HEWLETT PACKARD ENTERPRISE COMPANY
For purposes of this Management's Discussion and Analysis of Financial Condition
and Results of Operations ("MD&A") section, we use the terms "Hewlett Packard
Enterprise", "HPE", "the Company", "we", "us", and "our" to refer to Hewlett
Packard Enterprise Company . References in the MD&A section to "former Parent"
refer to HP Inc.
This section of this Form 10-K generally discusses fiscal 2021 and fiscal 2020
items and year-to-year comparisons between fiscal 2021 and fiscal 2020.
Discussions of fiscal 2019 items and year-to-year comparisons between fiscal
2020 and fiscal 2019 that are not included in this Form 10-K can be found in
"Part II, Item 7, Management's Discussion and Analysis of Financial Condition
and Results of Operations" of the Company's Annual Report on Form 10-K for the
fiscal year ended October 31, 2020 , as filed with the SEC on December 10, 2020 ,
which is available on the SEC's website at www.sec.gov.
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 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 Consolidated Financial Statements. This discussion should
be read in conjunction with our Consolidated Financial Statements and the
related notes that appear in Part II, Item 8 of this document.
This MD&A is organized as follows:
•Trends and Uncertainties. A discussion of material events and uncertainties
known to management such as COVID-19, our response to the challenges and trends,
and our pivot to as-a-service strategy.
•Executive Overview. A discussion of our business and summary analysis of
financial and other highlights, including non-GAAP financial measures, affecting
the Company in order to provide context to the remainder of the MD&A.
•Critical Accounting Policies and Estimates. A discussion of accounting policies
and estimates that we believe are important to understanding the assumptions and
judgments incorporated in our reported financial results.
•Results of Operations. 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 Cash and Other Obligations. An overview of contractual obligations,
retirement and post-retirement benefit plan funding, restructuring plans,
uncertain tax positions and off-balance sheet arrangements.
•GAAP to Non-GAAP Reconciliation. Each non-GAAP measure has been reconciled to
the most directly comparable GAAP measure therein. This section also includes a
discussion on the usefulness of non-GAAP financial measures, and material
limitations associated with the use of non-GAAP financial measures.
TRENDS AND UNCERTAINTIES
COVID-19
While great progress has been made in the fight against COVID-19, it remains a
global challenge and continues to have an impact on our operations. For a
further discussion of the pandemic and the risks, uncertainties and actions
taken in response to it, see the discussion in the section titled "COVID-19
Pandemic Update", "Manufacturing and Materials" and "Backlog" in Part I, Item 1,
and risks identified in the section entitled " Risk Factors" in Part I, Item 1A.
The Company also believes that the pandemic has forced fundamental changes in
businesses and communities that are aligned with the Company's edge-to-cloud
platform delivered as-a-service strategy. Navigating through the pandemic and
planning for a post-COVID world have increased customers' needs for as-a-service
offerings, secure connectivity, remote work capabilities and analytics to unlock
insights from data. Our solutions are aligned to these needs, and we see
opportunity to help our customers drive digital transformations as they continue
to adapt to operate in a new world.
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Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
Other Trends and Uncertainties
We are in the process of addressing many challenges facing our business. One set
of challenges include dynamic and accelerating market trends, such as the market
shift of workloads to cloud-related IT infrastructure business models, emergence
of software-defined architectures and converged infrastructure functionality and
growth in IT consumption models. Certain of our legacy hardware server and
storage businesses face challenges as customers migrate to cloud-based offerings
and reduce their purchases of hardware products. Therefore, the demand
environment for traditional server and storage products is challenging and lower
traditional compute and storage unit volume is impacting support attach
opportunities within the associated services organization.
Another set of challenges relates to changes in the competitive landscape. Our
major competitors are expanding their product and service offerings with
integrated products and solutions, our business-specific competitors are
exerting increased competitive pressure in targeted areas and are entering new
markets, our emerging competitors are introducing new technologies and business
models, and our alliance partners in some businesses are increasingly becoming
our competitors.
A third set of challenges relates to business model changes and our go-to-market
execution. We intend to provide our customers with a choice between traditional
consumption models or subscription-based, pay-per-use and as-a-service offerings
across our entire portfolio of HPE products and services.
Additionally, the global pandemic has accelerated several trends relevant to the
Company. First, the exponential increase of data at the edge driven by the
proliferation of devices. Second is the need for a cloud experience everywhere
to manage the growth of data at the edge. Third, data growth is creating new
opportunities with the need to quickly extract value from the captured data.
Enterprises have embraced multi-cloud strategies, as they recognize the need for
different cloud environments for different types of data and workloads.
Increasingly, customers want to digitally transform, while preserving capital
and eliminating operating expense, by paying only for the IT they use.
In response to the aforementioned challenges and trends, we are accelerating
growth in our areas of strategic focus, which include the Intelligent Edge and
High Performance Computing and Artificial Intelligence ("HPC & AI") businesses
while at the same time, we are strengthening our core Compute and Storage
businesses, doubling down in key areas of growth, and accelerating our
as-a-service pivot to become the edge-to-cloud platform-as-a-service choice for
our customers and partners.
At the same time our transformation programs have improved our cost structure,
channel execution and alignment of our sales coverage with our strategic goals.
We continue to pursue new product innovations that build on our existing
capabilities in areas such as cloud and data center computing, software-defined
networking, converged storage, high-performance compute, and wireless
networking, which will keep us aligned with market demand, industry trends and
the needs of our customers and partners. In addition, we continue to improve our
operations, with a particular focus on enhancing our end-to-end processes and
efficiencies.
Examples of accelerating and strengthening growth in our segments include the
following:
•Intelligent Edge - we are seeing continued traction from our investment at the
edge including rich software capabilities in security and edge services from HPE
Aruba . The Aruba Edge Services Platform ("ESP") with Aruba's built-in
identity-based network security is unique in the market and provides the ideal
foundation for building a zero trust and secure access service edge. Our
comprehensive portfolio and Artificial Intelligence-powered cloud-driven
platforms, such as Aruba ESP and Aruba Central, will continue to accelerate WAN
and security deployments, advance cloud and IoT adoption and fast-track digital
transformation. We are on track to grow high-margin recurring revenue with
technology that accelerates our ability to capture the high-growth WAN market
opportunity. Additionally, we introduced a new class of cloud-native and fully
automated data center switching products specifically designed for edge cloud
data centers which represents a significant market opportunity for HPE.
•HPC & AI - enterprises are running analytics on increasingly large data sets
and are adopting new techniques, such as AI, deep learning, and machine
learning. They now will have access to HPC technologies, including exascale
supercomputing systems, that were historically prohibitive due to their cost and
complexity. HPE GreenLake cloud services is a flexible as-a-service platform
that customers can run on-premises or in a colocation facility.
•Compute - our strategy to grow profitability and pivot to more as-a-service
solutions is paying off. Compute includes three new HPE ProLiant Solutions
targeting 5G deployments for telecommunication companies and virtual desktop
infrastructure. We launched our new HPE 5G Open radio access network ("RAN")
solution stack for telecommunications companies to accelerate the commercial
adoption of Open RAN in 5G network deployments. This
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Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
is a transformative technology, featuring the industry's first server-optimized
for 5G Open RAN workloads with our HPE ProLiant Servers.
•Storage - we continue to see strength in key software defined solutions, which
drive our ability to attach rich services and provide data insights with our
portfolio offerings. We introduced a new portfolio of cloud native data
infrastructure called HPE Alletra which delivers workload optimized systems and
provides customers with architectural flexibility to run any application without
compromise, from edge-to-cloud with our operational experience. These
innovations are propelling our storage business into a cloud-native
software-defined data services business through organic innovation and targeted
acquisitions.
Annualized Revenue Run-rate ("ARR")
Our pivot to as-a-service continues its strong momentum with the addition of HPE
GreenLake Cloud Services. Our mix of ARR is becoming more software-rich as we
build our GreenLake Cloud platform, which is improving our margin profile. On
the innovation front, we announced a transformative new data storage services
platform that brings our cloud operations model to wherever data lives by
unifying data operations. The platform will be available through HPE GreenLake
Central and include a new data services cloud console and a suite of software
subscription services that simplifies and automates global infrastructure at
scale. We will continue to invest aggressively in HPE GreenLake Cloud Services
to provide a true cloud experience and operating model, whether at the edge,
on-premises or across multiple clouds.
ARR represents the annualized revenue of all net GreenLake services revenue,
related financial services revenue (which includes rental income from operating
leases and interest income from capital leases) and software-as-a-service,
subscription, and other as-a-service offerings, recognized during a quarter and
multiplied by four. We use ARR as a performance metric. ARR should be viewed
independently of net revenue, and is not intended to be combined with it.
The following presents our ARR as of October 31, 2021 and 2020:
For the fiscal years ended
2021 2020
In millions
ARR $ 796 $ 585
year-over-year growth rate 36 % N/A
The 36% increase in ARR in fiscal 2021 as compared to the prior-year period was
due to growth in HPE GreenLake services and related financial services due to an
expanding customer installed base. Additionally, ARR increased due to higher
Intelligent Edge as-a-service activity, including Silver Peak , and growth in
Storage as-a-service driven by Zerto , a recent acquisition.
The following Executive Overview, Results of Operations and Liquidity
discussions and analysis compare fiscal 2021 to fiscal 2020, unless otherwise
noted. The Capital Resources and Contractual Cash and Other Obligations
discussions present information as of October 31, 2021 , unless otherwise noted.
