HEWLETT PACKARD ENTERPRISE COMPANY HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
This Management's Discussion and Analysis of Financial Condition and Results of
Operations ("MD&A") is organized as follows:
•COVID-19 Update. A discussion of our response to the novel coronavirus pandemic
("COVID-19"), including our efforts to protect the health and well-being of our
workforce, community and customers.
•Overview. A discussion of our business and summary analysis of financial and
other highlights, including non-GAAP financial measures, affecting the Company
in order to provide context to the remainder of the MD&A, financial statements
and footnotes. The Overview analysis compares the three and six months ended
April 30, 2020 to the prior-year periods.
•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 six months ended April 30, 2020 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 and post-retirement benefit plan funding, restructuring plans,
uncertain tax positions, cross-indemnifications with HP Inc. (formerly known as
"Hewlett-Packard Company "), DXC Technology Company ("DXC"), and Micro Focus
International plc ("Micro Focus") and off-balance sheet arrangements.
We intend the discussion of our financial condition and results of operations
that follows to provide information that will assist the reader in understanding
our Condensed Consolidated Financial Statements, the changes in certain key
items in those financial statements from year-to-year, 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 Overview, Results of Operations and Liquidity discussions and
analysis compare the three and six months ended April 30, 2020 to the prior-year
periods, unless otherwise noted. The Capital Resources and Contractual and Other
Obligations discussions present information as of April 30, 2020 , unless
otherwise noted.
For purposes of this MD&A section, we use the terms "Hewlett Packard
Enterprise", "HPE", the "Company", "we", "us" and "our" to refer to Hewlett
Packard Enterprise Company .
COVID-19 UPDATE
The outbreak of COVID-19 has resulted in a global slowdown of economic activity
including worldwide travel restrictions, prohibitions of non-essential work
activities, disruption and shutdown of businesses and greater uncertainty in
global financial markets. Our financial results for the three months ended April
30, 2020 represent a full quarter of operating during the COVID-19 crisis. These
dynamics had a significant impact on our financial performance this quarter as
the pandemic intensified. We are currently unable to predict the extent to which
COVID-19 may adversely impact our future business operations, financial
performance and results of operations. The full extent of the impact of COVID-19
on the Company's operational and financial performance is currently uncertain
and will depend on many factors outside the Company's control, including,
without limitation, the timing, extent, trajectory and duration of the pandemic,
the development and availability of effective treatments and vaccines, the
imposition of protective public safety measures, and the impact of the pandemic
on the global economy and demand for our enterprise technology solutions. For a
further discussion of the risks,
44
--------------------------------------------------------------------------------
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
uncertainties and actions taken in response to COVID-19, see risks identified in
the section entitled " Risk Factors" in Part II, Item 1A.
The Company believes its existing balances of cash, cash equivalents and
marketable securities, along with commercial paper and other short-term
liquidity arrangements, will be sufficient to satisfy its working capital needs,
capital asset purchases, dividends, share repurchases, debt repayments and other
liquidity requirements associated with its existing operations.
During this unprecedented time, our purpose as a company of advancing the way
people live and work is more important than it has ever been. We have
prioritized protecting the health and safety of our team members, supporting the
global communities in which we live and work and supporting our customers and
partners to help them adjust to new and emerging needs.
We implemented a global work-from-home policy until further notice, with the
exception of team members performing essential activities necessary to maintain
minimum business operations. We have also made additional education and support
resources and personal protective supplies available to team members. In the
event of a confirmed or probable case of COVID-19 among our team members and
contractors, we have implemented a confidential reporting process to trace and
notify close contacts-including third parties-that maintains the anonymity of
all involved.
We also responded with important initiatives to address key needs created by the
pandemic including:
•We launched special HPE Gives matching campaigns to provide team members with
opportunities to make financial donations to global and local initiatives
addressing COVID-19 that the HPE Foundation is matching dollar for dollar.
•Our Aruba networking capabilities have been deployed in drive-up and virtual
healthcare clinics and in schools that are facilitating distance learning.
•Our high-performance computing ("HPC") solutions are helping scientists at
leading research institutions speed up drug discovery with complex modeling,
simulation, AI and machine learning capabilities.
•We joined forces with the U.S. government and other high tech companies to form
the COVID-19 High Performance Computing Consortium giving COVID-19 researchers
access to HPC resources.
•We also signed the Open COVID Pledge, granting free access to all of our
patented technologies for the purpose of diagnosing, preventing, and treating
the virus.
We are delivering relevant capabilities and experiences to aid our customers'
transformations as they navigate this challenging time. Our technology is
enabling secure and productive operations in distributed and remote locations.
Our unique intellectual property at the edge is Aruba Central, which is the
industry's only cloud-native, simple-to-use and secure platform that unifies
network management for wired, wireless, and wide area networks, and soon 5G
network. This allows organizations to manage and deliver the optimal experience
at all of their edges. In addition, our HPE GreenLake business provides flexible
as-a-service offerings reducing information technology complexity and increasing
speed and innovation. In early May 2020 , we announced the general availability
of HPE GreenLake Central, our advanced cloud-native software platform that
provides customers with a consistent cloud experience for all their applications
and data, through an online operations console that runs, manages, and optimizes
their entire hybrid cloud estate.
While we are actively working to mitigate the impact on our business and
operations to address the near-term uncertainty, we are taking a number of
actions to ensure HPE is well positioned to emerge stronger, more agile and
digitally enabled for a post-COVID-19 world.
•On May 19, 2020 , the Board of Directors of HPE (the "Board") approved a cost
optimization and prioritization plan (the "Plan") in order to focus our
investments, realign our workforce to areas of growth and simplify and evolve
our product portfolio strategy, go-to-market configurations, supply chain
structures, digital customer support model, marketing experiences, and real
estate strategies. We expect that the Plan will be implemented through fiscal
year 2022 and estimate that it will include gross savings of at least $1.0
billion as a result of changes to our workforce, real estate model and business
process improvements, with the Plan being expected to deliver annualized net
run-rate savings of at least $800 million by the end of fiscal year 2022, in
both cases relative to our fiscal 2019 exit. In order to achieve this level of
cost savings, we estimate cash funding payments between $1.0 billion to $1.3
billion over the next three years.
45
--------------------------------------------------------------------------------
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
•On May 19, 2020 , the Board approved temporary base salary adjustments or unpaid
leave for certain employees beginning July 1, 2020 through the remainder of
fiscal year 2020. In addition, we implemented cost containment measures across
the Company, including restrictions on external hiring and salary increases
through the end of our fiscal year.
•On April 9, 2020 , we issued $2.25 billion aggregate principal amount of
unsecured senior notes to enhance our liquidity and strengthen our capital. The
net proceeds from this offering will be used for general corporate purposes,
including the repayment of indebtedness.
•On April 6, 2020 , we announced that we suspended purchases under our share
repurchase program in response to the global economic uncertainty that resulted
from the worldwide spread of COVID-19.
OVERVIEW
We are a global technology leader focused on developing intelligent solutions
that allow customers to capture, analyze and act upon data seamlessly from edge
to cloud. We enable customers to accelerate business outcomes by driving new
business models, creating new customer and employee experiences, and increasing
operational efficiency today and into the future. Our legacy dates back to a
partnership founded in 1939 by William R. Hewlett and David Packard , and we
strive every day to uphold and enhance that legacy through our dedication to
providing innovative technological solutions to our customers.
As described in Item 1, Note 1, "Overview and Summary of Significant Accounting
Policies", effective at the beginning of the first quarter of fiscal 2020, we
implemented certain organizational changes to align our segment financial
reporting more closely with our current business structure. As a result, Hewlett
Packard Enterprise's operations are now organized into seven segments for
financial reporting purposes: Compute, High Performance Compute &
Mission-Critical Systems ("HPC & MCS"), Storage, Advisory and Professional
Services ("A & PS"), Intelligent Edge, Financial Services ("FS"), and Corporate
Investments. 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.
The following provides an overview of our key financial metrics by segment for
the three months ended April 30, 2020 , as compared to the prior-year period:
Financial Corporate
HPE Consolidated Compute HPC & MCS Storage A & PS Intelligent Edge Services Investments
Dollars in millions, except for per share amounts Net revenue(1)
$ 6,009 $ 2,640 $ 589 $ 1,086 $ 237 $ 665$ 833 $ 124 Year-over-year change % (16.0) % (20.4) % (18.3) % (17.6) % (8.8) % (2.9) % (7.0) % (0.8) % (Loss) earnings from operations(2) $ (834)$ 125 $ 33 $ 145 $ 2 $ 73$ 75 $ (28) (Loss) earnings from operations as a % of net revenue (13.9) % 4.7 % 5.6 % 13.4 % 0.8 % 11.0 % 9.0 % (22.6) % Year-over-year change percentage points (20.0) pts (4.6) pts (7.2) pts (5.1) pts 6.2 pts 5.7 pts 0.4 pts 0.6 pts Net loss $ (821) Diluted net loss per share$ (0.64) Supplemental Non-GAAP information: Non-GAAP earnings from operations $ 365 Non-GAAP earnings from operations as a % of net revenue 6.1 % Non-GAAP net earnings $ 285 Non-GAAP diluted net earnings per share $ 0.22 46
--------------------------------------------------------------------------------
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
(1)HPE consolidated net revenue excludes intersegment net revenue.
