Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of Hewlett Packard Enterprise Company
Opinion on Internal Control over Financial Reporting
We have audited Hewlett Packard Enterprise Company and subsidiaries’ internal control over financial reporting as of October 31, 2022, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, Hewlett Packard Enterprise Company and subsidiaries (the Company) maintained, in all material respects, effective internal control over financial reporting as of October 31, 2022, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of October 31, 2022 and 2021, the related consolidated statements of earnings, comprehensive income, stockholders' equity and cash flows for each of the three years in the period ended October 31, 2022, and the related notes and our report dated December 8, 2022 expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Ernst & Young LLP
San Jose, California
December 8, 2022
Management's Report on Internal Control Over Financial Reporting
Hewlett Packard Enterprise's management is responsible for establishing and maintaining adequate internal control over financial reporting for Hewlett Packard Enterprise. Hewlett Packard Enterprise's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles. Hewlett Packard Enterprise's internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of Hewlett Packard Enterprise; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of Hewlett Packard Enterprise are being made only in accordance with authorizations of management and directors of Hewlett Packard Enterprise; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of Hewlett Packard Enterprise's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Hewlett Packard Enterprise's management assessed the effectiveness of Hewlett Packard Enterprise's internal control over financial reporting as of October 31, 2022, utilizing the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework (2013 framework). Based on the assessment by Hewlett Packard Enterprise's management, we determined that Hewlett Packard Enterprise's internal control over financial reporting was effective as of October 31, 2022. The effectiveness of Hewlett Packard Enterprise's internal control over financial reporting as of October 31, 2022 has been audited by Ernst & Young LLP, Hewlett Packard Enterprise's independent registered public accounting firm, as stated in their report on the preceding pages.
| | | | | | | | |
/s/ ANTONIO F. NERI | | /s/ TAREK A. ROBBIATI |
Antonio F. Neri President and Chief Executive Officer | | Tarek A. Robbiati Executive Vice President and Chief Financial Officer |
December 8, 2022 | | December 8, 2022 |
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Consolidated Statements of Earnings
| | | | | | | | | | | | | | | | | |
| For the fiscal years ended October 31, |
| 2022 | | 2021 | | 2020 |
| In millions, except per share amounts |
Net revenue: | | | | | |
Products | $ | 17,794 | | | $ | 17,011 | | | $ | 16,264 | |
Services | 10,219 | | | 10,279 | | | 10,249 | |
Financing income | 483 | | | 494 | | | 469 | |
Total net revenue | 28,496 | | | 27,784 | | | 26,982 | |
Costs and expenses: | | | | | |
Cost of products | 12,463 | | | 11,892 | | | 11,698 | |
Cost of services | 6,217 | | | 6,304 | | | 6,544 | |
Financing cost | 310 | | | 212 | | | 271 | |
Research and development | 2,045 | | | 1,979 | | | 1,874 | |
Selling, general and administrative | 4,941 | | | 4,929 | | | 4,624 | |
Amortization of intangible assets | 293 | | | 354 | | | 379 | |
Impairment of goodwill | 905 | | | — | | | 865 | |
| | | | | |
Transformation costs | 473 | | | 930 | | | 950 | |
Disaster charges | 48 | | | 16 | | | 26 | |
Acquisition, disposition and other related charges | 19 | | | 36 | | | 80 | |
| | | | | |
Total costs and expenses | 27,714 | | | 26,652 | | | 27,311 | |
Earnings (loss) from operations | 782 | | | 1,132 | | | (329) | |
Interest and other, net | (188) | | | (211) | | | (215) | |
Tax indemnification and related adjustments | (67) | | | 65 | | | (101) | |
Non-service net periodic benefit credit | 134 | | | 70 | | | 136 | |
Litigation judgment | — | | | 2,351 | | | — | |
Earnings from equity interests | 215 | | | 180 | | | 67 | |
Earnings (loss) before (provision) benefit for taxes | 876 | | | 3,587 | | | (442) | |
(Provision) benefit for taxes | (8) | | | (160) | | | 120 | |
| | | | | |
| | | | | |
Net earnings (loss) | $ | 868 | | | $ | 3,427 | | | $ | (322) | |
Net earnings (loss) per share: | | | | | |
| | | | | |
Basic | $ | 0.67 | | | $ | 2.62 | | | $ | (0.25) | |
Diluted | $ | 0.66 | | | $ | 2.58 | | | $ | (0.25) | |
| | | | | |
| | | | | |
Weighted-average shares used to compute net earnings (loss) per share: | | | | | |
Basic | 1,303 | | | 1,309 | | | 1,294 | |
Diluted | 1,322 | | | 1,330 | | | 1,294 | |
The accompanying notes are an integral part of these Consolidated Financial Statements.
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
| | | | | | | | | | | | | | | | | |
| For the fiscal years ended October 31, |
| 2022 | | 2021 | | 2020 |
| In millions |
Net earnings (loss) | $ | 868 | | | $ | 3,427 | | | $ | (322) | |
Other comprehensive (loss) income before taxes: | | | | | |
Change in net unrealized losses on available-for-sale securities: | | | | | |
Net unrealized losses arising during the period | (16) | | | (3) | | | (1) | |
Gains reclassified into earnings | — | | | — | | | (4) | |
| (16) | | | (3) | | | (5) | |
Change in net unrealized gains (losses) on cash flow hedges: | | | | | |
Net unrealized gains (losses) arising during the period | 1,025 | | | (50) | | | (40) | |
Net (gains) losses reclassified into earnings | (978) | | | 156 | | | (21) | |
| 47 | | | 106 | | | (61) | |
Change in unrealized components of defined benefit plans: | | | | | |
Net unrealized (losses) gains arising during the period | (315) | | | 763 | | | (358) | |
Amortization of net actuarial loss and prior service benefit | 155 | | | 281 | | | 249 | |
Curtailments, settlements and other | 5 | | | 4 | | | 10 | |
| (155) | | | 1,048 | | | (99) | |
| | | | | |
Change in cumulative translation adjustment | (146) | | | 16 | | | (12) | |
Other comprehensive (loss) income before taxes | (270) | | | 1,167 | | | (177) | |
Benefit (provision) for taxes | 87 | | | (143) | | | 8 | |
Other comprehensive (loss) income, net of taxes | (183) | | | 1,024 | | | (169) | |
Comprehensive income (loss) | $ | 685 | | | $ | 4,451 | | | $ | (491) | |
The accompanying notes are an integral part of these Consolidated Financial Statements.
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Consolidated Balance Sheets
| | | | | | | | | | | |
| As of October 31, |
| 2022 | | 2021 |
| In millions, except par value |
ASSETS | | | |
Current assets: | | | |
Cash and cash equivalents | $ | 4,163 | | | $ | 3,996 | |
Accounts receivable, net of allowances | 4,101 | | | 3,979 | |
Financing receivables, net of allowances | 3,522 | | | 3,932 | |
Inventory | 5,161 | | | 4,511 | |
| | | |
Other current assets | 3,559 | | | 2,460 | |
Total current assets | 20,506 | | | 18,878 | |
Property, plant and equipment | 5,784 | | | 5,613 | |
Long-term financing receivables and other assets | 10,537 | | | 11,670 | |
Investments in equity interests | 2,160 | | | 2,210 | |
Goodwill | 17,403 | | | 18,306 | |
Intangible assets | 733 | | | 1,022 | |
Total assets | $ | 57,123 | | | $ | 57,699 | |
LIABILITIES AND STOCKHOLDERS' EQUITY | | | |
Current liabilities: | | | |
Notes payable and short-term borrowings | $ | 4,612 | | | $ | 3,552 | |
Accounts payable | 8,717 | | | 7,004 | |
Employee compensation and benefits | 1,401 | | | 1,778 | |
Taxes on earnings | 176 | | | 169 | |
Deferred revenue | 3,451 | | | 3,408 | |
Accrued restructuring | 192 | | | 290 | |
Other accrued liabilities | 4,625 | | | 4,486 | |
Total current liabilities | 23,174 | | | 20,687 | |
Long-term debt | 7,853 | | | 9,896 | |
Other non-current liabilities | 6,187 | | | 7,099 | |
Commitments and contingencies | | | |
Stockholders' equity | | | |
HPE stockholders' equity: | | | |
| | | |
Common stock, $0.01 par value (9,600 shares authorized; 1,281 and 1,295 issued and outstanding at October 31, 2022 and October 31, 2021, respectively) | 13 | | | 13 | |
Additional paid-in capital | 28,299 | | | 28,470 | |
Accumulated deficit | (5,350) | | | (5,597) | |
Accumulated other comprehensive loss | (3,098) | | | (2,915) | |
Total HPE stockholders' equity | 19,864 | | | 19,971 | |
Non-controlling interests | 45 | | | 46 | |
Total stockholders' equity | 19,909 | | | 20,017 | |
Total liabilities and stockholders' equity | $ | 57,123 | | | $ | 57,699 | |
The accompanying notes are an integral part of these Consolidated Financial Statements.
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Consolidated Statements of Cash Flows
| | | | | | | | | | | | | | | | | |
| For the fiscal years ended October 31, |
| 2022 | | 2021 | | 2020 |
| In millions |
Cash flows from operating activities: | | | | | |
Net earnings (loss) | $ | 868 | | | $ | 3,427 | | | $ | (322) | |
Adjustments to reconcile net earnings (loss) to net cash provided by operating activities: | | | | | |
Depreciation and amortization | 2,480 | | | 2,597 | | | 2,625 | |
Impairment of goodwill | 905 | | | — | | | 865 | |
Stock-based compensation expense | 391 | | | 382 | | | 274 | |
Provision for inventory and doubtful accounts | 262 | | | 176 | | | 308 | |
Restructuring charges | 214 | | | 620 | | | 769 | |
Deferred taxes on earnings | (249) | | | (167) | | | (294) | |
Earnings from equity interests | (215) | | | (180) | | | (67) | |
Dividends received from equity investees | 197 | | | 184 | | | 165 | |
Other, net | 310 | | | 202 | | | 163 | |
Changes in operating assets and liabilities, net of acquisitions: | | | | | |
Accounts receivable | (186) | | | (591) | | | (461) | |
Financing receivables | 694 | | | (165) | | | (487) | |
Inventory | (713) | | | (1,959) | | | (527) | |
Accounts payable | 1,707 | | | 1,608 | | | (225) | |
Taxes on earnings | 150 | | | (73) | | | (122) | |
Restructuring | (334) | | | (527) | | | (478) | |
Other assets and liabilities | (1,888) | | | 337 | | | 54 | |
Net cash provided by operating activities | 4,593 | | | 5,871 | | | 2,240 | |
Cash flows from investing activities: | | | | | |
Investment in property, plant and equipment | (3,122) | | | (2,502) | | | (2,383) | |
Proceeds from sale of property, plant and equipment | 602 | | | 354 | | | 703 | |
Purchases of investments | (55) | | | (60) | | | (101) | |
Proceeds from maturities and sales of investments | 262 | | | 15 | | | 48 | |
Financial collateral posted | (148) | | | (903) | | | (644) | |
Financial collateral received | 374 | | | 805 | | | 665 | |
Payments made in connection with business acquisitions, net of cash acquired | — | | | (505) | | | (866) | |
| | | | | |
Net cash used in investing activities | (2,087) | | | (2,796) | | | (2,578) | |
Cash flows from financing activities: | | | | | |
Short-term borrowings with original maturities less than 90 days, net | 100 | | | (36) | | | (9) | |
Proceeds from debt, net of issuance costs | 3,296 | | | 3,022 | | | 7,007 | |
Payment of debt | (3,992) | | | (5,465) | | | (5,099) | |
Settlement of cash flow hedge | (8) | | | — | | | — | |
Net payments related to stock-based award activities | (53) | | | (29) | | | (36) | |
Repurchase of common stock | (512) | | | (213) | | | (355) | |
| | | | | |
| | | | | |
| | | | | |
Cash dividends paid to non-controlling interests, net of contributions | (6) | | | (18) | | | (7) | |
Cash dividends paid to shareholders | (621) | | | (625) | | | (618) | |
Net cash (used in) provided by financing activities | (1,796) | | | (3,364) | | | 883 | |
Effect of exchange rate changes on cash, cash equivalents, and restricted cash | (279) | | | — | | | — | |
Increase (decrease) in cash, cash equivalents and restricted cash | 431 | | | (289) | | | 545 | |
Cash, cash equivalents and restricted cash at beginning of period | 4,332 | | | 4,621 | | | 4,076 | |
Cash, cash equivalents and restricted cash at end of period | $ | 4,763 | | | $ | 4,332 | | | $ | 4,621 | |
Supplemental cash flow disclosures: | | | | | |
Income taxes paid, net of refunds | $ | 107 | | | $ | 398 | | | $ | 297 | |
Interest expense paid | $ | 453 | | | $ | 486 | | | $ | 574 | |
The accompanying notes are an integral part of these Consolidated Financial Statements.
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Stock | | | | | | | | | | | | |
| Number of Shares | | Par Value | | Additional Paid-in Capital | | (Accumulated Deficit) Retained Earnings | | Accumulated Other Comprehensive Loss | | Equity Attributable to the Company | | Non- controlling Interests | | Total Equity |
| In millions, except number of shares in thousands |
Balance at October 31, 2019 | 1,294,369 | | | $ | 13 | | | $ | 28,444 | | | $ | (7,632) | | | $ | (3,727) | | | $ | 17,098 | | | $ | 51 | | | $ | 17,149 | |
Net (loss) earnings | | | | | | | (322) | | | | | (322) | | | 11 | | | (311) | |
Other comprehensive loss | | | | | | | | | (169) | | | (169) | | | — | | | (169) | |
Comprehensive (loss) income | | | | | | | | | | | (491) | | | 11 | | | (480) | |
Stock-based compensation expense | | | | | 278 | | | | | | | 278 | | | | 278 |
Tax withholding related to vesting of employee stock plans | | | | | (89) | | | | | | | (89) | | | | | (89) | |
Issuance of common stock in connection with employee stock plans and other | 17,397 | | | | | 63 | | | | | | | 63 | | 1 | | 64 |
Repurchases of common stock | (24,756) | | | | | (346) | | | | | | | (346) | | | | | (346) | |
Cash dividends declared ($0.36 per common share) | | | | | | | (464) | | | | | (464) | | | (16) | | | (480) | |
Effects of adoption of accounting standard updates relating to the reclassification of stranded tax effects | | | | | | | 43 | | | (43) | | | — | | | | | — | |
Balance at October 31, 2020 | 1,287,010 | | | $ | 13 | | | $ | 28,350 | | | $ | (8,375) | | | $ | (3,939) | | | $ | 16,049 | | | $ | 47 | | | $ | 16,096 | |
Net earnings | | | | | | | 3,427 | | | | | 3,427 | | | 9 | | 3,436 | |
Other comprehensive income | | | | | | | | | 1,024 | | | 1,024 | | | — | | | 1,024 | |
Comprehensive income | | | | | | | | | | | 4,451 | | | 9 | | | 4,460 | |
Stock-based compensation expense | | | | | 382 | | | | | | | 382 | | | | | 382 | |
Tax withholding related to vesting of employee stock plans | | | | | (86) | | | | | | | (86) | | | | | (86) | |
Issuance of common stock in connection with employee stock plans and other | 23,135 | | | | | 49 | | | 1 | | | | 50 | | | | | 50 | |
Repurchases of common stock | (15,511) | | | | | (225) | | | | | | | (225) | | | | | (225) | |
Cash dividends declared ($0.48 per common share) | | | | | | | (625) | | | | | (625) | | | (10) | | | (635) | |
Effects of adoption of ASC 326, Current expected credit losses | | | | | | | (25) | | | | | (25) | | | | | (25) | |
Balance at October 31, 2021 | 1,294,634 | | | $ | 13 | | | $ | 28,470 | | | $ | (5,597) | | | $ | (2,915) | | | $ | 19,971 | | | $ | 46 | | | $ | 20,017 | |
Net earnings | | | | | | | 868 | | | | | 868 | | | 5 | | | 873 | |
Other comprehensive income | | | | | | | | | (183) | | | (183) | | | — | | | (183) | |
Comprehensive income | | | | | | | | | | | 685 | | | 5 | | | 690 | |
Stock-based compensation expense | | | | | 391 | | | | | | | 391 | | | | | 391 | |
Tax withholding related to vesting of employee stock plans | | | | | (111) | | | | | | | (111) | | | | | (111) | |
Issuance of common stock in connection with employee stock plans and other | 21,346 | | | | | 54 | | | | | | | 54 | | | 2 | | | 56 | |
Repurchases of common stock | (34,943) | | | | | (505) | | | | | | | (505) | | | | | (505) | |
Cash dividends declared ($0.48 per common share) | | | | | | | (621) | | | | | (621) | | | (8) | | | (629) | |
| | | | | | | | | | | | | | | |
Balance at October 31, 2022 | 1,281,037 | | $ | 13 | | | $ | 28,299 | | | $ | (5,350) | | | $ | (3,098) | | | $ | 19,864 | | | $ | 45 | | | $ | 19,909 | |
The accompanying notes are an integral part of these Consolidated Financial Statements.
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Note 1: Overview and Summary of Significant Accounting Policies
Background
Hewlett Packard Enterprise Company ("Hewlett Packard Enterprise", "HPE", or the "Company") is a global technology leader focused on developing intelligent solutions that allow customers to capture, analyze and act upon data seamlessly from edge to cloud. Hewlett Packard Enterprise enables customers to accelerate business outcomes by driving new business models, creating new customer and employee experiences, and increasing operational efficiency today and into the future. Hewlett Packard Enterprise's customers range from small- and medium-sized businesses ("SMBs") to large global enterprises and governmental entities.
Russia/Ukraine Conflict
The conflict between Russia and Ukraine and the related sanctions imposed by the U.S., European Union ("EU") and other countries in response have negatively impacted the Company's operations in both countries and increased economic and political uncertainty across the world. In response to the sanctions imposed, in February 2022, the Company suspended all new sales and shipments to Russia and Belarus and implemented compliance measures to address the continuously changing regulatory landscape. Based on a further assessment of business risks and needs, in June 2022, the Company determined that it is no longer tenable to maintain its operations in Russia and Belarus and is proceeding with an orderly, managed exit of its remaining business in these countries.
During fiscal 2022, the Company recorded total pre-tax charges of $161 million primarily related to expected credit losses of financing and trade receivables, employee severance and abandoned assets, $99 million of which was included in Financing cost, $12 million in Cost of services and $50 million in Disaster charges in the Consolidated Statements of Earnings.
The Company continues to monitor the social, political, regulatory and economic environment in Russia and Ukraine, and will consider further actions as appropriate.
Basis of Presentation and Principles of Consolidation
The Consolidated Financial Statements are prepared in accordance with U.S. generally accepted accounting principles ("GAAP").
The accompanying Consolidated Financial Statements include the accounts of the Company and its subsidiaries and affiliates in which the Company has a controlling financial interest or is the primary beneficiary. All intercompany transactions and accounts within the consolidated businesses of the Company have been eliminated.
The Company consolidates a Variable Interest Entity ("VIE") where it has been determined that the Company is the primary beneficiary of the entity's operation. The primary beneficiary is the party that has both the power to direct the activities that most significantly impact the VIE's economic performance and the obligation to absorb losses or the right to receive benefits of the VIE that could potentially be significant to the VIE. In evaluating whether the Company is the primary beneficiary, the Company evaluates its power to direct the most significant activities of the VIE by considering the purpose and design of the entity and the risks the entity was designed to create and pass through to its variable interest holders. The Company also evaluates its economic interests in the VIE.
The Company accounts for investments in companies over which it has the ability to exercise significant influence but does not hold a controlling interest under the equity method of accounting, and the Company records its proportionate share of income or losses in Earnings from equity interests in the Consolidated Statements of Earnings.
Non-controlling interests are presented as a separate component within Total stockholders' equity in the Consolidated Balance Sheets. Net earnings attributable to non-controlling interests are recorded within Interest and other, net in the Consolidated Statements of Earnings and are not presented separately, as they were not material for any periods presented.
Use of Estimates
The preparation of financial statements requires management to make estimates, judgments and assumptions that affect the amounts reported in the Consolidated Financial Statements and accompanying notes. Estimates are assessed each period and updated to reflect current information, including those related to revenue recognition, stock-based compensation, net periodic benefit costs, restructuring accruals, provision for taxes, valuation allowance for deferred taxes, provision for expected credit losses, inventory reserves, and impairment assessments of goodwill, intangible assets and other long-lived assets. The Company
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
believes that these estimates, judgments and assumptions are reasonable under the circumstances, and are subject to significant uncertainties, some of which are beyond the Company's control. Should any of these estimates change, it could adversely affect the Company's results of operations. Actual results could differ materially from these estimates under different assumptions or conditions.
Foreign Currency Translation
The Company predominately uses the U.S. dollar as its functional currency. Assets and liabilities denominated in non-U.S. currencies are remeasured into U.S. dollars at current exchange rates for monetary assets and liabilities and at historical exchange rates for non-monetary assets and liabilities. Net revenue, costs and expenses denominated in non-U.S. currencies are recorded in U.S. dollars at the average rates of exchange prevailing during the period. The Company includes gains or losses from foreign currency remeasurement in Interest and other, net in the Consolidated Statements of Earnings and gains and losses from cash flow hedges in Net revenue as the hedged revenue is recognized. Certain non-U.S. subsidiaries designate the local currency as their functional currency, and the Company records the translation of their assets and liabilities into U.S. dollars at the balance sheet date as translation adjustments and includes them as a component of Accumulated other comprehensive loss in the Consolidated Balance Sheets. The effect of foreign currency exchange rates on cash, cash equivalents and restricted cash was $279 million for fiscal 2022 and was not material for the prior years presented.
Revenue Recognition
The Company accounts for a contract with a customer when both parties have provided written approval and are committed to perform, each party's rights including payment terms are identified, the contract has commercial substance, and collection of consideration is probable.
The Company enters into contracts with customers that may include combinations of products and services, resulting in arrangements containing multiple performance obligations for hardware and software products and/or various services. The Company determines whether each product or service is distinct in order to identify the performance obligations in the contract and allocate the contract transaction price among the distinct performance obligations. Arrangements are distinct based on whether the customer can benefit from the product or service on its own or together with other resources that are readily available and whether the commitment to transfer the product or service to the customer is separately identifiable from other obligations in the contract. The Company classifies its hardware, perpetual software licenses, and software-as-a-service ("SaaS") as distinct performance obligations. Term software licenses represent multiple obligations, which include software licenses and software maintenance. In transactions where the Company delivers hardware or software, it is typically the principal and records revenue and costs of goods sold on a gross basis.
The majority of the Company's revenue is derived from sales of products and services and the associated support and maintenance, and such revenue is recognized when, or as, control of promised products or services is transferred to the customer, in an amount that reflects the consideration to which the Company expects to be entitled, in exchange for those products or services. Variable consideration offered in contracts with customers, partners and distributors may include rebates, volume-based discounts, cooperative marketing, price protection, and other incentive programs. Variable consideration is estimated at contract inception and updated at the end of each reporting period as additional information becomes available and recognized only to the extent that it is probable that a significant reversal of revenue will not occur.
Transfer of control occurs once the customer has the contractual right to use the product, generally upon shipment or once delivery and risk of loss has transferred to the customer. Transfer of control can also occur over time for maintenance and services as the customer receives the benefit over the contract term. The Company's hardware and perpetual software licenses are distinct performance obligations where revenue is recognized upfront upon transfer of control. Term software licenses include multiple performance obligations where the term licenses are recognized upfront upon transfer of control, with the associated software maintenance revenue recognized ratably over the contract term as services and software updates are provided. SaaS arrangements have one distinct performance obligation which is satisfied over time with revenue recognized ratably over the contract term as the customer consumes the services. On its product sales, the Company records consideration from shipping and handling on a gross basis within net product sales. Revenue is recorded net of any associated sales taxes.
The Company allocates the transaction price for the contract among the performance obligations on a relative standalone selling price basis. The standalone selling price ("SSP") is the price at which an entity would sell a promised product or service separately to a customer. The Company establishes SSP for most of its products and services based on the observable price of the products or services when sold separately in similar circumstances to similar customers. When the SSP is not directly observable, the Company estimates SSP based on management judgment by considering available data such as internal margin
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Notes to Consolidated Financial Statements (Continued)
objectives, pricing strategies, market/competitive conditions, historical profitability data, as well as other observable inputs. The Company establishes SSP ranges for its products and services and reassesses them periodically.
