HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
Results of operations in dollars and as a percentage of net revenue were as follows:
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Three months ended April 30,
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Six months ended April 30,
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2020
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2019
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2020
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2019
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Dollars
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% of
Revenue
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Dollars
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% of
Revenue
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Dollars
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% of
Revenue
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Dollars
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% of
Revenue
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Dollars in millions
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Net revenue
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$
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6,009
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|
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100.0
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%
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$
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7,150
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100.0
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%
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$
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12,958
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100.0
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%
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$
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14,703
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|
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100.0
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%
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Cost of sales
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4,095
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68.1
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4,845
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67.8
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8,762
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67.6
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10,052
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68.4
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Gross profit
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1,914
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|
|
31.9
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|
|
2,305
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32.2
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|
|
4,196
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32.4
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4,651
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31.6
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Research and development
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450
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7.5
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|
457
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6.4
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935
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7.2
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923
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6.3
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Selling, general and administrative
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1,109
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18.4
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|
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1,214
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16.9
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|
|
2,327
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|
17.9
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|
|
2,425
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|
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16.4
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Amortization of intangible assets
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84
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|
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1.5
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|
|
69
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|
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0.9
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|
|
204
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|
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1.6
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|
|
141
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|
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0.9
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Impairment of goodwill
|
865
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14.4
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—
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—
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865
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6.7
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—
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—
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Transformation costs
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200
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|
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3.3
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|
|
54
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0.8
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|
|
289
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|
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2.3
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|
|
132
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0.9
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Disaster charges (recovery)
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22
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0.4
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(7)
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(0.1)
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|
22
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|
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0.2
|
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(7)
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—
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Acquisition, disposition and other related charges
|
18
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|
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0.3
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|
|
84
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|
|
1.2
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|
|
40
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|
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0.3
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|
|
147
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|
|
1.0
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(Loss) earnings from operations
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(834)
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|
(13.9)
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|
|
434
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|
|
6.1
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(486)
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(3.8)
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|
890
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6.1
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Interest and other, net
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(68)
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(1.1)
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(18)
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(0.3)
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(87)
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(0.7)
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(69)
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(0.5)
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Tax indemnification adjustments
|
(35)
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(0.6)
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|
4
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0.1
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(56)
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(0.4)
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|
223
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1.5
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Non-service net periodic benefit credit
|
36
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0.6
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17
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0.3
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|
73
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0.6
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|
33
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0.2
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(Loss) earnings from equity interests
|
(10)
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(0.2)
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3
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—
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|
23
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|
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0.2
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18
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|
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0.1
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(Loss) earnings before taxes
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(911)
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(15.2)
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440
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6.2
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(533)
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(4.1)
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1,095
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7.4
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Benefit (provision) for taxes
|
90
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1.5
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(21)
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(0.3)
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45
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0.3
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(499)
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(3.3)
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Net (loss) earnings
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$
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(821)
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(13.7)
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%
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$
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419
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5.9
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%
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$
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(488)
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(3.8)
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%
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$
|
596
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4.1
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%
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Stock-based compensation expense is included within costs and expenses presented in the table above as follows:
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Three months ended April 30,
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Six months ended April 30,
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2020
|
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2019
|
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2020
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2019
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In millions
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Cost of sales
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$
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9
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$
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11
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$
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22
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$
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23
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Research and development
|
19
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|
19
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|
46
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|
40
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Selling, general and administrative
|
39
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|
44
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|
92
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|
|
86
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Transformation costs
|
—
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|
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—
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|
|
—
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2
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Acquisition, disposition and other related charges
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1
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—
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|
1
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|
|
—
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Stock-based compensation expense
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$
|
68
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$
|
74
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|
|
$
|
161
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|
$
|
151
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|
During the three months ended April 30, 2020 the Company reversed $20 million of previously recognized compensation costs for the performance based awards that are no longer probable of vesting.
Net Revenue
For the three months ended April 30, 2020, as compared to the prior-year period, total net revenue decreased by $1.1 billion, or 16.0% (decreased 14.6% on a constant currency basis). U.S. net revenue decreased by $278 million, or 12.7%, to $1.9 billion, and net revenue from outside of the U.S. decreased by $863 million, or 17.4%, to $4.1 billion. For the six months ended April 30, 2020, as compared to the prior-year period, total net revenue decreased by $1.7 billion, or 11.9% (decreased 10.7% on a constant currency basis). U.S. net revenue decreased by $461 million, or 9.8%, to $4.2 billion, and net revenue from outside of the U.S. decreased by $1.3 billion, or 12.8%, to $8.7 billion.
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
The components of the weighted net revenue change by segment were as follows:
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Three months ended April 30, 2020
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|
Six months ended April 30, 2020
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Percentage points
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Compute
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(9.5)
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(8.6)
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Storage
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(3.2)
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(2.3)
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HPC & MCS
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(1.9)
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(0.6)
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Financial Services
|
(0.9)
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|
(0.8)
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A & PS
|
(0.3)
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|
(0.1)
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Intelligent Edge
|
(0.3)
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|
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—
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Corporate Investments/Other (1)
|
0.1
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0.5
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Total HPE
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(16.0)
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|
(11.9)
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(1) Other primarily relates to the elimination of intersegment net revenue.
Three months ended April 30, 2020 compared with three months ended April 30, 2019
From a segment perspective, the primary factors contributing to the change in total net revenue are summarized as follows:
•Compute net revenue declined due primarily to supply chain constraints and customer acceptance challenges related to COVID-19, and competitive pricing pressures;
•HPC & MCS net revenue decreased due to challenges performing on-site installations and meeting customer acceptance milestones, and delays with order fulfillment related to COVID-19 and lower services attach;
•Storage net revenue decreased due primarily to uneven demand, and supply chain constraints and customer acceptance challenges due to COVID-19 and lower revenue from the expiration of a one-time legacy contract;
•A & PS net revenue decreased due primarily to demand weakness and delivery delays in Europe and America given lockdown restrictions due to COVID-19;
•Intelligent Edge net revenue decreased due primarily to unfavorable foreign currency fluctuations, market weakness for switching products and lower revenue from software; and
•HPE Financial Services net revenue decreased due primarily to a decrease in rental revenue due to lower average operating lease assets and unfavorable currency fluctuations.
Six months ended April 30, 2020 compared with six months ended April 30, 2019
From a segment perspective, the primary factors contributing to the change in total net revenue are summarized as follows:
•Compute net revenue declined due primarily to multiple factors including supply chain and customer acceptance constraints from COVID-19, commodity and manufacturing capacity constraints, and competitive pricing pressures;
•HPC & MCS net revenue decreased due to challenges performing on-site installations and meeting customer acceptance milestones, and delays with order fulfillment related to COVID-19, unfavorable large deal linearity, and lower services attach;
•Storage net revenue decreased due primarily to uneven demand, supply chain and customer acceptance constraints partially related to COVID-19, commodity and North American manufacturing capacity constraints. and lower revenue from the expiration of a one-time legacy contract;
•A & PS net revenue decreased due primarily to demand weakness and delivery delays in Europe and America due to lockdown restrictions related to COVID-19 ;
•Intelligent Edge net revenue decreased due primarily to unfavorable foreign currency fluctuations and lower revenue from switching products driven by market weakness; and
•HPE Financial Services net revenue decreased due primarily to a decrease in rental revenue due to lower average operating lease assets, unfavorable currency fluctuation, and lower lease equipment buyout revenue.
