Attached files

file filename
EX-32 - EX-32 - Hewlett Packard Enterprise Coa2228788zex-32.htm
EX-31.2 - EX-31.2 - Hewlett Packard Enterprise Coa2228788zex-31_2.htm
EX-31.1 - EX-31.1 - Hewlett Packard Enterprise Coa2228788zex-31_1.htm
EX-12 - EX-12 - Hewlett Packard Enterprise Coa2228788zex-12.htm

Use these links to rapidly review the document
Table of Contents
Index

Table of Contents

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549



FORM 10-Q

(Mark One)    

ý

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended: April 30, 2016

Or

o

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from            to            

Commission file number 001-37483



HEWLETT PACKARD ENTERPRISE COMPANY
(Exact name of registrant as specified in its charter)

Delaware   47-3298624
(State or other jurisdiction of
incorporation or organization)
  (I.R.S. employer
identification no.)

3000 Hanover Street, Palo Alto, California

 

94304
(Address of principal executive offices)   (Zip code)

(650) 687-5817
(Registrant's telephone number, including area code)



        Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 (the "Exchange Act") during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o

        Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý No o

        Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer o   Accelerated filer o   Non-accelerated filer ý
(Do not check if a smaller
reporting company)
  Smaller reporting company o

        Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act). Yes o No ý

        The number of shares of Hewlett Packard Enterprise Company common stock outstanding as of May 31, 2016 was 1,661,714,690 shares, par value $0.01.


Table of Contents


HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES

Form 10-Q

For the Quarterly Period Ended April 30, 2016


Table of Contents

1


Table of Contents

Forward-Looking Statements

        This Quarterly Report on Form 10-Q, including "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Item 2 of Part I, contains forward-looking statements that involve risks, uncertainties and assumptions. If the risks or uncertainties ever materialize or the assumptions prove incorrect, the results of Hewlett Packard Enterprise Company and its consolidated subsidiaries ("Hewlett Packard Enterprise") may differ materially from those expressed or implied by such forward-looking statements and assumptions. The words "believe", "expect", "anticipate", "optimistic", "intend", "aim", "will", "should" and similar expressions are intended to identify such forward-looking statements. All statements other than statements of historical fact are statements that could be deemed forward-looking statements, including but not limited to any projections of revenue, margins, expenses, effective tax rates, net earnings, net earnings per share, cash flows, benefit plan funding, deferred tax assets, share repurchases, currency exchange rates or other financial items; any projections of the amount, timing or impact of cost savings or restructuring charges; any statements of the plans, strategies and objectives of management for future operations, including the previously announced spin-off and merger of our Enterprise Service business, and including the completed separation transaction and the future performance of the post-separation company, as well as the execution of restructuring plans and any resulting cost savings, revenue or profitability improvements; any statements concerning the expected development, performance, market share or competitive performance relating to products or services; any statements regarding current or future macroeconomic trends or events and the impact of those trends and events on Hewlett Packard Enterprise and its financial performance; any statements regarding pending investigations, claims or disputes; any statements of expectation or belief; and any statements of assumptions underlying any of the foregoing. Risks, uncertainties and assumptions include the need to address the many challenges facing Hewlett Packard Enterprise's businesses; the competitive pressures faced by Hewlett Packard Enterprise's businesses; risks associated with executing Hewlett Packard Enterprise's strategy, including the planned spin-off and merger of our Enterprise Service business; the impact of macroeconomic and geopolitical trends and events; the need to manage third-party suppliers and the distribution of Hewlett Packard Enterprise's products and the delivery of Hewlett Packard Enterprise's services effectively; the protection of Hewlett Packard Enterprise's intellectual property assets, including intellectual property licensed from third parties and intellectual property shared with its former Parent; risks associated with Hewlett Packard Enterprise's international operations; the development and transition of new products and services and the enhancement of existing products and services to meet customer needs and respond to emerging technological trends; the execution and performance of contracts by Hewlett Packard Enterprise and its suppliers, customers, clients and partners; the hiring and retention of key employees; integration and other risks associated with business combination and investment transactions; the results of the separation transaction and the execution, timing and results of any restructuring plans, including the anticipated benefits of the separation transaction and restructuring plans; the resolution of pending investigations, claims and disputes; and other risks that are described herein, including but not limited to the items discussed in "Risk Factors" in Item 1A of Part I of Hewlett Packard Enterprise's Annual Report on Form 10-K for the fiscal year ended October 31, 2015 and that are otherwise described or updated from time to time in Hewlett Packard Enterprise's reports filed with the Securities and Exchange Commission. Hewlett Packard Enterprise assumes no obligation and does not intend to update these forward-looking statements.

2


Table of Contents

Part I. Financial Information

Item 1. Financial Statements and Supplementary Data.


Index

 
  Page  

Condensed Consolidated and Combined Statements of Earnings for the three and six months ended April 30, 2016 and 2015 (Unaudited)

    4  

Condensed Consolidated and Combined Statements of Comprehensive Income for the three and six months ended April 30, 2016 and 2015 (Unaudited)

   
5
 

Condensed Consolidated Balance Sheets as of April 30, 2016 (Unaudited) and as of October 31, 2015 (Audited)

   
6
 

Condensed Consolidated and Combined Statements of Cash Flows for the six months ended April 30, 2016 and 2015 (Unaudited)

   
7
 

Notes to Condensed Consolidated and Combined Financial Statements (Unaudited)

   
8
 

Note 1: Overview and Basis of Presentation

   
8
 

Note 2: Segment Information

   
12
 

Note 3: Restructuring

   
17
 

Note 4: Retirement and Post-Retirement Benefit Plans

   
19
 

Note 5: Stock-Based Compensation

   
21
 

Note 6: Taxes on Earnings

   
25
 

Note 7: Balance Sheet Details

   
27
 

Note 8: Financing Receivables and Operating Leases

   
29
 

Note 9: Acquisitions and Divestitures

   
32
 

Note 10: Goodwill and Intangible Assets

   
35
 

Note 11: Fair Value

   
37
 

Note 12: Financial Instruments

   
40
 

Note 13: Borrowings

   
48
 

Note 14: Related Party Transactions and Former Parent Company Investment

   
51
 

Note 15: Stockholders' Equity

   
53
 

Note 16: Net Earnings Per Share

   
55
 

Note 17: Litigation and Contingencies

   
57
 

Note 18: Guarantees, Indemnifications and Warranties

   
61
 

3


Table of Contents


HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES

Condensed Consolidated and Combined Statements of Earnings

(Unaudited)

 
  Three months ended
April 30
  Six months ended
April 30
 
 
  2016   2015   2016   2015  
 
  In millions, except per share amounts
 

Net revenue:

                         

Products

  $ 4,971   $ 4,562   $ 9,981   $ 9,379  

Services

    7,652     7,898     15,278     16,039  

Financing income

    88     89     176     184  

Total net revenue

    12,711     12,549     25,435     25,602  

Costs and expenses:

                         

Cost of products

    3,314     2,982     6,626     6,205  

Cost of services

    5,694     5,922     11,436     12,069  

Financing interest

    60     61     118     124  

Research and development

    624     552     1,209     1,084  

Selling, general and administrative

    2,021     1,974     4,019     3,947  

Amortization of intangible assets

    201     204     419     407  

Restructuring charges

    161     248     472     380  

Acquisition and other related charges

    53     19     90     23  

Separation costs

    91     159     170     203  

Total costs and expenses

    12,219     12,121     24,559     24,442  

Earnings from operations

    492     428     876     1,160  

Interest and other, net

    (129 )   (30 )   (194 )   (48 )

Earnings before taxes

    363     398     682     1,112  

Provision for taxes

    (43 )   (93 )   (95 )   (260 )

Net earnings

  $ 320   $ 305   $ 587   $ 852  

Net earnings per share:(1):

                         

Basic

  $ 0.19   $ 0.17   $ 0.34   $ 0.47  

Diluted

  $ 0.18   $ 0.16   $ 0.33   $ 0.46  

Cash dividends declared per share

  $ 0.06   $   $ 0.17   $  

Weighted-average shares used to compute net earnings per share:(1)

                         

Basic

    1,725     1,804     1,743     1,804  

Diluted

    1,751     1,834     1,765     1,834  

(1)
On November 1, 2015, HP Inc. distributed a total of 1.8 billion shares of Hewlett Packard Enterprise common stock to HP Inc. stockholders as of the record date. For comparative purposes, the same number of shares used to compute basic and diluted net earnings per share ("EPS") for the fiscal year ended October 31, 2015 is used for the calculation of basic and diluted net EPS for all periods in fiscal 2015. See Note 16, "Net Earnings Per Share", for further details.

   

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

4


Table of Contents


HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES

Condensed Consolidated and Combined Statements of Comprehensive Income

(Unaudited)

 
  Three months
ended April 30
  Six months
ended April 30
 
 
  2016   2015   2016   2015  
 
  In millions
 

Net earnings

  $ 320   $ 305   $ 587   $ 852  

Other comprehensive income before taxes:

                         

Change in net unrealized (losses) gains on available-for-sale securities:

                         

Net unrealized gains (losses) arising during the period

    2     (11 )   4     (9 )

(Gains) losses reclassified into earnings

    (5 )       4      

    (3 )   (11 )   8     (9 )

Change in net unrealized losses on cash flow hedges:

                         

Net unrealized (losses) gains arising during the period

    (206 )   4     (64 )   232  

Net gains reclassified into earnings

    (70 )   (191 )   (191 )   (299 )

    (276 )   (187 )   (255 )   (67 )

Change in unrealized components of defined benefit plans:

                         

Losses arising during the period

    (1 )       (1 )    

Amortization of actuarial loss and prior service benefit

    70     34     142     70  

Curtailments, settlements and other

    1     1     (17 )   1  

    70     35     124     71  

Change in cumulative translation adjustment

    57         (82 )   (68 )

Other comprehensive loss before taxes

    (152 )   (163 )   (205 )   (73 )

Benefit (provision) for taxes

    77     44     53     (22 )

Other comprehensive loss, net of tax

    (75 )   (119 )   (152 )   (95 )

Comprehensive income

  $ 245   $ 186   $ 435   $ 757  

   

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

5


Table of Contents


HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

 
  As of  
 
  April 30,
2016
  October 31,
2015
 
 
  In millions, except par
value

 
 
  (Unaudited)
   
 

ASSETS

             

Current assets:

             

Cash and cash equivalents

  $ 9,010   $ 9,842  

Accounts receivable

    7,707     8,538  

Financing receivables

    3,017     2,918  

Inventory

    2,099     2,198  

Assets held for sale

    4,077      

Other current assets

    5,237     6,468  

Total current assets

    31,147     29,964  

Property, plant and equipment

    9,674     9,886  

Long-term financing receivables and other assets

    11,563     10,875  

Goodwill

    24,244     27,261  

Intangible assets

    1,436     1,930  

Total assets

  $ 78,064   $ 79,916  

LIABILITIES AND STOCKHOLDERS' EQUITY

             

Current liabilities:

             

Notes payable and short-term borrowings

  $ 965   $ 691  

Accounts payable

    5,289     5,828  

Employee compensation and benefits

    2,212     2,902  

Taxes on earnings

    462     476  

Deferred revenue

    4,817     5,154  

Accrued restructuring

    613     628  

Liabilities held for sale

    727      

Other accrued liabilities

    5,512     6,314  

Total current liabilities

    20,597     21,993  

Long-term debt

    15,247     15,103  

Other liabilities

    10,196     8,902  

Commitments and contingencies

             

Stockholders' equity

             

HPE stockholders' equity:

             

Preferred stock, $0.01 par value (300 shares authorized; none issued and outstanding at April 30, 2016)

         

Common stock, $0.01 par value (9,600 shares authorized; 1,724 issued and outstanding at April 30, 2016)

    17      

Additional paid-in capital

    36,483      

Retained earnings

    301      

Former Parent company investment

        38,550  

Accumulated other comprehensive loss

    (5,167 )   (5,015 )

Total HPE stockholders' equity

    31,634     33,535  

Non-controlling interests

    390     383  

Total stockholders' equity

    32,024     33,918  

Total liabilities and stockholders' equity

  $ 78,064   $ 79,916  

   

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

6


Table of Contents


HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES

Condensed Consolidated and Combined Statements of Cash Flows

(Unaudited)

 
  Six months
ended April 30
 
 
  2016   2015  
 
  In millions
 

Cash flows from operating activities:

             

Net earnings

  $ 587   $ 852  

Adjustments to reconcile net earnings to net cash provided by operating activities:

             

Depreciation and amortization

    1,949     1,970  

Stock-based compensation expense

    303     236  

Provision for doubtful accounts

    26     17  

Provision for inventory

    83     57  

Restructuring charges

    472     380  

Deferred taxes on earnings

    (31 )   (950 )

Excess tax benefit from stock-based compensation

    (4 )   (88 )

Other, net

    79     5  

Changes in operating assets and liabilities, net of acquisitions:(a)

             

Accounts receivable

    366     482  

Financing receivables

    (209 )   (71 )

Inventory

    (186 )   (219 )

Accounts payable

    (412 )   (577 )

Taxes on earnings

    (347 )   1,368  

Restructuring

    (489 )   (569 )

Other assets and liabilities

    (1,155 )   (1,137 )

Net cash provided by operating activities

    1,032     1,756  

Cash flows from investing activities:

             

Investment in property, plant and equipment

    (1,552 )   (1,432 )

Proceeds from sale of property, plant and equipment

    200     175  

Purchases of available-for-sale securities and other investments

    (341 )   (106 )

Maturities and sales of available-for-sale securities and other investments

    270     119  

Payments made in connection with business acquisitions, net of cash acquired

    (13 )   (139 )

Proceeds from business divestitures, net

    315      

Net cash used in investing activities

    (1,121 )   (1,383 )

Cash flows from financing activities:

             

Short-term borrowings with original maturities less than 90 days, net

    (36 )   99  

Issuance of debt

    570     508  

Payment of debt

    (354 )   (467 )

Settlement of cash flow hedge

    3      

Issuance of common stock under employee stock plans

    18      

Repurchase of common stock

    (1,212 )    

Net transfer from (to) former Parent

    491     (191 )

Excess tax benefit from stock-based compensation

    4     88  

Cash dividends paid

    (190 )   (10 )

Net cash (used in) provided by financing activities

    (706 )   27  

(Decrease) increase in cash and cash equivalents

    (795 )   400  

Cash held for sale(a)

    (37 )    

Cash and cash equivalents at beginning of period

    9,842     2,319  

Cash and cash equivalents at end of period

  $ 9,010   $ 2,719  
(a)
The impact of assets and liabilities reclassified as held for sale during the period was not considered in the changes in operating assets and liabilities, net of acquisitions within cash flows from operating activities. See Note 9 "Acquisition and Divestitures" for more details on the assets and liabilities reclassified as held for sale.

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

7


Table of Contents


HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES

Notes to Condensed Consolidated and Combined Financial Statements

(Unaudited)

Note 1: Overview and Basis of Presentation

Background

        Hewlett Packard Enterprise Company ("we", "us", "our", "Hewlett Packard Enterprise", "HPE" or "the Company") is a leading global provider of the cutting-edge technology solutions customers need to optimize their traditional information technology ("IT") while helping them build the secure, cloud-enabled, mobile-ready future that is uniquely suited to their needs. Our customers range from small- and medium-sized businesses ("SMBs") to large global enterprises.

        On November 1, 2015, the Company became an independent publicly-traded company through a pro rata distribution by HP Inc., formerly known as Hewlett-Packard Company ("former Parent"), of 100% of the outstanding shares of Hewlett Packard Enterprise Company to HP Inc.'s stockholders. Each HP Inc. stockholder of record received one share of Hewlett Packard Enterprise common stock for each share of HP Inc. common stock held on the record date. Approximately 1.8 billion shares of Hewlett Packard Enterprise common stock were distributed on November 1, 2015 to HP Inc. stockholders. In connection with the separation, Hewlett Packard Enterprise's common stock began trading "regular-way" under the ticker symbol "HPE" on the New York Stock Exchange on November 2, 2015.

Basis of Presentation

        Prior to October 31, 2015, the combined financials statements were derived from the Consolidated Financial Statements and accounting records of former Parent as if the Company were operated on a standalone basis during the periods presented. From and after October 31, 2015, substantially all of the assets and liabilities and operations of the Company were transferred from former Parent to the Company and the condensed consolidated and combined financial statements included the accounts of the Company and its wholly-owned subsidiaries in accordance with the separation agreement for the transfer from former Parent to the Company. These Condensed Consolidated and Combined Financial Statements of the Company were prepared in connection with the separation and in accordance with United States ("U.S.") generally accepted accounting principles ("GAAP").

        In the opinion of management, the accompanying unaudited Condensed Consolidated and Combined Financial Statements of Hewlett Packard Enterprise contain all adjustments, including normal recurring adjustments, necessary to present fairly the Company's financial position as of April 30, 2016 and October 31, 2015, its results of operations for the three and six months ended April 30, 2016 and 2015 and its cash flows for the six months ended April 30, 2016 and 2015.

        The results of operations and cash flows for the six months ended April 30, 2016 are not necessarily indicative of the results to be expected for the full year. The information included in this Quarterly Report on Form 10-Q should be read in conjunction with the Company's Annual Report on Form 10-K for the fiscal year ended October 31, 2015, including "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Quantitative and Qualitative Disclosures About Market Risk" and the Combined and Consolidated Financial Statements and notes thereto included in Items 7, 7A and 8, respectively, included therein.

8


Table of Contents


HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES

Notes to Condensed Consolidated and Combined Financial Statements (Continued)

(Unaudited)

Note 1: Overview and Basis of Presentation (Continued)

Principles of Consolidation and Combination

        The accompanying unaudited Condensed Consolidated and Combined Financial Statements include the accounts of the Company and other subsidiaries and affiliates in which the Company has a controlling financial interest or is the primary beneficiary. All intercompany transactions and accounts within the consolidated and combined businesses of the Company have been eliminated.

        Prior to the separation, intercompany transactions between the Company and former Parent are considered to be effectively settled in the Condensed Consolidated and Combined Financial Statements at the time the transaction was recorded. The total net effect of the settlement of these intercompany transactions is reflected in the Condensed Consolidated and Combined Statements of Cash Flows within financing activities and in the Condensed Consolidated Balance Sheets within former Parent company investment.

        The Company accounts for investments in companies over which it has the ability to exercise significant influence but does not hold a controlling interest under the equity method, and the Company records its proportionate share of income or losses in Interest and other, net in the Condensed Consolidated and Combined Statements of Earnings.

        Non-controlling interests are presented as a separate component within Total stockholders' equity in the Condensed Consolidated Balance Sheets. Net earnings attributable to the non-controlling interests are recorded within Interest and other, net in the Condensed Consolidated and Combined Statements of Earnings and are not presented separately as they were not material for any period presented.

May 2016 Announcement of Enterprise Services Business Spin-Off and Merger

        On May 24, 2016, the Company announced plans for a tax-free spin-off and merger of its Enterprise Services business ("Everett SpinCo Inc." or "Everett") with Computer Sciences Corporation ("CSC") which will create a pure-play, global IT services company. Upon the completion of the transaction, which is currently targeted to be completed by March 31, 2017, shareholders of Hewlett Packard Enterprise Company will own shares of both Hewlett Packard Enterprise and approximately fifty percent of the new combined company. The transaction is subject to certain customary closing conditions including approval by CSC shareholders, the effective filing of related registration statements, completion of a tax-free spin-off, Everett debt exchange, the expiration of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and the receipt of certain required foreign anti-trust approvals.

Segment Realignment

        The Company has implemented certain segment and business unit realignments in order to align its segment financial reporting more closely with its current business structure. Reclassifications of certain prior-year segment and business unit financial information have been made to conform to the current-year presentation. None of the changes impacts the Company's previously reported consolidated net revenue, earnings from operations, net earnings or net earnings per share ("EPS"). See Note 2, "Segment Information", for a further discussion of the Company's segment realignment.

9


Table of Contents


HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES

Notes to Condensed Consolidated and Combined Financial Statements (Continued)

(Unaudited)

Note 1: Overview and Basis of Presentation (Continued)

Use of Estimates

        The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the Company's Condensed Consolidated and Combined Financial Statements and accompanying notes. Actual results could differ materially from those estimates.

Accounting Pronouncements

        In March 2016, the Financial Accounting Standards Board ("FASB") amended the existing accounting standards for employee share-based payment arrangements. The amendments require all excess tax benefits and tax deficiencies associated with share-based payments to be recognized as income tax expense or income tax benefit, respectively, rather than as additional paid-in capital. The amendments also increase the amount an employer can withhold in order to cover income taxes on awards, allows companies to recognize forfeitures of awards as they occur, and requires companies to present excess tax benefits from stock-based compensation as an operating activity in the statement of cash flows rather than as a financing activity. The Company is required to adopt the guidance in the first quarter of fiscal 2018. Early adoption is permitted. The Company is currently evaluating the timing and the impact of these amendments on its Condensed Consolidated and Combined Financial Statements.

        In February 2016, the FASB amended the existing accounting standards for leases. The amendments require lessees to record, at lease inception, a lease liability for the obligation to make lease payments and a right-of-use ("ROU") asset for the right to use the underlying asset for the lease term on their balance sheets. Lessees may elect to not recognize lease liabilities and ROU assets for most leases with terms of 12 months or less. The lease liability is measured at the present value of the lease payments over the lease term. The ROU asset will be based on the liability, adjusted for lease prepayments, lease incentives received, and the lessee's initial direct costs. For finance leases, lease expense will be the sum of interest on the lease obligation and amortization of the ROU asset, resulting in a front-loaded expense pattern. For operating leases, lease expense will generally be recognized on a straight-line basis. The amended lessor accounting model is similar to the current model, updated to align with certain changes to the lessee model and the new revenue standard. The current sale-leaseback guidance, including guidance applicable to real estate, is also replaced with a new model for both lessees and lessors. The Company is required to adopt the guidance in the first quarter of fiscal 2020 using a modified retrospective approach. Early adoption is permitted. The Company is currently evaluating the timing and the impact of these amendments on its Condensed Consolidated and Combined Financial Statements.

        In November 2015, the FASB amended the existing accounting standards for income taxes. The amendment requires companies to report their deferred tax liabilities and deferred tax assets each as a single non-current item on their classified balance sheets. The Company elected to adopt the amendments in the first quarter of fiscal 2016 and applied them retrospectively to all periods presented, as permitted by the standard. The adoption of the amendments had no impact to its net earnings or cash flows from operations for any period presented.

10


Table of Contents


HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES

Notes to Condensed Consolidated and Combined Financial Statements (Continued)

(Unaudited)

Note 1: Overview and Basis of Presentation (Continued)

        The following table presents the Condensed Consolidated Balance Sheet under the historical accounting method for deferred taxes and as adjusted to reflect the adoption of the amendments:

 
  As of October 31, 2015  
 
  Historical Accounting
Method
  Effect of Adoption   As Adjusted  
 
  In millions
 

Other current assets

  $ 7,677   $ (1,209 ) $ 6,468  

Long-term financing receivables and other assets

  $ 11,020   $ (145 ) $ 10,875  

Taxes on earnings

  $ (634 ) $ 158   $ (476 )

Other liabilities

  $ (10,098 ) $ 1,196   $ (8,902 )

        In September 2015, the FASB amended the existing accounting standards to simplify the accounting for measurement period adjustments to provisional amounts recognized in a business combination. The amendments require all such adjustments to be recognized in the period they are determined. Adjustments related to previous reporting periods since the acquisition date must be disclosed by income statement line item, either on the face of the income statement or within the footnotes. The Company elected to early adopt the amendments in the first quarter of fiscal 2016, as permitted by the standard. The adoption of the amendments did not have a material impact on the Company's Condensed Consolidated and Combined Financial Statements. See Footnote 9, "Acquisitions and Divestitures", for additional information on measurement period adjustments recognized during the six months ended April 30, 2016.

        In April 2015, the FASB amended the existing accounting standards for intangible assets. The amendments provide explicit guidance to customers in determining the accounting for fees paid in a cloud computing arrangement, wherein the arrangements that do not convey a software license to the customer are accounted for as service contracts. The amendments also eliminate the practice of accounting for software licenses as executory contracts which may result in more software assets being capitalized. The Company is required to adopt the guidance in the first quarter of fiscal 2017; however early adoption is permitted, as is retrospective application. The adoption of these amendments is not expected to have a material impact on the Company's Condensed Consolidated and Combined Financial Statements.

        In April 2015, the FASB amended the existing accounting standards for imputation of interest. The amendments require that debt issuance costs related to a recognized debt liability be presented on the classified balance sheet as a direct deduction from the carrying amount of the related debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs is not affected by these amendments. The Company is required to adopt the guidance in the first quarter of fiscal 2017. Early adoption is permitted. The amendments should be applied retrospectively with the adjusted balance sheet of each individual period presented, in order to reflect the period-specific effects of applying the new guidance. The adoption of these amendments is not expected to have a material impact on the Company's Condensed Consolidated and Combined Financial Statements.

        In May 2014, the FASB amended the existing accounting standards for revenue recognition. The amendments are based on the principle that revenue should be recognized to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the

11


Table of Contents


HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES

Notes to Condensed Consolidated and Combined Financial Statements (Continued)

(Unaudited)

Note 1: Overview and Basis of Presentation (Continued)

entity expects to be entitled to in exchange for those goods or services. In August 2015, the FASB issued an accounting standard update for a one-year deferral of the effective date, with an option of applying the standard on the original effective date, which for the Company is the first quarter of fiscal 2018. In accordance with this deferral, the Company is required to adopt these amendments in the first quarter of fiscal 2019. The amendments may be applied retrospectively to each prior period presented or retrospectively with the cumulative effect recognized as of the date of initial application. The Company is currently evaluating the impact of these amendments and the transition alternatives on its Condensed Consolidated and Combined Financial Statements.

Note 2: Segment Information

        Hewlett Packard Enterprise's operations are organized into five segments for financial reporting purposes: the Enterprise Group ("EG"), Enterprise Services ("ES"), Software, Financial Services ("FS") and Corporate Investments. Hewlett Packard Enterprise's organizational structure is based on a number of factors that management uses to evaluate, view and run its 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.

        A summary description of each segment follows.

        The Enterprise Group provides servers, storage, networking and technology services that, when combined with Hewlett Packard Enterprise's Cloud solutions, enable customers to manage applications across virtual private cloud, private cloud and traditional IT environments. Described below are the business units and capabilities within EG.

    Servers offers both Industry Standard Servers ("ISS") as well as Mission-Critical Servers ("MCS") to address the full array of our customers' computing needs. ISS provides a range of products, from entry level servers through premium HPE ProLiant servers, which run primarily on Windows, Linux and virtualization platforms from software providers including Microsoft Corporation ("Microsoft") and VMware, Inc. ("VMware") and open sourced software from other major vendors while leveraging x86 processors from Intel Corporation ("Intel") and Advanced Micro Devices ("AMD"). For the most mission-critical workloads, HPE delivers Integrity servers based on the Intel® Itanium® processor, HPE Integrity NonStop solutions and mission critical x86 ProLiant servers.

    Storage offers Converged Storage solutions and traditional storage. Converged Storage solutions include 3PAR StoreServ, StoreOnce, and StoreVirtual products. Traditional storage includes tape, storage networking and legacy external disk products such as EVA and XP.

