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Hewlett Packard Enterprise Co - Quarter Report: 2018 July (Form 10-Q)

Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________________________________________________________________________
FORM 10-Q
(Mark One)
 
 
x
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: July 31, 2018
Or
o
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from            to            
Commission file number 001-37483
_______________________________________________________________________________
HEWLETT PACKARD ENTERPRISE COMPANY
(Exact name of registrant as specified in its charter)
Delaware
 
47-3298624
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. employer
identification no.)
3000 Hanover Street, Palo Alto, California
 
94304
(Address of principal executive offices)
 
(Zip code)
(650) 687-5817
(Registrant's telephone number, including area code)
_______________________________________________________________________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 (the "Exchange Act") during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer", "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer x
 
Accelerated filer o
 
Non-accelerated filer o
 (Do not check if a smaller
reporting company)
 
Smaller reporting company o
 
 
 
 
 
 
Emerging growth company o

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act). Yes o No x

Table of Contents


The number of shares of Hewlett Packard Enterprise Company common stock outstanding as of August 20, 2018 was 1,471,648,283 shares, par value $0.01.

Table of Contents

HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Form 10-Q
For the Quarterly Period Ended July 31, 2018

Table of Contents
 
 
 
Page
 
 
 
 
 
 
 
 
 
 
 


3
Table of Contents

Forward-Looking Statements
This Quarterly Report on Form 10-Q, including "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Item 2 of Part I, contains forward-looking statements that involve risks, uncertainties and assumptions. If the risks or uncertainties ever materialize or the assumptions prove incorrect, the results of Hewlett Packard Enterprise Company and its consolidated subsidiaries ("Hewlett Packard Enterprise") may differ materially from those expressed or implied by such forward-looking statements and assumptions. The words "believe", "expect", "anticipate", "optimistic", "intend", "aim", "will", "should" and similar expressions are intended to identify such forward-looking statements. All statements other than statements of historical fact are statements that could be deemed forward-looking statements, including but not limited to any projections of revenue, margins, expenses, effective tax rates, the impact of the U.S. Tax Cuts and Jobs Act of 2017, including the effect on deferred tax assets and the one-time transition tax on unremitted foreign earnings, net earnings, net earnings per share, cash flows, benefit plan funding, deferred tax assets, share repurchases, currency exchange rates or other financial items; any projections of the amount, timing or impact of cost savings or restructuring charges; any statements of the plans, strategies and objectives of management for future operations, as well as the execution of transformation and restructuring plans and any resulting cost savings, revenue or profitability improvements; any statements concerning the expected development, performance, market share or competitive performance relating to products or services; any statements regarding current or future macroeconomic trends or events and the impact of those trends and events on Hewlett Packard Enterprise and its financial performance; any statements regarding pending investigations, claims or disputes; any statements of expectation or belief; and any statements of assumptions underlying any of the foregoing. Risks, uncertainties and assumptions include the need to address the many challenges facing Hewlett Packard Enterprise's businesses; the competitive pressures faced by Hewlett Packard Enterprise's businesses; risks associated with executing Hewlett Packard Enterprise's strategy; the impact of macroeconomic and geopolitical trends and events; the need to manage third-party suppliers and the distribution of Hewlett Packard Enterprise's products and the delivery of Hewlett Packard Enterprise's services effectively; the protection of Hewlett Packard Enterprise's intellectual property assets, including intellectual property licensed from third parties and intellectual property shared with HP Inc.; risks associated with Hewlett Packard Enterprise's international operations; the development and transition of new products and services and the enhancement of existing products and services to meet customer needs and respond to emerging technological trends; the execution and performance of contracts by Hewlett Packard Enterprise and its suppliers, customers, clients and partners; the hiring and retention of key employees; integration and other risks associated with business combination and investment transactions; the execution, timing and results of any transformation or restructuring plans, including estimates and assumptions related to the costs and anticipated benefits of implementing the transformation and restructuring plans; the effects of the U.S. Tax Cuts and Jobs Act and related guidance and regulations that may be implemented; the resolution of pending investigations, claims and disputes; and other risks that are described herein, including but not limited to the items discussed or referenced in "Risk Factors" in Item 1A of Part II of this Quarterly Report on Form 10-Q and that are otherwise described or updated from time to time in Hewlett Packard Enterprise's reports filed with the Securities and Exchange Commission. Hewlett Packard Enterprise assumes no obligation and does not intend to update these forward-looking statements.


4
Table of Contents

Part I. Financial Information
Item 1. Financial Statements and Supplementary Data.
Index
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

5
Table of Contents


HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Condensed Consolidated Statements of Earnings
(Unaudited)
 
Three Months Ended July 31,
 
Nine Months Ended July 31,
 
2018
 
2017
 
2018
 
2017
 
In millions, except per share amounts
Net revenue:
 

 
 

 
 
 
 
Products
$
4,944

 
$
4,691

 
$
14,414

 
$
12,920

Services
2,711

 
2,708

 
8,160

 
8,000

Financing income
109

 
102

 
332

 
291

Total net revenue
7,764

 
7,501

 
22,906

 
21,211

Costs and expenses:
 

 
 

 
 
 
 
Cost of products
3,515

 
3,447

 
10,428

 
9,329

Cost of services
1,800

 
1,793

 
5,436

 
5,268

Financing interest
69

 
66

 
207

 
197

Research and development
434

 
390

 
1,224

 
1,122

Selling, general and administrative
1,203

 
1,285

 
3,632

 
3,718

Amortization of intangible assets
72

 
97

 
222

 
235

Restructuring charges
2

 
152

 
14

 
304

Transformation costs
131

 
31

 
499

 
31

Acquisition and other related charges
24

 
56

 
70

 
150

Separation costs
(2
)
 
5

 
—

 
46

Defined benefit plan settlement charges and remeasurement (benefit)
—

 
(22
)
 
—

 
(38
)
Total costs and expenses
7,248

 
7,300

 
21,732

 
20,362

Earnings from continuing operations
516

 
201

 
1,174

 
849

Interest and other, net
(64
)
 
(87
)
 
(163
)
 
(251
)
Tax indemnification adjustments
2

 
10

 
(1,342
)
 
(1
)
Earnings (loss) from equity interests
11

 
1

 
23

 
(24
)
Earnings (loss) from continuing operations before taxes
465

 
125

 
(308
)
 
573

(Provision) benefit for taxes
(13
)
 
160

 
3,092

 
(515
)
Net earnings from continuing operations
452

 
285

 
2,784

 
58

Net loss from discontinued operations
(1
)
 
(120
)
 
(119
)
 
(238
)
Net earnings (loss)
$
451

 
$
165

 
$
2,665

 
$
(180
)
Net earnings (loss) per share:
 

 
 

 
 
 
 
Basic
 
 
 
 
 
 
 
Continuing operations
$
0.30

 
$
0.17

 
$
1.79

 
$
0.04

Discontinued operations
—

 
(0.07
)
 
(0.07
)
 
(0.15
)
Total basic net earnings (loss) per share
$
0.30

 
$
0.10

 
$
1.72

 
$
(0.11
)
Diluted
 
 
 
 
 
 
 
Continuing operations
$
0.29

 
$
0.17

 
$
1.76

 
$
0.03

Discontinued operations
—

 
(0.07
)
 
(0.07
)
 
(0.14
)
Total diluted net earnings (loss) per share
$
0.29

 
$
0.10

 
$
1.69

 
$
(0.11
)
Cash dividends declared per share
$
0.1125

 
$
0.0650

 
$
0.3750

 
$
0.2600

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

 
 

 
 
 
 
Basic
1,513

 
1,641

 
1,552

 
1,656

Diluted
1,531

 
1,667

 
1,578

 
1,683

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

6
Table of Contents

HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Condensed Consolidated Statements of Comprehensive Income
(Unaudited)
 
Three Months Ended
July 31,
 
Nine Months Ended
July 31,
 
2018
 
2017
 
2018
 
2017
 
In millions
Net earnings (loss)
$
451

 
$
165

 
$
2,665

 
$
(180
)
Other comprehensive income before taxes:
 

 
 

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

 
 

 
 
 
 
Net unrealized (losses) gains arising during the period
(2
)
 
7

 
(1
)
 
(10
)
Gains reclassified into earnings
—

 
—

 
(9
)
 
—


(2
)
 
7

 
(10
)
 