(2)Segment earnings from operations exclude certain unallocated corporate costs
and eliminations, stock-based compensation expense related to corporate and
certain global functions, amortization of initial direct costs, amortization of
intangible assets, impairment of goodwill, transformation costs, disaster
(recovery) charges and acquisition, disposition and other related charges.
The following provides an overview of our key financial metrics by segment for
the six months ended April 30, 2020 , as compared to the prior-year period:
Financial Corporate
HPE Consolidated Compute HPC & MCS Storage A & PS Intelligent Edge Services Investments
Dollars in millions, except for per share amounts Net revenue(1)
$ 12,958 $ 5,651 $ 1,412 $ 2,336 $ 480 $ 1,385 $ 1,692 $ 245 Year-over-year change % (11.9) % (18.0) % (5.9) % (12.6) % (4.2) % (0.4) % (6.8) % 0.8 % (Loss) earnings from operations(2) $ (486)$ 411 $ 82 $ 371 $ - $ 143$ 148 $ (55) (Loss) earnings from operations as a % of net revenue (3.8) % 7.3 % 5.8 % 15.9 % - % 10.3 % 8.7 % (22.4) % Year-over-year change percentage points (9.9) pts (2.1) pts (6.9) pts (2.7) pts 9.2 pts 6.0 pts 0.2 pts 1.1 pts Net loss $ (488) Diluted net loss per share $ (0.38) Supplemental Non-GAAP information: Non-GAAP earnings from operations $ 967 Non-GAAP earnings from operations as a % of net revenue 7.5 % Non-GAAP net earnings $ 860 Non-GAAP diluted net earnings per share $ 0.66 (1)HPE consolidated net revenue excludes intersegment net revenue. (2)Segment earnings from operations exclude certain unallocated corporate costs and eliminations, stock-based compensation expense related to corporate and certain global functions, amortization of initial direct costs, amortization of intangible assets, impairment of goodwill, transformation costs, disaster (recovery) 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)
The following table provides reconciliation of GAAP to non-GAAP measures for the
three and six months ended
Diluted net Diluted net
Three Months Ended earnings per Six Months Ended earnings per
April 30, 2020 share April 30, 2020 share
In millions In millions
GAAP net loss $ (821) $ (0.64) $ (488) $ (0.38)
Non-GAAP adjustments:
Amortization of initial direct costs 3 - 6 -
Amortization of intangible assets 84 0.07 204 0.17
Impairment of goodwill 865 0.67 865 0.67
Transformation costs 200 0.15 289 0.22
Disaster charges 22 0.02 22 0.02
Acquisition, disposition and other related
charges 25 0.02 67 0.05
Tax indemnification adjustments 35 0.03 56 0.04
Non-service net periodic benefit credit (36) (0.03) (73) (0.06)
Loss from equity interests(1) 37 0.03 74 0.06
Adjustments for taxes (129) (0.10) (162) (0.13)
Non-GAAP net earnings $ 285 $ 0.22 $ 860 $ 0.66
GAAP loss from operations $ (834) $ (486)
Non-GAAP adjustments:
Amortization of initial direct costs 3 6
Amortization of intangible assets 84 204
Impairment of goodwill 865 865
Transformation costs 200 289
Disaster charges 22 22
Acquisition, disposition and other related
charges 25 67
Non-GAAP earnings from operations $ 365 $ 967
GAAP operating profit margin (13.9) % (3.8) %
Non-GAAP adjustments 20.0 % 11.3 %
Non-GAAP operating profit margin 6.1 % 7.5 %
GAAP Net revenue $ 6,009 $ 12,958
GAAP Cost of Sales 4,095 8,762
GAAP Gross profit $ 1,914 $ 4,196
Non-GAAP adjustments
Amortization of initial direct costs $ 3 $ 6
Acquisition, disposition and other related
charges(2) $ 7 $ 27
Non-GAAP Gross Profit $ 1,924 $ 4,229
GAAP gross profit margin 31.9 % 32.4 %
Non-GAAP adjustments 0.1 % 0.2 %
Non-GAAP gross profit margin 32.0 % 32.6 %
(1) Represents the amortization of basis difference adjustments related to the
H3C divestiture.
(2) For the periods presented, amounts represent Acquisition, disposition and
other related charges related to a non-cash inventory fair value adjustment in
connection with the acquisition of Cray, Inc. , which was included in Cost of
Sales.
48
--------------------------------------------------------------------------------
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
Non-GAAP financial measures
The non-GAAP financial measures presented are net revenue on a constant currency
basis, non-GAAP gross profit, non-GAAP gross profit margin, non-GAAP operating
profit margin (non-GAAP earnings from operations as a percentage of net
revenue), non-GAAP net earnings and non-GAAP diluted net earnings per share.
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.
Net revenue on a constant currency basis assumes no change in the foreign
exchange rate from the prior-year period. Non-GAAP gross profit margin is
defined to exclude charges relating to the amortization of initial direct costs
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 relating to the amortization of initial direct
costs, amortization of intangible assets, impairment of goodwill, transformation
costs, disaster charges (recovery) and acquisition, disposition and other
related charges. Non-GAAP net earnings and Non-GAAP diluted net earnings per
share consist of net earnings or diluted net earnings per share excluding those
same charges, as well as an adjustment to tax indemnification adjustments,
non-service net periodic benefit credit, loss from equity interests, certain
income tax valuation allowances and separation taxes, the impact of U.S. tax
reform, structural rate adjustment and excess tax benefit from stock-based
compensation. In addition, non-GAAP net earnings and non-GAAP diluted net
earnings per share are adjusted by the amount of additional taxes or tax
benefits associated with each non-GAAP item. We believe that excluding the items
mentioned above from these non-GAAP financial measures allows management to
better understand our consolidated financial performance in relation to the
operating results of our segments. Management does not believe that the excluded
items are reflective of ongoing operating results, and excluding them
facilitates a more meaningful evaluation of our current operating performance in
comparison to our peers. The excluded items can be inconsistent in amount and
frequency and/or not reflective of the operational performance of the business.
These non-GAAP financial measures have limitations as analytical tools, and
these measures should not be considered in isolation or as a substitute for
analysis of our results as reported under GAAP. Some of the limitations in
relying on these non-GAAP financial measures are that they can have a material
impact on the equivalent GAAP earnings measures and cash flows, they may be
calculated differently by other companies and may not reflect the full economic
effect of the loss in value of certain assets.
We compensate for these limitations on the use of non-GAAP financial measures by
relying primarily on our GAAP results and using non-GAAP financial measures only
as a supplement. We also provide a reconciliation of each non-GAAP financial
measure to its most directly comparable GAAP measure. We believe that providing
net revenue on a constant currency basis, non-GAAP gross profit, non-GAAP gross
profit margin, non-GAAP earnings from operations, non-GAAP operating profit
margin, non-GAAP net earnings and non-GAAP diluted net earnings per share in
addition to the related GAAP measures provides greater transparency to the
information used in our financial and operational decision making and allows the
reader of our Condensed Consolidated Financial Statements to see our financial
results "through the eyes" of management.
Three months ended April 30, 2020 compared with three months ended April 30,
2019
The three months ended April 30, 2020 represented our first full quarter of
operating under COVID-19, as such our results in the quarter were heavily
impacted by the global pandemic on both the demand and the supply chain side of
our business operations. The extent to which COVID-19 related events continue to
affect our operational performance will depend primarily on the duration of
lockdown actions taking place across the globe and access restrictions at
customer sites, along with the time it takes for the demand environment to
rebound.
49
--------------------------------------------------------------------------------
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
Net revenue decreased by $1.1 billion , or 16.0% (decreased 14.6% on a constant
currency basis), for the three months ended April 30, 2020 , as compared to the
prior-year period, as each of our segments experienced a net revenue decline.
From a segment perspective, the net revenue decline was primarily driven by
decreases in Compute, Storage and HPC & MCS. The net revenue decline in Compute
was pronounced as we experienced supply chain constraints and with customer
acceptance challenges due to lockdown actions taking place across the globe
related to COVID-19 and competitive pricing pressures. Storage net revenue was
impacted by the aforementioned COVID-19 related events coupled with uneven
demand and lower revenue from the expiration of a one-time legacy contract. HPC
& MCS also experienced COVID-19 related challenges, in particular with
performing on-site installations and meeting customer acceptance milestones
given lockdown constraints and delays with order fulfillment. Net revenue
declined in HPE Financial Services due to a decrease in rental revenue due to
lower average operating lease assets and unfavorable currency fluctuations.
COVID-19 related constraints also contributed to the relatively small net
revenue decline we experienced in A & PS. Net revenue declined in the
Intelligent Edge segment due to unfavorable currency fluctuations and market
weakness in the switching products sector of the market.
We experienced supply chain challenges related to the unfavorable impact of
COVID-19. Our gross profit margin was 31.9% ($1.9 billion ) and 32.2% ($2.3
billion ) for the three months ended April 30, 2020 and 2019, respectively,
representing a decline of 0.3 percentage points. The decline in the gross profit
margin was due to multiple factors led by competitive pricing pressures, the
scale of the net revenue decline which resulted in higher fixed overhead costs
as a percentage of net revenue and higher supply chain costs related to
COVID-19, partially offset by our continued shift to higher margin products and
services and lower variable compensation expense. Our operating profit margin
was (13.9%) and 6.1% for the three months ended April 30, 2020 and 2019,
respectively, representing a decline of 20.0 percentage points. The decrease was
due primarily to a goodwill impairment charge of $865 million impacting our HPC
& MCS segment due in part to market conditions and business trends caused by the
impact of COVID-19 and higher transformation costs.