    Networking offers wireless local area network equipment, mobility and security software, switches, routers, and network management products that span data centers, campus and branch environments and deliver software defined networking and unified communications capabilities.

    Technology Services provides support services and technology consulting to integrate and optimize EG's hardware platforms for the new style of IT. These services are available in the form of service contracts, pre-packaged offerings or on a customized basis.

12


Table of Contents


HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES

Notes to Condensed Consolidated and Combined Financial Statements (Continued)

(Unaudited)

Note 2: Segment Information (Continued)

        Enterprise Services provides technology consulting, outsourcing and support services across infrastructure, applications and business process domains within traditional and Strategic Enterprise Service offerings which includes analytics and data management, security and cloud services. Described below are the business units and capabilities within ES.

    Infrastructure Technology Outsourcing delivers comprehensive services that encompass the management of data centers, IT security, cloud computing, workplace technology, networks, unified communications and enterprise service management.

    Application and Business Services helps clients develop, revitalize and manage their applications and information assets and provides end-to-end, industry-specific business process services.

        Software provides big data analytics and applications, enterprise security, application testing and delivery management and IT operations management solutions for businesses and other enterprises of all sizes. These software offerings include licenses, support, professional services and software-as-a-service ("SaaS").

        Financial Services provides flexible investment solutions, such as leasing, financing, IT consumption and utility programs and asset management services, for customers to enable the creation of unique technology deployment models and acquire complete IT solutions, including hardware, software and services from Hewlett Packard Enterprise and others. Providing flexible services and capabilities that support the entire IT life cycle, FS partners with customers globally to help build investment strategies that enhance their business agility and support their business transformation. FS offers a wide selection of investment solution capabilities for large enterprise customers and channel partners, along with an array of financial options to SMBs and educational and governmental entities.

        Corporate Investments includes Hewlett Packard Labs and certain cloud-related business incubation projects among others.

Segment Policy

        Hewlett Packard Enterprise derives the results of the business segments directly from its internal management reporting system. The accounting policies Hewlett Packard Enterprise uses to derive segment results are substantially the same as those the consolidated company uses. Management measures the performance of each segment based on several metrics, including earnings from operations. Management uses these results, in part, to evaluate the performance of, and to allocate resources to, each of the segments.

        Segment revenue includes revenues from sales to external customers and intersegment revenues that reflect transactions between the segments on an arm's-length basis. Intersegment revenues primarily consist of sales of hardware and software that are sourced internally and, in the majority of the cases, are financed as leases by FS to our customers. Hewlett Packard Enterprise's consolidated net revenue is derived and reported after the elimination of intersegment revenues from such arrangements.

        Hewlett Packard Enterprise periodically engages in intercompany advanced royalty payment and licensing arrangements that may result in advance payments between subsidiaries. Revenues from these intercompany arrangements are deferred and recognized as earned over the term of the arrangement

13


Table of Contents


HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES

Notes to Condensed Consolidated and Combined Financial Statements (Continued)

(Unaudited)

Note 2: Segment Information (Continued)

by the Hewlett Packard Enterprise legal entities involved in such transactions; however, these advanced payments are eliminated from revenues as reported by Hewlett Packard Enterprise and its business segments. As disclosed in Note 6, "Taxes on Earnings", in the second quarter of fiscal 2016, Hewlett Packard Enterprise executed intercompany advanced royalty payment arrangements resulting in advanced payments of $1.6 billion and during fiscal 2015 the Company executed intercompany advanced royalty payment arrangements which resulted in advanced payments of $5.0 billion. In these transactions, the payments were received in the U.S. from a foreign consolidated affiliate, with a deferral of intercompany revenues over the term of the arrangements, approximately 5 years. The impact of these intercompany arrangements are eliminated from both Hewlett Packard Enterprise consolidated and segment net revenues.

        Financing interest in the Condensed Consolidated and Combined Statements of Earnings reflects interest expense on borrowing- and funding-related activities associated with FS and its subsidiaries, and debt issued by Hewlett Packard Enterprise for which a portion of the proceeds benefited FS. Prior to October 9, 2015, such financing interest expense resulted from debt issued by Hewlett-Packard Company.

        Hewlett Packard Enterprise does not allocate to its segments certain operating expenses, which it manages at the corporate level. These unallocated costs include certain corporate governance costs, stock-based compensation expense, amortization of intangible assets, restructuring charges, acquisition and other related charges, separation costs, and interest and other costs.

Segment Realignment

        Effective at the beginning of the first quarter of fiscal 2016, the Company implemented organizational changes to align its segment financial reporting more closely with its current business structure. These organizational changes resulted in: (i) within the Enterprise Group segment, the consolidation of the Industry Standard Servers and Business Critical Systems business units into the newly formed Servers business unit; and (ii) the transfer of certain cloud-related marketing headcount activities from the Corporate Investment segment to the Enterprise Group segment.

        The Company reflected these changes to its segment information retrospectively to the earliest period presented, which resulted in: (i) the consolidation of net revenue from the Industry Standard Servers and Business Critical Systems business units into the Servers business unit within the Enterprise Group segment; (ii) and the transfer of operating expenses from the Corporate Investment segment to the Enterprise Group segment. These changes had no impact on Hewlett Packard Enterprise's previously reported consolidated and combined net revenue, earnings from operations, net earnings or net earnings per share.

        There have been no material changes to the total assets of Hewlett Packard Enterprise's individual segments since October 31, 2015.

        During the second quarter of fiscal 2016, the Company received all the necessary regulatory approvals related to its partnership with Tsinghua Holdings (H3C transaction), and as such, the transaction met all of the held for sale criteria. Accordingly, 100% of the assets and liabilities reported in the Enterprise Group segment that were identified as part of the H3C transaction were reclassified as held for sale. See Note 9, "Acquisitions and Divestitures" for additional information.

14


Table of Contents


HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES

Notes to Condensed Consolidated and Combined Financial Statements (Continued)

(Unaudited)

Note 2: Segment Information (Continued)

Segment Operating Results

 
  Enterprise
Group
  Enterprise
Services
  Software   Financial
Services
  Corporate
Investments
  Total  
 
  In millions
 

Three months ended April 30, 2016

                                     

Net revenue

  $ 6,716   $ 4,526   $ 703   $ 764   $ 2   $ 12,711  

Intersegment net revenue and other

    294     197     71     24         586  

Total segment net revenue

  $ 7,010   $ 4,723   $ 774   $ 788   $ 2   $ 13,297  

Segment earnings (loss) from operations

  $ 817   $ 317   $ 192   $ 73   $ (87 ) $ 1,312  

Three months ended April 30, 2015

                                     

Net revenue

  $ 6,327   $ 4,622   $ 819   $ 780   $ 1   $ 12,549  

Intersegment net revenue and other

    233     195     73     25         526  

Total segment net revenue

  $ 6,560   $ 4,817   $ 892   $ 805   $ 1   $ 13,075  

Segment earnings (loss) from operations

  $ 923   $ 172   $ 159   $ 85   $ (108 ) $ 1,231  

Six months ended April 30, 2016

                                     

Net revenue

  $ 13,466   $ 9,025   $ 1,423   $ 1,518   $ 3   $ 25,435  

Intersegment net revenue and other

    595     386     131     46         1,158  

Total segment net revenue

  $ 14,061   $ 9,411   $ 1,554   $ 1,564   $ 3   $ 26,593  

Segment earnings (loss) from operations

  $ 1,761   $ 555   $ 328   $ 173   $ (186 ) $ 2,631  

Six months ended April 30, 2015

                                     

Net revenue

  $ 13,009   $ 9,400   $ 1,631   $ 1,557   $ 5   $ 25,602  

Intersegment net revenue and other

    533     410     131     51         1,125  

Total segment net revenue

  $ 13,542   $ 9,810   $ 1,762   $ 1,608   $ 5   $ 26,727  

Segment earnings (loss) from operations

  $ 1,981   $ 322   $ 316   $ 175   $ (199 ) $ 2,595  

15


Table of Contents


HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES

Notes to Condensed Consolidated and Combined Financial Statements (Continued)

(Unaudited)

Note 2: Segment Information (Continued)

        The reconciliation of segment operating results to Hewlett Packard Enterprise consolidated and combined results was as follows:

 
  Three months
ended
April 30
  Six months
ended
April 30
 
 
  2016   2015   2016   2015  
 
  In millions
 

Net Revenue:

                         

Total segments

  $ 13,297   $ 13,075   $ 26,593   $ 26,727  

Elimination of intersegment net revenue and other

    (586 )   (526 )   (1,158 )   (1,125 )

Total Hewlett Packard Enterprise consolidated and combined net revenue

  $ 12,711   $ 12,549   $ 25,435   $ 25,602  

Earnings before taxes:

                         

Total segment earnings from operations

  $ 1,312   $ 1,231   $ 2,631   $ 2,595  

Corporate and unallocated costs and eliminations

    (176 )   (76 )   (301 )   (186 )

Stock-based compensation expense

    (138 )   (97 )   (303 )   (236 )

Amortization of intangible assets

    (201 )   (204 )   (419 )   (407 )

Restructuring charges

    (161 )   (248 )   (472 )   (380 )

Acquisition and other related charges

    (53 )   (19 )   (90 )   (23 )

Separation costs

    (91 )   (159 )   (170 )   (203 )

Interest and other, net

    (129 )   (30 )   (194 )   (48 )

Total Hewlett Packard Enterprise consolidated and combined earnings before taxes

  $ 363   $ 398   $ 682   $ 1,112  

16


Table of Contents


HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES

Notes to Condensed Consolidated and Combined Financial Statements (Continued)

(Unaudited)

Note 2: Segment Information (Continued)

        Net revenue by segment and business unit was as follows:

 
  Three months
ended
April 30
  Six months
ended
April 30
 
 
  2016   2015   2016   2015  
 
  In millions
 

Servers

  $ 3,561   $ 3,332   $ 7,129   $ 6,927  

Technology Services

    1,823     1,932     3,633     3,920  

Networking

    874     556     1,737     1,118  

Storage

    752     740     1,562     1,577  

Enterprise Group

    7,010     6,560     14,061     13,542  

Infrastructure Technology Outsourcing

    2,839     2,871     5,713     6,003  

Application and Business Services

    1,884     1,946     3,698     3,807  

Enterprise Services

    4,723     4,817     9,411     9,810  

Software

    774     892     1,554     1,762  

Financial Services

    788     805     1,564     1,608  

Corporate Investments

    2     1     3     5  

Total segment net revenue

    13,297     13,075     26,593     26,727  

Eliminations of intersegment net revenue and other        

    (586 )   (526 )   (1,158 )   (1,125 )

Total net revenue

  $ 12,711   $ 12,549   $ 25,435   $ 25,602  

Note 3: Restructuring

    Summary of Restructuring Plans

        Restructuring charges of $161 million and $248 million have been recorded by the Company for the three months ended April 30, 2016 and 2015, respectively, and restructuring charges of $472 million and $380 million have been recorded for the six months ended April 30, 2016 and 2015, respectively, based on restructuring activities impacting the Company's employees and infrastructure. Restructuring

17


Table of Contents


HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES

Notes to Condensed Consolidated and Combined Financial Statements (Continued)

(Unaudited)

Note 3: Restructuring (Continued)

activities related to the Company's employees and infrastructure, summarized by plan, are presented in the table below:

 
  Fiscal 2015 Plan   Fiscal 2012 Plan   Other Plans    
 
 
  Employee
Severance
  Infrastructure
and other
  Employee
Severance
and EER
  Infrastructure
and other
  Employee
Severance
  Infrastructure
and other
  Total  

Liability as of October 31, 2015

  $ 351   $   $ 321   $ 45   $ 1   $ 24   $ 742  

Charges

    280     122     71     1         (2 )   472  

Cash payments

    (204 )   (62 )   (203 )   (15 )       (4 )   (488 )

Non-cash items

    (3 )   (19 )   5     (1 )           (18 )

Liability as of April 30, 2016

  $ 424   $ 41   $ 194   $ 30   $ 1   $ 18   $ 708  

Total costs incurred to date, as of April 30, 2016

  $ 631   $ 123   $ 3,963   $ 546   $ 1,997   $ 1,127   $ 8,387  

Total costs expected to be incurred, as of April 30, 2016

  $ 2,158   $ 423   $ 3,963   $ 546   $ 1,997   $ 1,127   $ 10,214  

        The current restructuring liability reported in Accrued restructuring in the Condensed Consolidated Balance Sheets at April 30, 2016 and October 31, 2015 was $613 million and $628 million, respectively. The long-term restructuring liability reported in Other liabilities in the Condensed Consolidated Balance Sheets at April 30, 2016 and October 31, 2015 was $95 million and $114 million, respectively.

    Fiscal 2015 Restructuring Plan

        On September 14, 2015, the former Parent's Board of Directors approved a restructuring plan (the "2015 Plan") in connection with the separation which will be implemented through fiscal 2018. At April 30, 2016, as part of the 2015 Plan, the Company expects approximately 30,000 employees to exit the Company by the end of 2018. These workforce reductions are primarily associated with our Enterprise Services segment. The changes to the workforce will vary by country, based on local legal requirements and consultations with employee works councils and other employee representatives, as appropriate. The Company estimates that it will incur aggregate pre-tax charges through fiscal 2018 of approximately $2.6 billion in connection with the 2015 Plan, of which approximately $2.2 billion relates to workforce reductions and approximately $423 million primarily relates to real estate consolidation.

18


Table of Contents


HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES

Notes to Condensed Consolidated and Combined Financial Statements (Continued)

(Unaudited)

Note 3: Restructuring (Continued)

    Fiscal 2012 Restructuring Plan

        On May 23, 2012, the former Parent adopted a multi-year restructuring plan (the "2012 Plan") designed to simplify business processes, accelerate innovation and deliver better results for customers, employees and stockholders. As of April 30, 2016 and October 31, 2015 the Company had eliminated 42,100 positions in connection with the 2012 Plan, with a portion of those employees exiting the Company as part of voluntary enhanced early retirement ("EER") programs in the U.S. and in certain other countries. During the first six months of fiscal 2016, the Company recorded severance charges of $71 million and infrastructure charges of $1 million, respectively, as a result of a change in the estimate of expected cash payouts. The Company recognized $4.5 billion in total aggregate charges in connection with the 2012 Plan, with $4.0 billion related to workforce reductions, including the EER programs, and $546 million related to infrastructure, including data center and real estate consolidation and other items. The 2012 Plan is substantially complete and the severance and infrastructure related cash payments associated with the 2012 Plan are expected to be paid out through fiscal 2021.

    Other Plans

        Restructuring plans initiated by the former Parent in fiscal 2008 and 2010 were substantially completed as of April 30, 2015. Severance and infrastructure related cash payments associated with these plans are expected to be paid out through fiscal 2019.

Note 4: Retirement and Post-Retirement Benefit Plans

    Pension Benefit Expense

        Prior to October 31, 2015 and with the exception of certain defined benefit pension plans, of which the Company was the sole sponsor, certain of Hewlett Packard Enterprise eligible employees, retirees and other former employees participated in certain U.S. and international defined benefit pension plans offered by the former Parent. These plans which included participants of both Company employees and other employees of the former Parent were accounted for as multiemployer benefit plans and the related net benefit plan obligations were not included in the Company's Combined Balance Sheets through July 31, 2015. The related benefit plan expense was allocated to the Company based on the Company's labor costs and allocations of corporate and other shared functional personnel. Substantially all plan assets and the related benefit obligations that were directly attributable to Hewlett Packard Enterprise eligible employees, retirees and other former employees were transferred to the Company as of October 31, 2015.

        The Company recognized total net pension and other post-retirement benefit expense in the Condensed Consolidated and Combined Statement of Earnings of $41 million and $29 million for the three months ended April 30, 2016 and 2015 respectively, and $70 million and $52 million for the six months ended April 30, 2016 and 2015, respectively. The amount for the three months ended April 30, 2015, includes $2 million of related benefit plan expenses that were allocated to the Company by former Parent for the multiemployer pension plans.

19


Table of Contents


HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES

Notes to Condensed Consolidated and Combined Financial Statements (Continued)

(Unaudited)

Note 4: Retirement and Post-Retirement Benefit Plans (Continued)

        The Company's net pension and post-retirement benefit cost that were directly attributable to the eligible employees, retirees and other former employees of Hewlett Packard Enterprise and recognized in the Condensed Consolidated and Combined Statements of Earnings was as follows:

 
  Three months ended April 30  
 
  U.S. Defined
Benefit
Plans
  Non-U.S. Defined
Benefit Plans
  Post-Retirement
Benefit Plans
 
 
  2016   2015   2016   2015   2016   2015  
 
  In millions
 

Service cost

  $   $   $ 64   $ 18   $ 1   $  

Interest cost

        4     136     62     2      

Expected return on plan assets

            (240 )   (96 )        

Amortization and deferrals:

                                     

Actuarial loss (gain)

            77     34     (1 )    

Prior service benefit

            (6 )            

Net periodic benefit cost

  $   $ 4   $ 31   $ 18   $ 2   $  

Settlement loss

            1     1          

Special termination benefits

            7     4          

Net benefit cost

  $   $ 4   $ 39   $ 23   $ 2   $  

 

 
  Six months ended April 30  
 
  U.S. Defined
Benefit
Plans
  Non-U.S. Defined
Benefit Plans
  Post-Retirement
Benefit Plans
 
 
  2016   2015   2016   2015   2016   2015  
 
  In millions
 

Service cost

  $   $   $ 128   $ 36   $ 2   $  

Interest cost

        8     277     128     4      

Expected return on plan assets

            (494 )   (197 )   (1 )    

Amortization and deferrals:

                                     

Actuarial loss (gain)

        1     156     69     (2 )    

Prior service benefit

            (12 )            

Net periodic benefit cost

  $   $ 9   $ 55   $ 36   $ 3   $  

Settlement loss

            1     1          

Special termination benefits

            11     6          

Net benefit cost

  $   $ 9   $ 67   $ 43   $ 3   $  

    Employer Contributions and Funding Policy

        The Company's policy is to fund its pension plans so that it makes at least the minimum contribution required by local government, funding and taxing authorities.

        HPE previously disclosed in its Combined and Consolidated Financial Statements for the fiscal year ended October 31, 2015 that it expected to contribute approximately $366 million in fiscal 2016 to its non-U.S. pension plans, approximately $1 million to cover benefit payments to U.S. non-qualified

20


Table of Contents


HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES

Notes to Condensed Consolidated and Combined Financial Statements (Continued)

(Unaudited)

Note 4: Retirement and Post-Retirement Benefit Plans (Continued)

plan participants and approximately $3 million to cover benefit claims for the Company's post-retirement benefit plans.

        During the six months ended April 30, 2016, the Company contributed $212 million to its non-U.S. pension plans, and paid $1 million to cover benefit claims under the Company's post-retirement benefit plans. During the remainder of fiscal 2016, as a result of the impact of foreign currency, HPE now anticipates making additional contributions of approximately $144 million to its non-U.S. pension plans, approximately $1 million to its U.S. non-qualified plan participants and expects to pay approximately $2 million to cover benefit claims under the Company's post-retirement benefit plans.

        The Company's pension and other post-retirement benefit costs and obligations depend on various assumptions. Differences between expected and actual returns on investments and changes in discount rates and other actuarial assumptions are reflected as unrecognized gains or losses, and such gains or losses are amortized to earnings in future periods. A deterioration in the funded status of a plan could result in a need for additional company contributions or an increase in net pension and post-retirement benefit costs in future periods. Actuarial gains or losses are determined at the measurement date and amortized over the remaining service life for active plans or the life expectancy of plan participants for frozen plans.

Note 5: Stock-Based Compensation

        Prior to the separation, certain of the Company's employees participated in stock-based compensation plans sponsored by the former Parent. The former Parent's stock-based compensation plans included incentive compensation plans and an employee stock purchase plan. All awards granted under the plans were based on the former Parent's common shares and as such the award activity is not reflected in the Company's Condensed Consolidated and Combined Financial Statements.

        In conjunction with the separation, the Company adopted the Hewlett Packard Enterprise Company 2015 Stock Incentive Plan (the "Plan"). The Plan became effective on November 1, 2015. The total number of shares of the Company's common stock authorized under the Plan was 260 million. The Plan provides for the grant of various types of awards including restricted stock awards, stock options, and performance-based awards.

        In connection with the separation, and in accordance with the Employee Matters Agreement between HP Inc. and the Company, the Company's employees with outstanding former Parent stock-based awards received replacement stock-based awards under the Plan at separation. The value of the replacement stock-based awards was designed to generally preserve the intrinsic value of the replaced awards immediately prior to separation. The incremental expense incurred by the Company was not material. Also in conjunction with the separation, the Company granted one-time retention stock awards, with a total grant date fair value of approximately $137 million to certain executives. These awards vest over three years from the grant date.

21


Table of Contents


HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES

Notes to Condensed Consolidated and Combined Financial Statements (Continued)

(Unaudited)

Note 5: Stock-Based Compensation (Continued)

Stock-based Compensation Expense

        Stock-based compensation expense and the resulting tax benefits were as follows:

 
  Three months
ended
April 30
  Six months
ended
April 30
 
 
  2016   2015   2016   2015  
 
  In millions
 

Stock-based compensation expense

  $ 138   $ 97   $ 303   $ 236  

Income tax benefit

    (39 )   (32 )   (89 )   (78 )

Stock-based compensation expense, net of tax

  $ 99   $ 65   $ 214   $ 158  

        For the three and six months ended April 30, 2015, stock-based compensation expense includes expense attributable to the Company based on the awards and terms previously granted under the former Parent incentive compensation plan to the Company's employees prior to the separation and an allocation of the former Parent's corporate and shared functional employee expenses. Accordingly, the amounts presented for the three and six months ended April 30, 2015 are not necessarily indicative of future awards and do not necessarily reflect the results that we would have experienced as an independent, publicly-traded company.

Restricted Stock Awards

        Restricted stock awards are non-vested stock awards that may include grants of restricted stock or restricted stock units. Restricted stock awards and cash-settled awards are generally subject to forfeiture if employment terminates prior to the lapse of the restrictions. Such awards generally vest one to three years from the date of grant. During the vesting period, ownership of the restricted stock cannot be transferred. Restricted stock has the same dividend and voting rights as common stock and is considered to be issued and outstanding upon grant. The dividends paid on restricted stock are non-forfeitable. Restricted stock units have forfeitable dividend equivalent rights equal to the dividend paid on common stock. Restricted stock units do not have the voting rights of common stock, and the shares underlying restricted stock units are not considered issued and outstanding upon grant. The fair value of the restricted stock awards is the close price of the Company's common stock on the grant date of the award. The Company expenses the fair value of restricted stock awards ratably over the period during which the restrictions lapse.

22


Table of Contents


HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES

Notes to Condensed Consolidated and Combined Financial Statements (Continued)

(Unaudited)

Note 5: Stock-Based Compensation (Continued)

        A summary of restricted stock award activity is as follows:

 
  Six months ended
April 30, 2016
 
 
  Shares   Weighted-
Average
Grant Date
Fair Value
Per Share
 
 
  In thousands
   
 

Outstanding at beginning of period

      $  

Converted from former Parent's plan

    42,012   $ 15  

Granted(1)

    31,175   $ 15  

Vested

    (5,175 ) $ 15  

Forfeited

    (2,319 ) $ 15  

Outstanding at end of period

    65,693   $ 15  

(1)
Includes one-time retention restricted stock units of approximately 5 million shares.

        At April 30, 2016, there was $674 million of unrecognized pre-tax, stock-based compensation expense related to non-vested restricted stock awards, which the Company expects to recognize over the remaining weighted-average vesting period of 1.4 years.

Stock Options

        Stock options granted under the Company's principal equity plans are generally non-qualified stock options, but the principal equity plans permitted some options granted to qualify as incentive stock options under the U.S. Internal Revenue Code. Stock options generally vest over three to four years from the date of grant. The exercise price of a stock option is equal to the closing price of the Company's common stock on the option grant date. The majority of the stock options issued by the Company contain only service vesting conditions. The Company also issued, to a lesser extent, performance-contingent stock options that vest only on the satisfaction of both service and market conditions.

        The Company utilizes the Black-Scholes-Merton option pricing formula to estimate the fair value of stock options subject to service-based vesting conditions. The Company estimates the fair value of stock options subject to performance-contingent vesting conditions using a combination of a Monte

23


Table of Contents


HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES

Notes to Condensed Consolidated and Combined Financial Statements (Continued)

(Unaudited)

Note 5: Stock-Based Compensation (Continued)

Carlo simulation model and a lattice model, as these awards contain market conditions. The weighted-average fair value and the assumptions used to measure fair value were as follows:

 
  Three months
ended
April 30, 2016
  Six months
ended
April 30, 2016
 

Weighted-average fair value(1)

  $3   $4  

Expected volatility(2)

  29.3 % 31.1 %

Risk-free interest rate(3)

  1.2 % 1.7 %

Expected dividend yield(4)

  1.6 % 1.5 %

Expected term in years(5)

  5.3   5.4  

(1)
The weighted-average fair value was based on the fair value of stock options granted during the period.

(2)
The expected volatility was estimated using the average historical volatility of selected peer companies.

(3)
The risk-free interest rate was estimated based on the yield on U.S. Treasury zero-coupon issues.

(4)
The expected dividend yield represents a constant dividend yield applied for the duration of the expected term of the award.

(5)
For awards subject to service-based vesting, the expected term was estimated using the simplified method detailed in SEC Staff Accounting Bulletin No. 107 and for performance-contingent awards, the expected term represents an output from the lattice model.

        A summary of stock option activity is as follows:

 
  Six months ended April 30, 2016  
 
  Shares   Weighted-
Average
Exercise
Price
  Weighted-
Average
Remaining
Contractual
Term
  Aggregate
Intrinsic
Value
 
 
  In thousands
   
  In years
  In millions
 

Outstanding at beginning of period

      $              

Converted from former Parent's plan

    42,579   $ 15              

Granted(1)

    25,283   $ 15              

Exercised

    (1,925 ) $ 9              

Forfeited/cancelled/expired

    (1,305 ) $ 20              

Outstanding at end of period

    64,632   $ 15     5.9   $ 180  

Vested and expected to vest at end of period

    59,547   $ 15     5.8   $ 172  

Exercisable at end of period

    28,029   $ 13     4.2   $ 120  

(1)
Includes one-time retention stock options of approximately 16 million shares.

        The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value that option holders would have realized had all option holders exercised their options on the last trading

24


Table of Contents


HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES

Notes to Condensed Consolidated and Combined Financial Statements (Continued)

(Unaudited)

Note 5: Stock-Based Compensation (Continued)

day of the second quarter of fiscal 2016. The aggregate intrinsic value is the difference between the Company's closing common stock price on the last trading day of the first quarter of fiscal 2016 and the exercise price, multiplied by the number of in-the-money options. The total intrinsic value of options exercised for the three and six months ended April 30, 2016 was $10 million and $13 million, respectively.

        At April 30, 2016, there was $88 million of unrecognized pre-tax, stock-based compensation expense related to stock options, which the Company expects to recognize over the remaining weighted-average vesting period of 2.2 years.