EXECUTIVE OVERVIEW
Net revenue of $27.8 billion represented an increase of 3.0% (increased 1.0% on
a constant currency basis) due to a variety of factors including improvements in
the overall demand environment from the prior-year period resulting in revenue
growth across most of our segments, a strong order backlog at the beginning of
the period, incremental revenue from the Silver Peak acquisition and favorable
currency fluctuations. The revenue increase was moderated by a decrease in unit
shipments due largely to industry-wide material constraints and a related
challenging supply chain environment which resulted in significantly higher
levels of order backlog across our hardware segments at the end of the current
period. The gross profit margin of 33.7% represented an increase of 2.3
percentage points due to a combination of factors led by strong pricing
discipline, cost savings from our transformation programs and a continued mix
shift toward higher-margin software-rich offerings. The operating profit margin
of 4.1% represented an increase of 5.3 percentage points due primarily to our
strong operational execution in fiscal 2021 and the absence of a goodwill
impairment charge which we recognized in fiscal 2020. We generated $5.9 billion
of cash flow from operations (including $2.2 billion of after-tax cash from
Oracle Corporation's satisfaction of a judgment in the Itanium breach of
contract litigation) due to higher net earnings and improved working capital
management. Free cash flow excluding the litigation judgment was $1.6 billion .
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Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
Financial Results
The following table summarizes our consolidated GAAP financial results:
For the fiscal years ended October
31,
2021 2020 Change
In millions, except per share amounts
Net revenue 27,784 26,982 3.0%
Gross profit $ 9,376 $ 8,469 10.7%
Gross profit margin 33.7 % 31.4 % 2.3pts
Earnings (loss) from operations $ 1,132 $ (329) NM
Operating profit margin 4.1 % (1.2) % 5.3pts
Net earnings (loss) $ 3,427 $ (322) NM
Diluted net earnings (loss) per share $ 2.58 $ (0.25) $ 2.83
Cash flow from operations $ 5,871 $ 2,240 162.1 %
NM - Not meaningful
The following table summarizes our consolidated non-GAAP financial results:
For the fiscal years ended October
31,
2021 2020 Change
In millions, except per share amounts
Net revenue adjusted for currency $ 27,247 $ 26,982 1.0%
Non-GAAP gross profit $ 9,424 $ 8,543 10.3%
Non-GAAP gross profit margin 33.9 % 31.7 % 2.2pts
Non-GAAP earnings from operations $ 2,848 $ 2,282 24.8%
Non-GAAP operating profit margin 10.3 % 8.5 % 1.8pts
Non-GAAP net earnings $ 2,602 $ 2,005 29.8%
Non-GAAP diluted net earnings per share $ 1.96 $ 1.54 $0.42
Free cash flow $ 1,551 $ 560 $991
Each non-GAAP measure has been reconciled to the most directly comparable GAAP
measure herein. Please refer to the section "GAAP to Non-GAAP Reconciliations"
included in this MD&A for these reconciliations, usefulness of non-GAAP
financial measures, and material limitations associated with the use of non-GAAP
financial measures.
Returning capital to our shareholders remains an important part of our capital
allocation framework which consists of capital returns to shareholders and
strategic investments. We believe our existing balance of cash, cash equivalents
and marketable securities, along with commercial paper and other short-term
liquidity arrangements, are sufficient to satisfy our working capital needs,
capital asset purchases, dividends, debt repayments and other liquidity
requirements associated with our existing operations. As of October 31, 2021 ,
our cash, cash equivalents and restricted cash were $4.3 billion , compared to
the October 31, 2020 balance of $4.6 billion , representing a decrease of $0.3
billion . We maintain a $4.75 billion five year senior unsecured committed credit
facility that was entered into in August 2019 . As of October 31, 2021 no
borrowings were outstanding under this credit facility.
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Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our Consolidated Financial Statements are prepared in accordance with U.S.
Generally Accepted Accounting Principles ("GAAP"), which requires us to make
estimates, judgments and assumptions that affect the reported amounts of assets,
liabilities, net revenue and expenses, and the disclosure of contingent
liabilities. A summary of significant accounting policies and a summary of
recent accounting pronouncements applicable to our Consolidated Financial
Statements are included in Note 1, "Overview and Summary of Significant
Accounting Policies", to the Consolidated Financial Statements in Item 8 of Part
II, which is incorporated herein by reference. An accounting policy is deemed to
be critical if the nature of the estimate or assumption it incorporates is
subject to material level of judgment related to matters that are highly
uncertain and changes in those estimates and assumptions are reasonably likely
to materially impact our Consolidated Financial Statements.
Estimates and judgments are based on historical experience, forecasted events,
and various other assumptions that we believe to be reasonable under the
circumstances. Estimates and judgments may vary under different assumptions or
conditions. We evaluate our estimates and judgments on an ongoing basis.
We believe the accounting policies below are critical in the portrayal of our
financial condition and results of operations and require management's most
difficult, subjective, or complex judgments.
Revenue Recognition
We enter into contracts with customers that may include combinations of products
and services, resulting in arrangements containing multiple performance
obligations for hardware and software products and/or various services.
The majority of our revenue is derived from sales of product and the associated
support and maintenance which is recognized when, or as, control of promised
products or services is transferred to the customer at the transaction price.
Transaction price is adjusted for variable consideration which may be offered in
contracts with customers, partners and distributors and may include rebates,
volume-based discounts, cooperative marketing, price protection, and other
incentive programs.
Significant judgment is applied in determining the transaction price as we may
be required to estimate variable consideration at the time of revenue
recognition. When determining the amount of revenue to recognize, we estimate
the expected usage of these programs, applying the expected value or most likely
estimate and update the estimate at each reporting period as actual utilization
becomes available. Variable consideration is recognized only to the extent that
it is probable that a significant reversal of revenue will not occur. We also
consider the customers' right of return in determining the transaction price,
where applicable.
To recognize revenue for the products and services for which control has been
transferred, we allocate the transaction price for the contract among the
performance obligations on a relative standalone selling price ("SSP") basis. We
establish SSP for most of our products and services based on the observable
price of the products or services when sold separately in similar circumstances
to similar customers. When the SSP is not directly observable, we estimate SSP
based on management judgment by considering available data such as internal
margin objectives, pricing strategies, market/competitive conditions, historical
profitability data, as well as other observable inputs. We establish SSP ranges
for our products and services and reassesses them periodically.
Taxes on Earnings
We calculate our current and deferred tax provisions based on estimates and
assumptions that could differ from the final positions reflected in our income
tax returns. We will adjust our current and deferred tax provisions based on our
tax returns which are generally filed in the third or fourth quarters of the
subsequent fiscal year.
We recognize deferred tax assets and liabilities for the expected tax
consequences of temporary differences between the tax bases of assets and
liabilities and their reported amounts using enacted tax rates in effect for the
year in which we expect the differences to reverse.
We record a valuation allowance to reduce deferred tax assets to the amount that
we are more likely than not to realize. In determining the need for a valuation
allowance, we consider future market growth, forecasted earnings, future sources
of taxable income, the mix of earnings in the jurisdictions in which we operate,
and prudent and feasible tax planning strategies. In order for us to realize our
deferred tax assets, we must be able to generate sufficient taxable income in
the jurisdictions in which the deferred tax assets are located.
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Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
Our effective tax rate includes the impact of certain undistributed foreign
earnings and basis differences for which we have not provided for U.S. federal
taxes because we plan to reinvest such earnings and basis differences
indefinitely outside the U.S. We will remit non-indefinitely reinvested earnings
of our non-U.S. subsidiaries for which deferred U.S. state income and foreign
withholding taxes have been provided where excess cash has accumulated and when
we determine that it is advantageous for business operations, tax or cash
management reasons.
We are subject to income taxes in the U.S. and approximately 90 other countries,
and we are subject to routine corporate income tax audits in many of these
jurisdictions. We believe that positions taken on our tax returns are fully
supported, but tax authorities may challenge these positions, which may not be
fully sustained on examination by the relevant tax authorities. Accordingly, our
income tax provision includes amounts intended to satisfy assessments that may
result from these challenges. Determining the income tax provision for these
potential assessments and recording the related effects requires management
judgments and estimates. The amounts ultimately paid on resolution of an audit
could be materially different from the amounts previously included in our income
tax provision and, therefore, could have a material impact on our (Provision)
benefit for taxes, Net earnings (loss) and cash flows. Our accrual for uncertain
tax positions is attributable primarily to uncertainties concerning the tax
treatment of our international operations, including the allocation of income
among different jurisdictions, intercompany transactions and related interest,
and uncertain tax positions from acquired companies. For further discussion on
taxes on earnings, refer to Note 6, "Taxes on Earnings", to the Consolidated
Financial Statements.
Business Combinations
We allocate the fair value of purchase consideration to the assets acquired,
including in-process research and development ("IPR&D"), liabilities assumed,
and non-controlling interests in the acquiree generally based on their fair
values at the acquisition date. IPR&D is initially capitalized at fair value as
an intangible asset with an indefinite life and assessed for impairment
thereafter. The excess of the fair value of purchase consideration over the fair
value of these assets acquired, liabilities assumed and non-controlling
interests in the acquiree is recorded as goodwill.
When determining the fair values of assets acquired, liabilities assumed, and
non-controlling interests in the acquiree, management makes significant
estimates and assumptions, especially with respect to intangible assets.