Judgment is applied in determining the transaction price as the Company may be required to estimate variable consideration when determining the amount of revenue to recognize. Variable consideration may include various rebates, volume-based discounts, cooperative marketing, price protection, and other incentive programs that are offered to customers, partners and distributors. When determining the amount of revenue to recognize, the Company estimates the expected usage of these programs, applying the expected value or most likely estimate and updates the estimate at each reporting period as actual utilization becomes available. The Company also considers the customers' right of return in determining the transaction price, where applicable.
Contract Balances
Accounts receivable and contract assets
A receivable is a right to consideration in exchange for products or services the Company has transferred to a customer that is unconditional. A contract asset is a right to consideration in exchange for products or services transferred to a customer that is conditional on something other than the passage of time. A receivable is recorded when the right to consideration becomes unconditional.
The Company's contract assets include unbilled receivables which are recorded when the Company recognizes revenue in advance of billings. Unbilled receivables generally relate to services contracts where a service has been performed and control has transferred, but invoicing to the customer is subject to future milestone billings or other contractual payment schedules. The Company classifies unbilled receivables as Accounts receivable.
Contract liabilities
A contract liability is an obligation to transfer products or services to a customer for which the Company has received consideration, or the amount is due, from the customer. The Company's contract liabilities primarily consist of deferred revenue. Deferred revenue is recorded when amounts invoiced to customers are in excess of revenue that can be recognized because performance obligations have not been satisfied and control of the promised products or services has not transferred to the customer. Deferred revenue largely represents amounts invoiced in advance for product (hardware/software) support contracts, consulting projects and product sales where revenue cannot be recognized yet.
Costs to obtain a contract with a customer
The Company capitalizes the incremental costs of obtaining a contract with a customer, primarily sales commissions, if the Company expects to recover those costs. The Company has elected, as a practical expedient, to expense the costs of obtaining a contract as incurred for contracts with terms of one year or less. The typical amortization periods used range from two to five years. The Company periodically reviews the capitalized sales commission costs for possible impairment losses. The amortization of capitalized costs to obtain a contract are included in Selling, general and administrative expense. Refer to Note 7, "Balance Sheet Details" for additional information.
Shipping and Handling
The Company includes costs related to shipping and handling in Cost of products.
Stock-Based Compensation
Stock-based compensation expense is based on the measurement date fair value of the award and is recognized only for those awards expected to meet the service and performance vesting conditions. Stock-based compensation expense for stock options and restricted stock units with only a service condition is recognized on a straight-line basis over the requisite service period of the award. For stock options and restricted stock units with both a service condition and a performance or market condition, the expense is recognized on a graded vesting basis over the requisite service period of the award. Stock-based compensation expense is determined at the aggregate grant level for service-based awards and at the individual vesting tranche level for awards with performance and/or market conditions. The forfeiture rate is estimated based on historical experience.
Retirement and Post-Retirement Plans
The Company has various defined benefit, other contributory and noncontributory, retirement and post-retirement plans. The costs and obligations for these plans depend on various assumptions. Major assumptions relate primarily to discount rates,
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Notes to Consolidated Financial Statements (Continued)
mortality rates, expected increases in compensation levels and the expected long-term return on plan assets. These assumptions vary by plan, and the weighted-average rates used are set forth in Note 4, "Retirement and Post-Retirement Benefit Plans".
The discount rate assumption is based on current investment yields of high-quality fixed-income securities with maturities similar to the expected benefits payment period. Mortality rates help predict the expected life of plan participants and are based on a historical demographic study of the plan. The expected increase in the compensation levels assumption reflects long-term actual experience and future expectations. The expected long-term return on plan assets is determined based on asset allocations, historical portfolio results, historical asset correlations and management's expected returns for each asset class. In any fiscal year, significant differences may arise between the actual return and the expected long-term return on plan assets. Historically, differences between the actual return and expected long-term return on plan assets have resulted from changes in target or actual asset allocation, short-term performance relative to expected long-term performance, and to a lesser extent, differences between target and actual investment allocations, the timing of benefit payments compared to expectations, and the use of derivatives intended to effect asset allocation changes or hedge certain investment or liability exposures.
The following table provides the impact changes in the weighted-average assumptions of discount rates, the expected increase in compensation levels and the expected long-term return on plan assets would have had on the net periodic benefit cost for fiscal 2022:
| | | | | | | | | | | |
| Change in basis points | | Change in Net Periodic Benefit Cost |
| | | In millions |
Assumptions: | | | |
Discount rate | (25) | | | $ | 21 | |
Expected increase in compensation levels | 25 | | | $ | 6 | |
Expected long-term return on plan assets | (25) | | | $ | 39 | |
The Company generally amortizes unrecognized actuarial gains and losses on a straight-line basis over the average remaining estimated service life or, in the case of closed plans, life expectancy of participants. In limited cases, actuarial gains and losses are amortized using the corridor approach.
Advertising
Costs to produce advertising are expensed as incurred during production. Costs to communicate advertising are expensed when the advertising is first run. Advertising expense totaled approximately $179 million in fiscal 2022, $188 million in fiscal 2021, and $143 million in fiscal 2020.
Restructuring
The Company's transformation programs include charges to approved restructuring plans. Restructuring charges include severance costs to eliminate a specified number of employees, infrastructure charges to vacate facilities and consolidate operations, and contract cancellation costs. These restructuring actions require management to estimate the timing and amount of severance and other employee separation costs for workforce reduction and enhanced early retirement programs, the fair value of assets made redundant or obsolete, and the value of lease and contract cancellation and other exit costs. The Company records restructuring charges based on estimated employee terminations and site closure and consolidation plans. The Company accrues for severance and other employee separation costs under these actions when it is probable that benefits will be paid and the amount is reasonably estimable. The rates used in determining severance accruals are based on existing plans, historical experiences and negotiated settlements. For a full description of the Company's restructuring actions, refer to the discussions in Note 3, "Transformation Programs".
Taxes on Earnings
The Company recognizes deferred tax assets and liabilities for the expected tax consequences of temporary differences between the tax bases of assets and liabilities and their reported amounts using enacted tax rates in effect for the year the differences are expected to reverse.
The Company records a valuation allowance to reduce deferred tax assets to the amount that is more likely than not to be realized. In determining the need for a valuation allowance, the Company considers future market growth, forecasted earnings, future sources of taxable income, the mix of earnings in the jurisdictions in which the Company operates, and prudent and
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Notes to Consolidated Financial Statements (Continued)
feasible tax planning strategies. In the event the Company were to determine that it is more likely than not that the Company will be unable to realize all or part of its deferred tax assets in the future, the Company would increase the valuation allowance and recognize a corresponding charge to earnings in the period in which such a determination was made. Likewise, if the Company later determines that the deferred tax assets are more likely than not to be realized, the Company would reverse the applicable portion of the previously recognized valuation allowance. In order for the Company to realize deferred tax assets, the Company must be able to generate sufficient taxable income in the jurisdictions in which the deferred tax assets are located.
The Company records accruals for uncertain tax positions when the Company believes that it is not more likely than not that the tax position will be sustained on examination by the taxing authorities based on the technical merits of the position. The provision for income taxes includes the effects of adjustments for uncertain tax positions as well as any related interest and penalties. The Company recognizes interest income from favorable settlements and interest expense and penalties accrued on unrecognized tax benefits in (Provision) benefit for taxes in the Consolidated Statements of Earnings.
The Company is subject to the Global Intangible Low Taxed Income ("GILTI") tax in the U.S. The Company elected to treat taxes on future GILTI inclusions in U.S. taxable income as a current period expense when incurred.
Allowance for Doubtful Accounts
Accounts Receivable
The allowance for expected credit losses related to accounts receivable is comprised of a general reserve and a specific reserve. The Company may record a specific reserve for individual accounts when the Company becomes aware of specific customer circumstances, such as in the case of a bankruptcy filing or deterioration in the customer's operating results or financial position. If there are additional changes in circumstances related to the specific customer, the Company further adjusts estimates of the recoverability of receivables. The Company maintains an allowance for credit losses for all other customers based on a variety of factors, including the use of third-party credit risk models that generate quantitative measures of default probabilities based on market factors, the financial condition of customers and the length of time receivables are past due. These qualitative factors are subjective and require a degree of management judgment. The past due or delinquency status of a receivable is based on the contractual payment terms of the receivable. The Company establishes an allowance for expected credit losses related to accounts receivable, including unbilled receivables.
Financing Receivable
The allowance for expected credit losses related to financing receivables is comprised of a general reserve and a specific reserve. The Company establishes a specific reserve for financing receivables with identified exposures, such as customer defaults, bankruptcy or other events, that make it unlikely the Company will recover its investment. For individually evaluated receivables, the Company determines the expected cash flow for the receivable, which includes consideration of estimated proceeds from disposition of the collateral and calculates an estimate of the potential loss and the probability of loss. For those accounts where a loss is considered probable, the Company records a specific reserve. The Company maintains a general reserve using a credit loss model on a regional basis and bases such percentages on several factors, including consideration of historical credit losses and portfolio delinquencies, trends in the overall weighted-average risk rating of the portfolio, current economic conditions, and forward-looking information, including reasonable and supportable forecasts. The Company excludes accounts evaluated as part of the specific reserve from the general reserve analysis. The Company generally writes off a receivable or records a specific reserve when a receivable becomes 180 days past due, or sooner if the Company determines that the receivable is not collectible.
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.
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Notes to Consolidated Financial Statements (Continued)
Concentrations of Risk
Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of cash, cash equivalents and restricted cash, investments, receivables from trade customers and contract manufacturers, financing receivables and derivatives.
The Company maintains cash, cash equivalents and restricted cash, investments, derivatives, and certain other financial instruments with various financial institutions. These financial institutions are located in many different geographic regions, and the Company's policy is designed to limit exposure from any particular institution. As part of its risk management processes, the Company performs periodic evaluations of the relative credit standing of these financial institutions. The Company has not sustained material credit losses from instruments held at these financial institutions. The Company utilizes derivative contracts to protect against the effects of foreign currency and interest rate exposures. Such contracts involve the risk of non-performance by the counterparty, which could result in a material loss. For more details on the collateral program, see Note 13, "Financial Instruments".
Credit risk with respect to accounts receivable from trade customers and financing receivables 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 performs ongoing credit evaluations of the financial condition of its customers and may require collateral, such as letters of credit and bank guarantees, in certain circumstances. As of October 31, 2022 and 2021 no single customer accounted for more than 10% of the Company's receivable from trade customers and financing receivables.
The Company utilizes outsourced manufacturers around the world to manufacture company-designed products. The Company may purchase product components from suppliers and sell those components to its outsourced manufacturers thereby creating receivable balances from the outsourced manufacturers. The three largest outsourced manufacturer receivable balances collectively represented 94% and 92% of the Company's manufacturer receivables of $1.0 billion and $0.9 billion at October 31, 2022 and 2021, respectively. The Company includes the manufacturer receivables in Other current assets in the Consolidated Balance Sheets on a gross basis. The Company's credit risk associated with these receivables is mitigated wholly or in part by the amount the Company owes to these outsourced manufacturers, as the Company generally has the legal right to offset its payables to the outsourced manufacturers against these receivables. The Company does not reflect the sale of these components in revenue and does not recognize any profit on these component sales until the manufactured products are sold by the Company, at which time any profit is recognized as a reduction to cost of sales. The Company obtains certain components from single source suppliers due to technology, availability, price, quality or other considerations. The loss of a single source supplier, the deterioration of the Company's relationship with a single source supplier, or any unilateral modification to the contractual terms under which the Company is supplied components by a single source supplier could adversely affect the Company's revenue and gross margins.
Restricted Cash
Restricted cash is included within Other current assets in the accompanying Consolidated Balance Sheets and is primarily related to cash received under the Company's collateral securities agreements for its derivative instruments and cash restricted under the fixed-term securitization program for the issuance of asset-backed debt securities.
Inventory
The Company values inventory at the lower of cost or net realizable value. Cost is computed using standard cost which approximates actual cost on a first-in, first-out basis. At each reporting period, the Company assesses the value of its inventory and writes down the cost of inventory to its net realizable value if required, for estimated excess or obsolescence. Factors influencing these adjustments include changes in future demand forecasts, market conditions, technological changes, product life-cycle and development plans, component cost trends, product pricing, physical deterioration, and quality issues. The write down for excess or obsolescence is charged to the provision of inventory, which is a component of Cost of Products and Cost of Services in the Consolidated Statement of Earnings. At the point of the loss recognition, a new, lower cost basis for that inventory is established, and subsequent changes in facts and circumstances do not result in the restoration or increase in that newly established cost basis.
Property, Plant and Equipment
The Company states property, plant and equipment at cost less accumulated depreciation. The Company capitalizes additions and improvements and expenses maintenance and repairs as incurred. Depreciation expense is recognized on a straight-line basis over the estimated useful lives of the assets. Estimated useful lives are five to 40 years for buildings and
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Notes to Consolidated Financial Statements (Continued)
improvements and three to 15 years for machinery and equipment. The Company depreciates leasehold improvements over the life of the lease or the asset, whichever is shorter. The Company depreciates equipment held for lease over the initial term of the lease to the equipment's estimated residual value. The estimated useful lives of assets used solely to support a customer services contract generally do not exceed the term of the customer contract. On retirement or disposition, the asset cost and related accumulated depreciation are removed from the Consolidated Balance Sheets with any gain or loss recognized in the Consolidated Statements of Earnings.
As of November 1, 2021, the Company increased its expected useful life of new servers and storage equipment assets from four years to five years. Concurrently, the Company completed an assessment of its existing server and storage equipment assets and extended the remaining useful lives of such assets by one year. The effects of this change in estimate reduced depreciation expense and increased net income and basic and diluted earnings per share by immaterial amounts for fiscal 2022.
The Company capitalizes certain internal and external costs incurred to acquire or create internal use software, principally related to software coding, designing system interfaces and installation and testing of the software. The Company amortizes capitalized internal use software costs using the straight-line method over the estimated useful lives of the software, generally from three to five years.
Leases
Lessee Accounting
The Company enters into various leases as a lessee for assets including office buildings, data centers, vehicles, and aviation. The Company determines if an arrangement is a lease at inception. An arrangement contains a lease when the arrangement conveys the right to control the use of an identified asset over the lease term. Upon lease commencement, the Company records a lease liability for the obligation to make lease payments and right-of-use ("ROU") asset for the right to use the underlying asset for the lease term in the Consolidated Balance Sheet. The lease liability is measured at commencement date based on the present value of lease payments not yet paid over the lease term and the Company's incremental borrowing rate. As most of the Company's leases do not provide an implicit rate, the Company uses an incremental borrowing rate which approximates the rate at which the Company would borrow, on a secured basis, in the country where the lease was executed. The ROU asset is based on the lease liability, adjusted for lease prepayments, lease incentives received, and the lessee's initial direct costs. Fixed payments are included in the recognition of ROU assets and liabilities, while non-lease components, such as maintenance or utility charges are expensed as incurred. The Company has agreements with lease and non-lease components that are accounted for separately and not included in its leased assets and corresponding liabilities for the majority of the Company's lease agreements. The Company allocates consideration to the lease and non-lease components using their relative standalone values.
For finance leases, the ROU asset is amortized on a straight-line basis over the shorter of the useful life of the asset or the lease term. Interest expense on the lease liability is recorded separately using the interest method. For operating leases, lease expense is generally recognized on a straight-line basis over the lease term.
Lessor Accounting
The Company's lease offerings are non-cancelable and the payment schedule primarily consists of fixed payments. Variable payments that are based on an index are included in lease receivables. The Company allocates consideration amongst lease components and non-lease components on a relative standalone selling price basis, when lease arrangements include multiple performance obligations. At the end of the lease term, the Company allows the client to either return the equipment, purchase the equipment or renew the lease based on mutually agreed upon terms.
The Company retains a residual position in equipment through lease and finance agreements which is equivalent to an estimated market value. The residual amount is established prior to lease inception, based upon estimated equipment values at end of lease using product road map trends, historical analysis, future projections and remarketing experience. The Company's residual amounts are evaluated at least annually to assess the appropriateness of the carrying values. Any anticipated declines in specific future residual values that are considered to be other-than-temporary would be recorded in current earnings. The Company is able to optimize the recovery of residual values by selling equipment in place, extending lease arrangements on a fixed term basis, entering into a monthly usage rental term beyond the initial lease term, and selling lease returned equipment in the secondary market. The contractual lease agreement also identifies return conditions that ensures the leased equipment will be in good operating condition upon return minus any normal wear and tear. During the residual review process, product changes, product updates, as well as market conditions are reviewed and adjustments if other than temporary are made to
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Notes to Consolidated Financial Statements (Continued)
residual values in accordance with the impact of any such changes. The remarketing sales organization closely manages the sale of equipment lease returns to optimize the recovery of outstanding residual by product.
Business Combinations
The Company includes the results of operations of acquired businesses in the Company's consolidated results prospectively from the date of acquisition. The Company allocates the fair value of purchase consideration to the assets acquired including in-process research and development ("IPR&D"), liabilities assumed, and non-controlling interests in the acquired entity based on their fair values at the acquisition date. IPR&D is initially capitalized at fair value as an intangible asset with an indefinite life and assessed for impairment thereafter. The excess of the fair value of purchase consideration over the fair value of the assets acquired, liabilities assumed and non-controlling interests in the acquired entity is recorded as goodwill. The primary items that generate goodwill include the value of the synergies between the acquired company and the Company and the value of the acquired assembled workforce, neither of which qualifies for recognition as an intangible asset. Acquisition-related expenses and post-acquisition restructuring costs are recognized separately from the business combination and are expensed as incurred.
Goodwill
The Company reviews goodwill for impairment annually and whenever events or changes in circumstances indicate the carrying amount of goodwill may not be recoverable. The Company performs a quantitative test for all of its reporting units as part of its annual goodwill impairment test in the fourth quarter of each fiscal year.
The Company estimates the fair value of its reporting units using a weighting of fair values derived most significantly from the income approach, and to a lesser extent, the market approach with the exception of the Software reporting unit which uses a weighting derived most significantly from the market approach. Under the income approach, the Company estimates the fair value of a reporting unit based on the present value of estimated future cash flows covering discrete forecast periods as well as terminal value determinations. The Company prepares cash flow projections based on management's estimates of revenue growth rates and operating margins, taking into consideration industry and market conditions. The Company bases the discount rate on the weighted-average cost of capital adjusted for the relevant risk associated with business-specific characteristics and the uncertainty related to the reporting unit's ability to execute on the projected cash flows. Under the market approach, the Company estimates fair value based on market multiples of revenue and earnings derived from comparable publicly traded companies with similar operating and investment characteristics as the reporting unit. The Company weights the fair value derived from the market approach commensurate with the level of comparability of these publicly traded companies to the reporting unit. When market comparables are not meaningful or not available, the Company estimates the fair value of a reporting unit using only the income approach.
If the fair value of a reporting unit exceeds the carrying amount of the net assets assigned to that reporting unit, goodwill is not impaired and no further testing is required. If the fair value of the reporting unit is less than its carrying amount, goodwill is impaired. The goodwill impairment loss is measured as the excess of the reporting unit's carrying value over its fair value (not to exceed the total goodwill allocated to that reporting unit).
Intangible Assets and Long-Lived Assets
The Company reviews intangible assets with finite lives, long-lived assets and ROU assets for impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. For lease assets such circumstances would include a decision to abandon the use of all or part of an asset, or subleases that do not fully recover the costs of the associated lease. The Company assesses the recoverability of assets based on the estimated undiscounted future cash flows expected to result from the use and eventual disposition of the asset. If the undiscounted future cash flows are less than the carrying amount, the asset is impaired. The Company measures the amount of impairment loss, if any, as the difference between the carrying amount of the asset and its fair value using an income approach or, when available and appropriate, using a market approach. The Company amortizes intangible assets with finite lives using the straight-line method over the estimated economic lives of the assets, ranging from one to ten years.
Equity Method Investments
Investments and ownership interests are accounted for under equity method accounting if the Company has the ability to exercise significant influence, but does not have a controlling financial interest. The Company records its interest in the net earnings of its equity method investees, along with adjustments for unrealized profits or losses on intra-entity transactions and amortization of basis differences, within Earnings from equity interests in the Consolidated Statements of Earnings. Profits or
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
losses related to intra-entity sales with its equity method investees are eliminated until realized by the investor or investee. Basis differences represent differences between the cost of the investment and the underlying equity in net assets of the investment and are generally amortized over the lives of the related assets that gave rise to them. Equity method goodwill is not amortized or tested for impairment; instead the equity method investment is tested for impairment. The Company records its interest in the net earnings of its equity method investments based on the most recently available financial statements of the investees.
The carrying amount of the investment in equity interests is adjusted to reflect the Company's interest in net earnings, dividends received and other-than-temporary impairments. The Company reviews for impairment whenever factors indicate that the carrying amount of the investment might not be recoverable. In such a case, the decrease in value is recognized in the period the impairment occurs in the Consolidated Statement of Earnings.
Equity Securities Investments
Equity securities investments with readily determinable fair values (other than those accounted for under the equity method or those that result in consolidation of the investee) are measured at fair value and any changes in fair value are recognized in Interest and other, net in the Consolidated Statement of Earnings. For equity investments without readily determinable fair values, the Company has elected to use the fair value option or apply the measurement alternative, under which investments are measured at cost, less impairment, and adjusted for qualifying observable price changes on a prospective basis. The Company reviews for impairment at each reporting period, assessing factors such as deterioration of earnings, adverse change in market/industry conditions, the ability to operate as a going concern, and other factors which indicate that the carrying amount of the investment might not be recoverable. In such a case, the decrease in value is recognized in the period the impairment occurs in the Consolidated Statement of Earnings.
Debt Securities Investments
Debt securities are generally considered available-for-sale and are reported at fair value with unrealized gains and losses, net of applicable taxes, recorded in Accumulated other comprehensive loss in the Consolidated Balance Sheets. Realized gains and losses for available-for-sale securities are calculated based on the specific identification method and included in Interest and other, net in the Consolidated Statements of Earnings. The Company monitors its investment portfolio for potential impairment on a quarterly basis. When the carrying amount of an investment in debt securities exceeds its fair value and the decline in value is determined to be due to credit-related factors, the Company recognizes the impairment using an allowance for credit loss in Interest and other, net, in the Consolidated Statements of Earnings, while the impairment that is not credit related is recorded in Accumulated other comprehensive loss in the Consolidated Balance Sheets.
Derivatives
The Company uses derivative financial instruments, primarily forwards, swaps, and, at times, options, to manage a variety of risks, including risks related to foreign currency and interest rate exposures. The Company does not use derivative financial instruments for speculative purposes.
The Company receives fair value to sell an asset or pay to transfer a liability in an orderly transaction between market participants at the measurement date. When prices in active markets are not available for an identical asset or liability, the Company generally uses industry standard valuation models to measure the fair value of derivative positions. Such measurements involve projecting future cash flows and discounting the future amounts to present value using market based observable inputs, including interest rate curves, Company and counterparty credit risk, foreign currency exchange rates, and forward and spot prices. In the absence of such data, the Company will use internal information that is consistent with what market participants would use in a hypothetical transaction that occurs at the measurement date. The determination of fair value often involves significant judgments about assumptions such as determining an appropriate discount rate that factors in both risk and liquidity premiums, identifying the similarities and differences in market transactions, weighting those differences accordingly and then making the appropriate adjustments to those market transactions to reflect the risks specific to the asset or liability being valued.
For a further discussion of fair value measurements and derivative instruments, refer to Note 12, "Fair Value" and Note 13, "Financial Instruments", respectively.
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Notes to Consolidated Financial Statements (Continued)
Contingencies
The Company is involved in various lawsuits, claims, investigations, and proceedings that arise in the ordinary course of business. The Company records a liability for contingencies when it believes it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. The Company does not record gain contingencies until realized. See Note 17, "Litigation and Contingencies", for a full description of the Company's contingencies.
Warranties
The Company accrues the estimated cost of product warranties at the time of recognizing revenue. The Company's standard product warranty terms generally include post-sales support and repairs or replacement of a product at no additional charge for a specified period of time. The Company engages in extensive product quality programs and processes, including actively monitoring and evaluating the quality of its component suppliers. The estimated warranty obligation is based on contractual warranty terms, repair costs, product call rates, average cost per call, current period product shipments and ongoing product failure rates, as well as specific product class failure outside of the Company's baseline experience. Warranty terms generally range from one to five years for parts and labor, depending upon the product. For certain networking products, the Company offers a lifetime warranty. Over the last three fiscal years, the annual warranty expense has averaged approximately 1.3% of annual net product revenue. Refer to Note 18, "Guarantees, Indemnifications and Warranties" for additional information.