Employee Stock Purchase Plan

        Effective November 1, 2015, the Company adopted the Hewlett Packard Enterprise Company 2015 Employee Stock Purchase Plan ("ESPP"). The total number of shares of Company's common stock authorized under the ESPP was 80 million. The ESPP allows eligible employees to contribute up to 10% of their eligible compensation to purchase Hewlett Packard Enterprise's common stock. The ESPP provides for a discount not to exceed 15% and an offering period up to 24 months. The Company currently offers 6 month offering periods during which employees have the ability to purchase shares at 95% of the closing market price on the purchase date. No stock-based compensation expense was recorded in connection with those purchases because the criteria of a non-compensatory plan were met.

Note 6: Taxes on Earnings

    Provision for Taxes

        Prior to the separation, Hewlett Packard Enterprise's operating results were included in the former Parent's various consolidated U.S. federal and state income tax returns, as well as non-U.S. tax filings. For purposes of the Company's Condensed Consolidated and Combined Financial Statements for the periods prior to the separation, income tax expense and deferred tax balances have been recorded as if the Company filed tax returns on a standalone basis separate from the former Parent. The Separate Return Method applies the accounting guidance for income taxes to the standalone financial statements as if the Company was a separate taxpayer and a standalone enterprise for the periods presented.

        The Company's effective tax rate was 11.8% and 23.4% for the three months ended April 30, 2016 and 2015, respectively, and 13.9% and 23.4% for the six months ended April 30, 2016 and 2015, respectively. HPE's effective tax rate generally differs from the U.S. federal statutory rate of 35% due to favorable tax rates associated with certain earnings from the Company's operations in lower-tax jurisdictions throughout the world. HPE has not provided U.S. taxes for all foreign earnings because the Company plans to reinvest some of those earnings indefinitely outside the U.S.

        For the three and six months ended April 30, 2016, HPE recorded $87 million and $197 million of net income tax benefits related to items discrete to the periods, respectively. These amounts primarily included tax benefits of $111 million and $215 million for the three and six months ended April 30, 2016, respectively, on restructuring charges, separation costs, acquisition and other related charges and tax indemnification adjustments, partially offset by various tax charges of $24 million and $18 million for the three and six months ended April 30, 2016, respectively.

        For the three and six months ended April 30, 2015, HPE recorded $119 million and $113 million of net income tax benefits related to items discrete to the periods, respectively. For both three and six

25


Table of Contents


HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES

Notes to Condensed Consolidated and Combined Financial Statements (Continued)

(Unaudited)

Note 6: Taxes on Earnings (Continued)

months ended April 30, 2015, these amounts primarily included tax benefits on restructuring charges and separation costs. In addition, for the six months ended April 30, 2015, HPE recorded a tax benefit arising from a retroactive research and development credit provided by the Tax Increase Prevention Act of 2014 which signed into law in December 2014.

    Uncertain Tax Positions

        The Company is subject to income tax in the U.S. and approximately 105 other countries and is subject to routine corporate income tax audits in many of these jurisdictions. In addition, former Parent, whose liabilities for which the Company is jointly and severally liable, is subject to numerous ongoing audits by federal, state and foreign tax authorities. The Company believes it has provided adequate reserves for all tax deficiencies or reductions in tax benefits that could result from federal, state and foreign tax audits. The Company regularly assesses the likely outcomes of these audits in order to determine the appropriateness of the Company's tax provision. The Company adjusts its uncertain tax positions to reflect the impact of negotiations, settlements, rulings, advice of legal counsel, and other information and events pertaining to a particular audit. However, income tax audits are inherently unpredictable and there can be no assurance that the Company will accurately predict the outcome of these audits. The amounts ultimately paid on resolution of an audit could be materially different from the amounts previously included in the Provision for taxes and therefore the resolution of one or more of these uncertainties in any particular period could have a material impact on net income or cash flows.

        As of April 30, 2016 and October 31, 2015, the amount of unrecognized tax benefits was $9.3 billion and $4.9 billion, respectively, of which up to $2.7 billion and $0.6 billion would affect the Company's effective tax rate if realized as of the respective periods. The $4.4 billion increase in the amount of unrecognized tax benefits for the six months ended April 30, 2016 are primarily related to the impact of the Company's joint and several liabilities with HP Inc. that resulted from the separation.

        Hewlett Packard Enterprise recognizes interest income from favorable settlements and interest expense and penalties accrued on unrecognized tax benefits in Provision for taxes in the Condensed Consolidated and Combined Statements of Earnings. As of April 30, 2016, and October 31, 2015, the Company had recognized $302 million and $269 million, respectively, for interest and penalties in the Condensed Consolidated Balance Sheets.

        Hewlett Packard Enterprise engages in continuous discussion and negotiation with taxing authorities regarding tax matters in various jurisdictions. Hewlett Packard Enterprise does not expect complete resolution of any U.S. Internal Revenue Service ("IRS") audit cycle within the next 12 months. However, it is reasonably possible that certain federal, foreign and state tax issues may be concluded in the next 12 months, including issues involving transfer pricing and other matters. Accordingly, Hewlett Packard Enterprise believes it is reasonably possible that its existing unrecognized tax benefits may be reduced by an amount up to $106 million within the next 12 months.

    Deferred Tax Assets and Liabilities

        In the first quarter of fiscal 2016, the Company adopted the amendment to the existing accounting standards for income taxes issued by the FASB in November 2015, and elected to apply it on a retrospective basis. As a result, all of the Company's deferred tax assets and liabilities are classified as

26


Table of Contents


HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES

Notes to Condensed Consolidated and Combined Financial Statements (Continued)

(Unaudited)

Note 6: Taxes on Earnings (Continued)

noncurrent as of April 30, 2016 and retrospectively as of October 31, 2015. See Note 1, "Overview and Basis of Presentation", for more details.

        Deferred tax assets and liabilities included in the Condensed Consolidated Balance Sheets as follows:

 
  As of  
 
  April 30,
2016
  October 31,
2015
 
 
  In millions
 

Long-term deferred tax assets

  $ 3,084   $ 3,925  

Long-term deferred tax liabilities

    (91 )   (41 )

Deferred tax assets net of deferred tax liabilities

  $ 2,993   $ 3,884  

        The Company periodically engages in intercompany advanced royalty payment and licensing arrangements that may result in advance payments between subsidiaries in different tax jurisdictions. When the local tax treatment of the intercompany licensing arrangements differ from U.S. GAAP treatment, deferred taxes are recognized. In the second quarter of fiscal 2016, Hewlett Packard Enterprise executed intercompany advanced royalty payment arrangements resulting in advanced payments of $1.6 billion and during fiscal 2015 the Company executed intercompany advanced royalty payment arrangements which resulted in advanced payments of $5.0 billion. In these transactions, the payments were received in the U.S. from a foreign consolidated affiliate, with a deferral of intercompany revenues over the term of the arrangements, approximately 5 years. Intercompany royalty revenue and the amortization expense related to the licensing rights are eliminated in consolidation.

Tax Matters Agreement and Other Income Tax Matters

        In connection with the separation, the Company entered into a Tax Matters Agreement with HP Inc., formerly Hewlett-Packard Company. See Note 18, "Guarantees, Indemnifications and Warranties", for a full description of the Tax Matters Agreement.

Note 7: Balance Sheet Details

        Balance sheet details were as follows:

Accounts Receivable

 
  As of  
 
  April 30,
2016
  October 31,
2015
 
 
  In millions
 

Accounts receivable

  $ 7,814   $ 8,647  

Allowance for doubtful accounts

    (107 )   (109 )

  $ 7,707   $ 8,538  

27


Table of Contents


HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES

Notes to Condensed Consolidated and Combined Financial Statements (Continued)

(Unaudited)

Note 7: Balance Sheet Details (Continued)

        The allowance for doubtful accounts related to accounts receivable and changes to the allowance were as follows:

 
  Six months ended
April 30, 2016
 
 
  In millions
 

Balance at beginning of year

  $ 109  

Provision for doubtful accounts

    32  

Deductions, net of recoveries

    (34 )

Balance at end of period

  $ 107  

        The Company has third-party revolving short-term financing arrangements intended to facilitate the working capital requirements of certain customers. The recourse obligations associated with these short-term financing arrangements as of April 30, 2016 and October 31, 2015 were not material.

        The activity related to Hewlett Packard Enterprise's revolving short-term financing arrangements was as follows:

 
  Six months ended
April 30, 2016
 
 
  In millions
 

Balance at beginning of period(1)

  $ 68  

Trade receivables sold

    1,331  

Cash receipts

    (1,340 )

Foreign currency and other

    (1 )

Balance at end of period(1)

  $ 58  

(1)
Beginning and ending balance represents amounts for trade receivables sold but not yet collected.

Inventory

 
  As of  
 
  April 30,
2016
  October 31,
2015
 
 
  In millions
 

Finished goods

  $ 1,338   $ 1,518  

Purchased parts and fabricated assemblies

    761     680  

  $ 2,099   $ 2,198  

28


Table of Contents


HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES

Notes to Condensed Consolidated and Combined Financial Statements (Continued)

(Unaudited)

Note 7: Balance Sheet Details (Continued)

Property, Plant and Equipment

 
  As of  
 
  April 30,
2016
  October 31,
2015
 
 
  In millions
 

Land

  $ 492   $ 514  

Buildings and leasehold improvements

    6,830     6,924  

Machinery and equipment, including equipment held for lease

    14,406     13,986  

    21,728     21,424  

Accumulated depreciation

    (12,054 )   (11,538 )

  $ 9,674   $ 9,886  

        For the six months ended April 30, 2016, the change in gross property, plant and equipment was due primarily to purchases of $1.6 billion and currency impacts of $77 million, partially offset by sales and retirements of $1.2 billion and reclassification of certain property, plant and equipment as held for sale as a result of the H3C transaction of $183 million. Accumulated depreciation associated with the assets sold and retired was $1.0 billion.

Note 8: Financing Receivables and Operating Leases

        Financing receivables represent sales-type and direct-financing leases of the Company and third-party products. These receivables typically have terms ranging from two to five years and are usually collateralized by a security interest in the underlying assets. Financing receivables also include billed receivables from operating leases. The components of financing receivables were as follows:

 
  As of  
 
  April 30,
2016
  October 31,
2015
 
 
  In millions
 

Minimum lease payments receivable

  $ 7,194   $ 6,941  

Unguaranteed residual value

    229     217  

Unearned income

    (554 )   (503 )

Financing receivables, gross

    6,869     6,655  

Allowance for doubtful accounts

    (83 )   (95 )

Financing receivables, net

    6,786     6,560  

Less: current portion(1)

    (3,017 )   (2,918 )

Amounts due after one year, net(1)

  $ 3,769   $ 3,642  

(1)
The Company includes the current portion in Financing receivables, and amounts due after one year, net in Long-term financing receivables and other assets, in the accompanying Condensed Consolidated Balance Sheets.

29


Table of Contents


HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES

Notes to Condensed Consolidated and Combined Financial Statements (Continued)

(Unaudited)

Note 8: Financing Receivables and Operating Leases (Continued)

    Credit Quality Indicators

        Due to the homogenous nature of its leasing transactions, the Company manages its financing receivables on an aggregate basis when assessing and monitoring credit risk. Credit risk is generally diversified due to the large number of entities comprising the Company's customer base and their dispersion across many different industries and geographic regions. The Company evaluates the credit quality of an obligor at lease inception and monitors that credit quality over the term of a transaction. The Company assigns risk ratings to each lease based on the creditworthiness of the obligor and other variables that augment or mitigate the inherent credit risk of a particular transaction. Such variables include the underlying value and liquidity of the collateral, the essential use of the equipment, the term of the lease, and the inclusion of credit enhancements, such as guarantees, letters of credit or security deposits.

        The credit risk profile of gross financing receivables, based upon internal risk ratings, was as follows:

 
  As of  
 
  April 30,
2016
  October 31,
2015
 
 
  In millions
 

Risk Rating:

             

Low

  $ 3,478   $ 3,467  

Moderate

    3,312     3,115  

High

    79     73  

Total

  $ 6,869   $ 6,655  

        Accounts rated low risk typically have the equivalent of a Standard & Poor's rating of BBB– or higher, while accounts rated moderate risk generally have the equivalent of BB+ or lower. The Company classifies accounts as high risk when it considers the financing receivable to be impaired or when management believes there is a significant near-term risk of impairment.

    Allowance for Doubtful Accounts

        The allowance for doubtful accounts for financing receivables is comprised of a general reserve and a specific reserve. The Company maintains general reserve percentages on a regional basis and bases such percentages on several factors, including consideration of historical credit losses and portfolio delinquencies, trends in the overall weighted-average risk rating of the portfolio, current economic conditions and information derived from competitive benchmarking. The Company excludes accounts evaluated as part of the specific reserve from the general reserve analysis. The Company establishes a specific reserve for financing receivables with identified exposures, such as customer defaults, bankruptcy or other events, that make it unlikely the Company will recover its investment. For individually evaluated receivables, the Company determines the expected cash flow for the receivable, which includes consideration of estimated proceeds from disposition of the collateral, and calculates an estimate of the potential loss and the probability of loss. For those accounts where a loss is considered probable, the Company records a specific reserve. The Company generally writes off a receivable or

30


Table of Contents


HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES

Notes to Condensed Consolidated and Combined Financial Statements (Continued)

(Unaudited)

Note 8: Financing Receivables and Operating Leases (Continued)

records a specific reserve when a receivable becomes 180 days past due, or sooner if the Company determines that the receivable is not collectible.

        The allowance for doubtful accounts for financing receivables as of April 30, 2016 and October 31, 2015 and the respective changes during the six and twelve months then ended were as follows:

 
  As of  
 
  April 30,
2016
  October 31,
2015
 
 
  In millions
 

Balance at beginning of period

  $ 95   $ 111  

Provision for doubtful accounts

    (6 )   25  

Write-offs

    (6 )   (41 )

Balance at end of period

  $ 83   $ 95  

        The gross financing receivables and related allowance evaluated for loss were as follows:

 
  As of  
 
  April 30,
2016
  October 31,
2015
 
 
  In millions
 

Gross financing receivables collectively evaluated for loss

  $ 6,546   $ 6,399  

Gross financing receivables individually evaluated for loss

    323     256  

Total

  $ 6,869   $ 6,655  

Allowance for financing receivables collectively evaluated for loss

  $ 70   $ 82  

Allowance for financing receivables individually evaluated for loss

    13     13  

Total

  $ 83   $ 95  

    Non-Accrual and Past-Due Financing Receivables

        The Company considers a financing receivable to be past due when the minimum payment is not received by the contractually specified due date. The Company generally places financing receivables on non-accrual status, which is the suspension of interest accrual, and considers such receivables to be non-performing at the earlier of the time at which full payment of principal and interest becomes doubtful or the receivable becomes 90 days past due. Subsequently, the Company may recognize revenue on non-accrual financing receivables as payments are received, which is on a cash basis, if the Company deems the recorded financing receivable to be fully collectible; however, if there is doubt regarding the ultimate collectability of the recorded financing receivable, all cash receipts are applied to the carrying amount of the financing receivable, which is the cost recovery method. In certain circumstances, such as when the Company deems a delinquency to be of an administrative nature, financing receivables may accrue interest after becoming 90 days past due. The non-accrual status of a financing receivable may not impact a customer's risk rating. After all of a customer's delinquent principal and interest balances are settled, the Company may return the related financing receivable to accrual status.

31


Table of Contents


HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES

Notes to Condensed Consolidated and Combined Financial Statements (Continued)

(Unaudited)

Note 8: Financing Receivables and Operating Leases (Continued)

        The following table summarizes the aging and non-accrual status of gross financing receivables:

 
  As of  
 
  April 30,
2016
  October 31,
2015
 
 
  In millions
 

Billed(1):

             

Current 1-30 days

  $ 334   $ 358  

Past due 31-60 days

    29     52  

Past due 61-90 days

    22     14  

Past due > 90 days

    59     57  

Unbilled sales-type and direct-financing lease receivables

    6,425     6,174  

Total gross financing receivables

  $ 6,869   $ 6,655  

Gross financing receivables on non-accrual status(2)

  $ 187   $ 154  

Gross financing receivables 90 days past due and still accruing interest(2)

  $ 136   $ 102  

(1)
Includes billed operating lease receivables and billed sales-type and direct-financing lease receivables.

(2)
Includes billed operating lease receivables and billed and unbilled sales-type and direct-financing lease receivables.

    Operating Leases

        Operating lease assets included in machinery and equipment in the Condensed Consolidated Balance Sheets were as follows:

 
  As of  
 
  April 30,
2016
  October 31,
2015
 
 
  In millions
 

Equipment leased to customers

  $ 5,278   $ 4,428  

Accumulated depreciation

    (2,072 )   (1,513 )

  $ 3,206   $ 2,915  

Note 9: Acquisitions and Divestitures

    Acquisitions

        During the first six months of fiscal 2016, the Company completed the acquisition of Trilead AG, a next generation provider of virtual machine backup software. In connection with this acquisition, the Company recorded approximately $10 million of goodwill and $4 million of intangible assets. Trilead AG's results are reported within the Software segment.

32


Table of Contents


HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES

Notes to Condensed Consolidated and Combined Financial Statements (Continued)

(Unaudited)

Note 9: Acquisitions and Divestitures (Continued)

        The purchase price allocation for previous acquisitions may reflect various preliminary fair value estimates and analyses, including preliminary work performed by third-party valuation specialists, certain tangible assets and liabilities acquired, the valuation of intangible assets acquired, certain legal matters, income and income based taxes, and residual goodwill; which are subject to change within the measurement period as valuations are finalized. Measurement period adjustments are recorded in the reporting period in which the estimates are finalized and adjustment amounts are determined.

        During the six months ended April 30, 2016, $260 million of purchase price adjustments were recorded which impacted goodwill in the EG segment. These measurement period adjustments, are primarily provisional tax related items recorded in conjunction with the acquisition of Aruba Networks, Inc. ("Aruba").

    Divestitures

        During the six months ended April 30, 2016, the Company completed three divestitures which resulted in $340 million of net proceeds, of which $25 million represents a deposit that was received in the fourth quarter of fiscal 2015. These divestitures primarily represent the sale of the TippingPoint business, which was previously reported within the Software segment, and the sale of a business which was previously reported within the ES segment. The gains associated with these divestitures were included in Selling, general and administrative expense in the Condensed Consolidated and Combined Statements of Earnings.

        In April 2016, the Company signed a definitive agreement with The Blackstone Group to sell at least 84% of its equity stake in MphasiS Limited ("MphasiS"), an IT services provider headquartered in Bangalore, for Indian Rupees ("INR") 430 per share. Additionally, the Blackstone Group will purchase the maximum amount of the remaining 16% of the Company's equity stake that is permitted under Indian securities law, subject to the outcome of a mandatory tender offer to MphasiS' public shareholders during the period between signing and closing. The Company's full equity stake in MphasiS is valued at approximately $825 million based upon the agreed purchase price of INR 430 per share. The financial results of Mphasis are reported within the ES segment. The transaction is expected to close during the second half of fiscal 2016, subject to regulatory approvals and other closing conditions.

    Assets and Liabilities Held for Sale

        The Company classifies its long-lived assets or disposal groups to be sold as held for sale in the period in which all of the held for sale criteria are met. The Company initially measures a long-lived asset or disposal group that is classified as held for sale at the lower of its carrying value or fair value less any costs to sell. Any loss resulting from this measurement is recognized in the period in which the held for sale criteria are met. Conversely, gains are not recognized on the sale of a long-lived asset or disposal group until the date of sale. The Company assesses the fair value of a long-lived asset or disposal group less any costs to sell at each reporting period and until the asset or disposal group is no longer is classified as held for sale.

        In May 2015, the Company and Tsinghua Holdings jointly announced a partnership that will bring together the Chinese enterprise technology assets of the Company and Tsinghua University to create a

33


Table of Contents


HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES

Notes to Condensed Consolidated and Combined Financial Statements (Continued)

(Unaudited)

Note 9: Acquisitions and Divestitures (Continued)

Chinese business provider of technology infrastructure. Under the definitive agreement, Tsinghua Holdings' subsidiary, Unisplendour Corporation, purchased 51% of the new business named H3C, comprising the Company's current H3C Technologies and China-based server, storage and technology services businesses, which are currently reported within the EG segment as of April 30, 2016, for approximately $2.6 billion, which includes purchase consideration adjustments ("H3C transaction"). The Company's remaining China subsidiary will maintain 100% ownership of its existing China-based Enterprise Services, Software and Helion Cloud businesses. The new H3C will be the exclusive provider of the Company's server and storage portfolio, as well as the Company's exclusive hardware support services provider in China, customized for that market. During the fiscal quarter ended April 30, 2016, the transaction met all of the held for sale criteria. No loss was recognized on the related assets and liabilities, as the fair value less any costs to sell exceeded their recorded value. The transaction closed in May 2016.

        The results of the H3C transaction disposal group ("H3C disposal group"), which represents 100% of the Company's current H3C Technologies and China-based server, storage and technology services businesses, are reflected in our Condensed Consolidated and Combined Financial Statements through April 30, 2016. The pre-tax earnings for the three and six months ended April 30, 2016 were $49 million and $182 million, respectively. The pre-tax earnings for the three and six months ended April 30, 2015 were $55 million and $152 million, respectively.

        The following table presents information related to the major classes of assets and liabilities that were reclassified as held for sale in the Condensed Consolidated Balance Sheet at April 30, 2016. The assets and liabilities reclassified as held for sale are 100% of the H3C disposal group, however, the Company will retain a 49% interest in the new company, which it will record as an equity method investment in its Consolidated and Combined Financial Statements upon the closing of the transaction.

 
  As of
April 30, 2016
 

Cash and cash equivalents

  $ 37  

Accounts receivable

    440  

Inventory

    200  

Other current assets

    59  

Goodwill

    3,022  

Other assets

    319  

Total assets held for sale

  $ 4,077  

Accounts payable

  $ 129  

Deferred revenue

    223  

Other current liabilities

    258  

Other liabilities

    117  

Total liabilities held for sale

  $ 727  

34


Table of Contents


HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES

Notes to Condensed Consolidated and Combined Financial Statements (Continued)

(Unaudited)

Note 10: Goodwill and Intangible Assets

    Goodwill

        Goodwill allocated to the Company's reportable segments as of April 30, 2016 and changes in the respective carrying amounts during the six months then ended were as follows:

 
  Enterprise
Group
  Enterprise
Services(2)
  Software   Financial
Services
  Total  
 
  In millions
 

Balance at October 31, 2015(1)

  $ 18,712   $ 92   $ 8,313   $ 144   $ 27,261  

Goodwill acquired during the period

            10         10  

Goodwill reclassified as held for sale or divested during the period(3)

    (3,022 )       (234 )       (3,256 )

Changes due to foreign currency

    (29 )   (2 )           (31 )

Goodwill adjustments(4)

    260                 260  

Balance at April 30, 2016(1)

  $ 15,921   $ 90   $ 8,089   $ 144   $ 24,244  

(1)
Goodwill is net of accumulated impairment losses of $13.7 billion which were recorded prior to October 31, 2013. Of that amount, $8.0 billion relates to the Enterprise Services segment and the remaining $5.7 billion relates to the Software segment.

(2)
Goodwill relates to the MphasiS Limited reporting unit.

(3)
Primarily goodwill reclassified as held for sale in the second quarter of fiscal 2016 related to the H3C transaction, as well as, other divestitures.

(4)
Primarily measurement period adjustments to provisional tax items, recorded in conjunction with the Aruba acquisition.

        The Company reviews goodwill for impairment annually and whenever events or changes in circumstances indicate the carrying amount of goodwill may not be recoverable. During the first six months of fiscal 2016, the Company's stock price experienced volatility and the Company's market capitalization was below its book value. The Company considered this along with other factors including, its continued execution in accordance with its annual budget and anticipated future cash flows; the length of time that the Company's stock has been trading; the Company's stock price appreciation during the period; and analyst indications that the Company's stock has significant potential for growth and margin expansion. Based upon its evaluation, the Company determined that there have been no events or circumstances which would more likely than not reduce fair value for its reporting units below their carrying value. As a result, the Company determined an interim impairment test was not necessary as of April 30, 2016. However, if the Company's market capitalization remains below its book value or if the Company's outlook for its business and industry in general is subject to a significant adverse change, the Company may be required to record an impairment to goodwill in the future. The Company will continue to evaluate the recoverability of goodwill on an annual basis as of the beginning of its fourth fiscal quarter and whenever events or changes in circumstances indicate there may be a potential impairment.

35


Table of Contents


HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES

Notes to Condensed Consolidated and Combined Financial Statements (Continued)

(Unaudited)

Note 10: Goodwill and Intangible Assets (Continued)

    Intangible Assets

        The Company's intangible assets are composed of:

 
  As of April 30, 2016   As of October 31, 2015  
 
  Gross   Accumulated
Amortization
  Accumulated
Impairment
Loss
  Net   Gross   Accumulated
Amortization
  Accumulated
Impairment
Loss
  Net  
 
  In millions
 

Customer contracts, customer lists and distribution agreements

  $ 4,832   $ (3,563 ) $ (856 ) $ 413   $ 5,109   $ (3,517 ) $ (856 ) $ 736  

Developed and core technology and patents

    4,214     (1,136 )   (2,138 )   940     4,218     (1,110 )   (2,138 )   970  

Trade name and trademarks

    225     (57 )   (109 )   59     231     (57 )   (109 )   65  

In-process research and development

    24             24     159             159  

Total intangible assets

  $ 9,295   $ (4,756 ) $ (3,103 ) $ 1,436   $ 9,717   $ (4,684 ) $ (3,103 ) $ 1,930  

        The decrease in gross intangible assets during the first six months of fiscal 2016 was related to $354 million of intangible assets that were divested or reclassified as held for sale; $69 million of intangible assets which became fully amortized and have been eliminated from gross intangible assets and accumulated amortization; $4 million of purchases related to the acquisition of Trilead AG; as well as, changes in the gross intangible balance due to foreign currency exchange rate fluctuations. Intangible asset amortization expense for the three months ended April 30, 2016 and 2015 was $201 million and $204 million and for the six months ended April 30, 2016 and 2015 was $419 million and $407 million, respectively.

        In-process research and development is efforts that are in process on the date the Company acquires a business. Under the accounting guidance for intangible assets, in-process research and development acquired in a business combination is considered an indefinite-lived intangible asset until completion or abandonment of the associated research and development efforts. The Company begins amortizing its in-process research and development intangible assets upon completion of the projects. If an in-process research and development project is abandoned, the Company records a charge for the value of the related intangible asset to its Consolidated and Combined Statement of Earnings in the period of abandonment. The Company reclassified in-process research and development assets acquired of $135 million to Developed and core technology and patents as the projects were completed and began amortization during the first six months of fiscal 2016.

36


Table of Contents


HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES

Notes to Condensed Consolidated and Combined Financial Statements (Continued)

(Unaudited)

Note 10: Goodwill and Intangible Assets (Continued)

        As of April 30, 2016, estimated future amortization expense related to finite-lived intangible assets was as follows:

Fiscal year:
  In millions  

2016 (remaining 6 months)

  $ 329  

2017

    345  

2018

    248  

2019

    203  

2020

    174  

2021

    54  

Thereafter

    59  

Total

  $ 1,412  

Note 11: Fair Value

        Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the measurement date.