(10
)
Change in net unrealized gains (losses) on cash flow hedges:
 

 
 

 
 
 
 
Net unrealized gains (losses) arising during the period
149

 
(133
)
 
50

 
7

Net (gains) losses reclassified into earnings
(43
)
 
15

 
78

 
(231
)

106

 
(118
)
 
128

 
(224
)
Change in unrealized components of defined benefit plans:
 

 
 

 
 
 
 
(Losses) gains arising during the period
(25
)
 
210

 
(23
)
 
700

Amortization of actuarial loss and prior service benefit
47

 
56

 
143

 
230

Curtailments, settlements and other
9

 
6

 
11

 
9


31

 
272

 
131

 
939

Change in cumulative translation adjustment
(40
)
 
49

 
(40
)
 
13

Other comprehensive income before taxes
95

 
210

 
209

 
718

Provision for taxes
(19
)
 
(26
)
 
(34
)
 
(58
)
Other comprehensive income, net of taxes
76

 
184

 
175

 
660

Comprehensive income
$
527

 
$
349

 
$
2,840

 
$
480



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

7
Table of Contents

HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Unaudited)
 
As of
 
July 31, 2018
 
October 31, 2017
 
In millions, except par value
ASSETS
 

 
 

Current assets:
 

 
 

Cash and cash equivalents
$
5,193

 
$
9,579

Accounts receivable, net of allowance for doubtful accounts(1)
2,906

 
3,073

Financing receivables
3,435

 
3,378

Inventory
2,771

 
2,315

Assets held for sale(2)
6

 
14

Other current assets
3,156

 
3,085

Total current assets
17,467

 
21,444

Property, plant and equipment
6,184

 
6,269

Long-term financing receivables and other assets
12,863

 
12,600

Investments in equity interests
2,513

 
2,535

Goodwill
17,626

 
17,516

Intangible assets
860

 
1,042

Total assets
$
57,513

 
$
61,406

LIABILITIES AND STOCKHOLDERS' EQUITY
 

 
 

Current liabilities:
 

 
 

Notes payable and short-term borrowings
$
2,326

 
$
3,850

Accounts payable
6,143

 
6,072

Employee compensation and benefits
1,187

 
1,156

Taxes on earnings
484

 
429

Deferred revenue
3,168

 
3,128

Accrued restructuring
256

 
445

Other accrued liabilities
3,843

 
3,844

Total current liabilities
17,407

 
18,924

Long-term debt
9,963

 
10,182

Other non-current liabilities
6,681

 
8,795

Commitments and contingencies

 

Stockholders' equity
 

 
 

HPE stockholders' equity:
 

 
 

Preferred stock, $0.01 par value (300 shares authorized; none issued and outstanding at July 31, 2018)
—

 
—

Common stock, $0.01 par value (9,600 shares authorized; 1,482 and 1,595 shares issued and outstanding at July 31, 2018 and October 31, 2017, respectively)
15

 
16

Additional paid-in capital
31,338

 
33,583

Accumulated deficit
(5,021
)
 
(7,238
)
Accumulated other comprehensive loss
(2,906
)
 
(2,895
)
Total HPE stockholders' equity
23,426

 
23,466

Non-controlling interests
36

 
39

Total stockholders' equity
23,462

 
23,505

Total liabilities and stockholders' equity
$
57,513

 
$
61,406


8
Table of Contents

 
(1)
The allowance for doubtful accounts related to accounts receivable was $42 million at both July 31, 2018 and October 31, 2017.
(2)
In connection with the HPE Next initiative, the Company determined that certain properties within its real estate portfolio met the criteria to be classified as Assets held for sale. The Company expects these properties to be sold within the next twelve months.



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

9
Table of Contents

HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
 
Nine Months Ended
July 31,
 
2018
 
2017
 
In millions
Cash flows from operating activities:
 

 
 

Net earnings (loss)
$
2,665

 
$
(180
)
Adjustments to reconcile net earnings (loss) to net cash provided by operating activities:
 

 
 

Depreciation and amortization
1,931

 
2,369

Stock-based compensation expense
242

 
349

Provision for inventory and doubtful accounts
137

 
82

Restructuring charges
399

 
558

Deferred taxes on earnings
(1,215
)
 
145

(Earnings) loss from equity interests
(23
)
 
24

Dividends received from equity investees
47

 
—

Other, net
55

 
392

Changes in operating assets and liabilities, net of acquisitions:
 

 
 

Accounts receivable
137

 
250

Financing receivables
(228
)
 
(127
)
Inventory
(545
)
 
(341
)
Accounts payable
72

 
652

Taxes on earnings
(2,271
)
 
(602
)
Restructuring
(540
)
 
(688
)
Other assets and liabilities(1)
775

 
(2,379
)
Net cash provided by operating activities
1,638

 
504

Cash flows from investing activities:
 

 
 

Investment in property, plant and equipment
(2,129
)
 
(2,405
)
Proceeds from sale of property, plant and equipment
561

 
403

Purchases of available-for-sale securities and other investments
(32
)
 
(31
)
Maturities and sales of available-for-sale securities and other investments
96

 
14

Financial collateral posted
(1,318
)
 
(384
)
Financial collateral returned
1,333

 
49

Payments made in connection with business acquisitions, net of cash acquired
(207
)
 
(2,050
)
Proceeds from (payments to) business divestitures, net
13

 
(20
)
Net cash used in investing activities
(1,683
)
 
(4,424
)
Cash flows from financing activities:
 

 
 

Short-term borrowings with original maturities less than 90 days, net
84

 
30

Proceeds from debt, net of issuance costs
894

 
3,340

Restricted cash - Seattle debt issuance (2)
—

 
(2,620
)
Payment of debt
(2,538
)
 
(2,296
)
Settlement of cash flow hedge
—

 
5

Net proceeds related to stock-based award activities
104

 
41

Repurchase of common stock
(2,585
)
 
(1,936
)

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Table of Contents

Cash dividend from Everett
—

 
3,008

Net transfer of cash and cash equivalents to Everett
(41
)
 
(559
)
Net transfer of cash and cash equivalents from Seattle
156

 
—

Cash dividends paid to non-controlling interests
(9
)
 
—

Cash dividends paid
(406
)
 
(323
)
Net cash used in financing activities
(4,341
)
 
(1,310
)
Decrease in cash and cash equivalents
(4,386
)
 
(5,230
)
Cash and cash equivalents at beginning of period
9,579

 
12,987

Cash and cash equivalents at end of period
$
5,193

 
$
7,757

 
(1)
For the nine months ended July 31, 2017, this amount includes $1.9 billion of pension funding payments associated with the separation and merger of Everett SpinCo, Inc. with Computer Sciences Corporation.
(2)
For the nine months ended July 31, 2017, this amount represents a $2.6 billion Seattle SpinCo, Inc. term loan facility. The proceeds from the term loan were used to fund a $2.5 billion dividend payment from Seattle SpinCo, Inc. to HPE. The obligation under the term loan facility was retained by Seattle SpinCo, Inc.







