as a % of net revenue 11.2  % 3.9  % 15.1  % 15.8  % 11.1  % (8.4) % 4.1  %
Year-over-year change percentage points 1.9 pts (3.1) pts 0.1 pts 5.4 pts 3.0 pts 14.0 pts 3.9 pts
The following provides an overview of our key financial metrics by segment for the nine months ended July 31, 2021, as compared to the prior-year period:
Compute HPC & MCS Storage Intelligent Edge Financial Services Corporate Investments and Other HPE Consolidated
Net revenue(1)
$ 9,066  $ 2,188  $ 3,506  $ 2,472  $ 2,543  $ 1,003  $ 20,430 
Year-over-year change % (0.3) % 3.5  % 1.0  % 19.5  % 1.6  % 4.7  % 3.3  %
Earnings (loss) from operations(2)
$ 1,024  $ 91  $ 604  $ 413  $ 269  $ (84) $ 782 
Earnings (loss) from operations as a % of net revenue 11.3  % 4.2  % 17.2  % 16.7  % 10.6  % (8.4) % 3.8  %
Year-over-year change percentage points 2.5 pts (3.2) pts 0.1 pts 5.1 pts 1.9 pts 9.6 pts 6.2 pts
(1)HPE consolidated net revenue excludes intersegment net revenue.
(2)Segment earnings from operations exclude certain unallocated corporate costs and eliminations, stock-based compensation expense, amortization of initial direct costs, amortization of intangible assets, transformation costs, disaster charges and acquisition, disposition and other related charges.
47
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
Compute
  Three Months Ended July 31, 2021
  2021 2020 % Change
  Dollars in millions  
Net revenue $ 3,104  $ 3,409  (8.9) %
Earnings from operations $ 347  $ 318  9.1  %
Earnings from operations as a % of net revenue 11.2  % 9.3  %  
  Nine Months Ended July 31, 2021
  2021 2020 % Change
  Dollars in millions  
Net revenue $ 9,066  $ 9,094  (0.3) %
Earnings from operations $ 1,024  $ 797  28.5  %
Earnings from operations as a % of net revenue 11.3  % 8.8  %
Three months ended July 31, 2021 compared with three months ended July 31, 2020
Compute net revenue decreased by $305 million, or 8.9% (decreased 11.8% on a constant currency basis), for the three months ended July 31, 2021 as compared to the prior-year period. Net revenue in Compute decreased primarily due to a decrease in unit shipments resulting from material constraints partially offset by higher average unit prices and favorable currency fluctuations. Prior year period also included the impact of additional unit shipments due to elevated backlog entering the quarter.
Compute earnings from operations as a percentage of net revenue increased 1.9 percentage points for the three months ended July 31, 2021, as compared to the prior-year period, due to a decrease in costs of products and services as a percentage of net revenue partially offset by an increase in operating expense as a percentage of net revenue. The decrease in costs of products and services as a percentage of net revenue was primarily due to favorable currency fluctuations, disciplined pricing, lower supply chain overhead costs and favorable product mix partially offset by higher variable compensation expense. The increase in operating expense as a percentage of net revenue was primarily due to strategic investments and higher variable compensation expense.
Nine months ended July 31, 2021 compared with nine months ended July 31, 2020
Compute net revenue decreased by $28 million, or 0.3% (decreased 2.3% on a constant currency basis), for the nine months ended July 31, 2021 as compared to the prior-year period. Net revenue in Compute decreased primarily due to a decrease in unit shipments resulting from material constraints. This was partially offset by higher average unit prices and favorable currency fluctuations. In additional prior year third quarter also reflected higher unit shipments as a result of elevated backlog entering the quarter.
Compute earnings from operations as a percentage of net revenue increased 2.5 percentage points for the nine months ended July 31, 2021, as compared to the prior-year period, due to decreases in costs of products and services as a percentage of net revenue and operating expenses as a percentage of net revenue. The decrease in costs of products and services as a percentage of net revenue was primarily due to lower supply chain overhead costs, favorable currency fluctuations and disciplined pricing partially offset by variable compensation expense. The decrease in operating expense as a percentage of net revenue was primarily due to cost savings from our transformation programs partially offset by higher variable compensation expense.
48
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
HPC & MCS
  Three Months Ended July 31,
  2021 2020 % Change
  Dollars in millions  
Net revenue $ 741  $ 667  11.1  %
Earnings from operations $ 29  $ 47  (38.3) %
Earnings from operations as a % of net revenue 3.9  % 7.0  %
Nine Months Ended July 31,
2021 2020 % Change
Dollars in millions
Net revenue $ 2,188  $ 2,113  3.5  %
Earnings from operations $ 91  $ 156  (41.7) %
Earnings from operations as a % of net revenue 4.2  % 7.4  %
Three months ended July 31, 2021 compared with three months ended July 31, 2020
HPC & MCS net revenue increased by $74 million, or 11.1% (increased 9.4% on a constant currency basis), for the three months ended July 31, 2021, as compared to the prior-year period, primarily due to favorable demand environment, eased competitive pricing pressures, favorable foreign currency fluctuations and as we achieved more customer acceptance milestones.
HPC & MCS earnings from operations as a percentage of net revenue decreased 3.1 percentage points for the three months ended July 31, 2021, as compared to the prior-year period, primarily due to increases in cost of products and services as a percentage of net revenue and operating expenses as a percentage of net revenue. The increase in cost of products and services as a percentage of net revenue was primarily due to lower mix of revenue from services and high-margin MCS products partially offset by lower competitive pricing pressures and savings from our transformation programs. The increase in operating expenses as a percentage of net revenue was primarily due to higher field selling costs partially offset by cost savings from our transformation programs.
Nine months ended July 31, 2021 compared with nine months ended July 31, 2020
HPC & MCS net revenue increased by $75 million or 3.5% (increased 2.7% on a constant currency basis), for the nine months ended July 31, 2021, as compared to the prior-year period, as we achieved more customer acceptance milestones.
HPC & MCS earnings from operations as a percentage of net revenue decreased 3.2 percentage points for the nine months ended July 31, 2021, as compared to the prior-year period, primarily due to increases in cost of products and services as a percentage of net revenue and operating expenses as a percentage of net revenue. The increase in cost of products and services as a percentage of net revenue was primarily due to competitive pricing pressures during the first half of fiscal 2021, higher variable compensation expense along with lower mix of revenue from services and high-margin MCS products partially offset by cost savings from our transformation programs. The increase in operating expenses as a percentage of net revenue was primarily due to higher field selling costs and variable compensation expense partially offset by cost savings from our transformation programs.