A more detailed discussion of segment revenue is included under "Segment Information" below.
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
Gross Profit
For the three months ended April 30, 2020, as compared to the prior-year period, total gross profit margin decreased 0.3 percentage points. The decline in gross profit margin was due to multiple factors led by competitive pricing pressures, the scale of the net revenue decline which resulted in higher fixed overhead costs as a percentage of net revenue and higher supply chain costs related to COVID-19. These increases were partially offset by our continued shift to higher margin products and services and lower variable compensation expense.
For the six months ended April 30, 2020, as compared to the prior-year period, total gross margin increased 0.8 percentage points. The gross margin increase was primarily due to a favorable mix of revenue from higher margin products and services along with improved service delivery costs, lower commodity costs and lower variable compensation expense. These increases were partially offset primarily by competitive pricing pressures and supply chain costs related to COVID-19.
Research and Development
Research and development ("R&D") expense decreased by $7 million or 2% for the three months ended April 30, 2020, as compared to the prior-year period, due primarily to lower variable compensation expense, partially offset by on-going expenses from business acquisitions.
Research and development ("R&D") expense increased by $12 million or 1% for the six months ended April 30, 2020, as compared to the prior-year period, due primarily to on-going expenses from business acquisitions, partially offset by lower variable compensation expense.
Selling, General and Administrative
Selling, general and administrative expense decreased by $105 million or 9%, and by $98 million or 4% for the three and six months ended April 30, 2020, respectively, as compared to the prior-year periods, due primarily to lower variable compensation expense, favorable currency fluctuations, partially offset by on-going expenses from business acquisitions.
Amortization of Intangible Assets
Amortization of intangible assets increased by $15 million or 22%, for the three months ended April 30, 2020, as compared to the prior-year period, due to an increase in the amortization of intangible assets from recent business acquisitions, partially offset by certain intangible assets associated with prior acquisitions reaching the end of their amortization period.
Amortization of intangible assets increased by $63 million or 45%, for the six months ended April 30, 2020, as compared to the prior-year period, due to an increase in the amortization of intangible assets from recent acquisitions and the write-off of certain intangible assets, partially offset by certain intangible assets associated with prior acquisitions reaching the end of their amortization period.
Impairment of Goodwill
The Company recorded a partial goodwill impairment charge of $865 million in the second quarter of fiscal 2020 as it was determined that the fair value of the HPC & MCS reporting unit was below the carrying value of its net assets.
While the other reporting units were negatively impacted by COVID-19, their fair values continued to exceed the carrying value of their net assets and did not result in impairment. In order to evaluate the sensitivity of the estimated fair value of other reporting units for the quantitative goodwill impairment test, the Company applied a hypothetical 10% reduction to the estimated fair value of each of these other reporting units. Based on the results of this hypothetical 10% reduction to the estimated fair value, each of these other reporting units had an excess of fair value over carrying value of their net assets. However, should economic conditions deteriorate further or remain depressed for a prolonged period of time, estimates of future cash flows for each of our reporting units may be insufficient to support the carrying value and the goodwill assigned to them, requiring impairment charges, including additional impairment charges for the HPC & MCS reporting unit. Further impairment charges, if any, may be material to our results of operations and financial position. See Part II, Item 1A, Risk Factors for a discussion of the potential impacts of COVID-19 on the fair value of our assets.
Transformation Costs
HPE Next transformation costs increased by $146 million or 270%, and by $157 million or 119%, for the three and six months ended April 30, 2020, respectively, as compared to the prior-year periods, due to higher restructuring costs, partially offset by higher gains from the sale of real estate during the six months ended April 30, 2020.
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
Given an uncertain business environment, in March 2020, the Company announced the extension of the HPE Next initiative to fiscal 2021.
Disaster charges (recovery)
Disaster charges for the three and six months ended April 30, 2020, represent direct costs resulting from COVID-19 for HPE hosted, co-hosted, or sponsored events which were converted to a virtual format or cancelled. For the three and six months ended April 30, 2019, disaster recovery amounts represent insurance recoveries in relation to damage to our facilities in Houston, Texas due to Hurricane Harvey in fiscal 2017.
Acquisition, Disposition and Other Related Charges
Acquisition, disposition and other related charges decreased by $66 million or 79%, and by $107 million or 73%, for the three and six months ended April 30, 2020, respectively, as compared with the prior-year periods, due primarily to higher costs in the prior-year period for legal fees and disposition activities, partially offset by recent business acquisition costs related to retention bonuses and integration activities.
Interest and Other, Net
Interest and other, net expense increased by $50 million for the three months ended April 30, 2020, as compared with the prior-year period, due primarily to unfavorable currency fluctuations. Interest and other, net expense increased by $18 million for the six months ended April 30, 2020, as compared with the prior-year period, due primarily to unfavorable currency fluctuations and higher net interest expense, partially offset by a gain on the sale of certain assets in the current year.
Tax Indemnification Adjustments
We recorded tax indemnification expense of $35 million and tax indemnification income of $4 million for the three months ended April 30, 2020 and 2019, respectively, and tax indemnification expense of $56 million and tax indemnification income of $223 million for the six months ended April 30, 2020 and 2019, respectively. For the three and six months ended April 30, 2020, the amount resulted from changes in certain pre-Separation tax liabilities for which we share joint and several liability with HP Inc. and for which we are indemnified by HP Inc. For the six months ended April 30, 2019, the amount was due primarily to the effects of U.S. tax reform on tax attributes related to fiscal periods prior to the Separation.
Non-service net periodic benefit
Non-service net periodic benefit credit increased by $19 million and $40 million for the three and six months ended April 30, 2020, respectively, as compared with the prior-year period, due primarily to lower interest rates.
(Loss) earnings from Equity Interests
Earnings from equity interests primarily represents our 49% interest in H3C Technologies' ("H3C") earnings and the amortization of our interest in a basis difference. For the three months ended April 30, 2020, earnings from equity interests decreased by $13 million, as compared to the prior-year period, due to lower net income earned by H3C. For the six months ended April 30, 2020, earnings from equity interests increased by $5 million, as compared to the prior-year period, due to higher net income earned by H3C.