Critical estimates in valuing intangible assets include, but are not limited to,
expected future cash flows, which includes consideration of future growth rates
and margins, attrition rates, future changes in technology and brand awareness,
loyalty and position, and discount rates. Fair value estimates are based on the
assumptions management believes a market participant would use in pricing the
asset or liability. Amounts recorded in a business combination may change during
the measurement period, which is a period not to exceed one year from the date
of acquisition, as additional information about conditions existing at the
acquisition date becomes available.
Goodwill
We review goodwill for impairment annually and whenever events or changes in
circumstances indicate the carrying amount of goodwill may not be recoverable.
We are permitted to conduct a qualitative assessment to determine whether it is
necessary to perform a quantitative goodwill impairment test.
In the goodwill impairment test, we compare the fair value of each reporting
unit to its carrying amount. Estimating the fair value of a reporting unit is
judgmental in nature and involves the use of significant estimates and
assumptions. We estimate the fair value of our reporting units using a weighting
of fair values derived most significantly from the income approach and, to a
lesser extent, the market approach, with the exception of the Software reporting
unit which uses a weighting derived most significantly from the market approach.
Under the income approach, we estimate the fair value of a reporting unit based
on the present value of estimated future cash flows. Cash flow projections are
based on discrete forecast periods as well as terminal value determinations,
including revenue growth rates and operating margins used to calculate projected
future cash flows. These cash flow projections are discounted to arrive at the
fair value of each reporting unit. The discount rate used is based on the
weighted-average cost of capital of comparable public companies adjusted for the
relevant risk associated with business specific characteristics and the
uncertainty related to the reporting unit's ability to execute on the projected
cash flows. Under the market approach, we estimate the fair value based on
market multiples of revenue and earnings derived from comparable publicly traded
companies with operating and investment characteristics similar to the reporting
unit. We weight the fair value derived from the market approach commensurate
with the level of comparability of these publicly traded companies to the
reporting unit. When market comparables are not meaningful or not available, we
estimate the fair value of a reporting unit using only the income approach. A
significant and sustained decline in our stock price could provide evidence of a
need to record a goodwill impairment charge.
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Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
In addition, we make certain judgments and assumptions in allocating shared
assets and liabilities to individual reporting units to determine the carrying
amount of each reporting unit.
On March 31, 2020 , due to the macroeconomic impacts of the pandemic on our
projected future results of operations, we determined that an indicator of
potential impairment existed to require an interim quantitative goodwill
impairment test for its reporting units. The quantitative goodwill impairment
test indicated that the carrying value of the HPC & AI reporting unit exceeded
its fair value by $865 million . As a result, we recorded a partial goodwill
impairment charge of $865 million in the second quarter of fiscal 2020.
During the annual impairment test in fiscal 2020, we determined that no
additional impairment of goodwill existed.
Our annual goodwill impairment analysis, which we performed as of the first day
of the fourth quarter of fiscal 2021, did not result in any additional
impairment charges. The excess of fair value over carrying amount for our
reporting units ranged from approximately 8% to 133% of the respective carrying
amounts. In order to evaluate the sensitivity of the estimated fair value of our
reporting units in the goodwill impairment test, we applied a hypothetical 10%
decrease to the fair value of each reporting unit. Based on the results of this
hypothetical 10% decrease all of the reporting units had an excess of fair value
over carrying amount, with the exception of HPC & AI reporting unit.
As of the annual test date, the HPC & AI reporting unit had a goodwill of $3.7
billion and an excess of fair value over carrying value of net assets of 8%. The
HPC & AI business is facing challenges on the current and projected future
results as the revenue growth is dependent on timing of delivery and related
achievement of customer acceptance milestones. If we are not successful in
addressing these challenges, the projected revenue growth rates or operating
margins could decline resulting in a decrease in the fair value of the HPC & AI
reporting unit. The fair value of the HPC & AI reporting unit could also be
negatively impacted by changes in its weighted average cost of capital, changes
in management's business strategy or significant and sustained declines in the
stock price, which could result in an indicator of impairment. Further
impairment charges, if any, may be material to our results of operations and
financial position. See Part I, Item 1A, "Risk Factors" for a discussion of the
potential impacts of the pandemic on the fair value of our assets.
Intangible Assets
We review intangible assets with finite lives for impairment whenever events or
changes in circumstances indicate the carrying amount of an asset may not be
recoverable. Recoverability of our finite-lived intangible assets is assessed
based on the estimated undiscounted future cash flows expected to result from
the use and eventual disposition of the asset. If the undiscounted future cash
flows are less than the carrying amount, the finite-lived intangible assets are
considered to be impaired. The amount of the impairment loss, if any, is
measured as the difference between the carrying amount of the asset and its fair
value. We estimate the fair value of finite-lived intangible assets by using an
income approach or, when available and appropriate, using a market approach.
In March 2020 , prior to the quantitative goodwill impairment test, we tested the
recoverability of long-lived assets and other assets of the HPC & AI reporting
unit and concluded that such assets were not impaired.
Contingencies
We are subject to the possibility of losses from various contingencies.
Significant judgment is necessary to estimate the probability and amount of a
loss, if any, from such contingencies. An accrual is made when it is probable
that a liability has been incurred or an asset has been impaired and the amount
of loss can be reasonably estimated. We review these matters at least quarterly
and adjust these liabilities to reflect the impact of negotiations, settlements,
rulings, advice of legal counsel, and other updated information and events,
pertaining to a particular case.
Based on our experience, we believe that any damage amounts claimed in the
specific litigation and contingency matters further discussed in Note 17,
"Litigation and Contingencies", to the Consolidated Financial Statements are not
a meaningful indicator of our potential liability. Litigation is inherently
unpredictable. However, we believe we have valid defenses with respect to legal
matters pending against us. Nevertheless, cash flows or results of operations
could be materially affected in any particular period by the resolution of one
or more of these contingencies. We believe we have recorded adequate provisions
for any such matters and, as of October 31, 2021 , it was not reasonably possible
that a material loss had been incurred in connection with such matters in excess
of the amounts recognized in our financial statements.
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Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
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) 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.
Results of operations in dollars and as a percentage of net revenue were as
follows:
For the fiscal years ended October 31,
2021 2020 2019
Dollars % of Revenue Dollars % of Revenue Dollars % of Revenue
Dollars in millions
Net revenue $ 27,784 100.0 % $ 26,982 100.0 % $ 29,135 100.0 %
Cost of sales 18,408 66.3 % 18,513 68.6 % 19,642 67.4 %
Gross profit 9,376 33.7 % 8,469 31.4 % 9,493 32.6 %
Research and development 1,979 7.1 % 1,874 6.9 % 1,842 6.3 %
Selling, general and administrative 4,929 17.7 % 4,624 17.2 % 4,907 16.9 %
Amortization of intangible assets 354 1.3 % 379 1.4 % 267 0.8 %
Impairment of goodwill - - % 865 3.2 % - - %
Transformation costs 930 3.3 % 950 3.5 % 453 1.6 %
Disaster charges (recovery) 16 0.1 % 26 0.1 % (7) - %
Acquisition, disposition and other
related charges 36 0.1 % 80 0.3 % 757 2.6 %
Earnings (loss) from operations 1,132 4.1 % (329) (1.2) % 1,274 4.4 %
Interest and other, net (211) (0.8) % (215) (0.8) % (177) (0.6) %
Tax indemnification and related
adjustments 65 0.2 % (101) (0.4) % 377 1.3 %
Non-service net periodic benefit credit 70 0.3 % 136 0.5 % 59 0.2 %
Litigation judgment 2,351 8.5 % - - % - - %
Earnings from equity interests 180 0.6 % 67 0.3 % 20 - %
Earnings (loss) before taxes 3,587 12.9 % (442) (1.6) % 1,553 5.3 %
(Provision) benefit for taxes (160) (0.6) % 120 0.4 % (504) (1.7) %
Net earnings (loss) $ 3,427 12.3 % $ (322) (1.2) % $ 1,049 3.6 %
Fiscal 2021 compared with fiscal 2020
Net revenue
In fiscal 2021, total net revenue of $27.8 billion , increased by $0.8 billion ,
or 3.0% (increased 1.0% on a constant currency basis). U.S. net revenue
decreased by $0.3 billion or 3.4% to $8.9 billion , while net revenue from
outside of the U.S. increased by $1.1 billion or 6.3% to $18.9 billion .
From a segment perspective, net revenue increased across most of our segments
due to the improved demand environment led by revenue growth of 15% in
Intelligent Edge and 5%, 3%, 2% and 2% in Corporate Investments and Other,
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Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
HPC & AI, Storage, and Financial Service, respectively. Compute net revenue was
largely unchanged from the prior-year period.