    Fair Value Hierarchy

        The Company uses valuation techniques that are based upon observable and unobservable inputs. Observable inputs are developed using market data such as publicly available information and reflect the assumptions market participants would use, while unobservable inputs are developed using the best information available about the assumptions market participants would use. Assets and liabilities are classified in the fair value hierarchy based on the lowest level input that is significant to the fair value measurement:

        Level 1—Quoted prices (unadjusted) in active markets for identical assets or liabilities.

        Level 2—Quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability and market-corroborated inputs.

        Level 3—Unobservable inputs for the asset or liability.

        The fair value hierarchy gives the highest priority to observable inputs and lowest priority to unobservable inputs.

37


Table of Contents


HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES

Notes to Condensed Consolidated and Combined Financial Statements (Continued)

(Unaudited)

Note 11: Fair Value (Continued)

        The following table presents the Company's assets and liabilities that are measured at fair value on a recurring basis:

 
  As of April 30, 2016   As of October 31, 2015  
 
  Fair Value
Measured Using
   
  Fair Value
Measured Using
   
 
 
  Level 1   Level 2   Level 3   Total   Level 1   Level 2   Level 3   Total  
 
  In millions
 

Assets

                                                 

Cash Equivalents and Investments:

                                                 

Time deposits

  $   $ 2,004   $   $ 2,004   $   $ 2,473   $   $ 2,473  

Money market funds

    4,799             4,799     4,592             4,592  

Mutual funds

        277         277         246         246  

Equity securities in public companies

    26     1         27     46     7         53  

Foreign bonds

    8     344         352     8     305         313  

Other debt securities

            38     38             40     40  

Derivatives Instruments:

                                                 

Interest rate contracts

        112         112                  

Foreign currency contracts

        494         494         816         816  

Other derivatives

        3         3         3         3  

Total assets

  $ 4,833   $ 3,235   $ 38   $ 8,106   $ 4,646   $ 3,850   $ 40   $ 8,536  

Liabilities

                                                 

Derivatives Instruments:

                                                 

Interest rate contracts

  $   $   $   $   $   $ 55   $   $ 55  

Foreign currency contracts

        395         395         137         137  

Total liabilities

  $   $ 395   $   $ 395   $   $ 192   $   $ 192  

        During the six months ended April 30, 2016, there were no material transfers between levels within the fair value hierarchy. During the six months ended April 30, 2015, the Company transferred $41 million of equity securities in public companies from Level 2 to Level 1 within the fair value hierarchy as a result of a change in the market activity of the underlying investment. The remaining transfers between levels within the fair value hierarchy were not material.

    Valuation Techniques

        Cash Equivalents and Investments: The Company holds time deposits, money market funds, mutual funds, other debt securities primarily consisting of corporate and foreign government notes and bonds, and common stock and equivalents. The Company values cash equivalents and equity investments using quoted market prices, alternative pricing sources, including net asset value, or models utilizing market observable inputs. The fair value of debt investments was based on quoted market prices or model-driven valuations using inputs primarily derived from or corroborated by observable market data, and, in certain instances, valuation models that utilize assumptions which cannot be corroborated with observable market data.

38


Table of Contents


HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES

Notes to Condensed Consolidated and Combined Financial Statements (Continued)

(Unaudited)

Note 11: Fair Value (Continued)

        Derivative Instruments: The Company uses forward contracts, interest rate and total return swaps to hedge certain foreign currency and interest rate exposures. The Company uses industry standard valuation models to measure fair value. Where applicable, these models project future cash flows and discount the future amounts to present value using market-based observable inputs, including interest rate curves, the Company and counterparty credit risk, foreign currency exchange rates, and forward and spot prices for currencies and interest rates. See Note 12, "Financial Instruments", for a further discussion of the Company's use of derivative instruments.

    Other Fair Value Disclosures

        Short- and Long-Term Debt: The Company estimates the fair value of its debt primarily using an expected present value technique, which is based on observable market inputs using interest rates currently available to companies of similar credit standing for similar terms and remaining maturities, and considering its own credit risk. The portion of the Company's debt that is hedged is reflected in the Condensed Consolidated Balance Sheets as an amount equal to the debt's carrying amount and a fair value adjustment representing changes in the fair value of the hedged debt obligations arising from movements in benchmark interest rates. At April 30, 2016, the estimated fair value of the Company's short-term and long-term debt was $16.3 billion and the carrying value was $16.2 billion. The estimated fair value of the Company's short-term and long-term debt approximated its carrying value of $15.8 billion as of October 31, 2015. If measured at fair value in the Condensed Consolidated Balance Sheets, short-term and long-term debt would be classified in Level 2 of the fair value hierarchy.

        Other Financial Instruments: For the balance of the Company's financial instruments, primarily accounts receivable, accounts payable and financial liabilities included in other accrued liabilities, the carrying amounts approximate fair value due to their short maturities. If measured at fair value in the Condensed Consolidated Balance Sheets, these other financial instruments would be classified in Level 2 or Level 3 of the fair value hierarchy.

        Non-Marketable Equity Investments and Non-Financial Assets: The Company's non-marketable equity investments and non-financial assets, such as intangible assets, goodwill and property, plant and equipment, are recorded at fair value in the period an impairment charge is recognized. If measured at fair value in the Condensed Consolidated Balance Sheets, these would generally be classified in Level 3 of the fair value hierarchy.

39


Table of Contents


HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES

Notes to Condensed Consolidated and Combined Financial Statements (Continued)

(Unaudited)

Note 12: Financial Instruments

    Cash Equivalents and Available-for-Sale Investments

        Cash equivalents and available-for-sale investments were as follows:

 
  As of April 30, 2016   As of October 31, 2015  
 
  Cost   Gross
Unrealized
Gain
  Gross
Unrealized
Loss
  Fair
Value
  Cost   Gross
Unrealized
Gain
  Gross
Unrealized
Loss
  Fair
Value
 
 
  In millions
 

Cash Equivalents:

                                                 

Time deposits

  $ 1,918   $   $   $ 1,918   $ 2,367   $   $   $ 2,367  

Money market funds

    4,799             4,799     4,592             4,592  

Mutual funds

    189             189     173             173  

Total cash equivalents

    6,906             6,906     7,132             7,132  

Available-for-Sale Investments:

                                                 

Debt securities:

                                                 

Time deposits

    86             86     106             106  

Foreign bonds

    283     69         352     244     69         313  

Other debt securities

    50         (12 )   38     53         (13 )   40  

Total debt securities

    419     69     (12 )   476     403     69     (13 )   459  

Equity securities:

                                                 

Mutual funds

    88             88     73             73  

Equity securities in public companies

    22     5         27     55     7     (9 )   53  

Total equity securities

    110     5         115     128     7     (9 )   126  

Total available-for-sale investments

    529     74     (12 )   591     531     76     (22 )   585  

Total cash equivalents and available-for-sale investments

  $ 7,435   $ 74   $ (12 ) $ 7,497   $ 7,663   $ 76   $ (22 ) $ 7,717  

        All highly liquid investments with original maturities of three months or less at the date of acquisition are considered cash equivalents. As of April 30, 2016 and October 31, 2015, the carrying amount of cash equivalents approximated fair value due to the short period of time to maturity. Time deposits were primarily issued by institutions outside the U.S. as of April 30, 2016 and October 31, 2015. The estimated fair value of the available-for-sale investments may not be representative of values that will be realized in the future.

40


Table of Contents


HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES

Notes to Condensed Consolidated and Combined Financial Statements (Continued)

(Unaudited)

Note 12: Financial Instruments (Continued)

        Contractual maturities of investments in available-for-sale debt securities were as follows:

 
  As of April 30, 2016  
 
  Amortized
Cost
  Fair Value  
 
  In millions
 

Due in one year

  $ 70   $ 70  

Due in one to five years

    39     39  

Due in more than five years

    310     367  

  $ 419   $ 476  

        During the six months ended April 30, 2016, the Company recognized a $30 million impairment charge related to a public equity investment as the Company determined that such impairment was other than temporary. The Company made its determination primarily based on closing prices during the quarter of impairment and the prospect of recovery in the near term.

        Equity securities in privately held companies include cost basis and equity method investments and are included in Long-term financing receivables and other assets in the Condensed Consolidated Balance Sheets. These amounted to $100 million and $45 million at April 30, 2016 and October 31, 2015, respectively.

    Derivative Instruments

        The Company is a global company exposed to foreign currency exchange rate fluctuations and interest rate changes in the normal course of its business. As part of its risk management strategy, the Company uses derivative instruments, primarily forward contracts, interest rate swaps, total return swaps to hedge certain foreign currency, interest rate and, to a lesser extent, equity exposures. The Company's objective is to offset gains and losses resulting from these exposures with losses and gains on the derivative contracts used to hedge them, thereby reducing volatility of earnings or protecting the fair value of assets and liabilities. The Company does not have any leveraged derivatives and does not use derivative contracts for speculative purposes. The Company may designate its derivative contracts as fair value hedges, cash flow hedges or hedges of the foreign currency exposure of a net investment in a foreign operation ("net investment hedges"). Additionally, for derivatives not designated as hedging instruments, the Company categorizes those economic hedges as other derivatives. The Company recognizes all derivative instruments at fair value in the Condensed Consolidated Balance Sheets. The change in fair value of derivative instruments is recognized in the Condensed Consolidated and Combined Statements of Earnings or Condensed Consolidated and Combined Statements of Comprehensive Income depending upon the type of hedge, see further discussion below. The Company classifies cash flows from its derivative programs with the activities that correspond to the underlying hedged items in the Condensed Consolidated and Combined Statements of Cash Flows.

        As a result of its use of derivative instruments, the Company is exposed to the risk that its counterparties will fail to meet their contractual obligations. To mitigate counterparty credit risk, the Company has a policy of only entering into derivative contracts with carefully selected major financial institutions based on their credit ratings and other factors, and the Company maintains dollar risk limits

41


Table of Contents


HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES

Notes to Condensed Consolidated and Combined Financial Statements (Continued)

(Unaudited)

Note 12: Financial Instruments (Continued)

that correspond to each financial institution's credit rating and other factors. The Company's established policies and procedures for mitigating credit risk include reviewing and establishing limits for credit exposure and periodically reassessing the creditworthiness of its counterparties. Master netting agreements further mitigated credit exposure to counterparties by permitting the Company to net amounts due from the Company to counterparty against amounts due to the Company from the same counterparty under certain conditions.

        To further mitigate credit exposure to counterparties, the Company has collateral security agreements, which allow the Company to hold collateral from, or require the Company to post collateral to, counterparties when aggregate derivative fair values exceed contractually established thresholds which are generally based on the credit ratings of the Company and its counterparties. If the Company's credit rating falls below a specified credit rating, the counterparty has the right to request full collateralization of the derivatives' net liability position. Conversely, if the counterparty's credit rating falls below a specified credit rating, the Company has the right to request full collateralization of the derivatives' net liability position. Collateral is generally posted within two business days. The fair value of the Company's derivatives, with credit contingent features, in a net liability position was $85 million and $35 million at April 30, 2016 and October 31, 2015, respectively, all of which were fully collateralized within two business days.

        Under the Company's derivative contracts, the counterparty can terminate all outstanding trades following a covered change of control event affecting the Company that results in the surviving entity being rated below a specified credit rating. This credit contingent provision did not affect the Company's financial position or cash flows as of April 30, 2016 and October 31, 2015.

    Fair Value Hedges

        The Company issues long-term debt in U.S. dollars based on market conditions at the time of financing. The Company may enter into fair value hedges, such as interest rate swaps, to reduce the exposure of its debt portfolio to changes in fair value resulting from changes in interest rates by achieving a primarily U.S. dollar LIBOR-based floating interest expense. The swap transactions generally involve principal and interest obligations for U.S. dollar-denominated amounts. Alternatively, the Company may choose not to swap fixed for floating interest payments or may terminate a previously executed swap if it believes a larger proportion of fixed-rate debt would be beneficial. When investing in fixed-rate instruments, the Company may enter into interest rate swaps that convert the fixed interest payments into variable interest payments and may designate these swaps as fair value hedges.

        For derivative instruments that are designated and qualify as fair value hedges, the Company recognizes the change in fair value of the derivative instrument, as well as the offsetting change in the fair value of the hedged item, in Interest and other, net in the Condensed Consolidated and Combined Statements of Earnings in the period of change.

    Cash Flow Hedges

        The Company uses forward contracts designated as cash flow hedges to protect against the foreign currency exchange rate risks inherent in its forecasted net revenue and, to a lesser extent, cost of sales,

42


Table of Contents


HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES

Notes to Condensed Consolidated and Combined Financial Statements (Continued)

(Unaudited)

Note 12: Financial Instruments (Continued)

operating expenses, and intercompany loans denominated in currencies other than the U.S. dollar. The Company's foreign currency cash flow hedges mature generally within twelve months; however, forward contracts associated with sales-type and direct-financing leases and intercompany loans extend for the duration of the lease or loan term, which typically range from two to five years.

        For derivative instruments that are designated and qualify as cash flow hedges, the Company initially records changes in fair value for the effective portion of the derivative instrument in Accumulated other comprehensive loss as a separate component of equity in the Condensed Consolidated Balance Sheets and subsequently reclassifies these amounts into earnings in the period during which the hedged transaction is recognized in earnings. The Company reports the effective portion of its cash flow hedges in the same financial statement line item as changes in the fair value of the hedged item.

    Net Investment Hedges

        The Company uses forward contracts designated as net investment hedges to hedge net investments in certain foreign subsidiaries whose functional currency is the local currency. The Company records the effective portion of such derivative instruments together with changes in the fair value of the hedged items in Cumulative translation adjustment, a component of Accumulated other comprehensive loss, as a separate component of equity in the Condensed Consolidated Balance Sheets.

    Other Derivatives

        Other derivatives not designated as hedging instruments consist primarily of forward contracts used to hedge foreign currency-denominated balance sheet exposures. The Company also uses total return swaps and, to a lesser extent, interest rate swaps, based on equity or fixed income indices, to hedge its executive deferred compensation plan liability.

        For derivative instruments not designated as hedging instruments, the Company recognizes changes in fair value of the derivative instrument, as well as the offsetting change in the fair value of the hedged item, in Interest and other, net in the Condensed Consolidated and Combined Statements of Earnings in the period of change.

    Hedge Effectiveness

        For interest rate swaps designated as fair value hedges, the Company measures hedge effectiveness by offsetting the change in fair value of the hedged items with the change in fair value of the derivative. For forward contracts designated as cash flow or net investment hedges, the Company measures hedge effectiveness by comparing the cumulative change in fair value of the hedge contract with the cumulative change in fair value of the hedged item, both of which are based on forward rates. The Company recognizes any ineffective portion of the hedge in the Condensed Consolidated and Combined Statements of Earnings in the same period in which ineffectiveness occurs. Amounts excluded from the assessment of effectiveness are recognized in the Condensed Consolidated and Combined Statements of Earnings in the period they arise.

43


Table of Contents


HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES

Notes to Condensed Consolidated and Combined Financial Statements (Continued)

(Unaudited)

Note 12: Financial Instruments (Continued)

    Fair Value of Derivative Instruments in the Condensed Consolidated Balance Sheets

        The gross notional and fair value of derivative instruments in the Condensed Consolidated Balance Sheets was as follows:

 
  As of April 30, 2016   As of October 31, 2015  
 
   
  Fair Value    
  Fair Value  
 
  Outstanding
Gross
Notional
  Other
Current
Assets
  Long-Term
Financing
Receivables
and Other
Assets
  Other
Accrued
Liabilities
  Long-Term
Other
Liabilities
  Outstanding
Gross
Notional
  Other
Current
Assets
  Long-Term
Financing
Receivables
and Other
Assets
  Other
Accrued
Liabilities
  Long-Term
Other
Liabilities
 
 
  In millions
 

Derivatives designated as hedging instruments

                                                             

Fair value hedges:

                                                             

Interest rate contracts

  $ 9,500   $   $ 112   $   $   $ 9,500   $   $   $   $ 55  

Cash flow hedges:

                                                             

Foreign currency contracts

    9,777     181     106     200     49     8,692     296     206     28     8  

Net investment hedges:

                                                             

Foreign currency contracts

    1,848     52     27     36     17     1,861     114     66     7     4  

Total derivatives designated as hedging instruments

    21,125     233     245     236     66     20,053     410     272     35     67  

Derivatives not designated as hedging instruments

                                                             

Foreign currency contracts

    9,453     91     37     86     7     9,283     46     88     50     40  

Other derivatives

    144     3                 127     3              

Total derivatives not designated as hedging instruments

    9,597     94     37     86     7     9,410     49     88     50     40  

Total derivatives

  $ 30,722   $ 327   $ 282   $ 322   $ 73   $ 29,463   $ 459   $ 360   $ 85   $ 107  

    Offsetting of Derivative Instruments

        The Company recognizes all derivative instruments on a gross basis in the Condensed Consolidated Balance Sheets. The Company's derivative instruments are subject to master netting arrangements and collateral security arrangements. The Company does not offset the fair value of its derivative instruments against the fair value of cash collateral posted under collateral security agreements. As of April 30, 2016 and October 31, 2015, information related to the potential effect of the Company's use of the master netting agreements and collateral security agreements was as follows:

 
  As of April 30, 2016  
 
  In the Condensed Consolidated Balance Sheets    
 
 
  (vi) = (iii)–(iv)–(v)
 
 
  (i)
  (ii)
  (iii) = (i)–(ii)
  (iv)
  (v)
 
 
   
   
   
  Gross Amounts
Not Offset
   
 
 
  Gross
Amount
Recognized
  Gross
Amount
Offset
  Net Amount
Presented
  Derivatives   Financial
Collateral
  Net Amount  
 
  In millions
 

Derivative assets

  $ 609   $   $ 609   $ 294   $ 270 (1) $ 45  

Derivative liabilities

  $ 395   $   $ 395   $ 294   $ 50 (2) $ 51  

44


Table of Contents


HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES

Notes to Condensed Consolidated and Combined Financial Statements (Continued)

(Unaudited)

Note 12: Financial Instruments (Continued)


 
  As of October 31, 2015  
 
  In the Condensed Consolidated Balance Sheets    
 
 
  (vi) = (iii)–(iv)–(v)
 
 
  (i)
  (ii)
  (iii) = (i)–(ii)
  (iv)
  (v)
 
 
   
   
   
  Gross Amounts
Not Offset
   
 
 
  Gross
Amount
Recognized
  Gross
Amount
Offset
  Net Amount
Presented
  Derivatives   Financial
Collateral
  Net Amount  
 
  In millions
 

Derivative assets

  $ 819   $   $ 819   $ 153   $ 631 (1) $ 35  

Derivative liabilities

  $ 192   $   $ 192   $ 153   $ 19 (2) $ 20  

(1)
Represents the cash collateral posted by counterparties as of the respective reporting date for the Company's asset position, net of derivative amounts that could be offset, as of, generally, two business days prior to the respective reporting date.

(2)
Represents the collateral posted by the Company through re-use of counterparty cash collateral as of the respective reporting date for the Company's liability position, net of derivative amounts that could be offset, as of, generally, two business days prior to the respective reporting date.

    Effect of Derivative Instruments on the Condensed Consolidated and Combined Statements of Earnings

        The pre-tax effect of derivative instruments and related hedged items in a fair value hedging relationship for the three and six months ended April 30, 2016 and 2015 were as follows:

 
  Gains (Losses) Recognized in Earnings on Derivative and Related Hedged Item  
Derivative Instrument
  Location   Three
months
ended
April 30,
2016
  Six
months
ended
April 30,
2016
  Hedged Item   Location   Three
months
ended
April 30,
2016
  Six
months
ended
April 30,
2016
 
 
   
  In millions
   
   
  In millions
 

Interest rate contracts

  Interest and other, net   $ 34   $ 167   Fixed-rate debt   Interest and other, net   $ (34 ) $ (167 )

 

 
  Gains (Losses) Recognized in Earnings on Derivative and Related Hedged Item  
Derivative Instrument
  Location   Three
months
ended
April 30,
2015
  Six
months
ended
April 30,
2015
  Hedged Item   Location   Three
months
ended
April 30,
2015
  Six
months
ended
April 30,
2015
 
 
   
  In millions
   
   
  In millions
 

Interest rate contracts

  Interest and other, net   $   $   Fixed-rate debt   Interest and other, net   $   $  

45


Table of Contents


HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES

Notes to Condensed Consolidated and Combined Financial Statements (Continued)

(Unaudited)

Note 12: Financial Instruments (Continued)

        The pre-tax effect of derivative instruments in cash flow and net investment hedging relationships for the three and six months ended April 30, 2016 were as follows:

 
  Gains (Losses)
Recognized
in Other
Comprehensive
Income ("OCI")
on Derivatives
(Effective Portion)
  Gains (Losses) Reclassified from Accumulated
OCI Into Earnings (Effective Portion)
 
 
  Three
months
ended
April 30,
2016
  Six
months
ended
April 30,
2016
  Location   Three
months
ended
April 30,
2016
  Six
months
ended
April 30,
2016
 
 
  In millions
   
  In millions
 

Cash flow hedges:

                             

Foreign currency contracts

  $ (277 ) $ (186 ) Net revenue   $ 6   $ 67  

Foreign currency contracts

    7     1   Cost of products     (2 )   (1 )

Foreign currency contracts

    3     2   Other operating expenses          

Foreign currency contracts

    61     119   Interest and other, net     66     125  

Total cash flow hedges

  $ (206 ) $ (64 )     $ 70   $ 191  

Net investment hedges:

                             

Foreign currency contracts

  $ (137 ) $ (80 ) Interest and other, net   $   $  

        The pre-tax effect of derivative instruments in cash flow and net investment hedging relationships for the three and six months ended April 30, 2015 was as follows:

 
  Gains (Losses)
Recognized
in Other
Comprehensive
Income ("OCI")
on Derivatives
(Effective Portion)
  Gains (Losses) Reclassified from Accumulated
OCI Into Earnings (Effective Portion)
 
 
  Three
months
ended
April 30,
2015
  Six
months
ended
April 30,
2015
  Location   Three
months
ended
April 30,
2015
  Six
months
ended
April 30,
2015
 
 
  In millions
   
  In millions
 

Cash flow hedges:

                             

Foreign currency contracts

  $ (57 ) $ 137   Net revenue   $ 123   $ 202  

Foreign currency contracts

    (6 )   (5 ) Cost of products     1     3  

Foreign currency contracts

        (2 ) Other operating expenses     (2 )   (5 )

Foreign currency contracts

    67     102   Interest and other, net     69     99  

Total cash flow hedges

  $ 4   $ 232       $ 191   $ 299  

Net investment hedges:

                             

Foreign currency contracts

  $ (6 ) $ 123   Interest and other, net   $   $  

46


Table of Contents


HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES

Notes to Condensed Consolidated and Combined Financial Statements (Continued)

(Unaudited)

Note 12: Financial Instruments (Continued)

        As of April 30, 2016 and 2015, no portion of the hedging instruments gain or loss was excluded from the assessment of effectiveness for fair value, cash flow or net investment hedges. Hedge ineffectiveness for fair value, cash flow and net investment hedges was not material in the six months ended April 30, 2016 and 2015.

        As of April 30, 2016, the Company expects to reclassify an estimated net Accumulated other comprehensive loss of approximately $120 million, net of taxes, to earnings in the next twelve months along with the earnings effects of the related forecasted transactions associated with cash flow hedges.

        The pre-tax effect of derivative instruments not designated as hedging instruments on the Condensed Consolidated and Combined Statements of Earnings for the three and six months ended April 30, 2016 and 2015 was as follows:

 
  Gains (Losses) Recognized in Earnings on Derivatives  
 
  Location   Three
months
ended
April 30,
2016
  Six
months
ended
April 30,
2016
 
 
   
  In millions
 

Foreign currency contracts

  Interest and other, net   $ (331 ) $ (323 )

Other derivatives

  Interest and other, net     5      

Total

      $ (326 ) $ (323 )

 

 
  Gains (Losses) Recognized in Earnings on Derivatives  
 
  Location   Three
months
ended
April 30,
2015
  Six
months
ended
April 30,
2015
 
 
   
  In millions
 

Foreign currency contracts

  Interest and other, net   $ (77 ) $ 73  

Other derivatives

  Interest and other, net     (1 )   (2 )

Total

      $ (78 ) $ 71  

47


Table of Contents


HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES

Notes to Condensed Consolidated and Combined Financial Statements (Continued)

(Unaudited)

Note 13: Borrowings

    Notes Payable and Short-Term Borrowings

        Notes payable and short-term borrowings, including the current portion of long-term debt, were as follows:

 
  As of  
 
  April 30, 2016   October 31, 2015  
 
  Amount
Outstanding
  Weighted-Average
Interest Rate
  Amount
Outstanding
  Weighted-Average
Interest Rate
 
 
  Dollars in millions
 

Current portion of long-term debt

  $ 178     3.4 % $ 161     2.6 %

FS Commercial paper

    288     0.1 %   39     0.2 %

Notes payable to banks, lines of credit and other(1)

    499     2.9 %   491     2.7 %

Total notes payable and short-term borrowings

  $ 965         $ 691        

(1)
Notes payable to banks, lines of credit and other includes $384 million and $374 million at April 30, 2016 and October 31, 2015, respectively, of borrowing- and funding-related activity associated with FS and its subsidiaries.

48


Table of Contents


HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES

Notes to Condensed Consolidated and Combined Financial Statements (Continued)

(Unaudited)

Note 13: Borrowings (Continued)

    Long-Term Debt

 
  As of  
 
  April 30,
2016
  October 31,
2015
 
 
  In millions
 

Hewlett Packard Enterprise Senior Notes(1)

             

$2,250 issued at discount to par at a price of 99.944% in October 2015 at 2.45%, due October 5, 2017, interest payable semi-annually on April 5 and October 5 of each year

  $ 2,249   $ 2,249  

$2,650 issued at discount to par at a price of 99.872% in October 2015 at 2.85%, due October 5, 2018, interest payable semi-annually on April 5 and October 5 of each year

    2,647     2,647  

$3,000 issued at discount to par at a price of 99.972% in October 2015 at 3.6%, due October 15, 2020, interest payable semi-annually on April 15 and October 15 of each year

    2,999     2,999  

$1,350 issued at discount to par at a price of 99.802% in October 2015 at 4.4%, due October 15, 2022, interest payable semi-annually on April 15 and October 15 of each year

    1,348     1,347  

$2,500 issued at discount to par at a price of 99.725% in October 2015 at 4.9%, due October 15, 2025, interest payable semi-annually on April 15 and October 15 of each year

    2,494     2,493  

$750 issued at discount to par at a price of 99.942% in October 2015 at 6.2%, due October 15, 2035, interest payable semi-annually on April 15 and October 15 of each year

    750     749  

$1,500 issued at discount to par at a price of 99.932% in October 2015 at 6.35%, due October 15, 2045, interest payable semi-annually on April 15 and October 15 of each year

    1,499     1,499  

$350 issued at par in October 2015 at three-month USD LIBOR plus 1.74%, due October 5, 2017, interest payable quarterly on January 5, April 5, July 5 and October 5 of each year

    350     350  

$250 issued at par in October 2015 at three-month USD LIBOR plus 1.93%, due October 5, 2018, interest payable quarterly on January 5, April 5, July 5 and October 5 of each year

    250     250  

EDS Senior Notes(1)

             

$300 issued October 1999 at 7.45%, due October 2029

    312     313  

Other, including capital lease obligations, at 0.00%-8.47%, due in calendar years 2016-2022(2)

    415     423  

Fair value adjustment related to hedged debt

    112     (55 )

Less: current portion

    (178 )   (161 )

Total long-term debt

  $ 15,247   $ 15,103  

(1)
The Company may redeem some or all of the fixed-rate Hewlett Packard Enterprise senior notes and the EDS senior notes at any time in accordance with the terms thereof.