Six months ended April 30, 2020 compared with six months ended April 30, 2019
Net revenue decreased by $1.7 billion , or 11.9% (decreased 10.7% on a constant
currency basis), for the six months ended April 30, 2020 , as compared to the
prior-year period. In the first three months of fiscal 2020, we experienced a
net revenue decline due to weak market demand along with commodity and North
American manufacturing capacity constraints. The second quarter of fiscal 2020
represented our first full quarter of operating under COVID-19 and as such our
financial results were heavily impacted by the global pandemic on both the
demand and the supply-chain side of our business operations.
From a segment perspective, the net revenue decrease for the first six months of
fiscal 2020, as compared to the prior year period was primarily driven by
declines in Compute and Storage. The net revenue decline in Compute was
pronounced as we experienced a combination of factors including supply chain and
customer acceptance constraints due to COVID-19 along with commodity and
manufacturing capacity constraints, and competitive pricing pressures. Storage
net revenue was primarily impacted by uneven demand, supply chain and customer
acceptance constraints related to COVID-19 along with lower revenue from the
expiration of a one-time legacy contract. Financial services net revenue was
impacted due to a decrease in rental revenue due to lower average operating
lease assets and unfavorable currency fluctuations. HPC & MCS experienced a net
revenue decline from the impact of COVID-19 related challenges, in particular
with completing on-site installations and meeting customer acceptance milestones
given lockdown constraints taking place across the globe, partially offset by
the addition of revenue from the acquisition of Cray Inc. ("Cray") in the fourth
quarter of fiscal 2019. COVID-19 related constraints also contributed to the
relatively small net revenue declines we experienced in the A & PS and
Intelligent Edge segments.
We experienced supply chain challenges related to the unfavorable impact of
COVID-19. Gross profit margin was 32.4% ($4.2 billion ) and 31.6% ($4.7 billion )
for the six months ended April 30, 2020 and 2019, respectively. The 0.8
percentage point increase to the gross profit margin was primarily driven by our
overall shift to higher margin products and services along with improved service
delivery costs, lower commodity costs and lower variable compensation expense.
Our operating profit margin was (3.8%) and 6.1% for the six months ended April
30, 2020 and 2019, respectively, representing a decrease of 9.9 percentage
points. The decrease was due to an increase in operating expenses as a
percentage of net revenue partially offset by the gross profit margin increase.
The increase in operating expenses was due to the goodwill impairment charge
impacting our HPC & MCS segment, in part due to market conditions and business
trends caused by the impact of COVID-19 and higher transformation costs.
As of April 30, 2020 , cash, cash equivalents and restricted cash were $6.0
billion , representing an increase of approximately $1.9 billion from the
October 31, 2019 balance of $4.1 billion . The increase was due primarily to the
following: proceeds from debt, net of repayments and issuance costs of $2.7
billion and net financial collateral received of $562 million
50
--------------------------------------------------------------------------------
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
partially offset by share repurchases and cash dividend payments of $665 million
and investments in property, plant and equipment, net of sales proceeds, of $608
million .
Trends and Uncertainties
We are in the process of addressing many challenges facing our business, a
discussion of which is available in our Annual Report on Form 10-K for the
fiscal year ended October 31, 2019 .
For a further discussion of trends, uncertainties and other factors that could
impact our operating results, see the section entitled "Risk Factors" in Item 1A
of Part II.
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. As the extent and duration of the impacts from COVID-19 remain
unclear, the Company's estimates, judgements and assumptions may evolve as
conditions change. Management believes that there have been no significant
changes during the six months ended April 30, 2020 , with the exception of
certain accounting policies that were updated resulting from our adoption of the
new leasing standard (See Note 1 in Item 1, "Overview and Summary of Significant
Accounting Policies"), to the items that we disclosed as our critical accounting
policies and estimates in Management's Discussion and Analysis of Financial
Condition and Results of Operations in our Annual Report on Form 10-K for the
fiscal year ended October 31, 2019 .
ACCOUNTING PRONOUNCEMENTS
For a summary of recent accounting pronouncements applicable to our Condensed
Consolidated Financial Statements, see Note 1 in Item 1, "Overview and Summary
of Significant Accounting Policies".
RESULTS OF OPERATIONS
Revenue from our international operations has historically represented, and we
expect will continue to represent, a majority of our overall net revenue. As a
result, our revenue growth has been impacted, and we expect will continue to be
impacted, by fluctuations in foreign currency exchange rates. In order to
provide a framework for assessing performance excluding the impact of foreign
currency fluctuations, we present the year-over-year percentage change in
revenue on a constant currency basis, which assumes no change in foreign
currency exchange rates from the prior-year period and doesn't adjust for any
repricing or demand impacts from changes in foreign currency exchange rates.
This change in revenue on a constant currency basis is calculated as the
quotient of (a) current year revenue converted to U.S. dollars using the
prior-year period's foreign currency exchange rates divided by (b) the
prior-year period revenue. This information is provided so that revenue can be
viewed without the effect of fluctuations in foreign currency exchange rates,
which is consistent with how management evaluates our revenue results and
trends. This constant currency disclosure is provided in addition to, and not as
a substitute for, the year-over-year percentage change in revenue on a GAAP
basis. Other companies may calculate and define similarly labeled items
differently, which may limit the usefulness of this measure for comparative
purposes.
51
--------------------------------------------------------------------------------
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
Results of operations in dollars and as a percentage of net revenue were as
follows:
Three months ended April 30 , Six months ended April 30,
2020 2019 2020 2019
% of % of % of % of
Dollars Revenue Dollars Revenue Dollars Revenue Dollars Revenue
Dollars in millions
Net revenue $ 6,009 100.0 % $ 7,150 100.0 % $ 12,958 100.0 % $ 14,703 100.0 %
Cost of sales 4,095 68.1 4,845 67.8 8,762 67.6 10,052 68.4
Gross profit 1,914 31.9 2,305 32.2 4,196 32.4 4,651 31.6
Research and development 450 7.5 457 6.4 935 7.2 923 6.3
Selling, general and administrative 1,109 18.4 1,214 16.9 2,327 17.9 2,425 16.4
Amortization of intangible assets 84 1.5 69 0.9 204 1.6 141 0.9
Impairment of goodwill 865 14.4 - - 865 6.7 - -
Transformation costs 200 3.3 54 0.8 289 2.3 132 0.9
Disaster charges (recovery) 22 0.4 (7) (0.1) 22 0.2 (7) -
Acquisition, disposition and other
related charges 18 0.3 84 1.2 40 0.3 147 1.0
(Loss) earnings from operations (834) (13.9) 434 6.1 (486) (3.8) 890 6.1
Interest and other, net (68) (1.1) (18) (0.3) (87) (0.7) (69) (0.5)
Tax indemnification adjustments (35) (0.6) 4 0.1 (56) (0.4) 223 1.5
Non-service net periodic benefit
credit 36 0.6 17 0.3 73 0.6 33 0.2
(Loss) earnings from equity interests (10) (0.2) 3 - 23 0.2 18 0.1
(Loss) earnings before taxes (911) (15.2) 440 6.2 (533) (4.1) 1,095 7.4
Benefit (provision) for taxes 90 1.5 (21) (0.3) 45 0.3 (499) (3.3)
Net (loss) earnings $ (821) (13.7) % $ 419 5.9 % $ (488) (3.8) % $ 596 4.1 %
Stock-based compensation expense is included within costs and expenses presented in the table above as follows:
Six months ended April
Three months ended April 30, 30,
2020 2019 2020 2019
In millions
Cost of sales $ 9 $ 11 $ 22 $ 23
Research and development 19 19 46 40
Selling, general and administrative 39 44 92 86
Transformation costs - - - 2
Acquisition, disposition and other related charges 1 - 1 -
Stock-based compensation expense $ 68 During the three months endedApril 30, 2020 the Company reversed$20 million of previously recognized compensation costs for the performance based awards that are no longer probable of vesting. Net Revenue For the three months endedApril 30, 2020 , as compared to the prior-year period, total net revenue decreased by$1.1 billion , or 16.0% (decreased 14.6% on a constant currency basis).U.S. net revenue decreased by$278 million , or 12.7%, to$1.9 billion , and net revenue from outside of theU.S. decreased by$863 million , or 17.4%, to$4.1 billion . For the six months endedApril 30, 2020 , as compared to the prior-year period, total net revenue decreased by$1.7 billion , or 11.9% (decreased 10.7% on a constant currency basis).U.S. net revenue decreased by$461 million , or 9.8%, to$4.2 billion , and net revenue from outside of theU.S. decreased by$1.3 billion , or 12.8%, to$8.7 billion . 52 --------------------------------------------------------------------------------
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
The components of the weighted net revenue change by segment were as follows:
Three months ended Six months ended
April 30, 2020 April 30, 2020
Percentage points
Compute (9.5) (8.6)
Storage (3.2) (2.3)
HPC & MCS (1.9) (0.6)
Financial Services (0.9) (0.8)
A & PS (0.3) (0.1)
Intelligent Edge (0.3) -
Corporate Investments/Other (1) 0.1 0.5
Total HPE (16.0) (11.9)
(1) Other primarily relates to the elimination of intersegment net revenue.