The components of the weighted net revenue change by segment were as follows:
For the fiscal years ended October 31,
2021 2020
Percentage Points
Compute - (5.0)
HPC & AI 0.3 0.4
Storage 0.3 (2.0)
Intelligent Edge 1.6 (0.2)
Financial Services 0.2 (0.8)
Corporate Investments and Other 0.2 0.1
Total segment 2.6
(7.5)
Elimination of intersegment net revenue 0.4 0.1 Total HPE 3.0 (7.4) Gross Profit Our gross profit margin increased 2.3 percentage points due primarily to a combination of factors led by strong pricing discipline, cost savings from our transformation programs, a continued mix shift toward higher-margin software-rich offerings and favorable currency fluctuations. Operating expenses Research and development R&D expense increased by$105 million , or 6% due primarily to higher employee compensation expense which contributed 11.0 percentage points to the change. The increase was moderated by cost savings of 4.5 percentage points as we rationalize our R&D through transformation programs by focusing investment in growth areas. Selling, general and administrative SG&A expense increased by$305 million , or 7% due primarily to higher employee compensation expense and unfavorable currency fluctuations, which contributed 4.1 percentage points and 2.1 percentage points to the change, respectively. Amortization of intangible assets Amortization expense decreased by$25 million , or 7% due to certain intangible assets associated with prior acquisitions reaching the end of their amortization in the current period and higher write-offs of certain intangible assets in the prior-year period. The decrease was moderated by an increase in amortizations in the current period resulting from recent acquisitions. Impairment of goodwill Impairment of goodwill for fiscal 2020 represents a partial goodwill impairment charge of$865 million recorded in the second quarter of fiscal 2020, as it was determined that the fair value of the HPC & AI reporting unit was below the carrying value of its net assets. Transformation programs and costs Our transformation programs consist of the cost optimization and prioritization plan (launched in 2020) and HPE Next initiative (launched in 2017). The cost optimization and prioritization plan focuses on realigning our workforce to areas of growth, a new hybrid workforce model called Edge-to-Office, real estate strategies and simplifying and evolving our product portfolio strategy. The implementation period for the cost optimization and prioritization plan is through fiscal 2023. The HPE Next initiative was intended to put in place a purpose-built company designed to compete and win in the markets where we 40
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Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
participate by simplifying our operating model, streamlining our offerings,
business processes and business systems to improve our execution. The
implementation period for HPE Next was extended to fiscal 2023.
Transformation costs decreased by $20 million , or 2% due primarily to lower
restructuring charges recorded in the current year, with higher IT costs and
lower gains on real estate sales in the current period moderating the decrease.
Disaster charges
In fiscal 2021 and fiscal 2020, disaster charges represent direct costs
resulting from the pandemic and are primarily related to HPE hosted, co-hosted,
or sponsored events which were converted to a virtual format or cancelled.
Acquisition, disposition and other related charges
Acquisition, disposition and other related charges decreased by $44 million due
primarily to lower business acquisition costs related to retention bonuses and
integration activities in the current year period.
Interest and other, net
Interest and other, net expense was relatively unchanged from period to period,
due to offsetting factors with the current period including higher gains from
equity investments, lower interest expense from lower average borrowings, and
lower unfavorable currency fluctuations, offset by early debt redemption costs,
lower gains on the sale of certain assets and lower interest income.
Tax indemnification and related adjustments
We record changes in certain pre-Separation tax liabilities for which we share
joint and several liability with HP Inc. and for which we were indemnified under
the Termination and Mutual Release Agreement within Tax Indemnification and
related Adjustments. We also record changes to certain pre-Separation and
pre-divestiture tax liabilities and tax receivables for which we remain liable
on behalf of the separated or divested business, but which may not be subject to
indemnification.
We recorded Tax indemnification and related adjustments income of $65 million
and expense of $101 million in fiscal 2021 and 2020, respectively.
Tax indemnification and related adjustments in fiscal 2021 primarily included
the impacts of a Brazilian Supreme Court decision received regarding the base on
which two social contribution taxes in Brazil ("PIS" and "COFINS") are imposed.
As a result of this decision, the Company is entitled to recover credits and
associated interest related to the overpayment of these transaction taxes
imposed between 2005 and 2019 to be used to offset future Brazilian tax
liabilities. As such, we have recorded benefits of $17 million and $80 million ,
both net of taxes, for the recovery of PIS and COFINS, respectively, during
fiscal 2021, of which $25 million was included in Net revenue, $10 million
related to interest income was included in Interest and other, net, and $80
million related to pre-Separation liabilities was included in Tax
indemnification and related adjustments. The corresponding income taxes of $18
million as a result of this recovery were included in (Provision) benefit for
taxes in the Consolidated Statement of Earnings.
Tax indemnification and related adjustments in fiscal 2020 resulted from changes
in certain pre-Separation tax liabilities for which we shared joint and several
liability with HP Inc. and for which we are indemnified under the Termination
and Mutual Release Agreement and changes to certain pre-divestiture tax
liabilities and tax receivables.
Non-service net periodic benefit credit
Non-service net periodic benefit credit represents the components of net
periodic pension benefit costs, other than service cost, for the Hewlett Packard
Enterprise defined benefit pension and post-retirement benefit plans such as
interest cost, expected return on plan assets, and the amortization of prior
plan amendments and actuarial gains or losses. The credit also includes the
impact of any plan settlements, curtailments, or special termination benefits.
Non-service net periodic benefit credit decreased by $66 million due primarily
to lower expected returns on plan assets.
Litigation judgment
In October 2021 , the Company received $2.35 billion which represents Oracle
Corporation's satisfaction of the judgment in the Itanium breach of contract
dispute. The gain was recognized as other income and presented as a Litigation
judgment in
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Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
the Consolidated Statements of Earnings. For further discussion, refer to Note
17, "Litigation and Contingencies" to the Consolidated Financial Statements in
Item 8 of Part II, which is incorporated herein by reference.
Earnings from equity interests
Earnings from equity interests primarily represents our 49% interest in H3C
Technologies and the amortization of our interest in a basis difference.
Earnings from equity interests increased by $113 million due to higher net
income earned by H3C and gains from certain venture investments.
(Provision) benefit for taxes
For fiscal 2021 and 2020, we recorded income tax expense of $160 million and an
income tax benefit of $120 million , respectively, which reflect effective tax
rates of 4.5% and 27.1%, respectively. Our effective tax rate generally differs
from the U.S. federal statutory rate of 21% due to favorable tax rates
associated with certain earnings from our operations in lower tax jurisdictions
throughout the world but may also be materially impacted by discrete tax
adjustments during the fiscal year. The jurisdictions with favorable tax rates
that had the most significant impact on our effective tax rate in the periods
presented include Puerto Rico and Singapore .
In fiscal 2021, we recorded $294 million of net income tax benefits related to
items discrete to the year. These amounts primarily included:
•$180 million of income tax benefits related to transformation costs, and
acquisition, disposition and other related charges,
•$157 million of income tax benefits related to releases of foreign valuation
allowances,
•$39 million of income tax benefits related to tax rate changes on deferred
taxes,
•$32 million of income tax benefits related to the change in pre-Separation tax
liabilities, primarily those for which we share joint and several liability with
HP Inc. and for which we are indemnified by HP Inc.
•These benefits were partially offset by $337 million of net income tax charges
associated with income from the Itanium litigation judgment, against which $244
million of income tax attributes previously subject to a valuation allowance
were utilized, resulting in a net tax expense of $93 million .
In fiscal 2020, we recorded $362 million of net income tax benefits related to
items discrete to the year. These amounts primarily included:
• $174 million of income tax benefits related to transformation costs, and
acquisition, disposition and other related charges,
•$66 million of income tax benefits related to the change in pre-Separation tax
liabilities, primarily those for which we shared joint and several liability
with HP Inc. and for which we are indemnified by HP Inc.,
•$57 million of income tax benefits related to Indian distribution tax rate
changes, and
• $40 million of income tax benefits related to tax rate changes on deferred
taxes.
•These discrete tax benefits were offset by $242 million of net income tax
charges related to normal operations and the impact of the Company's goodwill
impairment charge being non-deductible from a tax perspective.
Segment Information
Hewlett Packard Enterprise's organizational structure is based on a number of
factors that the Chief Operating Decision Maker ("CODM"), who is the Chief
Executive Officer ("CEO"), uses to evaluate, view and run our business
operations, which include, but are not limited to, customer base and homogeneity
of products and technology. The segments are based on this organizational
structure and information reviewed by Hewlett Packard Enterprise's management to
evaluate segment results.
In October 2021 , we renamed the segment previously known as High Performance
Computing and Mission Critical Solutions ("HPC & MCS") to High Performance
Computing and Artificial Intelligence ("HPC & AI").
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Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
As described in Note 1, "Overview and Summary of Significant Accounting
Policies" to the Consolidated Financial Statements in Item 8 of Part II,
effective at the beginning of the first quarter of fiscal 2021, we (a) excluded
stock-based compensation expense from our segment earnings from operations; and
(b) implemented certain organizational changes to align our segment financial
reporting more closely with our current business structure. As a result of these
organizational changes, our operations are now organized into six segments for
financial reporting purposes: Compute, HPC & AI, Storage, Intelligent Edge, FS,
and Corporate Investments and Other. The Corporate Investments and Other Segment
now includes the A & PS operating segment, the Communications and Media
Solutions operating segment, the Software operating segment, and Hewlett Packard
Enterprise Labs which is responsible for research and development. We reflected
these changes in our segment information retrospectively to the earliest period
presented, which primarily resulted in the realignment of net revenue and
operating profit for each of the segments. These changes had no impact on
Hewlett Packard Enterprise's previously reported consolidated results.
A description of the products and services for each segment, along with other
pertinent information related to Segments can be found in Note 2, "Segment
Information", to the Consolidated Financial Statements in Item 8 of Part II,
which is incorporated herein by reference.