49
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
Storage
  Three Months Ended July 31,
  2021 2020 % Change
  Dollars in millions  
Net revenue $ 1,176  $ 1,132  3.9  %
Earnings from operations $ 178  170  4.7  %
Earnings from operations as a % of net revenue 15.1  % 15.0  %
Nine Months Ended July 31,
2021 2020 % Change
Dollars in millions
Net revenue $ 3,506  $ 3,470  1.0  %
Earnings from operations $ 604  $ 592  2.0  %
Earnings from operations as a % of net revenue 17.2  % 17.1  %
Three months ended July 31, 2021 compared with three months ended July 31, 2020
Storage net revenue increased by $44 million or 3.9% (increased 1.1% on a constant currency basis), for the three months ended July 31, 2021 as compared to the prior-year period due primarily to favorable currency fluctuations and revenue growth in HPE Primera products and Storage Services, partially offset by revenue decline in HPE 3PAR products as we continue our transition to more software-rich products in the hyperconverged portfolio and primary storage market. The increase in Storage net revenue was also favorably impacted by a large deal in Traditional Storage.
Storage earnings from operations as a percentage of net revenue increased 0.1 percentage point for the three months ended July 31, 2021, as compared to the prior-year period, due to a decrease in cost of products and services as a percentage of net revenue, partially offset by an increase in operating expenses as a percentage of net revenue. The decrease in cost of products and services as a percentage of net revenue was due primarily to a higher margin large deal for HPE Primera and favorable currency fluctuations, the effects of which were partially offset by higher competitive pricing pressures and customer satisfaction settlement. The increase in operating expenses as a percentage of net revenue was due primarily to higher variable compensation expense and field selling costs.
Nine months ended July 31, 2021 compared with nine months ended July 31, 2020
Storage net revenue increased by $36 million or 1.0% (decreased 0.8% on a constant currency basis), for the nine months ended July 31, 2021 as compared to the prior-year period due primarily to favorable currency fluctuations and growth in HPE Primera products, Nimble Storage, and Storage Services, partially offset by revenue decline in HPE 3PAR and Simplivity products as we continue our transition to more software-rich products in the hyperconverged portfolio and primary storage market respectively. Storage net revenue in the first nine months of fiscal 2021 was also favorably impacted by a large deal in Traditional Storage.
Storage earnings from operations as a percentage of net revenue increased 0.1 percentage point for the nine months ended July 31, 2021, as compared to the prior-year period, due to a decrease in cost of products and services as a percentage of net revenue, partially offset by an increase in operating expenses as a percentage of net revenue. The decrease in cost of products and services as a percentage of net revenue was due primarily to favorable currency fluctuations, lower supply chain overhead costs, higher margin large deal for HPE Primera, and lower delivery cost in storage service, the effects of which were partially offset by higher variable compensation expense. The increase in operating expenses as a percentage of net revenue was due primarily to higher variable compensation expense.
50
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
Intelligent Edge
  Three Months Ended July 31,
  2021 2020 % Change
  Dollars in millions  
Net revenue $ 867  $ 684  26.8  %
Earnings from operations $ 137  $ 71  93.0  %
Earnings from operations as a % of net revenue 15.8  % 10.4  %  
Nine Months Ended July 31,
2021 2020 % Change
Dollars in millions
Net revenue $ 2,472  $ 2,069  19.5  %
Earnings from operations $ 413  $ 240  72.1  %
Earnings from operations as a % of net revenue 16.7  % 11.6  %
Three months ended July 31, 2021 compared with three months ended July 31, 2020
Intelligent Edge net revenue increased by $183 million, or 26.8% (increased 23.0% on a constant currency basis), for the three months ended July 31, 2021, as compared to the prior-year period primarily due to revenue growth in switching products, additional revenue from the Silver Peak acquisition, and favorable foreign currency fluctuations.
Intelligent Edge earnings from operations as a percentage of net revenue increased 5.4 percentage points for the three months ended July 31, 2021 as compared to the prior year period due primarily to a decrease in cost of products and services as a percentage of net revenue while operating expenses as a percentage of net revenue remained relatively flat. The decrease in cost of product and services as a percentage of net revenue was primarily due to lower cost of Switching products, favorable supply chain costs and impact of the Silver Peak acquisition partially offset by lower mix of revenue from services and higher variable compensation expense. Operating expenses as a percentage of net revenue remained relatively flat primarily due to improved operational efficiencies including cost savings from transformation programs offset by higher variable compensation expense, additional expenses from the Silver Peak acquisition and a legal settlement.
Nine months ended July 31, 2021 compared with nine months ended July 31, 2020
Intelligent Edge net revenue increased by $403 million, or 19.5% (increased 16.8% on a constant currency basis), for the nine months ended July 31, 2021, as compared to the prior-year period primarily due to revenue growth in Switching and WLAN products, additional revenue from the Silver Peak acquisition, and favorable foreign currency fluctuations.
Intelligent Edge earnings from operations as a percentage of net revenue increased 5.1 percentage points for the nine months ended July 31, 2021 as compared to the prior year period due primarily to decreases in operating expenses as a percentage of net revenue and cost of products and services as a percentage of net revenue. The decrease in cost of product and services as a percentage of net revenue was primarily due to lower cost of Switching and WLAN products, and the favorable impact of the Silver Peak acquisition partially offset by higher variable compensation expense and logistics expense. The decrease in operating expenses as a percentage of net revenue was primarily due to improved operational efficiencies including cost savings from transformation programs partially offset by higher variable compensation expense and the addition of expenses from the Silver Peak acquisition.
Financial Services
  Three Months Ended July 31,
  2021 2020 % Change
  Dollars in millions
Net revenue $ 844  $ 811  4.1  %
Earnings from operations $ 94  $ 66  42.4  %
Earnings from operations as a % of net revenue 11.1  % 8.1  %
51
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
  Nine Months Ended July 31,
  2021 2020 % Change
  Dollars in millions  
Net revenue $ 2,543  $ 2,503  1.6  %
Earnings from operations $ 269  $ 218  23.4  %
Earnings from operations as a % of net revenue 10.6  % 8.7  %  
Three months ended July 31, 2021 compared with three months ended July 31, 2020
FS net revenue increased by $33 million, or 4.1% (decreased 0.2% on a constant currency basis), for the three months ended July 31, 2021, as compared to the prior-year period. The increase in net revenue was due primarily to favorable currency fluctuations, partially offset by a decrease in rental revenue due to lower average operating lease assets.