Three months ended April 30, 2020 compared with three months ended April 30,
2019
From a segment perspective, the primary factors contributing to the change in
total net revenue are summarized as follows:
•Compute net revenue declined due primarily to supply chain constraints and
customer acceptance challenges related to COVID-19, and competitive pricing
pressures;
•HPC & MCS net revenue decreased due to challenges performing on-site
installations and meeting customer acceptance milestones, and delays with order
fulfillment related to COVID-19 and lower services attach;
•Storage net revenue decreased due primarily to uneven demand, and supply chain
constraints and customer acceptance challenges due to COVID-19 and lower revenue
from the expiration of a one-time legacy contract;
•A & PS net revenue decreased due primarily to demand weakness and delivery
delays in Europe and America given lockdown restrictions due to COVID-19;
•Intelligent Edge net revenue decreased due primarily to unfavorable foreign
currency fluctuations, market weakness for switching products and lower revenue
from software; and
•HPE Financial Services net revenue decreased due primarily to a decrease in
rental revenue due to lower average operating lease assets and unfavorable
currency fluctuations.
Six months ended April 30, 2020 compared with six months ended April 30, 2019
From a segment perspective, the primary factors contributing to the change in
total net revenue are summarized as follows:
•Compute net revenue declined due primarily to multiple factors including supply
chain and customer acceptance constraints from COVID-19, commodity and
manufacturing capacity constraints, and competitive pricing pressures;
•HPC & MCS net revenue decreased due to challenges performing on-site
installations and meeting customer acceptance milestones, and delays with order
fulfillment related to COVID-19, unfavorable large deal linearity, and lower
services attach;
•Storage net revenue decreased due primarily to uneven demand, supply chain and
customer acceptance constraints partially related to COVID-19, commodity and
North American manufacturing capacity constraints. and lower revenue from the
expiration of a one-time legacy contract;
•A & PS net revenue decreased due primarily to demand weakness and delivery
delays in Europe and America due to lockdown restrictions related to COVID-19 ;
•Intelligent Edge net revenue decreased due primarily to unfavorable foreign
currency fluctuations and lower revenue from switching products driven by market
weakness; and
•HPE Financial Services net revenue decreased due primarily to a decrease in
rental revenue due to lower average operating lease assets, unfavorable currency
fluctuation, and lower lease equipment buyout revenue.
A more detailed discussion of segment revenue is included under "Segment
Information" below.
53
--------------------------------------------------------------------------------
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
Gross Profit
For the three months ended April 30, 2020 , as compared to the prior-year period,
total gross profit margin decreased 0.3 percentage points. The decline in gross
profit margin was due to multiple factors led by competitive pricing pressures,
the scale of the net revenue decline which resulted in higher fixed overhead
costs as a percentage of net revenue and higher supply chain costs related to
COVID-19. These increases were partially offset by our continued shift to higher
margin products and services and lower variable compensation expense.
For the six months ended April 30, 2020 , as compared to the prior-year period,
total gross margin increased 0.8 percentage points. The gross margin increase
was primarily due to a favorable mix of revenue from higher margin products and
services along with improved service delivery costs, lower commodity costs and
lower variable compensation expense. These increases were partially offset
primarily by competitive pricing pressures and supply chain costs related to
COVID-19.
Research and Development
Research and development ("R&D") expense decreased by $7 million or 2% for the
three months ended April 30, 2020 , as compared to the prior-year period, due
primarily to lower variable compensation expense, partially offset by on-going
expenses from business acquisitions.
Research and development ("R&D") expense increased by $12 million or 1% for the
six months ended April 30, 2020 , as compared to the prior-year period, due
primarily to on-going expenses from business acquisitions, partially offset by
lower variable compensation expense.
Selling, General and Administrative
Selling, general and administrative expense decreased by $105 million or 9%, and
by $98 million or 4% for the three and six months ended April 30, 2020 ,
respectively, as compared to the prior-year periods, due primarily to lower
variable compensation expense, favorable currency fluctuations, partially offset
by on-going expenses from business acquisitions.
Amortization of Intangible Assets
Amortization of intangible assets increased by $15 million or 22%, for the three
months ended April 30, 2020 , as compared to the prior-year period, due to an
increase in the amortization of intangible assets from recent business
acquisitions, partially offset by certain intangible assets associated with
prior acquisitions reaching the end of their amortization period.
Amortization of intangible assets increased by $63 million or 45%, for the six
months ended April 30, 2020 , as compared to the prior-year period, due to an
increase in the amortization of intangible assets from recent acquisitions and
the write-off of certain intangible assets, partially offset by certain
intangible assets associated with prior acquisitions reaching the end of their
amortization period.
Impairment of Goodwill
The Company recorded a partial goodwill impairment charge of $865 million in the
second quarter of fiscal 2020 as it was determined that the fair value of the
HPC & MCS reporting unit was below the carrying value of its net assets.
While the other reporting units were negatively impacted by COVID-19, their fair
values continued to exceed the carrying value of their net assets and did not
result in impairment. In order to evaluate the sensitivity of the estimated fair
value of other reporting units for the quantitative goodwill impairment test,
the Company applied a hypothetical 10% reduction to the estimated fair value of
each of these other reporting units. Based on the results of this hypothetical
10% reduction to the estimated fair value, each of these other reporting units
had an excess of fair value over carrying value of their net assets. However,
should economic conditions deteriorate further or remain depressed for a
prolonged period of time, estimates of future cash flows for each of our
reporting units may be insufficient to support the carrying value and the
goodwill assigned to them, requiring impairment charges, including additional
impairment charges for the HPC & MCS reporting unit. Further impairment charges,
if any, may be material to our results of operations and financial position. See
Part II, Item 1A, Risk Factors for a discussion of the potential impacts of
COVID-19 on the fair value of our assets.
Transformation Costs
HPE Next transformation costs increased by $146 million or 270%, and by $157
million or 119%, for the three and six months ended April 30, 2020 ,
respectively, as compared to the prior-year periods, due to higher restructuring
costs, partially offset by higher gains from the sale of real estate during the
six months ended April 30, 2020 .
54
--------------------------------------------------------------------------------
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
Given an uncertain business environment, in March 2020 , the Company announced
the extension of the HPE Next initiative to fiscal 2021.
Disaster charges (recovery)
Disaster charges for the three and six months ended April 30, 2020 , represent
direct costs resulting from COVID-19 for HPE hosted, co-hosted, or sponsored
events which were converted to a virtual format or cancelled. For the three and
six months ended April 30, 2019 , disaster recovery amounts represent insurance
recoveries in relation to damage to our facilities in Houston, Texas due to
Hurricane Harvey in fiscal 2017.
Acquisition, Disposition and Other Related Charges
Acquisition, disposition and other related charges decreased by $66 million or
79%, and by $107 million or 73%, for the three and six months ended April 30,
2020 , respectively, as compared with the prior-year periods, due primarily to
higher costs in the prior-year period for legal fees and disposition activities,
partially offset by recent business acquisition costs related to retention
bonuses and integration activities.
Interest and Other, Net
Interest and other, net expense increased by $50 million for the three months
ended April 30, 2020 , as compared with the prior-year period, due primarily to
unfavorable currency fluctuations. Interest and other, net expense increased by
$18 million for the six months ended April 30, 2020 , as compared with the
prior-year period, due primarily to unfavorable currency fluctuations and higher
net interest expense, partially offset by a gain on the sale of certain assets
in the current year.
Tax Indemnification Adjustments
We recorded tax indemnification expense of $35 million and tax indemnification
income of $4 million for the three months ended April 30, 2020 and 2019,
respectively, and tax indemnification expense of $56 million and tax
indemnification income of $223 million for the six months ended April 30, 2020
and 2019, respectively. For the three and six months ended April 30, 2020 , the
amount 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 by HP Inc. For the six months ended April 30, 2019 , the amount was
due primarily to the effects of U.S. tax reform on tax attributes related to
fiscal periods prior to the Separation.
Non-service net periodic benefit
Non-service net periodic benefit credit increased by $19 million and $40 million
for the three and six months ended April 30, 2020 , respectively, as compared
with the prior-year period, due primarily to lower interest rates.
(Loss) 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 months ended April 30, 2020 , earnings from equity
interests decreased by $13 million , as compared to the prior-year period, due to
lower net income earned by H3C. For the six months ended April 30, 2020 ,
earnings from equity interests increased by $5 million , as compared to the
prior-year period, due to higher net income earned by H3C.
Provision for Taxes
Our effective tax rate was 9.9% and 4.8% for the three months ended April 30,
2020 and 2019, respectively, and 8.4% and 45.6% for the six months ended April
30, 2020 , and 2019, respectively. The effective tax rates for the three and six
months ended April 30, 2020 differed from the statutory tax rate due to
favorable tax rates associated with certain earnings from our operations in
lower tax jurisdictions throughout the world, tax rate changes, and the effects
of the non-deductible goodwill impairment. The effective tax rates for the three
and six months ended April 30, 2019 were significantly impacted by the Tax Act.
Our effective tax rate is based on forecasted annual results which may fluctuate
significantly through the remainder of fiscal 2020 due to the uncertain economic
impact of COVID-19 on our operating results.