Segment Results
The following provides an overview of our key financial metrics by segment for
fiscal 2021, as compared to fiscal 2020:
Corporate
HPE Investments and
Consolidated Compute HPC & AI Storage Intelligent Edge Financial Services Other
Dollars in millions, except for per share amounts
Net revenue(1) $ 27,784 $ 12,292 $ 3,188 $ 4,763 $ 3,287 $ 3,401 $ 1,356
Year-over-year change % 3.0 % 0.1 % 2.7 % 1.7 % 15.1 % 1.5 % 4.5 %
Earnings (loss) from
operations(2) $ 1,132 $ 1,326 $ 234 $ 778 $ 500 $ 390 $ (95)
Earnings (loss) from
operations as a % of net
revenue 4.1 % 10.8 % 7.3 % 16.3 % 15.2 % 11.5 % (7.0) %
Year-over-year change
percentage points 5.3 pts 2.6 pts (1.9) pts (1.1) pts 3.4 pts 3.0 pts 8.9 pts
(1)HPE consolidated net revenue excludes intersegment net revenue.
(2)Segment earnings from operations exclude certain unallocated corporate costs
and eliminations, stock-based compensation expense, amortization of initial
direct costs, amortization of intangible assets, impairment of goodwill,
transformation costs, disaster charges and acquisition, disposition and other
related charges.
Compute
For the
fiscal years ended
2021 2020 2019
Dollars in millions
Net revenue $ 12,292 $ 12,285 $ 13,730
Earnings from operations $ 1,326 $ 1,007 $ 1,719
Earnings from operations as a % of net revenue 10.8 % 8.2 % 12.5 %
Fiscal 2021 compared with fiscal 2020
Compute net revenue increased by $7 million , or 0.1% (decreased 2.0% on a
constant currency basis) due primarily to favorable currency fluctuations and an
increase in average unit prices. The net revenue increase was partially offset
by a decrease in unit shipments resulting from material constraints due to a
challenging supply chain environment. As a result, we ended the period with a
significantly higher level of order backlog.
From a product perspective, Compute experienced revenue growth in the rack and
synergy server product categories partially moderated by a revenue decline due
to certain products approaching their end-of-life. Services net revenue was
relatively unchanged from period to period.
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Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
Compute earnings from operations as a percentage of net revenue increased 2.6
percentage points due to decreases in costs of products and services as a
percentage of net revenue and operating expenses as a percentage of net revenue.
The decrease in costs of products and services as a percentage of net revenue
was due primarily to favorable currency fluctuations, lower supply chain
overhead costs from operational efficiencies, and disciplined pricing. The
decrease in operating expenses as a percentage of net revenue was due primarily
to cost savings from our transformation programs partially offset by higher
employee compensation expense.
Fiscal 2020 compared with fiscal 2019
Compute net revenue decreased by $1.4 billion , or 10.5% (decreased 9.4% on a
constant currency basis) due to the impact of the pandemic on the demand
environment as we experienced multiple factors including competitive pricing
pressures, manufacturing capacity constraints in North America in the first
quarter of fiscal 2020, and unfavorable currency fluctuations. As a result,
Compute experienced a decline in unit shipments and average unit selling prices.
Compute earnings from operations as a percentage of net revenue decreased 4.3
percentage points due primarily to an increase in costs of products and services
as a percentage of net revenue and an increase in operating expenses as a
percentage of net revenue. The increase in cost of products as a percentage of
net revenue was due primarily to competitive pricing pressures, unfavorable
currency fluctuations, higher supply chain costs and the scale of the net
revenue decline, partially offset by lower commodity costs and a favorable mix.
The increase in operating expenses as a percentage of net revenue was due to the
scale of the net revenue decline as total operating expenses declined due
primarily to lower spending resulting from our cost containment measures and
lower variable compensation expense, partially offset by higher field selling
costs.
HPC & AI
For the
fiscal years ended
2021 2020 2019
Dollars in millions
Net revenue $ 3,188 $ 3,105 $ 2,983
Earnings from operations $ 234 $ 285 $ 365
Earnings from operations as a % of net revenue 7.3 % 9.2 % 12.2 %
Fiscal 2021 compared with fiscal 2020
HPC & AI net revenue increased by $83 million or 2.7% (increased 1.8% on a
constant currency basis) as the challenges encountered in the prior year period
resulting from the pandemic receded, such as delays with meeting customer
milestones, and the demand environment improved. This resulted in net revenue
growth in the Apollo and Cray product categories within HPC and growth in Edge
Compute. Favorable currency fluctuations also added to the net revenue increase.
These increases were moderated by revenue declines in Data Solutions and
Services due to certain products approaching their end-of-life and lower support
services, respectively.
HPC & AI earnings from operations as a percentage of net revenue decreased 1.9
percentage points primarily due to increases in cost of products and services as
a percentage of net revenue and operating expenses as a percentage of net
revenue. The increase in cost of products and services as a percentage of net
revenue was due primarily to a lower mix of revenue from services and
higher-margin Data Solutions, while cost savings from our transformation
programs moderated the increase. The increase in operating expenses as a
percentage of net revenue was due primarily to higher field selling costs and
employee compensation expense, while cost savings from our transformation
programs moderated the increase.
Fiscal 2020 compared with fiscal 2019
HPC & AI net revenue increased by $122 million , or 4.1% (increased 4.4% on a
constant currency basis) due primarily to higher revenue in HPC from the
addition of product and services revenue resulting from the acquisition of Cray,
partially offset by a revenue decline in Edge Compute and Data Solutions.
HPC & AI earnings from operations as a percentage of net revenue decreased 3.0
percentage points 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 decrease in cost of products and services as a
percentage of net revenue was due primarily to an improved product mix resulting
from Cray. The increase in operating expenses as a percentage of net revenue was
due to the addition of operating expenses from Cray.
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Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
Storage
For the
fiscal years ended
2021 2020 2019
Dollars in millions
Net revenue $ 4,763 $ 4,685 $ 5,255
Earnings from operations $ 778 $ 813 $ 1,009
Earnings from operations as a % of net revenue 16.3 % 17.4 % 19.2 %
Fiscal 2021 compared with fiscal 2020
Storage net revenue increased by $78 million , or 1.7% (decreased 0.1% on a
constant currency basis) as we continue our transition to more services, and
software-rich offerings. The net revenue increase was led by favorable currency
fluctuations, growth in Storage services and incremental revenue from the Zerto
acquisition. Net revenue in Storage products was unchanged as growth from HPE
Primera products, Traditional Storage and Nimble Storage was offset by revenue
declines in SimpliVity and HPE 3PAR, while we are transitioning to the
next-generation HPE Primera and HPE Alletra product set.
Storage earnings from operations as a percentage of net revenue decreased 1.1
percentage points due to an increase in operating expenses as a percentage of
net revenue, partially offset by a decrease in cost of products and services as
a percentage of net revenue. The decrease in cost of products and services as a
percentage of net revenue was due primarily to a favorable mix of higher-margin
HPE Primera and Big Data products, and improved operational efficiencies
achieved through our transformation programs, the effects of which were
partially offset by higher fixed overhead costs as a percentage of net revenue.
Operating expenses as a percentage of net revenue increased across all functions
due to higher employee compensation expense and planned investments in our cloud
data services.
Fiscal 2020 compared with fiscal 2019
Storage net revenue decreased by $570 million , or 10.8% (decreased 9.9% on a
constant currency basis) due primarily to the impact of the pandemic on the
demand environment as we experienced commodity and manufacturing capacity
constraints in North America in the first quarter of fiscal 2020, and lower
revenue from the expiration of a one-time legacy contract, partially offset by
higher revenue from Big Data.
Storage earnings from operations as a percentage of net revenue decreased 1.8
percentage points due to an increase in cost of product and services as a
percentage of net revenue and an increase in operating expenses as a percentage
of net revenue. The increase in cost of product and services as a percentage of
net revenue was due primarily to a combination of factors including competitive
pricing pressures, increased cost of products due to higher fixed overhead cost,
and unfavorable currency fluctuations, partially offset by lower cost of
services due to delivery efficiencies. The increase in operating expenses as a
percentage of net revenue was due primarily to the scale of the net revenue
decline while total operating expenses declined due to lower field selling costs
amid lower spending resulting from our cost containment measures.
Intelligent Edge
For the fiscal
years ended
2021 2020 2019
Dollars in millions
Net revenue $ 3,287 $ 2,855 $ 2,913
Earnings from operations $ 500 $ 337 $ 216
Earnings from operations as a % of net revenue 15.2 % 11.8 % 7.4 %
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Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
Fiscal 2021 compared with fiscal 2020
Intelligent Edge net revenue increased by $432 million , or 15.1% (increased
12.8% on a constant currency basis) from growth in product and services revenue
due to an improved demand environment in the current period, the addition of
revenue from Silver Peak and favorable currency fluctuations. The increase in
product revenue was led by the Switching and WLAN product categories. The
increase in services revenue was led by higher attached support services and
increased as-a-service offerings.
Intelligent Edge earnings from operations as a percentage of net revenue
increased 3.4 percentage points due primarily to decreases in cost of products
and services as a percentage of net revenue and operating expenses as a
percentage of net revenue. The decrease in cost of product and services as a
percentage of net revenue was due primarily to lower product costs in Switching
and WLAN and addition of higher-margin Silver Peak activity. The decrease in
operating expenses as a percentage of net revenue was due primarily to improved
operational efficiencies including cost savings from transformation programs,
while higher employee compensation expense and the addition of expenses from
Silver Peak moderated the decrease.
Fiscal 2020 compared with fiscal 2019
Intelligent Edge net revenue decreased by $58 million , or 2.0% (decreased 1.2%
on a constant currency basis) due primarily to weak market demand, competitive
pricing pressures and unfavorable currency fluctuations. As a result, we
experienced lower revenue from WLAN, switching products, and software offerings.