Provision for Taxes
Our effective tax rate was 9.9% and 4.8% for the three months ended April 30, 2020 and 2019, respectively, and 8.4% and 45.6% for the six months ended April 30, 2020, and 2019, respectively. The effective tax rates for the three and six months ended April 30, 2020 differed from the statutory tax rate due to favorable tax rates associated with certain earnings from our operations in lower tax jurisdictions throughout the world, tax rate changes, and the effects of the non-deductible goodwill impairment. The effective tax rates for the three and six months ended April 30, 2019 were significantly impacted by the Tax Act. Our effective tax rate is based on forecasted annual results which may fluctuate significantly through the remainder of fiscal 2020 due to the uncertain economic impact of COVID-19 on our operating results.
Segment Information
Effective in the first quarter of fiscal 2020, we implemented certain organizational changes to align our segment financial reporting more closely with our current business structure. We replaced the Hybrid IT segment with four new financial reporting segments, Compute, High Performance Compute & Mission-Critical Systems, Storage and Advisory and Professional Services as follows:
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
•we created the Compute segment consisting of the general purpose server and workload optimized server portfolios that were previously a part of the Hybrid IT-Compute business unit and the related operational services business that was previously a part of the Hybrid IT-HPE Pointnext business unit;
• we created the HPC & MCS segment consisting of the high performance compute, mission-critical systems and edge compute offerings that were previously a part of the Hybrid IT-Compute business unit and the related operational services business that was previously a part of the Hybrid IT-HPE Pointnext business unit;
•we created the Storage segment consisting of the former Hybrid IT-Storage business unit and the related operational services business that was previously a part of the Hybrid IT-HPE Pointnext business unit and the hyperconverged infrastructure products that were previously a part of the Hybrid IT-Compute business unit;
•we created the A & PS segment consisting of the consultative-led services that were previously a part of the Hybrid IT-HPE Pointnext business unit; and
•we transferred the DC Networking operational services business that was previously a part of the Hybrid IT-HPE Pointnext business unit to the Intelligent Edge segment.
As a result of these realignments, our operations are now organized into seven segments for financial reporting purposes: Compute, HPC & MCS, Storage, A & PS, Intelligent Edge, FS, and Corporate Investments.
For additional information related to these realignments and for a description of the products and services for each segment, see Note 2, "Segment Information".
Compute
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended April 30,
|
|
|
|
|
|
2020
|
|
2019
|
|
% Change
|
|
Dollars in millions
|
|
|
|
|
Net revenue
|
$
|
2,640
|
|
|
$
|
3,318
|
|
|
(20.4)
|
%
|
Earnings from operations
|
$
|
125
|
|
|
$
|
307
|
|
|
(59.3)
|
%
|
Earnings from operations as a % of net revenue
|
4.7
|
%
|
|
9.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended April 30,
|
|
|
|
|
|
2020
|
|
2019
|
|
% Change
|
|
Dollars in millions
|
|
|
|
|
Net revenue
|
$
|
5,651
|
|
|
$
|
6,893
|
|
|
(18.0)
|
%
|
Earnings from operations
|
$
|
411
|
|
|
$
|
647
|
|
|
(36.5)
|
%
|
Earnings from operations as a % of net revenue
|
7.3
|
%
|
|
9.4
|
%
|
|
|
|
|
|
|
|
|
Three months ended April 30, 2020 compared with three months ended April 30, 2019
Compute net revenue decreased by $678 million, or 20.4% (decreased 19.1% on a constant currency basis), for the three months ended April 30, 2020 as compared to the prior-year period.
Net revenue in Compute was impacted by supply chain constraints and customer acceptance challenges given lockdown actions taking place across the globe related to COVID-19 and competitive pricing pressures. As a result, Compute experienced a decline in unit shipments and lower average unit selling prices.
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
Compute earnings from operations as a percentage of net revenue decreased 4.6 percentage points for the three months ended April 30, 2020, as compared to the prior-year period, due to an increase in cost of products and services as a percentage of net revenue and an increase in operating expenses as a percentage of net revenue. The increase to cost of products as a percentage of net revenue was due primarily to competitive pricing pressures and increased supply chain logistic costs resulting from COVID-19, partially offset by lower commodity costs and variable compensation expense. The increase in operating expense as a percentage of net revenue was due to the scale of the net revenue decline while total operating expenses declined year-over-year due primarily to lower variable compensation expense and restricted discretionary spending during the period on travel and hiring due to COVID-19. These declines were partially offset by higher field selling costs.
Six months ended April 30, 2020 compared with six months ended April 30, 2019
Compute net revenue decreased by $1.2 billion or 18.0% (decreased 16.8% on a constant currency basis), for the six months ended April 30, 2020, as compared to the prior-year period.
In the second quarter of fiscal 2020, as compared to the prior-year period, net revenue in Compute was impacted by supply chain and customer acceptance constraints given lockdown actions taking place across the globe related to COVID-19, and competitive pricing pressures. In the first quarter of fiscal 2020, as compared to the prior-year period, Compute experienced challenges with commodity and North American manufacturing capacity constraints. As a result, for the first six months of fiscal 2020, as compared to the prior-year period, Compute experienced a decline in unit shipments and average unit selling prices.
Compute earnings from operations as a percentage of net revenue decreased 2.1 percentage points for the six months ended April 30, 2020, as compared to the prior-year period due primarily to an increase in operating expenses as a percentage of net revenue while the total cost of products and services as a percentage of net revenue was mostly unchanged. The increase in operating expense as a percentage of net revenue was due to the scale of the net revenue decline while total operating expenses declined year-over-year due primarily to lower variable compensation expense partially offset by higher field selling costs. The cost of products and services as a percentage of net revenue remained mostly unchanged as competitive pricing pressures and higher supply chain logistics costs were offset by a combination of lower commodity costs, variable compensation expense and mix of Tier-1 server sales.
HPC & MCS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended April 30,
|
|
|
|
|
|
2020
|
|
2019
|
|
% Change
|
|
Dollars in millions
|
|
|
|
|
Net revenue
|
$
|
589
|
|
|
$
|
721
|
|
|
(18.3)
|
%
|
Earnings from operations
|
$
|
33
|
|
|
$
|
92
|
|
|
(64.1)
|
%
|
Earnings from operations as a % of net revenue
|
5.6
|
%
|
|
12.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended April 30,
|
|
|
|
|
|
2020
|
|
2019
|
|
% Change
|
|
Dollars in millions
|
|
|
|
|
Net revenue
|
$
|
1,412
|
|
|
$
|
1,500
|
|
|
(5.9)
|
%
|
Earnings from operations
|
$
|
82
|
|
|
$
|
190
|
|
|
(56.8)
|
%
|
Earnings from operations as a % of net revenue
|
5.8
|
%
|
|
12.7
|
%
|
|
|
Three months ended April 30, 2020 compared with three months ended April 30, 2019
HPC & MCS net revenue decreased by $132 million, or 18.3% (decreased 17.8% on a constant currency basis), for the three months ended April 30, 2020, as compared to the prior-year period.