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



11

HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 1: Overview and Basis of Presentation
Background
Hewlett Packard Enterprise Company ("Hewlett Packard Enterprise", "HPE" or "the Company") is an industry leading technology company that enables customers to go further, faster. With a deep and comprehensive portfolio, spanning the cloud to the data center to the intelligent edge, its technology and services help customers around the world make better business outcomes. Hewlett Packard Enterprise's customers range from small- and medium-sized businesses ("SMBs") to large global enterprises. On November 1, 2015, the Company became an independent publicly-traded company through a pro rata distribution by HP Inc. ("former Parent" or "HPI"), formerly known as Hewlett-Packard Company, of 100% of the outstanding shares of Hewlett Packard Enterprise Company to HP Inc.'s stockholders (the "Separation").
Discontinued Operations
On April 1, 2017, HPE completed the separation and merger of its Enterprise Services business with Computer Sciences Corporation ("CSC") (collectively, the "Everett Transaction"). HPE transferred its Enterprise Services business to Everett SpinCo, Inc. (a wholly-owned subsidiary of HPE) ("Everett") and distributed all of the shares of Everett to HPE stockholders. Following the distribution, New Everett Merger Sub Inc., a wholly-owned subsidiary of Everett, merged with and into CSC and Everett changed its name to DXC Technology Company ("DXC").
On September 1, 2017, the Company completed the separation and merger of its Software business segment with Micro Focus International plc (“Micro Focus”) (collectively, the “Seattle Transaction”). HPE transferred its Software business segment to Seattle SpinCo, Inc. (a wholly-owned subsidiary of HPE) ("Seattle"), and distributed all of the shares of Seattle to HPE stockholders. Following the share distribution, Seattle MergerSub, Inc., an indirect, wholly-owned subsidiary of Micro Focus, merged with and into Seattle.
The historical financial results of Everett and Seattle are reported as Net loss from discontinued operations in the Condensed Consolidated Statements of Earnings. For further information on discontinued operations, see Note 2, "Discontinued Operations".
Basis of Presentation
These Condensed Consolidated Financial Statements of the Company were prepared in accordance with United States ("U.S.") Generally Accepted Accounting Principles ("GAAP"). In the opinion of management, the accompanying unaudited Condensed Consolidated Financial Statements of Hewlett Packard Enterprise contain all adjustments, including normal recurring adjustments, necessary to present fairly the Company's financial position as of July 31, 2018 and October 31, 2017, its results of operations for the three and nine months ended July 31, 2018 and 2017 and its cash flows for the nine months ended July 31, 2018 and 2017.
The results of operations for the three and nine months ended July 31, 2018 and its cash flows for the nine months ended July 31, 2018, are not necessarily indicative of the results to be expected for the full year. The information included in this Quarterly Report on Form 10-Q should be read in conjunction with the Company's Annual Report on Form 10-K for the fiscal year ended October 31, 2017, including "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Quantitative and Qualitative Disclosures About Market Risk" and the Consolidated and Combined Financial Statements and notes thereto included in Items 7, 7A and 8, respectively, included therein.
Principles of Consolidation
The accompanying unaudited Condensed Consolidated Financial Statements include the accounts of the Company and all 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 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 (loss) from equity interests in the Condensed Consolidated Statements of Earnings.

12
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)

Non-controlling interests are presented as a separate component within Total stockholders' equity in the Condensed Consolidated Balance Sheets. Net earnings attributable to non-controlling interests are recorded within Interest and other, net in the Condensed Consolidated Statements of Earnings and are not presented separately, as they were not material for any period presented.
Segment Realignment and Reclassifications
See Note 3, "Segment Information", for a discussion of the Company's segment realignment.
Use of Estimates
The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the Company's Condensed Consolidated Financial Statements and accompanying notes. Actual results could differ materially from those estimates.
Acquisition
On June 1, 2018 the Company completed the acquisition of Plexxi, a leading provider of software-defined data fabric networking technology. Plexxi's results of operations have been included within the Hybrid IT segment from the date of the acquisition.
Recent Tax Legislation
On December 22, 2017, the Tax Cuts and Jobs Act (the “Tax Act”) was enacted into law. The Tax Act includes significant changes to the U.S. corporate income tax structure, including a federal corporate rate reduction from 35% to 21% effective January 1, 2018; limitations on the deductibility of interest expense and executive compensation; creation of new minimum taxes such as the Base Erosion Anti-abuse Tax (“BEAT”) and the Global Intangible Low Taxed Income (“GILTI”) tax; and the transition of U.S. international taxation from a worldwide tax system to a modified territorial tax system, which will result in a one-time U.S. tax liability on those earnings which have not previously been repatriated to the U.S. (the “Transition Tax”).
In December 2017, the U.S. Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act (“SAB 118”), which allows the Company to record provisional amounts during a measurement period not to extend beyond one year of the enactment date. Due to the complexity involved in applying the provisions of the Tax Act, the Company has not completed the accounting for the effects of the Tax Act, but has made reasonable estimates of the effects and recorded provisional amounts in its Condensed Consolidated Financial Statements for the three and nine months ended July 31, 2018. The accounting for the tax effects of the Tax Act will be completed during the measurement period in accordance with SAB 118. For further details, see Note 7, "Taxes on Earnings".
Recently Adopted Accounting Pronouncements
In March 2018, the Financial Accounting Standards Board (“FASB”) issued guidance that amends ASC 740, Income Taxes, to reflect and codify SAB 118. The guidance became effective upon issuance. The Company applied SAB 118 upon the original issuance in December 2017 prior to the codification. See Note 7, “Taxes on Earnings” for a full description of the impact of the Tax Act to the Company's operations.
  In March 2016, the FASB amended the existing accounting standards for employee share-based payment arrangements. The new guidance requires excess tax benefits and tax deficiencies to be recorded in the income statement when stock awards vest or are settled. In addition, cash flows related to excess tax benefits will no longer be separately classified as an inflow from financing activities, with a corresponding outflow from operating activities, but will be classified along with other income tax cash flows as an operating activity. The standard also allows the Company to repurchase more of an employee’s vesting shares for tax withholding purposes without triggering liability accounting and clarifies that all cash payments made to tax authorities on an employee’s behalf for withheld shares should be presented as a financing activity on the statement of cash flows. The Company adopted the guidance in the first quarter of fiscal 2018 and prospectively recorded all excess tax benefits and tax deficiencies arising from stock awards vesting or settled as income tax expense or benefit, rather than in equity. For the three and nine months ended July 31, 2018, the impact of the adoption was the recognition of $26 million and $68 million respectively, of net excess tax benefits as a component of the (provision) benefit for income taxes. The Company elected to continue to estimate forfeitures of awards in determining stock-based compensation expense. The Company elected to apply the presentation requirements for cash flows retrospectively, which resulted in an increase to Net cash provided by operating activities of $441 million and a corresponding increase to Net cash used in financing activities for the nine months ended July

13
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)

31, 2017. There were no other material impacts to the Company's Condensed Consolidated Financial Statements as a result of adopting this standard.
Recently Enacted Accounting Pronouncements
In February 2018, the FASB issued guidance that allows companies to reclassify stranded tax effects resulting from the Tax Act, from accumulated other comprehensive income to retained earnings. The guidance also requires certain new disclosures regardless of the election.  The Company is required to adopt the guidance in the first quarter of fiscal 2020. Early adoption is permitted. The Company is currently evaluating the timing and the impact of these amendments to its Condensed Consolidated Financial Statements.
In February 2016, the FASB amended the existing accounting standards for leases. The amendments require lessees to record, at lease inception, a lease liability for the obligation to make lease payments and a right-of-use ("ROU") asset for the right to use the underlying asset for the lease term on their balance sheets. Lessees may elect to not recognize lease liabilities and ROU assets for most leases with terms of 12 months or less. The lease liability is measured at the present value of the lease payments over the lease term. The ROU asset will be based on the liability, adjusted for lease prepayments, lease incentives received, and the lessee's initial direct costs. For finance leases, lease expense will be the sum of interest on the lease obligation and amortization of the ROU asset, resulting in a front-loaded expense pattern. For operating leases, lease expense will generally be recognized on a straight-line basis over the lease term. The amended lessor accounting model is similar to the current model, updated to align with certain changes to the lessee model and the new revenue standard. The current sale-leaseback guidance, including guidance applicable to real estate, is also replaced with a new model for both lessees and lessors. The Company is required to adopt the guidance in the first quarter of fiscal 2020 and early adoption is permitted. In addition, the FASB provided a practical expedient transition method to adopt the new lease requirements by allowing companies to recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption that would enable the Company to not provide comparative period financial statements. Instead, the Company would apply the transition provisions at its effective date. The Company is currently evaluating the timing and the impact of these amendments on its Condensed Consolidated Financial Statements.
In May 2014, the FASB amended the existing accounting standards for revenue recognition. The Company plans to adopt the new revenue standard in the first quarter of fiscal 2019, beginning November 1, 2018, using the modified retrospective method. The Company has completed a review of the accounting systems and processes required to apply the modified retrospective method. In response, the Company is in the process of implementing a new IT solution as part of the adoption of the new standard. The Company expects revenue recognition for its broad portfolio of hardware, software and services offerings to remain largely unchanged. However, the guidance is expected to change the timing of revenue recognition in certain areas, including accounting for certain software licenses. The Company is still assessing the impact of these changes. Since the Company currently expenses sales commissions as incurred, the requirement in the new standard to capitalize certain sales commissions will result in an accounting change for the Company. The Company is in the process of quantifying the impact on its Consolidated Financial Statements. The Company will continue to assess the impact of the new revenue standard as it works through the adoption in fiscal 2018, and there still remain areas to be fully concluded upon.
There have been no other significant changes to the Company's accounting policies or recently adopted or enacted accounting pronouncements disclosed in the Company's Annual Report on Form 10-K for the fiscal year ended October 31, 2017.
Note 2: Discontinued Operations
On April 1, 2017 and September 1, 2017, the Company completed the Everett and Seattle Transactions, respectively. As a result, the financial results of Everett and Seattle are presented as Net loss from discontinued operations in the Condensed Consolidated Statements of Earnings.