These declines were partially offset by an increase in net revenue due to higher
service renewals.
Intelligent Edge earnings from operations as a percentage of net revenue
increased 4.4 percentage points due to a decrease in operating expenses as a
percentage of net revenue coupled with lower cost of products and services as a
percentage of net revenue. The decrease in cost of product and services as a
percentage of net revenue was due primarily to a favorable mix of revenue from
services and lower costs of switching products, partially offset by higher
logistics cost. The decrease in operating expenses as a percentage of net
revenue was due primarily to lower spending as a result of cost containment
measures, partially offset by higher variable compensation expense.
Financial Services
For the
fiscal years ended
2021 2020 2019
Dollars in millions
Net revenue $ 3,401 $ 3,352 $ 3,581
Earnings from operations $ 390 $ 284 $ 310
Earnings from operations as a % of net revenue 11.5 % 8.5 % 8.7 %
Fiscal 2021 compared with fiscal 2020
FS net revenue increased by $49 million , or 1.5% (decreased 0.9% on a constant
currency basis) due primarily to favorable currency fluctuations, partially
offset by a decrease in rental revenue due to lower average operating lease
assets, along with lower asset management revenue from lease buyouts.
FS earnings from operations as a percentage of net revenue increased 3.0
percentage points due primarily to lower cost of services as a percentage of net
revenue. The decrease to cost of services as a percentage of net revenue
resulted primarily from lower borrowing costs while operating expenses as a
percentage of net revenue remained relatively flat.
Fiscal 2020 compared with fiscal 2019
FS net revenue decreased by $229 million , or 6.4% (decreased 5.2% on a constant
currency basis) due primarily to a decrease in rental revenue due to lower
average operating leases assets and lower lease equipment buyout revenue, along
with unfavorable currency fluctuations, partially offset by higher revenue from
lease extensions.
FS earnings from operations as a percentage of net revenue decreased 0.2
percentage points due primarily to an increase in operating expenses as a
percentage of net revenue, partially offset by lower cost of services as a
percentage of net revenue. The decrease to cost of services as a percentage of
net revenue resulted from lower depreciation expense and borrowing costs,
partially offset by higher bad debt 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.
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Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
Financing Volume
For the fiscal years ended October 31,
2021 2020 2019
Dollars in millions
Financing volume $ 6,168 $ 6,005 $ 6,200
Financing volume, which represents the amount of financing provided to customers
for equipment and related software and services, including intercompany
activity, increased by 2.7% in fiscal 2021 and decreased 3.1% in fiscal 2020 as
compared to the prior-year periods. The increase in fiscal 2021 was primarily
driven by favorable currency fluctuations, along with higher financing
associated with third-party product sales and related service offerings. The
decrease in fiscal 2020 was primarily related to lower financing associated with
both third-party and HPE product sales and related service offerings, along with
unfavorable currency fluctuations.
Portfolio Assets and Ratios
The FS business model is asset intensive and uses certain internal metrics to
measure its performance against other financial services companies, including a
segment balance sheet that is derived from our internal management reporting
system. The accounting policies used to derive FS amounts are substantially the
same as those used by the Company. However, intercompany loans and certain
accounts that are reflected in the segment balances are eliminated in our
Consolidated Financial Statements.
The portfolio assets and ratios derived from the segment balance sheets for FS
were as follows:
As of October 31,
2021 2020
Dollars in millions
Financing receivables, gross $ 9,198 $ 9,058
Net equipment under operating leases 4,001 4,027
Capitalized profit on intercompany equipment transactions(1) 275
315
Intercompany leases(1) 96 92
Gross portfolio assets 13,570 13,492
Allowance for doubtful accounts(2) 228 154
Operating lease equipment reserve 39 64 Total reserves 267 218 Net portfolio assets$ 13,303 $ 13,274 Reserve coverage 2.0 % 1.6 % Debt-to-equity ratio(3) 7.0x 7.0x (1)Intercompany activity is eliminated in consolidation. (2)Allowance for credit losses for financing receivables includes both the short- and long-term portions. (3)Debt benefiting FS consists of intercompany equity that is treated as debt for segment reporting purposes, intercompany debt, and borrowing- and funding-related activity associated with FS and its subsidiaries. Debt benefiting FS totaled$11.9 billion and$11.7 billion atOctober 31, 2021 and 2020, 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 bothOctober 31, 2021 andOctober 31, 2020 was$1.7 billion . As ofOctober 31, 2021 and 2020, FS net cash and cash equivalents were$898 million and$729 million , respectively. Net portfolio assets as ofOctober 31, 2021 increased 0.2% fromOctober 31, 2020 . The increase generally resulted from favorable currency fluctuations, largely offset by portfolio runoff exceeding new financing volume during the period. FS bad debt expense includes charges to general reserves, specific reserves and write-offs for sales-type, direct-financing and operating leases. FS recorded net bad debt expense of$95 million ,$93 million and$75 million in fiscal 2021, 2020 and 2019, respectively. 47
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HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
As of October 31, 2021 , FS experienced an increase in billed finance receivables
compared to October 31, 2020 , which included a limited impact to collections
from customers as a result of the pandemic. We are currently unable to fully
predict the extent to which the pandemic may adversely impact future collections
of our receivables.
Corporate Investments and Other
For the
fiscal years ended
2021 2020 2019
Dollars in millions
Net revenue $ 1,356 $ 1,298 $ 1,288
Loss from operations $ (95) $ (206) $ (314)
Loss from operations as a % of net revenue (7.0) % (15.9) % (24.4) %
Fiscal 2021 compared with fiscal 2020
Corporate Investments and Other net revenue increased by $58 million , or 4.5%
(increased 2.5% on a constant currency basis) due to favorable currency
fluctuations and higher revenue from Communications and Media Solutions ("CMS")
and Software.
Corporate Investments and Other loss from operations as a percentage of net
revenue decreased 8.9 percentage points due primarily to a decrease in cost of
services and operating expenses as a percentage of net revenue. The decrease in
cost of services as a percentage of net revenue was due primarily to service
delivery and overhead efficiencies achieved through our transformation programs.
The decrease in operating expenses as a percentage of net revenue was due
primarily to lower spending resulting from cost containment measures.
Fiscal 2020 compared with fiscal 2019
Corporate Investments and Other net revenue increased by $10 million , or 0.8%
(increased 1.2% on a constant currency basis) due to higher revenue from
Software partially offset by lower revenue from A & PS and CMS, and unfavorable
currency fluctuations.
Corporate Investments and Other loss from operations as a percentage of net
revenue decreased 8.5 percentage points due to a decrease in costs of services
and operating expenses as a percentage of net revenue. The decrease in cost of
services as a percentage of net revenue was due primarily to service delivery
and overhead efficiencies achieved through our transformation programs. The
decrease in operating expenses as a percentage of net revenue was due primarily
to lower spending resulting from our cost containment measures.
LIQUIDITY AND CAPITAL RESOURCES
Current Overview
We use cash generated by operations as our primary source of liquidity. We
believe that internally generated cash flows will be generally sufficient to
support our operating businesses, capital expenditures, product development
initiatives, acquisition and disposal activities including legal settlements,
restructuring activities, transformation costs, indemnifications, maturing debt,
interest payments, and income tax payments, in addition to any future
investments, share repurchases, and stockholder dividend payments. We expect to
supplement this short-term liquidity, if necessary, by accessing the capital
markets, issuing commercial paper, and borrowing under credit facilities made
available by various domestic and foreign financial institutions. However, our
access to capital markets may be constrained and our cost of borrowing may
increase under certain business, market and economic conditions. We anticipate
that the available funds and cash generated from operations along with our
access to capital markets will be sufficient to meet our liquidity requirements
for at least the next twelve months. We continue to monitor the severity and
duration of the COVID-19 pandemic and its impact on the U.S. and other global
economies, the capital markets, consumer behavior, our businesses, results of
operations, financial condition and cash flows. Our liquidity is subject to
various risks including the risks identified in the section entitled "Risk
Factors" in Item 1A and market risks identified in the section entitled
"Quantitative and Qualitative Disclosures about Market Risk" in Item 7A, each of
which is incorporated herein by reference.
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HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
Our cash balances are held in numerous locations throughout the world, with a
substantial amount held outside the U.S as of October 31, 2021 . We utilize a
variety of planning and financing strategies in an effort to ensure that our
worldwide cash is available when and where it is needed.
Amounts held outside of the U.S. are generally utilized to support our non-U.S.
liquidity needs. Repatriations of amounts held outside the U.S. generally will
not be taxable from a U.S. federal tax perspective, but may be subject to state
income or foreign withholding tax. Where local restrictions prevent an efficient
intercompany transfer of funds, our intent is to keep cash balances outside of
the U.S. and to meet liquidity needs through ongoing cash flows, external
borrowings, or both. We do not expect restrictions or potential taxes incurred
on repatriation of amounts held outside of the U.S. to have a material effect on
our overall liquidity, financial condition or results of operations.
As a result of increased uncertainty due to the pandemic, purchases under our
share repurchase program previously authorized by our Board of Directors, were
temporarily suspended in April, 2020. We resumed our share repurchase program in
the fourth quarter of fiscal 2021 and settled $213 million of our stock. As of
October 31, 2021 , we had a remaining authorization of $1.9 billion for future
share repurchases. For more information on our share repurchase program, refer
to Note 15, "Stockholders' Equity", to the Consolidated Financial Statements in
Part II, Item 8, which is incorporated herein by reference.