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
Net revenue in HPC & MCS decreased due to challenges performing on-site installations and meeting customer acceptance milestones, and delays with order fulfillment as a result of supply chain constraints due to COVID-19. Additionally, lower services attachment resulting from historical hardware revenue declines also contributed to the net revenue decline. These decreases were partially offset by the addition of revenue resulting from the acquisition of Cray which continues to perform consistent with our expectations.
HPC & MCS earnings from operations as a percentage of net revenue decreased 7.2 percentage points for the three months ended April 30, 2020, as compared to the prior-year period, due to an increase in operating expenses as a percentage of net revenue, partially offset by lower cost of products and services as a percentage of net revenue. The increase in operating expenses as a percentage of net revenue was due to the scale of the net revenue decline and the increase in total operating expenses due to the addition of expenses resulting from the acquisition of Cray. The decrease in cost of products and services as a percentage of net revenue was due primarily to a higher mix of lower-cost MCS product and a higher mix of lower-cost services, and lower variable compensation expense.
Six months ended April 30, 2020 compared with six months ended April 30, 2019
HPC & MCS net revenue decreased by $88 million, or 5.9% (decreased 5.4% on a constant currency basis), for the six months ended April 30, 2020, as compared to the prior-year period.
Net revenue decreased due to challenges performing on-site installations and meeting customer acceptance milestones, and delays with order fulfillment as a result of supply chain constraints from COVID-19, unfavorable large deal linearity, and lower services attachment resulting from historical hardware revenue declines. These decreases were partially offset by the addition of revenue resulting from Cray which continues to perform consistent with our expectations.
HPC & MCS earnings from operations as a percentage of net revenue decreased 6.9 percentage points for the six months ended April 30, 2020, as compared to the prior-year period, due to an increase to operating expenses as a percentage of net revenue partially offset by lower cost of products and services as a percentage of net revenue. The increase in operating expenses as a percentage of net revenue was due to the addition of expenses resulting from the acquisition of Cray. The decrease in cost of products and services as a percentage of net revenue was due primarily to lower variable compensation expense, a higher mix of lower-cost MCS products and a higher mix of services.
Storage
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended April 30,
|
|
|
|
|
|
2020
|
|
2019
|
|
% Change
|
|
Dollars in millions
|
|
|
|
|
Net revenue
|
$
|
1,086
|
|
|
$
|
1,318
|
|
|
(17.6)
|
%
|
Earnings from operations
|
$
|
145
|
|
|
$
|
244
|
|
|
(40.6)
|
%
|
Earnings from operations as a % of net revenue
|
13.4
|
%
|
|
18.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended April 30,
|
|
|
|
|
|
2020
|
|
2019
|
|
% Change
|
|
Dollars in millions
|
|
|
|
|
Net revenue
|
$
|
2,336
|
|
|
|
$
|
2,674
|
|
|
(12.6)
|
%
|
Earnings from operations
|
$
|
371
|
|
|
|
$
|
498
|
|
|
(25.5)
|
%
|
Earnings from operations as a % of net revenue
|
15.9
|
%
|
|
18.6
|
%
|
|
|
Three months ended April 30, 2020 compared with three months ended April 30, 2019
Storage net revenue decreased by $232 million or 17.6% (decreased 16.4% on a constant currency basis), for the three months ended April 30, 2020 as compared to the prior-year period.
Net revenue in Storage was impacted by uneven demand and supply chain constraints and customer acceptance challenges given lockdown actions taking place across the globe related to COVID-19 and lower revenue from the expiration of a one-time legacy contract. Partially offsetting the net revenue decline was higher revenue from Big Data and Storage services.
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
Storage earnings from operations as a percentage of net revenue decreased 5.1 percentage points for the three months ended April 30, 2020, as compared to the prior-year period, due to an increase in cost of product as a percentage of net revenue and an increase in operating expenses as a percentage of net revenue. The increase in cost of product as a percentage of net revenue was due primarily to the scale of the net revenue decline which resulted in higher fixed overhead costs as a percentage of net revenue, and competitive pricing pressure, the effects of which were partially offset by lower variable compensation expense and lower cost of services. The increase in operating expense as a percentage of net revenue was due primarily to the scale of the net revenue decline, while total operating expenses declined during the period due to restrictions on travel and hiring due to COVID-19 and lower variable compensation expense.
Six months ended April 30, 2020 compared with six months ended April 30, 2019
Storage net revenue decreased by $338 million or 12.6% (decreased 11.4% on a constant currency basis), for the six months ended April 30, 2020, as compared to the prior-year period.
Net revenue in Storage was impacted by uneven demand, and supply chain and customer acceptance constraints in the first half of fiscal 2020, coupled with commodity and North American manufacturing capacity constraints in the first quarter of fiscal 2020. Additionally, lower revenue from the expiration of a one-time legacy contract contributed to the net revenue decline. Partially offsetting the net revenue decrease was revenue growth from Big Data and Storage services.
Storage earnings from operations as a percentage of net revenue decreased 2.7 percentage points for the six months ended April 30, 2020, as compared to the prior-year period, due to an increase in operating expenses as a percentage of net revenue, partially offset by a decrease in cost of product and services as a percentage of net revenue. The increase in operating expenses as a percentage of net revenue was due primarily to the scale of the net revenue decline, which was partially offset by lower variable compensation expense and lower field selling costs. The decrease in the cost of product and services as a percentage of net revenue was due primarily to lower commodity costs, lower cost of services as a result of delivery efficiencies and lower variable compensation expense.
A & PS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended April 30,
|
|
|
|
|
|
2020
|
|
2019
|
|
% Change
|
|
Dollars in millions
|
|
|
|
|
Net revenue
|
$
|
237
|
|
|
$
|
260
|
|
|
(8.8)
|
%
|
Earnings (loss) from operations
|
$
|
2
|
|
|
$
|
(14)
|
|
|
114.3
|
%
|
Earnings (loss) from operations as a % of net revenue
|
0.8
|
%
|
|
(5.4)
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended April 30,
|
|
|
|
|
|
2020
|
|
2019
|
|
% Change
|
|
Dollars in millions
|
|
|
|
|
Net revenue
|
$
|
480
|
|
|
$
|
501
|
|
|
(4.2)
|
%
|
Earnings (loss) from operations
|
$
|
—
|
|
|
$
|
(46)
|
|
|
100.0
|
%
|
Earnings (loss) from operations as a % of net revenue
|
—
|
%
|
|
(9.2)
|
%
|
|
|
Three months ended April 30, 2020 compared with three months ended April 30, 2019
A & PS net revenue decreased by $23 million, or 8.8% (decreased 7.7% on a constant currency basis), for the three months ended April 30, 2020 as compared to the prior-year period.
The decrease in A & PS net revenue was due primarily to demand weakness and delivery delays in Europe and the Americas regions given the lockdown actions and constraints taking place across the globe as a result of COVID-19 partially offset by strength in the Asia Pacific and Japan region driven by strong revenue growth in Japan.