FS earnings from operations as a percentage of net revenue increased 3.0 percentage points for the three months ended July 31, 2021, as compared to the prior-year period, due primarily to lower cost of services as a percentage of net revenue. The decrease to cost of services as a percentage of net revenue resulted primarily from lower borrowing costs, partially offset by higher bad debt expense. The operating expenses as a percentage of net revenue remained relatively flat.
Nine months ended July 31, 2021 compared with nine months ended July 31, 2020
FS net revenue increased by $40 million, or 1.6% (decreased 1.3% on a constant currency basis), for the nine months ended July 31, 2021, as compared to the prior-year period. The increase in net revenue was due primarily to favorable currency fluctuations, partially offset by a decrease in rental revenue due to lower average operating lease assets, along with lower asset management revenue from lease buyouts.
FS earnings from operations as a percentage of net revenue increased 1.9 percentage points for the nine months ended July 31, 2021, as compared to the prior-year period, due primarily to lower cost of services as a percentage of net revenue. The decrease to cost of services as a percentage of net revenue resulted from lower borrowing costs and lower depreciation expense, partially offset by higher bad debt expense. The operating expenses as a percentage of net revenue remained relatively flat.
Financing Volume
  Three Months Ended July 31, Nine Months Ended July 31,
  2021 2020 2021 2020
  In millions
Financing volume $ 1,575  $ 1,491  $ 4,271  $ 4,392 
Financing volume, which represents the amount of financing provided to customers for equipment and related software and services, including intercompany activity, increased by 5.6% and decreased by 2.8% for the three and nine months ended July 31, 2021 respectively, as compared to the prior-year periods. For the three months ended July 31, 2021, the increase was primarily driven by favorable currency fluctuations. For the nine months ended July 31, 2021, the decrease was primarily related to lower financing associated with both third-party and HPE product sales and related service offerings, partially offset by favorable currency fluctuations.
52
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
Portfolio Assets and Ratios
The portfolio assets and ratios derived from the segment balance sheets for FS were as follows:
  As of
  July 31, 2021 October 31, 2020
  Dollars in millions
Financing receivables, gross $ 9,007  $ 9,058 
Net equipment under operating leases 3,943  4,027 
Capitalized profit on intercompany equipment transactions(1)
271  315 
Intercompany leases(1)
86  92 
Gross portfolio assets 13,307  13,492 
Allowance for credit losses(2)
234  154 
Operating lease equipment reserve 44  64 
Total reserves 278  218 
Net portfolio assets $ 13,029  $ 13,274 
Reserve coverage 2.1  % 1.6  %
Debt-to-equity ratio(3)
7.0x 7.0x
(1)Intercompany activity is eliminated in consolidation.
(2)Allowance for credit losses for financing receivables includes both the short- and long-term portions.
(3)Debt benefiting FS consists of intercompany equity that is treated as debt for segment reporting purposes, intercompany debt, and borrowing- and funding-related activity associated with FS and its subsidiaries. Debt benefiting FS totaled $11.7 billion at both July 31, 2021 and October 31, 2020, and was determined by applying an assumed debt-to-equity ratio, which management believes to be comparable to that of other similar financing companies. FS equity at both July 31, 2021 and October 31, 2020 was $1.7 billion.
As of July 31, 2021 and October 31, 2020, FS net cash and cash equivalents balances were approximately $976 million and $729 million, respectively.
Net portfolio assets as of July 31, 2021 decreased 1.8% from October 31, 2020. The decrease generally resulted from portfolio runoff exceeding new financing volume during the period, partially offset by favorable currency fluctuations.
FS bad debt expense includes charges to general reserves, specific reserves and write-offs for sales-type, direct-financing and operating leases. For the three and nine months ended July 31, 2021, FS recorded net bad debt expense of $30 million and $89 million, respectively. For the three and nine months ended July 31, 2020, FS recorded net bad debt expense of $25 million and $58 million, respectively.
As of July 31, 2021, FS experienced a decrease in billed finance receivables compared to October 31, 2020, which included limited impact to collections from customers as a result of COVID-19. We are currently unable to fully predict the extent to which COVID-19 may adversely impact future collections of our receivables.
Corporate Investments and Other
  Three Months Ended July 31,
  2021 2020 % Change
  Dollars in millions
Net revenue $ 332  $ 303  9.6  %
Loss from operations $ (28) $ (68) 58.8  %
Loss from operations as a % of net revenue (8.4) % (22.4) %
53
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
  Nine Months Ended July 31,
  2021 2020 % Change
  Dollars in millions
Net revenue $ 1,003  $ 958  4.7  %
Loss from operations $ (84) $ (172) 51.2  %
Loss from operations as a % of net revenue (8.4) % (18.0) %
Three months ended July 31, 2021 compared with three months ended July 31, 2020
Corporate Investments and Other net revenue increased by $29 million, or 9.6% (increased 6.9% on a constant currency basis), for the three months ended July 31, 2021 as compared to the prior-year period. The increase in net revenue was due primarily to revenue growth from A & PS, Software and Communications and Media Solutions ("CMS") and favorable currency fluctuations.
Corporate Investments and Other loss from operations as a percentage of net revenue decreased 14.0 percentage points for the three months ended July 31, 2021, as compared to the prior-year period. The decrease was due to lower cost of services as a percentage of net revenue and a decrease in operating expenses as a percentage of net revenue. The decrease in cost of services as a percentage of net revenue was primarily due to overhead efficiencies achieved through our transformation programs. The decrease in operating expenses as a percentage of net revenue was primarily due to cost savings from transformation programs.
Nine months ended July 31, 2021 compared with nine months ended July 31, 2020
Corporate Investments and Other net revenue increased by $45 million, or 4.7% (increased 2.1% on a constant currency basis), for the nine months ended July 31, 2021 as compared to the prior-year period primarily due to favorable currency fluctuations and revenue growth from Software and CMS.