Liquidity
Our cash, cash equivalents, restricted cash, total debt and available borrowing
resources were as follows:
As of October 31,
2021 2020 2019
In millions
Cash, cash equivalents and restricted cash
$ 13,448 $ 15,941 $
13,820
Available borrowing resources$ 6,017 $ 6,297 $
5,639
The tables below represent the way in which management reviews cash flows:
For the
fiscal years ended
2021 2020 2019
In millions
Net cash provided by operating activities $ 5,871 $ 2,240 $ 3,997
Net cash used in investing activities (2,796) (2,578) (3,457)
Net cash (used in) provided by financing activities (3,364) 883 (1,548)
Net (decrease) increase in cash, cash equivalents and
restricted cash $ (289) $ 545 $ (1,008)
Operating Activities
Net cash provided by operating activities increased by $3.6 billion , for fiscal
2021 as compared to fiscal 2020. The increase was due primarily to higher
earnings, which includes a $2.2 billion litigation judgment.
Our key working capital metrics were as follows:
As of
2021 2020 2019
Days of sales outstanding in accounts receivable ("DSO") 49 42 37
Days of supply in inventory ("DOS") 82 48 45
Days of purchases outstanding in accounts payable ("DPO") (128)
(97) (104)
Cash conversion cycle 3 (7) (22)
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HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
The cash conversion cycle is the sum of DSO and DOS less DPO. Items which may
cause the cash conversion cycle in a particular period to differ include, but
are not limited to, changes in business mix, changes in payment terms (including
extended payment terms to customers or from suppliers), early or late invoice
payments from customers or to suppliers, the extent of receivables factoring,
seasonal trends, the timing of sales and inventory purchases within the period,
the impact of commodity costs and acquisition activity.
DSO measures the average number of days our receivables are outstanding. DSO is
calculated by dividing ending accounts receivable, net of allowance for doubtful
accounts, by a 90-day average of net revenue. For fiscal 2021, as compared to
the prior-year period, DSO increased due primarily to a decrease in early
payments and factoring, extended payments terms and unfavorable billing
linearity.
DOS measures the average number of days from procurement to sale of our product.
DOS is calculated by dividing ending inventory by a 90-day average of cost of
goods sold. For fiscal 2021, as compared to the prior-year period, the DOS
increased due primarily to higher levels of inventory resulting from a
combination of supply chain constraints, positioning of inventory to fulfill
planned future shipments and strategic purchases of certain key components.
DPO measures the average number of days our accounts payable balances are
outstanding. DPO is calculated by dividing ending accounts payable by a 90-day
average of cost of goods sold. For fiscal 2021, as compared to the prior-year
period, DPO increased due primarily to higher inventory purchases for planned
future shipments and extended payment terms.
Investing Activities
Net cash used in investing activities increased by $0.2 billion in fiscal 2021
as compared to fiscal 2020. The change was primarily due to higher cash utilized
for investment in property, plant and equipment, net of sales proceeds of $0.5
billion and higher cash utilized in net financial collateral activities of $0.1
billion , partially offset by lower payments made in connection with business
acquisitions, net of $0.4 billion .
Financing Activities
Net cash generated in financing activities decreased by $4.2 billion in fiscal
2021 as compared to fiscal 2020. The decrease was due primarily to lower
proceeds from debt issuance of $4.0 billion , higher cash utilized for debt
repayment of $0.4 billion and lower cash utilized for share repurchase of $0.1
billion .
Free Cash Flow
For the
fiscal years ended
2021 2020 2019
In millions
Net cash provided by operating activities $ 5,871 $ 2,240 $ 3,997
Litigation judgment, net of taxes paid (2,172) - -
Net cash provided by operating activities, excluding litigation judgment, net of taxes paid
3,699 2,240 3,997
Investment in property, plant and equipment (2,502) (2,383) (2,856)
Proceeds from sale of property, plant and equipment 354 703 597
Free Cash Flow $ 1,551 $ 560 $ 1,738
Free cash flow is defined as cash flow from operations less investments in
property, plant and equipment net of proceeds from the sale of property, plant
and equipment. In fiscal 2021, free cash flow does not include $2.2 billion of
after-tax cash impact from Oracle's satisfaction of the judgment in the Itanium
litigation. Free cash flow increased by $1.0 billion in fiscal 2021 as compared
to fiscal 2020. The increase was due to higher cash generated from operations
and improved net working capital moderated by increased cash used for
investments in property, plant and equipment, net of sales proceeds.
Our improved free cash flow outlook and cash position help to ensure we have
ample liquidity to run operations, continuing to invest in our business to drive
growth and return capital to shareholders.
For more information on the impact from operating assets and liabilities to cash
flows, see Note 7, "Balance Sheet Details", to the Consolidated Financial
Statements in Item 8, which is incorporated herein by reference.
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HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
Capital Resources
Debt Levels
As of October 31,
2021 2020 2019
In millions
Short-term debt $ 3,552 $ 3,755 $ 4,425
Long-term debt $ 9,896 $ 12,186 $ 9,395 Weighted-average interest rate 2.9 % 3.2 % 4.1 %
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. For more information on the activity for fiscal 2021 relating toUnsecured Senior Notes and Asset-Backed Debt Securities , see Note 14, "Borrowings", to the Consolidated Financial Statements in Item 8, which is incorporated herein by reference. Commercial Paper We maintain two commercial paper programs, "the Parent Programs", and a wholly-owned subsidiary maintains a third program. OurU.S. program provides for the issuance ofU.S. dollar-denominated commercial paper up to a maximum aggregate principal amount of$4.75 billion which was increased from$4.0 billion inMarch 2020 . Our euro commercial paper program provides for the issuance of commercial paper outside of theU.S. denominated inU.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 as authorized by our Board of Directors. 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 ofOctober 31, 2021 andOctober 31, 2020 , no borrowings were outstanding under the Parent Programs, and$705 million and$677 million , respectively, were outstanding under our subsidiary's program. During fiscal 2021, we issued$757 million and repaid$728 million of commercial paper. 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 13, "Financial Instruments", to the Consolidated Financial Statements in Item 8, which is incorporated herein by reference. InDecember 2020 , we filed a shelf registration statement with theSecurities 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. Revolving Credit Facility We maintain a$4.75 billion five year senior unsecured committed credit facility that was entered into inAugust 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 onHewlett Packard Enterprise's external credit rating. As ofOctober 31, 2021 andOctober 31, 2020 , no borrowings were outstanding under the Credit Agreement. 51
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HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
Available Borrowing Resources
As of
As of
October 31, 2021
In millions
Commercial paper programs $ 5,045
Uncommitted lines of credit $ 972
For more information on our available borrowing resources and the impact of
operating assets and liabilities to cash flows, see Note 14, "Borrowings", and
Note 7, "Balance Sheet Details", respectively, to the Consolidated Financial
Statements in Part II, Item 8, which is incorporated herein by reference.
CONTRACTUAL CASH AND OTHER OBLIGATIONS
In fiscal 2020 the total of our contractual cash and other obligations was $20.8
billion and in fiscal 2021 totals $17.9 billion . Hence we do not currently
expect changes to our contractual cash and other obligations to significantly
impact our free cash flow expectations.
Our contractual cash and other obligations as of October 31, 2021 , were as
follows:
Payments Due by Period
1 Year or More than
Total Less 1-3 Years 3-5 Years 5 Years
In millions
Principal payments on long-term
debt(1) $ 12,404 $ 2,597
377 556 378 2,228
Operating lease obligations (net of
sublease rental income)(3) 1,140 187 316 241 396
Unconditional purchase obligations(4) 768 458 228 59 23
Capital lease obligations (includes
interest) 62 7 13 14 28
Total(5)(6)(7) $ 17,913 $ 3,626 $ 5,405 $ 3,957 $ 4,925
(1)Amounts represent the principal cash payments relating to our long-term debt,
including current portion of long-term debt, and do not include fair value
adjustments, discounts or premiums and debt issuance costs. As of October 31,
2021 , the future principal payments related to asset-backed debt securities were
expected to be $1.2 billion in fiscal 2022, $0.7 billion in fiscal 2023 and $0.2
billion in fiscal 2024. For more information on our debt, see Note 14,
"Borrowings", to the Consolidated Financial Statements in Item 8, which is
incorporated herein by reference.
(2)Amounts represent the expected interest payments relating to our long-term
debt. We use interest rate swaps to mitigate the exposure of our fixed rate debt
to changes in fair value resulting from changes in interest rates, or hedge the
variability of cash flows in the interest payments associated with our
variable-rate debt. The impact of our outstanding interest rate swaps at
October 31, 2021 was factored into the calculation of the future interest
payments on long-term debt.
(3)Amounts include uncommenced operating leases as of fiscal 2021 and do not
reflect imputed interest adjustments.
(4)For additional information on our Unconditional Purchase Obligations, see
Note 19, "Commitments", to the Consolidated Financial Statements in Item 8,
which is incorporated herein by reference.
(5)In fiscal 2022, we anticipate making contributions of $199 million to our
non-U.S. pension plans. Our policy is to fund pension plans so that we meet at
least the minimum contribution requirements, as established by various
authorities including local government and taxing authorities. Expected
contributions and payments to our pension and post-retirement benefit plans are
excluded from the contractual obligations table because they do not represent
contractual cash outflows, as they are dependent on numerous factors which may
result in a wide range of outcomes. For more information on our retirement and
post-retirement benefit plans, see Note 4, "Retirement and Post-Retirement
Benefit Plans", to the Consolidated Financial Statements in Item 8, which is
incorporated herein by reference.