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
A & PS earnings from operations as a percentage of net revenue improved 6.2 percentage points for the three months ended April 30, 2020, as compared to the prior-year period, due to lower cost of services as a percentage of net revenue coupled with a decrease in operating expenses as a percentage of net revenue. The decrease to cost of services as a percentage of net revenue was due primarily to lower variable compensation expense and improved service delivery and overhead efficiencies. The decrease to operating expenses as a percentage of net revenue was due primarily to a reduction in field selling costs.
Six months ended April 30, 2020 compared with six months ended April 30, 2019
A & PS net revenue decreased by $21 million, or 4.2% (decreased 3.8% on a constant currency basis), for the six months ended April 30, 2020 as compared to the prior-year period.
The decrease in A & PS net revenue was due primarily to demand weakness and delivery delays in Europe and the Americas regions given the lockdown actions and constraints taking place across the globe as a result of COVID-19 partially offset by strength in the Asia Pacific and Japan region driven by strong revenue growth in Japan.
A & PS earnings from operations as a percentage of net revenue improved 9.2 percentage points for the six months ended April 30, 2020, as compared to the prior-year period, due to lower cost of services as a percentage of net revenue coupled with a decrease in operating expenses as a percentage of net revenue. The decrease to cost of services as a percentage of net revenue was due primarily to improved service delivery and overhead efficiencies. The decrease to operating expenses as a percentage of net revenue was due primarily to a reduction in research and development and field selling costs.
Intelligent Edge
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended April 30,
|
|
|
|
|
|
2020
|
|
2019
|
|
% Change
|
|
Dollars in millions
|
|
|
|
|
Net revenue
|
$
|
665
|
|
|
$
|
685
|
|
|
(2.9)
|
%
|
Earnings from operations
|
$
|
73
|
|
|
$
|
36
|
|
|
102.8
|
%
|
Earnings from operations as a % of net revenue
|
11.0
|
%
|
|
5.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended April 30,
|
|
|
|
|
|
2020
|
|
2019
|
|
% Change
|
|
Dollars in millions
|
|
|
|
|
Net revenue
|
$
|
1,385
|
|
|
$
|
1,390
|
|
|
(0.4)
|
%
|
Earnings from operations
|
$
|
143
|
|
|
$
|
60
|
|
|
138.3
|
%
|
Earnings from operations as a % of net revenue
|
10.3
|
%
|
|
4.3
|
%
|
|
|
Three months ended April 30, 2020 compared with three months ended April 30, 2019
Intelligent Edge net revenue decreased by $20 million, or 2.9% (decreased 1.6% on a constant currency basis), for the three months ended April 30, 2020, as compared to the prior-year period.
The decrease in Intelligent Edge net revenue was due primarily to unfavorable foreign currency fluctuations, market weakness for switching products and lower software net revenue, partially offset by an increase in net revenue from service renewals and WLAN products in North America.
Intelligent Edge earnings from operations as a percentage of net revenue increased 5.7 percentage points for the three months ended April 30, 2020 as compared to the prior year period due primarily to a decrease in operating expenses as a percentage of net revenue. The cost of products and services as a percentage of net revenue were largely unchanged. The decrease in operating expenses as a percentage of net revenue was due primarily to lower field selling costs. The cost of product and services as a percentage of net revenue were largely unchanged due primarily to cost improvements in WLAN and switching products offset by higher costs in services and software.
Six months ended April 30, 2020 compared with Six months ended April 30, 2019
Intelligent Edge net revenue decreased by $5 million, or 0.4% (increased 1.0% on a constant currency basis), for the six months ended April 30, 2020, as compared to the prior-year period.
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
The small decrease in Intelligent Edge net revenue was due primarily to unfavorable foreign currency fluctuations and lower revenue from switching products driven by market weakness, partially offset by higher revenue from WLAN products, service renewals and support services.
Intelligent Edge earnings from operations as a percentage of net revenue increased 6.0 percentage points for the six months ended April 30, 2020 as compared to the prior year period due primarily to lower cost of products and services as a percentage of net revenue, and lower operating expenses as a percentage of net revenue. The decrease in cost of products and services as a percentage of net revenue was due primarily to cost improvements in switches and a higher mix of revenue from lower cost WLAN products and services. The decrease in operating expense as a percentage of net revenue was due primarily to lower field selling costs.
Financial Services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended April 30,
|
|
|
|
|
|
2020
|
|
2019
|
|
% Change
|
|
Dollars in millions
|
|
|
|
|
Net revenue
|
$
|
833
|
|
|
$
|
896
|
|
|
(7.0)
|
%
|
Earnings from operations
|
$
|
75
|
|
|
$
|
77
|
|
|
(2.6)
|
%
|
Earnings from operations as a % of net revenue
|
9.0
|
%
|
|
8.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended April 30,
|
|
|
|
|
|
2020
|
|
2019
|
|
% Change
|
|
Dollars in millions
|
|
|
|
|
Net revenue
|
$
|
1,692
|
|
|
$
|
1,815
|
|
|
(6.8)
|
%
|
Earnings from operations
|
$
|
148
|
|
|
$
|
154
|
|
|
(3.9)
|
%
|
Earnings from operations as a % of net revenue
|
8.7
|
%
|
|
8.5
|
%
|
|
|
Three months ended April 30, 2020 compared with three months ended April 30, 2019
FS net revenue decreased by $63 million, or 7.0% (decreased 4.7% on a constant currency basis), for the three months ended April 30, 2020, as compared to the prior-year period.
The decrease in net revenue was due primarily to a decrease in rental revenue due to lower average operating lease assets and unfavorable currency fluctuations, partially offset by higher asset management revenue from lease extensions.
FS earnings from operations as a percentage of net revenue increased 0.4 percentage points for the three months ended April 30, 2020, as compared to the prior-year period, due primarily to lower cost of services as a percentage of net revenue, partially offset by an increase to operating expenses as a percentage of net revenue. The decrease to cost of services as a percentage of net revenue resulted from lower depreciation expense. The increase to operating expenses as a percentage of net revenue was due primarily to lower capitalized initial direct costs as a result of adopting the new lease accounting standard, along with the overall decrease in net revenue.
Six months ended April 30, 2020 compared with six months ended April 30, 2019
FS net revenue decreased by $123 million, or 6.8% (decreased 5.3% on a constant currency basis), for the six months ended April 30, 2020, as compared to the prior-year period.
The decrease in net revenue was due primarily to a decrease in rental revenue due to lower average operating lease assets, unfavorable currency fluctuations, along with lower lease equipment buyout revenue, partially offset by higher asset management revenue from lease extensions.