Corporate Investments and Other loss from operations as a percentage of net revenue decreased 9.6 percentage points for the nine months ended July 31, 2021, as compared to the prior-year period. The decrease was due to lower cost of services as a percentage of net revenue and a decrease in operating expenses as a percentage of net revenue, primarily due to cost savings from transformation programs.
LIQUIDITY AND CAPITAL RESOURCES
We use cash generated by operations as our primary source of liquidity. We believe that internally generated cash flows will be generally sufficient to support our operating businesses, capital expenditures, product development initiatives, acquisitions and disposal activities including legal settlements, restructuring activities, transformation costs, indemnifications, maturing debt, interest payments, and income tax payments, in addition to any future investments, share repurchases and stockholder dividend payments. We expect to supplement this short-term liquidity, if necessary, by accessing the capital markets, issuing commercial paper, and borrowing under credit facilities made available by various domestic and foreign financial institutions. However, our access to capital markets may be constrained and our cost of borrowing may increase under certain business, market and economic conditions. We continue to monitor the severity and duration of the COVID-19 pandemic and its impact on the U.S. and other global economies, the capital markets, consumer behavior, our businesses, results of operations, financial condition and cash flows. Our liquidity is subject to various risks including the risks identified in the section entitled "Risk Factors" in Item 1A of Part II and market risks identified in the section entitled "Quantitative and Qualitative Disclosures about Market Risk" in Item 3 of Part I.
Our cash and cash equivalent balances are held in numerous locations throughout the world, with a majority of the amount held outside the U.S. We utilize a variety of planning and financing strategies in an effort to ensure that our worldwide cash is available when and where it is needed. Our cash position is strong and we expect that our cash and cash equivalent balances, anticipated cash flow generated from operations and access to capital markets will be sufficient to cover our expected near-term cash outlays.
Amounts held outside of the U.S. are generally utilized to support our non-U.S. liquidity needs. Repatriations of amounts held outside the U.S. generally will not be taxable from a U.S. federal tax perspective, but may be subject to state income or foreign withholding tax. Where local restrictions prevent an efficient intercompany transfer of funds, our intent is to keep cash balances outside of the U.S. and to meet liquidity needs through ongoing cash flows, external borrowings, or both. We do not
54
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
expect restrictions or potential taxes incurred on repatriation of amounts held outside of the U.S. to have a material effect on our overall liquidity, financial condition or results of operations.
As a result of increased uncertainty due to COVID-19, purchases under our share repurchase program previously authorized by our Board of Directors, were temporarily suspended and as such, no purchases were made during the nine months ended July 31, 2021. However, we expect to resume share repurchase activity in the fourth quarter of fiscal 2021. As of July 31, 2021, we had a remaining authorization of $2.1 billion for future share repurchases.
Liquidity
Our cash flow metrics were as follows:
  Nine Months Ended July 31,
  2021 2020
  In millions
Net cash provided by operating activities $ 2,915  $ 1,493 
Net cash used in investing activities (1,717) (1,154)
Net cash (used in) provided by financing activities (167) 4,522 
Net increase in cash, cash equivalents and restricted cash $ 1,031  $ 4,861 
Operating Activities
For the nine months ended July 31, 2021, net cash from operating activities increased by $1.4 billion, as compared to the corresponding period in fiscal 2020. The increase was primarily due to higher cash generated from working capital and higher earnings.
Our working capital metrics and cash conversion impacts were as follows:
  As of As of
  July 31, 2021 October 31, 2020 Change July 31, 2020 October 31, 2019 Change Y/Y Change
Days of sales outstanding in accounts receivable ("DSO") 43  42  1  38  37  1  5 
Days of supply in inventory ("DOS") 79  48  31  66  45  21  13 
Days of purchases outstanding in accounts payable ("DPO") (130) (97) (33) (114) (104) (10) (16)
Cash conversion cycle (8) (7) (1) (10) (22) 12  2 
The cash conversion cycle is the sum of DSO and DOS less DPO. Items which may cause the cash conversion cycle in a particular period to differ include, but are not limited to, changes in business mix, changes in payment terms (including extended payment terms to customers or from suppliers), early or late invoice payments from customers or to suppliers, the extent of receivables factoring, seasonal trends, the timing of the revenue recognition and inventory purchases within the period, the impact of commodity costs and acquisition activity.
DSO measures the average number of days our receivables are outstanding. DSO is calculated by dividing ending accounts receivable, net of allowance for doubtful accounts, by a 90-day average of net revenue. Compared to the corresponding three month period in fiscal 2020, the increase in DSO in the current period was primarily due to lower customer participation in early payment programs and factoring.
DOS measures the average number of days from procurement to sale of our products. DOS is calculated by dividing ending inventory by a 90-day average of cost of goods sold. Compared to the corresponding three month period in fiscal 2020, the increase in DOS in the current period was primarily due to higher purchases of inventory as we position inventory to fulfill planned future shipments and strategic purchases of certain key components.
DPO measures the average number of days our accounts payable balances are outstanding. DPO is calculated by dividing ending accounts payable by a 90-day average of cost of goods sold. Compared to the corresponding three month period in fiscal 2020, the increase in DPO was primarily due to lower vendor payments in the current period.
55
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
Investing Activities
For the nine months ended July 31, 2021, net cash used in investing activities increased by $0.6 billion, as compared to the corresponding period in fiscal 2020. The increase was primarily due to higher cash utilized for investment in property, plant and equipment, net of sales proceeds of $0.3 billion, higher cash utilized in net financial collateral activities of $0.2 billion and higher payments made in connection with business acquisitions, net of $0.1 billion as compared to the prior year period.
Financing Activities
For the nine months ended July 31, 2021, net cash generated from financing activities decreased by $4.7 billion, as compared to the corresponding period in fiscal 2020. The decrease was primarily due to lower proceeds from debt issuance of $4.1 billion, higher cash utilized for debt repayment of $1.0 billion and cash utilized for share repurchases of $0.4 billion in the prior year period.
Free Cash Flow
Free cash flow is defined as cash flow from operations less investments in property, plant and equipment net of proceeds from the sale of property, plant and equipment. For the nine months ended July 31, 2021, free cash flow increased by $1.1 billion, as compared to the corresponding period in fiscal 2020. The increase was due to higher cash generated from operations of $1.4 billion as compared to the prior year period, partially offset by higher cash utilized for investment in property, plant and equipment, net of sales proceeds of $0.3 billion.