(2)
Other, including capital lease obligations includes $173 million and $196 million as of April 30, 2016 and October 31, 2015, respectively, of borrowing- and funding-related activity associated with FS and its subsidiaries that are collateralized by receivables and underlying assets associated with the related capital and operating leases. For both the periods presented, the carrying amount of the assets approximated the carrying amount of the borrowings.

        As disclosed in Note 12, "Financial Instruments", the Company uses interest rate swaps to mitigate the exposure of its debt portfolio to changes in fair value resulting from changes in interest rates by achieving a primarily U.S. dollar LIBOR-based floating interest expense. As of April 30, 2016, the Company had entered into interest rate swaps to reduce the exposure of $9.5 billion of aggregate principal amount of fixed rate senior notes to changes in fair value resulting from changes in interest rates by achieving LIBOR-based floating interest expense. Interest rates on long-term debt in the table above have not been adjusted to reflect the impact of any interest rate swaps.

49


Table of Contents


HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES

Notes to Condensed Consolidated and Combined Financial Statements (Continued)

(Unaudited)

Note 13: Borrowings (Continued)

        Interest expense on borrowings recognized in the Condensed Consolidated and Combined Statements of Earnings was as follows:

 
   
  Three months
ended April 30
  Six months
ended April 30
 
Expense
  Location   2016   2015   2016   2015  
 
   
  In millions
 

Financing interest

  Financing interest   $ 60   $ 61   $ 118   $ 124  

Interest expense

  Interest and other, net     89     10     169     20  

Total interest expense

      $ 149   $ 71   $ 287   $ 144  

    Available Borrowing Resources

        The Company had the following resources available to obtain short- or long-term additional liquidity if needed:

 
  As of
April 30,
2016
 
 
  In millions
 

Commercial paper programs

  $ 4,212  

Uncommitted lines of credit

  $ 1,822  

    Commercial Paper

        Hewlett Packard Enterprise's Board of Directors has authorized the issuance of up to $4.0 billion in aggregate principal amount of commercial paper by Hewlett Packard Enterprise. Hewlett Packard Enterprise's subsidiaries are authorized to issue up to an additional $500 million in aggregate principal amount of commercial paper. Hewlett Packard Enterprise maintains two commercial paper programs, and a wholly-owned subsidiary maintains a third program. Hewlett Packard Enterprise's U.S. program provides for the issuance of U.S. dollar-denominated commercial paper up to a maximum aggregate principal amount of $4.0 billion. Hewlett Packard Enterprise's euro commercial paper program provides for the issuance of commercial paper outside of the U.S. denominated in U.S. dollars, euros or British pounds up to a maximum aggregate principal amount of $3.0 billion or the equivalent in those alternative currencies. The combined aggregate principal amount of commercial paper outstanding under those programs at any one time cannot exceed the $4.0 billion authorized by Hewlett Packard Enterprise's Board of Directors. The Hewlett Packard Enterprise subsidiary's euro Commercial Paper/Certificate of Deposit Program provides for the issuance of commercial paper in various currencies of up to a maximum aggregate principal amount of $500 million.

    Revolving Credit Facility

        On November 1, 2015, the Company entered into a revolving credit facility (the "Credit Agreement"), together with the lenders named therein, JPMorgan Chase Bank, N.A. ("JPMorgan"), as co-administrative agent and administrative processing agent, and Citibank, N.A., as co-administrative agent, providing for a senior, unsecured revolving credit facility with aggregate lending commitments of

50


Table of Contents


HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES

Notes to Condensed Consolidated and Combined Financial Statements (Continued)

(Unaudited)

Note 13: Borrowings (Continued)

$4.0 billion. Loans under the revolving credit facility may be used for general corporate purposes. Commitments under the Credit Agreement are available for a period of five years, which period may be extended, subject to satisfaction of certain conditions, by up to two one-year periods. Commitment fees, interest rates and other terms of borrowing under the credit facility vary based on Hewlett Packard Enterprise's external credit rating.

Note 14: Related Party Transactions and Former Parent Company Investment

        Prior to November 1, 2015, the Company consisted of the enterprise technology infrastructure, software, services and financing businesses of former Parent and thus, transactions with former Parent were considered related party transactions. Following November 1, 2015, in connection with the separation, the Company became an independent publicly-traded company.

        On October 31, 2015 and November 1, 2015, in connection with the separation, the Company entered into several agreements with former Parent that govern the relationship between the Company and former Parent following the distribution, including the following:

    Separation and Distribution Agreement;

    Transition Services Agreement;

    Tax Matters Agreement;

    Employee Matters Agreement;

    Real Estate Matters Agreement;

    Master Commercial Agreement; and

    Information Technology Service Agreement.

        These agreements provided the allocation between the Company and former Parent's assets, employees, liabilities and obligations (including its investments, property and employee benefits and tax-related assets and liabilities) attributable to periods prior to, at and after the separation.

    Final Cash Allocation from former Parent

        In December 2015, and in connection with the Separation and Distribution Agreement, the Company received a net cash allocation of $526 million from former Parent. The cash allocation was based on the projected cash requirements of the Company, in light of the intended investment grade credit rating, business plan, and anticipated operations and activities.

51


Table of Contents


HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES

Notes to Condensed Consolidated and Combined Financial Statements (Continued)

(Unaudited)

Note 14: Related Party Transactions and Former Parent Company Investment (Continued)

    Receivable from and Payable (to) former Parent

 
  As of
October 31, 2015
 
 
  In millions
 

Receivable from former Parent(1)

  $ 492  

Payable to former Parent(2)

    (343 )

Net receivable from former Parent

  $ 149  

(1)
The Company includes the receivable from former Parent in Other current assets in the accompanying Condensed Consolidated Balance Sheets.

(2)
The Company includes the employee compensation and benefits portion in Employee compensation and benefits and all other accruals from former Parent in Other accrued liabilities in the accompanying Condensed Consolidated Balance Sheets.

    Intercompany Purchases

        For the three and six months ended April 30, 2015, the Company purchased equipment from other businesses of former Parent in the amount of $291 million and $603 million, respectively.

    Allocation of Corporate Expenses

        Prior to the separation, the Condensed Consolidated and Combined Statements of Earnings and Comprehensive Income include an allocation of general corporate expenses from former Parent for certain management and support functions which are provided on a centralized basis within former Parent. These management and support functions include, but are not limited to, executive management, finance, legal, information technology, employee benefits administration, treasury, risk management, procurement, and other shared services. These allocations were made on a direct usage basis when identifiable, with the remainder allocated on the basis of revenue, expenses, headcount or other relevant measures. During the three months and six ended April 30, 2015, the allocation was $0.9 billion and $1.9 billion, respectively.

        Management of the Company and former Parent consider these allocations to be a reasonable reflection of the utilization of services by, or the benefits provided to, the Company. These allocations may not, however, reflect the expense the Company would have incurred as a standalone company for the periods presented. Actual costs that may have been incurred if the Company had been a standalone company would depend on a number of factors, including the chosen organizational structure, what functions were outsourced or performed by employees and strategic decisions made in areas such as information technology and infrastructure.

    Former Parent Company Investment

        Former Parent company investment on the Condensed Consolidated Balance Sheets represents former Parent's historical investment in the Company, the net effect of transactions with and allocations from former Parent and the Company's accumulated earnings. As of November 1, 2015, in

52


Table of Contents


HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES

Notes to Condensed Consolidated and Combined Financial Statements (Continued)

(Unaudited)

Note 14: Related Party Transactions and Former Parent Company Investment (Continued)

connection with the separation and distribution, former Parent's investment in the Company's business was redesignated as stockholders' equity and allocated between common stock and additional paid-in capital based on the number of shares of the Company's common stock outstanding at the distribution date.

    Net Transfers from Former Parent

        Net transfers from former Parent are included within former Parent company investment. Former Parent historically used a centralized approach to cash management and the financing of its operations. Prior to the separation, transactions between the Company and former Parent were considered to be effectively settled for cash at the time the transaction was recorded. The net effect of these transactions is included in the Net transfer from (to) former Parent in Condensed Consolidated and Combined Statements of Cash Flow.

Note 15: Stockholders' Equity

    Taxes related to Other Comprehensive (Loss) Income

 
  Three months
ended
April 30
  Six months
ended
April 30
 
 
  2016   2015   2016   2015  
 
  In millions
 

Taxes on change in net unrealized (losses) gains on available-for-sale securities:

                         

Tax (provision) benefit on net unrealized gains (losses) arising during the period

  $ (2 ) $ 4   $ (1 ) $ 4  

Tax provision (benefit) on (gains) losses reclassified into earnings

    1         (2 )    

    (1 )   4     (3 )   4  

Taxes on change in net unrealized losses on cash flow hedges:

                         

Tax benefit (provision) on net unrealized (losses) gains arising during the period

    46     3     31     (32 )

Tax provision on net gains reclassified into earnings

    6     32     25     54  

    52     35     56     22  

Taxes on change in unrealized components of defined benefit plans:

                         

Tax benefit (provision) on losses arising during the period

                 

Tax (benefit) provision on amortization of actuarial loss and prior service benefit

    (5 )   2     (10 )   (4 )

Tax provision on curtailments, settlements and other

    (11 )       (12 )    

    (16 )   2     (22 )   (4 )

Tax benefit (provision) on change in cumulative translation adjustment

    42     3     22     (44 )

Tax benefit (provision) on other comprehensive income

  $ 77   $ 44   $ 53   $ (22 )

53


Table of Contents


HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES

Notes to Condensed Consolidated and Combined Financial Statements (Continued)

(Unaudited)

Note 15: Stockholders' Equity (Continued)

    Changes and reclassifications related to Other Comprehensive Loss, net of taxes

 
  Three months
ended April 30
  Six months
ended April 30
 
 
  2016   2015   2016   2015  
 
  In millions
  In millions
 

Other comprehensive loss, net of taxes:

                         

Change in net unrealized (losses) gains on available-for-sale securities:

                         

Net unrealized (losses) gains arising during the period

  $   $ (7 ) $ 3   $ (5 )

(Gains) losses reclassified into earnings

    (4 )       2      

    (4 )   (7 )   5     (5 )

Change in net unrealized losses on cash flow hedges:

                         

Net unrealized (losses) gains arising during the period

    (160 )   7     (33 )   200  

Net gains reclassified into earnings(1)

    (64 )   (159 )   (166 )   (245 )

    (224 )   (152 )   (199 )   (45 )

Change in unrealized components of defined benefit plans:

                         

Losses arising during the period

    (1 )       (1 )    

Amortization of actuarial loss and prior service benefit(2)

    65     36     132     66  

Curtailments, settlements and other

    (10 )   1     (29 )   1  

    54     37     102     67  

Change in cumulative translation adjustment

    99     3     (60 )   (112 )

Other comprehensive loss, net of taxes

  $ (75 ) $ (119 ) $ (152 ) $ (95 )

(1)
Reclassification of pre-tax (gains) losses on cash flow hedges into the Condensed Consolidated and Combined Statements of Earnings was as follows:

   
  Three months
ended April 30
  Six months
ended April 30
 
   
  2016   2015   2016   2015  
   
  In millions
  In millions
 
 

Net revenue

  $ (6 ) $ (123 ) $ (67 ) $ (202 )
 

Cost of products

    2     (1 )   1     (3 )
 

Other operating expenses

        2         5  
 

Interest and other, net

    (66 )   (69 )   (125 )   (99 )
 

  $ (70 ) $ (191 ) $ (191 ) $ (299 )
(2)
These components are included in the computation of net pension and post-retirement benefit (credit) cost in Note 4, "Retirement and Post-Retirement Benefit Plans."

54


Table of Contents


HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES

Notes to Condensed Consolidated and Combined Financial Statements (Continued)

(Unaudited)

Note 15: Stockholders' Equity (Continued)

        The components of accumulated other comprehensive loss, net of taxes as of April 30, 2016, and changes during the six months ended April 30, 2016 were as follows:

 
  Net unrealized
gains (losses) on
available-for-sale
securities
  Net unrealized
gains (losses)
on cash
flow hedges
  Unrealized
components
of defined
benefit plans
  Cumulative
translation
adjustment
  Accumulated
other
comprehensive
loss
 
 
  In millions
 

Balance at beginning of period

  $ 55   $ 68   $ (4,173 ) $ (965 ) $ (5,015 )

Other comprehensive income (loss) before reclassifications

    3     (33 )   132     (60 )   42  

Reclassifications of losses (gains) into earnings

    2     (166 )   (30 )       (194 )

Balance at end of period

  $ 60   $ (131 ) $ (4,071 ) $ (1,025 ) $ (5,167 )

    Share Repurchase Program

        The Company's share repurchase program authorizes both open market and private repurchase transactions and does not have a specific expiration date. The Company may choose to repurchase shares when sufficient liquidity exists and the shares are trading at a discount relative to estimated intrinsic value.

        In November 2015, the Company entered into an accelerated share repurchase agreement ("ASR Agreement") with a financial institution. For the six months ended April 30, 2016, the Company retired a total of 88 million shares as a result of its share repurchase programs which included purchases of 78 million shares under the ASR Agreement. The 88 million shares were retired and recorded as a $1.2 billion reduction to stockholder's equity. The total shares repurchased under the ASR Agreement was 78 million shares based on the average daily volume weighted average stock price of the Company's common stock during the term of the transaction, plus transaction fees. As of April 30, 2016, the Company had remaining authorization of $1.8 billion for future share repurchases under the $3.0 billion repurchase authorization approved by the Company's Board of Directors on October 13, 2015. On May 24, 2016, the Company announced that its Board of Directors authorized an additional $3.0 billion under the Company's authorized share repurchase program.

Note 16: Net Earnings Per Share

        The Company calculates basic net EPS using net earnings and the weighted-average number of shares outstanding during the reporting period. Diluted net EPS includes any dilutive effect of restricted stock awards, stock options, and performance-based awards.

55


Table of Contents


HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES

Notes to Condensed Consolidated and Combined Financial Statements (Continued)

(Unaudited)

Note 16: Net Earnings Per Share (Continued)

        The reconciliations of the numerators and denominators of each of the basic and diluted net EPS calculations were as follows:

 
  Three months
ended April 30
  Six months ended
April 30
 
 
  2016   2015   2016   2015  
 
  In millions, except per share amounts
 

Numerator:

                         

Net earnings

  $ 320   $ 305   $ 587   $ 852  

Denominator:(1)(2)

                         

Weighted-average shares used to compute basic net EPS

    1,725     1,804     1,743     1,804  

Dilutive effect of employee stock plans(3)

    26     30     22     30  

Weighted-average shares used to compute diluted net EPS

    1,751     1,834     1,765     1,834  

Net earnings per share:

                         

Basic

  $ 0.19   $ 0.17   $ 0.34   $ 0.47  

Diluted

  $ 0.18   $ 0.16   $ 0.33   $ 0.46  

Anti-dilutive weighted average stock awards(4)

    46     28     51     28  

(1)
The Company considers restricted stock that provide the holder with a non-forfeitable right to receive dividends to be participating securities. For the periods presented, there were no shares outstanding of restricted stock that provided the holder with a non-forfeitable right to receive dividends.

(2)
On November 1, 2015, the distribution date, HP Inc. stockholders received one share of Hewlett Packard Enterprise common stock for every share of HP Inc. common stock held as of the record date on October 21, 2015. For comparative purposes, the same number of shares used to compute basic and diluted net earnings per share for the fiscal year ended October 31, 2015 is used in the calculation of basic and diluted net earnings per share for all periods in fiscal 2015.

(3)
For the periods presented in fiscal 2015, the Company calculates the weighted-average dilutive effect of employee stock plans after conversion, by multiplying the dilutive Hewlett-Packard Company stock-based awards for the fiscal period ended October 31, 2015, attributable to Hewlett Packard Enterprise employees with the price conversion ratio used to convert those awards to equivalent units of Hewlett Packard Enterprise awards on the separation date. The price conversion ratio was calculated using the closing price of Hewlett-Packard Company common shares on October 31, 2015 divided by the opening price of Hewlett Packard Enterprise common shares on November 2, 2015.

(4)
The Company excludes stock awards where the assumed proceeds exceed the average market price from the calculation of diluted net EPS, because their effect would be anti-dilutive. The assumed proceeds of a stock award includes the sum of its exercise price (if the award is an option), average unrecognized compensation cost and excess tax benefit. For the three and six months ended April 30, 2015, the Company's anti-dilutive shares were calculated based on Hewlett-Packard Company anti-dilutive awards for the fiscal period ended October 31, 2015 attributable to Hewlett Packard Enterprise employees, with the price conversion ratio used to convert those

56


Table of Contents


HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES

Notes to Condensed Consolidated and Combined Financial Statements (Continued)

(Unaudited)

Note 16: Net Earnings Per Share (Continued)

    awards to equivalent units of Hewlett Packard Enterprise awards on the distribution date. The price conversion ratio was calculated using the closing price of Hewlett-Packard Company common shares on October 31, 2015 divided by the opening price of Hewlett Packard Enterprise common shares on November 2, 2015.

Note 17: Litigation and Contingencies

        Hewlett Packard Enterprise is involved in various lawsuits, claims, investigations and proceedings including those consisting of IP, commercial, securities, employment, employee benefits and environmental matters, which arise in the ordinary course of business. In addition, as part of the Separation and Distribution Agreement, Hewlett Packard Enterprise and HP Inc. (formerly known as "Hewlett-Packard Company") agreed to cooperate with each other in managing certain existing litigation related to both parties' businesses. The Separation and Distribution Agreement included provisions that allocate liability and financial responsibility for pending litigation involving the parties, as well as provide for cross-indemnification of the parties against liabilities to one party arising out of liabilities allocated to the other party. The Separation and Distribution Agreement also included provisions that assign to the parties responsibility for managing pending and future litigation related to the general corporate matters of HP Inc. arising prior to the separation. Hewlett Packard Enterprise records a liability when it believes that it is both probable that a liability has been incurred and the amount of loss can be reasonably estimated. Significant judgment is required to determine both the probability of having incurred a liability and the estimated amount of the liability. Hewlett Packard Enterprise reviews these matters at least quarterly and adjusts these liabilities to reflect the impact of negotiations, settlements, rulings, advice of legal counsel and other updated information and events pertaining to a particular matter. Litigation is inherently unpredictable. However, Hewlett Packard Enterprise believes it has valid defenses with respect to legal matters pending against us. Nevertheless, cash flows or results of operations could be materially affected in any particular period by the resolution of one or more of these contingencies. Hewlett Packard Enterprise believes it has recorded adequate provisions for any such matters and, as of April 30, 2016, it was not reasonably possible that a material loss had been incurred in connection with such matters in excess of the amounts recognized in its financial statements.

    Litigation, Proceedings and Investigations

        Fair Labor Standards Act Litigation.    Hewlett Packard Enterprise is involved in several pre-separation lawsuits in which the plaintiffs are seeking unpaid overtime compensation and other damages based on allegations that various employees of Electronic Data Systems Corporation ("EDS") or HP Inc. have been misclassified as exempt employees under the Fair Labor Standards Act (the "FLSA") and/or in violation of the California Labor Code or other state laws. Those matters include the following:

    Karlbom, et al. v. Electronic Data Systems Corporation is a class action filed on March 16, 2009 in California Superior Court alleging that certain information technology employees allegedly involved in installing and/or maintaining computer software and hardware were misclassified as exempt employees. On October 30, 2015, plaintiffs filed a motion to certify a Rule 23 state class of all California-based EDS employees in the Infrastructure Associate, Infrastructure Analyst,

57


Table of Contents


HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES

Notes to Condensed Consolidated and Combined Financial Statements (Continued)

(Unaudited)

Note 17: Litigation and Contingencies (Continued)

      Infrastructure Specialist, and Infrastructure Specialist Senior job codes from March 16, 2005 through October 31, 2009 that they claim were improperly classified as exempt from overtime under state law. On January 22, 2016, the court denied plaintiffs' motion for class certification. On April 8, 2016, plaintiffs filed a notice of appeal to the California Court of Appeal.

    Benedict v. Hewlett-Packard Company is a purported class action filed on January 10, 2013 in the United States District Court for the Northern District of California alleging that certain technical support employees allegedly involved in installing, maintaining and/or supporting computer software and/or hardware for HP Inc. were misclassified as exempt employees under the FLSA. The plaintiff has also alleged that HP Inc. violated California law by, among other things, allegedly improperly classifying these employees as exempt. On February 13, 2014, the court granted plaintiff's motion for conditional class certification. On May 7, 2015, plaintiff filed a motion to certify a Rule 23 state class of certain Technical Solutions Consultants in California, Massachusetts, and Colorado that they claim were improperly classified as exempt from overtime under state law. On July 30, 2015, the court dismissed the Technology Consultant and certain Field Technical Support Consultant opt-ins from the conditionally certified FLSA collective action. The court denied plaintiffs' motion for Rule 23 class certification on March 29, 2016. On April 12, 2016, plaintiffs filed a notice of appeal of that decision to the United States Court of Appeal for the Ninth Circuit. The hearing on HP Inc.'s motion to decertify the FLSA collective action is scheduled for June 16, 2016.

        India Directorate of Revenue Intelligence Proceedings.    On April 30 and May 10, 2010, the India Directorate of Revenue Intelligence (the "DRI") issued show cause notices to Hewlett-Packard India Sales Private Ltd ("HP India"), a subsidiary of HP Inc., seven HP India employees and one former HP India employee alleging that HP India underpaid customs duties while importing products and spare parts into India and seeking to recover an aggregate of approximately $370 million, plus penalties. Prior to the issuance of the show cause notices, HP India deposited approximately $16 million with the DRI and agreed to post a provisional bond in exchange for the DRI's agreement to not seize HP India products and spare parts and to not interrupt the transaction of business by HP India.

        On April 11, 2012, the Bangalore Commissioner of Customs issued an order on the products-related show cause notice affirming certain duties and penalties against HP India and the named individuals of approximately $386 million, of which HP India had already deposited $9 million. On December 11, 2012, HP India voluntarily deposited an additional $10 million in connection with the products-related show cause notice. On April 20, 2012, the Commissioner issued an order on the parts-related show cause notice affirming certain duties and penalties against HP India and certain of the named individuals of approximately $17 million, of which HP India had already deposited $7 million. After the order, HP India deposited an additional $3 million in connection with the parts-related show cause notice so as to avoid certain penalties.

        HP India filed appeals of the Commissioner's orders before the Customs Tribunal along with applications for waiver of the pre-deposit of remaining demand amounts as a condition for hearing the appeals. The Customs Department has also filed cross-appeals before the Customs Tribunal. On January 24, 2013, the Customs Tribunal ordered HP India to deposit an additional $24 million against the products order, which HP India deposited in March 2013. The Customs Tribunal did not order any additional deposit to be made under the parts order. In December 2013, HP India filed applications

58


Table of Contents


HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES

Notes to Condensed Consolidated and Combined Financial Statements (Continued)

(Unaudited)

Note 17: Litigation and Contingencies (Continued)

before the Customs Tribunal seeking early hearing of the appeals as well as an extension of the stay of deposit as to HP India and the individuals already granted until final disposition of the appeals. On February 7, 2014, the application for extension of the stay of deposit was granted by the Customs Tribunal until disposal of the appeals. On October 27, 2014, the Customs Tribunal commenced hearings on the cross-appeals of the Commissioner's orders. The Customs Tribunal rejected HP India's request to remand the matter to the Commissioner on procedural grounds. The hearings were scheduled to reconvene on April 6, 2015, and again on November 3, 2015 and April 11, 2016, but were cancelled at the request of the Customs Tribunal. No new hearing date has been set.

        Department of Justice, Securities and Exchange Commission Proceedings.    In April 2014, HP Inc. and HP Inc. subsidiaries in Russia, Poland, and Mexico collectively entered into agreements with the U.S. Department of Justice ("DOJ") and the Securities and Exchange Commission ("SEC") to resolve claims of Foreign Corrupt Practices Act ("FCPA") violations. Pursuant to the terms of the resolutions with the DOJ and SEC, HP Inc. was required to undertake certain compliance, reporting and cooperation obligations for a three-year period. In October of 2015, Hewlett Packard Enterprise contractually undertook the same compliance, reporting and cooperation obligations that were held by HP Inc. under the DOJ resolutions for the balance of the three-year period. Hewlett Packard Enterprise has reached a similar agreement with the Staff of the SEC, which remains subject to approval by the SEC's Commissioners.

        ECT Proceedings.    In January 2011, the postal service of Brazil, Empresa Brasileira de Correios e Telégrafos ("ECT"), notified a former subsidiary of HP Inc. in Brazil ("HP Brazil") that it had initiated administrative proceedings to consider whether to suspend HP Brazil's right to bid and contract with ECT related to alleged improprieties in the bidding and contracting processes whereby employees of HP Brazil and employees of several other companies allegedly coordinated their bids and fixed results for three ECT contracts in 2007 and 2008. In late July 2011, ECT notified HP Brazil it had decided to apply the penalties against HP Brazil and suspend HP Brazil's right to bid and contract with ECT for five years, based upon the evidence before it. In August 2011, HP Brazil appealed ECT's decision. In April 2013, ECT rejected HP Brazil's appeal, and the administrative proceedings were closed with the penalties against HP Brazil remaining in place. In parallel, in September 2011, HP Brazil filed a civil action against ECT seeking to have ECT's decision revoked. HP Brazil also requested an injunction suspending the application of the penalties until a final ruling on the merits of the case. The court of first instance has not issued a decision on the merits of the case, but it has denied HP Brazil's request for injunctive relief. HP Brazil appealed the denial of its request for injunctive relief to the intermediate appellate court, which issued a preliminary ruling denying the request for injunctive relief but reducing the length of the sanctions from five to two years. HP Brazil appealed that decision and, in December 2011, obtained a ruling staying enforcement of ECT's sanctions until a final ruling on the merits of the case. HP Brazil expects the decision to be issued in 2016 and any subsequent appeal on the merits to last several years.