FS earnings from operations as a percentage of net revenue increased 0.2 percentage point for the six months ended April 30, 2020, as compared to the prior-year period, due primarily to lower cost of services as a percentage of net revenue, partially offset by an increase to operating expenses as a percentage of net revenue. The decrease to cost of services as a percentage of net revenue resulted from lower depreciation expense. The increase to operating expenses as a percentage of net revenue was
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
due primarily to lower capitalized initial direct costs as a result of adopting the new lease accounting standard, along with the overall decrease in net revenue.
Financing Volume
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended April 30,
|
|
|
|
Six months ended April 30,
|
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
In millions
|
|
|
|
|
|
|
Total financing volume
|
$
|
1,493
|
|
|
$
|
1,395
|
|
|
$
|
2,901
|
|
|
$
|
2,784
|
|
New financing volume, which represents the amount of financing provided to customers for equipment and related software and services, including intercompany activity, increased by 7.0% and 4.2% for the three and six months ended April 30, 2020 as compared to the prior-year periods. For both three and six months ended April 30, 2020, the increase was primarily driven by higher financing associated with third-party product sales and related service offerings, partially offset by unfavorable currency fluctuations. The growth in financing volume in the six month period was partially offset by lower financing associated with HPE product sales and related service offerings.
Portfolio Assets and Ratios
The portfolio assets and ratios derived from the segment balance sheets for FS were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
|
April 30, 2020
|
|
October 31, 2019
|
|
Dollars in millions
|
|
|
Financing receivables, gross
|
$
|
8,678
|
|
|
$
|
8,652
|
|
Net equipment under operating leases
|
3,887
|
|
|
4,084
|
|
Capitalized profit on intercompany equipment transactions(1)
|
325
|
|
|
382
|
|
Intercompany leases(1)
|
93
|
|
|
100
|
|
Gross portfolio assets
|
12,983
|
|
|
13,218
|
|
Allowance for doubtful accounts(2)
|
126
|
|
|
131
|
|
Operating lease equipment reserve
|
53
|
|
|
60
|
|
Total reserves
|
179
|
|
|
191
|
|
Net portfolio assets
|
$
|
12,804
|
|
|
$
|
13,027
|
|
Reserve coverage
|
1.4
|
%
|
|
1.4
|
%
|
Debt-to-equity ratio(3)
|
7.0x
|
|
7.0x
|
(1)Intercompany activity is eliminated in consolidation.
(2)Allowance for doubtful accounts for financing receivables includes both the short- and long-term portions.
(3)Debt benefiting FS consists of intercompany equity that is treated as debt for segment reporting purposes, intercompany debt, and borrowing- and funding-related activity associated with FS and its subsidiaries. Debt benefiting FS totaled $11.5 billion and $11.4 billion at April 30, 2020 and October 31, 2019, respectively, and was determined by applying an assumed debt-to-equity ratio, which management believes to be comparable to that of other similar financing companies. FS equity at both April 30, 2020 and October 31, 2019 was $1.6 billion.
As of April 30, 2020 and October 31, 2019, FS net cash and cash equivalents balances were approximately $676 million and $711 million, respectively.
Net portfolio assets as of April 30, 2020 decreased 1.7% from October 31, 2019. The decrease generally resulted from unfavorable currency fluctuations, partially offset by new financing volume exceeding portfolio runoff during the period.
FS bad debt expense includes charges to general reserves and specific reserves for sales-type, direct-financing and operating leases. For the three and six months ended April 30, 2020, FS recorded net bad debt expense of $19 million and $33 million, respectively. For the three and six months ended April 30, 2019, FS recorded net bad debt expense of $17 million and $32 million, respectively.
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
As of April 30, 2020, FS experienced an increase in billed finance receivables compared to October 31, 2019, which included some impact to collections from customers as a result of COVID-19. We are currently unable to fully predict the extent to which COVID-19 may adversely impact future collections of our receivables.
Corporate Investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended April 30,
|
|
|
|
|
|
2020
|
|
2019
|
|
% Change
|
|
Dollars in millions
|
|
|
|
|
Net revenue
|
$
|
124
|
|
|
$
|
125
|
|
|
(0.8)
|
%
|
Loss from operations
|
$
|
(28)
|
|
|
$
|
(29)
|
|
|
3.4
|
%
|
Loss from operations as a % of net revenue
|
(22.6)
|
%
|
|
(23.2)
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended April 30,
|
|
|
|
|
|
2020
|
|
2019
|
|
% Change
|
|
Dollars in millions
|
|
|
|
|
Net revenue
|
$
|
245
|
|
|
$
|
243
|
|
|
0.8
|
%
|
Loss from operations
|
$
|
(55)
|
|
|
$
|
(57)
|
|
|
3.5
|
%
|
Loss from operations as a % of net revenue
|
(22.4)
|
%
|
|
(23.5)
|
%
|
|
|
|
|
|
|
|
|
Three months ended April 30, 2020 compared with three months ended April 30, 2019
Corporate Investments net revenue decreased by $1 million, or 0.8% (increased 0.7% on a constant currency basis), for the three months ended April 30, 2020 as compared to the prior-year period. The decrease in Corporate Investments net revenue was due primarily to unfavorable currency fluctuations. Revenue in the Corporate Investments segment represents revenue from our Communications and Media Solutions ("CMS") business.
Corporate Investments loss from operations as a percentage of net revenue decreased 0.6 percentage points for the three months ended April 30, 2020, as compared to the prior-year period. The decrease was due primarily to lower cost of services, partially offset by higher legal expenses.
Six Months Ended April 30, 2020 compared with six months ended April 30, 2019
Corporate Investments net revenue increased by $2 million, or 0.8% (increased 1.6% on a constant currency basis), for the six months ended April 30, 2020 as compared to the prior-year period. The increase in Corporate Investments net revenue was due primarily to higher services revenue from the CMS business, partially offset by unfavorable currency fluctuations.
Corporate Investments loss from operations as a percentage of net revenue decreased 1.1 percentage points for the six months ended April 30, 2020, as compared to the prior-year period. The decrease was due primarily to lower cost of services, partially offset by higher legal expenses.
LIQUIDITY AND CAPITAL RESOURCES
We use cash generated by operations as our primary source of liquidity. We believe that internally generated cash flows will be generally sufficient to support our operating businesses, capital expenditures, product development initiatives, acquisitions and disposal activities including legal settlements, restructuring activities, transformation costs, indemnifications, maturing debt, interest payments, and income tax payments, in addition to any future investments, share repurchases and stockholder dividend payments. We expect to supplement this short-term liquidity, if necessary, by accessing the capital markets, issuing commercial paper, and borrowing under credit facilities made available by various domestic and foreign financial institutions. However, our access to capital markets may be constrained and our cost of borrowing may increase under certain business, market and economic conditions. Our liquidity is subject to various risks including the risks identified in the section entitled "Risk Factors" in Item 1A of Part II and market risks identified in the section entitled "Quantitative and Qualitative Disclosures about Market Risk" in Item 3 of Part I.