Recently Adopted Accounting Pronouncements
In July 2021, the Financial Accounting Standards Board ("FASB") issued guidance that requires lessors to classify and account for a lease with variable lease payments that do not depend on a reference index or a rate as an operating lease, if the lease would have been classified as a sales-type lease or a direct financing lease and the lessor would have otherwise recognized a day-one loss. The Company adopted the guidance in the first quarter of fiscal 2022 on a prospective basis, and there was no material impact on the Company’s Consolidated Financial Statements.
In January 2020, the FASB issued guidance to clarify certain interactions between the guidance to account for equity securities, the guidance to account for investments under the equity method of accounting, and the guidance to account for derivatives and hedging. The new guidance clarifies the application of measurement alternatives and the accounting for certain forward contracts and purchased options to acquire investments. The Company adopted the guidance in the first quarter of fiscal 2022, and there was no material impact on the Company's Consolidated Financial Statements.
Recently Enacted Accounting Pronouncements
In March 2022, the FASB issued guidance related to troubled debt restructurings (“TDRs”) and vintage disclosures for financing receivables. The amendments eliminate current recognition and measurement guidance for TDRs by creditors while enhancing disclosure requirements for certain loan refinancing and restructurings by creditors when a borrower is experiencing financial difficulty. The amendments also require disclosure of current-period gross write-offs by year of origination for financing receivables and net investments in leases. The Company is required to adopt the guidance in the first quarter of fiscal 2024, though early adoption is permitted. The Company does not expect the guidance to have a material impact on its Consolidated Financial Statements.
Note 2: Segment Information
Hewlett Packard Enterprise's operations are organized into six segments for financial reporting purposes: Compute, High Performance Computing & Artificial Intelligence ("HPC & AI"), Storage, Intelligent Edge, Financial Services ("FS"), and Corporate Investments and Other. Hewlett Packard Enterprise's organizational structure is based on a number of factors that the Chief Operating Decision Maker ("CODM"), who is the Chief Executive Officer ("CEO"), uses to evaluate, view and run the Company's business operations, which include, but are not limited to, customer base and homogeneity of products and technology. The six segments are based on this organizational structure and information reviewed by Hewlett Packard Enterprise's management to evaluate segment results. A summary of the types of products and services within each segment is as follows:
Compute includes both general purpose servers for multi-workload computing and workload optimized servers to deliver the best performance and value for demanding applications. This portfolio of products includes the HPE Proliant rack and tower servers and HPE Synergy. Compute offerings also include operational and support services and HPE GreenLake for Compute that provides flexible Compute as-a-service ("aaS") IT infrastructure on a consumption basis through the HPE GreenLake edge-to-cloud platform.
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
HPC & AI offers integrated systems comprised of software and hardware designed to address High-Performance Computing ("HPC"), Artificial Intelligence (AI), Data Analytics, and Transaction Processing workloads for government and commercial customers globally. The solutions are segmented into several categories: HPC and Data Solutions. The HPC portfolio of products includes HPE Cray, HPE Apollo and Converged Edge Systems (formerly known as Edge Compute) hardware, software, and data management appliances that are often sold as supercomputing systems, including exascale supercomputers. The Data Solutions portfolio includes the mission critical compute portfolio and HPE NonStop. The mission critical compute portfolio includes the HPE Superdome Flex and HPE Integrity product lines for critical applications including large enterprise software applications and data analytics platforms. The HPE Nonstop portfolio includes high-availability, fault-tolerant, software and appliances that power applications such as credit-card transaction processing that require large scale and high availability. HPC & AI offerings also include operational and support services sold with its systems and as standalone services, and also offers most of its solutions as-a-service through the HPE GreenLake edge-to-cloud platform.
Storage provides primary storage product and service offerings, which include software-powered HCI with HPE Nimble Storage Disaggregated HCI and HPE SimpliVity; cloud native primary storage with HPE Primera and HPE Alletra, first storage as-a-service with HPE GreenLake for Block Storage, and disaster recovery and ransomware recovery with Zerto, backup as-a-service with HPE Backup and Recovery Service, and big data solutions running on HPE Apollo servers. Storage also provides solutions for secondary workloads and traditional tape, storage networking and disk products, such as HPE MSA and HPE XP. Storage also provides data-driven intelligence with HPE InfoSight and HPE CloudPhysics along with operational and support services, software subscription services, and data infrastructure portfolio and solutions delivered as-a-service through the HPE GreenLake edge-to-cloud platform.
Intelligent Edge offers wired and wireless local area network ("LAN"), campus and data center switching, software-defined wide-area-network, network security, and associated services to enable secure connectivity for businesses of any size. The HPE Aruba product portfolio includes hardware products such as Wi-Fi access points, switches and gateways. The HPE Aruba software and services portfolio includes cloud-based management, network management, network access control, analytics and assurance, location services software, and professional and support services, as well as as-a-service and consumption models through the HPE GreenLake edge-to-cloud platform for the Intelligent Edge portfolio of products. Intelligence Edge offerings are consolidated in the Edge Service Platform ("Aruba ESP") which takes a cloud-native approach that provides customers a unified framework to meet their connectivity, security and financial requirements across campus, branch, data center, and remote worker environments.
Financial Services provides flexible investment solutions, such as leasing, financing, IT consumption, utility programs, and asset management services, for customers that facilitate unique technology deployment models and the acquisition of complete IT solutions, including hardware, software, and services from Hewlett Packard Enterprise and others. FS also supports financial solutions for on-premise flexible consumption models, such as the HPE GreenLake edge-to-cloud platform.
Corporate Investments and Other includes the Advisory and Professional Services ("A & PS") business which primarily offers consultative-led services, HPE and partner technology expertise and advice, implementation services as well as complex solution engagement capabilities; the Communications and Media Solutions business ("CMS"), which primarily offers software and related services to the telecommunications industry; the HPE Software business which offers the HPE Ezmeral Container Platform and HPE Ezmeral Data Fabric; and Hewlett Packard Labs which is responsible for research and development.
Segment Policy
Hewlett Packard Enterprise derives the results of its business segments directly from its internal management reporting system. The accounting policies that Hewlett Packard Enterprise uses to derive segment results are substantially the same as those the consolidated company uses. The CODM measures the performance of each segment based on several metrics, including earnings from operations. The CODM 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 operating leases by FS to the Company's customers. Hewlett Packard Enterprise's consolidated net revenue is derived and reported after the elimination of intersegment revenues from such arrangements.
Financing cost in the Consolidated Statements of Earnings reflects interest expense on borrowing and funding-related activity associated with FS and its subsidiaries, and debt issued by Hewlett Packard Enterprise for which a portion of the proceeds benefited FS.
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Hewlett Packard Enterprise does not allocate to its segments certain operating expenses, which it manages at the corporate level. These unallocated operating costs include certain corporate costs and eliminations, stock-based compensation expense, amortization of initial direct costs, amortization of intangible assets, impairment of goodwill, transformation costs, disaster charges and acquisition, disposition and other related charges.
Segment Operating Results
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Compute | | HPC & AI | | Storage | | Intelligent Edge | | Financial Services | | Corporate Investments and Other | | Total |
| In millions |
Fiscal 2022 | | | | | | | | | | | | | |
Net revenue | $ | 12,519 | | | $ | 3,078 | | | $ | 4,654 | | | $ | 3,665 | | | $ | 3,326 | | | $ | 1,254 | | | $ | 28,496 | |
Intersegment net revenue | 223 | | | 114 | | | 57 | | | 9 | | | 13 | | | 1 | | | 417 | |
Total segment net revenue | $ | 12,742 | | | $ | 3,192 | | | $ | 4,711 | | | $ | 3,674 | | | $ | 3,339 | | | $ | 1,255 | | | $ | 28,913 | |
Segment earnings (loss) from operations | $ | 1,780 | | | $ | 11 | | | $ | 682 | | | $ | 549 | | | $ | 399 | | | $ | (92) | | | $ | 3,329 | |
Fiscal 2021 | | | | | | | | | | | | | |
Net revenue | $ | 12,033 | | | $ | 3,037 | | | $ | 4,678 | | | $ | 3,292 | | | $ | 3,388 | | | $ | 1,356 | | | $ | 27,784 | |
Intersegment net revenue | 251 | | | 147 | | | 82 | | | 10 | | | 13 | | | — | | | 503 | |
Total segment net revenue | $ | 12,284 | | | $ | 3,184 | | | $ | 4,760 | | | $ | 3,302 | | | $ | 3,401 | | | $ | 1,356 | | | $ | 28,287 | |
Segment earnings (loss) from operations | $ | 1,323 | | | $ | 231 | | | $ | 775 | | | $ | 509 | | | $ | 390 | | | $ | (95) | | | $ | 3,133 | |
Fiscal 2020 | | | | | | | | | | | | | |
Net revenue | $ | 11,894 | | | $ | 3,011 | | | $ | 4,589 | | | $ | 2,855 | | | $ | 3,340 | | | $ | 1,293 | | | $ | 26,982 | |
Intersegment net revenue | 380 | | | 91 | | | 93 | | | 17 | | | 12 | | | 5 | | | 598 | |
Total segment net revenue | $ | 12,274 | | | $ | 3,102 | | | $ | 4,682 | | | $ | 2,872 | | | $ | 3,352 | | | $ | 1,298 | | | $ | 27,580 | |
Segment earnings (loss) from operations | $ | 1,002 | | | $ | 282 | | | $ | 810 | | | $ | 346 | | | $ | 284 | | | $ | (206) | | | $ | 2,518 | |
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
The reconciliation of segment operating results to Consolidated Statement of Earnings results was as follows:
| | | | | | | | | | | | | | | | | |
| For the fiscal years ended October 31, |
| 2022 | | 2021 | | 2020 |
| In millions |
Net revenue: | | | | | |
Total segments | $ | 28,913 | | | $ | 28,287 | | | $ | 27,580 | |
Elimination of intersegment net revenue | (417) | | | (503) | | | (598) | |
Total consolidated net revenue | $ | 28,496 | | | $ | 27,784 | | | $ | 26,982 | |
Earnings before taxes: | | | | | |
Total segment earnings from operations | $ | 3,329 | | | $ | 3,133 | | | $ | 2,518 | |
Unallocated corporate costs and eliminations | (303) | | | (285) | | | (236) | |
Stock-based compensation expense | (391) | | | (372) | | | (274) | |
Amortization of initial direct costs | (4) | | | (8) | | | (10) | |
Amortization of intangible assets | (293) | | | (354) | | | (379) | |
Impairment of goodwill | (905) | | | — | | | (865) | |
| | | | | |
Transformation costs | (473) | | | (930) | | | (950) | |
Disaster charges(1) | (159) | | | (16) | | | (26) | |
Acquisition, disposition and other related charges | (19) | | | (36) | | | (107) | |
| | | | | |
Interest and other, net | (188) | | | (211) | | | (215) | |
Tax indemnification adjustments | (67) | | | 65 | | | (101) | |
Non-service net periodic benefit credit | 134 | | | 70 | | | 136 | |
Litigation judgment | — | | | 2,351 | | | — | |
Earnings from equity interests | 215 | | | 180 | | | 67 | |
Total earnings (loss) before benefit (provision) for taxes | $ | 876 | | | $ | 3,587 | | | $ | (442) | |
(1)During fiscal year ended 2022, the Company recorded total pre-tax charges of $161 million, primarily related to the Company's exit from its Russia and Belarus businesses. Additionally, in fiscal 2022, Disaster charges included a recovery of $2 million related to COVID-19. Refer to Note 1, "Overview and Summary of Significant Accounting Policies", for further information.
Segment Assets
Hewlett Packard Enterprise allocates assets to its business segments based on the segments primarily benefiting from the assets. Total assets by segment and the reconciliation of segment assets to total assets as per Consolidated Balance Sheets were as follows:
| | | | | | | | | | | |
| As of October 31, |
| 2022 | | 2021 |
| In millions |
Compute | $ | 16,872 | | | $ | 16,000 | |
HPC & AI | 5,986 | | | 6,667 | |
Storage | 7,506 | | | 7,325 | |
Intelligent Edge | 4,597 | | | 4,355 | |
Financial Services | 14,837 | | | 14,951 | |
Corporate Investments and Other | 1,108 | | | 1,210 | |
Corporate and unallocated assets | 6,217 | | | 7,191 | |
Total assets | $ | 57,123 | | | $ | 57,699 | |
Major Customers
No single customer represented 10% or more of the Company's total net revenue in any fiscal year presented.
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Geographic Information
Net revenue by country is based upon the sales location that predominately represents the customer location. For each of the fiscal years of 2022, 2021 and 2020, other than the U.S., no country represented more than 10% of the Company's net revenue.
Net revenue by country was as follows:
| | | | | | | | | | | | | | | | | |
| For the fiscal years ended October 31, |
| 2022 | | 2021 | | 2020 |
| In millions |
Americas | | | | | |
U.S. | $ | 9,425 | | | $ | 8,850 | | | $ | 9,162 | |
Americas excluding U.S. | 1,964 | | | 1,825 | | | 1,700 | |
Total Americas | 11,389 | | | 10,675 | | | 10,862 | |
Europe, Middle East and Africa | 10,292 | | | 10,329 | | | 9,745 | |
Asia Pacific and Japan | 6,815 | | | 6,780 | | | 6,375 | |
Total consolidated net revenue | $ | 28,496 | | | $ | 27,784 | | | $ | 26,982 | |
Property, plant and equipment by country in which the Company's operates was as follows:
| | | | | | | | | | | |
| As of October 31, |
| 2022 | | 2021 |
| In millions |
U.S. | $ | 3,035 | | | $ | 2,811 | |
Other countries | 2,749 | | | 2,802 | |
Total property, plant and equipment | $ | 5,784 | | | $ | 5,613 | |
Note 3: Transformation Programs
Transformation programs are comprised of the cost optimization and prioritization plan and the HPE Next initiative. During the third quarter of fiscal 2020, the Company launched the cost optimization and prioritization plan which focuses on realigning the workforce to areas of growth, a new hybrid workforce model called Edge-to-Office, real estate strategies and simplifying and evolving the Company's product portfolio strategy. The implementation period of the cost optimization and prioritization plan is primarily through fiscal 2023. During the remaining implementation period, Company expects to incur transformation costs predominantly related to labor restructuring, non-labor restructuring, IT investments, design and execution charges and real estate initiatives.
During the third quarter of fiscal 2017, the Company launched an initiative called HPE Next to put in place a purpose-built company designed to compete and win in the markets where it participates. Through this program, the Company is simplifying the operating model, and streamlining its offerings, business processes and business systems to improve its execution of strategy. The implementation period of the HPE Next initiative is primarily through fiscal 2023. During the remaining implementation period, the Company expects to incur predominantly IT infrastructure costs for streamlining, upgrading and simplifying back-end operations, and real estate initiatives. These costs are expected to be offset by gains from real estate sales and sublease income from inactive office space.
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Cost Optimization and Prioritization Plan
The components of the expense relating to the cost optimization and prioritization plan were as follows:
| | | | | | | | | | | | | | | | | |
| For the fiscal years ended October 31, |
| 2022 | | 2021 | | 2020 |
| In millions |
Program management | $ | 27 | | | $ | 83 | | | $ | 55 | |
IT costs | 26 | | | 14 | | | — | |
Restructuring charges | 201 | | | 598 | | | 329 | |
| | | | | |
| | | | | |
| | | | | |
Total | $ | 254 | | | $ | 695 | | | $ | 384 | |
During fiscal 2022, 2021 and 2020, $253 million, $690 million and $384 million, respectively, were recorded within Transformation costs, and $1 million and $5 million in fiscal 2022 and 2021, respectively, were recorded within Non-service net periodic benefit credit in the Consolidated Statements of Earnings.
HPE Next
The components of transformation costs relating to HPE Next were as follows:
| | | | | | | | | | | | | | | | | |
| For the fiscal years ended October 31, |
| 2022 | | 2021 | | 2020 |
| In millions |
Program management | $ | 7 | | | $ | 14 | | | $ | 35 | |
IT costs | 184 | | | 174 | | | 100 | |
Restructuring charges | 13 | | | 22 | | | 440 | |
Gains on real estate sales | (8) | | | (3) | | | (45) | |
Impairment on real estate assets | 11 | | | 4 | | | 10 | |
Other | 13 | | | 29 | | | 29 | |
Total | $ | 220 | | | $ | 240 | | | $ | 569 | |
During fiscal 2022, 2021 and 2020, $220 million, $240 million and $566 million, respectively, were recorded within Transformation costs, and $3 million was recorded within Non-service net periodic benefit credit in the Consolidated Statements of Earnings for fiscal 2020.
Restructuring Plan
On May 19, 2020, the Company's Board of Directors approved a restructuring plan in connection with the cost optimization and prioritization plan. As of October 31, 2022, the Company estimates that it will incur aggregate charges of approximately $1.3 billion primarily through fiscal 2023 in connection with the cost optimization and prioritization plan which relates to labor restructuring and non-labor restructuring, mostly relating to real estate site exits. The changes to the workforce will vary by country, based on business needs, local legal requirements and consultations with employee works councils and other employee representatives, as appropriate.
On October 16, 2017, the Company's Board of Directors approved a restructuring plan in connection with the HPE Next (the "HPE Next Plan"), and on September 20, 2018, the Company's Board of Directors approved a revision to that restructuring plan. Headcount exits under the HPE Next Plan were substantially complete as of October 31, 2020. Other restructuring actions primarily related to infrastructure were substantially complete as of October 31, 2022.
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Restructuring activities related to the Company's employees and infrastructure under the cost optimization and prioritization plan and HPE Next Plan, are presented in the table below:
| | | | | | | | | | | | | | | | | | | | | | | |
| Cost Optimization and Prioritization Plan | | HPE Next Plan |
| Employee Severance | | Infrastructure and other | | Employee Severance | | Infrastructure and other |
| In millions | | In millions |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Liability as of October 31, 2021 | $ | 228 | | | $ | 189 | | | $ | 44 | | | $ | 33 | |
Charges | 138 | | | 63 | | | — | | | 13 | |
Cash payments | (161) | | | (119) | | | (30) | | | (21) | |
Non-cash items | (20) | | | (11) | | | (3) | | | — | |
Liability as of October 31, 2022 | $ | 185 | | | $ | 122 | | | $ | 11 | | | $ | 25 | |
Total costs incurred to date as of October 31, 2022 | $ | 645 | | | $ | 483 | | | $ | 1,261 | | | $ | 260 | |
Total expected costs to be incurred as of October 31, 2022 | $ | 700 | | | $ | 600 | | | $ | 1,261 | | | $ | 260 | |
The current restructuring liability related to the transformation programs reported in the Consolidated Balance Sheets as of October 31, 2022 and 2021, was $191 million and $287 million, respectively, in accrued restructuring, and $28 million and $27 million, respectively, in Other accrued liabilities. The non-current restructuring liability related to the transformation programs, reported in Other non-current liabilities in the Consolidated Balance Sheets as of October 31, 2022 and 2021 was $124 million and $180 million, respectively.
Note 4: Retirement and Post-Retirement Benefit Plans
Defined Benefit Plans
The Company sponsors defined benefit pension plans worldwide, the most significant of which are the United Kingdom ("UK") and Germany plans. The pension plan in the UK is closed to new entrants, however, members continue to earn benefit accruals. This plan provides benefits based on final pay and years of service and generally requires contributions from members. The German pension program that is open to new hires consists of cash balance plans that provide employer credits as a percentage of pay, certain employee pay deferrals and employer matching contributions. There also are previously closed German pension programs that include cash balance and final average pay plans. These previously closed pension programs comprise the majority of the pension obligations in Germany.
Post-Retirement Benefit Plans
The Company sponsors retiree health and welfare benefit plans, the most significant of which is in the U.S. Generally, employees hired before August 2008 are eligible for employer credits under the Hewlett Packard Enterprise Retirement Medical Savings Account Plan ("RMSA") upon attaining age 45. Employer credits to the RMSA available after September 2008 are provided in the form of matching credits on employee contributions made to a voluntary employee beneficiary association. Upon retirement, employees may use these employer credits for the reimbursement of certain eligible medical expenses.
Defined Contribution Plans
The Company offers various defined contribution plans for U.S. and non-U.S. employees. The Company's defined contribution expense was approximately $196 million in fiscal 2022, $170 million in fiscal 2021 and $160 million in fiscal 2020. U.S. employees are automatically enrolled in the Hewlett Packard Enterprise Company 401(k) Plan ("HPE 401(k) Plan"), when they meet eligibility requirements, unless they decline participation. The HPE 401(k) Plan's quarterly employer matching contributions are 100% of an employee's contributions, up to a maximum of 4% of eligible compensation. Due to cost containment measures put in place in response to COVID-19, the Company suspended the employer match for U.S. employees from July 1, 2020 through the end of the calendar year 2020.
Pension Benefit Expense
The Company's net pension and post-retirement benefit costs that were directly attributable to the eligible employees, retirees and other former employees of Hewlett Packard Enterprise and recognized in the Consolidated Statements of Earnings for fiscal 2022, 2021 and 2020 are presented in the table below.
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| For the fiscal years ended October 31, |
| 2022 | | 2021 | | 2020 | | 2022 | | 2021 | | 2020 |
| Defined Benefit Plans | | Post-Retirement Benefit Plans |
| In millions |
Service cost | $ | 78 | | | $ | 97 | | | $ | 94 | | | $ | 1 | | | $ | 1 | | | $ | 1 | |
Interest cost(1) | 154 | | | 118 | | | 143 | | | 4 | | | 4 | | | 5 | |
Expected return on plan assets(1) | (450) | | | (479) | | | (544) | | | (2) | | | (1) | | | (1) | |
Amortization and deferrals(1): | | | | | | | | | | | |
Actuarial loss (gain) | 167 | | | 296 | | | 264 | | | (2) | | | (2) | | | (1) | |
Prior service benefit | (10) | | | (13) | | | (14) | | | — | | | — | | | — | |
Net periodic benefit cost | (61) | | | 19 | | | (57) | | | 1 | | | 2 | | | 4 | |
| | | | | | | | | | | |
Settlement Loss and Special termination benefits(1) | 5 | | | 7 | | | 12 | | | — | | | — | | | — | |
| | | | | | | | | | | |
Total net benefit (credit) cost | $ | (56) | | | $ | 26 | | | $ | (45) | | | $ | 1 | | | $ | 2 | | | $ | 4 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
(1)These non-service components of net periodic benefit cost were included in Non-service net periodic benefit credit in the Consolidated Statements of Earnings.
The weighted-average assumptions used to calculate the net benefit cost (credit) in the table above for fiscal 2022, 2021 and 2020 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| For the fiscal years ended October 31, |
| 2022 | | 2021 | | 2020 | | 2022 | | 2021 | | 2020 |
| Defined Benefit Plans | | Post-Retirement Benefit Plans |
Discount rate used to determine benefit obligation | 1.3 | % | | 1.0 | % | | 1.2 | % | | 3.0 | % | | 2.8 | % | | 3.4 | % |
Discount rate used to determine service cost | 1.7 | % | | 1.3 | % | | 1.6 | % | | 2.7 | % | | 2.6 | % | | 3.0 | % |
Discount rate used to determine interest cost | 1.1 | % | | 0.8 | % | | 1.0 | % | | 2.6 | % | | 2.3 | % | | 3.2 | % |
Expected increase in compensation levels | 2.6 | % | | 2.5 | % | | 2.5 | % | | — | | | — | | | — | |
Expected long-term return on plan assets | 3.2 | % | | 3.3 | % | | 4.1 | % | | 3.3 | % | | 2.3 | % | | 2.3 | % |
Interest crediting rate(1) | 2.5 | % | | 2.5 | % | | 2.5 | % | | 2.7 | % | | 2.7 | % | | 3.7 | % |
(1)The average assumed interest credited for HPE's cash balance plans and postretirement plans, as applicable.
To estimate the service and interest cost components of net periodic benefit cost for defined benefit plans that use the yield curve approach, which represent substantially all of the Company's defined benefit plans, the Company has elected to use a full yield curve approach in the estimation of these components of benefit cost by applying the specific spot rates along the yield curve used in the determination of the benefit obligation to the relevant projected cash flows.