        Cisco Systems.    On August 21, 2015, Cisco Systems, Inc. ("Cisco Systems") and Cisco Systems Capital Corporation ("Cisco Capital") filed an action in Santa Clara County Superior Court for declaratory judgment and breach of contract against HP Inc. in connection with a dispute arising out of a third-party's termination of a services contract with HP Inc. As part of that third-party services contract, HP Inc. separately contracted with Cisco on an agreement to utilize Cisco products and

59


Table of Contents


HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES

Notes to Condensed Consolidated and Combined Financial Statements (Continued)

(Unaudited)

Note 17: Litigation and Contingencies (Continued)

services. HP Inc. prepaid the entire amount due Cisco through a financing arrangement with Cisco Capital. Following the termination of HP Inc.'s services contract with the third-party, HP Inc. no longer required Cisco's products and services, and, accordingly, exercised its contractual termination rights under the agreement with Cisco, and requested that Cisco apply the appropriate credit toward the remaining balance owed Cisco Capital. This lawsuit relates to the calculation of that credit under the agreement between Cisco and HP Inc. Cisco contends that after the credit is applied, HP Inc. still owes Cisco Capital approximately $58 million. HP Inc. contends that under a proper reading of the agreement, HP Inc. owes nothing to Cisco Capital, and that Cisco owes a significant amounts to HP Inc. On December 18, 2015, the court held a status conference at which it lifted the responsive pleading and discovery stay. Following the conference, Cisco filed an amended complaint that abandons the claim for breach of contract set forth in the original complaint, and asserts a single cause of action for declaratory relief concerning the proper calculation of the cancellation credit. On January 19, 2016, HP Inc. filed a counterclaim for breach of contract simultaneously with its answer to the amended complaint. A case management conference has been scheduled for July 15, 2016.

        Washington DC Navy Yard Litigation:    In December 2013, HP Enterprise Services, LLC (HPES) was named in a lawsuit arising out of the September 2013 Washington DC Navy Yard shooting that resulted in the deaths of twelve individuals. The perpetrator was an employee of The Experts, HPES's now-terminated subcontractor on its IT services contract with the U.S. Navy. This action was filed in the Middle District of Florida by the estate of a deceased victim, asserting claims for negligence against HPES, The Experts, and the U.S. Navy. The court dismissed the plaintiff's claims against the U.S. Navy but did not decide the motions to dismiss of HP Inc. or The Experts. On February 11, 2015, the action was transferred to the United States District Court for the District of Columbia. An additional eight lawsuits were filed against HPES in 2015. Accordingly, a total of nine lawsuits have now been filed against HPES in connection with the September 2013 Washington DC Navy Yard shooting, all of which are now pending with the original action in the United States District Court for the District of Columbia. Pursuant to a coordinated schedule, defendants filed motions to dismiss all of the complaints on December 11, 2015. Plaintiffs' oppositions to defendants' motion to dismiss were filed on February 12, 2016. A hearing date on defendants' motion to dismiss has not yet been scheduled.

    Environmental

        The Company's operations and products are or may in the future become subject to various federal, state, local and foreign laws and regulations concerning environmental protection, including laws addressing the discharge of pollutants into the air and water, the management and disposal of hazardous substances and wastes, the clean-up of contaminated sites, the substances and materials used in the Company's products, the energy consumption of products, services and operations and the operational or financial responsibility for recycling, treatment and disposal of those products. This includes legislation that makes producers of electrical goods, including servers and networking equipment, financially responsible for specified collection, recycling, treatment and disposal of past and future covered products (sometimes referred to as "product take-back legislation"). The Company could incur substantial costs, its products could be restricted from entering certain jurisdictions, and it could face other sanctions, if it were to violate or become liable under environmental laws or if its products become non-compliant with environmental laws. The Company's potential exposure includes impacts on revenue, fines and civil or criminal sanctions, third-party property damage or personal injury

60


Table of Contents


HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES

Notes to Condensed Consolidated and Combined Financial Statements (Continued)

(Unaudited)

Note 17: Litigation and Contingencies (Continued)

claims and clean-up costs. The amount and timing of costs to comply with environmental laws are difficult to predict.

        In particular, the Company may become a party to, or otherwise involved in, proceedings brought by U.S. or state environmental agencies under the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA"), known as "Superfund," or other federal, state or foreign laws and regulations addressing the clean-up of contaminated sites, and may become a party to, or otherwise involved in, proceedings brought by private parties for contribution towards clean-up costs. The Company is also contractually obligated to make financial contributions to address actions related to certain environmental liabilities, both ongoing and arising in the future, pursuant to its separation and distribution agreement with HP Inc.

Note 18: Guarantees, Indemnifications and Warranties

    Guarantees

        In the ordinary course of business, the Company may issue performance guarantees to certain of its clients, customers and other parties pursuant to which the Company has guaranteed the performance obligations of third parties. Some of those guarantees may be backed by standby letters of credit or surety bonds. In general, the Company would be obligated to perform over the term of the guarantee in the event a specified triggering event occurs as defined by the guarantee. The Company believes the likelihood of having to perform under a material guarantee is remote.

        The Company has entered into service contracts with certain of its clients that are supported by financing arrangements. If a service contract is terminated as a result of the Company's non-performance under the contract or failure to comply with the terms of the financing arrangement, the Company could, under certain circumstances, be required to acquire certain assets related to the service contract. The Company believes the likelihood of having to acquire a material amount of assets under these arrangements is remote.

    Indemnifications

        In the ordinary course of business, the Company enters into contractual arrangements under which the Company may agree to indemnify a third party to such arrangement from any losses incurred relating to the services they perform on behalf of the Company or for losses arising from certain events as defined within the particular contract, which may include, for example, litigation or claims relating to past performance. The Company also provides indemnifications to certain vendors and customers against claims of IP infringement made by third parties arising from the use by such vendors and customers of the Company's software products and services and certain other matters. Some indemnifications may not be subject to maximum loss clauses. Historically, payments made related to these indemnifications have been immaterial.

    General Cross-indemnification

        In connection with the separation, the Company entered into a Separation and Distribution Agreement with HP Inc. effective November 1, 2015 where the Company agreed to indemnify HP Inc., each of its subsidiaries and each of their respective directors, officers and employees from and against

61


Table of Contents


HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES

Notes to Condensed Consolidated and Combined Financial Statements (Continued)

(Unaudited)

Note 18: Guarantees, Indemnifications and Warranties (Continued)

all liabilities relating to, arising out of or resulting from, among other matters, the liabilities allocated to the Company as part of the separation. HP Inc. similarly agreed to indemnify the Company, each of its subsidiaries and each of their respective directors, officers and employees from and against all claims and liabilities relating to, arising out of or resulting from, among other matters, the liabilities allocated to HP Inc. as part of the separation. As a result, as of April 30, 2016 and October 31, 2015, the Company has recorded both a receivable from HP Inc. of $79 million and $232 million, respectively and a payable to HP Inc. of $87 million and $38 million, respectively related to litigation matters.

    Shared Litigation with HP Inc.

        As part of the Separation and Distribution Agreement, the Company and HP Inc. agreed to cooperate with each other in managing certain existing litigation related to both parties' businesses. The Separation and Distribution Agreement also included provisions that assign to the parties responsibility for managing pending and future litigation related to general corporate matters of HP Inc. arising prior to the separation.

    Tax Matters Agreement and Other Income Tax Matters

        In connection with the separation, the Company entered into a Tax Matters Agreement (the "Tax Matters Agreement") with HP Inc. effective November 1, 2015 that governs the rights and obligations of the Company and HP Inc. for certain pre-separation tax liabilities. The Tax Matters Agreement provides that the Company and HP Inc. will share certain pre-separation income tax liabilities that arise from adjustments made by tax authorities to the Company and HP Inc.'s U.S. and certain non-U.S. income tax returns. In certain jurisdictions, the Company and HP Inc. have joint and several liability for past income tax liabilities and accordingly, the Company could be legally liable under applicable tax law for such liabilities and required to make additional tax payments.

        In addition, if the Distribution of Hewlett Packard Enterprise's common shares to the HP Inc. stockholders are determined to be taxable, the Company and HP Inc. would share the tax liability equally, unless the taxability of the Distribution is the direct result of action taken by either the Company or HP Inc. subsequent to the Distribution in which case the party causing the Distribution to be taxable would be responsible for any taxes imposed on the Distribution.

        As of April 30, 2016, the Company recorded a net long-term receivable of $0.9 billion from HP Inc. for certain tax liabilities that the Company is joint and severally liable for, but for which it is indemnified by the Company under the Tax Matters Agreement. The actual amount that the Company may receive could vary depending upon the outcome of certain unresolved tax matters, which may not be resolved for several years.

    Warranties

        The Company accrues the estimated cost of product warranties at the time it recognizes revenue. The Company engages in extensive product quality programs and processes, including actively monitoring and evaluating the quality of its component suppliers; however, contractual warranty terms, repair costs, product call rates, average cost per call, current period product shipments and ongoing

62


Table of Contents


HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES

Notes to Condensed Consolidated and Combined Financial Statements (Continued)

(Unaudited)

Note 18: Guarantees, Indemnifications and Warranties (Continued)

product failure rates, as well as specific product class failures outside of the Company's baseline experience, affect the estimated warranty obligation.

        The Company's aggregate product warranty liabilities as of April 30, 2016, and changes during the six months ended April 30, 2016 were as follows:

 
  Six months ended
April 30, 2016
 
 
  In millions
 

Balance at beginning of period

  $ 523  

Accruals for warranties issued

    185  

Adjustments related to pre-existing warranties (including changes in estimates)

    3  

Reclassified as held for sale liability

    (23 )

Settlements made (in cash or in kind)

    (191 )

Balance at end of period

  $ 497  

63


Table of Contents

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.


HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES

Management's Discussion and Analysis of
Financial Condition and Results of Operations

        This Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") is organized as follows:

    Overview.  A discussion of our business and overall analysis of financial and other highlights affecting the Company to provide context for the remainder of MD&A. The overview analysis compares the three and six months ended April 30, 2016 to the prior-year periods.

    Critical Accounting Policies and Estimates.  A discussion of accounting policies and estimates that we believe are important to understanding the assumptions and judgments incorporated in our reported financial results.

    Results of Operations.  An analysis of our financial results comparing the three and six months ended April 30, 2016 to the prior-year periods. A discussion of the results of operations at the consolidated and combined level is followed by a discussion of the results of operations at the segment level.

    Liquidity and Capital Resources.  An analysis of changes in our cash flows and a discussion of our financial condition and liquidity.

    Contractual and Other Obligations.  An overview of contractual obligations, retirement and post-retirement benefit plan funding, restructuring plans, uncertain tax positions, off-balance sheet arrangements and cross-indemnifications with HP Inc. (formerly known as "Hewlett-Packard Company" and also referred to in this Quarterly Report as "former Parent").

        We intend the discussion of our financial condition and results of operations that follows to provide information that will assist the reader in understanding our Condensed Consolidated and Combined Financial Statements, the changes in certain key items in those financial statements from year to year, and the primary factors that accounted for those changes, as well as how certain accounting principles, policies and estimates affect our Condensed Consolidated and Combined Financial Statements. This discussion should be read in conjunction with our Condensed Consolidated and Combined Financial Statements and the related notes that appear elsewhere in this document.

        On November 1, 2015, HP Inc. spun-off Hewlett Packard Enterprise Company. To effect the spin-off, HP Inc. distributed all of the shares of Hewlett Packard Enterprise Company common stock owned by HP Inc. to its stockholders on November 1, 2015. Holders of HP Inc. common stock received one share of Hewlett Packard Enterprise Company for every share of HP Inc. stock held as of the record date. As a result of the spin-off, we now operate as an independent, publicly-traded company.

May 2016 Announcement of Enterprise Services Business Spin-Off and Merger

        On May 24, 2016, we announced plans for a tax-free spin-off and merger of our Enterprise Services business ("Everett SpinCo, Inc." or "Everett") with Computer Sciences Corporation ("CSC"). Immediately following the transaction, which is currently targeted to be completed by March 31, 2017, shareholders of Hewlett Packard Enterprise Company will own shares of both Hewlett Packard Enterprise Company and approximately fifty percent of the new combined company, CSC. Mr. J. Michael Lawrie, the current head of CSC will become chairman, president and CEO of CSC and Ms. Margaret C. Whitman, President and CEO of HPE will join the Board of Directors. Other executives and directors will be announced at a later date. The transaction is expected to deliver approximately $8.5 billion to the shareholders of Hewlett Packard Enterprise on an after-tax basis. This

64


Table of Contents


HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES

Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)

includes an equity stake in the company valued at approximately $4.5 billion, which represents approximately fifty percent ownership, a cash dividend of $1.5 billion, and the assumption of $2.5 billion of net debt and other liabilities. Preceding the close of the transaction, we expect to incur one-time costs of approximately $900 million to separate the Enterprise Services business from Hewlett Packard Enterprise. The majority of these costs will be offset by lower costs associated with the Fiscal 2015 Restructuring Plan. The transaction is subject to certain customary closing conditions including approval by CSC shareholders, the effective filing of related registration statements, completion of a tax-free spin-off, Everett debt exchange, the expiration of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and the receipt of certain required foreign anti-trust approvals.

        The following Overview, Results of Operations and Liquidity discussions and analysis compare the three and six months ended April 30, 2016 to the prior-year periods, unless otherwise noted. The Capital Resources and Contractual and Other Obligations discussions present information as of April 30, 2016, unless otherwise noted.

        For purposes of this MD&A section, we use the terms "Hewlett Packard Enterprise," "HPE," "the Company," "we," "us" and "our" to refer to Hewlett Packard Enterprise Company. References in this MD&A section to "former Parent" refer to HP Inc.

OVERVIEW

        Hewlett Packard Enterprise is a leading global provider of the cutting-edge technology solutions customers need to optimize their traditional IT while helping them build the secure, cloud-enabled, mobile-ready future that is uniquely suited to their needs. Our legacy dates back to a partnership founded in 1939 by William R. Hewlett and David Packard, and we strive every day to uphold and enhance that legacy through our dedication to providing innovative technological solutions to our customers. We are a global company with customers ranging from small-and medium-sized businesses ("SMBs") to large global enterprises.

        We organize our business into five segments for financial reporting purposes: the Enterprise Group ("EG"), Enterprise Services ("ES"), Software, Financial Services ("FS") and Corporate Investments. The following provides an overview of our key financial metrics by segment for the three months ended April 30, 2016 as compared to the prior-year period:

 
  HPE
Consolidated
  Enterprise
Group
  Enterprise
Services
  Software   FS   Corporate
Investments(3)
 
 
  Dollars in millions, except for per share amounts
 

Net revenue(1)

  $ 12,711   $ 7,010   $ 4,723   $ 774   $ 788   $ 2  

Year-over-year change %

    1.3 %   6.9 %   (2.0 )%   (13.2 )%   (2.1 )%   100 %

Earnings from operations(2)

  $ 492   $ 817   $ 317   $ 192   $ 73   $ (87 )

Earnings from operations as a % of net revenue

    3.9 %   11.7 %   6.7 %   24.8 %   9.3 %   NM  

Year-over-year change percentage points

    0.5 pts   (2.4 )pts   3.1 pts   7.0 pts   (1.3 )pts   NM  

Net earnings

  $ 320                                

Net earnings per share

                                     

Basic

  $ 0.19                                

Diluted

  $ 0.18                                

(1)
HPE consolidated and combined net revenue excludes intersegment net revenue and other.

65


Table of Contents


HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES

Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)

(2)
Segment earnings from operations exclude corporate and unallocated costs and eliminations, stock-based compensation expense, amortization of intangible assets, restructuring charges, acquisition and other related charges, and separation costs.

(3)
"NM" represents not meaningful.

        Net revenue increased 1.3% (increased 4.9% on a constant currency basis) in the three months ended April 30, 2016, as compared to the prior-year period. The leading contributors to the net revenue increase was growth in sales of Networking and Server products within EG. Partially offsetting this increase was unfavorable currency impacts, lower software revenue due to divestitures and the transfer of a business to former Parent and a net revenue decline in Technology Services ("TS") within EG. Gross margin was 28.7% ($3.6 billion) and 28.6% ($3.6 billion) for the three months ended April 30, 2016 and 2015, respectively. The 0.1 percentage point increase in gross margin was due primarily to service delivery efficiencies in ES, partially offset by lower gross margin in Software. We continue to experience gross margin pressures resulting from a competitive pricing environment across our hardware portfolio. Operating margin increased by 0.5 percentage points in the three months ended April 30, 2016, as compared to the prior-year period, due primarily to lower restructuring charges, lower separation costs and an increase in gross margin, partially offset by higher research and development ("R&D") expense and higher selling, general and administrative ("SG&A") expense primarily from Aruba Network Inc. ("Aruba").

        The following provides an overview of our key financial metrics by segment for the six months ended April 30, 2016 as compared to the prior-year period:

 
  HPE
Consolidated
  Enterprise
Group
  Enterprise
Services
  Software   FS   Corporate
Investments(3)
 
 
  Dollars in millions, except for per share amounts
 

Net revenue(1)

  $ 25,435   $ 14,061   $ 9,411   $ 1,554   $ 1,564   $ 3  

Year-over-year change %

    (0.7 )%   3.8 %   (4.1 )%   (11.8 )%   (2.7 )%   (40 )%

Earnings from operations(2)

  $ 876   $ 1,761   $ 555   $ 328   $ 173   $ (186 )

Earnings from operations as a % of net revenue

    3.4 %   12.5 %   5.9 %   21.1 %   11.1 %   NM  

Year-over-year change percentage points

    (1.1 )pts   (2.1 )pts   2.6 pts   3.2 pts   0.2 pts   NM  

Net earnings

  $ 587                                

Net earnings per share

                                     

Basic

  $ 0.34                                

Diluted

  $ 0.33                                

(1)
HPE consolidated and combined net revenue excludes intersegment net revenue and other.

(2)
Segment earnings from operations exclude corporate and unallocated costs and eliminations, stock-based compensation expense, amortization of intangible assets, restructuring charges, acquisition and other related charges, and separation costs.

(3)
"NM" represents not meaningful.

        Net revenue decreased 0.7% (increased 4.3% on a constant currency basis) for the six months ended April 30, 2016, as compared to the prior-year period. The leading contributors to the net revenue decrease were unfavorable currency impacts, a net revenue decline in ES, the TS business unit within EG and lower software revenue due to divestitures and the transfer of a business to former Parent. Partially offsetting these decreases was net revenue growth in Networking and Server products

66


Table of Contents


HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES

Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)

within the EG segment. Gross margin was 28.5% ($7.3 billion) and 28.1% ($7.2 billion) for the six months ended April 30, 2016 and 2015, respectively. The 0.4 percentage point increase in gross margin was due primarily to service delivery efficiencies in ES, partially offset by lower gross margin in Software. We continue to experience gross margin pressures resulting from a competitive pricing environment across our hardware portfolio. Operating margin decreased by 1.1 percentage points in the six months ended April 30, 2016, as compared to the prior-year period, due primarily to higher R&D expense, restructuring charges, SG&A expenses and acquisition and other related charges, partially offset by the increase in gross margin.

        As of April 30, 2016, cash and cash equivalents and short-term and long-term investments were $9.3 billion, representing a decrease of approximately $0.8 billion from the October 31, 2015 balance of $10.1 billion. The decrease in cash and cash equivalents and short-term and long-term investments during the six months ended April 30, 2016 was due primarily to the following factors: investments in property, plant and equipment net of sales proceeds of $1.4 billion, cash utilization for share repurchases of common stock of $1.2 billion; partially offset primarily by cash received from operating cash flows of $1.0 billion, a final cash allocation of $0.5 billion from former Parent and proceeds from business divestitures, net of $0.3 billion.

        We are in the process of addressing many challenges facing our business. One set of challenges relates to dynamic and accelerating market trends, such as the market shift to cloud-related IT infrastructure, software and services, and the growth in software-as-a-service ("SaaS") business models. Certain of our legacy hardware businesses face challenges as customers migrate to cloud-based offerings and reduce their purchases of hardware products. Additionally, our legacy software business derives a large portion of its revenues from upfront license sales, some of which over time can be expected to shift to SaaS. 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 in others. A third set of challenges relates to business model changes and our go-to-market execution.

        The macroeconomic weakness we have experienced has moderated in some geographic regions but remains an overall challenge. A discussion of some of these challenges at the segment level is set forth below.

    In EG, we are experiencing challenges due to multiple market trends, including the increasing demand for hyperscale computing infrastructure products, the transition to cloud computing and a highly competitive pricing environment. In addition, demand for our Mission-Critical Systems ("MCS") products continues to weaken as has the overall market for UNIX products. The effect of lower MCS and traditional storage revenue along with a higher mix of ISS density optimized server products and midrange converged storage solutions is impacting support attach opportunities in TS. To be successful in overcoming these challenges, we must address business model shifts and go-to-market execution challenges, while continuing to pursue new product innovation that builds on our existing capabilities in areas such as cloud and data center computing, software-defined networking, storage, blade servers and wireless networking.

    In ES, we are facing challenges, including managing the revenue runoff from several large contracts, pressured public sector spending and a competitive pricing environment. We are also

67


Table of Contents


HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES

Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)

      experiencing commoditization in the IT infrastructure services market that is placing pressure on traditional ITO pricing and cost structures. There is also an industry-wide shift to highly automated, asset-light delivery of IT infrastructure and applications leading to headcount consolidation. To be successful in addressing these challenges, we must execute on the ES multi-year turnaround plan, which includes a cost reduction initiative to align our costs to our revenue trajectory, a focus on new logo wins and Strategic Enterprise Services ("SES") and initiatives to improve execution in sales performance and accountability, contracting practices and pricing.

    In Software, we are facing challenges, including the market shift to SaaS and go-to-market execution challenges. To be successful in addressing these challenges, we must improve our go-to-market execution with multiple product delivery models which better address customer needs and achieve broader integration across our overall product portfolio as we work to capitalize on important market opportunities in cloud, big data and security.

        To address these challenges, we continue to pursue innovation with a view towards developing new products and services aligned with market demand, industry trends and the needs of our customers and partners. In addition, we need to continue to improve our operations, with a particular focus on enhancing our end-to-end processes and efficiencies. We also need to continue to optimize our sales coverage models, align our sales incentives with our strategic goals, improve channel execution, strengthen our capabilities in our areas of strategic focus, and develop and capitalize on market opportunities.

        For a further discussion of trends, uncertainties and other factors that could impact our operating results, see the section entitled "Risk Factors" in Item 1A, which is incorporated herein by reference.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

        Management's Discussion and Analysis of Financial Condition and Results of Operations is based on our Condensed Consolidated and Combined Financial Statements, which have been prepared in accordance with U.S. generally accepted accounting principles ("GAAP"). The preparation of these financial statements requires management to make estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, net revenues and expenses, and disclosure of contingent liabilities. Management believes that there have been no significant changes during the six months ended April 30, 2016 to the items that we disclosed as our critical accounting policies and estimates in Management's Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the fiscal year ended October 31, 2015, which is incorporated herein by reference.

ACCOUNTING PRONOUNCEMENTS

        For a summary of recent accounting pronouncements applicable to our Condensed Consolidated and Combined Financial Statements see Note 1, "Overview and Basis of Presentation", to the Condensed Consolidated and Combined Financial Statements in Item 1, which is incorporated herein by reference.

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

68


Table of Contents


HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES

Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)

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 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:

 
  Three months ended April 30   Six months ended April 30  
 
  2016   2015   2016   2015  
 
  Dollars   % of
Revenue
  Dollars   % of
Revenue
  Dollars   % of
Revenue
  Dollars   % of
Revenue
 
 
  Dollars in millions
 

Net revenue

  $ 12,711     100.0 % $ 12,549     100.0 % $ 25,435     100.0 % $ 25,602     100.0 %

Cost of sales

    9,068     71.3 %   8,965     71.4 %   18,180     71.5 %   18,398     71.9 %

Gross profit

    3,643     28.7 %   3,584     28.6 %   7,255     28.5 %   7,204     28.1 %

Research and development

    624     4.9 %   552     4.4 %   1,209     4.8 %   1,084     4.2 %

Selling, general and administrative

    2,021     15.9 %   1,974     15.8 %   4,019     15.7 %   3,947     15.4 %

Amortization of intangible assets

    201     1.6 %   204     1.5 %   419     1.6 %   407     1.6 %

Restructuring charges

    161     1.3 %   248     2.0 %   472     1.9 %   380     1.5 %

Separation costs

    91     0.7 %   159     1.3 %   170     0.7 %   203     0.8 %

Acquisition and other related charges

    53     0.4 %   19     0.2 %   90     0.4 %   23     0.1 %

Earnings from operations

    492     3.9 %   428     3.4 %   876     3.4 %   1,160     4.5 %

Interest and other, net

    (129 )   (1.0 )%   (30 )   (0.2 )%   (194 )   (0.7 )%   (48 )   (0.2 )%

Earnings before taxes

    363     2.9 %   398     3.2 %   682     2.7 %   1,112     4.3 %

Provision for taxes

    (43 )   (0.4 )%   (93 )   (0.8 )%   (95 )   (0.4 )%   (260 )   (1.0 )%

Net earnings

  $ 320     2.5 % $ 305     2.4 % $ 587     2.3 % $ 852     3.3 %

Net Revenue

        For the three months ended April 30, 2016, total net revenue increased 1.3% (increased 4.9% on a constant currency basis). U.S. net revenue increased 6.3% to $4.8 billion, while net revenue from outside of the U.S. decreased 1.5% to $7.9 billion. For the six months ended April 30, 2016, total net revenue decreased 0.7% (increased 4.3% on a constant currency basis). U.S. net revenue increased 3.0% to $9.5 billion, while net revenue from outside of the U.S. decreased 2.7% to $15.9 billion.

69


Table of Contents


HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES

Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)

        The components of the weighted net revenue change by segment were as follows:

 
  Three months ended
April 30, 2016
  Six months ended
April 30, 2016
 
 
  Percentage Points
 

Enterprise Group

    3.6     2.0  

Financial Services

    (0.1 )   (0.2 )

Corporate Investments/Other(1)

    (0.6 )   (0.1 )

Enterprise Services

    (0.7 )   (1.6 )

Software

    (0.9 )   (0.8 )

Total HPE

    1.3     (0.7 )

(1)
Primarily related to elimination of intersegment net revenue.

Three and six months ended April 30, 2016 compared with three and six months ended April 30, 2015

        From a segment perspective, the primary factors contributing to the change in total Company net revenue are summarized as follows:

    EG net revenue increased due primarily to growth in Networking, in part from the acquisition of Aruba in May 2015, and growth in Servers due to a unit volume increase and higher average unit prices ("AUP");

    FS net revenue decreased due primarily to unfavorable currency impacts and lower asset management activity from lower residual maturities;

    ES net revenue decreased due primarily to unfavorable currency impacts; and

    Software net revenue decreased due primarily to the transfer of a business to former Parent, business divestitures and unfavorable currency impacts.

        A more detailed discussion of segment revenue is included under "Segment Information" below.

Gross Margin

Three and six months ended April 30, 2016 compared with three and six months ended April 30, 2015

        For the three months and six months ended April 30, 2016, total gross margin increased by 0.1 percentage point and 0.4 percentage points, respectively. From a segment perspective, the primary factors impacting gross margin performance are summarized as follows:

    ES gross margin increased due primarily to service delivery efficiencies as a result of cost savings associated with our ongoing restructuring programs;

    EG gross margin decreased due primarily to unfavorable currency impacts, competitive pricing, a decline in TS margins, and a higher revenue mix of density optimized servers;

    FS gross margin decreased primarily due to unfavorable currency impacts and higher bad debt expense recorded on higher financing volume for the three months ended April 30, 2016. For the six months ended April 30, 2016, FS gross margin increased primarily due to lower bad debt expense; and

70


Table of Contents


HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES

Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)

    Software gross margin decreased due primarily to a higher mix of professional services revenue and a lower mix of support revenue.