(6)As of October 31, 2021 , we expect future cash payments of approximately $0.8
billion in connection with our approved restructuring plans, which includes $0.5
billion expected to be paid in fiscal 2022 and $0.3 billion expected to be paid
thereafter. Payments for restructuring activities have been excluded from the
contractual obligations table, because they do not represent contractual cash
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HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
outflows and there is uncertainty as to the timing of these payments. For more
information on our restructuring activities, see Note 3, "Transformation
Programs", to the Consolidated Financial Statements in Item 8, which is
incorporated herein by reference.
(7)As of October 31, 2021 , we had approximately $428 million of recorded
liabilities and related interest and penalties pertaining to uncertain tax
positions. These liabilities and related interest and penalties include
$68 million expected to be paid within one year. For the remaining amount, we
are unable to make a reasonable estimate as to when cash settlement with the tax
authorities might occur due to the uncertainties related to these tax matters.
Payments of these obligations would result from settlements with taxing
authorities. For more information on our uncertain tax positions, see Note 6,
"Taxes on Earnings", to the Consolidated Financial Statements in Item 8, which
is incorporated herein by reference.
Off-balance Sheet Arrangements
As part of our ongoing business, we have not participated in transactions that
generate material relationships with unconsolidated entities or financial
partnerships, such as entities often referred to as structured finance or
special purpose entities, established for the purpose of facilitating
off-balance sheet arrangements or other contractually narrow or limited
purposes.
We have third-party revolving short-term financing arrangements intended to
facilitate the working capital requirements of certain customers. For more
information on our third-party revolving short-term financing arrangements, see
Note 7, "Balance Sheet Details", to the Consolidated Financial Statements in
Item 8, which is incorporated herein by reference.
GAAP TO NON-GAAP RECONCILIATIONS
Effective at the beginning of the first quarter of fiscal 2021, the Company
excluded stock-based compensation expense from its segment earnings from
operations results and excluded stock-based compensation expense from non-GAAP
results. The Company has reflected this change retrospectively to its financial
results for the earliest period presented. This change had no impact on Hewlett
Packard Enterprise's previously reported consolidated GAAP results. However, the
Company reflected the change resulting from the reclassification of its
stock-based compensation expense by restating its consolidated non-GAAP gross
profit, non-GAAP gross profit margin, non-GAAP earnings from operations,
non-GAAP operating profit margin, non-GAAP net earnings and non-GAAP net
earnings per share.
The following tables provide reconciliation of GAAP to non-GAAP measures for
fiscal 2021 and 2020:
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HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)Reconciliation of GAAP net earnings and diluted net earnings per share to non-GAAP net earnings and diluted net earnings per share.
For the fiscal years ended
2021 2020
Diluted net Diluted net
Dollars in earnings per Dollars in earnings per
millions share millions share
GAAP net earnings (loss) $ 3,427
8 0.01 10 0.01
Amortization of intangible assets 354 0.27 379 0.29
Impairment of goodwill - - 865 0.67
Transformation costs 930 0.70 950 0.74
Disaster charges 16 0.01 26 0.02
Stock-based compensation expense 372 0.28 274 0.21
Acquisition, disposition and other related charges 36 0.03 107 0.08
Tax indemnification and related adjustments (65) (0.05) 101 0.08
Non-service net periodic benefit credit (70) (0.05) (136) (0.11)
Litigation judgment (2,351) (1.78) - -
Early debt redemption costs 100 0.08 - -
Earnings from equity interests(1) 109 0.08 145 0.11
Adjustments for taxes (264) (0.20) (394) (0.31)
Non-GAAP net earnings $ 2,602 $ 1.96 $ 2,005 $ 1.54
(1) Represents the amortization of basis difference adjustments related to the
H3C divestiture.
Reconciliation of GAAP earnings from operations and operating profit margin to
non-GAAP earnings from operations and operating profit margin.
For the fiscal years ended
2021 2020
% of % of
Dollars Revenue Dollars Revenue
In millions
GAAP earnings (loss) from operations $ 1,132 4.1 % $ (329) (1.2) %
Non-GAAP adjustments:
Amortization of initial direct costs 8 - % 10 - %
Amortization of intangible assets 354 1.3 % 379 1.4 %
Impairment of goodwill - - % 865 3.2 %
Transformation costs 930 3.3 % 950 3.5 %
Disaster charges 16 0.1 % 26 0.1 %
Stock-based compensation expense 372 1.3 % 274 1.0 %
Acquisition, disposition and other related charges 36 0.1 % 107 0.4 %
Non-GAAP earnings from operations $ 2,848 10.3 % $ 2,282 8.5 %
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HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)Reconciliation of GAAP gross profit and gross profit margin to non-GAAP gross profit and gross profit margin.
For the fiscal years ended
2021 2020
% of % of
Dollars Revenue Dollars Revenue
In millionsGAAP Net revenue$ 27,784 100 %$ 26,982 100 % GAAP Cost of sales 18,408 66.3 % 18,513 68.7 % GAAP gross profit$ 9,376 33.7 %$ 8,469 31.4 % Non-GAAP adjustments Amortization of initial direct costs 8 - % 10 - % Stock-based compensation expense 40 0.2 % 37 0.2 % Acquisition, disposition and other related charges(1) - - % 27 0.1 % Non-GAAP gross profit$ 9,424 33.9 %$ 8,543 31.7 % (1) Represent charges related to a non-cash inventory fair value adjustment in connection with the acquisition of Cray, which was included in Cost of Sales. Reconciliation of net cash provided by operating activities to free cash flow. For the fiscal years ended October 31, 2021 2020 In millions Net cash provided by operating activities$ 5,871 $ 2,240 Litigation judgment, net of taxes paid (2,172) -
Net cash provided by operating activities, excluding litigation judgment, net of taxes paid
3,699 2,240
Investment in property, plant and equipment (2,502) (2,383)
Proceeds from sale of property, plant and equipment 354 703
Free cash flow $ 1,551 $ 560
Non-GAAP financial measures
The non-GAAP financial measures presented are net revenue on a constant currency
basis, non-GAAP gross profit, non-GAAP gross profit margin, non-GAAP operating
profit margin (non-GAAP earnings from operations as a percentage of net
revenue), non-GAAP net earnings, non-GAAP diluted net earnings per share and
free cash flow. These non-GAAP financial measures are used by management for
purposes of evaluating our historical and prospective financial performance, as
well as evaluating our performance relative to our competitors. These non-GAAP
financial measures are not computed in accordance with, or as an alternative to,
generally accepted accounting principles in the United States . The GAAP measure
most directly comparable to net revenue on a constant currency basis is net
revenue. The GAAP measure most directly comparable to non-GAAP gross profit is
gross profit. The GAAP measure most directly comparable to non-GAAP gross profit
margin is gross profit margin. The GAAP measure most directly comparable to
non-GAAP earnings from operations is earnings from operations. The GAAP measure
most directly comparable to non-GAAP operating profit margin (non-GAAP earnings
from operations as a percentage of net revenue) is operating profit margin
(Earnings from operations as a percentage of net revenue). The GAAP measure most
directly comparable to non-GAAP net earnings is net earnings. The GAAP measure
most directly comparable to non-GAAP diluted net earnings per share is diluted
net earnings per share. The GAAP measure most directly comparable to cash flow
from operations and free cash flow, each excluding litigation judgment, net of
taxes paid, is cash flow from operations.
Net revenue on a constant currency basis assumes no change in the foreign
exchange rate from the prior-year period. Non-GAAP gross profit and non-GAAP
gross profit margin is defined to exclude charges related to the amortization of
initial direct costs, stock-based compensation expense and certain acquisition,
disposition and other related charges. Non-GAAP earnings from operations and
non-GAAP operating profit margin (non-GAAP earnings from operations as a
percentage of net
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HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
revenue) consist of earnings from operations excluding any charges related to
the amortization of initial direct costs, amortization of intangible assets,
impairment of goodwill, transformation costs, disaster charges, stock-based
compensation expense and acquisition, disposition and other related charges.
Non-GAAP net earnings and Non-GAAP diluted net earnings per share consist of net
earnings or diluted net earnings per share excluding those same charges, as well
as items such as tax indemnification and related adjustments, non-service net
periodic benefit credit, litigation judgment, early debt redemption costs,
earnings from equity interests, certain income tax valuation allowances and
separation taxes, the impact of U.S. tax reform, structural rate adjustment and
excess tax benefit from stock-based compensation. In addition, non-GAAP net
earnings and non-GAAP diluted net earnings per share are adjusted by the amount
of additional taxes or tax benefits associated with each non-GAAP item. We
believe that excluding the items mentioned above from these non-GAAP financial
measures allows management to better understand our consolidated financial
performance in relation to the operating results of our segments. Management
does not believe that the excluded items are reflective of ongoing operating
results, and excluding them facilitates a more meaningful evaluation of our
current operating performance in comparison to our peers. The excluded items can
be inconsistent in amount and frequency and/or not reflective of the operational
performance of the business.
These non-GAAP financial measures have limitations as analytical tools, and
these measures should not be considered in isolation or as a substitute for
analysis of our results as reported under GAAP. Some of the limitations in
relying on these non-GAAP financial measures are that they can have a material
impact on the equivalent GAAP earnings measures, 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 Consolidated Financial Statements to see our financial results
"through the eyes" of management.
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