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Funded Status
The funded status of the plans was as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| As of October 31, |
| 2022 | | 2021 | | 2022 | | 2021 |
| Defined Benefit Plans | | Post-Retirement Benefit Plans |
| In millions |
Change in fair value of plan assets: | | | | | | | |
Fair value—beginning of year | $ | 15,354 | | | $ | 14,127 | | | $ | 60 | | | $ | 57 | |
Transfers | (6) | | | — | | | — | | | — | |
Addition/deletion of plans(1) | — | | | 60 | | | — | | | — | |
Actual return on plan assets | (3,176) | | | 1,256 | | | (3) | | | 2 | |
Employer contributions | 160 | | | 167 | | | 6 | | | 5 | |
Participant contributions | 28 | | | 23 | | | 6 | | | 5 | |
Benefits paid | (429) | | | (486) | | | (9) | | | (9) | |
Settlement | (54) | | | (32) | | | — | | | — | |
Currency impact | (1,962) | | | 239 | | | — | | | — | |
Fair value—end of year | $ | 9,915 | | | $ | 15,354 | | | $ | 60 | | | $ | 60 | |
Change in benefit obligation: | | | | | | | |
Projected benefit obligation—beginning of year | $ | 14,872 | | | $ | 14,845 | | | $ | 161 | | | $ | 167 | |
| | | | | | | |
Addition/deletion of plans(1) | — | | | 68 | | | — | | | — | |
Service cost | 78 | | | 97 | | | 1 | | | 1 | |
Interest cost | 154 | | | 118 | | | 4 | | | 4 | |
Participant contributions | 28 | | | 23 | | | 6 | | | 5 | |
Actuarial (gain) loss | (3,253) | | | 13 | | | (24) | | | (10) | |
Benefits paid | (429) | | | (486) | | | (9) | | | (9) | |
Plan amendments | (1) | | | — | | | — | | | — | |
Curtailment | — | | | (5) | | | — | | | — | |
Settlement | (54) | | | (32) | | | — | | | — | |
Special termination benefits | 1 | | | 3 | | | — | | | — | |
Currency impact | (1,879) | | | 228 | | | (1) | | | 3 | |
Projected benefit obligation—end of year | $ | 9,517 | | | $ | 14,872 | | | $ | 138 | | | $ | 161 | |
Funded status at end of year | $ | 398 | | | $ | 482 | | | $ | (78) | | | $ | (101) | |
Accumulated benefit obligation | $ | 9,376 | | | $ | 14,668 | | | $ | — | | | $ | — | |
(1)Includes the addition/deletion of plans resulting from acquisitions.
For the year ended October 31, 2022, the benefit obligation decreased sharply from $14.9 billion to $9.5 billion primarily due to the effects of materially increasing discount rates and the strengthening of the US dollar offset by increases in long-term inflation assumptions for various plans. Pension assets decreased from $15.4 billion to $9.9 billion as interest rates increased and equities underperformed.
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
The weighted-average assumptions used to calculate the projected benefit obligations were as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| As of October 31, |
| 2022 | | 2021 | | 2022 | | 2021 |
| Defined Benefit Plans | | Post-Retirement Benefit Plans |
Discount rate | 3.9 | % | | 1.3 | % | | 6.0 | % | | 3.0 | % |
Expected increase in compensation levels | 3.0 | % | | 2.6 | % | | — | | | — | |
Interest crediting rate | 2.4 | % | | 2.5 | % | | 4.3 | % | | 2.7 | % |
The net amounts recognized for defined benefit and post-retirement benefit plans in the Company's Consolidated Balance Sheets were as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| As of October 31, |
| 2022 | | 2021 | | 2022 | | 2021 |
| Defined Benefit Plans | | Post-Retirement Benefit Plans |
| In millions |
Non-current assets | $ | 1,287 | | | $ | 1,898 | | | $ | — | | | $ | — | |
Current liabilities | (43) | | | (48) | | | (7) | | | (7) | |
Non-current liabilities | (846) | | | (1,368) | | | (71) | | | (94) | |
Funded status at end of year | $ | 398 | | | $ | 482 | | | $ | (78) | | | $ | (101) | |
The following table summarizes the pre-tax net actuarial loss and prior service benefit recognized in accumulated other comprehensive loss for the defined benefit plans:
| | | | | | | | | | | |
| As of October 31, 2022 |
| Defined Benefit Plans | | Post-Retirement Benefit Plans |
| In millions |
Net actuarial loss (gain) | $ | 2,736 | | | $ | (19) | |
Prior service benefit | (7) | | | — | |
Total recognized in accumulated other comprehensive loss | $ | 2,729 | | | $ | (19) | |
Defined benefit plans with projected benefit obligations exceeding the fair value of plan assets were as follows:
| | | | | | | | | | | |
| As of October 31, |
| 2022 | | 2021 |
| In millions |
Aggregate fair value of plan assets | $ | 1,907 | | | $ | 1,191 | |
Aggregate projected benefit obligation | $ | 2,795 | | | $ | 2,606 | |
Defined benefit plans with accumulated benefit obligations exceeding the fair value of plan assets were as follows:
| | | | | | | | | | | |
| As of October 31, |
| 2022 | | 2021 |
| In millions |
Aggregate fair value of plan assets | $ | 412 | | | $ | 1,164 | |
Aggregate accumulated benefit obligation | $ | 1,206 | | | $ | 2,487 | |
Fair Value of Plan Assets
The Company pays the U.S. defined benefit plan obligations when they come due since these plans are unfunded. The table below sets forth the fair value of non-U.S. defined benefit plan assets by asset category within the fair value hierarchy as of October 31, 2022 and 2021.
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| As of October 31, 2022 | | As of October 31, 2021 |
| Level 1 | | Level 2 | | Level 3 | | Total | | Level 1 | | Level 2 | | Level 3 | | Total |
| In millions |
Asset Category: | | | | | | | | | | | | | | | |
Equity securities | | | | | | | | | | | | | | | |
U.S. | $ | 510 | | | $ | 9 | | | $ | — | | | $ | 519 | | | $ | 884 | | | $ | 128 | | | $ | — | | | $ | 1,012 | |
Non-U.S. | 214 | | | 96 | | | — | | | 310 | | | 345 | | | 196 | | | — | | | 541 | |
Debt securities | | | | | | | | | | | | | | | |
Corporate | — | | | 961 | | | — | | | 961 | | | — | | | 1,859 | | | — | | | 1,859 | |
Government(1) | — | | | 4,853 | | | — | | | 4,853 | | | — | | | 6,998 | | | — | | | 6,998 | |
Government at NAV(2) | | | | | | | | | | | | | | | 822 | |
Other(3) | — | | | 131 | | | 932 | | | 1,063 | | | — | | | 673 | | | 748 | | | 1,421 | |
Alternative investments | | | | | | | | | | | | | | | |
Private Equity | — | | | 4 | | | 46 | | | 50 | | | — | | | 2 | | | 46 | | | 48 | |
Hybrids(4) | — | | | 785 | | | 182 | | | 967 | | | 19 | | | 1,613 | | | 116 | | | 1,748 | |
Hybrids at NAV(5) | | | | | | | 377 | | | | | | | | | 561 | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
Common Contractual Funds at NAV(6) | | | | | | | | | | | | | | | |
Equities at NAV | | | | | | | 922 | | | | | | | | | 1,513 | |
Fixed Income at NAV | | | | | | | 449 | | | | | | | | | 734 | |
Emerging Markets at NAV | | | | | | | 263 | | | | | | | | | 464 | |
Alternative investments at NAV | | | | | | | 16 | | | | | | | | | 214 | |
Real Estate Funds(7) | 22 | | | 311 | | | 164 | | | 497 | | | 29 | | | 246 | | | 48 | | | 323 | |
Insurance Group Annuity Contracts | — | | | 84 | | | 21 | | | 105 | | | — | | | 98 | | | 33 | | | 131 | |
Cash and Cash Equivalents | 173 | | | 479 | | | — | | | 652 | | | 254 | | | 239 | | | — | | | 493 | |
Other(8) | 27 | | | (13) | | | 1 | | | 15 | | | 44 | | | 47 | | | 1 | | | 92 | |
Obligation to return cash received from repurchase agreements(1) | — | | | (2,104) | | | — | | | (2,104) | | | — | | | (3,620) | | | — | | | (3,620) | |
Total | $ | 946 | | | $ | 5,596 | | | $ | 1,346 | | | $ | 9,915 | | | $ | 1,575 | | | $ | 8,479 | | | $ | 992 | | | $ | 15,354 | |
(1)Repurchase agreements, primarily in the UK, represent the plans' short-term borrowing to hedge against interest rate and inflation risks. Investments in approximately $3 billion and $5 billion of government bonds collateralize this short-term borrowing at October 31, 2022 and 2021, respectively. The plans have an obligation to return the cash after the term of the agreements. Due to the short-term nature of the agreements, the outstanding balance of the obligation approximates fair value.
(2)Includes a fund that invests in various government bonds issued by worldwide governments, interest rate swaps, and cash, to match or slightly outperform the benchmark of the future liabilities of the fund. While the fund is not publicly traded, the custodian strikes a net asset value daily. There are no redemption restrictions or future commitments on these investments.
(3)Includes funds that invest primarily in asset-backed securities, mortgage-backed securities, collateralized loan obligations, and/or private debt investments. Primary valuation techniques for level 3 investments include discounted cash flows and broker quotes and/or 3rd party pricing services. Significant unobservable inputs include yields which are determined by considering the market yield of comparable public debt instruments adjusted for estimated losses to reflect where the expected recovery rate would be less than 100%, and discount rates. The yields ranged from 4% to 18%, with the weighted average around 7%. In the prior year, the yields ranged from 4% to 17%, with the weighted average around 7%. The discount rates ranged from 1% to 5%, with the weighted average around 3%. Generally, an increase in yield and discounted rates may result in a decrease in the fair value of certain investments.
(4)Includes funds, primarily in the UK, that invest in both private and public equities, as well as emerging markets across all sectors. The funds also hold fixed income and derivative instruments to hedge interest rate and inflation risk. In addition, the funds include units in transferable securities, collective investment schemes, money market funds, asset-backed income, cash, and deposits. Primary valuation techniques for level 3 investments include discounted cash flows and book value or net asset value. Significant unobservable inputs include discount rates. The discount rates ranged from 3% to 30%, with the weighted average around 12%. In the prior year, the discount rates ranged from3% to 25%, with the weighted average around 7%. Generally, an increase in discount rates may result in a decrease in the fair value of certain investments.
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
(5)Includes a pooled fund in the UK, that seeks a rate of return with direct or indirect linkage to UK inflation by investing in vehicles including bonds, long lease property, income strips, asset-backed securities, and index linked assets. Units are available for subscription on the first business day of each calendar month at net asset value. There are no redemption restrictions or future commitments on these investments.
(6)HPE Invest Common Contractual Funds (CCFs) are investment arrangements in which institutional investors pool their assets. Units may be acquired in four different sub-funds focused on equities, fixed income, alternative investments, and emerging markets. Each sub-fund is invested in accordance with the fund's investment objective and units are issued in relation to each sub-fund. While the sub-funds are not publicly traded, the custodian strikes a net asset value either once or twice a month, depending on the sub-fund. There are no redemption restrictions or future commitments on these investments.
(7) Includes funds, primarily in Germany, that invest in a diversified portfolio of European real estate assets exposed to logistics real estate properties, food retailing properties, residential and commercial properties, and properties under development. Primary valuation techniques for level 3 investments include the income capitalization approach and cost approach. Significant unobservable inputs include rental yield. The rental yield rates ranged from 3% to 6%, with the weighted average around 4%. Generally, an increase in rental yield rates may result in a decrease in the fair value of certain investments.
(8)Includes life insurance investment policies, unsettled transactions, and derivative instruments. As of October 31, 2022, the derivative instruments include synthetic equity swaps held by the UK plans with equity exposure of $300 million.
As of October 31, 2022 post-retirement benefit plan assets of $60 million were invested in publicly traded registered investment entities of which $48 million are classified within Level 1 and $12 million within Level 2 of the fair value hierarchy. As of October 31, 2021 post-retirement benefit plan assets of $60 million were invested in publicly traded registered investment entities of which $49 million are classified within Level 1 and $11 million within Level 2 of the fair value hierarchy.
Changes in fair value measurements of Level 3 investments for the non-U.S. defined benefit plans were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| For the fiscal year ended October 31, 2022 |
| | | Alternative Investments | | | | | | | | |
| Debt-Other | | Private Equity | | Hybrids | | Real Estate Funds | | Insurance Group Annuities | | Other | | Total |
| | | In millions |
Balance at beginning of year | $ | 748 | | | $ | 46 | | | $ | 116 | | | $ | 48 | | | $ | 33 | | | $ | 1 | | | $ | 992 | |
Actual return on plan assets: | | | | | | | | | | | | | |
Relating to assets held at the reporting date | (97) | | | — | | | 21 | | | (3) | | | (11) | | | — | | | (90) | |
Relating to assets sold during the period | — | | | 7 | | | — | | | — | | | — | | | — | | | 7 | |
Purchases, sales, and settlements | 281 | | | (7) | | | 45 | | | 119 | | | (1) | | | — | | | 437 | |
| | | | | | | | | | | | | |
Balance at end of year | $ | 932 | | | $ | 46 | | | $ | 182 | | | $ | 164 | | | $ | 21 | | | $ | 1 | | | $ | 1,346 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| For the fiscal year ended October 31, 2021 |
| | | Alternative Investments | | | | | | | | |
| Debt-Other | | Private Equity | | Hybrids | | Real Estate Funds | | Insurance Group Annuities | | Other | | Total |
| In millions |
Balance at beginning of year | $ | 555 | | | $ | 35 | | | $ | 90 | | | $ | 39 | | | $ | 36 | | | $ | 1 | | | $ | 756 | |
Actual return on plan assets: | | | | | | | | | | | | | |
Relating to assets held at the reporting date | 43 | | | 13 | | | 10 | | | 5 | | | (3) | | | — | | | 68 | |
Relating to assets sold during the period | — | | | 10 | | | — | | | — | | | — | | | — | | | 10 | |
Purchases, sales, and settlements | 150 | | | (12) | | | 16 | | | 4 | | | — | | | — | | | 158 | |
| | | | | | | | | | | | | |
Balance at end of year | $ | 748 | | | $ | 46 | | | $ | 116 | | | $ | 48 | | | $ | 33 | | | $ | 1 | | | $ | 992 | |
The following is a description of the valuation methodologies used to measure plan assets at fair value.
Investments in publicly traded equity securities are valued using the closing price on the measurement date as reported on the stock exchange on which the individual securities are traded. For corporate, government backed debt securities, and some
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
other investments, fair value is based on observable inputs of comparable market transactions. The valuation of certain real estate funds, insurance group annuity contracts and alternative investments, such as limited partnerships and joint ventures, may require significant management judgment and involves a level of uncertainty. The valuation is generally based on fair value as reported by the asset manager and adjusted for cash flows, if necessary. In making such an assessment, a variety of factors are reviewed by management, including, but are not limited to, the timeliness of fair value as reported by the asset manager and changes in general economic and market conditions subsequent to the last fair value reported by the asset manager. The use of different techniques or assumptions to estimate fair value could result in a different fair value measurement at the reporting date. Cash and cash equivalents includes money market funds, which are valued based on cost, which approximates fair value. Other than those assets that have quoted prices from an active market, investments are generally classified in Level 2 or Level 3 of the fair value hierarchy based on the lowest level input that is significant to the fair value measure in its entirety. Investments measured using net asset value as a practical expedient are not categorized within the fair value hierarchy.
Plan Asset Allocations
The weighted-average target and actual asset allocations across the benefit plans at the respective measurement dates for the non-U.S. defined benefit plans were as follows:
| | | | | | | | | | | | | | | | | |
| Defined Benefit Plans |
| | | Plan Assets |
| 2022 Target Allocation | | 2022 | | 2021 |
Public equity securities | | | 20.3 | % | | 23.0 | % |
Private/hybrid equity securities | | | 14.2 | % | | 16.7 | % |
Real estate and other(1) | | | 5.2 | % | | 2.7 | % |
Equity-related investments(1) | 46.0 | % | | 39.7 | % | | 42.4 | % |
Debt securities | 52.0 | % | | 53.7 | % | | 54.4 | % |
Cash and cash equivalents | 2.0 | % | | 6.6 | % | | 3.2 | % |
Total | 100.0 | % | | 100.0 | % | | 100.0 | % |
(1) Included in Real estate and other investments are synthetic equity swaps with equity exposure of $300 million, which is held in the UK plans as of October 31, 2022.
For the Company's post-retirement benefit plans, approximately 81% of the plan assets are invested in cash and cash equivalents and approximately 19% in multi-asset credit investments which consists primarily of investment grade credit, emerging market debt and high yield bonds.
Investment Policy
The Company's investment strategy is to seek a competitive rate of return relative to an appropriate level of risk depending on the funded status of each plan and the timing of expected benefit payments. The majority of the plans' investment managers employ active investment management strategies with the goal of outperforming the broad markets in which they invest. Risk management practices include diversification across asset classes and investment styles and periodic rebalancing toward asset allocation targets. A number of the plans' investment managers are authorized to utilize derivatives for investment or liability exposures, and the Company may utilize derivatives to effect asset allocation changes or to hedge certain investment or liability exposures.
Asset allocation decisions are typically made by an independent board of trustees for the specific plan. Investment objectives are designed to generate returns that will enable the plan to meet its future obligations. In some countries, local regulations may restrict asset allocations, typically leading to a higher percentage of investment in fixed income securities than would otherwise be deployed. The Company reviews the investment strategy and provides a recommended list of investment managers for each country plan, with final decisions on asset allocation and investment managers made by the board of trustees or investment committees for the specific plan.
Basis for Expected Long-Term Rate of Return on Plan Assets
The expected long-term rate of return on plan assets reflects the expected returns for each major asset class in which the plan invests and the weight of each asset class in the target mix. Expected asset returns reflect the current yield on government bonds, risk premiums for each asset class and expected real returns, which considers each country's specific inflation outlook.
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Because the Company's investment policy is to employ primarily active investment managers who seek to outperform the broader market, the expected returns are adjusted to reflect the expected additional returns, net of fees.
Employer Contributions and Funding Policy
During fiscal 2022, the Company contributed approximately $160 million to its non-U.S. pension plans and paid $6 million to cover benefit claims under the Company's post-retirement benefit plans.
During fiscal 2023, the Company expects to contribute approximately $170 million to its non-U.S. pension plans and an additional $2 million to cover benefit payments to U.S. non-qualified plan participants. In addition, the Company expects to pay approximately $7 million to cover benefit claims for its post-retirement benefit plans. The Company's policy is to fund its pension plans so that it makes at least the minimum contribution required by various authorities including local government and taxing authorities.
Estimated Future Benefits Payments
As of October 31, 2022, estimated future benefits payments for the Company's retirement plans were as follows:
| | | | | | | | | | | |
Fiscal year | Defined Benefit Plans | | Post-Retirement Benefit Plans |
| In millions |
2023 | $ | 515 | | | $ | 11 | |
2024 | 470 | | | 12 | |
2025 | 497 | | | 11 | |
2026 | 512 | | | 11 | |
2027 | 527 | | | 11 | |
Next five fiscal years to October 31, 2032 | 2,820 | | | 56 | |
Note 5: Stock-Based Compensation
On April 14, 2021 (the "Approval Date"), shareholders of the Company approved the Hewlett Packard Enterprise Company 2021 Stock Incentive Plan (the "2021 Plan") that replaced the Company’s 2015 Stock Incentive Plan (the “2015 Plan”). The 2021 Plan provides for the grant of various types of awards including restricted stock awards, stock options and performance-based awards. These awards generally vest over 3 years from the grant date. The maximum number of shares as of the Approval Date that may be delivered to the participants under the 2021 Plan shall not exceed 7 million shares, plus 35.8 million shares that were available for grant under the 2015 Plan and any awards granted under the 2015 Plan prior to the Approval Date that were cash-settled, forfeited, terminated, or lapsed after the Approval Date. On April 5, 2022, shareholders of the Company approved an amendment to the 2021 Plan thereby increasing the overall number of shares available for issuance by 15 million shares. As of October 31, 2022, the Company had remaining authorization of 36.9 million shares under the 2021 Plan.
Stock-Based Compensation Expense
Stock-based compensation expense and the resulting tax benefits were as follows:
| | | | | | | | | | | | | | | | | |
| For the fiscal years ended October 31, |
| 2022 | | 2021 | | 2020 |
| In millions |
Stock-based compensation expense | $ | 391 | | | $ | 382 | | | $ | 278 | |
Income tax benefit | (75) | | | (70) | | | (51) | |
Stock-based compensation expense, net of tax | $ | 316 | | | $ | 312 | | | $ | 227 | |
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Stock-based compensation expense as presented in the table above is recorded within the following cost and expense lines in the Consolidated Statements of Earnings.
| | | | | | | | | | | | | | | | | |
| For the fiscal years ended October 31, |
| 2022 | | 2021 | | 2020 |
| In millions |
Cost of sales | $ | 46 | | | $ | 40 | | | $ | 37 | |
Research and development | 143 | | | 124 | | | 81 | |
Selling, general and administrative | 202 | | | 208 | | | 156 | |
| | | | | |
Acquisition, disposition and other related charges | — | | | 10 | | | 4 | |
Stock-based compensation expense | $ | 391 | | | $ | 382 | | | $ | 278 | |
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, as the criteria of a non-compensatory plan were met.
Restricted Stock Units
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 units is the closing price of the Company's common stock on the grant date of the award. The Company expenses the fair value of restricted stock units ratably over the period during which the restrictions lapse.
The following table summarizes restricted stock unit activity for the year ended October 31, 2022: | | | | | | | | | | | |
| Shares | | Weighted-Average Grant Date Fair Value Per Share |
| In thousands | | |
Outstanding at beginning of year | 45,749 | | | $ | 13 | |
Granted and replacement awards for acquisition | 31,093 | | | $ | 15 | |
| | | |
Vested | (20,755) | | | $ | 14 | |
Forfeited/canceled | (4,185) | | | $ | 14 | |
Outstanding at end of year | 51,902 | | | $ | 14 | |
The total grant date fair value of restricted stock awards vested for Company employees in fiscal 2022, 2021 and 2020 was $262 million, $271 million and $254 million, respectively. As of October 31, 2022, there was $297 million of unrecognized pre-tax stock-based compensation expense related to unvested restricted stock units, which the Company expects to recognize over the remaining weighted-average vesting period of 1.3 years.
Performance Restricted Units
The Company issues performance stock units ("PSU") that vest on the satisfaction of service and performance conditions. The fair value of the PSUs is the closing price of the Company's common stock on the grant date of the award. The Company also issues performance-adjusted restricted stock units ("PARSU") that vest only on the satisfaction of service, performance and market conditions. The Company estimates the fair value of PARSUs subject to performance-contingent vesting conditions using the Monte Carlo simulation model. The expenses associated with these performance restricted units were not material for any of the periods presented.
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Stock Options
Stock options granted under the Plan are generally non-qualified stock options, but the Plan permits some options granted to qualify as incentive stock options under the U.S. Internal Revenue Code. 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 has also issued performance-contingent stock options that vest only on the satisfaction of both service and market conditions. The Company did not issue stock options in fiscal 2022 and 2021. The expenses associated with these stock options were not material for any of the periods presented.
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 Carlo simulation model and a lattice model, as these awards contain market conditions.
Note 6: Taxes on Earnings
Provision for Taxes
The domestic and foreign components of Net earnings (loss) from operations before taxes were as follows:
| | | | | | | | | | | | | | | | | |
| For the fiscal years ended October 31, |
| 2022 | | 2021 | | 2020 |
| In millions |
U.S. | $ | (1,138) | | | $ | (1,128) | | | $ | (2,008) | |
Non-U.S. | 2,014 | | | 4,715 | | | 1,566 | |
| $ | 876 | | | $ | 3,587 | | | $ | (442) | |
Foreign earnings in fiscal 2021 were higher as compared to fiscal 2022 and 2020, primarily as a result of the income from the Itanium litigation judgment.