Capital Resources
We maintain debt levels that we establish through consideration of a number of factors, including cash flow expectations, cash requirements for operations, investment plans (including acquisitions), share repurchase activities, our cost of capital and targeted capital structure.
In June 2021, the Company issued $753 million of asset-backed debt securities in six tranches at a weighted average price of 99.99% and a weighted average interest rate of 0.58%, payable monthly from August 2021 with a stated final maturity date of March 2029.
In March 2021, the Company repaid $500 million of three-month USD LIBOR plus 0.68% Senior Notes on their original maturity date.
In March 2021, the Company issued $1.0 billion of asset-backed debt securities in six tranches at a weighted average price of 99.99% and a weighted average interest rate of 0.49%, payable monthly from April 2021 with a stated final maturity date of March 2031.
In December 2020, we filed a shelf registration statement with the Securities and Exchange Commission that allows us to sell, at any time and from time to time, in one or more offerings, debt securities, preferred stock, common stock, warrants, depository shares, purchase contracts, guarantees or units consisting of any of these securities.
Commercial Paper
We maintain two commercial paper programs, "the Parent Programs", and a wholly-owned subsidiary maintains a third program. Our U.S. program provides for the issuance of U.S. dollar-denominated commercial paper up to a maximum aggregate principal amount of $4.75 billion. Our euro commercial paper program provides for the issuance of commercial paper outside of the U.S. denominated in U.S. dollars, euros or British pounds up to a maximum aggregate principal amount of $3.0 billion or the equivalent in those alternative currencies. The combined aggregate principal amount of commercial paper outstanding under those two programs at any one time cannot exceed $4.75 billion. In addition, our subsidiary's euro Commercial Paper/Certificate of Deposit Program provides for the issuance of commercial paper in various currencies of up to a maximum aggregate principal amount of $1.0 billion. As of July 31, 2021 and October 31, 2020, no borrowings were outstanding under the Parent Programs, and $694 million and $677 million, respectively, were outstanding under our subsidiary’s program.
During the first nine months of fiscal 2021, we issued $584 million and repaid $582 million of commercial paper.
56
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations (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 the satisfaction of certain conditions, by up to two, one-year periods. Commitment fees, interest rates and other terms of borrowing under the credit facility vary based on Hewlett Packard Enterprise's external credit rating. As of July 31, 2021 and October 31, 2020, no borrowings were outstanding under the Credit Agreement.
Available Borrowing Resources
We had the following additional liquidity resources available if needed:
  As of
July 31, 2021
  In millions
Commercial paper programs $ 5,056 
Uncommitted lines of credit $ 1,034 

CONTRACTUAL AND OTHER OBLIGATIONS
Contractual Obligations
On September 7, 2021, the Company expects to redeem all $500 million aggregate principal amount of its outstanding 3.5% Notes due October 2021, and all $800 million aggregate principal amount of its outstanding Floating Rate Notes due October 2021.
On July 1, 2021, the Company entered into a definitive agreement to acquire Zerto, an industry leader in cloud data management and protection, in a transaction valued at $374 million. The transaction closed on August 31, 2021.
In June 2021, the Company issued $753 million of asset-backed debt securities in six tranches at a weighted average price of 99.99% and a weighted average interest rate of 0.58%, payable monthly from August 2021 with a stated final maturity date of March 2029.
In March 2021, we repaid $500 million of three-month USD LIBOR plus 0.68% Senior Notes on their original maturity date.
In March 2021, we issued $1.0 billion of asset-backed debt securities in six tranches at a weighted average price of 99.99% and a weighted average interest rate of 0.49%, payable monthly from April 2021 with a stated final maturity date of March 2031.
Other than the above, our contractual obligations have not changed materially since October 31, 2020. For further information see "Contractual and Other Obligations" in Item 7 of Part II of our Annual Report on Form 10-K for the fiscal year ended October 31, 2020.
Retirement Benefit Plan Funding
For the remainder of fiscal 2021, we anticipate making contributions of approximately $46 million to our non-U.S. pension plans. Our policy is to fund our pension plans so that we meet at least the minimum contribution requirements, as established by various authorities including local government and tax authorities.
Restructuring Plans
As of July 31, 2021, we expect to make future cash payments of approximately $870 million in connection with our approved restructuring plans, which includes $140 million expected to be paid through the remainder of fiscal 2021 and $730 million expected to be paid thereafter. For more information on our restructuring activities, see Note 3, "Transformation Programs".
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HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
Uncertain Tax Positions
As of July 31, 2021, we had approximately $438 million of recorded liabilities and related interest and penalties pertaining to uncertain tax positions. These liabilities and related interest and penalties include $61 million expected to be paid within one year. For the remaining amount, we are unable to make a reasonable estimate as to when cash settlement with tax authorities might occur due to the uncertainties related to these tax matters. Payments of these obligations would result from settlements with tax authorities. For more information on our uncertain tax positions, see Note 5, "Taxes on Earnings".
Off-Balance Sheet Arrangements
As part of our ongoing business, we have not participated in transactions that generate material relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.
We have third-party revolving short-term financing arrangements intended to facilitate the working capital requirements of certain customers. For more information on our third-party revolving short-term financing arrangements, see Note 6, "Balance Sheet Details", to the Consolidated Financial Statements in Item 1 of Part I, which is incorporated herein by reference.
GAAP to Non GAAP Reconciliations
Effective at the beginning of the first quarter of fiscal 2021, the Company excluded stock-based compensation expense from its segment earnings from operations results and excluded stock-based compensation expense from non-GAAP results. The Company has reflected this change retrospectively to its financial results for the earliest period presented. This change had no impact on Hewlett Packard Enterprise's previously reported consolidated GAAP results. However, the Company reflected the change resulting from the reclassification of its stock-based compensation expense by restating its consolidated non-GAAP gross profit, non-GAAP gross profit margin, non-GAAP earnings from operations, non-GAAP operating profit margin, non-GAAP net earnings and non-GAAP net earnings per share.
The following tables provide reconciliation of GAAP to non-GAAP measures for the three and nine months ended July 31, 2021 and 2020:
Reconciliation of GAAP net earnings and diluted net earnings per share to non-GAAP net earnings and diluted net earnings per share.