Segment Information
Effective in the first quarter of fiscal 2020, we implemented certain
organizational changes to align our segment financial reporting more closely
with our current business structure. We replaced the Hybrid IT segment with four
new financial reporting segments, Compute, High Performance Compute &
Mission-Critical Systems , Storage and Advisory and Professional Services as
follows:
55
--------------------------------------------------------------------------------
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
•we created the Compute segment consisting of the general purpose server and
workload optimized server portfolios that were previously a part of the Hybrid
IT-Compute business unit and the related operational services business that was
previously a part of the Hybrid IT-HPE Pointnext business unit;
• we created the HPC & MCS segment consisting of the high performance compute,
mission-critical systems and edge compute offerings that were previously a part
of the Hybrid IT-Compute business unit and the related operational services
business that was previously a part of the Hybrid IT-HPE Pointnext business
unit;
•we created the Storage segment consisting of the former Hybrid IT-Storage
business unit and the related operational services business that was previously
a part of the Hybrid IT-HPE Pointnext business unit and the hyperconverged
infrastructure products that were previously a part of the Hybrid IT-Compute
business unit;
•we created the A & PS segment consisting of the consultative-led services that
were previously a part of the Hybrid IT-HPE Pointnext business unit; and
•we transferred the DC Networking operational services business that was
previously a part of the Hybrid IT-HPE Pointnext business unit to the
Intelligent Edge segment.
As a result of these realignments, our operations are now organized into seven
segments for financial reporting purposes: Compute, HPC & MCS, Storage, A & PS,
Intelligent Edge, FS, and Corporate Investments.
For additional information related to these realignments and for a description
of the products and services for each segment, see Note 2, "Segment
Information".
Compute
Three months ended April 30,
2020 2019 % Change
Dollars in millions
Net revenue $ 2,640 $ 3,318 (20.4) %
Earnings from operations $ 125 $ 307 (59.3) %
Earnings from operations as a % of net revenue 4.7 % 9.3 %
Six months ended April 30,
2020 2019 % Change
Dollars in millions
Net revenue $ 5,651 $ 6,893 (18.0) %
Earnings from operations $ 411 $ 647 (36.5) %
Earnings from operations as a % of net revenue 7.3 % 9.4 %
Three months endedApril 30, 2020 compared with three months endedApril 30, 2019 Compute net revenue decreased by$678 million , or 20.4% (decreased 19.1% on a constant currency basis), for the three months endedApril 30, 2020 as compared to the prior-year period. Net revenue in Compute was impacted by supply chain constraints and customer acceptance challenges given lockdown actions taking place across the globe related to COVID-19 and competitive pricing pressures. As a result, Compute experienced a decline in unit shipments and lower average unit selling prices. 56 --------------------------------------------------------------------------------
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
Compute earnings from operations as a percentage of net revenue decreased 4.6
percentage points for the three months ended April 30, 2020 , as compared to the
prior-year period, due to an increase in cost of products and services as a
percentage of net revenue and an increase in operating expenses as a percentage
of net revenue. The increase to cost of products as a percentage of net revenue
was due primarily to competitive pricing pressures and increased supply chain
logistic costs resulting from COVID-19, partially offset by lower commodity
costs and variable compensation expense. The increase in operating expense as a
percentage of net revenue was due to the scale of the net revenue decline while
total operating expenses declined year-over-year due primarily to lower variable
compensation expense and restricted discretionary spending during the period on
travel and hiring due to COVID-19. These declines were partially offset by
higher field selling costs.
Six months ended April 30, 2020 compared with six months ended April 30, 2019
Compute net revenue decreased by $1.2 billion or 18.0% (decreased 16.8% on a
constant currency basis), for the six months ended April 30, 2020 , as compared
to the prior-year period.
In the second quarter of fiscal 2020, as compared to the prior-year period, net
revenue in Compute was impacted by supply chain and customer acceptance
constraints given lockdown actions taking place across the globe related to
COVID-19, and competitive pricing pressures. In the first quarter of fiscal
2020, as compared to the prior-year period, Compute experienced challenges with
commodity and North American manufacturing capacity constraints. As a result,
for the first six months of fiscal 2020, as compared to the prior-year period,
Compute experienced a decline in unit shipments and average unit selling prices.
Compute earnings from operations as a percentage of net revenue decreased 2.1
percentage points for the six months ended April 30, 2020 , as compared to the
prior-year period due primarily to an increase in operating expenses as a
percentage of net revenue while the total cost of products and services as a
percentage of net revenue was mostly unchanged. The increase in operating
expense as a percentage of net revenue was due to the scale of the net revenue
decline while total operating expenses declined year-over-year due primarily to
lower variable compensation expense partially offset by higher field selling
costs. The cost of products and services as a percentage of net revenue remained
mostly unchanged as competitive pricing pressures and higher supply chain
logistics costs were offset by a combination of lower commodity costs, variable
compensation expense and mix of Tier-1 server sales.
HPC & MCS
Three Months Ended April 30,
2020 2019 % Change
Dollars in millions
Net revenue $ 589 $ 721 (18.3) %
Earnings from operations $ 33 $ 92 (64.1) %
Earnings from operations as a % of net revenue 5.6 % 12.8 %
Six Months Ended April 30,
2020 2019 % Change
Dollars in millions
Net revenue $ 1,412 $ 1,500 (5.9) %
Earnings from operations $ 82 $ 190 (56.8) %
Earnings from operations as a % of net revenue 5.8 % 12.7 %
Three months endedApril 30, 2020 compared with three months endedApril 30, 2019 HPC & MCS net revenue decreased by$132 million , or 18.3% (decreased 17.8% on a constant currency basis), for the three months endedApril 30, 2020 , as compared to the prior-year period. 57 --------------------------------------------------------------------------------
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
Net revenue in HPC & MCS decreased due to challenges performing on-site
installations and meeting customer acceptance milestones, and delays with order
fulfillment as a result of supply chain constraints due to COVID-19.
Additionally, lower services attachment resulting from historical hardware
revenue declines also contributed to the net revenue decline. These decreases
were partially offset by the addition of revenue resulting from the acquisition
of Cray which continues to perform consistent with our expectations.
HPC & MCS earnings from operations as a percentage of net revenue decreased 7.2
percentage points for the three months ended April 30, 2020 , as compared to the
prior-year period, due to an increase in operating expenses as a percentage of
net revenue, partially offset by lower cost of products and services as a
percentage of net revenue. The increase in operating expenses as a percentage of
net revenue was due to the scale of the net revenue decline and the increase in
total operating expenses due to the addition of expenses resulting from the
acquisition of Cray. The decrease in cost of products and services as a
percentage of net revenue was due primarily to a higher mix of lower-cost MCS
product and a higher mix of lower-cost services, and lower variable compensation
expense.
Six months ended April 30, 2020 compared with six months ended April 30, 2019
HPC & MCS net revenue decreased by $88 million , or 5.9% (decreased 5.4% on a
constant currency basis), for the six months ended April 30, 2020 , as compared
to the prior-year period.
Net revenue decreased due to challenges performing on-site installations and
meeting customer acceptance milestones, and delays with order fulfillment as a
result of supply chain constraints from COVID-19, unfavorable large deal
linearity, and lower services attachment resulting from historical hardware
revenue declines. These decreases were partially offset by the addition of
revenue resulting from Cray which continues to perform consistent with our
expectations.
HPC & MCS earnings from operations as a percentage of net revenue decreased 6.9
percentage points for the six months ended April 30, 2020 , as compared to the
prior-year period, due to an increase to operating expenses as a percentage of
net revenue partially offset by lower cost of products and services as a
percentage of net revenue. The increase in operating expenses as a percentage of
net revenue was due to the addition of expenses resulting from the acquisition
of Cray. The decrease in cost of products and services as a percentage of net
revenue was due primarily to lower variable compensation expense, a higher mix
of lower-cost MCS products and a higher mix of services.
Storage
Three Months Ended
2020 2019 % Change
Dollars in millions
Net revenue $ 1,086 $ 1,318 (17.6) %
Earnings from operations $ 145 $ 244 (40.6) %
Earnings from operations as a % of net revenue 13.4 % 18.5 %
Six Months Ended April 30,
2020 2019 % Change
Dollars in millions
Net revenue $ 2,336 $ 2,674 (12.6) %
Earnings from operations $ 371 $ 498 (25.5) %
Earnings from operations as a % of net revenue 15.9 % 18.6 %
Three months endedApril 30, 2020 compared with three months endedApril 30, 2019 Storage net revenue decreased by$232 million or 17.6% (decreased 16.4% on a constant currency basis), for the three months endedApril 30, 2020 as compared to the prior-year period. Net revenue in Storage was impacted by uneven demand and supply chain constraints and customer acceptance challenges given lockdown actions taking place across the globe related to COVID-19 and lower revenue from the expiration of a one-time legacy contract. Partially offsetting the net revenue decline was higher revenue from Big Data and Storage services. 58 --------------------------------------------------------------------------------
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
Storage earnings from operations as a percentage of net revenue decreased 5.1
percentage points for the three months ended April 30, 2020 , as compared to the
prior-year period, due to an increase in cost of product as a percentage of net
revenue and an increase in operating expenses as a percentage of net revenue.