The (Provision) benefit for taxes on Net earnings (loss) from operations were as follows:
| | | | | | | | | | | | | | | | | |
| For the fiscal years ended October 31, |
| 2022 | | 2021 | | 2020 |
| In millions |
U.S. federal taxes: | | | | | |
Current | $ | (12) | | | $ | (26) | | | $ | 55 | |
Deferred | 98 | | | 79 | | | 149 | |
Non-U.S. taxes: | | | | | |
Current | (288) | | | (305) | | | (284) | |
Deferred | 143 | | | 116 | | | 133 | |
State taxes: | | | | | |
Current | 43 | | | 4 | | | 55 | |
Deferred | 8 | | | (28) | | | 12 | |
| $ | (8) | | | $ | (160) | | | $ | 120 | |
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
The differences between the U.S. federal statutory income tax rate and the Company's effective tax rate were as follows:
| | | | | | | | | | | | | | | | | |
| For the fiscal years ended October 31, |
| 2022 | | 2021 | | 2020(1) |
U.S. federal statutory income tax rate | 21.0 | % | | 21.0 | % | | 21.0 | % |
State income taxes, net of federal tax benefit | 2.8 | % | | 0.7 | % | | 0.9 | % |
Lower rates in other jurisdictions, net | (0.9) | % | | (7.6) | % | | (2.3) | % |
Valuation allowance | (31.5) | % | | (10.0) | % | | 20.8 | % |
U.S. permanent differences | 6.0 | % | | 3.6 | % | | (3.4) | % |
U.S. R&D credit | (5.1) | % | | (1.3) | % | | 8.4 | % |
Uncertain tax positions | (15.6) | % | | (0.9) | % | | 7.6 | % |
Goodwill impairment | 21.5 | % | | — | % | | (41.2) | % |
Tax law changes | — | % | | (1.1) | % | | 15.5 | % |
Other, net | 2.7 | % | | 0.1 | % | | (0.2) | % |
| 0.9 | % | | 4.5 | % | | 27.1 | % |
(1)Positive percentages represent tax benefits and negative percentages represent tax expense as the Company recorded income tax benefit on a pretax loss.
The jurisdictions with favorable tax rates that had the most significant impact on the Company's effective tax rate in the periods presented include Puerto Rico and Singapore.
In fiscal 2022, the Company recorded $454 million of net income tax benefits related to various items discrete to the year. These amounts primarily included $150 million of income tax benefits related to releases of foreign valuation allowances, $99 million of income tax benefits related to transformation costs, and acquisition, disposition and other related charges, $43 million of income tax benefits related to the settlement of U.S. tax audit matters, $42 million of income tax benefits related to the release of U.S. passive foreign tax credit valuation allowances, $30 million of income tax benefits related to the change in pre-separation tax liabilities, primarily those for which the Company shared joint and several liability with HP Inc. and for which the Company was indemnified by HP Inc.,$27 million of income tax benefits related to the utilization of capital losses which had a full valuation allowance, $12 million of income tax benefits as a result of the fiscal 2021 U.S. tax return filing primarily from the decrease in GILTI, and $11 million of net income tax benefits related to settlements and ongoing discussions in foreign tax audit matters.
In fiscal 2021, the Company recorded $294 million of net income tax benefits related to items discrete to the year. These amounts primarily included $180 million of income tax benefits related to transformation costs, and acquisition, disposition and other related charges, $157 million of income tax benefits related to releases of foreign valuation allowances, $39 million of income tax benefits related to tax rate changes on deferred taxes, and $32 million of income tax benefits related to the change in pre-separation tax liabilities, primarily those for which the Company shared joint and several liability with HP Inc. and for which the Company was indemnified by HP Inc. These benefits were partially offset by $337 million of net income tax charges associated with income from the Itanium litigation judgment, against which $244 million of income tax attributes previously subject to a valuation allowance were utilized, resulting in a net tax expense of $93 million.
In fiscal 2020, the Company recorded $362 million of net income tax benefits related to items discrete to the year. These amounts primarily included $174 million of income tax benefits related to transformation costs, and acquisition, disposition and other related charges, $66 million of income tax benefits related to the change in pre-separation tax liabilities, primarily those for which the Company shared joint and several liability with HP Inc. and for which the Company was indemnified by HP Inc., $57 million of income tax benefits related to Indian distribution tax rate changes, and $40 million of income tax benefits related to tax rate changes on deferred taxes.
As a result of certain employment actions and capital investments the Company has undertaken, income from manufacturing and services in certain countries is subject to reduced tax rates through 2037. The gross foreign income tax benefits attributable to these actions and investments were $832 million ($0.63 diluted net EPS) in fiscal 2022, $889 million ($0.67 diluted net EPS) in fiscal 2021, and $521 million ($0.40 diluted net EPS) in fiscal 2020. Refer to Note 16, "Net Earnings Per Share" for details on shares used to compute diluted net EPS.
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Uncertain Tax Positions
A reconciliation of unrecognized tax benefits is as follows:
| | | | | | | | | | | | | | | | | |
| As of October 31, |
| 2022 | | 2021 | | 2020 |
| In millions |
Balance at beginning of year | $ | 2,131 | | | $ | 2,159 | | | $ | 2,269 | |
Increases: | | | | | |
For current year's tax positions | 81 | | | 24 | | | 27 | |
For prior years' tax positions | 41 | | | 64 | | | 40 | |
Decreases: | | | | | |
For prior years' tax positions | (48) | | | (31) | | | (71) | |
Statute of limitations expiration | (12) | | | (44) | | | (17) | |
Settlements with taxing authorities | (1,491) | | | (15) | | | (53) | |
Settlements related to joint and several positions of former Parent | (28) | | | (26) | | | (36) | |
Balance at end of year | $ | 674 | | | $ | 2,131 | | | $ | 2,159 | |
Up to $386 million, $688 million and $731 million of the Company's unrecognized tax benefits at October 31, 2022, 2021 and 2020, respectively, would affect its effective tax rate if realized in their respective periods. During the first quarter of fiscal 2022, the Company effectively settled with the U.S. Internal Revenue Service ("IRS") for fiscal 2016, primarily contributing to the reduction in the Company's unrecognized tax benefits of $1.5 billion, which was predominantly related to the timing of intercompany royalty revenue recognition which does not affect the Company’s effective tax rate.
The Company recognizes interest income from favorable settlements and interest expense and penalties accrued on unrecognized tax benefits in (Provision) benefit for taxes in the Consolidated Statements of Earnings. The Company recognized $55 million of interest income, $17 million of interest expense, and $10 million of interest income in fiscal 2022, 2021, and 2020, respectively. As of October 31, 2022 and 2021, the Company had accrued $81 million and $136 million, respectively, for interest and penalties in the Consolidated Balance Sheets.
The Company is subject to income tax in the U.S. and approximately 90 other countries and is subject to routine corporate income tax audits in many of these jurisdictions.
The Company engages in continuous discussion and negotiation with taxing authorities regarding tax matters in various jurisdictions. The Company is no longer subject to U.S. federal tax audits for years prior to 2017. With respect to major state and foreign tax jurisdictions, the Company is no longer subject to tax authority examinations for years prior to 2005. The Company does not expect complete resolution of any other IRS audit cycle within the next 12 months. However, it is reasonably possible that certain federal, foreign and state tax issues may be concluded in the next 12 months, including issues involving resolution of certain intercompany transactions, and other matters. Accordingly, the Company believes it is reasonably possible that its existing unrecognized tax benefits may be reduced by an amount up to $21 million within the next 12 months.
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) benefit for taxes and therefore the resolution of one or more of these uncertainties in any particular period could have a material impact on net earnings or cash flows.
The Company has not provided for U.S. federal and state income and foreign withholding taxes on $9.3 billion of undistributed earnings and basis differences from non-U.S. operations as of October 31, 2022 because the Company intends to reinvest such earnings indefinitely outside of the U.S. Determination of the amount of unrecognized deferred tax liability related to these earnings and basis differences is not practicable. The Company will remit non-indefinitely reinvested earnings of its non-U.S. subsidiaries for which deferred U.S. state income and foreign withholding taxes have been provided where
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
excess cash has accumulated and the Company determines that it is advantageous for business operations, tax or cash management reasons.
Deferred Income Taxes
Deferred income taxes result from temporary differences between the amount of assets and liabilities recognized for financial reporting and tax purposes.
The significant components of deferred tax assets and deferred tax liabilities were as follows:
| | | | | | | | | | | |
| As of October 31, |
| 2022 | | 2021 |
| In millions |
Deferred tax assets: | | | |
Loss and credit carryforwards | $ | 7,222 | | | $ | 7,526 | |
Inventory valuation | 87 | | | 79 | |
Intercompany prepayments | 321 | | | 308 | |
Other intercompany transactions | 10 | | | 13 | |
Warranty | 61 | | | 50 | |
Employee and retiree benefits | 247 | | | 287 | |
Restructuring | 55 | | | 93 | |
Deferred revenue | 601 | | | 517 | |
Intangible assets | 113 | | | 91 | |
Lease liabilities | 185 | | | 184 | |
Other | 259 | | | 246 | |
Total deferred tax assets | 9,161 | | | 9,394 | |
Valuation allowance | (6,817) | | | (7,368) | |
Total deferred tax assets net of valuation allowance | 2,344 | | | 2,026 | |
Deferred tax liabilities: | | | |
Unremitted earnings of foreign subsidiaries | (170) | | | (168) | |
ROU assets | (167) | | | (159) | |
Fixed assets | (200) | | | (170) | |
Total deferred tax liabilities | (537) | | | (497) | |
Net deferred tax assets and liabilities | $ | 1,807 | | | $ | 1,529 | |
Deferred tax assets and liabilities included in the Consolidated Balance Sheets are as follows:
| | | | | | | | | | | |
| As of October 31, |
| 2022 | | 2021 |
| In millions |
Deferred tax assets | $ | 2,127 | | | $ | 2,023 | |
Deferred tax liabilities | (320) | | | (494) | |
Deferred tax assets net of deferred tax liabilities | $ | 1,807 | | | $ | 1,529 | |
As of October 31, 2022, the Company had $420 million, $3.2 billion and $19.1 billion of federal, state and foreign net operating loss carryforwards, respectively. Amounts included in federal, state and foreign net operating loss carryforwards will begin to expire in years 2030, 2023, and 2023, respectively. The Company has provided a valuation allowance of $160 million and $3.8 billion for deferred tax assets related to state and foreign net operating losses carryforwards, respectively. As of October 31, 2022, the Company also had $5.5 billion, $5.5 billion, and $96 million of federal, state, and foreign capital loss carryforwards, respectively. Amounts included in federal and state capital loss carryforwards will begin to expire in 2023;
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
foreign capital losses can carry forward indefinitely. The Company has provided a valuation allowance of $1.2 billion, $184 million, and $28 million for deferred tax assets related to federal, state, and foreign capital loss carryforwards, respectively.
As of October 31, 2022, the Company had recorded deferred tax assets for various tax credit carryforwards as follows:
| | | | | | | | | | | | | | | | | |
| Carryforward | | Valuation Allowance | | Initial Year of Expiration |
| In millions | | |
U.S. foreign tax credits | $ | 999 | | | $ | (951) | | | 2026 |
U.S. research and development and other credits | 198 | | | — | | | 2029 |
Tax credits in state and foreign jurisdictions | 157 | | | (105) | | | 2023 |
Balance at end of year | $ | 1,354 | | | $ | (1,056) | | | |
Total valuation allowances decreased by $551 million in fiscal 2022, primarily from decreases to the value of foreign deferred taxes following changes in foreign exchange rates and remeasurement of pension obligations, the release of certain foreign valuation allowances, and the release of valuation allowances on U.S. passive foreign tax credits.
Tax Matters Agreement and Other Income Tax Matters
In connection with the Everett and Seattle Transactions, the Company entered into a DXC Tax Matters Agreement with DXC and a Micro Focus Tax Matters Agreement with Micro Focus, respectively. See Note 18, "Guarantees, Indemnifications and Warranties", for a description of the DXC Tax Matters Agreement and Micro Focus Tax Matters Agreement.
Note 7: Balance Sheet Details
Cash, Cash Equivalents and Restricted Cash
| | | | | | | | | | | |
| As of October 31, |
| 2022 | | 2021 |
| In millions |
Cash and cash equivalents | $ | 4,163 | | | $ | 3,996 | |
Restricted cash | 600 | | | 336 | |
Total | $ | 4,763 | | | $ | 4,332 | |
Accounts Receivable, Net
| | | | | | | | | | | |
| As of October 31, |
| 2022 | | 2021 |
| In millions |
Unbilled receivable | $ | 245 | | | $ | 206 | |
Accounts receivable | 3,881 | | | 3,796 | |
Allowances | (25) | | | (23) | |
Total | $ | 4,101 | | | $ | 3,979 | |
The allowance for doubtful accounts related to accounts receivable and changes therein were as follows:
| | | | | | | | | | | | | | | | | |
| As of October 31, |
| 2022 | | 2021 | | 2020 |
| In millions |
Balance at beginning of year | $ | 23 | | | $ | 46 | | | $ | 31 | |
Provision for credit losses | 25 | | | 11 | | | 29 | |
Adjustments to existing allowances, including write offs | (23) | | | (34) | | | (14) | |
Balance at end of year | $ | 25 | | | $ | 23 | | | $ | 46 | |
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
The Company has third-party revolving short-term financing arrangements intended to facilitate the working capital requirements of certain customers. The Company recorded an obligation of $88 million, $65 million and $75 million in Notes payable and short-term borrowings in its Consolidated Balance Sheets as of October 31, 2022, 2021 and 2020, respectively, related to the trade receivables sold and collected from the third-party for which the revenue recognition was deferred. For arrangements involving an element of recourse, the fair value of the recourse obligation is measured using market data from similar transactions and reported as a current liability in Other accrued liabilities in the Consolidated Balance Sheets.
The activity related to Hewlett Packard Enterprise's revolving short-term financing arrangements was as follows: | | | | | | | | | | | | | | | | | |
| As of October 31, |
| 2022 | | 2021 | | 2020 |
| In millions |
Balance at beginning of period(1) | $ | 336 | | | $ | 122 | | | $ | (10) | |
Trade receivables sold | 4,130 | | | 4,190 | | | 3,897 | |
Cash receipts | (4,292) | | | (3,975) | | | (3,768) | |
Foreign currency and other | (11) | | | (1) | | | 3 | |
Balance at end of period(1) | $ | 163 | | | $ | 336 | | | $ | 122 | |
(1)Beginning and ending balances represent amounts for trade receivables sold but not yet collected.
Inventory
| | | | | | | | | | | |
| As of October 31, |
| 2022 | | 2021 |
| In millions |
Finished goods | $ | 2,187 | | | $ | 1,593 | |
Purchased parts and fabricated assemblies | 2,974 | | | 2,918 | |
Total | $ | 5,161 | | | $ | 4,511 | |
Property, Plant and Equipment
| | | | | | | | | | | |
| As of October 31, |
| 2022 | | 2021 |
| In millions |
Land | $ | 74 | | | $ | 76 | |
Buildings and leasehold improvements | 1,503 | | | 1,751 | |
Machinery and equipment, including equipment held for lease | 9,729 | | | 9,735 | |
Gross property, plant and equipment | 11,306 | | | 11,562 | |
Accumulated depreciation | (5,522) | | | (5,949) | |
Net property, plant and equipment | $ | 5,784 | | | $ | 5,613 | |
Depreciation expense was $2.2 billion, in fiscal 2022, 2021 and 2020.
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Long-Term Financing Receivables and Other Assets
| | | | | | | | | | | |
| As of October 31, |
| 2022 | | 2021 |
| In millions |
Financing receivables, net | $ | 4,512 | | | $ | 5,038 | |
ROU assets | 854 | | | 884 | |
Deferred tax assets | 2,127 | | | 2,023 | |
Prepaid pension | 1,287 | | | 1,898 | |
Other | 1,757 | | | 1,827 | |
Total | $ | 10,537 | | | $ | 11,670 | |
Other Accrued Liabilities
| | | | | | | | | | | |
| As of October 31, |
| 2022 | | 2021 |
| In millions |
Value-added and property taxes | $ | 902 | | | $ | 782 | |
Warranty | 192 | | | 163 | |
Sales and marketing programs | 1,052 | | | 977 | |
Operating lease liabilities | 168 | | | 192 | |
Contract manufacturer liabilities | 332 | | | 709 | |
Collateral payable | 508 | | | 173 | |
Other | 1,471 | | | 1,490 | |
Total | $ | 4,625 | | | $ | 4,486 | |
Other Non-Current Liabilities
| | | | | | | | | | | |
| As of October 31, |
| 2022 | | 2021 |
| In millions |
Pension, post-retirement, and post-employment | $ | 944 | | | $ | 1,496 | |
Deferred revenue | 2,955 | | | 2,972 | |
Taxes on earnings | 271 | | | 365 | |
Operating lease liabilities | 851 | | | 938 | |
Deferred tax liabilities | 320 | | | 494 | |
Other | 846 | | | 834 | |
Total | $ | 6,187 | | | $ | 7,099 | |
Contract Liabilities and Remaining Performance Obligations
As of October 31, 2022 and 2021, current deferred revenue of $3.4 billion and $3.4 billion, respectively, were recorded in Deferred revenue, and non-current deferred revenue of $3.0 billion and $3.0 billion, respectively, were recorded in Other non-current liabilities in the Consolidated Balance Sheets. During fiscal 2022, approximately $3.2 billion of deferred revenue as of October 31, 2021 was recognized as revenue.
Revenue allocated to remaining performance obligations represents contract work that has not yet been performed and does not include contracts where the customer is not committed. Remaining performance obligations estimates are subject to change and are affected by several factors, including contract terminations, changes in the scope of contracts, adjustments for revenue that has not materialized and adjustments for currency. As of October 31, 2022, the Company expects to recognize
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
approximately 54% of the aggregate amount of remaining performance obligations, or deferred revenue, of $6.4 billion revenue over the next twelve months with the remainder to be recognized thereafter.
Costs to obtain a Contract
As of October 31, 2022, the current and non-current portions of the capitalized costs to obtain a contract were $76 million and $124 million, respectively. As of October 31, 2021, the current and non-current portions of the capitalized costs to obtain a contract were $64 million and $95 million, respectively. The current and non-current portions of the capitalized costs to obtain a contract were included in Other current assets, and Long-term financing receivables and other assets, respectively, in the Consolidated Balance Sheets. In fiscal 2022 and 2021, the Company amortized $83 million and $73 million, respectively, of the capitalized costs to obtain a contract which are included in Selling, general and administrative expense in the Consolidated Statements of Earnings.
Note 8: Accounting for Leases as a Lessee
Components of lease cost included in the Consolidated Statement of Earnings were as follows:
| | | | | | | | | | | | | | | | | |
| For the fiscal years ended October 31, |
| 2022 | | 2021 | | 2020 |
| In millions |
Operating lease cost | $ | 197 | | | $ | 207 | | | $ | 236 | |
Finance lease cost | 5 | | | 5 | | | 8 | |
Sublease rental income | (27) | | | (35) | | | (61) | |
Total lease cost | $ | 175 | | | $ | 177 | | | $ | 183 | |
The ROU assets and lease liabilities for operating and finance leases included in the Consolidated Balance Sheets were as follows:
| | | | | | | | | | | | | | | | | |
| | | As of October 31, |
| Balance Sheet Classification | | 2022 | | 2021 |
| | | In millions |
Operating Leases | | | | | |
ROU Assets | Long-term financing receivables and other assets | | $ | 854 | | | $ | 884 | |
Lease Liabilities: | | | | | |
Operating lease liabilities – current | Other accrued liabilities | | 168 | | | 192 | |
Operating lease liabilities – non-current | Other non-current liabilities | | 851 | | | 938 | |
Total operating lease liabilities | | | $ | 1,019 | | | $ | 1,130 | |
| | | | | |
Finance Leases | | | | | |
Finance lease ROU Assets: | Property, plant and equipment | | | | |
Gross finance lease ROU assets | | | $ | 32 | | | $ | 36 | |
Less: Accumulated depreciation | | | (11) | | | (8) | |
Net finance lease ROU assets | | | $ | 21 | | | $ | 28 | |
Lease Liabilities: | | | | | |
Finance lease liabilities – current | Notes payable and short-term borrowings | | $ | 5 | | | $ | 5 | |
Finance lease liabilities – non-current | Long-term debt | | 43 | | | 48 | |
Total finance lease liabilities | | | $ | 48 | | | $ | 53 | |
| | | | | |
Total ROU assets | | | $ | 875 | | | $ | 912 | |
Total lease liabilities | | | $ | 1,067 | | | $ | 1,183 | |
| | | | | |
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
The weighted-average remaining lease term and the weighted-average discount rate for the operating and finance leases were as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| As of October 31, |
| 2022 | | 2021 |
| Operating Leases | | Finance Leases | | Operating Leases | | Finance Leases |
Weighted-average remaining lease term (in years) | 7.8 | | 7.5 | | 7.7 | | 8.5 |
Weighted-average discount rate | 3.2 | % | | 3.5 | % | | 2.7 | % | | 3.5 | % |
Supplemental cash flow information related to leases was as follows: | | | | | | | | | | | | | | | | | | | | | | | |
| | | For the fiscal years ended October 31, |
| Cash Flow Statement Activity | | 2022 | | 2021 | | 2020 |
| | | In millions |
Cash outflows from operating leases | Net cash used in operating activities | | $ | 214 | | | $ | 220 | | | $ | 239 | |
| | | | | | | |
ROU assets obtained in exchange for new operating lease liabilities | Non-cash activities | | $ | 195 | | | $ | 248 | | | $ | 298 | |
The following tables shows the future payments on the Company's operating and finance leases:
| | | | | | | | | | | |
| As of October 31, 2022 |
| Operating Leases | | Finance Leases |
Fiscal year | In millions |
2023 | $ | 196 | | | $ | 7 | |
2024 | 171 | | | 7 | |
2025 | 151 | | | 7 | |
2026 | 132 | | | 7 | |
2027 | 121 | | | 7 | |
Thereafter | 389 | | | 20 | |
Total future lease payments | $ | 1,160 | | | $ | 55 | |
Less: imputed interest | (141) | | | (7) | |
Total lease liabilities | $ | 1,019 | | | $ | 48 | |
As of October 31, 2022, the Company entered into $153 million of operating leases that have not yet commenced and are not yet recorded on the Consolidated Balance Sheet. These operating leases are scheduled to commence during fiscal 2023 and contain lease terms from 7 to 10 years.
Note 9: Accounting for Leases as a Lessor
Financing Receivables
Financing receivables represent sales-type and direct-financing leases of the Company and third-party products. These receivables typically have terms ranging from two to five years and are usually collateralized by a security interest in the underlying assets. Financing receivables also include billed receivables from operating leases. The allowance for credit losses represents future expected credit losses over the life of the receivables based on past experience, current information and forward-looking economic considerations. The components of financing receivables were as follows:
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
| | | | | | | | | | | |
| As of October 31, |
| 2022 | | 2021 |
| In millions |
Minimum lease payments receivable | $ | 8,686 | | | $ | 9,526 | |
Unguaranteed residual value | 380 | | | 390 | |
Unearned income | (707) | | | (718) | |
Financing receivables, gross | 8,359 | | | 9,198 | |
Allowance for credit losses | (325) | | | (228) | |
Financing receivables, net | 8,034 | | | 8,970 | |
Less: current portion | (3,522) | | | (3,932) | |
Amounts due after one year, net | $ | 4,512 | | | $ | 5,038 | |
As of October 31, 2022, scheduled maturities of the Company's minimum lease payments receivable were as follows:
| | | | | |
| As of October 31, |
| 2022 |
Fiscal year | In millions |
2023 | $ | 3,957 | |
2024 | 2,293 | |
2025 | 1,401 | |
2026 | 713 | |
2027 | 241 | |
Thereafter | 81 | |
Total undiscounted cash flows | $ | 8,686 | |
Present value of lease payments (recognized as finance receivables) | $ | 7,979 | |
Difference between undiscounted cash flows and discounted cash flows | $ | 707 | |
Sale of Financing Receivables
The Company entered into arrangements to transfer the contractual payments due under certain financing receivables to third party financial institutions. During the fiscal years ended October 31, 2022 and 2021, the Company sold $183 million and $142 million, respectively, of financing receivables.
Credit Quality Indicators
Due to the homogeneous nature of its leasing transactions, the Company manages its financing receivables on an aggregate basis when assessing and monitoring credit risk. Credit risk is generally diversified due to the large number of entities comprising the Company's customer base and their dispersion across many different industries and geographic regions. The Company evaluates the credit quality of an obligor at lease inception and monitors that credit quality over the term of a transaction. The Company assigns risk ratings to each lease based on the creditworthiness of the obligor and other variables that augment or mitigate the inherent credit risk of a particular transaction and periodically updates the risk ratings when there is a change in the underlying credit quality. Such variables include the underlying value and liquidity of the collateral, the essential use of the equipment, the term of the lease, and the inclusion of credit enhancements, such as guarantees, letters of credit or security deposits.