Three Months Ended July 31, Nine Months Ended July 31,
2021 2020 2021 2020
Dollars in millions Diluted net earnings per share Dollars in millions Diluted net earnings per share Dollars in millions Diluted net earnings per share Dollars in millions Diluted net earnings per share
GAAP net earnings (loss) $ 392  $ 0.29  $ 9  $ 0.01  $ 874  $ 0.66  $ (479) $ (0.37)
Non-GAAP adjustments:
Amortization of initial direct costs 2  —  3  —  6  —  9  — 
Amortization of intangible assets 82  0.06  95  0.07  276  0.21  299  0.23 
Impairment of goodwill —  —  —  —  —  —  865  0.67 
Transformation costs 213  0.16  357  0.27  733  0.56  646  0.49 
Disaster charges 5  —  2  —  6  0.01  24  0.02 
Stock-based compensation expense 86  0.06  55  0.04  294  0.22  215  0.18 
Acquisition, disposition and other related charges 3  —  15  0.01  34  0.02  82  0.06 
Tax indemnification and related adjustments (76) (0.05) 30  0.03  (60) (0.05) 86  0.07 
Non-service net periodic benefit credit (19) (0.01) (28) (0.02) (53) (0.04) (101) (0.08)
Earnings from equity interests(1)
23  0.02  36  0.03  91  0.07  110  0.09 
Adjustments for taxes (88) (0.06) (107) (0.08) (287) (0.22) (288) (0.23)
Non-GAAP net earnings $ 623  $ 0.47  $ 467  $ 0.36  $ 1,914  $ 1.44  $ 1,468  $ 1.13 
58
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
(1) Represents the amortization of basis difference adjustments related to the H3C divestiture.
Reconciliation of GAAP earnings from operations and operating profit margin to non-GAAP earnings from operations and operating profit margin.
Three Months Ended July 31, Nine Months Ended July 31,
2021 2020 2021 2020
Dollars % of
Revenue 		Dollars % of
Revenue 		Dollars % of
Revenue 		Dollars % of
Revenue
In millions In millions
GAAP earnings (loss) from operations $ 282  4.1  % $ 12  0.2  % $ 782  3.8  % $ (474) (2.4) %
Non-GAAP adjustments:
Amortization of initial direct costs 2  —  % 3  —  % 6  —  % 9  —  %
Amortization of intangible assets 82  1.2  % 95  1.4  % 276  1.4  % 299  1.5  %
Impairment of goodwill —  —  % —  —  % —  —  % 865  4.4  %
Transformation costs 213  3.1  % 357  5.3  % 733  3.6  % 646  3.3  %
Disaster charges 5  0.1  % 2  —  % 6  —  % 24  0.1  %
Stock-based compensation expense 86  1.2  % 55  0.8  % 294  1.4  % 215  1.1  %
Acquisition, disposition and other related charges 3  —  % 15  0.2  % 34  0.2  % 82  0.4  %
Non-GAAP earnings from operations $ 673  9.8  % $ 539  7.9  % $ 2,131  10.4  % $ 1,666  8.4  %
Reconciliation of GAAP gross profit and gross profit margin to non-GAAP gross profit and gross profit margin.
Three Months Ended July 31, Nine Months Ended July 31,
2021 2020 2021 2020
Dollars % of
Revenue 		Dollars % of
Revenue 		Dollars % of
Revenue 		Dollars % of
Revenue
In millions In millions
GAAP Net revenue $ 6,897  100  % $ 6,816  100  % $ 20,430  100  % $ 19,774  100  %
GAAP Cost of sales 4,515  65.5  % 4,749  69.7  % 13,473  65.9  % 13,511  68.3  %
GAAP Gross profit $ 2,382  34.5  % $ 2,067  30.3  % $ 6,957  34.1  % $ 6,263  31.7  %
Non-GAAP adjustments
Amortization of initial direct costs 2  —  % 3  —  % 6  —  % 9  —  %
Stock-based compensation expense 9  0.2  % 8  0.2  % 33  0.2  % 30  0.2  %
Acquisition, disposition and other related charges(1)
—  —  % —  —  % —  —  % 27  0.1  %
Non-GAAP Gross Profit $ 2,393  34.7  % $ 2,078  30.5  % $ 6,996  34.2  % $ 6,329  32.0  %
(1) Represent charges related to a non-cash inventory fair value adjustment in connection with the acquisition of Cray, which was included in Cost of Sales.
59
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
Reconciliation of net cash provided by operating activities to free cash flow.
Three Months Ended July 31, Nine Months Ended July 31,
2021 2020 2021 2020
In millions In millions
Net cash provided by operating activities $ 1,130  $ 1,472  $ 2,915  $ 1,493 
Investment in property, plant and equipment (684) (620) (1,732) (1,779)
Proceeds from sale of property, plant and equipment 80  72  274  623 
Free cash flow $ 526  $ 924  $ 1,457  $ 337 
Non-GAAP financial measures
The non-GAAP financial measures presented are net revenue on a constant currency basis, non-GAAP gross profit, non-GAAP gross profit margin, non-GAAP operating profit margin (non-GAAP earnings from operations as a percentage of net revenue), non-GAAP net earnings, non-GAAP diluted net earnings per share and free cash flow. These non-GAAP financial measures are used by management for purposes of evaluating our historical and prospective financial performance, as well as evaluating our performance relative to our competitors. These non-GAAP financial measures are not computed in accordance with, or as an alternative to, generally accepted accounting principles in the United States. The GAAP measure most directly comparable to net revenue on a constant currency basis is net revenue. The GAAP measure most directly comparable to non-GAAP gross profit is gross profit. The GAAP measure most directly comparable to non-GAAP gross profit margin is gross profit margin. The GAAP measure most directly comparable to non-GAAP earnings from operations is earnings from operations. The GAAP measure most directly comparable to non-GAAP operating profit margin (non-GAAP earnings from operations as a percentage of net revenue) is operating profit margin (Earnings from operations as a percentage of net revenue). The GAAP measure most directly comparable to non-GAAP net earnings is net earnings. The GAAP measure most directly comparable to non-GAAP diluted net earnings per share is diluted net earnings per share. The GAAP measure most directly comparable to free cash flow is cash flow from operations.