The increase in cost of product as a percentage of net revenue was due primarily
to the scale of the net revenue decline which resulted in higher fixed overhead
costs as a percentage of net revenue, and competitive pricing pressure, the
effects of which were partially offset by lower variable compensation expense
and lower cost of services. The increase in operating expense as a percentage of
net revenue was due primarily to the scale of the net revenue decline, while
total operating expenses declined during the period due to restrictions on
travel and hiring due to COVID-19 and lower variable compensation expense.
Six months ended April 30, 2020 compared with six months ended April 30, 2019
Storage net revenue decreased by $338 million or 12.6% (decreased 11.4% on a
constant currency basis), for the six months ended April 30, 2020 , as compared
to the prior-year period.
Net revenue in Storage was impacted by uneven demand, and supply chain and
customer acceptance constraints in the first half of fiscal 2020, coupled with
commodity and North American manufacturing capacity constraints in the first
quarter of fiscal 2020. Additionally, lower revenue from the expiration of a
one-time legacy contract contributed to the net revenue decline. Partially
offsetting the net revenue decrease was revenue growth from Big Data and Storage
services.
Storage earnings from operations as a percentage of net revenue decreased 2.7
percentage points for the six months ended April 30, 2020 , as compared to the
prior-year period, due to an increase in operating expenses as a percentage of
net revenue, partially offset by a decrease in cost of product and services as a
percentage of net revenue. The increase in operating expenses as a percentage of
net revenue was due primarily to the scale of the net revenue decline, which was
partially offset by lower variable compensation expense and lower field selling
costs. The decrease in the cost of product and services as a percentage of net
revenue was due primarily to lower commodity costs, lower cost of services as a
result of delivery efficiencies and lower variable compensation expense.
A & PS
Three Months Ended
2020 2019 % Change
Dollars in millions
Net revenue $ 237 $ 260 (8.8) %
Earnings (loss) from operations $ 2 $ (14) 114.3 %
Earnings (loss) from operations as a % of net revenue 0.8 % (5.4) %
Six Months Ended April 30,
2020 2019 % Change
Dollars in millions
Net revenue $ 480 $ 501 (4.2) %
Earnings (loss) from operations $ - $ (46) 100.0 %
Earnings (loss) from operations as a % of net revenue - %
(9.2) %
Three months endedApril 30, 2020 compared with three months endedApril 30, 2019 A & PS net revenue decreased by$23 million , or 8.8% (decreased 7.7% on a constant currency basis), for the three months endedApril 30, 2020 as compared to the prior-year period. The decrease in A & PS net revenue was due primarily to demand weakness and delivery delays inEurope and theAmericas regions given the lockdown actions and constraints taking place across the globe as a result of COVID-19 partially offset by strength in theAsia Pacific andJapan region driven by strong revenue growth inJapan . 59 --------------------------------------------------------------------------------
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
A & PS earnings from operations as a percentage of net revenue improved 6.2
percentage points for the three months ended April 30, 2020 , as compared to the
prior-year period, due to lower cost of services as a percentage of net revenue
coupled with a decrease in operating expenses as a percentage of net revenue.
The decrease to cost of services as a percentage of net revenue was due
primarily to lower variable compensation expense and improved service delivery
and overhead efficiencies. The decrease to operating expenses as a percentage of
net revenue was due primarily to a reduction in field selling costs.
Six months ended April 30, 2020 compared with six months ended April 30, 2019
A & PS net revenue decreased by $21 million , or 4.2% (decreased 3.8% on a
constant currency basis), for the six months ended April 30, 2020 as compared to
the prior-year period.
The decrease in A & PS net revenue was due primarily to demand weakness and
delivery delays in Europe and the Americas regions given the lockdown actions
and constraints taking place across the globe as a result of COVID-19 partially
offset by strength in the Asia Pacific and Japan region driven by strong revenue
growth in Japan .
A & PS earnings from operations as a percentage of net revenue improved 9.2
percentage points for the six months ended April 30, 2020 , as compared to the
prior-year period, due to lower cost of services as a percentage of net revenue
coupled with a decrease in operating expenses as a percentage of net revenue.
The decrease to cost of services as a percentage of net revenue was due
primarily to improved service delivery and overhead efficiencies. The decrease
to operating expenses as a percentage of net revenue was due primarily to a
reduction in research and development and field selling costs.
Intelligent Edge
Three Months Ended
2020 2019 % Change
Dollars in millions
Net revenue $ 665 $ 685 (2.9) %
Earnings from operations $ 73 $ 36 102.8 %
Earnings from operations as a % of net revenue 11.0 % 5.3 %
Six Months Ended April 30,
2020 2019 % Change
Dollars in millions
Net revenue $ 1,385 $ 1,390 (0.4) %
Earnings from operations $ 143 $ 60 138.3 %
Earnings from operations as a % of net revenue 10.3 % 4.3 %
Three months endedApril 30, 2020 compared with three months endedApril 30, 2019 Intelligent Edge net revenue decreased by$20 million , or 2.9% (decreased 1.6% on a constant currency basis), for the three months endedApril 30, 2020 , as compared to the prior-year period. The decrease in Intelligent Edge net revenue was due primarily to unfavorable foreign currency fluctuations, market weakness for switching products and lower software net revenue, partially offset by an increase in net revenue from service renewals and WLAN products inNorth America . Intelligent Edge earnings from operations as a percentage of net revenue increased 5.7 percentage points for the three months endedApril 30, 2020 as compared to the prior year period due primarily to a decrease in operating expenses as a percentage of net revenue. The cost of products and services as a percentage of net revenue were largely unchanged. The decrease in operating expenses as a percentage of net revenue was due primarily to lower field selling costs. The cost of product and services as a percentage of net revenue were largely unchanged due primarily to cost improvements in WLAN and switching products offset by higher costs in services and software. Six months endedApril 30, 2020 compared with Six months endedApril 30, 2019 Intelligent Edge net revenue decreased by$5 million , or 0.4% (increased 1.0% on a constant currency basis), for the six months endedApril 30, 2020 , as compared to the prior-year period. 60 --------------------------------------------------------------------------------
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
The small decrease in Intelligent Edge net revenue was due primarily to
unfavorable foreign currency fluctuations and lower revenue from switching
products driven by market weakness, partially offset by higher revenue from WLAN
products, service renewals and support services.
Intelligent Edge earnings from operations as a percentage of net revenue
increased 6.0 percentage points for the six months ended April 30, 2020 as
compared to the prior year period due primarily to lower cost of products and
services as a percentage of net revenue, and lower 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 cost improvements in switches and
a higher mix of revenue from lower cost WLAN products and services. The decrease
in operating expense as a percentage of net revenue was due primarily to lower
field selling costs.
Financial Services
Three months ended
2020 2019 % Change
Dollars in millions
Net revenue $ 833 $ 896 (7.0) %
Earnings from operations $ 75 $ 77 (2.6) %
Earnings from operations as a % of net revenue 9.0 % 8.6 %
Six months ended
2020 2019 % Change
Dollars in millions
Net revenue $ 1,692 $ 1,815 (6.8) %
Earnings from operations $ 148 $ 154 (3.9) %
Earnings from operations as a % of net revenue 8.7 % 8.5 %
Three months endedApril 30, 2020 compared with three months endedApril 30, 2019 FS net revenue decreased by$63 million , or 7.0% (decreased 4.7% on a constant currency basis), for the three months endedApril 30, 2020 , as compared to the prior-year period. The decrease in net revenue was due primarily to a decrease in rental revenue due to lower average operating lease assets and unfavorable currency fluctuations, partially offset by higher asset management revenue from lease extensions. FS earnings from operations as a percentage of net revenue increased 0.4 percentage points for the three months endedApril 30, 2020 , as compared to the prior-year period, due primarily to lower cost of services as a percentage of net revenue, partially offset by an increase to operating expenses as a percentage of net revenue. The decrease to cost of services as a percentage of net revenue resulted from lower depreciation expense. The increase to operating expenses as a percentage of net revenue was due primarily to lower capitalized initial direct costs as a result of adopting the new lease accounting standard, along with the overall decrease in net revenue. Six months endedApril 30, 2020 compared with six months endedApril 30, 2019 FS net revenue decreased by$123 million , or 6.8% (decreased 5.3% on a constant currency basis), for the six months endedApril 30, 2020 , as compared to the prior-year period. The decrease in net revenue was due primarily to a decrease in rental revenue due to lower average operating lease assets, unfavorable currency fluctuations, along with lower lease equipment buyout revenue, partially offset by higher asset management revenue from lease extensions. FS earnings from operations as a percentage of net revenue increased 0.2 percentage point for the six months endedApril 30, 2020 , as compared to the prior-year period, due primarily to lower cost of services as a percentage of net revenue, partially offset by an increase to operating expenses as a percentage of net revenue. The decrease to cost of services as a percentage of net revenue resulted from lower depreciation expense. The increase to operating expenses as a percentage of net revenue was 61 --------------------------------------------------------------------------------
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
due primarily to lower capitalized initial direct costs as a result of adopting
the new lease accounting standard, along with the overall decrease in net
revenue.
Financing Volume
Six months ended April
Three months ended April 30, 30,
2020 2019 2020 2019
In millions
Total financing volume $ 1,493 $ 1,395 $ 2,901 $ 2,784
New financing volume, which represents the amount of financing provided to
customers for equipment and related software and services, including
intercompany activity, increased by 7.0% and 4.2% for the three and six months
ended April 30, 2020 as compared to the prior-year periods. For both three and
six months ended April 30, 2020 , the increase was primarily driven by higher
financing associated with third-party product sales and related service
offerings, partially offset by unfavorable currency fluctuations. The growth in
financing volume in the six month period was partially offset by lower financing
associated with HPE product sales and related service offerings.