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
COVID-19 has severely impacted global economic activity and caused significant volatility and negative pressure in the capital markets, which increases the cost of capital and adversely impacts access to capital. In addition, our businesses may be adversely affected, which may have a material adverse impact on our profitability and cash flows, and the timing and collectability of payments may be adversely affected as a result of the impact of COVID-19 on our customers. As a result of the continued uncertainty generated by COVID-19, on April 9, 2020, we issued $2.25 billion aggregate principal amount of unsecured senior notes to enhance our liquidity and strengthen our capital. The net proceeds from this offering will be used for general corporate purposes, which may include the repayment of indebtedness. The pricing on our undrawn $4.75 billion revolving credit facility, maturing in August 2024, remains unchanged. We continue to monitor the severity and duration of the pandemic and its impact on the U.S. and global economies, consumer behavior, our businesses, results of operations, financial condition and cash flows.
On May 19, 2020, our Board of Directors approved a cost optimization and prioritization plan in order to focus our investments and realign the workforce to areas of growth and measures to simplify and evolve its product portfolio strategy, go-to-market configurations, supply chain structures, digital customer support model, marketing experiences, and real estate strategies. We expect that the Plan will be implemented through fiscal year 2022 and estimate it will include gross savings of at least $1.0 billion as a result of changes to our workforce, real estate model and business process improvements, with the Plan expected to deliver annualized net run-rate savings of at least $800 million by end of fiscal year 2022, in both cases relative to our fiscal year 2019 exit. In order to achieve this level of cost savings, we estimate cash funding payments between $1.0 billion to $1.3 billion over the next three years.
Our cash and cash equivalent balances are held in numerous locations throughout the world, with a majority of the amount held in the U.S. We utilize a variety of planning and financing strategies in an effort to ensure that our worldwide cash is available when and where it is needed. Our cash position is strong and we expect that our cash and cash equivalent balances, anticipated cash flow generated from operations and access to capital markets will be sufficient to cover our expected near-term cash outlays.
Amounts held outside of the U.S. are generally utilized to support non-U.S. liquidity needs. Repatriations of amounts held outside the U.S. generally will not be taxable from a U.S. federal tax perspective, but may be subject to state income or foreign withholding tax. Where local restrictions prevent an efficient intercompany transfer of funds, our intent is to keep cash balances outside of the U.S. and to meet liquidity needs through ongoing cash flows, external borrowings, or both. We do not expect restrictions or potential taxes incurred on repatriation of amounts held outside of the U.S. to have a material effect on our overall liquidity, financial condition or results of operations.
In connection with the share repurchase program previously authorized by our Board of Directors, during the first six months of fiscal 2020, we repurchased 25.3 million shares for an aggregate amount of $355 million. As of April 30, 2020, we had a remaining authorization of $2.1 billion for future share repurchases. As a result of increased uncertainty due to COVID-19, we have suspended purchases under our share repurchase program.
For more information on our share repurchase program, refer to the section entitled "Unregistered Sales of Equity Securities and Use of Proceeds" in Item 2 of Part II.
Liquidity
Our cash flow metrics were as follows:
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Six months ended April 30, 2020
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2020
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2019
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In millions
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Net cash provided by operating activities
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$
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21
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$
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1,369
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Net cash used in investing activities
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(104)
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(1,064)
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Net cash provided by (used in) financing activities
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1,997
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(1,600)
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Net increase (decrease) in cash, cash equivalents and restricted cash
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$
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1,914
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$
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(1,295)
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Operating Activities
For the six months ended April 30, 2020, net cash from operating activities decreased by $1.3 billion, as compared to the prior-year period. The decrease was due primarily to lower net earnings from operations and unfavorable net working capital, as compared to the prior-year period.
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
Working capital metrics for the three months ended April 30, 2020 compared with the three months ended April 30, 2019
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Three months ended April 30,
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2020
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2019
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Change
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Days of sales outstanding in accounts receivable ("DSO")
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39
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40
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(1)
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Days of supply in inventory ("DOS")
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76
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41
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35
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Days of purchases outstanding in accounts payable ("DPO")
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(120)
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(102)
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(18)
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Cash conversion cycle
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(5)
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(21)
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16
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The cash conversion cycle is the sum of DSO and DOS less DPO. Items which may cause the cash conversion cycle in a particular period to differ include, but are not limited to, changes in business mix, changes in payment terms (including extended payment terms from suppliers), the extent of receivables factoring, seasonal trends, the timing of the revenue recognition and inventory purchases within the period, the impact of commodity costs and acquisition activity. For the three months ended April 30, 2020, as compared to the corresponding three month period in fiscal 2019, the cash conversion cycle was impacted by COVID-19 related events involving supply chain and customer acceptance constraints given lockdown actions taking place across the globe.
DSO measures the average number of days our receivables are outstanding. DSO is calculated by dividing ending accounts receivable, net of allowance for doubtful accounts, by a 90-day average of net revenue. Compared to the corresponding three month period in fiscal 2019, DSO decreased due primarily to favorable billing linearity partially offset by lower customer participation in enhanced early payment programs and factoring.
DOS measures the average number of days from procurement to sale of our products. DOS is calculated by dividing ending inventory by a 90-day average of cost of goods sold. Compared to the corresponding three month period in fiscal 2019, DOS increased as we experienced a lower consumption of inventory due to constraints with accessing certain key components. Additionally, purchases of inventory increased as we position inventory to fulfill planned future shipments.
DPO measures the average number of days our accounts payable balances are outstanding. DPO is calculated by dividing ending accounts payable by a 90-day average of cost of goods sold. Compared to the corresponding three month period in fiscal 2019, DPO increased due primarily to higher inventory purchases in order to fulfill planned future shipments, extended payment terms and a further shift of production to design manufacturing partners.
Investing Activities
For the six months ended April 30, 2020, net cash used in investing activities decreased by $1.0 billion, as compared to the corresponding period in fiscal 2019. The decrease was due primarily to lower investment in and higher sales proceeds from property, plant and equipment and higher cash generated from net financial collateral activities as compared to the prior-year period.
Financing Activities
For the six months ended April 30, 2020, net cash provided by financing activities increased by $3.6 billion, as compared to the corresponding period in fiscal 2019. The increase was due primarily to higher cash generated from debt issuance and lower cash utilization for share repurchases as compared to the prior-year period.
Capital Resources
Debt Levels
We maintain debt levels that we establish through consideration of a number of factors, including cash flow expectations, cash requirements for operations, investment plans (including acquisitions), share repurchase activities, our cost of capital and targeted capital structure.
We plan to redeem $3.0 billion of Senior Notes that mature on October 15, 2020, either on or before that date.
During the first six months of fiscal 2020, we issued $367 million and repaid $448 million of commercial paper.