        A more detailed discussion of segment gross margins and operating margins is included under "Segment Information" below.

Operating Expenses

    Research and Development

        R&D expense increased 13% and 12% for the three and six months ended April 30, 2016, due primarily to an increase in Networking (due in part to the acquisition of Aruba) and Servers in the EG segment, partially offset by favorable currency impacts. We continue to make investments in our strategic focus areas of cloud, security, big data and mobility.

    Selling, General and Administrative

        Selling, general and administrative expense increased 2% for the three months ended April 30, 2016, due primarily to expenses in the current period from Aruba and higher compensation costs. The increase was partially offset by a gain associated with the divestiture of the TippingPoint business in Software and favorable currency impacts.

        Selling, general and administrative expense increased 2% for the six months ended April 30, 2016, due primarily to expenses in the current period from Aruba and higher compensation costs. The increase was partially offset by favorable currency impacts and gains from divestitures in Software and ES, primarily the TippingPoint business in Software.

    Amortization of Intangible Assets

        Amortization expense decreased 1% for the three months ended April 30, 2016 due to certain intangible assets associated with prior acquisitions reaching the end of their respective amortization periods partially offset by intangible assets purchased as part of the acquisition of Aruba.

        Amortization expense increased 3% for the six months ended April 30, 2016 due primarily to intangible assets purchased as part of the acquisition of Aruba. The increase was partially offset by certain intangible assets associated with prior acquisitions reaching the end of their respective amortization periods.

    Restructuring Charges

        Restructuring charges decreased for the three months ended April 30, 2016 due to lower charges from the multi-year restructuring plan initially announced in May 2012 (the "2012 Plan"), partially offset by charges from the restructuring plan we announced in September 2015 (the "2015 Plan"), which is in connection with our separation from former Parent.

        Restructuring charges increased for the six months ended April 30, 2016 due primarily to charges from the restructuring plan we announced in September 2015 (the "2015 Plan"), which is in connection with our separation from former Parent, partially offset by lower charges from the multi-year restructuring plan initially announced in May 2012 (the "2012 Plan").

71


Table of Contents


HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES

Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)

    Acquisition and Other Related Charges

        Acquisition and other related charges increased for the three and six months ended April 30, 2016 due primarily to charges resulting from the planned divestiture of H3C. Additionally, for the three month period, the increase was partially offset by lower charges from the acquisition of Aruba.

    Separation Costs

        Costs resulting from our separation from former Parent decreased for the three and six months ended April 30, 2016 due primarily to lower third-party consulting, contractor fees and other incremental costs, partially offset by higher marketing and branding related expenses.

Interest and Other, Net

        Interest and other, net expense increased by $99 million for the three months ended April 30, 2016 due primarily to higher interest expense from higher average borrowings and a tax indemnification adjustment related to our Tax Matters Agreement with former Parent.

        Interest and other, net expense increased by $146 million for the six months ended April 30, 2016 due primarily to higher interest expense from higher average borrowings, a tax indemnification adjustment related to our Tax Matters Agreement with former Parent and an other-than-temporary impairment of a public equity investment.

Provision for Taxes

        Our effective tax rate was 11.8% and 23.4% for the three months ended April 30, 2016 and 2015, respectively, and 13.9% and 23.4% for the six months ended April 30, 2016 and 2015, respectively. Our effective tax rate generally differs from the U.S. federal statutory rate of 35% due to favorable tax rates associated with certain earnings from our operations in lower-tax jurisdictions throughout the world. The jurisdictions with favorable tax rates that had the most significant effective tax rate impact in the periods presented were Puerto Rico, Singapore and China. We plan to reinvest certain earnings of these jurisdictions indefinitely outside the U.S. and therefore have not provided for U.S. taxes on those indefinitely reinvested earnings.

        For the three and six months ended April 30, 2016, we recorded $87 million and $197 million of net income tax benefits related to items discrete to the periods, respectively. These amounts primarily included tax benefits of $111 million and $215 million for the three and six months ended April 30, 2016, respectively, on restructuring charges, separation costs, acquisition and other related charges and tax indemnification adjustments. These tax benefits were offset by $24 million and $18 million of net tax charges related to various items for the three and six months ended April 30, 2016, respectively.

        For the three and six months ended April 30, 2015, we recorded $119 million and $113 million of net income tax benefits related to items discrete to the periods, respectively. For both three and six months ended April 30, 2015, these amounts primarily included tax benefits on restructuring charges and separation costs. In addition, for the six months ended April 30, 2015, we recorded a tax benefit arising from a retroactive research and development credit provided by the Tax Increase Prevention Act of 2014 which signed into law in December 2014.

Segment Information

        A description of the products and services for each segment can be found in Note 2, "Segment Information", to the Condensed Consolidated and Combined Financial Statements in Item 1 of Part I,

72


Table of Contents


HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES

Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)

which is incorporated herein by reference. Future changes to this organizational structure may result in changes to the segments disclosed.

        Effective at the beginning of its first quarter of fiscal 2016, the Company implemented organizational changes to align its segment financial reporting more closely with its current business structure. These organizational changes resulted in: (i) within the Enterprise Group segment, the consolidation of the Industry Standard Servers and Business Critical Systems business units into the newly formed Servers business unit and; (ii) the transfer of certain cloud-related marketing headcount activities from the Corporate Investment segment to the Enterprise Group segment.

        The Company reflected these changes to its segment information retrospectively to the earliest period presented, which resulted in: (i) the consolidation of net revenue from the Industry Standard Servers and Business Critical Systems business units into the Servers business unit within the Enterprise Group segment; and (ii) the transfer of operating expenses from the Corporate Investment segment to the Enterprise Group segment. These changes had no impact on the Company's previously reported consolidated and combined net revenue, earnings from operations, net earnings or net earnings per share.

Enterprise Group

 
  Three months ended April 30  
 
  2016   2015   % Change  
 
  Dollars in millions
   
 

Net revenue

  $ 7,010   $ 6,560     6.9 %

Earnings from operations

  $ 817   $ 923     (11.5 )%

Earnings from operations as a % of net revenue

    11.7 %   14.1 %      

 

 
  Six months ended April 30  
 
  2016   2015   % Change  
 
  Dollars in millions
   
 

Net revenue

  $ 14,061   $ 13,542     3.8 %

Earnings from operations

  $ 1,761   $ 1,981     (11.1 )%

Earnings from operations as a % of net revenue

    12.5 %   14.6 %      

        The components of the weighted net revenue change by business unit were as follows:

 
  Three months ended April 30  
 
  Net Revenue   Weighted
Net Revenue
Change
Percentage
Points
 
 
  2016   2015   2016  
 
  Dollars in millions
   
 

Networking

  $ 874   $ 556     4.9  

Servers

    3,561     3,332     3.5  

Storage

    752     740     0.2  

Technology Services

    1,823     1,932     (1.7 )

Total Enterprise Group

  $ 7,010   $ 6,560     6.9  

73


Table of Contents


HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES

Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)


 
  Six months ended April 30  
 
  Net Revenue   Weighted
Net Revenue
Change
Percentage
Points
 
 
  2016   2015   2016  
 
  Dollars in millions
   
 

Networking

  $ 1,737   $ 1,118     4.6  

Servers

    7,129     6,927     1.5  

Storage

    1,562     1,577     (0.1 )

Technology Services

    3,633     3,920     (2.2 )

Total Enterprise Group

  $ 14,061   $ 13,542     3.8  

Three and six months ended April 30, 2016 compared with three and six months ended April 30, 2015

        EG net revenue increased 6.9% and 3.8% (increased 10.5% and 8.8% on a constant currency basis) for the three and six months ended April 30, 2016, respectively. The increase in EG net revenue was due primarily to growth in Networking, in part from the acquisition of Aruba in May 2015, and Servers, partially offset by unfavorable currency impacts led by the euro and the Japanese yen, and a net revenue decline in TS for both periods. We continue to experience challenges due to market trends, including the transition to cloud computing, as well as, product and technology transitions, along with a highly competitive pricing environment.

        Networking net revenue increased 57% and 55% for the three and six months ended April 30, 2016, respectively, due primarily to revenue from Aruba and growth in China. Networking experienced double-digit revenue growth across the hardware product portfolio, led by wireless local area network ("WLAN") products. Servers net revenue increased 7% and 3% for the three and six months ended April 30, 2016, respectively, as a result of an increase in unit volume and higher AUPs, partially offset by unfavorable currency impacts for both periods. The increase in unit volume was primarily in rack and density optimized products, partially offset by decreases in the tower and blade product categories. The increase in AUPs was in the rack, tower and blade product categories, partially offset by a decrease in AUPs for density optimized products. The increase in AUPs is primarily driven by higher option attach rates for memory, processors and hard drives and a mix shift to high-end new generation HPE ProLiant servers, partially offset by a highly competitive environment. Storage net revenue increased 2% for the three months ended April 30, 2016 as a result of growth in Converged Storage solutions from 3PAR StoreServ products, particularly All-flash Arrays, which was partially offset by unfavorable currency impacts and a decline in traditional storage products. Storage net revenue decreased 1% for the six months then ended, as a result of unfavorable currency impacts and a decline in traditional storage products, the effects of which were partially offset by growth in Converged Storage solutions. TS net revenue decreased 6% and 7% for the three and six months ended April 30, 2016, respectively, due primarily to unfavorable currency impacts, the discontinuation of attach activity with our former Parent, and a reduction in support for MCS and traditional storage products, along with lower revenue from consulting services, the effects of which were partially offset by growth in HPE Data Center Care and HPE Proactive Care support solutions.

        EG earnings from operations as a percentage of net revenue decreased by 2.4 percentage points and 2.1 percentage points for the three and six months ended April 30, 2016, respectively, due to a decrease in gross margin and an increase in operating expenses as a percentage of net revenue. The

74


Table of Contents


HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES

Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)

decrease in gross margin was due primarily to unfavorable currency impacts, competitive pricing, a decline in TS margins, and a higher revenue mix of density optimized servers, partially offset by improved pricing in blade product categories and a higher gross margin contribution in Networking, primarily from Aruba. The increase in operating expenses as a percentage of net revenue was due primarily to expenses in the period from Aruba, partially offset by favorable currency impacts.

Enterprise Services

 
  Three months ended April 30  
 
  2016   2015   % Change  
 
  Dollars in millions
 

Net revenue

  $ 4,723   $ 4,817     (2.0 )%

Earnings from operations

  $ 317   $ 172     84.3 %

Earnings from operations as a % of net revenue

    6.7 %   3.6 %      

 

 
  Six months ended April 30  
 
  2016   2015   % Change  
 
  Dollars in millions
 

Net revenue

  $ 9,411   $ 9,810     (4.1 )%

Earnings from operations

  $ 555   $ 322     72.4 %

Earnings from operations as a % of net revenue

    5.9 %   3.3 %      

        The components of the weighted net revenue change by business unit were as follows:

 
  Three months ended April 30  
 
  Net Revenue   Weighted
Net Revenue
Change
Percentage
Points
 
 
  2016   2015   2016  
 
  Dollars in millions
   
 

Infrastructure Technology Outsourcing

  $ 2,839   $ 2,871     (0.7 )

Application and Business Services

    1,884     1,946     (1.3 )

Total Enterprise Services

  $ 4,723   $ 4,817     (2.0 )

 

 
  Six months ended April 30  
 
  Net Revenue   Weighted
Net Revenue
Change
Percentage
Points
 
 
  2016   2015   2016  
 
  Dollars in millions
   
 

Infrastructure Technology Outsourcing

  $ 5,713   $ 6,003     (3.0 )

Application and Business Services

    3,698     3,807     (1.1 )

Total Enterprise Services

  $ 9,411   $ 9,810     (4.1 )

75


Table of Contents


HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES

Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)

Three and six months ended April 30, 2016 compared with three and six months ended April 30, 2015

        ES net revenue decreased 2.0% (increased 1.4% on a constant currency basis) and decreased 4.1% (increased 0.8% on a constant currency basis) for the three and six months ended April 30, 2016, respectively. For both periods, the net revenue decrease in ES was due to unfavorable currency impacts. Partially offsetting the net revenue decline for both periods was revenue growth from new client signings and our SES portfolio. The revenue growth in SES for both periods, which includes analytics and data management, security and cloud services, was experienced across all regions, led primarily by EMEA and the Americas regions.

        Net revenue in ITO decreased by 1% and 5% for the three and six months ended April 30, 2016, respectively, due to unfavorable currency impacts. Additionally, for the six month period revenue runoff in certain key accounts contributed to the decline. The net revenue decrease in ITO for both periods was partially offset by revenue growth in new client signings and SES. SES experienced revenue growth across all regions, led by EMEA and the Americas where growth resulted primarily from the U.S. public sector. Net revenue in Application and Business Services ("ABS") declined by 3% for both the three and six months ended April 30, 2016, due to unfavorable currency impacts. Partially offsetting the decrease was growth for the three and six months periods from additional contracts and project work in the Asia Pacific region and for the six month period from additional contracts and project work growth in the U.S. public sector.

        For the three and six months ended April 30, 2016, ES earnings from operations as a percentage of net revenue increased by 3.1 percentage points and 2.6 percentage points, respectively. The increase in operating margin for both periods was due to an increase in gross margin and a decrease in operating expenses as a percentage of net revenue. The increase in gross margin for both periods was due primarily to service delivery efficiencies as a result of cost savings associated with our ongoing restructuring programs. For both periods, the decrease in operating expenses as a percentage of net revenue was due to lower administrative expenses resulting from cost structure reductions. The decline in administrative expenses for the six month period also resulted from a business divestiture gain.

Software

 
  Three months ended April 30  
 
  2016   2015   % Change  
 
  Dollars in millions
   
 

Net revenue

  $ 774   $ 892     (13.2 )%

Earnings from operations

  $ 192   $ 159     20.8 %

Earnings from operations as a % of net revenue

    24.8 %   17.8 %      

 

 
  Six months ended April 30  
 
  2016   2015   % Change  
 
  Dollars in millions
   
 

Net revenue

  $ 1,554   $ 1,762     (11.8 )%

Earnings from operations

  $ 328   $ 316     3.8 %

Earnings from operations as a % of net revenue

    21.1 %   17.9 %      

Three and six months ended April 30, 2016 compared with three and six months ended April 30, 2015

        Software net revenue decreased 13.2% and 11.8% (decreased 10.4% and 8.3% on a constant currency basis) for the three and six months ended April 30, 2016, respectively. Revenue growth in Software is being challenged by the overall market shift to SaaS solutions which is impacting growth in

76


Table of Contents


HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES

Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)

license and support revenue and implementation challenges as we transform our go-to-market approach. For the three and six months ended April 30, 2016, net revenue growth was negatively impacted by the transfer of the marketing optimization product group to former Parent, business divestitures and unfavorable foreign currency impacts.

        For the three months ended April 30, 2016, net revenue from licenses, support, professional services and SaaS decreased by 12%, 16%, 3% and 11%, respectively. For the six months ended April 30, 2016, net revenue from licenses, support, professional services and SaaS decreased by 9%, 15%, 5% and 10%, respectively. The decrease in license revenue for both periods was due primarily to the market shift to SaaS solutions and sales execution challenges and, as a result, we experienced lower revenue in IT operations management. Additionally, the decrease in license revenue for both periods was also attributable to the transfer of the marketing optimization product group to former Parent effective at the beginning of the fourth quarter of fiscal 2015 and the divestiture of the TippingPoint business during the second quarter of fiscal 2016. The decrease in support revenue for both periods was due primarily to the transfer of the marketing optimization product group to former Parent, the divestiture of the iManage business, during the third quarter of fiscal 2015, the divestiture of the TippingPoint business during second quarter of fiscal 2016, unfavorable currency impacts and past declines in license revenue. Professional services net revenue decreased for both periods due primarily to the impact of the transfer of the marketing optimization product group to former Parent. SaaS net revenue decreased for both periods due primarily to the divestiture of the LiveVault business, during the fourth quarter of fiscal 2015.

        For the three and six months ended April 30, 2016, Software earnings from operations as a percentage of net revenue increased by 7.0 percentage points and 3.2 percentage points, respectively, due primarily to a decrease in operating expenses as a percentage of net revenue, partially offset by a decline in gross margin. The decrease in operating expenses as a percentage of net revenue was driven primarily by a one-time gain related to the divestiture of the TippingPoint business during the second quarter of fiscal 2016 as well as the transfer of the marketing optimization product group to former Parent. The decrease in gross margin was due primarily to a higher mix of professional services revenue and a lower mix of support revenue.

Financial Services

 
  Three months ended
April 30
 
 
  2016   2015   % Change  
 
  Dollars in millions
 

Net revenue

  $ 788   $ 805     (2.1 )%

Earnings from operations

  $ 73   $ 85     (14.1 )%

Earnings from operations as a % of net revenue

    9.3 %   10.6 %      

 

 
  Six months ended April 30  
 
  2016   2015   % Change  
 
  Dollars in millions
 

Net revenue

  $ 1,564   $ 1,608     (2.7 )%

Earnings from operations

  $ 173   $ 175     (1.1 )%

Earnings from operations as a % of net revenue

    11.1 %   10.9 %      

77


Table of Contents


HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES

Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)

Three months ended April 30, 2016 compared with three months ended April 30, 2015

        FS net revenue decreased by 2.1% (increased 1.0% on a constant currency basis) for the three months ended April 30, 2016. The net revenue decrease was due primarily to unfavorable currency impacts and lower asset management activity from lower residual maturities, partially offset by higher portfolio revenue due to an increase in average portfolio assets.

        FS earnings from operations as a percentage of net revenue decreased by 1.3 percentage points for the three months ended April 30, 2016 due primarily to a decrease in gross margin and an increase in operating expenses as a percentage of net revenue. The decrease in gross margin was due primarily to unfavorable currency impacts and higher bad debt expense recorded on higher financing volume. The increase in operating expenses was due primarily to higher field selling costs.

Six months ended April 30, 2016 compared with six months ended April 30, 2015

        FS net revenue decreased by 2.7% (increased 2.2% on a constant currency basis) for the six months ended April 30, 2016. The net revenue decrease was due primarily to unfavorable currency impacts and lower asset management activity from lower residual maturities, partially offset by higher portfolio revenue due to an increase in average portfolio assets.

        FS earnings from operations as a percentage of net revenue increased by 0.2 percentage points for the six months ended April 30, 2016 due primarily to an increase in gross margin, partially offset by an increase in operating expenses as a percentage of net revenue. The increase in gross margin was primarily due to lower bad debt expense, partially offset by unfavorable currency impacts, and lower margins on asset management activity primarily in lease extensions. The increase in operating expenses as a percentage of net revenue was due primarily to higher IT expenses.

    Financing Volume

 
  Three months
ended April 30
  Six months
ended April 30
 
 
  2016   2015   2016   2015  
 
  Dollars in millions
  Dollars in millions
 

Total financing volume

  $ 1,659   $ 1,440   $ 3,157   $ 3,005  

        New financing volume, which represents the amount of financing provided to customers for equipment and related software and services, including intercompany activity, increased 15.2% for the three months ended April 30, 2016 and 5.1% for the six months ended April 30, 2015. The increase for both periods was driven primarily by higher financing of HPE products and services, partially offset by unfavorable currency impacts.

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 Condensed Consolidated and Combined Financial Statements.

78


Table of Contents


HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES

Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)

        The portfolio assets and ratios derived from the segment balance sheets for FS were as follows:

 
  As of  
 
  April 30, 2016   October 31, 2015  
 
  Dollars in millions
 

Financing receivables, gross

  $ 6,869   $ 6,655  

Net equipment under operating leases

    3,206     2,915  

Capitalized profit on intercompany equipment transactions(1)

    554     853  

Intercompany leases(1)

    2,247     1,990  

Gross portfolio assets

    12,876     12,413  

Allowance for doubtful accounts(2)

    83     95  

Operating lease equipment reserve

    47     58  

Total reserves

    130     153  

Net portfolio assets

  $ 12,746   $ 12,260  

Reserve coverage

    1.0 %   1.2 %

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 $11.3 billion and $10.7 billion at April 30, 2016 and October 31, 2015, 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 April 30, 2016 and October 31, 2015 was $1.6 billion and $1.5 billion, respectively.

        At April 30, 2016 and October 31, 2015, FS cash and cash equivalents balances were approximately $746 million and $589 million, respectively.

        Net portfolio assets at April 30, 2016 increased 4.0% from October 31, 2015. The increase generally resulted from new financing volume in excess of portfolio runoff, along with favorable currency impacts.

        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, 2016, FS recorded an $11 million expense and $4 million benefit to bad debt expense, respectively. The benefit to the net bad debt expense was a result of the release of previously recorded general reserves in the prior quarter. For the corresponding periods in fiscal 2015, FS recorded net bad debt expense of $8 million and $16 million, respectively.

79


Table of Contents


HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES

Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)

Corporate Investments

 
  Three months ended April 30  
 
  2016   2015   % Change  
 
  Dollars in millions
 

Net revenue

  $ 2   $ 1     100 %

Loss from operations

  $ (87 ) $ (108 )   (19 )%

Loss from operations as a % of net revenue(1)

    NM     NM     NM  

 

 
  Six months ended April 30  
 
  2016   2015   % Change  
 
  Dollars in millions
 

Net revenue

  $ 3   $ 5     (40 )%

Loss from operations

  $ (186 ) $ (199 )   (7 )%

Loss from operations as a % of net revenue(1)

    NM     NM     NM  

(1)
"NM" represents not meaningful.

        Corporate investments net revenue increased by 100% for the three months ended April 30, 2016 and decreased by 40% for the six months ended April 30, 2016. Net revenue represents residual activity from certain cloud-related incubation projects.

        For the three months and six months ended April 30, 2016, corporate investments loss from operations decreased by 19% and 7%, respectively. The decline in loss from operations was due to lower spending on certain cloud-related incubation activities and lower expense in HP Labs.

LIQUIDITY AND CAPITAL RESOURCES

        We use cash generated by operations as our primary source of liquidity. We believe that internally generated cash flows will generally be sufficient to support our operating businesses, capital expenditures, restructuring activities, separation costs, maturing debt, interest payments, income tax payments and the payment of future stockholder dividends, in addition to any future investments and any future share repurchases. We would supplement this short-term liquidity, if necessary, by accessing the capital markets 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. For example, under the tax matters agreement entered into in connection with the separation, we will generally be prohibited, except in specific circumstances, from issuing equity securities beyond certain thresholds for a two-year period following the separation. 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, each of which is incorporated herein by reference.

        Our cash balances are held in numerous locations throughout the world, with substantially all of those amounts held outside of 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 balances, anticipated cash flow generated from operations and access to capital markets will be sufficient to cover our expected near-term cash outlays.

80


Table of Contents


HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES

Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)

        Amounts held outside of the U.S. are generally utilized to support non-U.S. liquidity needs, although a portion of those amounts may from time to time be subject to short-term intercompany loans into the U.S. Most of the amounts held outside of the U.S. could be repatriated to the U.S. but, under current law, some would be subject to U.S. federal income taxes, less applicable foreign tax credits. Repatriation of some foreign earnings is restricted by local law. Except for foreign earnings that are considered indefinitely reinvested outside of the U.S., we have provided for the U.S. federal tax liability on these earnings for financial statement purposes. Repatriation could result in additional income tax payments in future years. Where local restrictions prevent an efficient intercompany transfer of funds, our intent is that cash balances would remain outside of the U.S. and we would 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.

        On October 13, 2015, our Board of Directors authorized a $3.0 billion share repurchase program. On May 24, 2016, an additional $3.0 billion share repurchase programs was authorized by our Board of Directors. The number of shares that we repurchase under the share repurchase program may vary depending on numerous factors, including share price, liquidity and other market conditions, our ongoing capital allocation planning, levels of cash and debt balances, other demands for cash, such as acquisition activity, general economic or business conditions and board and management discretion. Additionally, our share repurchase activity, if any, during any particular period may fluctuate. We may commence, accelerate, suspend, delay or discontinue any share repurchase activity any time, without notice. These programs do not have a specific expiration date.

        In the first six months of fiscal 2016, the Company repurchased an aggregate of $1.1 billion under an accelerated share repurchase agreement ("ASR Agreement") with a financial institution. For more information on our ASR Agreement, refer to Note 15, "Stockholders' Equity", to the Condensed Consolidated and Combined Financial Statements in Item 1 of Part I, which is incorporated herein by reference.

        In December 2015, in connection with the Separation and Distribution Agreement, we received a final cash allocation of approximately $526 million from former Parent. The cash allocation was based on the projected cash requirements of the Company in light of the intended investment grade credit rating, business plan and anticipated operations and activities.

        In May 2015, we announced a partnership jointly with Tsinghua Holdings that will bring together the Chinese enterprise technology assets of the Company and Tsinghua University to create a Chinese provider of technology infrastructure. Under the definitive agreement, Tsinghua Holdings' subsidiary, Unisplendour Corporation, purchased 51% of a new business named H3C, comprising the Company's current H3C Technologies and China-based server, storage and technology services businesses, as of April 30, 2016, which are currently reported within the Enterprise Group segment, for approximately $2.6 billion, which includes purchase consideration adjustments ("H3C transaction"). The transaction closed in May 2016.

        On May 24, 2016, we announced plans for a tax-free spin-off and merger of our Enterprise Services business with CSC which will create a pure-play, global IT services company. The transaction, which is currently targeted to be completed by March 31, 2017, is expected to deliver approximately $8.5 billion to the shareholders of Hewlett Packard Enterprise on an after-tax basis. This amount includes an equity stake in the company valued at approximately $4.5 billion, which represents approximately fifty percent ownership, a cash dividend of $1.5 billion, and the assumption of $2.5 billion of net debt and other liabilities. Preceding the close of the transaction, we expect to incur

81


Table of Contents


HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES

Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)

one-time costs of approximately $900 million to separate the Enterprise Services business from Hewlett Packard Enterprise. The majority of these costs will be offset by lower costs associated with our 2015 Restructuring Plan.

Liquidity

 
  Six months
ended
April 30
 
 
  2016   2015  
 
  In millions
 

Net cash provided by operating activities

  $ 1,032   $ 1,756  

Net cash used in investing activities

    (1,121 )   (1,383 )

Net cash (used in) provided by financing activities

    (706 )   27  

(Decrease) increase in cash and cash equivalents

  $ (795 ) $ 400  

Operating Activities

        Compared to the corresponding period in fiscal 2015, net cash provided by operating activities decreased by $0.7 billion for the six months ended April 30, 2016. The decrease was due primarily to higher utilization of cash for payments for taxes and lower net earnings.

        As of April 30, 2016, the cash conversion cycle increased one day as compared to October 31, 2015, which includes a favorable impact of three days from the reclassification of related assets and liabilities held for sale. As of April 30, 2015, the cash conversion cycle increased six days as compared to October 31, 2014. As a result, cash generated from working capital management improved in the current period as compared to the corresponding period in fiscal 2015.