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
The credit risk profile of gross financing receivables, based on internal risk ratings as of October 31, 2022, presented on an amortized cost basis by year of origination was as follows:
| | | | | | | | | | | | | | | | | |
| As of October 31, 2022 |
| Risk Rating |
| Low | | Moderate | | High |
Fiscal Year | In millions |
2022 | $ | 1,987 | | | $ | 1,277 | | | $ | 44 | |
2021 | 1,338 | | | 1,071 | | | 42 | |
2020 | 756 | | | 571 | | | 67 | |
2019 | 328 | | | 336 | | | 69 | |
2018 and prior | 143 | | | 234 | | | 96 | |
Total | $ | 4,552 | | | $ | 3,489 | | | $ | 318 | |
The credit risk profile of gross financing receivables, based on internal risk ratings as of October 31, 2021, was as follows:
| | | | | | | | | | | | | | | | | |
| As of October 31, 2021 |
| Risk Rating |
| Low | | Moderate | | High |
Fiscal Year | In millions |
2021 | $ | 1,978 | | | $ | 1,542 | | | $ | 49 | |
2020 | 1,441 | | | 1,061 | | | 87 | |
2019 | 829 | | | 771 | | | 85 | |
2018 | 364 | | | 407 | | | 78 | |
2017 and prior | 169 | | | 234 | | | 103 | |
Total | $ | 4,781 | | | $ | 4,015 | | | $ | 402 | |
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. The credit quality indicators do not reflect any mitigation actions taken to transfer credit risk to third parties.
Allowance for Credit Losses
The allowance for credit losses for financing receivables and changes therein were as follows:
| | | | | | | | | | | | | | | | | |
| As of October 31, |
| 2022 | | 2021 | | 2020 |
| In millions |
Balance at beginning of period | $ | 228 | | | $ | 154 | | | $ | 131 | |
Adjustment for adoption of the new credit loss standard | — | | | 28 | | | — | |
Provision for credit losses(1) | 177 | | | 61 | | | 43 | |
Adjustment to the existing allowance | (10) | | | 19 | | | — | |
Write-offs | (70) | | | (34) | | | (20) | |
Balance at end of period | $ | 325 | | | $ | 228 | | | $ | 154 | |
(1) Fiscal 2022 included a provision of $99 million related to expected credit losses due to the Company's exit from its Russia and Belarus businesses.
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Non-Accrual and Past-Due Financing Receivables
The following table summarizes the aging and non-accrual status of gross financing receivables:
| | | | | | | | | | | |
| As of October 31, |
| 2022 | | 2021 |
| In millions |
Billed:(1) | | | |
Current and past due 1-30 days | $ | 372 | | | $ | 410 | |
Past due 31-60 days | 32 | | | 35 | |
Past due 61-90 days | 19 | | | 17 | |
Past due >90 days | 121 | | | 111 | |
Unbilled sales-type and direct-financing lease receivables | 7,815 | | | 8,625 | |
Total gross financing receivables | $ | 8,359 | | | $ | 9,198 | |
Gross financing receivables on non-accrual status(2) | $ | 290 | | | $ | 257 | |
Gross financing receivables 90 days past due and still accruing interest(2) | $ | 72 | | | $ | 78 | |
(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 Property, plant and equipment in the Consolidated Balance Sheets were as follows:
| | | | | | | | | | | |
| As of October 31, |
| 2022 | | 2021 |
| In millions |
Equipment leased to customers | $ | 6,879 | | | $ | 7,039 | |
Accumulated depreciation | (2,776) | | | (3,038) | |
Total | $ | 4,103 | | | $ | 4,001 | |
As of October 31, 2022, minimum future rentals on non-cancelable operating leases related to leased equipment were as follows:
| | | | | |
| As of October 31, |
| 2022 |
Fiscal year | In millions |
2023 | $ | 1,737 | |
2024 | 1,126 | |
2025 | 515 | |
2026 | 87 | |
2027 | 2 | |
Thereafter | 1 | |
Total | $ | 3,468 | |
If a lease is classified as an operating lease, the Company records lease revenue on a straight-line basis over the lease term. At commencement of an operating lease, initial direct costs are deferred and are expensed over the lease term on the same basis as the lease revenue is recorded.
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
The following table presents amounts included in the Consolidated Statement of Earnings related to lessor activity:
| | | | | | | | | | | | | | | | | |
| For the fiscal years ended October 31, |
| 2022 | | 2021 | | 2020 |
| In millions |
Sales-type leases and direct financing leases: | | | | | |
Interest income | $ | 483 | | | $ | 494 | | | $ | 469 | |
Lease income - operating leases | 2,296 | | | 2,383 | | | 2,431 | |
Total lease income | $ | 2,779 | | | $ | 2,877 | | | $ | 2,900 | |
Variable Interest Entities
The Company has issued asset-backed debt securities under a fixed-term securitization program to private investors. The asset-backed debt securities are collateralized by the U.S. fixed-term financing receivables and leased equipment in the offering, which is held by a Special Purpose Entity ("SPE"). The SPE meets the definition of a VIE and is consolidated, along with the associated debt, into the Consolidated Financial Statements as the Company is the primary beneficiary of the VIE. The SPE is a bankruptcy-remote legal entity with separate assets and liabilities. The purpose of the SPE is to facilitate the funding of customer receivables and leased equipment in the capital markets.
The Company's risk of loss related to securitized receivables and leased equipment is limited to the amount by which the Company's right to receive collections for assets securitized exceeds the amount required to pay interest, principal, and fees and expenses related to the asset-backed securities.
The following table presents the assets and liabilities held by the consolidated VIE as of October 31, 2022 and 2021, which are included in the Consolidated Balance Sheets. The assets in the table below include those that can be used to settle the obligations of the VIE. Additionally, general creditors do not have recourse to the assets of the VIE.
| | | | | | | | | | | |
| As of October 31, |
| 2022 | | 2021 |
Assets held by VIE | In millions |
Other current assets | $ | 203 | | | $ | 165 | |
Financing receivables | | | |
Short-term | $ | 838 | | | $ | 749 | |
Long-term | $ | 1,085 | | | $ | 707 | |
Property, plant and equipment | $ | 1,323 | | | $ | 854 | |
Liabilities held by VIE | | | |
Notes payable and short-term borrowings, net of unamortized debt issuance costs | $ | 1,510 | | | $ | 1,204 | |
Long-term debt, net of unamortized debt issuance costs | $ | 1,415 | | | $ | 950 | |
Financing receivables transferred via securitization through the SPE were $1.6 billion and $1.1 billion for the fiscal years ended October 31, 2022 and 2021, respectively. Leased equipment transferred via securitization through the SPE was $1.2 billion and $720 million for the fiscal years ended October 31, 2022 and 2021, respectively.
Note 10: Acquisitions
The Company did not have any acquisitions during fiscal 2022.
Acquisitions in fiscal 2021
During fiscal 2021, the Company completed four acquisitions, none of which were material, both individually and in the aggregate, to the Company's Consolidated Financial Statements. The following table presents the aggregate final purchase price allocation as of October 31, 2022 for the Company's acquisitions in fiscal 2021:
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
| | | | | |
| In millions |
| |
Goodwill | $ | 302 | |
Amortizable intangible assets | 277 | |
| |
Net tangible liabilities assumed | (11) | |
Total fair value consideration | $ | 568 | |
On August 31, 2021, the Company completed the acquisition of Zerto, an industry leader in cloud data management and protection. Zerto's results of operations were included within the Storage segment. The acquisition date fair value consideration of $416 million primarily consisted of cash paid for outstanding common stock and vested in-the-money stock awards. In connection with this acquisition, the Company recorded approximately $214 million of goodwill, and $212 million of intangible assets after considering the measurement period adjustments. The Company is amortizing the intangible assets on a straight-line basis over an estimated weighted-average useful life of seven years.
Acquisitions in fiscal 2020
During fiscal 2020, the Company completed two acquisitions. The following table presents the aggregate final purchase price allocation for the Company's acquisitions for the fiscal year ended October 31, 2020:
| | | | | |
| In millions |
| |
Goodwill | $ | 561 | |
Amortizable intangible assets | 354 | |
Net tangible liabilities assumed | (29) | |
Total fair value consideration | $ | 886 | |
On September 21, 2020, the Company completed the acquisition of Silver Peak, a Software-Defined Wide Area Network leader. Silver Peak's results of operations were included within the Intelligent Edge segment. The acquisition date fair value consideration of $879 million consisted of cash paid for outstanding common stock, pre-acquisition service of the replacement awards, and vested in-the-money stock awards. In connection with this acquisition, the Company recorded approximately $561 million of goodwill, and $348 million of intangible assets. The Company is amortizing the intangible assets on a straight-line basis over an estimated weighted-average useful life of five years.
Note 11: Goodwill and Intangible Assets
Goodwill
Goodwill and related changes in the carrying amount by reportable segment were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Compute | | HPC & AI | | Storage | | Intelligent Edge | | Financial Services | | Corporate Investments & Other | | | Total |
| In millions |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
Balance at October 31, 2021(1) | $ | 7,532 | | | $ | 3,702 | | | $ | 4,160 | | | $ | 2,555 | | | $ | 144 | | | $ | 213 | | | | $ | 18,306 | |
| | | | | | | | | | | | | | |
Impairment of goodwill | — | | | (815) | | | — | | | — | | | — | | | (90) | | | | (905) | |
| | | | | | | | | | | | | | |
Goodwill adjustments | — | | | 2 | | | — | | | — | | | — | | | — | | | | 2 | |
Balance at October 31, 2022(1) | $ | 7,532 | | | $ | 2,889 | | | $ | 4,160 | | | $ | 2,555 | | | $ | 144 | | | $ | 123 | | | | $ | 17,403 | |
| | | | | | | | | | | | | | |
(1)Goodwill is net of accumulated impairment losses of $1.9 billion. Of this amount, $1.7 billion relates to HPC & AI of which $815 million was recorded during the fourth quarter of fiscal 2022 and $865 million was recorded during the second quarter of fiscal 2020. The Software reporting unit within Corporate Investments and Other, has an accumulated impairment loss of $90 million which was also recorded during the fourth quarter of fiscal 2022.
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Goodwill Impairments
Goodwill is tested annually for impairment, as of the first day of the fourth quarter, at the reporting unit level. As of October 31, 2022, the Company's reporting units with goodwill are consistent with the reportable segments identified in Note 2, "Segment Information" to the Consolidated Financial Statements, with the exception of Corporate Investments and Other which contains three reporting units, Software, CMS and A & PS.
The Company’s annual goodwill impairment analysis resulted in impairment charges for the HPC & AI and Software reporting units of $815 million and $90 million, respectively. There was no impairment of goodwill for the other reporting units.
The decline in the fair value of the HPC & AI reporting unit below its carrying value resulted from changes in expected future cash flows as compared to the Company's fiscal 2021 long-term plan due to the continuation of supply chain constraints, and other operational challenges, as well as an increase in the cost of capital. The fair value estimate of the HPC & AI reporting unit was derived primarily from the income approach, and to a lesser extent, the market approach as described in Note 1, “Overview and Summary of Significant Accounting Policies.” Under the income approach, the Company estimates the fair value of a reporting unit based on the present value of estimated future cash flows which the Company considers to be a level 3 unobservable input in the fair value hierarchy. The Company prepared multiple cash flow projections based on management's estimates of revenue growth rates and operating margins, taking into consideration the historical performance and the current macroeconomic, industry, and market conditions. These multiple cash flow projections were probability weighted to determine a fair value estimate under the income approach. The Company bases the discount rate on the weighted-average cost of capital adjusted for the relevant risk associated with business-specific characteristics and the uncertainty related to the reporting unit's ability to execute on the projected cash flows. Under the market approach, the Company estimates fair value based on market multiple earnings derived from comparable publicly traded companies with similar operating and investment characteristics as the reporting unit.
Prior to the quantitative goodwill impairment test, the Company tested the recoverability of long-lived assets and other assets of the HPC & AI reporting unit and concluded that such assets were not impaired. As a result, the Company recorded a goodwill impairment charge of $815 million in the fourth quarter of fiscal 2022.
The HPC & AI reporting unit has remaining goodwill allocated of $2.9 billion as of October 31, 2022, and an excess of fair value over carrying value of net assets of 0% as of the annual test date. The HPC & AI business is facing challenges reflected in the results for the year ended October 31, 2022. The challenges are primarily related to supply chain constraints and other operational challenges impacting the Company’s ability to achieve certain customer acceptance milestones required for revenue recognition and resulting cost increases associated with fulfilling contracts over longer than originally anticipated timelines. The Company currently believes these challenges will be successfully addressed when supply chain constraints ease. If the global macroeconomic or geopolitical conditions worsen, projected revenue growth rates or operating margins decline, weighted average cost of capital increases, or if the Company has significant or sustained decline in its stock price, it is possible its estimates about the HPC & AI reporting unit's ability to successfully address the current challenges may change, which could result in the carrying value of the HPC & AI reporting unit exceeding its estimated fair value, and potential impairment charges.
The decline in the fair value of the Software reporting unit below its carrying value resulted primarily from a decline in market multiples. The fair value of the Software reporting unit was based on the market approach described in Note 1. Prior to the quantitative goodwill impairment test, the Company tested the recoverability of long-lived assets and other assets of the Software reporting unit and concluded that such assets were not impaired. As a result, The Company recorded a goodwill impairment charge of $90 million in the fourth quarter of fiscal 2022.
The Software reporting unit has remaining goodwill allocated of $123 million as of October 31, 2022, and an excess of fair value over carrying value of net assets of 0% as of the annual test date. As noted above, the fair value of the Software reporting unit is derived from the market approach, which is impacted by market volatility. If global macroeconomic or geopolitical conditions worsen and cause a further decline in the equity market or if revenue expectations are not met, this could result in the carrying value of the Software reporting unit exceeding its estimated fair value and potential impairment charges.
The excess of fair value over carrying amount for the Company’s reporting units, excluding HPC & AI and Software, ranged from approximately 22% to 142% of the respective carrying amounts. In order to evaluate the sensitivity of the estimated fair value of the Company’s other reporting units in the goodwill impairment test, the Company applied a hypothetical 10% decrease to the fair value of each reporting unit. Based on the results of this hypothetical 10% decrease all of the other reporting units had an excess of fair value over carrying amount.
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Based on the results of the Company's interim and annual impairment tests in fiscal 2021 and the annual impairment test in fiscal 2020, the Company determined that no impairment of goodwill existed. The macroeconomic impacts of COVID-19 which lowered the projected revenue growth rates and profitability levels for the Company resulted in the Company performing an interim impairment test in the second quarter of fiscal 2020. The interim impairment test concluded that the fair value of the HPC & AI reporting unit was below the carrying value and the Company recorded a goodwill impairment charge of $865 million.
Intangible Assets
Intangible assets comprise:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| As of October 31, 2022 | | As of October 31, 2021 |
| Gross | | Accumulated Amortization | | Net | | Gross | | Accumulated Amortization | | Net |
| In millions |
Customer contracts, customer lists and distribution agreements | $ | 475 | | | $ | (256) | | | $ | 219 | | | $ | 472 | | | $ | (175) | | | $ | 297 | |
Developed and core technology and patents | 1,163 | | | (695) | | | 468 | | | 1,187 | | | (537) | | | 650 | |
Trade name and trademarks | 144 | | | (98) | | | 46 | | | 144 | | | (73) | | | 71 | |
In-process research and development | — | | | — | | | — | | | 4 | | | — | | | 4 | |
Total intangible assets | $ | 1,782 | | | $ | (1,049) | | | $ | 733 | | | $ | 1,807 | | | $ | (785) | | | $ | 1,022 | |
For fiscal 2022, the decrease in gross intangible assets was due primarily to $29 million of intangible assets which became fully amortized and were eliminated from gross intangible assets and accumulated amortization, partially offset by $4 million of purchase accounting adjustments related to acquisitions.
For fiscal 2022, the Company reclassified in-process research and development assets acquired of $4 million to developed and core technology and patents, as the projects were completed, and began amortization. For fiscal 2021, the Company reclassified in-process research and development assets acquired of $113 million to developed and core technology and patents as the projects were completed, and began amortization.
As of October 31, 2022, the weighted-average remaining useful lives of the Company's finite-lived intangible assets were as follows:
| | | | | |
Finite-Lived Intangible Assets | Weighted-Average Remaining Useful Lives |
| In years |
Customer contracts, customer lists and distribution agreements | 5 |
Developed and core technology and patents | 4 |
Trade name and trademarks | 2 |
As of October 31, 2022, estimated future amortization expense related to finite-lived intangible assets was as follows:
| | | | | |
Fiscal year | In millions |
2023 | $ | 267 | |
2024 | 208 | |
2025 | 96 | |
2026 | 81 | |
2027 | 48 | |
Thereafter | 33 | |
Total | $ | 733 | |
Note 12: 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.
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
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 assets or liabilities.
The fair value hierarchy gives the highest priority to observable inputs and lowest priority to unobservable inputs.
The following table presents the Company's assets and liabilities that are measured at fair value on a recurring basis:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| As of October 31, 2022 | | As of October 31, 2021 | | |
| Fair Value Measured Using | | | | Fair Value Measured Using | | | | | | |
| Level 1 | | Level 2 | | Level 3 | | Total | | Level 1 | | Level 2 | | Level 3 | | Total | | | | | | | | |
| In millions | | In millions |
Assets | | | | | | | | | | | | | | | | | | | | | | | |
Cash equivalents and investments: | | | | | | | | | | | | | | | | | | | | | | | |
Time deposits | $ | — | | | $ | 1,516 | | | $ | — | | | $ | 1,516 | | | $ | — | | | $ | 806 | | | $ | — | | | $ | 806 | | | | | | | | | |
Money market funds | 744 | | | — | | | — | | | 744 | | | 1,495 | | | — | | | — | | | 1,495 | | | | | | | | | |
Equity securities | — | | | — | | | 126 | | | 126 | | | 57 | | | — | | | 129 | | | 186 | | | | | | | | | |
Foreign bonds | — | | | 91 | | | — | | | 91 | | | — | | | 122 | | | — | | | 122 | | | | | | | | | |
Other debt securities | — | | | — | | | 33 | | | 33 | | | — | | | — | | | 42 | | | 42 | | | | | | | | | |
Derivative instruments: | | | | | | | | | | | | | | | | | | | | | | | |
Interest rate contracts | — | | | — | | | — | | | — | | | — | | | 95 | | | — | | | 95 | | | | | | | | | |
Foreign exchange contracts | — | | | 840 | | | — | | | 840 | | | — | | | 308 | | | — | | | 308 | | | | | | | | | |
Other derivatives | — | | | 2 | | | — | | | 2 | | | — | | | 4 | | | — | | | 4 | | | | | | | | | |
Total assets | $ | 744 | | | $ | 2,449 | | | $ | 159 | | | $ | 3,352 | | | $ | 1,552 | | | $ | 1,335 | | | $ | 171 | | | $ | 3,058 | | | | | | | | | |
Liabilities | | | | | | | | | | | | | | | | | | | | | | | |
Derivative instruments: | | | | | | | | | | | | | | | | | | | | | | | |
Interest rate contracts | $ | — | | | $ | 178 | | | $ | — | | | $ | 178 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | | | | | | | |
Foreign exchange contracts | — | | | 128 | | | — | | | 128 | | | — | | | 127 | | | — | | | 127 | | | | | | | | | |
Other derivatives | — | | | 1 | | | — | | | 1 | | | — | | | — | | | — | | | — | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
Total liabilities | $ | — | | | $ | 307 | | | $ | — | | | $ | 307 | | | $ | — | | | $ | 127 | | | $ | — | | | $ | 127 | | | | | | | | | |
For the fiscal years ended October 31, 2022 and 2021, there were no transfers between levels within the fair value hierarchy.
Valuation Techniques
Cash Equivalents and Investments: The Company holds time deposits, money market funds, debt securities primarily consisting of corporate and foreign government notes and bonds. The Company values cash equivalents using quoted market prices, alternative pricing sources, including net asset value, or models utilizing market observable inputs. The fair value of debt and equity 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. Equity and other securities include investments in marketable and non-marketable
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
securities. In evaluating non-marketable securities for impairment or observable price changes, the Company uses valuation techniques using the best information available, and may include quoted market prices, market comparables and discounted cash flow projections.
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 counterparties' credit risk, foreign currency exchange rates, and forward and spot prices for currencies and interest rates. See Note 13, "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 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. As of October 31, 2022, the estimated fair value of the Company's short-term and long-term debt was $12.2 billion and the carrying value was $12.5 billion. As of October 31, 2021, the estimated fair value of the Company's short-term and long-term debt was $14.6 billion and the carrying value was $13.4 billion. If measured at fair value in the Consolidated Balance Sheets, short-term and long-term debt would be classified in Level 2 of the fair value hierarchy.
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 Consolidated Balance Sheets, these other financial instruments would be classified in Level 2 or Level 3 of the fair value hierarchy.
Equity investments without readily determinable fair value: Equity Investments are recorded at cost and measured at fair value, when they are deemed to be impaired or when there is an adjustment from observable price changes. For the fiscal years ended October 31, 2022, 2021 and 2020, the Company recognized an unrealized net loss of $17 million, which included a $24 million impairment charge, and unrealized gains of $64 million and $19 million, respectively, in Interest and other, net in the Consolidated Statements of Earnings. For the fiscal years ended October 31, 2021 and 2020, there were no material impairment charges relating to equity investments. If measured at fair value in the Consolidated Balance Sheets, these would generally be classified in Level 3 of the fair value hierarchy. These adjustments are based on observable price changes for certain equity investments without readily determinable fair value.
Non-Financial Assets: The Company's non-financial assets, such as intangible assets, goodwill and property, plant and equipment, are recorded at cost. The Company records ROU assets based on the lease liability, adjusted for lease prepayments, lease incentives received and the lessee's initial direct costs. Fair value adjustments are made to these non-financial assets in the period an impairment charge is recognized.
In fiscal 2022, 2021 and 2020, the Company recorded a ROU asset impairment charge of $5 million, $89 million and $74 million, respectively, in Transformation costs in the Consolidated Statements of Earnings as the carrying value of certain ROU assets exceeded its fair value. If measured at fair value in the Consolidated Balance Sheets, these would generally be classified in Level 3 of the fair value hierarchy.
In the fourth quarter of fiscal 2022, the Company recorded a goodwill impairment charge of $905 million associated with the HPC & AI reporting unit and the Software reporting unit within the Corporate Investments and Other segment. In the second quarter of fiscal 2020, the Company recorded a goodwill impairment charge of $865 million associated with the HPC & AI reporting unit. The fair value of the Company's reporting units was classified in Level 3 of the fair value hierarchy due to the significance of unobservable inputs developed using company-specific information. For more information on the goodwill impairment, see Note 11, "Goodwill and Intangible Assets."
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 13: Financial Instruments
Cash Equivalents and Available-for-Sale Investments
Cash equivalents and available-for-sale investments were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| As of October 31, 2022 | | As of October 31, 2021 | | |
| Cost | | Gross Unrealized Gains/(Losses) | | | | Fair Value | | Cost | | Gross Unrealized Gains/(Losses) | | | | Fair Value | | | | | | | | |
| In millions |
Cash Equivalents: | | | | | | | | | | | | | | | | | | | | | | | |
Time deposits | $ | 1,516 | | | $ | — | | | | | $ | 1,516 | | | $ | 806 | | | $ | — | | | | | $ | 806 | | | | | | | | | |
Money market funds | 744 | | | — | | | | | 744 | | | 1,495 | | | — | | | | | 1,495 | | | | | | | | | |
Total cash equivalents | 2,260 | | | — | | | | | 2,260 | | | 2,301 | | | — | | | | | 2,301 | | | | | | | | | |
Available-for-Sale Investments: | | | | | | | | | | | | | | | | | | | | | | | |
Foreign bonds | 93 | | | (2) | | | | | 91 | | | 108 | | | 14 | | | | | 122 | | | | | | | | | |
Other debt securities | 32 | | | 1 | | | | | 33 | | | 41 | | | 1 | | | | | 42 | | | | | | | | | |
Total available-for-sale investments | 125 | | | (1) | | | | | 124 | | | 149 | | | 15 | | | | | 164 | | | | | | | | | |
Total cash equivalents and available-for-sale investments | $ | 2,385 | | | $ | (1) | | | | | $ | 2,384 | | | $ | 2,450 | | | $ | 15 | | | | | $ | 2,465 | | | | | | | | | |
All highly liquid investments with original maturities of three months or less at the date of acquisition are considered cash equivalents. As of October 31, 2022 and 2021, the carrying amount of cash equivalents approximated fair value due to the short period of time to maturity. Interest income related to cash, cash equivalents and debt securities was approximately $39 million, $18 million and $44 million in fiscal 2022, 2021 and 2020 respectively. Time deposits were primarily issued by institutions outside the U.S. as of October 31, 2022 and October 31, 2021. The estimated fair value of the available-for-sale investments may not be representative of values that will be realized in the future.