Portfolio Assets and Ratios
The portfolio assets and ratios derived from the segment balance sheets for FS
were as follows:
As of
April 30, 2020 October 31, 2019
Dollars in millions
Financing receivables, gross $ 8,678 $ 8,652
Net equipment under operating leases 3,887 4,084
Capitalized profit on intercompany equipment transactions(1) 325 382
Intercompany leases(1) 93 100
Gross portfolio assets 12,983 13,218
Allowance for doubtful accounts(2) 126 131
Operating lease equipment reserve 53 60
Total reserves 179 191
Net portfolio assets $ 12,804 $ 13,027
Reserve coverage 1.4 % 1.4 %
Debt-to-equity ratio(3) 7.0x 7.0x
(1)Intercompany activity is eliminated in consolidation.
(2)Allowance for doubtful accounts for financing receivables includes both the
short- and long-term portions.
(3)Debt benefiting FS consists of intercompany equity that is treated as debt
for segment reporting purposes, intercompany debt, and borrowing- and
funding-related activity associated with FS and its subsidiaries. Debt
benefiting FS totaled $11.5 billion and $11.4 billion at April 30, 2020 and
October 31, 2019 , respectively, and was determined by applying an assumed
debt-to-equity ratio, which management believes to be comparable to that of
other similar financing companies. FS equity at both April 30, 2020 and
October 31, 2019 was $1.6 billion .
As of April 30, 2020 and October 31, 2019 , FS net cash and cash equivalents
balances were approximately $676 million and $711 million , respectively.
Net portfolio assets as of April 30, 2020 decreased 1.7% from October 31, 2019 .
The decrease generally resulted from unfavorable currency fluctuations,
partially offset by new financing volume exceeding portfolio runoff during the
period.
FS bad debt expense includes charges to general reserves and specific reserves
for sales-type, direct-financing and operating leases. For the three and six
months ended April 30, 2020 , FS recorded net bad debt expense of $19 million and
$33 million , respectively. For the three and six months ended April 30, 2019 , FS
recorded net bad debt expense of $17 million and $32 million , respectively.
62
--------------------------------------------------------------------------------
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
As of April 30, 2020 , FS experienced an increase in billed finance receivables
compared to October 31, 2019 , which included some impact to collections from
customers as a result of COVID-19. We are currently unable to fully predict the
extent to which COVID-19 may adversely impact future collections of our
receivables.
Corporate Investments
Three months ended
2020 2019 % Change
Dollars in millions
Net revenue $ 124 $ 125 (0.8) %
Loss from operations $ (28) $ (29) 3.4 %
Loss from operations as a % of net revenue (22.6) % (23.2) %
Six months ended
2020 2019 % Change
Dollars in millions
Net revenue $ 245 $ 243 0.8 %
Loss from operations $ (55) $ (57) 3.5 %
Loss from operations as a % of net revenue (22.4) % (23.5) %
Three months endedApril 30, 2020 compared with three months endedApril 30, 2019 Corporate Investments net revenue decreased by$1 million , or 0.8% (increased 0.7% on a constant currency basis), for the three months endedApril 30, 2020 as compared to the prior-year period. The decrease in Corporate Investments net revenue was due primarily to unfavorable currency fluctuations. Revenue in the Corporate Investments segment represents revenue from our Communications and Media Solutions ("CMS") business. Corporate Investments loss from operations as a percentage of net revenue decreased 0.6 percentage points for the three months endedApril 30, 2020 , as compared to the prior-year period. The decrease was due primarily to lower cost of services, partially offset by higher legal expenses. Six Months EndedApril 30, 2020 compared with six months endedApril 30, 2019 Corporate Investments net revenue increased by$2 million , or 0.8% (increased 1.6% on a constant currency basis), for the six months endedApril 30, 2020 as compared to the prior-year period. The increase in Corporate Investments net revenue was due primarily to higher services revenue from the CMS business, partially offset by unfavorable currency fluctuations. Corporate Investments loss from operations as a percentage of net revenue decreased 1.1 percentage points for the six months endedApril 30, 2020 , as compared to the prior-year period. The decrease was due primarily to lower cost of services, partially offset by higher legal expenses. LIQUIDITY AND CAPITAL RESOURCES We use cash generated by operations as our primary source of liquidity. We believe that internally generated cash flows will be generally sufficient to support our operating businesses, capital expenditures, product development initiatives, acquisitions and disposal activities including legal settlements, restructuring activities, transformation costs, indemnifications, maturing debt, interest payments, and income tax payments, in addition to any future investments, share repurchases and stockholder dividend payments. We expect to supplement this short-term liquidity, if necessary, by accessing the capital markets, issuing commercial paper, and borrowing under credit facilities made available by various domestic and foreign financial institutions. However, our access to capital markets may be constrained and our cost of borrowing may increase under certain business, market and economic conditions. Our liquidity is subject to various risks including the risks identified in the section entitled "Risk Factors" in Item 1A of Part II and market risks identified in the section entitled "Quantitative and Qualitative Disclosures about Market Risk" in Item 3 of Part I. 63 --------------------------------------------------------------------------------
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
COVID-19 has severely impacted global economic activity and caused significant
volatility and negative pressure in the capital markets, which increases the
cost of capital and adversely impacts access to capital. In addition, our
businesses may be adversely affected, which may have a material adverse impact
on our profitability and cash flows, and the timing and collectability of
payments may be adversely affected as a result of the impact of COVID-19 on our
customers. As a result of the continued uncertainty generated by COVID-19, on
April 9, 2020 , we issued $2.25 billion aggregate principal amount of unsecured
senior notes to enhance our liquidity and strengthen our capital. The net
proceeds from this offering will be used for general corporate purposes, which
may include the repayment of indebtedness. The pricing on our undrawn $4.75
billion revolving credit facility, maturing in August 2024 , remains unchanged.
We continue to monitor the severity and duration of the pandemic and its impact
on the U.S. and global economies, consumer behavior, our businesses, results of
operations, financial condition and cash flows.
On May 19, 2020 , our Board of Directors approved a cost optimization and
prioritization plan in order to focus our investments and realign the workforce
to areas of growth and measures to simplify and evolve its product portfolio
strategy, go-to-market configurations, supply chain structures, digital customer
support model, marketing experiences, and real estate strategies. We expect that
the Plan will be implemented through fiscal year 2022 and estimate it will
include gross savings of at least $1.0 billion as a result of changes to our
workforce, real estate model and business process improvements, with the Plan
expected to deliver annualized net run-rate savings of at least $800 million by
end of fiscal year 2022, in both cases relative to our fiscal year 2019 exit. In
order to achieve this level of cost savings, we estimate cash funding payments
between $1.0 billion to $1.3 billion over the next three years.
Our cash and cash equivalent balances are held in numerous locations throughout
the world, with a majority of the amount held in the U.S. We utilize a variety
of planning and financing strategies in an effort to ensure that our worldwide
cash is available when and where it is needed. Our cash position is strong and
we expect that our cash and cash equivalent balances, anticipated cash flow
generated from operations and access to capital markets will be sufficient to
cover our expected near-term cash outlays.
Amounts held outside of the U.S. are generally utilized to support non-U.S.
liquidity needs. Repatriations of amounts held outside the U.S. generally will
not be taxable from a U.S. federal tax perspective, but may be subject to state
income or foreign withholding tax. Where local restrictions prevent an efficient
intercompany transfer of funds, our intent is to keep cash balances outside of
the U.S. and to meet liquidity needs through ongoing cash flows, external
borrowings, or both. We do not expect restrictions or potential taxes incurred
on repatriation of amounts held outside of the U.S. to have a material effect on
our overall liquidity, financial condition or results of operations.
In connection with the share repurchase program previously authorized by our
Board of Directors, during the first six months of fiscal 2020, we repurchased
25.3 million shares for an aggregate amount of $355 million . As of April 30,
2020 , we had a remaining authorization of $2.1 billion for future share
repurchases. As a result of increased uncertainty due to COVID-19, we have
suspended purchases under our share repurchase program.
For more information on our share repurchase program, refer to the section
entitled "Unregistered Sales of Equity Securities and Use of Proceeds" in Item 2
of Part II.
Liquidity
Our cash flow metrics were as follows:
Six months ended April 30, 2020
2020 2019
In millions
Net cash provided by operating activities $ 21 $ 1,369
Net cash used in investing activities (104) (1,064)
Net cash provided by (used in) financing activities 1,997 (1,600)
Net increase (decrease) in cash, cash equivalents and restricted
cash $ 1,914 $ (1,295)
Operating Activities
For the six months ended April 30, 2020 , net cash from operating activities
decreased by $1.3 billion , as compared to the prior-year period. The decrease
was due primarily to lower net earnings from operations and unfavorable net
working capital, as compared to the prior-year period.