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
On April 9, 2020, we completed our offering of $1.25 billion aggregate principal amount of 4.45% Senior Notes due October 2, 2023 (the "2023 Notes") and $1.0 billion aggregate principal amount of 4.65% notes due October 1, 2024 (the "2024 Notes"). We will pay interest semi-annually on the 2023 Notes on each April 2 and October 2, beginning on October 2, 2020. We will pay interest semi-annually on the 2024 Notes on each April 1 and October 1, beginning on October 1, 2020. The net proceeds from this offering will be used for general corporate purposes, including repayment of existing debt.
On February 20, 2020, we issued $755 million of asset-backed debt securities in six tranches at a weighted average price of 99.99% and a weighted average interest rate of 1.87%, payable monthly from April 2020 with a stated final maturity date of February 2030. As of April 30, 2020, the outstanding balance of these asset-backed debt securities was $704 million and future principal payments will be based on the underlying loan and lease payment streams. For more information on the asset-backed debt securities and related Variable Interest Entities, see Note 8 “Accounting for Leases as a Lessor”.
Our weighted-average interest rate reflects the average effective rate on our borrowings prevailing during the period and reflects the impact of interest rate swaps. For more information on our interest rate swaps, see Note 11, "Financial Instruments".
In December 2017, we filed a shelf registration statement with the Securities and Exchange Commission that allows us to sell, at any time and from time to time, in one or more offerings, debt securities, preferred stock, common stock, warrants, depository shares, purchase contracts, guarantees or units consisting of any of these securities.
Commercial Paper
We maintain two commercial paper programs, and a wholly-owned subsidiary maintains a third program. Our U.S. program provides for the issuance of U.S. dollar-denominated commercial paper up to a maximum aggregate principal amount of $4.75 billion which was increased from $4.0 billion in March 2020. Our euro commercial paper program provides for the issuance of commercial paper outside of the U.S. denominated in U.S. dollars, euros or British pounds up to a maximum aggregate principal amount of $3.0 billion or the equivalent in those alternative currencies. The combined aggregate principal amount of commercial paper outstanding under those programs at any one time cannot exceed $4.75 billion. In addition, our subsidiary's euro Commercial Paper/Certificate of Deposit Program provides for the issuance of commercial paper in various currencies of up to a maximum aggregate principal amount of $1.0 billion. As of April 30, 2020 and October 31, 2019, no borrowings were outstanding under our commercial paper programs, and $605 million and $698 million, respectively, were outstanding under our subsidiary’s program.
Revolving Credit Facility
We maintain a $4.75 billion five year senior unsecured committed credit facility that was entered into in August 2019. Loans under the revolving credit facility may be used for general corporate purposes, including support of the commercial paper program. Commitments under the Credit Agreement are available for a period of five years, which period may be extended, subject to the satisfaction of certain conditions, by up to two, one-year periods. Commitment Fees, interest rates and other terms of borrowing under the credit facility vary based on Hewlett Packard Enterprise's external credit rating. As of April 30, 2020 and October 31, 2019, no borrowings were outstanding under the Credit Agreement.
Available Borrowing Resources
As of April 30, 2020, we had the following additional liquidity resources available if needed:
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As of
April 30, 2020
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In millions
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Commercial paper programs
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$
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5,145
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Uncommitted lines of credit
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$
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1,285
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CONTRACTUAL AND OTHER OBLIGATIONS
Contractual Obligations
On April 9, 2020, we completed our offering of the 2023 Notes and 2024 Notes. We will pay interest semi-annually on the 2023 Notes on each April 2 and October 2, beginning on October 2, 2020. We will pay interest semi-annually on the 2024 Notes on each April 1 and October 1, beginning on October 1, 2020.
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
On February 20, 2020, we issued $755 million of asset-backed debt securities in six tranches at a weighted average price of 99.99% and a weighted average interest rate of 1.87%, payable monthly from April 2020 with a stated final maturity date of February 2030. As of April 30, 2020, the outstanding balance of these asset-backed debt securities was $704 million and future principal payments will be based on the underlying loan and lease payment streams. For more information on the asset-backed debt securities and related Variable Interest Entities, see Note 8 “Accounting for Leases as a Lessor”.
Our other contractual obligations have not changed materially since October 31, 2019. For further information see "Contractual and Other Obligations" in Item 7 of Part II of our Annual Report on Form 10-K for the fiscal year ended October 31, 2019.
Retirement Benefit Plan Funding
For the remainder of fiscal 2020, we anticipate making contributions of approximately $92 million to our non-U.S. pension plans. Our policy is to fund our pension plans so that we meet at least the minimum contribution requirements, as established by local government, funding and tax authorities.
Restructuring Plans
As of April 30, 2020, we expect to make future cash payments of approximately $345 million in connection with our approved restructuring plans, which includes $142 million expected to be paid through the remainder of fiscal 2020 and $203 million expected to substantially be paid through fiscal 2022. For more information on our HPE Next restructuring activities, see Note 3, "HPE Next".
On May 19, 2020, our Board of Directors approved a cost optimization and prioritization plan in order to focus our investments and realign the workforce to areas of growth and measures to simplify and evolve its product portfolio strategy, go-to-market configurations, supply chain structures, digital customer support model, marketing experiences, and real estate strategies. We expect that the Plan will be implemented through fiscal year 2022 and estimate it will include gross savings of at least $1.0 billion as a result of changes to our workforce, real estate model and business process improvements, with the Plan expected to deliver annualized net run-rate savings of at least $800 million by end of fiscal year 2022, in both cases relative to our fiscal year 2019 exit. In order to achieve this level of cost savings, we estimate cash funding payments between $1.0 billion to $1.3 billion over the next three years.
Uncertain Tax Positions
As of April 30, 2020, we had approximately $477 million of recorded liabilities and related interest and penalties pertaining to uncertain tax positions. These liabilities and related interest and penalties include $15 million expected to be paid within one year. For the remaining amount, we are unable to make a reasonable estimate as to when cash settlement with tax authorities might occur due to the uncertainties related to these tax matters. Payments of these obligations would result from settlements with tax authorities. For more information on our uncertain tax positions, see Note 5, "Taxes on Earnings".
Cross-indemnification with HP Inc., DXC and Micro Focus
As of April 30, 2020, we had approximately $175 million of recorded net receivables pertaining to income tax indemnifications with HP Inc., including $75 million related to certain state income tax liabilities for which we are joint and severally liable. These amounts include $50 million expected to be received within one year. For the amounts related to the joint and several state tax liabilities, we are unable to make a reasonable estimate as to when cash settlement with HP Inc. might occur due to the uncertainties related to the underlying tax matters. Realization of these obligations would result from payments to tax authorities and the resulting settlements with HP Inc. under the Termination and Mutual Release Agreement. For details on the Separation and Distribution Agreements and Tax Matters Agreement with HP Inc., DXC and Micro Focus, see our Annual Report on Form 10-K for the fiscal year ended October 31, 2019.
Off-Balance Sheet Arrangements
As part of our ongoing business, we have not participated in transactions that generate material relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.