Contractual maturities of investments in available-for-sale debt securities were as follows:
| | | | | | | | | | | |
| As of October 31, 2022 |
| Amortized Cost | | Fair Value |
| In millions |
Due in one year | $ | 19 | | | $ | 19 | |
| | | |
Due in more than five years | 106 | | | 105 | |
| $ | 125 | | | $ | 124 | |
Non-marketable equity investments in privately held companies are included in Long-term financing receivables and other assets in the Consolidated Balance Sheets. These non-marketable equity investments are carried either at fair value or under the measurement alternative.
The carrying amount of those non-marketable equity investments accounted for under the measurement alternative was $175 million and $253 million as of October 31, 2022 and 2021, respectively. During the twelve months ended October 31, 2022, 2021 and 2020, the Company recorded an unrealized net loss of $17 million, which included a $24 million impairment charge, and unrealized gains of $64 million and $19 million respectively, on these investments. During the twelve months ended October 31, 2021 and 2020, there were no material impairment charges relating to equity investments.
The carrying amount of those non-marketable equity investments accounted for under the fair value option was $126 million and $129 million as of October 31, 2022 and 2021, respectively. During the twelve months ended October 31, 2022, 2021, the Company recorded unrealized gains of $86 million and $50 million respectively, on these investments. During the twelve months ended October 31, 2022, the Company sold $165 million of these investments.
Equity investments with readily determinable fair values are included in Long-term financing receivables and other assets in the Consolidated Balance Sheets. There were no such equity investments as of October 31, 2022 as the Company completed the sale of these investments. The carrying amount of such equity investments was $57 million as of October 31, 2021.
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Investments in equity securities that are accounted for using the equity method are included in Investments in equity interests in the Consolidated Balance Sheets. These amounted to $2.2 billion at October 31, 2022 and 2021. For additional information, see Note 20, "Equity Method Investments."
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 and 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. Derivative instruments are recognized at fair value in the Consolidated Balance Sheets. The change in fair value of the derivative instruments is recognized in the Consolidated Statements of Earnings or Consolidated Statements of Comprehensive Income depending upon the type of hedge as further discussed below. The Company classifies cash flows from its derivative programs with the activities that correspond to the underlying hedged items in the Consolidated 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 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 also mitigate credit exposure to counterparties by permitting the Company to net amounts due from the Company to a 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 allows 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 $106 million and $3 million at October 31, 2022 and 2021, 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 October 31, 2022 and 2021.
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 rate. 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 Consolidated Statements of Earnings in the period of change.
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
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, 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 can extend up to five years.
The Company used interest rate contracts designated as cash flow hedges to hedge the variability of cash flows in the interest payments associated with its variable-rate debt due to changes in the U.S. dollar LIBOR-based floating interest rate. The swap transactions generally involved principal and interest obligations for U.S. dollar-denominated amounts. There were no cash flow hedges related to interest rate contracts in fiscal 2022.
For derivative instruments that are designated and qualify as cash flow hedges, and as long as they remain highly effective, the Company records the changes in fair value of the derivative instrument in Accumulated other comprehensive loss as a separate component of equity in the Consolidated Balance Sheets and subsequently reclassifies these amounts into earnings in the same financial statement line item when the hedged transaction is recognized.
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 changes in the fair value of the hedged items in cumulative translation adjustment as a separate component of equity in the 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, 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 Consolidated 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.
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Fair Value of Derivative Instruments in the Consolidated Balance Sheets
The gross notional and fair value of derivative instruments in the Consolidated Balance Sheets was as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| As of October 31, 2022 | | As of October 31, 2021 |
| | | 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 | $ | 2,500 | | | $ | — | | | $ | — | | | $ | — | | | $ | 178 | | | $ | 3,850 | | | $ | 15 | | | $ | 80 | | | $ | — | | | $ | — | |
Cash flow hedges: | | | | | | | | | | | | | | | | | | | |
Foreign currency contracts | 7,662 | | | 420 | | | 246 | | | 25 | | | 13 | | | 7,664 | | | 125 | | | 68 | | | 49 | | | 32 | |
| | | | | | | | | | | | | | | | | | | |
Net investment hedges: | | | | | | | | | | | | | | | | | | | |
Foreign currency contracts | 1,883 | | | 60 | | | 74 | | | 12 | | | 13 | | | 1,860 | | | 33 | | | 40 | | | 12 | | | 18 | |
Total derivatives designated as hedging instruments | 12,045 | | | 480 | | | 320 | | | 37 | | | 204 | | | 13,374 | | | 173 | | | 188 | | | 61 | | | 50 | |
Derivatives not designated as hedging instruments | | | | | | | | | | | | | | | | | | | |
Foreign currency contracts | 7,780 | | | 36 | | | 4 | | | 53 | | | 12 | | | 6,994 | | | 25 | | | 17 | | | 16 | | | — | |
Other derivatives | 95 | | | 2 | | | — | | | 1 | | | — | | | 113 | | | 4 | | | — | | | — | | | — | |
Total derivatives not designated as hedging instruments | 7,875 | | | 38 | | | 4 | | | 54 | | | 12 | | | 7,107 | | | 29 | | | 17 | | | 16 | | | — | |
Total derivatives | $ | 19,920 | | | $ | 518 | | | $ | 324 | | | $ | 91 | | | $ | 216 | | | $ | 20,481 | | | $ | 202 | | | $ | 205 | | | $ | 77 | | | $ | 50 | |
Offsetting of Derivative Instruments
The Company recognizes all derivative instruments on a gross basis in the 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 October 31, 2022 and 2021, 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 October 31, 2022 |
| In the Consolidated Balance Sheets | | | | |
| (i) | | (ii) | | (iii) = (i)–(ii) | | (iv) | | (v) | | | | (vi) = (iii)–(iv)–(v) |
| | | | | | | Gross Amounts Not Offset | | | | |
| Gross Amount Recognized | | Gross Amount Offset | | Net Amount Presented | | Derivatives | | Financial Collateral | | | | Net Amount |
| In millions |
Derivative assets | $ | 842 | | | $ | — | | | $ | 842 | | | $ | 199 | | | $ | 508 | | | (1) | | $ | 135 | |
Derivative liabilities | $ | 307 | | | $ | — | | | $ | 307 | | | $ | 199 | | | $ | 113 | | | (2) | | $ | (5) | |
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| As of October 31, 2021 |
| In the Consolidated Balance Sheets | | | | |
| (i) | | (ii) | | (iii) = (i)–(ii) | | (iv) | | (v) | | (vi) = (iii)–(iv)–(v) |
| | | | | | | Gross Amounts Not Offset | | | | |
| Gross Amount Recognized | | Gross Amount Offset | | Net Amount Presented | | Derivatives | | Financial Collateral | | | | Net Amount |
| In millions |
Derivative assets | $ | 407 | | | $ | — | | | $ | 407 | | | $ | 123 | | | $ | 173 | | | (1) | | $ | 111 | |
Derivative liabilities | $ | 127 | | | $ | — | | | $ | 127 | | | $ | 123 | | | $ | 5 | | | (2) | | $ | (1) | |
(1)Represents the cash collateral posted by counterparties as of the respective reporting date for the Company's asset position, net of derivative amounts that could be offset, as of, generally, two business days prior to the respective reporting date.
(2)Represents the collateral posted by the Company in cash or through re-use of counterparty cash collateral as of the respective reporting date for the Company's liability position, net of derivative amounts that could be offset, as of, generally, two business days prior to the respective reporting date. As of October 31, 2022 and 2021 the entire amount of the collateral posted of $113 million and $5 million, respectively, was through re-use of counterparty collateral.
The amounts recorded in the Consolidated Balance Sheets related to cumulative basis adjustments for fair value hedges were as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Carrying amount of the hedged assets/ (liabilities) | | Cumulative amount of fair value hedging adjustment included in the carrying amount of the hedged assets/ (liabilities) |
| As of October 31, | | As of October 31, |
Balance Sheet Line Item of Hedged Item | 2022 | | 2021 | | 2022 | | 2021 |
| In millions | | In millions |
Notes payable and short-term borrowings | $ | — | | | $ | (1,365) | | | $ | — | | | $ | (15) | |
Long-term debt | $ | (2,317) | | | $ | (2,573) | | | $ | 178 | | | $ | (80) | |
The pre-tax effect of derivative instruments in cash flow and net investment hedging relationships recognized in Other Comprehensive Income ("OCI") were as follows:
| | | | | | | | | | | | | | | | | |
| Gains (Losses) Recognized in OCI on Derivatives |
| For the twelve months ended October 31, |
| 2022 | | 2021 | | 2020 |
| In millions |
Derivatives in Cash Flow Hedging relationship | | | | | |
Foreign exchange contracts | $ | 1,025 | | | $ | (50) | | | $ | (34) | |
Interest rate contracts | — | | | — | | | (6) | |
Derivatives in Net Investment Hedging relationship | | | | | |
Foreign exchange contracts | 99 | | | (33) | | | 56 |
Total | $ | 1,124 | | | $ | (83) | | | $ | 16 | |
As of October 31, 2022, the Company expects to reclassify an estimated net accumulated other comprehensive gain of approximately $125 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.
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Effect of Derivative Instruments on the Consolidated Statements of Earnings
The pre-tax effect of derivative instruments on the Consolidated Statements of Earnings were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Gains (Losses) Recognized in Income |
| For the twelve months ended October 31, |
| 2022 | | 2021 | | 2020 |
| Net revenue | | Interest and other, net | | Net revenue | | Interest and other, net | | Net revenue | | Interest and other, net |
| In millions |
Total amounts of income and expense line items presented in the Consolidated Statements of Earnings in which the effects of fair value hedges, cash flow hedges and derivatives not designated as hedging instruments are recorded | $ | 28,496 | | | $ | (188) | | | $ | 27,784 | | | $ | (211) | | | $ | 26,982 | | | $ | (215) | |
Gains (losses) on derivatives in fair value hedging relationships | | | | | | | | | | | |
Interest rate contracts | | | | | | | | | | | |
Hedged items | — | | | 273 | | | — | | | 125 | | | — | | | (159) | |
Derivatives designated as hedging instruments | — | | | (273) | | | — | | | (125) | | | — | | | 159 | |
Gains (losses) on derivatives in cash flow hedging relationships | | | | | | | | | | | |
Foreign exchange contracts | | | | | | | | | | | |
Amount of gains (losses) reclassified from accumulated other comprehensive income into income | 388 | | | 590 | | | (81) | | | (73) | | | 38 | | | (14) | |
Interest rate contracts | | | | | | | | | | | |
Amount of gains (losses) reclassified from accumulated other comprehensive income into income | — | | | — | | | — | | | (2) | | | — | | | (3) | |
Gains (losses) on derivatives not designated as hedging instruments | | | | | | | | | | | |
Foreign exchange contracts | — | | | 287 | | | — | | | (68) | | | — | | | 44 | |
Other derivatives | — | | | (3) | | | — | | | 6 | | | — | | | (5) | |
Total gains (losses) | $ | 388 | | | $ | 874 | | | $ | (81) | | | $ | (137) | | | $ | 38 | | | $ | 22 | |
Note 14: 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 October 31, |
| 2022 | | 2021 |
| Amount Outstanding | | Weighted-Average Interest Rate | | Amount Outstanding | | Weighted-Average Interest Rate |
| Dollars in millions |
Current portion of long-term debt(1) | $ | 3,876 | | | 3.6 | % | | $ | 2,613 | | | 2.1 | % |
Commercial paper | 542 | | | 0.6 | % | | 705 | | | (0.3) | % |
Notes payable to banks, lines of credit and other | 194 | | | 2.7 | % | | 234 | | | 1.0 | % |
Total notes payable and short-term borrowings | $ | 4,612 | | | | | $ | 3,552 | | | |
(1)As of October 31, 2022, the Current portion of long-term debt, net of discount and issuance costs, included $1.5 billion associated with the current portion of the Company issued asset-backed debt securities.
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Long-Term Debt
| | | | | | | | | | | |
| As of October 31, |
| 2022 | | 2021 |
| In millions |
Hewlett Packard Enterprise Unsecured Senior Notes | | | |
$1,000 issued at discount to par at a price of 99.883% in July 2020 at 1.45% due April 1, 2024, interest payable semi-annually on April 1 and October 1 of each year | $ | 1,000 | | | $ | 999 | |
$750 issued at discount to par at a price of 99.820% in July 2020 at 1.75% due April 1, 2026, interest payable semi-annually on April 1 and October 1 of each year | 749 | | | 749 | |
$1,250 issued at discount to par at a price of 99.956% in April 2020 at 4.45% due October 2, 2023, interest payable semi-annually on April 2 and October 2 of each year | 1,250 | | | 1,250 | |
| | | |
| | | |
$1,000 issued at discount to par at a price of 99.979% in September 2019 at 2.25% due April 1, 2023, interest payable semi-annually on April 1 and October 1 of each year | 1,000 | | | 1,000 | |
| | | |
| | | |
$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 | — | | | 1,349 | |
$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 | 2,497 | | | 2,497 | |
$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 | | | 750 | |
$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 | |
Hewlett Packard Enterprise Asset-Backed Debt Securities | | | |
$651 issued in October 2022, in five tranches at a weighted average price of 99.99% and a weighted average interest rate of 5.55%, payable monthly from November 2022 with a stated final maturity date of August 2029 | 651 | | | — | |
$747 issued in May 2022, in six tranches at a weighted average price of 99.99% and a weighted average interest rate of 3.68%, payable monthly from July 2022 with a stated final maturity date of March 2030 | 614 | | | — | |
$1,000 issued in January 2022, in six tranches at a weighted average price of 99.99% and a weighted average interest rate of 1.51%, payable monthly from March 2022 with a stated final maturity date of November 2029 | 712 | | | — | |
$753 issued in June 2021, in six tranches at a weighted average price of 99.99% and a weighted average interest rate of 0.58%, payable monthly from August 2021 with a stated final maturity date of March 2029 | 362 | | | 636 | |
$1,000 issued in March 2021, in six tranches at a weighted average price of 99.99% and a weighted average interest rate of 0.49%, payable monthly from April 2021 with a stated final maturity date of March 2031 | 354 | | | 676 | |
$1,000 issued in June 2020, in six tranches at a weighted average price of 99.99% and a weighted average interest rate of 1.19%, payable monthly from August 2020 with a stated final maturity date of July 2030 | 151 | | | 442 | |
$755 issued in February 2020 of in six tranches at a weighted average price of 99.99% and a weighted average interest rate of 1.87%, payable monthly from April 2020 with a stated final maturity date of February 2030 | 88 | | | 261 | |
$763 issued in September 2019, in six tranches at a discount to par, at a weighted average price of 99.99% and a weighted average interest rate of 2.31%, payable monthly from November 2019 with a stated final maturity date of September 2029 | — | | | 145 | |
Other, including finance lease obligations, at 1.1%-5.4%, due in calendar years 2022-2030(1) | 261 | | | 198 | |
Fair value adjustment related to hedged debt | (178) | | | 95 | |
Unamortized debt issuance costs | (31) | | | (37) | |
Less: current portion | (3,876) | | | (2,613) | |
Total long-term debt | $ | 7,853 | | | $ | 9,896 | |
(1)Other, including finance lease obligations included $86 million and $70 million as of October 31, 2022 and 2021, 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 finance and operating leases. For both the periods presented, the carrying amount of the assets approximated the carrying amount of the borrowings.
Interest expense on borrowings recognized in the Consolidated Statements of Earnings was as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| | | For the fiscal years ended October 31, |
Expense | Location | | 2022 | | 2021 | | 2020 |
| | | In millions |
Financing interest | Financing interest | | $ | 211 | | | $ | 212 | | | $ | 271 | |
Interest expense | Interest and other, net | | 260 | | | 289 | | | 332 | |
Total interest expense | | | $ | 471 | | | $ | 501 | | | $ | 603 | |
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Hewlett Packard Enterprise Unsecured Senior Notes
In August 2022, the Company redeemed $1.35 billion of 4.40% Senior Notes with an original maturity date of October 15, 2022, utilizing the par call option on the debt, with no redemption penalties.
In October 2021, the Company redeemed $1 billion of 4.65% Senior Notes with an original maturity date of October 1, 2024. The Company recognized $100 million as early debt redemption costs within Interest and other, net in the Consolidated Statements of Earnings.
In September 2021, the Company redeemed $500 million of 3.5% Senior Notes with an original maturity date of October 5, 2021, and $800 million of its outstanding Floating Rate Senior Notes at three-month USD LIBOR plus 0.72% due October 5, 2021.
In March 2021, the Company repaid $500 million of Floating Rate Senior Notes at three-month USD LIBOR plus 0.68% on their original maturity date.
Asset-Backed Debt Securities
In September 2022, the Company redeemed $763 million asset-backed debt securities with a weighted average price of 99.99% and a weighted average interest rate of 2.31%, and an original maturity date of September 20, 2029.
As disclosed in Note 13, "Financial Instruments", the Company used interest rate swaps to mitigate the exposure of its fixed rate debt to changes in fair value resulting from changes in interest rates, or hedge the variability of cash flows in the interest payments associated with its variable-rate debt. Interest rates on long-term debt in the table above have not been adjusted to reflect the impact of any interest rate swaps.
Commercial Paper
Hewlett Packard Enterprise maintains two commercial paper programs, "the Parent Programs", and a wholly-owned subsidiary maintains a third program. The Parent Program in the U.S. provides for the issuance of U.S. dollar-denominated commercial paper up to a maximum aggregate principal amount of $4.75 billion. The Parent Program outside the U.S. provides for the issuance of commercial paper denominated in U.S. dollars, euros or British pounds up to a maximum aggregate principal amount of $3.0 billion or the equivalent in those alternative currencies. The combined aggregate principal amount of commercial paper outstanding under those two programs at any one time cannot exceed the $4.75 billion as authorized by Hewlett Packard Enterprise's Board of Directors. In addition, the Hewlett Packard Enterprise subsidiary's euro Commercial Paper/Certificate of Deposit Program provides for the issuance of commercial paper in various currencies of up to a maximum aggregate principal amount of $1.0 billion. As of October 31, 2022 and 2021, no borrowings were outstanding under the Parent Programs, and $542 million and $705 million, respectively, were outstanding under the subsidiary's program.
Revolving Credit Facility
In December 2021, the Company terminated its prior senior unsecured revolving credit facility and entered into a new senior unsecured revolving credit facility with an aggregate lending commitment of $4.75 billion for a period of five years. As of October 31, 2022 and 2021, no borrowings were outstanding under either credit facility.
Future Maturities of Borrowings
As of October 31, 2022, aggregate future maturities of the Company's borrowings at face value (excluding a fair value adjustment related to hedged debt of $178 million, a net discount of $5 million and debt issuance costs of $31 million), including finance lease obligations were as follows:
| | | | | |
Fiscal year | In millions |
2023 | $ | 3,882 | |
2024 | 2,038 | |
2025 | 2,973 | |
2026 | 770 | |
2027 | 10 | |
Thereafter | 2,270 | |
Total | $ | 11,943 | |
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 15: Stockholders' Equity
The components of accumulated other comprehensive loss, net of taxes as of October 31, 2022 and changes during fiscal 2022 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 | $ | 15 | | | $ | 81 | | | $ | (2,545) | | | $ | (466) | | | $ | (2,915) | |
| | | | | | | | | |
Other comprehensive (loss) income before reclassifications | (16) | | | 1025 | | | (315) | | | (146) | | | 548 | |
Reclassifications of (gains) losses into earnings | — | | | (978) | | | 160 | | | — | | | (818) | |
Tax (provision) benefit | — | | | (19) | | | 104 | | | 2 | | | 87 | |
Balance at end of period | $ | (1) | | | $ | 109 | | | $ | (2,596) | | | $ | (610) | | | $ | (3,098) | |
The components of accumulated other comprehensive loss, net of taxes as of October 31, 2021 and changes during fiscal 2021 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net unrealized gains (losses) on available-for-sale securities | | Net unrealized gains (losses) on cash flow hedges | | Unrealized components of defined benefit plans | | Cumulative translation adjustment | | Accumulated other comprehensive loss |
| In millions |
Balance at beginning of period | $ | 18 | | | $ | (7) | | | $ | (3,473) | | | $ | (477) | | | $ | (3,939) | |
| | | | | | | | | |
Other comprehensive (loss) income before reclassifications | (3) | | | (50) | | | 763 | | | 16 | | | 726 | |
Reclassifications of losses into earnings | — | | | 156 | | | 285 | | | — | | | 441 | |
Tax provision | — | | | (18) | | | (120) | | | (5) | | | (143) | |
Balance at end of period | $ | 15 | | | $ | 81 | | | $ | (2,545) | | | $ | (466) | | | $ | (2,915) | |
The components of accumulated other comprehensive loss, net of taxes as of October 31, 2020 and changes during fiscal 2020 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net unrealized gains (losses) on available-for-sale securities | | Net unrealized gains (losses) on cash flow hedges | | Unrealized components of defined benefit plans | | Cumulative translation adjustment | | Accumulated other comprehensive loss |
| In millions |
Balance at beginning of period | $ | 23 | | | $ | 53 | | | $ | (3,366) | | | $ | (437) | | | $ | (3,727) | |
Effect of change in accounting principle (1) | — | | | $ | (10) | | | $ | — | | | (33) | | | $ | (43) | |
Other comprehensive loss before reclassifications | (1) | | | (40) | | | (358) | | | (12) | | | (411) | |
Reclassifications of (gains) losses into earnings | (4) | | | (21) | | | 259 | | | — | | | 234 | |
Tax benefit (provision) | — | | | 11 | | | (8) | | | 5 | | | 8 | |
Balance at end of period | $ | 18 | | | $ | (7) | | | $ | (3,473) | | | $ | (477) | | | $ | (3,939) | |
(1)Reflects the adoption of the FASB guidance on stranded tax effects.
Dividends
The stockholders of HPE common stock are entitled to receive dividends when and as declared by HPE's Board of Directors. Dividends declared were $0.48 per common share in both fiscal 2022 and 2021.
On November 29, 2022, the Company declared a regular cash dividend of $0.12 per share on the Company's common stock, payable on January 13, 2023, to the stockholders of record as of the close of business on December 14, 2022.
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Share Repurchase Program
On October 13, 2015, the Company's Board of Directors approved a share repurchase program with a $3.0 billion authorization, which was refreshed with additional share repurchase authorizations of $3.0 billion, $5.0 billion and $2.5 billion on May 24, 2016, October 16, 2017 and February 21, 2018, respectively. This program, which does not have a specific expiration date, authorizes repurchases in the open market or in private transactions.
In fiscal 2022, the Company repurchased and settled a total of 35.4 million shares under its share repurchase program through open market repurchases, which included 0.8 million shares that were unsettled open market repurchases as of October 31, 2021. Additionally, the Company had unsettled open market repurchases of 0.3 million shares as of October 31, 2022. Shares repurchased during the fiscal 2022 were recorded as a $0.5 billion reduction to stockholders' equity. As of October 31, 2022, the Company had a remaining authorization of $1.4 billion for future share repurchases.
In fiscal 2021, the Company repurchased and settled a total of 14.7 million shares under its share repurchase program through open market repurchases and there were no unsettled open market repurchases outstanding as of October 31, 2020. Additionally, the Company had unsettled open market repurchases of 0.8 million shares as of October 31, 2021. Shares repurchased during the fiscal 2021 were recorded as a $0.2 billion reduction to stockholders' equity. As of October 31, 2021, the Company had a remaining authorization of $1.9 billion for future share repurchases.
Note 16: Net Earnings (Loss) Per Share
The Company calculates basic net earnings per share ("EPS") using net earnings and the weighted-average number of shares outstanding during the reporting period. Diluted net EPS includes the weighted-average dilutive effect of outstanding restricted stock units, stock options, and performance-based awards.