14
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)


The following table presents the financial results for HPE's discontinued operations.
 
Three Months Ended
July 31,
 
Nine Months Ended
July 31,
 
2018
 
2017
 
2018
 
2017
 
In millions
Net revenue
$
—

 
$
708

 
$
—

 
$
8,337

Cost of revenue(1)
—

 
218

 
—

 
5,838

Expenses(2)
—

 
647

 
51

 
2,888

Interest and other, net(3)
—

 
10

 
68

 
13

Loss from discontinued operations before taxes
—

 
(167
)
 
(119
)
 
(402
)
(Provision) benefit for taxes
(1
)
 
47

 
—

 
164

Net loss from discontinued operations
$
(1
)
 
$
(120
)
 
$
(119
)
 
$
(238
)
 
(1)
Cost of revenue includes cost of products and services.
(2)
Expenses for the nine months ended July 31, 2018 primarily consist of separation costs. Expenses for the three and nine months ended July 31, 2017 primarily consist of selling, general and administrative (“SG&A”) expenses, research and development (“R&D”) expenses, restructuring charges, separation costs, amortization of intangible assets, acquisition and other related charges, and defined benefit plan settlement charges and remeasurement (benefit).
(3)
Interest and other, net for the nine months ended July 31, 2018 primarily consists of tax indemnification adjustments in connection with the Everett and Seattle Transactions.
For the three and nine months ended July 31, 2017, significant non-cash items of discontinued operations consisted of depreciation and amortization of $44 million and $514 million, respectively. For the nine months ended July 31, 2017, purchases of property, plant and equipment of discontinued operations consisted of $153 million.
Note 3: Segment Information
Hewlett Packard Enterprise's operations are organized into four segments for financial reporting purposes: Hybrid IT, Intelligent Edge, Financial Services ("FS"), and Corporate Investments. Hewlett Packard Enterprise's organizational structure is based on a number of factors that the Chief Operating Decision Maker ("CODM"), the Chief Executive Officer ("CEO"), uses to evaluate, view and run its business operations, which include, but are not limited to, customer base and homogeneity of products and technology. The segments are based on this organizational structure and information reviewed by Hewlett Packard Enterprise's management to evaluate segment results.
A summary description of each segment follows.
Hybrid IT provides a broad portfolio of services-led and software-enabled infrastructure and solutions including secure, software-defined servers, storage, data center networking and HPE Pointnext services, thereby combining HPE's hardware, software and services capabilities to make Hybrid IT simple for its customers. Described below are the business units and capabilities within Hybrid IT.
•
Hybrid IT Product includes Compute, Storage and Data Center Networking ("DC Networking").

◦
Compute offers both Industry Standard Servers ("ISS") as well as Mission-Critical Servers ("MCS") to address the full array of the Company's customers' computing needs. ISS provides a range of products, from entry level servers through premium HPE ProLiant servers. For the most mission-critical workloads, HPE delivers Integrity servers based on the Intel® Itanium® processor, HPE Integrity NonStop solutions and mission-critical x86 ProLiant servers.
◦
Storage offers Converged Storage solutions and traditional storage. Converged Storage solutions include All-Flash Arrays and hybrid storage solutions like HPE Nimble Storage, 3PAR StoreServe, StoreOnce, Big Data, StoreVirtual, and Software Defined and Cloud Group storage products. Traditional storage includes tape, storage networking and legacy external disk products such as MSA and XP.

15
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)

◦
DC Networking offerings include top-of-rack switches, core switches, and open networking switches. The Company offers a full stack of networking solutions that deliver open, scalable, secure, and agile solutions, by enabling programmable fabric, network virtualization, and network management products.

•
HPE Pointnext creates preferred IT experiences that power a digital business. The HPE Pointnext team and the Company's extensive partner network provide value across the IT life cycle delivering advice, transformation projects, professional services, support services, and operational services. HPE Pointnext is also a provider of on-premises flexible consumption models that enable IT agility, simplify operations and align costs to business value. HPE Pointnext offerings includes Operational Services, Advisory and Professional Services, and Communications and Media Solutions ("CMS").

Intelligent Edge offers unified, software-defined Aruba Mobile First architecture solutions for connectivity in the campus and branch environments, including wireless local area network equipment, mobility and security software, switches, routers, network management products, and associated customer support, as well as industrial IoT solutions.
Financial Services provides flexible investment solutions, such as leasing, financing, IT consumption, and utility programs and asset management services, for customers to enable the creation of unique technology deployment models and acquire complete IT solutions, including hardware, software and services from HPE and others. Providing flexible services and capabilities that support the entire IT life cycle, FS partners with customers globally to help build investment strategies that enhance their business agility and support their business transformation. FS offers a wide selection of investment solution capabilities for large enterprise customers and channel partners, along with an array of financial options to SMBs and educational and governmental entities.
Corporate Investments includes Hewlett Packard Labs and certain business incubation projects.
Segment Policy
There have been no significant changes to the Company's segment accounting policies disclosed in the Company's Annual Report on Form 10-K for the fiscal year ended October 31, 2017, except as described in the 'Segment Realignment' section below.
Hewlett Packard Enterprise periodically engages in intercompany advanced royalty payment and licensing arrangements that may result in advance payments between subsidiaries. Revenues from these intercompany arrangements are deferred and recognized as earned over the term of the arrangement by the Hewlett Packard Enterprise legal entities involved in such transactions; however, these advanced payments are eliminated from revenues as reported by Hewlett Packard Enterprise and its business segments. Hewlett Packard Enterprise executed intercompany advanced royalty payment arrangements resulting in advanced payments of $439 million during the first nine months of fiscal 2017. In these transactions, the payments were received in the U.S. from a foreign consolidated affiliate, with a deferral of intercompany revenues over the term of the arrangements, approximately 15 years. The impact of these intercompany arrangements is eliminated from both Hewlett Packard Enterprise's consolidated and segment net revenues.
Hewlett Packard Enterprise does not allocate to its segments certain operating expenses, which it manages at the corporate level. These unallocated costs include certain corporate costs and eliminations, stock-based compensation expense related to corporate and certain global functions, transformation costs, amortization of intangible assets, acquisition and other related charges, restructuring charges, separation costs and defined benefit plan settlement charges and remeasurement (benefit).
Segment Realignment
Effective at the beginning of the first quarter of fiscal 2018, the Company implemented organizational changes to align its segment financial reporting more closely with its current business structure. These organizational changes primarily include: (i) the transfer of the former Servers and Storage business units, the HPE Pointnext and CMS businesses within the former Technology Services business unit, and the data center networking business within the former Networking business unit, all of which were previously reported within the former Enterprise Group ("EG") segment, to the newly formed Hybrid IT segment; (ii) the transfer of the remaining networking products businesses, which include wireless local area network, campus and branch switching and edge compute within the former Networking business unit, and Aruba services within the former Technology Services business unit, all of which were previously reported within the former EG segment, to the newly formed Intelligent Edge segment; and (iii) the transfer of cloud-related activities previously reported within Corporate Investments to the Hybrid IT segment.