64
--------------------------------------------------------------------------------
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
Working capital metrics for the three months ended
Three months ended
2020 2019 Change
Days of sales outstanding in accounts receivable ("DSO") 39 40 (1)
Days of supply in inventory ("DOS") 76 41 35
Days of purchases outstanding in accounts payable ("DPO") (120) (102) (18)
Cash conversion cycle (5) (21) 16
The cash conversion cycle is the sum of DSO and DOS less DPO. Items which may
cause the cash conversion cycle in a particular period to differ include, but
are not limited to, changes in business mix, changes in payment terms (including
extended payment terms from suppliers), the extent of receivables factoring,
seasonal trends, the timing of the revenue recognition and inventory purchases
within the period, the impact of commodity costs and acquisition activity. For
the three months ended April 30, 2020 , as compared to the corresponding three
month period in fiscal 2019, the cash conversion cycle was impacted by COVID-19
related events involving supply chain and customer acceptance constraints given
lockdown actions taking place across the globe.
DSO measures the average number of days our receivables are outstanding. DSO is
calculated by dividing ending accounts receivable, net of allowance for doubtful
accounts, by a 90-day average of net revenue. Compared to the corresponding
three month period in fiscal 2019, DSO decreased due primarily to favorable
billing linearity partially offset by lower customer participation in enhanced
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
2019, DOS increased as we experienced a lower consumption of inventory due to
constraints with accessing certain key components. Additionally, purchases of
inventory increased as we position inventory to fulfill planned future
shipments.
DPO measures the average number of days our accounts payable balances are
outstanding. DPO is calculated by dividing ending accounts payable by a 90-day
average of cost of goods sold. Compared to the corresponding three month period
in fiscal 2019, DPO increased due primarily to higher inventory purchases in
order to fulfill planned future shipments, extended payment terms and a further
shift of production to design manufacturing partners.
Investing Activities
For the six months ended April 30, 2020 , net cash used in investing activities
decreased by $1.0 billion , as compared to the corresponding period in fiscal
2019. The decrease was due primarily to lower investment in and higher sales
proceeds from property, plant and equipment and higher cash generated from net
financial collateral activities as compared to the prior-year period.
Financing Activities
For the six months ended April 30, 2020 , net cash provided by financing
activities increased by $3.6 billion , as compared to the corresponding period in
fiscal 2019. The increase was due primarily to higher cash generated from debt
issuance and lower cash utilization for share repurchases as compared to the
prior-year period.
Capital Resources
Debt Levels
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.
We plan to redeem $3.0 billion of Senior Notes that mature on October 15, 2020 ,
either on or before that date.
During the first six months of fiscal 2020, we issued $367 million and repaid
$448 million of commercial paper.
65
--------------------------------------------------------------------------------
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
On April 9, 2020 , we completed our offering of $1.25 billion aggregate principal
amount of 4.45% Senior Notes due October 2, 2023 (the "2023 Notes") and $1.0
billion aggregate principal amount of 4.65% notes due October 1, 2024 (the "2024
Notes"). We will pay interest semi-annually on the 2023 Notes on each April 2
and October 2 , beginning on October 2, 2020 . We will pay interest semi-annually
on the 2024 Notes on each April 1 and October 1 , beginning on October 1, 2020 .
The net proceeds from this offering will be used for general corporate purposes,
including repayment of existing debt.
On February 20, 2020 , we issued $755 million of asset-backed debt securities in
six tranches at a weighted average price of 99.99% and a weighted average
interest rate of 1.87%, payable monthly from April 2020 with a stated final
maturity date of February 2030 . As of April 30, 2020 , the outstanding balance of
these asset-backed debt securities was $704 million and future principal
payments will be based on the underlying loan and lease payment streams. For
more information on the asset-backed debt securities and related Variable
Interest Entities, see Note 8 "Accounting for Leases as a Lessor".
Our weighted-average interest rate reflects the average effective rate on our
borrowings prevailing during the period and reflects the impact of interest rate
swaps. For more information on our interest rate swaps, see Note 11, "Financial
Instruments".
In December 2017 , we filed a shelf registration statement with the Securities
and Exchange Commission that allows us to sell, at any time and from time to
time, in one or more offerings, debt securities, preferred stock, common stock,
warrants, depository shares, purchase contracts, guarantees or units consisting
of any of these securities.
Commercial Paper
We maintain two commercial paper programs, and a wholly-owned subsidiary
maintains a third program. Our U.S. program provides for the issuance of U.S.
dollar-denominated commercial paper up to a maximum aggregate principal amount
of $4.75 billion which was increased from $4.0 billion in March 2020 . Our euro
commercial paper program provides for the issuance of commercial paper outside
of the U.S. denominated in U.S. dollars, euros or British pounds up to a maximum
aggregate principal amount of $3.0 billion or the equivalent in those
alternative currencies. The combined aggregate principal amount of commercial
paper outstanding under those programs at any one time cannot exceed $4.75
billion . In addition, our subsidiary's euro Commercial Paper/Certificate of
Deposit Program provides for the issuance of commercial paper in various
currencies of up to a maximum aggregate principal amount of $1.0 billion . As of
April 30, 2020 and October 31, 2019 , no borrowings were outstanding under our
commercial paper programs, and $605 million and $698 million , respectively, were
outstanding under our subsidiary's program.
Revolving Credit Facility
We maintain a $4.75 billion five year senior unsecured committed credit facility
that was entered into in August 2019 . Loans under the revolving credit facility
may be used for general corporate purposes, including support of the commercial
paper program. Commitments under the Credit Agreement are available for a period
of five years, which period may be extended, subject to the satisfaction of
certain conditions, by up to two, one-year periods. Commitment Fees, interest
rates and other terms of borrowing under the credit facility vary based on
Hewlett Packard Enterprise's external credit rating. As of April 30, 2020 and
October 31, 2019 , no borrowings were outstanding under the Credit Agreement.
Available Borrowing Resources
As of April 30, 2020 , we had the following additional liquidity resources
available if needed:
As of
April 30, 2020
In millions
Commercial paper programs $ 5,145
Uncommitted lines of credit $ 1,285
CONTRACTUAL AND OTHER OBLIGATIONS
Contractual Obligations
On April 9, 2020 , we completed our offering of the 2023 Notes and 2024 Notes. We
will pay interest semi-annually on the 2023 Notes on each April 2 and October 2 ,
beginning on October 2, 2020 . We will pay interest semi-annually on the 2024
Notes on each April 1 and October 1 , beginning on October 1, 2020 .
66
--------------------------------------------------------------------------------
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
On February 20, 2020 , we issued $755 million of asset-backed debt securities in
six tranches at a weighted average price of 99.99% and a weighted average
interest rate of 1.87%, payable monthly from April 2020 with a stated final
maturity date of February 2030 . As of April 30, 2020 , the outstanding balance of
these asset-backed debt securities was $704 million and future principal
payments will be based on the underlying loan and lease payment streams. For
more information on the asset-backed debt securities and related Variable
Interest Entities, see Note 8 "Accounting for Leases as a Lessor".
Our other contractual obligations have not changed materially since October 31,
2019 . For further information see "Contractual and Other Obligations" in Item 7
of Part II of our Annual Report on Form 10-K for the fiscal year ended
October 31, 2019 .
Retirement Benefit Plan Funding
For the remainder of fiscal 2020, we anticipate making contributions of
approximately $92 million to our non-U.S. pension plans. Our policy is to fund
our pension plans so that we meet at least the minimum contribution
requirements, as established by local government, funding and tax authorities.
Restructuring Plans
As of April 30, 2020 , we expect to make future cash payments of approximately
$345 million in connection with our approved restructuring plans, which includes
$142 million expected to be paid through the remainder of fiscal 2020 and $203
million expected to substantially be paid through fiscal 2022. For more
information on our HPE Next restructuring activities, see Note 3, "HPE Next".
On May 19, 2020 , our Board of Directors approved a cost optimization and
prioritization plan in order to focus our investments and realign the workforce
to areas of growth and measures to simplify and evolve its product portfolio
strategy, go-to-market configurations, supply chain structures, digital customer
support model, marketing experiences, and real estate strategies. We expect that
the Plan will be implemented through fiscal year 2022 and estimate it will
include gross savings of at least $1.0 billion as a result of changes to our
workforce, real estate model and business process improvements, with the Plan
expected to deliver annualized net run-rate savings of at least $800 million by
end of fiscal year 2022, in both cases relative to our fiscal year 2019 exit. In
order to achieve this level of cost savings, we estimate cash funding payments
between $1.0 billion to $1.3 billion over the next three years.
Uncertain Tax Positions
As of April 30, 2020 , we had approximately $477 million of recorded liabilities
and related interest and penalties pertaining to uncertain tax positions. These
liabilities and related interest and penalties include $15 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".
Cross-indemnification with HP Inc., DXC and Micro Focus
As of April 30, 2020 , we had approximately $175 million of recorded net
receivables pertaining to income tax indemnifications with HP Inc., including
$75 million related to certain state income tax liabilities for which we are
joint and severally liable. These amounts include $50 million expected to be
received within one year. For the amounts related to the joint and several state
tax liabilities, we are unable to make a reasonable estimate as to when cash
settlement with HP Inc. might occur due to the uncertainties related to the
underlying tax matters. Realization of these obligations would result from
payments to tax authorities and the resulting settlements with HP Inc. under the
Termination and Mutual Release Agreement. For details on the Separation and
Distribution Agreements and Tax Matters Agreement with HP Inc., DXC and Micro
Focus, see our Annual Report on Form 10-K for the fiscal year ended October 31,
2019 .
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.
67--------------------------------------------------------------------------------
Table of Contents
© Edgar Online, source