Net revenue on a constant currency basis assumes no change in the foreign exchange rate from the prior-year period. Non-GAAP gross profit and non-GAAP gross profit margin is defined to exclude charges related to the amortization of initial direct costs, stock-based compensation expense and certain acquisition, disposition and other related charges. Non-GAAP earnings from operations and non-GAAP operating profit margin (non-GAAP earnings from operations as a percentage of net revenue) consist of earnings from operations excluding any charges related to the amortization of initial direct costs, amortization of intangible assets, impairment of goodwill, transformation costs, disaster charges, stock-based compensation expense and acquisition, disposition and other related charges. Non-GAAP net earnings and Non-GAAP diluted net earnings per share consist of net earnings or diluted net earnings per share excluding those same charges, as well as items such as tax indemnification and related adjustments, non-service net periodic benefit credit, loss from equity interests, certain income tax valuation allowances and separation taxes, the impact of U.S. tax reform, structural rate adjustment and excess tax benefit from stock-based compensation. In addition, non-GAAP net earnings and non-GAAP diluted net earnings per share are adjusted by the amount of additional taxes or tax benefits associated with each non-GAAP item. We believe that excluding the items mentioned above from these non-GAAP financial measures allows management to better understand our consolidated financial performance in relation to the operating results of our segments. Management does not believe that the excluded items are reflective of ongoing operating results, and excluding them facilitates a more meaningful evaluation of our current operating performance in comparison to our peers. The excluded items can be inconsistent in amount and frequency and/or not reflective of the operational performance of the business.
These non-GAAP financial measures have limitations as analytical tools, and these measures should not be considered in isolation or as a substitute for analysis of our results as reported under GAAP. Some of the limitations in relying on these non-GAAP financial measures are that they can have a material impact on the equivalent GAAP earnings measures, they may be calculated differently by other companies and may not reflect the full economic effect of the loss in value of certain assets.
We compensate for these limitations on the use of non-GAAP financial measures by relying primarily on our GAAP results and using non-GAAP financial measures only as a supplement. We also provide a reconciliation of each non-GAAP financial measure to its most directly comparable GAAP measure. We believe that providing net revenue on a constant currency basis, non-GAAP gross profit, non-GAAP gross profit margin, non-GAAP earnings from operations, non-GAAP operating profit margin, non-GAAP net earnings and non-GAAP diluted net earnings per share in addition to the related GAAP measures provides greater transparency to the information used in our financial and operational decision making and allows the reader of our Condensed Consolidated Financial Statements to see our financial results “through the eyes” of management.
60
Item 3.    Quantitative and Qualitative Disclosures About Market Risk.
For quantitative and qualitative disclosures about market risk affecting HPE, see "Quantitative and Qualitative Disclosures About Market Risk" in Item 7A of Part II of our Annual Report on Form 10-K for the fiscal year ended October 31, 2020. There have been no material changes in our market risk exposures since October 31, 2020.
Item 4.    Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act as of the end of the period covered by this report (the "Evaluation Date"). Based on this evaluation, our principal executive officer and principal financial officer concluded as of the Evaluation Date that our disclosure controls and procedures were effective such that the information related to the Company, including our consolidated subsidiaries, required to be disclosed in our SEC reports (i) is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and (ii) is accumulated and communicated to the Company's management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control Over Financial Reporting
There were no changes to our internal control over financial reporting during the quarter ended July 31, 2021, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.


61
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
Information with respect to this item may be found in Note 14, "Litigation and Contingencies".
Item 1A. Risk Factors.
Our operations and financial results are subject to various risks and uncertainties, including those described in Part I, Item 1A, "Risk Factors" in our Annual Report on Form 10-K for the fiscal period ended October 31, 2020, which could adversely affect our business, financial condition, results of operations, cash flows, and the trading price of our common stock.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Recent Sales of Unregistered Securities
There were no unregistered sales of equity securities during the period covered by this report.
As of July 31, 2021, the Company had no unsettled open market repurchases and had a remaining authorization of $2.1 billion for future share repurchases.
Item 5. Other Information.
The following disclosure is being made under Section 13(r) of the Exchange Act:
On March 2, 2021, the U.S. Secretary of State designated the Russian Federal Security Service (“FSB”) as a party subject to the provisions of U.S. Executive Order No. 13382 issued in 2005 (“Executive Order 13382”). On the same day, the U.S. Department of the Treasury’s Office of Foreign Assets Control updated General License 1B (“General License 1B”) which generally authorizes U.S. companies to engage in certain licensing, permitting, certification, notification and related transactions with the FSB as may be required for the importation, distribution or use of information technology products in the Russian Federation. Our local subsidiary is required to engage on a regular basis with the FSB as a licensing authority and file documents in order to conduct business within the Russian Federation. There are no gross revenues or net profits directly associated with any such dealings by us with the FSB and all such dealings are explicitly authorized by General License 1B. We plan to continue these activities as required to continue to conduct business in the Russian Federation to the extent permitted by applicable law.
On April 15, 2021, the U.S. Government issued an executive order on Blocking Property with Respect to Specified Harmful Foreign Activities of the Government of the Russian Federation (“Executive Order 14024”), implementing additional U.S. sanctions against the Russian government and against Russian actors that threaten U.S. interests, including certain technology companies that support the Russian Intelligence Service. The U.S. Secretary of the Treasury designated Pozitiv Teknolodzhiz, AO (“Positive Technologies”) under Executive Order 14024 and Executive Order 13382. Prior to its designation, HPE’s local Russian subsidiary, occasionally through distributors and resellers, had sold equipment to and entered into service contracts with Positive Technologies. HPE’s local subsidiary had also entered into an original equipment manufacturing agreement with Positive Technologies and approved it as a reseller. Following the sanctions designation, our local subsidiary immediately initiated procedures to terminate its relationship with Positive Technologies. HPE does not plan to engage in any further transactions with this entity, except wind down activities that are authorized by OFAC going forward. In this reporting period HPE became aware of an additional payment to HPE Russia received from a third party involving Positive Technologies in the amount of $1,725. There are no identifiable net profits associated with HPE’s relationship with Positive Technologies for this reporting period.
For a summary of our revenue recognition policies, see "Revenue Recognition" described in PART II, Item 8, Note 1, "Overview and Summary of Significant Accounting Policies", of our Annual Report on Form 10-K for the fiscal year ended October 31, 2020.
Item 6. Exhibits.
The Exhibit Index beginning on page 63 of this report sets forth a list of exhibits.