16
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)

The Company reflected these changes to its segment information retrospectively to the earliest period presented, which primarily resulted in the transfer of net revenue, related eliminations of intersegment revenues and operating profit or loss from the former business units and segments to the newly formed business units and segments as described above.
The Company also implemented certain changes to its allocation methodology for stock-based compensation expense and certain corporate costs, which align to its segment financial reporting and are consistent with the manner in which the operating segments will be evaluated for performance on a prospective basis.
The Company reflected these changes retrospectively to the earliest period presented, which resulted in: (i) the transfer of a portion of stock-based compensation expense, which under the prior allocation methodology was not allocated to the segments, to the Hybrid IT, Intelligent Edge and Financial Services segments; and (ii) the transfer of certain corporate function costs previously allocated to the segments to unallocated corporate costs.
These changes had no impact on Hewlett Packard Enterprise's previously reported net revenue, earnings from operations, net earnings, or net earnings per share.
Segment Operating Results
 
Hybrid IT
 
Intelligent Edge
 
Financial
Services
 
Corporate
Investments
 
Total
 
In millions
Three months ended July 31, 2018
 

 
 

 
 

 
 

 
 

Net revenue
$
6,058

 
$
784

 
$
922

 
$
—

 
$
7,764

Intersegment net revenue and other
185

 
1

 
6

 
—

 
192

Total segment net revenue
$
6,243

 
$
785

 
$
928

 
$
—

 
$
7,956

Segment earnings (loss) from operations
$
661

 
$
91

 
$
73

 
$
(24
)
 
$
801

Three months ended July 31, 2017
 

 
 

 
 

 
 

 
 

Net revenue
$
5,898

 
$
707

 
$
896

 
$
—

 
$
7,501

Intersegment net revenue and other(1)
182

 
4

 
1

 
—

 
187

Total segment net revenue
$
6,080

 
$
711

 
$
897

 
$
—

 
$
7,688

Segment earnings (loss) from operations
$
482

 
$
104

 
$
69

 
$
(24
)
 
$
631

Nine months ended July 31, 2018
 

 
 

 


 
 

 
 

Net revenue
$
18,086

 
$
2,100

 
$
2,721

 
$
(1
)
 
$
22,906

Intersegment net revenue and other
511

 
15

 
11

 
—

 
537

Total segment net revenue
$
18,597

 
$
2,115

 
$
2,732

 
$
(1
)
 
$
23,443

Segment earnings (loss) from operations
$
1,890

 
$
155

 
$
217

 
$
(67
)
 
$
2,195

Nine months ended July 31, 2017
 

 
 

 
 

 
 

 
 

Net revenue
$
16,782

 
$
1,864

 
$
2,565

 
$
—

 
$
21,211

Intersegment net revenue and other(1)
690

 
23

 
27

 
—

 
740

Total segment net revenue
$
17,472

 
$
1,887

 
$
2,592

 
$
—

 
$
21,951

Segment earnings (loss) from operations
$
1,672

 
$
166

 
$
222

 
$
(85
)
 
$
1,975

 
(1)
For the three and nine months ended July 31, 2017, the amounts include the elimination of pre-separation intercompany sales to the former Software segment, which are included within Net loss from discontinued operations in the Condensed Consolidated Statements of Earnings. The nine months ended July 31, 2017 also includes the elimination of pre-separation intercompany sales to the former Enterprise Services segment.

17
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)

The reconciliation of segment operating results to Hewlett Packard Enterprise condensed consolidated results was as follows:
 
Three Months Ended
July 31,
 
Nine Months Ended
July 31,
 
2018
 
2017
 
2018
 
2017
 
In millions
Net Revenue:
 
 
 

 
 

 
 

Total segments
$
7,956

 
$
7,688

 
$
23,443

 
$
21,951

Eliminations of intersegment net revenue and other
(192
)
 
(187
)
 
(537
)
 
(740
)
Total Hewlett Packard Enterprise condensed consolidated net revenue
$
7,764

 
$
7,501

 
$
22,906

 
$
21,211

Earnings before taxes:
 

 
 

 
 

 
 

Total segment earnings from operations
$
801

 
$
631

 
$
2,195

 
$
1,975

Unallocated corporate costs and eliminations
(44
)
 
(88
)
 
(152
)
 
(308
)
Unallocated stock-based compensation expense
(14
)
 
(23
)
 
(64
)
 
(90
)
Amortization of intangible assets
(72
)
 
(97
)
 
(222
)
 
(235
)
Restructuring charges
(2
)
 
(152
)
 
(14
)
 
(304
)
Transformation costs
(131
)
 
(31
)
 
(499
)
 
(31
)
Acquisition and other related charges
(24
)
 
(56
)
 
(70
)
 
(150
)
Separation costs
2

 
(5
)
 
—

 
(46
)
Defined benefit plan settlement (charges) and remeasurement benefit
—

 
22

 
—

 
38

Interest and other, net
(64
)
 
(87
)
 
(163
)
 
(251
)
Tax indemnification adjustments
2

 
10

 
(1,342
)
 
(1
)
Earnings (loss) from equity interests
11

 
1

 
23

 
(24
)
Total Hewlett Packard Enterprise condensed consolidated earnings (loss) from continuing operations before taxes
$
465

 
$
125

 
$
(308
)
 
$
573


18
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)

Net revenue by segment and business unit was as follows:
 
Three Months Ended
July 31,
 
Nine Months Ended
July 31,
 
2018
 
2017
 
2018
 
2017
 
In millions
Hybrid IT
 
 
 
 
 
 
 
Hybrid IT Product
 
 
 
 
 
 
 
Compute
$
3,510

 
$
3,340

 
$
10,215

 
$
9,516

Storage
887

 
877

 
2,747

 
2,375

DC Networking
59

 
63

 
167

 
157

Total Hybrid IT Product
4,456

 
4,280

 
13,129

 
12,048

HPE Pointnext
1,787

 
1,800

 
5,468

 
5,424

Total Hybrid IT
6,243

 
6,080

 
18,597

 
17,472

Intelligent Edge
 
 
 
 
 
 
 
HPE Aruba Product
706

 
642

 
1,890

 
1,683

HPE Aruba Services
79

 
69

 
225

 
204

Total Intelligent Edge
785

 
711

 
2,115

 
1,887

Financial Services
928

 
897

 
2,732

 
2,592

Corporate Investments
—

 
—

 
(1
)
 
—

Total segment net revenue
7,956

 
7,688

 
23,443

 
21,951

Eliminations of intersegment net revenue and other        
(192
)
 
(187
)
 
(537
)
 
(740
)
Total Hewlett Packard Enterprise condensed consolidated net revenue
$
7,764

 
$
7,501

 
$
22,906

 
$
21,211

Note 4: Restructuring
Summary of Restructuring Plans
On September 14, 2015, former Parent's Board of Directors approved a restructuring plan (the "2015 Plan") in connection with the Separation. On May 23, 2012, former Parent adopted a multi-year restructuring plan (the "2012 Plan") designed to simplify business processes, accelerate innovation and deliver better results for customers, employees and stockholders. As of October 31, 2017, the 2015 and 2012 Plans were complete.
Restructuring Activity
In connection with the 2015 and 2012 Plans, restructuring charges of $2 million and $152 million have been recorded by the Company for the three months ended July 31, 2018 and 2017, respectively, and $14 million and $304 million for the nine months ended July 31, 2018 and 2017, respectively, based on restructuring activities impacting the Company's employees and infrastructure. For details on restructuring charges related to HPE Next, see Note 5, "HPE Next".

19
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)

Restructuring activities related to the Company's employees and infrastructure for the 2015 and 2012 Plans are presented in the table below:
 
2015 Plan
 
2012 Plan
 
 
 
Employee
Severance
 
Infrastructure
and other
 
Employee
Severance
and EER
 
Infrastructure
and other
 
Total
 
In millions
Liability as of October 31, 2017
$
219

 
$
17

 
$
16

 
$
2

 
$
254

Charges
5

 
(2
)
 
12

 
(1
)
 
14

Cash payments
(147
)
 
(8
)
 
(12
)
 
—

 
(167
)
Non-cash items
(3
)
 
4

 
(1
)
 
—

 
—

Liability as of July 31, 2018
$
74

 
$
11

 
$
15

 
$
1

 
$
101

Total costs incurred to date, as of July 31, 2018
$
747

 
$
78

 
$
1,267

 
$
145

 
$
2,237

Total costs expected to be incurred, as of July 31, 2018
$
747

 
$
78

 
$
1,267

 
$
145

 
$
2,237

The current restructuring liabilities related to the plans in the table above, reported in Accrued restructuring in the Condensed Consolidated Balance Sheets at July 31, 2018 and October 31, 2017, were $31 million and $158 million, respectively. The non-current restructuring liabilities related to the plans in the table above, reported in Other liabilities in the Condensed Consolidated Balance Sheets at July 31, 2018 and October 31, 2017, were $70 million and $96 million, respectively.
Note 5: HPE Next
Transformation Costs
The HPE Next initiative is expected to be implemented through fiscal 2020, during which time the Company expects to incur expenses for workforce reductions, to upgrade and simplify its IT infrastructure, and for other non-labor actions. These costs will be partially offset by proceeds resulting from real estate sales.
During the three and nine months ended July 31, 2018, the Company incurred $131 million and $499 million in net charges associated with the HPE Next initiative, which were recorded within Transformation costs in the Condensed Consolidated Statements of Earnings and include the following:
 
Three months ended July 31, 2018
 
Nine months ended July 31, 2018
 
In millions
Program management(1)
$
28

 
$
82

IT costs
38

 
107

Restructuring charges
129

 
385

Gain on real estate sales
(77
)
 
(114
)
Other
13

 
39

Total
$
131

 
$
499

 
(1)
Primarily consists of consulting fees and other direct costs attributable to the design and execution of the HPE Next initiative.