        Our working capital metrics and cash conversion impacts were as follows:

 
  As of   As of    
 
 
  April 30,
2016
  October 31,
2015
  Change   April 30,
2015
  October 31,
2014
  Change   Y/Y
Change
 

Days of sales outstanding in accounts receivable ("DSO")

    55     57     (2 )   57     54     3     (2 )

Days of supply in inventory ("DOS")

    21     21         21     17     4      

Days of purchases outstanding in accounts payable ("DPO")

    (52 )   (55 )   3     (45 )   (44 )   (1 )   (7 )

Cash conversion cycle

    24     23     1     33     27     6     (9 )

        As a result of the H3C transaction, we reclassified $440 million of accounts receivable and $200 million of inventory as assets held for sale, and $129 million of accounts payable as liabilities held for sale in the Condensed Consolidated Balance Sheets as of April 30, 2016. The working capital metrics and cash conversion cycle amounts in the table above include the impact of these reclassifications. See Note 9, "Acquisition and Divestitures", to the Condensed Consolidated and Combined Financial Statements in Item 1 of Part I for more details on the H3C transaction. The cash conversion cycle without the reclassification of assets and liabilities as held for sale increased by 3 days to 27 days, which reflects DSO of 58 days, DOS of 23 days and DPO of 54 days. As the operational results of H3C are included in our Condensed Consolidated and Combined Financial Statements, we

82


Table of Contents


HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES

Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)

believe this measure is a truer reflection of our cash conversion cycle for the first six months of fiscal 2016.

Three months ended April 30, 2016 compared with three months ended April 30, 2015

        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 period in fiscal 2015, the decrease in DSO was due primarily to the impact of the reclassification of certain accounts receivable as held for sale as a result of the H3C transaction and improved collections, the effects of which were partially offset by an increase in extended payment terms and unfavorable currency impacts.

        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. Compared to the corresponding period in fiscal 2015, there was no change in DOS due primarily to the reclassification of certain inventory as held for sale as a result of the H3C transaction. This was offset by higher inventory held at contract manufacturers and higher inventory to support service levels.

        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 period in fiscal 2015, the increase in DPO was primarily the result of an extension of payment terms with our product suppliers and purchasing linearity. This was partially offset by the impact of the reclassification of certain accounts payable classified as held for sale as a result of the H3C transaction.

        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 and the timing of revenue recognition and inventory purchases within the period.

Investing Activities

        Compared to the corresponding period in fiscal 2015, net cash used in investing activities decreased by $0.3 billion for the six months ended April 30, 2016. The decrease was due primarily to proceeds in the current period from business divestitures in Software and ES and lower payments in connection with business acquisitions.

Financing Activities

        Compared to the corresponding period in fiscal 2015, net cash used in financing activities increased by $0.7 billion for the six months ended April 30, 2016, due primarily to cash utilization for repurchases of common stock and dividend payments partially offset by a final cash allocation from former Parent.

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), separation activities, share repurchase activities, our cost of capital and targeted capital structure.

83


Table of Contents


HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES

Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)

        Outstanding borrowings increased to $16.2 billion as of April 30, 2016, as compared to $15.8 billion at October 31, 2015, bearing weighted-average interest rates of 3.7% and 3.0%, respectively. During the first six months of fiscal 2016, we issued $8.9 billion and repaid $8.6 billion of commercial paper.

        There are no Senior Notes scheduled to mature during the next twelve months. For more information on our borrowings, Note 13, "Borrowings", to the Condensed Consolidated and Combined Financial Statements in Item 1 of Part I, which is incorporated herein by reference.

        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 12, "Financial Instruments", to the Condensed Consolidated and Combined Financial Statements in Item 1 of Part I, which is incorporated herein by reference.

Revolving Credit Facility

        On November 1, 2015, the Company entered into a revolving credit facility (the "Credit Agreement"), together with the lenders named therein, JPMorgan Chase Bank, N.A. ("JPMorgan"), as co-administrative agent and administrative processing agent, and Citibank, N.A., as co-administrative agent, providing for a senior, unsecured revolving credit facility with aggregate lending commitments of $4.0 billion. Loans under the revolving credit facility may be used for general corporate purposes. Commitments under the Credit Agreement are available for a period of five years, which period may be extended, subject to satisfaction of certain conditions, by up to two one-year periods. Commitment fees, interest rates and other terms of borrowing under the credit facility vary based on Hewlett Packard Enterprise's external credit rating.

Available Borrowing Resources

        As of April 30, 2016, we had the following additional liquidity resources available if needed:

 
  As of
April 30,
2016
 
 
  In millions
 

Commercial paper programs

  $ 4,212  

Uncommitted lines of credit

  $ 1,822  

        For more information on our available borrowings resources, see Note 13, "Borrowings", to the Condensed Consolidated and Combined Financial Statements in Item 1 of Part I, which is incorporated herein by reference.

CONTRACTUAL AND OTHER OBLIGATIONS

Contractual Obligations

        For contractual obligations 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, 2015, which is incorporated herein by reference. Our contractual obligations have not changed materially since October 31, 2015.

Retirement and Post-Retirement Benefit Plan Funding

        For the remainder of fiscal 2016, we anticipate making additional contributions of approximately $144 million to our non-U.S. pension plans and approximately $1 million to our U.S. non-qualified plan

84


Table of Contents


HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES

Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)

participants and expect to pay approximately $2 million to cover benefit claims under the Company's post-retirement benefit 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 taxing authorities. For more information on our retirement and post-retirement benefit plans, see Note 4, "Retirement and Post-Retirement Benefit Plans", to the Condensed Consolidated and Combined Financial Statements in Item 1 of Part I, which is incorporated herein by reference.

Restructuring Plans

        As of April 30, 2016, we expect to make future cash payments of approximately $2.5 billion in connection with our approved restructuring plans which include $0.6 billion expected to be paid through the remainder of fiscal 2016 and $1.9 billion expected to be paid through fiscal 2021. For more information on our restructuring activities, see Note 3, "Restructuring", to the Condensed Consolidated and Combined Financial Statements in Item 1 of Part I, which is incorporated herein by reference.

Uncertain Tax Positions

        As of April 30, 2016, we had approximately $3.5 billion of recorded liabilities and related interest and penalties pertaining to uncertain tax positions. These liabilities and related interest and penalties include $51 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 Condensed Consolidated and Combined Financial Statements in Item 1 of Part I, which is incorporated herein by reference.

Cross-indemnification with HP Inc.

        In connection with the separation, the Company entered into a Separation and Distribution Agreement with HP Inc. effective November 1, 2015 where the Company agreed to indemnify HP Inc., each of its subsidiaries and each of their respective directors, officers and employees from and against all liabilities relating to, arising out of or resulting from, among other matters, the liabilities allocated to the Company as part of the separation. HP Inc. similarly agreed to indemnify the Company, each of its subsidiaries and each of their respective directors, officers and employees from and against all claims and liabilities relating to, arising out of or resulting from, among other matters, the liabilities allocated to HP Inc. as part of the separation. Additionally, in connection with the separation, the Company entered into a Tax Matters Agreement (the "Tax Matters Agreement") with HP Inc. effective November 1, 2015 that governs the rights and obligations of the Company and HP Inc. for certain pre-separation tax liabilities. The Tax Matters Agreement provides that the Company and HP Inc. will share certain pre-separation income tax liabilities that arise from adjustments made by tax authorities to the Company and HP Inc.'s U.S. and certain non-U.S. income tax returns. For more information on our General Cross-indemnification and Tax Matters Agreement and Other Income Tax Matters with HP Inc., see Note 18, "Guarantees, Indemnifications and Warranties", to the Condensed Consolidated and Combined Financial Statements in Item 1 of Part I, 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, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.

85


Table of Contents

Item 3.    Quantitative and Qualitative Disclosures About Market Risk.

        For quantitative and qualitative disclosures about market risk affecting HPE, see "Quantitative and Qualitative Disclosures About Market Risk" in Item 7A of Part II of our Annual Report on Form 10-K for the fiscal year ended October 31, 2015, which is incorporated herein by reference. Our exposure to market risk has not changed materially since October 31, 2015.

Item 4.    Controls and Procedures.

    Evaluation of Disclosure Controls and Procedures

        Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act as of the end of the period covered by this report (the "Evaluation Date"). Based on this evaluation, our principal executive officer and principal financial officer concluded as of the Evaluation Date that our disclosure controls and procedures were effective such that the information relating to the Company, including our consolidated subsidiaries, required to be disclosed in our SEC reports (i) is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and (ii) is accumulated and communicated to the Company's management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

    Changes in Internal Control Over Financial Reporting

        Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of any changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during our most recently completed fiscal quarter. Based on that evaluation, our principal executive officer and principal financial officer concluded that there has not been any change in our internal control over financial reporting during that quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

86


Table of Contents

PART II. OTHER INFORMATION

Item 1. Legal Proceedings.

        Information with respect to this item may be found in Note 17, "Litigation and Contingencies" to the Condensed Consolidated and Combined Financial Statements in Item 1 of Part I, which is incorporated herein by reference.

Item 1A. Risk Factors.

        Our operations and financial results are subject to various risks and uncertainties, including those described in Part I, Item 1A, "Risk Factors" in our Annual Report on Form 10-K for the fiscal period ended October 31, 2015, which could adversely affect our business, financial condition, results of operations, cash flows, and the trading price of our common stock as well as the following risks.

The proposed separation of our Enterprise Services business and subsequent merger may not be consummated as or when planned or at all, and may not achieve the intended benefits.

        The proposed separation of our Enterprise Services business, distribution of the shares of Everett SpinCo common stock to our stockholders and subsequent merger of Everett SpinCo with a wholly-owned subsidiary of Computer Sciences Corporation ("CSC") may not be consummated as currently contemplated or at all, or may encounter unanticipated delays or other roadblocks, including delays in obtaining necessary regulatory approvals. In addition, the transactions could create unanticipated difficulties in our Enterprise Services business prior to their consummation, or in our other businesses. Planning and executing the proposed separation, distribution and subsequent merger will require significant time, effort, and expense, and may divert the attention of our management and employees from other aspects of our business operations, and any delays in completion of the proposed separation, distribution and subsequent merger may increase the amount of time, effort, and expense that we devote to the transactions, which could adversely affect our business, financial condition and results of operations.

        There can be no assurance that we will be able to complete the transactions on the terms currently contemplated or at all. Disruptions in general market conditions or in the Enterprise Services business could affect our ability to complete the transactions. The proposed separation, distribution and subsequent merger are also subject to numerous closing conditions, including, among others, approval of the issuance of the CSC common stock by the requisite vote of CSC's stockholders; the effectiveness of CSC's registration statement registering the CSC common stock to be issued pursuant to the merger agreement; the expiration of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, the receipt of certain required foreign antitrust approvals, and a cash dividend payment to us which is expected to be financed through borrowing.

        In addition, if we complete the proposed separation, distribution and subsequent merger, there can be no assurance that we will be able to realize the intended benefits of the transactions or that the combined company will perform as anticipated. Specifically, the proposed transactions could cause disruptions in our remaining businesses, the Enterprise Services business and CSC's business, including by disrupting operations or causing customers to delay or to defer decisions or to end their relationships. Similarly, it is possible that current or prospective employees of the Enterprise Services business or CSC could experience uncertainty about their future roles with the combined company, which could harm the ability of the Enterprise Services business or CSC to attract and retain key personnel. Any of the foregoing could adversely affect our remaining businesses, CSC's or the Enterprise Services business, financial condition and results of operations.

        In addition, CSC and the Enterprise Services business could face difficulties in integrating their businesses, or CSC could face difficulties in its business generally, as a result of which our stockholders

87


Table of Contents

may not receive benefits or value in excess of the benefits and value that might have been created or realized had we retained the Enterprise Services business.

The stock distribution could result in significant tax liability, and CSC may in certain cases be obligated to indemnify us for any such tax liability imposed on us.

        We will receive a tax opinion from outside counsel to the effect that (i) the distribution and certain related transactions will qualify as a "reorganization" under Sections 368(a), 361 and 355 of the Internal Revenue Code of 1986 (the "Code"); (ii) no income, gain or loss will be recognized by us, Everett SpinCo or the holders of our common stock as a result of the distribution and such related transactions (except with respect to the receipt of cash in lieu of fractional shares of Everett SpinCo common stock, if any); and (iii) the merger will qualify as a "reorganization" within the meaning of Section 368(a) of the Code, and no income, gain or loss will be recognized, for U.S. federal income tax purposes by Everett SpinCo or the holders of Everett SpinCo common stock as a result of the merger (except with respect to the receipt of cash in lieu of fractional shares of CSC common stock).

        Assuming that the distribution and the merger so qualify, for U.S. federal income tax purposes, no gain or loss will be recognized by a holder of our common stock upon the receipt of Everett SpinCo common stock pursuant to the distribution or upon the merger other than with respect to cash received in lieu of fractional shares, and we will not recognize gain or loss with respect to the transfer of Everett SpinCo common stock pursuant to the distribution. We may also seek a ruling from the Internal Revenue Service (the "IRS") regarding certain issues relevant to the qualification of the distribution and certain other aspects of the separation for tax-free treatment for U.S. federal income tax purposes.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

Recent Sales of Unregistered Securities

        There were no unregistered sales of equity securities during the period covered by this report.

Issuer Purchases of Equity Securities

Period
  Total Number
of Shares
Purchased
  Average
Price Paid
per Share
  Total Number of
Shares Purchased as
Part of Publicly
Announced Plans
or Programs
  Approximate Dollar Value of
Shares that May Yet Be
Purchased under the Plans
or Programs
 
 
  In thousands, except per share amounts
 

Month #1 (February 2016)

    1,136   $ 13.17     1,136   $ 1,961,730  

Month #2 (March 2016)(1)

    14,180   $ 12.34     14,180   $ 1,786,730  

Month #3 (April 2016)

              $ 1,786,730  

Total

    15,316   $ 12.40     15,316        

(1)
In November 2015, the Company entered into an accelerated share repurchase agreement ("ASR Agreement") with a financial institution under which the Company paid an aggregate of $1.1 billion upfront to the financial institution. For the three months ended April 30, 2016, the Company received a delivery of 14 million shares of the Company's common stock, which were retired and recorded as a $0.2 billion reduction to stockholders' equity. During the first and second quarters of fiscal 2016, the total shares repurchased under the ASR Agreement was 78 million shares based on the average daily volume weighted average stock price of the Company's common stock during the term of the transaction, plus transaction fees. This was in addition to the Company's open market repurchase activities. See Note 15, "Stockholders' Equity" to the Condensed Consolidated and Combined Financial Statements in Item 1 of Part 1, which is incorporated herein by reference.

88


Table of Contents

        On October 13, 2015, the Hewlett Packard Enterprise Board of Directors announced the authorization of a $3.0 billion share repurchase program. Hewlett Packard Enterprise may choose to repurchase shares when sufficient liquidity exists and the shares are trading at a discount relative to estimated intrinsic value. This program, which does not have a specific expiration date, authorizes repurchases in the open market or in private transactions. Share repurchases settled in the second quarter of fiscal 2016 consisted of open market purchases and private transactions. As of April 30, 2016, the Company had remaining authorization of $1.8 billion for future share repurchases. On May 24, 2016, the Company announced that its Board of Directors authorized an additional $3.0 billion under the Company's authorized share repurchase program.

Item 5. Other Information.

        None.

Item 6. Exhibits.

        The Exhibit Index beginning on page 91 of this report sets forth a list of exhibits.

89


Table of Contents

SIGNATURE

        Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 
   
    HEWLETT PACKARD ENTERPRISE COMPANY

 

 

/s/ TIMOTHY C. STONESIFER

Timothy C. Stonesifer
Executive Vice President and Chief Financial Officer
(Principal Financial Officer and Authorized
Signatory)

Date: June 8, 2016

90


Table of Contents

HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
EXHIBIT INDEX

 
   
  Incorporated by Reference
Exhibit
Number
   
  Exhibit Description   Form   File No.   Exhibit(s)   Filing Date
2.1   Separation and Distribution Agreement, dated as of October 31, 2015, by and among Hewlett-Packard Company, Hewlett Packard Enterprise Company and the Other Parties Thereto   8-K   001-37483   2.1   November 5, 2015

2.2

 

Transition Services Agreement, dated as of November 1, 2015, by and between Hewlett-Packard Company and Hewlett Packard Enterprise Company

 

8-K

 

001-37483

 

2.2

 

November 5, 2015

2.3

 

Tax Matters Agreement, dated as of October 31, 2015, by and between Hewlett-Packard Company and Hewlett Packard Enterprise Company

 

8-K

 

001-37483

 

2.3

 

November 5, 2015

2.4

 

Employee Matters Agreement, dated as of October 31, 2015, by and between Hewlett-Packard Company and Hewlett Packard Enterprise Company

 

8-K

 

001-37483

 

2.4

 

November 5, 2015

2.5

 

Real Estate Matters Agreement, dated as of October 31, 2015, by and between Hewlett-Packard Company and Hewlett Packard Enterprise Company

 

8-K

 

001-37483

 

2.5

 

November 5, 2015

2.6

 

Master Commercial Agreement, dated as of November 1, 2015, by and between Hewlett-Packard Company and Hewlett Packard Enterprise Company

 

8-K

 

001-37483

 

2.6

 

November 5, 2015

2.7

 

Information Technology Service Agreement, dated as of November 1, 2015, by and between Hewlett-Packard Company and HP Enterprise Services, LLC

 

8-K

 

001-37483

 

2.7

 

November 5, 2015

2.8

 

Agreement and Plan of Merger, dated May 24, 2016, among Hewlett Packard Enterprise, CSC, Everett and Merger Sub

 

8-K

 

001-37483

 

2.1

 

May 26, 2016

2.9

 

Separation and Distribution Agreement, dated May 24, 2016, between Hewlett Packard Enterprise and Everett

 

8-K

 

001-37483

 

2.2

 

May 26, 2016

3.1

 

Registrant's Amended and Restated Certificate of Incorporation

 

8-K

 

001-37483

 

3.1

 

November 5, 2015

3.2

 

Registrant's Amended and Restated Bylaws effective October 31, 2015

 

8-K

 

001-37483

 

3.2

 

November 5, 2015

4.1

 

Senior Indenture, dated as of October 9, 2015, between Hewlett Packard Enterprise Company and The Bank of New York Mellon Trust Company, N.A., as Trustee

 

8-K

 

001-37483

 

4.1

 

October 13, 2015

91


Table of Contents

 
   
  Incorporated by Reference
Exhibit
Number
   
  Exhibit Description   Form   File No.   Exhibit(s)   Filing Date
4.2   First Supplemental Indenture, dated as of October 9, 2015, between Hewlett Packard Enterprise Company and The Bank of New York Mellon Trust Company, N.A., as Trustee, relating to Hewlett Packard Enterprise Company's 2.450% notes due 2017   8-K   001-37483   4.2   October 13, 2015

4.3

 

Second Supplemental Indenture, dated as of October 9, 2015, between Hewlett Packard Enterprise Company and The Bank of New York Mellon Trust Company, N.A., as Trustee, relating to Hewlett Packard Enterprise Company's 2.850% notes due 2018

 

8-K

 

001-37483

 

4.3

 

October 13, 2015

4.4

 

Third Supplemental Indenture, dated as of October 9, 2015, between Hewlett Packard Enterprise Company and The Bank of New York Mellon Trust Company, N.A., as Trustee, relating to Hewlett Packard Enterprise Company's 3.600% notes due 2020

 

8-K

 

001-37483

 

4.4

 

October 13, 2015

4.5

 

Fourth Supplemental Indenture, dated as of October 9, 2015, between Hewlett Packard Enterprise Company and The Bank of New York Mellon Trust Company, N.A., as Trustee, relating to Hewlett Packard Enterprise Company's 4.400% notes due 2022

 

8-K

 

001-37483

 

4.5

 

October 13, 2015

4.6

 

Fifth Supplemental Indenture, dated as of October 9, 2015, between Hewlett Packard Enterprise Company and The Bank of New York Mellon Trust Company, N.A., as Trustee, relating to Hewlett Packard Enterprise Company's 4.900% notes due 2025

 

8-K

 

001-37483

 

4.6

 

October 13, 2015

4.7

 

Sixth Supplemental Indenture, dated as of October 9, 2015, between Hewlett Packard Enterprise Company and The Bank of New York Mellon Trust Company, N.A., as Trustee, relating to Hewlett Packard Enterprise Company's 6.200% notes due 2035

 

8-K

 

001-37483

 

4.7

 

October 13, 2015

4.8

 

Seventh Supplemental Indenture, dated as of October 9, 2015, between Hewlett Packard Enterprise Company and The Bank of New York Mellon Trust Company, N.A., as Trustee, relating to Hewlett Packard Enterprise Company's 6.350% notes due 2045

 

8-K

 

001-37483

 

4.8

 

October 13, 2015

92


Table of Contents

 
   
  Incorporated by Reference
Exhibit
Number
   
  Exhibit Description   Form   File No.   Exhibit(s)   Filing Date
4.9   Eighth Supplemental Indenture, dated as of October 9, 2015, between Hewlett Packard Enterprise Company and The Bank of New York Mellon Trust Company, N.A., as Trustee, relating to Hewlett Packard Enterprise Company's floating rate notes due 2017   8-K   001-37483   4.9   October 13, 2015

4.10

 

Ninth Supplemental Indenture, dated as of October 9, 2015, between Hewlett Packard Enterprise Company and The Bank of New York Mellon Trust Company, N.A., as Trustee, relating to Hewlett Packard Enterprise Company's floating rate notes due 2018

 

8-K

 

001-37483

 

4.10

 

October 13, 2015

4.11

 

Guarantee Agreement, dated as of October 9, 2015, between Hewlett-Packard Company, Hewlett Packard Enterprise Company and The Bank of New York Mellon Trust Company, N.A., as Trustee, in favor of the holders of the Notes

 

8-K

 

001-37483

 

4.11

 

October 13, 2015

4.12

 

Registration Rights Agreement, dated as of October 9, 2015, among Hewlett Packard Enterprise Company, Hewlett-Packard Company, and the representatives of the initial purchasers of the Notes

 

8-K

 

001-37483

 

4.12

 

October 13, 2015

4.13

 

Eighth Supplemental Indenture, dated as of November 1, 2015, among Hewlett Packard Enterprise Company, HP Enterprise Services, LLC and the Bank of New York Mellon Trust Company, N.A., as Trustee, relating to HP Enterprise Services LLC's 7.45% Senior Notes due October 2029

 

10-K

 

001-04423

 

4.13

 

December 17, 2015

4.14

 

Hewlett Packard Enterprise 401(k) Plan

 

S-8

 

333-207680

 

4.3

 

October 30, 2015

10.1

 

Hewlett Packard Enterprise Company 2015 Stock Incentive Plan*

 

10

 

001-37483

 

10.1

 

September 28, 2015

10.2

 

Hewlett Packard Enterprise Company 2015 Employee Stock Purchase Plan

 

10

 

001-37483

 

10.2

 

September 28, 2015

10.3

 

Hewlett Packard Enterprise Company Severance and Long-Term Incentive Change in Control Plan for Executive Officers*

 

10

 

001-37483

 

10.4

 

September 28, 2015

10.4

 

Hewlett Packard Enterprise Executive Deferred Compensation Plan*

 

S-8

 

333-207679

 

4.3

 

October 30, 2015

10.5

 

Hewlett Packard Enterprise Grandfathered Executive Deferred Compensation Plan*

 

S-8

 

333-207679

 

4.4

 

October 30, 2015

10.6

 

Form of Non-Qualified Stock Option Grant Agreement*

 

8-K

 

001-37483

 

10.4

 

November 5, 2015

93


Table of Contents

 
   
  Incorporated by Reference
Exhibit
Number
   
  Exhibit Description   Form   File No.   Exhibit(s)   Filing Date
10.7   Form of Restricted Stock Unit Grant Agreement*   8-K   001-37483   10.5   November 5, 2015

10.8

 

Form of Performance-Adjusted Restricted Stock Unit Grant Agreement*

 

8-K

 

001-37483

 

10.6

 

November 5, 2015

10.9

 

Form of Restricted Stock Unit Launch Grant Agreement*

 

8-K

 

001-37483

 

10.7

 

November 5, 2015

10.10

 

Form of Performance-Contingent Non-Qualified Stock Option Launch Grant Agreement*

 

8-K

 

001-37483

 

10.8

 

November 5, 2015

10.11

 

Form of Non-Employee Director Stock Options Grant Agreement*

 

8-K

 

001-37483

 

10.9

 

November 5, 2015

10.12

 

Form of Non-Employee Director Restricted Stock Unit Grant Agreement*

 

8-K

 

001-37483

 

10.10

 

November 5, 2015

10.13

 

Credit Agreement, dated as of November 1, 2015, by and among Hewlett Packard Enterprise Company, JPMorgan Chase Bank, N.A., Citibank, N.A., and the other parties thereto

 

8-K

 

001-37483

 

10.1

 

November 5, 2015

10.14

 

Form of Restricted Stock Units Grant Agreement, as amended and restated effective January 1, 2016*

 

10-Q

 

001-37483

 

10.14

 

March 10, 2016

10.15

 

Form of Performance-Adjusted Restricted Stock Unit Agreement, as amended and restated effective January 1, 2016*

 

10-Q

 

001-37483

 

10.15

 

March 10, 2016

10.16

 

Description of Amendment to Equity Awards (incorporated by reference to Item 5.02 of the 8-K filed on May 26, 2016)*

 

8-K

 

001-37483

 

10.1

 

May 26, 2016

11

 

None

 

 

 

 

 

 

 

 

12

 

Statement of Computation of Ratio of Earnings to Fixed Charges‡

 

 

 

 

 

 

 

 

15

 

None

 

 

 

 

 

 

 

 

18-19

 

None

 

 

 

 

 

 

 

 

22-24

 

None

 

 

 

 

 

 

 

 

31.1

 

Certification of Chief Executive Officer pursuant to Rule 13a- 14(a) and Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended‡

 

 

 

 

 

 

 

 

31.2

 

Certification of Chief Financial Officer pursuant to Rule 13a- 14(a) and Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended‡

 

 

 

 

 

 

 

 

94


Table of Contents

 
   
  Incorporated by Reference
Exhibit
Number
   
  Exhibit Description   Form   File No.   Exhibit(s)   Filing Date
32   Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002†                

101.INS

 

XBRL Instance Document‡

 

 

 

 

 

 

 

 

101.SCH

 

XBRL Taxonomy Extension Schema Document‡

 

 

 

 

 

 

 

 

101.CAL

 

XBRL Taxonomy Extension Calculation Linkbase Document‡

 

 

 

 

 

 

 

 

101.DEF

 

XBRL Taxonomy Extension Definition Linkbase Document‡

 

 

 

 

 

 

 

 

101.LAB

 

XBRL Taxonomy Extension Label Linkbase Document‡

 

 

 

 

 

 

 

 

101.PRE

 

XBRL Taxonomy Extension Presentation Linkbase Document‡

 

 

 

 

 

 

 

 

*
Indicates management contract or compensation plan, contract or arrangement

Filed herewith

Furnished herewith

        The registrant agrees to furnish to the Commission supplementally upon request a copy of (1) any instrument with respect to long-term debt not filed herewith as to which the total amount of securities authorized thereunder does not exceed 10% of the total assets of the registrant and its subsidiaries on a consolidated basis and (ii) schedules or exhibits omitted pursuant to Item 601(b)(2) of Regulation S-K of any material plan of acquisition, disposition or reorganization set forth above.

95