62
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
EXHIBIT INDEX
  Incorporated by Reference
Exhibit
Number 		Exhibit Description Form File No. Exhibit(s) Filing Date
2.1 8-K 001-37483 2.1 November 5, 2015
2.2 8-K 001-37483 2.2 November 5, 2015
2.3 8-K 001-37483 2.4 November 5, 2015
2.4 8-K 001-37483 2.5 November 5, 2015
2.5 8-K 001-37483 2.6 November 5, 2015
2.6 8-K 001-37483 2.7 November 5, 2015
2.7 8-K 001-37483 2.1 May 26, 2016
2.8 8-K 001-37483 2.2 May 26, 2016
2.9 8-K 001-37483 2.1 September 7, 2016
2.10 8-K 001-37483 2.2 September 7, 2016
2.11 8-K 001-37483 2.3 September 7, 2016
2.12 8-K 001-37483 2.1 November 2, 2016
2.13 8-K 001-37483 2.2 November 2, 2016
2.14 8-K 001-37483 99.1 March 7, 2017
2.15 8-K 001-37483 99.2 March 7, 2017
63
2.16 8-K 001-38033 2.1 April 6, 2017
2.17 8-K 001-38033 2.2 April 6, 2017
2.18 8-K 001-38033 2.3 April 6, 2017
2.19 8-K 001-38033 2.4 April 6, 2017
2.20 8-K 001-38033 2.5 April 6, 2017
2.21 8-K 001-38033 2.6 April 6, 2017
2.22 8-K 001-37483 2.1 September 1, 2017
2.23 8-K 001-37483 2.2 September 1, 2017
2.24 8-K 001-37483 2.3 September 1, 2017
2.25 8-K 001-37483 2.4 September 1, 2017
2.26 8-K 001-37483 2.1 May 17, 2019
2.27 8-K 001-37483 2.1 July 13, 2020
3.1 8-K 001-37483 3.1 November 5, 2015
3.2 8-K 001-37483 3.2 November 5, 2015
3.3 8-K 001-37483 3.1 March 20, 2017
3.4 8-K 001-37483 3.2 March 20, 2017
4.1 8-K 001-37483 4.1 October 13, 2015
4.2 8-K 001-37483 4.5 October 13, 2015
64
4.3 8-K 001-37483 4.6 October 13, 2015
4.4 8-K 001-37483 4.7 October 13, 2015
4.5 8-K 001-37483 4.8 October 13, 2015
4.6 8-K 001-37483 4.2 September 19, 2018
4.7 8-K 001-37483 4.3 September 19, 2018
4.8 8-K 001-37483 4.2 September 13, 2019
4.9 8-K 001-37483 4.3 September 13, 2019
4.10 8-K 001-37483 4.2 April 9, 2020
4.11 8-K 001-37483 4.3 April 9, 2020
4.12 8-K 001-37483 4.2 July 17, 2020
4.13 8-K 001-37483 4.3 July 17, 2020
4.14 8-K 001-37483 4.12 October 13, 2015
65
4.15 S-3ASR 333-222102 4.5 December 15, 2017
4.16 10-K  001-37483 4.16 December 10, 2020
10.1 8-K 001-37483 10.1 January 30, 2017
10.2 S-8 333-255839 4.4 May 6, 2021
10.3 10-12B/A 001-37483 10.4 September 28, 2015
10.4 S-8 333-207679 4.4 October 30, 2015
10.5 8-K 001-37483 10.4 November 5, 2015
10.6 8-K 001-37483 10.7 November 5, 2015
10.7 8-K 001-37483 10.8 November 5, 2015
10.8 8-K 001-37483 10.9 November 5, 2015
10.9 8-K 001-37483 10.10 November 5, 2015
10.10 10-Q 001-37483 10.14 March 10, 2016
10.11 10-Q 001-37483 10.15 March 10, 2016
10.12 8-K 001-37483 10.1 May 26, 2016
10.13 S-8 333-216481 4.3 March 6, 2017
10.14 S-8 333-217349 4.3 April 18, 2017
10.15 S-8 333-217349 4.4 April 18, 2017
10.16 S-8 333-217438 4.3 April 24, 2017
10.17 10-K 000-51333 10.3 September 10, 2012
10.18 S-8 333-221254 4.3 November 1, 2017
10.19 S-8 333-221254 4.4 November 1, 2017
10.20 S-8 333-226181 4.3 July 16, 2018
10.21 10-Q 001-37483 10.29 September 4, 2018
10.22 10-Q 001-37483 10.30 September 4, 2018
10.23 10-K 001-37483 10.27 December 12, 2018
10.24 10-K 001-37483 10.29 December 12, 2018
10.25 S-8 333-229449 4.3 January 31, 2019
66
10.26 10-Q 001-37483 10.32 March 9, 2020
10.27 8-K 001-37483 10.1 August 20, 2019
10.28 S-8 333-234033 4.3 October 1, 2019
10.29 10-K 001-37483 10.31 December 13, 2019
10.30 S-8 333-249731 4.3 October 29, 2020
10.31 S-8 333-249731 4.4 October 29, 2020
10.32 10-Q 001-37483 10.31 March 4, 2021
10.33 10-Q 001-37483 10.32 March 4, 2021
31.1
31.2
32
101.INS Inline XBRL Instance Document‡
101.SCH Inline XBRL Taxonomy Extension Schema Document‡
101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase Document‡
101.DEF Inline XBRL Taxonomy Extension Definition Linkbase Document‡
101.LAB Inline XBRL Taxonomy Extension Label Linkbase Document‡
101.PRE Inline XBRL Taxonomy Extension Presentation Linkbase Document‡
104 Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)
*    Indicates management contract or compensation plan, contract or arrangement
‡    Filed herewith
†    Furnished herewith
The registrant agrees to furnish to the Commission supplementally upon request a copy of any instrument with respect to long-term debt not filed herewith as to which the total amount of securities authorized thereunder does not exceed 10% of the total assets of the registrant and its subsidiaries on a consolidated basis.
67
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
    HEWLETT PACKARD ENTERPRISE COMPANY
    /s/ TAREK A. ROBBIATI
Tarek A. Robbiati
 Executive Vice President and Chief Financial Officer
(Principal Financial Officer and Authorized
Signatory)
Date: September 3, 2021
68
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