20
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)

Restructuring Plan
On October 16, 2017, the Company's Board of Directors approved a restructuring plan in connection with the HPE Next initiative (the "HPE Next Plan"), which will be implemented through fiscal 2020. The changes to the workforce will vary by country, based on business needs, local legal requirements and consultations with employee work councils and other employee representatives, as appropriate, and are expected to be completed during fiscal 2019. As of July 31, 2018, the Company estimates that it will incur aggregate pre-tax restructuring charges of approximately $0.9 billion through fiscal 2020 in connection with the HPE Next Plan, of which approximately $0.7 billion relates to workforce reductions and approximately $0.2 billion relates to infrastructure, primarily real estate site exits.
 
Employee
Severance
 
Infrastructure
and other
 
In millions
Liability as of October 31, 2017
$
296

 
$
—

Charges
347

 
38

Cash payments
(365
)
 
(8
)
Non-cash items
(13
)
 
(8
)
Liability as of July 31, 2018
$
265

 
$
22

Total costs incurred to date, as of July 31, 2018
$
643

 
$
38

Total costs expected to be incurred, as of July 31, 2018
$
750

 
$
180

As of July 31, 2018 and October 31, 2017, the current restructuring liability related to the HPE Next Plan, reported in Accrued restructuring in the Condensed Consolidated Balance Sheets, was $225 million and $287 million, respectively. The non-current restructuring liability related to the HPE Next Plan, reported in Other liabilities in the Condensed Consolidated Balance Sheets as of July 31, 2018 and October 31, 2017 was $62 million and $9 million, respectively.
Note 6: Retirement and Post-Retirement Benefit Plans
The Company's net pension benefit cost for defined benefit plans recognized in the Condensed Consolidated Statements of Earnings for the three and nine months ended July 31, 2018 and 2017, was as follows:
 
Three months ended July 31,
 
Nine months ended July 31,
 
2018
 
2017
 
2018
 
2017
 
In millions
Service cost
$
26

 
$
36

 
$
79

 
$
106

Interest cost
55

 
53

 
168

 
155

Expected return on plan assets
(139
)
 
(137
)
 
(423
)
 
(401
)
Amortization and deferrals:
 

 
 

 
 
 
 

Actuarial loss
52

 
60

 
158

 
200

Prior service benefit
(4
)
 
(4
)
 
(12
)
 
(12
)
Net periodic benefit (credit) cost
(10
)
 
8

 
(30
)
 
48

Settlement loss
9

 
6

 
11

 
9

Special termination benefits
1

 
1

 
5

 
3

Plan expense allocation(1)
—

 
(1
)
 
—

 
(17
)
Net benefit (credit) cost from continuing operations
—

 
14

 
(14
)
 
43

Summary of net benefit (credit) cost:
 
 
 
 
 
 
 
Continuing operations
—

 
14

 
(14
)
 
43

Discontinued operations
—

 
3

 
—

 
83

Net benefit (credit) cost
$
—

 
$
17

 
$
(14
)
 
$
126

 

21
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)

(1)
Plan expense allocation represents the net cost impact of employees of HPE covered under Everett or Seattle plans and employees of Everett or Seattle covered under HPE plans.
Net pension benefit cost for the Company's post-retirement benefit plans was not material for the three and nine months ended July 31, 2018 and 2017.
401(k) Plan
Effective January 1, 2018, the Hewlett Packard Enterprise Company 401(k) Plan ("HPE 401(k) Plan") was amended such that quarterly employer matching contributions will be 100% of an employee's contributions, up to a maximum of 4% of eligible compensation. During 2017, the Company's active U.S. employees were eligible to participate in the HPE 401(k) Plan, under which the annual employer matching contribution was 50% of an employee’s contributions, on a maximum of 6% of eligible compensation.
Note 7: Taxes on Earnings
Provision for Taxes
The Company's effective tax rate was 2.8% and (128.0)% for the three months ended July 31, 2018 and 2017, respectively, and 1,003.9% and 89.9% for the nine months ended July 31, 2018 and 2017, respectively. The effective tax rate for three months ended July 31, 2018 was impacted by various items discrete to the quarter. The effective tax rate for nine months ended July 31, 2018 was significantly impacted by the Tax Act and the settlement of certain pre-Separation tax liabilities of HP Inc.
For the three and nine months ended July 31, 2018, the Company recorded $68 million and $3.3 billion of net income tax benefits, respectively, related to various items discrete to the period. For the three months ended July 31, 2018 this amount primarily included $38 million of income tax benefits from the release of non-U.S. valuation allowances on deferred tax assets following changes in foreign tax laws, $33 million of net income tax benefits for impacts related to U.S. tax reform and $26 million of net excess tax benefits related to stock-based compensation partially offset by $7 million of income tax charges related to tax indemnification with HP Inc. For the nine months ended July 31, 2018, this amount primarily included $2.0 billion of income tax benefits for the effects of the settlement of certain pre-Separation income tax liabilities, $713 million of net income tax benefits for impacts related to U.S. tax reform, $228 million of income tax benefits from foreign tax credits and from the release of non-U.S. valuation allowances on deferred tax assets and liabilities established in connection with the Everett Transaction following changes in foreign tax laws, $203 million of income tax benefits related to the liquidation of an insolvent non-U.S. subsidiary, $74 million of net income tax benefits on restructuring charges, separation costs and acquisition and other related charges, $68 million of net excess tax benefits related to stock-based compensation and $38 million of income tax benefits from the release of non-U.S. valuation allowances on deferred tax assets following changes in foreign tax laws.
For the three and nine months ended July 31, 2017, the Company recorded $290 million of net income tax benefits and $236 million of net income tax charges, respectively, related to various items discrete to the period. For the three months ended July 31, 2017, this amount primarily included $189 million of income tax benefits related to the Everett transaction, $61 million of income tax benefits on restructuring charges, separation costs and acquisition and other related charges, $29 million of income tax benefits related to U.S. provision-to-return adjustments, and $25 million of income tax benefits related to the expiration of the statute of limitations on uncertain tax reserves partially offset by $26 million related to tax indemnification with HP Inc. For the nine months ended July 31, 2017, this amount primarily included $473 million of income tax charges from valuation allowances on U.S. state deferred tax assets and $57 million of income tax charges related to tax indemnification with HP Inc., partially offset by $129 million of net income tax benefits on restructuring charges, separation costs and acquisition and other related charges, $79 million of income tax benefits related to the Everett transaction, $29 million of income tax benefits related to U.S. provision-to-return adjustments and $25 million income tax benefits related to the expiration of the statute of limitations on uncertain tax reserves.
Recent Tax Legislation
See Note 1, "Overview and Basis of Presentation", for details related to the Tax Act. The Tax Act requires the Company to incur a one-time Transition Tax on deferred foreign income not previously subject to U.S. income tax at a rate of 15.5% for foreign cash and certain other net current assets and 8% on the remaining income. The GILTI and BEAT provisions of the Tax Act will be effective for the Company beginning November 1, 2018.