The reconciliations of the numerators and denominators of each of the basic and diluted net EPS calculations were as follows:
| | | | | | | | | | | | | | | | | |
| For the fiscal years ended October 31, |
| 2022 | | 2021 | | 2020 |
| In millions, except per share amounts |
Numerator: | | | | | |
| | | | | |
Net earnings (loss) | $ | 868 | | | $ | 3,427 | | | $ | (322) | |
Denominator: | | | | | |
Weighted-average shares used to compute basic net EPS | 1,303 | | | 1,309 | | | 1,294 | |
Dilutive effect of employee stock plans | 19 | | | 21 | | | — | |
Weighted-average shares used to compute diluted net EPS | 1,322 | | | 1,330 | | | 1,294 | |
Net earnings (loss) per share: | | | | | |
Basic | $ | 0.67 | | | $ | 2.62 | | | $ | (0.25) | |
| | | | | |
Diluted | $ | 0.66 | | | $ | 2.58 | | | $ | (0.25) | |
Anti-dilutive weighted-average stock awards(1) | 2 | | | 6 | | | 49 | |
(1)The Company excludes shares potentially issuable under employee stock plans that could dilute basic net EPS in the future from the calculation of diluted net earnings (loss) per share, as their effect, if included, would have been anti-dilutive for the periods presented.
Note 17: Litigation and Contingencies
Hewlett Packard Enterprise is involved in various lawsuits, claims, investigations and proceedings including those consisting of intellectual property, commercial, securities, employment, employee benefits, and environmental matters, which arise in the ordinary course of business. In addition, as part of the Separation and Distribution Agreement (the "Separation and Distribution Agreement") entered into in connection with Hewlett Packard Enterprise's spin-off from HP Inc. (formerly known as "Hewlett-Packard Company") (the "Separation"), Hewlett Packard Enterprise and HP Inc. 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
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
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 October 31, 2022, it was not reasonably possible that a material loss had been incurred in connection with such matters in excess of the amounts recognized in its financial statements.
Litigation, Proceedings and Investigations
Ross and Rogus v. Hewlett Packard Enterprise Company. On November 8, 2018, a putative class action complaint was filed in the Superior Court of California, County of Santa Clara alleging that HPE pays its California-based female employees "systemically lower compensation" than HPE pays male employees performing substantially similar work. The complaint alleges various California state law claims, including California's Equal Pay Act, Fair Employment and Housing Act, and Unfair Competition Law, and seeks certification of a California-only class of female employees employed in certain "Covered Positions." The complaint seeks damages, statutory and civil penalties, attorneys' fees and costs. On April 2, 2019, HPE filed a demurrer to all causes of action and an alternative motion to strike portions of the complaint. On July 2, 2019, the court denied HPE’s demurrer as to the claims of the putative class and granted HPE's demurrer as to the claims of the individual plaintiffs. The parties have reached an agreement to resolve this litigation. The terms of the class settlement are reflected in Plaintiff’s Motion for Preliminary Approval of Class Action Settlement and Certification of Settlement Class, which was filed with the Court on September 26, 2022. On November 3, 2022, the Court granted Plaintiff’s motion and preliminarily approved the terms of the class settlement, which defines the settlement class as all “[w]omen actively employed in California by Defendant at any point from November 1, 2015 through the date of Preliminary Approval” who were employed in a covered job code. The settlement class excludes certain individuals, including those who previously executed an arbitration agreement with HPE or an agreement that resulted in a release or waiver of claims. The hearing on final approval of the class settlement is scheduled for April 27, 2023.
India Directorate of Revenue Intelligence Proceedings. On April 30 and May 10, 2010, the India Directorate of Revenue Intelligence (the "DRI") issued show cause notices to Hewlett-Packard India Sales Private Ltd ("HP India"), a subsidiary of HP Inc., seven HP India employees and one former HP India employee alleging that HP India underpaid customs duties while importing products and spare parts into India and seeking to recover an aggregate of approximately $370 million, plus penalties. Prior to the issuance of the show cause notices, HP India deposited approximately $16 million with the DRI and agreed to post a provisional bond in exchange for the DRI's agreement to not seize HP India products and spare parts and to not interrupt the transaction of business by HP India.
On April 11, 2012, the Bangalore Commissioner of Customs issued an order on the products-related show cause notice affirming certain duties and penalties against HP India and the named individuals of approximately $386 million, of which HP India had already deposited $9 million. On December 11, 2012, HP India voluntarily deposited an additional $10 million in connection with the products-related show cause notice. On April 20, 2012, the Commissioner issued an order on the parts-related show cause notice affirming certain duties and penalties against HP India and certain of the named individuals of approximately $17 million, of which HP India had already deposited $7 million. After the order, HP India deposited an additional $3 million in connection with the parts-related show cause notice to avoid certain penalties.
HP India filed appeals of the Commissioner's orders before the Customs Tribunal along with applications for waiver of the pre-deposit of remaining demand amounts as a condition for hearing the appeals. The Customs Department has also filed cross-appeals before the Customs Tribunal. On January 24, 2013, the Customs Tribunal ordered HP India to deposit an additional $24 million against the products order, which HP India deposited in March 2013. The Customs Tribunal did not order any additional deposit to be made under the parts order. In December 2013, HP India filed applications before the Customs Tribunal seeking early hearing of the appeals as well as an extension of the stay of deposit as to HP India and the individuals already granted until final disposition of the appeals. On February 7, 2014, the application for extension of the stay of deposit was granted by the Customs Tribunal until disposal of the appeals. On October 27, 2014, the Customs Tribunal commenced hearings on the cross-appeals of the Commissioner's orders. The Customs Tribunal rejected HP India's request to remand the matter to the Commissioner on procedural grounds. The hearings were scheduled to reconvene on April 6, 2015,
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
and again on November 3, 2015, April 11, 2016, and January 15, 2019, but were canceled at the request of the Customs Tribunal. The hearing was again rescheduled for January 20, 2021 but was postponed and has not yet been rescheduled.
ECT Proceedings. In January 2011, the postal service of Brazil, Empresa Brasileira de Correios e Telégrafos ("ECT"), notified a former subsidiary of HP Inc. in Brazil ("HP Brazil") that it had initiated administrative proceedings to consider whether to suspend HP Brazil's right to bid and contract with ECT related to alleged improprieties in the bidding and contracting processes whereby employees of HP Brazil and employees of several other companies allegedly coordinated their bids and fixed results for three ECT contracts in 2007 and 2008. In late July 2011, ECT notified HP Brazil it had decided to apply the penalties against HP Brazil and suspend HP Brazil's right to bid and contract with ECT for five years, based upon the evidence before it. In August 2011, HP Brazil appealed ECT's decision. In April 2013, ECT rejected HP Brazil's appeal, and the administrative proceedings were closed with the penalties against HP Brazil remaining in place. In parallel, in September 2011, HP Brazil filed a civil action against ECT seeking to have ECT's decision revoked. HP Brazil also requested an injunction suspending the application of the penalties until a final ruling on the merits of the case. The court of first instance has not issued a decision on the merits of the case, but it has denied HP Brazil's request for injunctive relief. HP Brazil appealed the denial of its request for injunctive relief to the intermediate appellate court, which issued a preliminary ruling denying the request for injunctive relief but reducing the length of the sanctions from five to two years. HP Brazil appealed that decision and, in December 2011, obtained a ruling staying enforcement of ECT's sanctions until a final ruling on the merits of the case. HP Brazil expects any appeal of the decision on the merits to last several years.
Forsyth, et al. vs. HP Inc. and Hewlett Packard Enterprise. This purported class and collective action was filed on August 18, 2016 and an amended complaint was filed on December 19, 2016 in the United States District Court for the Northern District of California, against HP Inc. and Hewlett Packard Enterprise (collectively, "Defendants") alleging Defendants violated the Federal Age Discrimination in Employment Act ("ADEA"), the California Fair Employment and Housing Act, California public policy and the California Business and Professions Code by terminating older workers and replacing them with younger workers. Plaintiffs seek to certify a nationwide collective action under the ADEA comprised of all individuals age 40 years and older who had their employment terminated by an HP entity pursuant to a work force reduction ("WFR") plan on or after December 9, 2014 for individuals terminated in deferral states and on or after April 8, 2015 in non-deferral states. Plaintiffs also seek to certify a Rule 23 class under California law comprised of all persons 40 years or older employed by Defendants in the state of California and terminated pursuant to a WFR plan on or after August 18, 2012. Following the filing of Plaintiffs' Fourth Amended Complaint, Plaintiffs filed a Motion for Preliminary Class Certification on December 30, 2020. On April 14, 2021, Plaintiffs’ Motion for Conditional Class Certification was granted. The conditionally certified collective action consists of all individuals who had their employment terminated by Defendants pursuant to a WFR Plan on or after November 1, 2015, and who were 40 years or older at the time of such termination. The collective action excludes all individuals who signed a Waiver and General Release Agreement or an Agreement to Arbitrate Claims. The Court-approved notice was issued to potential class members and the opt-in period is now closed.
Hewlett-Packard Company v. Oracle (Itanium). On June 15, 2011, HP Inc. filed suit against Oracle in the Superior Court of California, County of Santa Clara in connection with Oracle's March 2011 announcement that it was discontinuing software support for HP Inc.'s Itanium-based line of mission critical servers. HP Inc. asserted, among other things, that Oracle's actions breached the contract that was signed by the parties as part of the settlement of the litigation relating to Oracle's hiring of Mark Hurd. Trial was bifurcated into two phases. HP Inc. prevailed in the first phase of the trial, in which the court ruled that the contract at issue required Oracle to continue to offer its software products on HP Inc.'s Itanium-based servers for as long as HP Inc. decided to sell such servers. Phase 2 of the trial was then postponed by Oracle's appeal of the trial court's denial of Oracle's "anti-SLAPP" motion, in which Oracle argued that HP Inc.'s damages claim infringed on Oracle's First Amendment rights. On August 27, 2015, the California Court of Appeal rejected Oracle's appeal. The matter was remanded to the trial court for Phase 2 of the trial, which began on May 23, 2016, and was submitted to the jury on June 29, 2016. On June 30, 2016, the jury returned a verdict in favor of HP Inc., awarding HP Inc. approximately $3.0 billion in damages: $1.7 billion for past lost profits and $1.3 billion for future lost profits. On October 20, 2016, the court entered judgment for this amount with interest accruing until the judgment is paid. Oracle's motion for a new trial was denied on December 19, 2016, and Oracle filed its notice of appeal from the trial court's judgment on January 17, 2017. On February 2, 2017, HP Inc. filed a notice of cross-appeal challenging the trial court's denial of prejudgment interest. On May 16, 2019, HP Inc. filed its application to renew the judgment. As of May 16, 2019, the renewed judgment is approximately $3.8 billion. Daily interest on the renewed judgment is now accruing at $1 million and will be recorded upon receipt. On June 14, 2021, the California Court of Appeal affirmed the judgment of the trial court. Oracle filed a Petition for Rehearing with the California Court of Appeal, which was denied on July 8, 2021. On July 26, 2021, Oracle filed a Petition for Review with the California Supreme Court. The California Supreme Court denied the petition on September 29, 2021, and the California Court of Appeal issued the remittitur on September 30, 2021. On October 12, 2021, Oracle paid $4.66 billion, reflecting all amounts owed on the judgment plus accrued interest. Pursuant to the
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
terms of the Separation and Distribution Agreement between HP Inc. and HPE, this amount was split evenly between the parties following the reimbursement of approximately $48 million in pre-separation legal costs incurred by HPE in prosecution of the litigation. In total, HPE has received payment of approximately $2.35 billion, which was recognized as a gain from litigation judgment during the year ended October 31, 2021. On October 27, 2021, HP Inc. filed an acknowledgement of full satisfaction of judgment. On January 27, 2022, Oracle filed a Petition for Writ of Certiorari asking the United States Supreme Court to grant review. On May 16, 2022, the United States Supreme Court denied Oracle's Petition. The matter is now closed.
Oracle America, Inc., et al. v. Hewlett Packard Enterprise Company (Terix copyright matter). On March 22, 2016, Oracle filed a complaint against HPE in the United States District Court for the Northern District of California, alleging copyright infringement, interference with contract, intentional interference with prospective economic relations, and unfair competition. Oracle’s claims arise out of HPE's prior use of a third-party maintenance provider named Terix Computer Company, Inc. ("Terix"). Oracle contends that in connection with HPE's use of Terix as a subcontractor for certain customers of HPE's multivendor support business, Oracle's copyrights were infringed, and HPE is liable for vicarious and contributory infringement and related claims. The lawsuit against HPE follows a prior lawsuit brought by Oracle against Terix in 2013 relating to Terix's alleged unauthorized provision of Solaris patches to customers on Oracle hardware. On January 29, 2019, the court granted HPE's Motion for Summary Judgment as to all of Oracle's claims. On February 20, 2019, the court entered judgment in favor of HPE, dismissing Oracle's claims in their entirety. Oracle appealed the trial court's ruling to the United States Court of Appeals for the Ninth Circuit. On August 20, 2020, the United States Court of Appeals for the Ninth Circuit issued its ruling, affirming in part and reversing in part the trial court's decision granting summary judgment in favor of HPE. On October 6, 2020, the matter was remanded to the United States District Court for the Northern District of California. On June 4, 2021, the Court issued an order denying HPE’s motion for summary judgment and granting-in-part Oracle’s motion for partial summary judgment as to a certain of HPE’s defenses. Trial began on May 23, 2022. On June 15, 2022, the jury returned its verdict, awarding $30 million in compensatory damages to Oracle and rejecting Oracle’s request for punitive damages. Judgment has not yet been entered by the Court as the parties are engaged in post-verdict motion practice on multiple issues, including HPE’s Motion for Judgment as a Matter of Law and Oracle’s request for an award of prejudgment interest and attorneys’ fees. The parties have since reached an agreement to resolve this dispute. Pursuant to the terms of the settlement, the case will be dismissed, and the matter closed.
Q3 Networking Litigation. On September 21 and September 22, 2020, Q3 Networking LLC filed complaints against HPE, Aruba Networks, Commscope and Netgear in the United States District Court for the District of Delaware and the United States International Trade Commission (“ITC”). Both complaints allege infringement of four patents, and the ITC complaint defines the “accused products” as “routers, access points, controllers, network management servers, other networking products, and hardware and software components thereof.” The ITC action was instituted on October 23, 2020. The District of Delaware action has been stayed pending resolution of the ITC action. The evidentiary hearing before the ITC has been completed. On December 7, 2021, the Administrative Law Judge issued his initial determination finding no violation of section 337 of the Tariff Act. On May 3, 2022, the ITC issued its Notice of Final Determination, affirming the initial determination and terminating the investigation. On June 18, 2022, Q3 Networking filed a petition for review of the ITC ruling with the United States Court of Appeals for the Federal Circuit.
Shared Litigation with HP Inc., DXC and Micro Focus
As part of the Separation and Distribution Agreements between Hewlett Packard Enterprise and HP Inc., Hewlett Packard Enterprise and DXC, and Hewlett Packard Enterprise and Seattle SpinCo, the parties to each agreement agreed to cooperate with each other in managing certain existing litigation related to both parties' businesses. The Separation and Distribution Agreements also included provisions that assign to the parties responsibility for managing pending and future litigation related to the general corporate matters of HP Inc. (in the case of the separation of Hewlett Packard Enterprise from HP Inc.) or of Hewlett Packard Enterprise (in the case of the separation of DXC from Hewlett Packard Enterprise and the separation of Seattle SpinCo from Hewlett Packard Enterprise), in each case arising prior to the applicable separation.
Environmental
The Company's operations and products are or may in the future become subject to various federal, state, local and foreign laws and regulations concerning environmental protection, including laws addressing the discharge of pollutants into the air and water, the management and disposal of hazardous substances and wastes, the clean-up of contaminated sites, the substances and materials used in the Company's products, the energy consumption of products, services, and operations and the operational or financial responsibility for recycling, treatment and disposal of those products. This includes legislation that makes producers of electrical goods, including servers and networking equipment, financially responsible for specified collection, recycling, treatment and disposal of past and future covered products (sometimes referred to as "product take-back
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
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, including those related to addressing climate change and other environmental related issues, or if its products become non-compliant with such environmental laws. The Company's potential exposure includes impacts on revenue, fines and civil or criminal sanctions, third-party property damage or personal injury claims and clean-up costs. The amount and timing of costs to comply with environmental laws are difficult to predict.
In particular, the Company may become a party to, or otherwise involved in, proceedings brought by U.S. or state environmental agencies under the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA"), known as "Superfund," or other federal, state or foreign laws and regulations addressing the clean-up of contaminated sites, and may become a party to, or otherwise involved in, proceedings brought by private parties for contribution towards clean-up costs. The Company is also contractually obligated to make financial contributions to address actions related to certain environmental liabilities, both ongoing and arising in the future, pursuant to its Separation and Distribution Agreement with HP Inc.
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 support 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-indemnifications
In connection with the Separation, Everett and Seattle Transactions, the Company entered into a Separation and Distribution Agreement with HP Inc., DXC and Micro Focus respectively, whereby the Company agreed to indemnify HP Inc., DXC and Micro Focus, 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, Everett and Seattle Transactions. Similarly, HP Inc., DXC and Micro Focus 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., DXC and Micro Focus as part of the Separation, Everett and Seattle Transactions.
Tax Matters Agreement with DXC/Micro Focus and Other Income Tax Matters
In connection with the Everett Transaction and the Seattle Transaction, the Company entered into a Tax Matters Agreement with DXC and Micro Focus respectively (the "DXC Tax Matters Agreement" and the "Micro Focus Tax Matters Agreement"). The DXC Tax Matters Agreement and the Micro Focus Tax Matters Agreement govern the rights and obligations of the Company and DXC/Micro Focus for certain pre-divestiture tax liabilities and tax receivables. The DXC Tax Matters Agreement and the Micro Focus Tax Matters Agreement generally provide that the Company will be responsible for pre-divestiture tax liabilities and will be entitled to pre-divestiture tax receivables that arise from adjustments made by tax
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
authorities to the Company's and DXC's, or Micro Focus', as applicable, U.S. and certain non-U.S. tax returns. In certain jurisdictions, the Company and DXC/Micro Focus have joint and several liability for past 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 Everett's or Seattle's common shares to Hewlett Packard Enterprise's stockholders is determined to be taxable, the Company would generally bear the tax liability, unless the taxability of the distribution is the direct result of actions taken by DXC/Micro Focus, in which case DXC/Micro Focus would be responsible for any taxes imposed on the distribution.
As of October 31, 2022 and 2021, the Company's receivable and payable balances related to indemnified litigation matters and other contingencies, and income tax-related indemnification covered by these agreements were as follows:
| | | | | | | | | | | |
| As of October 31, |
| 2022 | | 2021 |
| In millions |
Litigation matters and other contingencies | | | |
Receivable | $ | 47 | | | $ | 54 | |
Payable | $ | 50 | | | $ | 53 | |
| | | |
Income tax-related indemnification(1) | | | |
Net indemnification receivable - long-term | $ | 7 | | | $ | 50 | |
Net indemnification receivable - short-term | $ | 11 | | | $ | 11 | |
| | | |
| | | |
(1)The actual amount that the Company may receive or pay could vary depending upon the outcome of certain unresolved tax matters, which may not be resolved for several years.
Warranties
The Company's aggregate product warranty liabilities and changes therein were as follows:
| | | | | | | | | | | |
| For the fiscal years ended October 31, |
| 2022 | | 2021 |
| In millions |
Balance at beginning of year | $ | 327 | | | $ | 385 | |
Charges | 238 | | | 203 | |
Adjustments related to pre-existing warranties | (2) | | | (27) | |
Settlements made | (203) | | | (234) | |
Balance at end of year(1) | $ | 360 | | | $ | 327 | |
(1)The Company included the current portion in Other accrued liabilities, and amounts due after one year in Other non-current liabilities in the accompanying Consolidated Balance Sheets.
Note 19: Commitments
Unconditional Purchase Obligations
As of October 31, 2022, the Company had unconditional purchase obligations of approximately $1.6 billion. These unconditional purchase obligations include agreements to purchase goods or services that are enforceable and legally binding on the Company and that specify all significant terms, including fixed or minimum quantities to be purchased, fixed, minimum or variable price provisions and the approximate timing of the transaction, as well as settlements that the Company has reached with third parties, requiring it to pay determined amounts over a specified period of time. These unconditional purchase obligations are related principally to inventory purchases, software maintenance and support services and other items. Unconditional purchase obligations exclude agreements that are cancellable without penalty. The Company expects the commitments to total $449 million, $186 million, $273 million, $301 million, $327 million, and $14 million for fiscal years 2023, 2024, 2025, 2026, 2027 and thereafter, respectively.
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Notes to Consolidated Financial Statements (Continued)
Note 20: Equity Method Investments
The Company includes investments which are accounted for using the equity method, under Investments in equity interests on the Company's Consolidated Balance Sheets. As of October 31, 2022 and 2021, the Company's Investments in equity interests was $2.2 billion and primarily related to a 49% equity interest in H3C Technologies ("H3C").
In the periods presented, the Company recorded its interest in the net earnings of H3C, prepared in accordance with U.S. GAAP on a one-month lag, along with an adjustment to eliminate unrealized profits on intra-entity sales, and the amortization of basis difference, within Earnings from equity interests in the Consolidated Statements of Earnings.
The difference between the sale date carrying value of the Company's investment in H3C and its proportionate share of the net assets fair value of H3C, created a basis difference of $2.5 billion, which was allocated as follows:
| | | | | |
| In millions |
Equity method goodwill | $ | 1,674 | |
Intangible assets | 749 | |
In-process research and development | 188 | |
Deferred tax liabilities | (152) | |
Other | 75 | |
Basis difference | $ | 2,534 | |
The Company amortizes the basis difference over the estimated useful lives of the assets that gave rise to this difference. The weighted-average life of the H3C intangible assets is five years and is being amortized using the straight-line method. As of October 31, 2022 and 2021, the Company determined that no impairment of its equity method investments existed.
Earnings from equity interest
The Company recorded earnings from equity interests of $215 million, $180 million and $67 million in fiscal 2022, 2021 and 2020, respectively, in the Consolidated Statements of Earnings, the components of which are as follows:
| | | | | | | | | | | | | | | | | |
| For the fiscal years ended October 31, |
| 2022 | | 2021 | | 2020 |
| In millions |
Earnings from equity interests, net of taxes(1) | $ | 270 | | | $ | 292 | | | $ | 211 | |
Basis difference amortization | (45) | | | (109) | | | (145) | |
Elimination of profit on intra-entity sales adjustment | (10) | | | (3) | | | 1 | |
Earnings from equity interests | $ | 215 | | | $ | 180 | | | $ | 67 | |
(1) In fiscal 2022 and 2021, earnings from equity interests, net of taxes included $275 million and $260 million from H3C and ($5) million and $32 million from other venture investments, respectively.
In fiscal 2022 and 2021, the Company received a cash dividend of $197 million and $184 million, respectively, from H3C. This amount was accounted for as a return on investment and reflected as a reduction in the carrying balance of the Company's Investments in equity interests in its Consolidated Balance Sheets.
The Company also has commercial arrangements with H3C to buy and sell HPE branded servers, storage and networking products and services. During fiscal 2022, 2021 and 2020, HPE recorded approximately $848 million, $794 million and $737 million of sales to H3C and $148 million, $150 million and $215 million of purchases from H3C, respectively. Payables due to H3C as of October 31, 2022 and 2021 were approximately $22 million and $32 million, respectively. Receivables due from H3C as of October 31, 2022 and 2021 were approximately $18 million and $70 million, respectively.
A summary of H3C’s statements of operations for the twelve-month periods ended September 30, 2022, 2021 and 2020 and balance sheets as of September 30, 2022 and 2021 are as follows:
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Notes to Consolidated Financial Statements (Continued)
| | | | | | | | | | | | | | | | | |
| For the twelve months ended September 30, |
| 2022 | | 2021 | | 2020 |
Statement of Operations: | In millions |
Revenue | $ | 7,633 | | | $ | 6,377 | | | $ | 5,054 | |
Gross profit | 2,014 | | | 1,676 | | | 1,377 | |
Net income | 561 | | | 530 | | | 431 | |
| | | | | |
| | | | | | | | | | | | | |
| As of September 30, |
| 2022 | | 2021 | | |
Balance Sheets: | In millions |
Current assets | $ | 4,341 | | | $ | 3,830 | | | |
Non-current assets | 631 | | | 696 | | | |
Current liabilities | 3,299 | | | 2,903 | | | |
Non-current liabilities | 203 | | | 216 | | | |