22
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)

The Company has an October 31 fiscal year end; therefore, the lower corporate tax rate enacted by the Tax Act will be phased in, resulting in a U.S. statutory federal rate of 23.3% for the fiscal year ending October 31, 2018 and 21% for subsequent fiscal years.
The Company has not completed its accounting for the tax effects of the Tax Act. Reasonable estimates of the impacts of the Tax Act are provided in accordance with guidance from the SEC that allows for a measurement period of up to one year after the enactment date of the Tax Act to finalize the recording of the related tax impacts. Adjustments may materially impact the Company’s provision for income taxes and effective tax rate in the period in which the adjustments are made. The Company expects to complete the accounting under the Tax Act as soon as practicable, but in no event later than one year from the enactment date of the Tax Act.
For the nine months ended July 31, 2018, the Company recorded a provisional estimate of $1.1 billion related to the Transition Tax, which was included in (Provision) benefit for taxes in the Condensed Consolidated Statements of Earnings. The adjustments made in the third quarter of fiscal 2018 were not significant. The final calculations of the Transition Tax may differ from estimates, potentially materially, due to, among other things, changes in interpretations of the Tax Act, analysis of proposed regulations and current and additional guidance from the Internal Revenue Service ("IRS"), the Company’s analysis of the Tax Act, or any updates or changes to estimates that the Company utilized to calculate the transition impacts, including impacts from changes to current year earnings estimates and assertions. No cash payment is anticipated due to the availability of tax attributes to offset the Transition Tax.
In addition, for the nine months ended July 31, 2018, the Company recorded a net $1.8 billion provisional tax benefit related to the remeasurement of U.S. deferred tax assets and liabilities as a result of the reduction of the U.S. corporate tax rate, which was included in (Provision) benefit for taxes in the Condensed Consolidated Statements of Earnings. The adjustments made in the third quarter of fiscal 2018 were not significant. As part of the remeasurement of the net U.S. deferred tax assets, the Company will need to reassess the realizability of certain deferred tax assets, including tax credits and other non-credit deferred tax assets, based on the new method of taxation on non-U.S. earnings applicable beginning in fiscal 2019 and such change may have a material impact. The Company's analysis of the future realization of the deferred tax assets is incomplete.
Regarding the new GILTI tax rules, the Company is required to make an accounting policy election to either treat taxes due on future GILTI inclusions in U.S. taxable income as a current period expense when incurred or reflect such portion of the future GILTI inclusions in U.S. taxable income that relate to existing basis differences in the Company's current measurement of deferred taxes. The Company's analysis of the new GILTI tax rules and how they may impact the Company is in process. Accordingly, the Company has not made a policy election regarding the treatment of the GILTI tax.
Uncertain Tax Positions
As of July 31, 2018 and October 31, 2017, the amount of unrecognized tax benefits was $8.7 billion and $11.3 billion, respectively, of which up to $1.1 billion and $3.0 billion would affect the Company's effective tax rate if realized as of their respective periods. The Company is joint and severally liable for certain pre-Separation tax liabilities of HP Inc. HP Inc. is subject to numerous ongoing audits by federal, state and foreign tax authorities. During the nine months ended July 31, 2018, HP Inc. settled with the IRS on certain matters and closed pre-Separation Hewlett-Packard Company audits for fiscal years 2009 through 2012, for which the Company had been joint and severally liable, resulting in a reduction in the Company's unrecognized tax benefits of $2.6 billion.
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 Condensed Consolidated Statements of Earnings. As of July 31, 2018 and October 31, 2017, the Company recorded $179 million and $304 million, respectively, for interest and penalties in the Condensed Consolidated Balance Sheets.
The Company engages in continuous discussions and negotiations with taxing authorities regarding tax matters in various jurisdictions. The Company does not expect complete resolution of any audit cycle within the next 12 months. However, it is reasonably possible that certain federal, foreign and state tax issues may be concluded in the next 12 months, including issues involving transfer pricing, joint and several tax liabilities related to the Separation from HP Inc. 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 $85 million within the next 12 months.

23
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)

Deferred Tax Assets and Liabilities
Deferred tax assets and liabilities included in the Condensed Consolidated Balance Sheets were as follows:
 
As of
 
July 31, 2018
 
October 31, 2017
 
In millions
Deferred tax assets - long-term
$
5,933

 
$
4,663

Deferred tax liabilities - long-term
(235
)
 
(104
)
Deferred tax assets net of deferred tax liabilities
$
5,698

 
$
4,559

The Company periodically engages in intercompany advanced royalty payment and licensing arrangements that may result in advance payments between subsidiaries in different tax jurisdictions. When the local tax treatment of the intercompany licensing arrangements differs from the U.S. GAAP treatment, deferred taxes are recognized. For further details, see Note 3, "Segment Information".
Tax Matters Agreement and Other Income Tax Matters
In connection with the Separation, the Company entered into a Tax Matters Agreement with HP Inc. In connection with the Everett and Seattle Transactions, the Company entered into a Tax Matters Agreement with DXC and a Tax Matters Agreement with Micro Focus, respectively. For more details, see the Company's Annual Report on Form 10-K for the fiscal year ended October 31, 2017.
Note 8: Balance Sheet Details
Balance sheet details were as follows:
Inventory
 
As of
 
July 31, 2018
 
October 31, 2017
 
In millions
Finished goods
$
1,382

 
$
1,236

Purchased parts and fabricated assemblies
1,389

 
1,079

Total
$
2,771

 
$
2,315

For the nine months ended July 31, 2018, the increase in inventory was due primarily to higher levels of strategic commodities inventory to support customer demand, increases in memory component costs, and higher inventory of server solutions which have longer time-to-shipment cycles.
Property, Plant and Equipment
 
As of
 
July 31, 2018
 
October 31, 2017
 
In millions
Land
$
296

 
$
312

Buildings and leasehold improvements
2,260

 
2,371

Machinery and equipment, including equipment held for lease
9,577

 
9,194

 
12,133

 
11,877

Accumulated depreciation
(5,949
)
 
(5,608
)
Total
$
6,184

 
$
6,269


24
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)

Notes Payable and Short-Term Borrowings
 
As of
 
July 31, 2018
 
October 31, 2017
 
In millions
Current portion of long-term debt
$
1,402

 
$
3,005

FS commercial paper
442

 
401

Notes payable to banks, lines of credit and other(1)
482

 
444

Total
$
2,326

 
$
3,850

 
(1)
As of July 31, 2018 and October 31, 2017, notes payable to banks, lines of credit and other includes $369 million and $390 million, respectively, of borrowing and funding-related activity associated with FS and its subsidiaries and $113 million and $52 million, respectively, of receivables transferred under factoring arrangements, recorded as short-term borrowings.
Warranties
The Company's aggregate product warranty liability as of July 31, 2018, and changes during the nine months ended July 31, 2018 were as follows:
 
Nine Months Ended
July 31, 2018
 
In millions
Balance at beginning of period
$
475

Accruals for warranties issued
201

Adjustments related to pre-existing warranties
(6
)
Settlements made
(230
)
Balance at end of period
$
440

Note 9: Financing Receivables and Operating Leases
Financing receivables represent sales-type and direct-financing leases of the Company and third-party products. These receivables typically have terms ranging from two to five years and are usually collateralized by a security interest in the underlying assets. Financing receivables also include billed receivables from operating leases. The components of financing receivables were as follows:
 
As of
 
July 31, 2018
 
October 31, 2017
 
In millions
Minimum lease payments receivable
$
8,530

 
$
8,226

Unguaranteed residual value
290

 
272

Unearned income
(705
)
 
(654
)
Financing receivables, gross
8,115

 
7,844

Allowance for doubtful accounts
(103
)
 
(86
)
Financing receivables, net
8,012

 
7,758

Less: current portion(1)
(3,435
)
 
(3,378
)
Amounts due after one year, net(1)
$
4,577

 
$
4,380

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

25
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)

Sale of Financing Receivables
During the three and nine months ended July 31, 2018 and 2017, the Company entered into arrangements to transfer the contractual payments due under certain financing receivables to third party financial institutions. During the nine months ended July 31, 2018 and 2017, the Company sold $127 million and $130 million, respectively, of financing receivables. The gains recognized on the sales of financing receivables were not material for both periods.
Credit Quality Indicators
The credit risk profile of gross financing receivables, based upon internal risk ratings, was as follows:
 
As of
 
July 31, 2018
 
October 31, 2017
 
In millions
Risk Rating:
 

 
 

Low
$
4,236

 
$
4,156

Moderate
3,697

 
3,556

High
182

 
132

Total
$
8,115

 
$
7,844

Accounts rated low risk typically have the equivalent of a Standard & Poor's rating of BBB– or higher, while accounts rated moderate risk generally have the equivalent of BB+ or lower. The Company classifies accounts as high risk when it considers the financing receivable to be impaired or when management believes there is a significant near-term risk of impairment.
Allowance for Doubtful Accounts
The allowance for doubtful accounts for financing receivables as of July 31, 2018 and October 31, 2017 and the respective changes during the nine and twelve months then ended were as follows:
 
As of
 
July 31, 2018
 
October 31, 2017
 
In millions
Balance at beginning of period
$
86

 
$
89

Provision for doubtful accounts
27

 
23

Write-offs, net of recoveries
(10
)
 
(26
)
Balance at end of period
$
103

 
$
86

The gross financing receivables and related allowance evaluated for loss were as follows:
 
As of
 
July 31, 2018
 
October 31, 2017
 
In millions
Gross financing receivables collectively evaluated for loss
$
7,708

 
$
7,523

Gross financing receivables individually evaluated for loss
407

 
321

Total
$
8,115

 
$
7,844

Allowance for financing receivables collectively evaluated for loss
$
75

 
$
67

Allowance for financing receivables individually evaluated for loss
28

 
19

Total
$
103

 
$
86


26
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)

Non-Accrual and Past-Due Financing Receivables
The following table summarizes the aging and non-accrual status of gross financing receivables:
 
As of
 
July 31, 2018
 
October 31, 2017
 
In millions
Billed:(1)
 

 
 

Current 1-30 days
$
274

 
$
257

Past due 31-60 days
59

 
52

Past due 61-90 days
15

 
15

Past due > 90 days
84

 
58

Unbilled sales-type and direct-financing lease receivables
7,683

 
7,462

Total gross financing receivables
$
8,115

 
$
7,844

Gross financing receivables on non-accrual status(2)
$
246

 
$
188

Gross financing receivables 90 days past due and still accruing interest(2)
$
161

 
$
133

 
(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 Condensed Consolidated Balance Sheets were as follows:
 
As of
 
July 31, 2018
 
October 31, 2017
 
In millions
Equipment leased to customers
$
7,486

 
$
7,356

Accumulated depreciation
(3,175
)
 
(2,943
)
Total
$
4,311

 
$
4,413

Note 10: Goodwill
Goodwill allocated to the Company's reportable segments as of July 31, 2018 and the change in the respective carrying amounts during the nine months then ended were as follows:
 
Hybrid IT
 
Intelligent Edge
 
Financial Services
 
Total
 
In millions
Balance at October 31, 2017
$
15,454

 
$
1,918

 
$
144

 
$
17,516

Goodwill acquired during the period
102

 
3

 
—

 
105

Changes due to foreign currency
(1
)
 
—

 
—

 
(1
)
Goodwill adjustments
6

 
—

 
—

 
6

Balance at July 31, 2018
$
15,561

 
$
1,921

 
$
144

 
$
17,626

On November 1, 2017, the Company’s former EG segment was realigned into two new reportable segments, Hybrid IT and Intelligent Edge. The Company's reporting units are consistent with the reportable segments identified in Note 3, "Segment Information". As a result of this realignment, the Company performed an interim goodwill impairment analysis for Hybrid IT and Intelligent Edge as of November 1, 2017, which did not result in any impairment charges. The Company will continue to evaluate the recoverability of goodwill at the reporting unit level on an annual basis as of the beginning of its fourth fiscal quarter and whenever events or changes in circumstances indicate there may be a potential impairment.

27
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)

Note 11: Fair Value
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the measurement date.
Fair Value Hierarchy
The Company uses valuation techniques that are based upon observable and unobservable inputs. Observable inputs are developed using market data such as publicly available information and reflect the assumptions market participants would use, while unobservable inputs are developed using the best information available about the assumptions market participants would use.
Assets and liabilities are classified in the fair value hierarchy based on the lowest level input that is significant to the fair value measurement:
Level 1—Quoted prices (unadjusted) in active markets for identical assets or liabilities.
Level 2—Quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability and market-corroborated inputs.
Level 3—Unobservable inputs for the asset or liability.
The fair value hierarchy gives the highest priority to observable inputs and lowest priority to unobservable inputs.
The following table presents the Company's assets and liabilities that are measured at fair value on a recurring basis:
 
As of July 31, 2018
 
As of October 31, 2017
 
Fair Value
Measured Using
 
 
 
Fair Value
Measured Using
 
 
 
Level 1
 
Level 2
 
Level 3
 
Total
 
Level 1
 
Level 2
 
Level 3
 
Total
 
In millions
Assets
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Cash Equivalents and Investments:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Time deposits
$
—

 
$
954

 
$
—

 
$
954

 
$
—

 
$
1,159

 
$
—

 
$
1,159

Money market funds
2,461

 
—

 
—

 
2,461

 
5,592

 
—

 
—

 
5,592

Foreign bonds
8

 
129

 
—

 
137

 
9

 
214

 
—

 
223

Other debt securities
—

 
—

 
25

 
25

 
—

 
—

 
26

 
26

Derivative Instruments:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Foreign exchange contracts
—

 
327

 
—

 
327

 
—

 
259

 
—

 
259

Other derivatives
—

 
2

 
—

 
2

 
—

 
1

 
—

 
1

Total assets
$
2,469

 
$
1,412

 
$
25

 
$
3,906

 
$
5,601

 
$
1,633

 
$
26

 
$
7,260

Liabilities
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Derivative Instruments:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Interest rate contracts
$
—

 
$
336

 
$
—

 
$
336

 
$
—

 
$
142

 
$
—

 
$
142

Foreign exchange contracts
—

 
165

 
—

 
165

 
—

 
335

 
—

 
335

Total liabilities
$
—

 
$
501

 
$
—

 
$
501

 
$
—

 
$
477

 
$
—

 
$
477

During the nine months ended July 31, 2018, there were no transfers between levels within the fair value hierarchy.
Other Fair Value Disclosures
Short- and Long-Term Debt: At July 31, 2018 and October 31, 2017, the estimated fair value of the Company's short-term and long-term debt was $12.5 billion and $14.6 billion, respectively.

28
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)

Note 12: Financial Instruments
Cash Equivalents and Available-for-Sale Investments
Cash equivalents and available-for-sale investments were as follows:
 
As of July 31, 2018
 
As of October 31, 2017
 
Cost
 
Gross
Unrealized
Gain
 
Gross
Unrealized
Loss
 
Fair
Value
 
Cost
 
Gross
Unrealized
Gain
 
Gross
Unrealized
Loss
 
Fair
Value
 
In millions
Cash Equivalents:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Time deposits
$
954

 
$
—

 
$
—

 
$
954

 
$
1,159

 
$
—

 
$
—

 
$
1,159

Money market funds
2,461

 
—

 
—

 
2,461

 
5,592

 
—

 
—

 
5,592

Total cash equivalents
3,415

 
—

 
—

 
3,415

 
6,751

 
—

 
—

 
6,751

Available-for-Sale Investments:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Foreign bonds
116

 
21

 
—

 
137

 
183

 
40

 
—

 
223

Other debt securities
27

 
—

 
(2
)
 
25

 
37

 
—

 
(11
)
 
26

Total available-for-sale investments
143

 
21

 
(2
)
 
162

 
220

 
40

 
(11
)
 
249

Total cash equivalents and available-for-sale investments
$
3,558

 
$
21

 
$
(2
)
 
$
3,577

 
$
6,971

 
$
40

 
$
(11
)
 
$
7,000

As of July 31, 2018 and October 31, 2017, the carrying amount of cash equivalents approximated fair value due to the short period of time to maturity. Time deposits were primarily issued by institutions outside the U.S. as of July 31, 2018 and October 31, 2017. 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:
 
July 31, 2018
 
Amortized Cost
 
Fair Value
 
In millions
Due in more than five years
$
143

 
$
162

Equity securities in privately held companies that are accounted for as cost method investments are included in Long-term financing receivables and other assets in the Condensed Consolidated Balance Sheets. These investments amounted to $165 million and $149 million at July 31, 2018 and October 31, 2017, respectively.
Investments in equity securities that are accounted for using the equity method are included in Investments in equity interests in the Condensed Consolidated Balance Sheets. These investments amounted to $2.5 billion at July 31, 2018 and October 31, 2017.

29
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)

Fair Value of Derivative Instruments in the Condensed Consolidated Balance Sheets
The gross notional and fair value of derivative instruments in the Condensed Consolidated Balance Sheets were as follows:
 
As of July 31, 2018
 
As of October 31, 2017
 
 
 
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
$
7,900

 
$
—

 
$
—

 
$
3

 
$
333

 
$
9,500

 
$
—

 
$
—

 
$
16

 
$
126

Cash flow hedges:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Foreign currency contracts
8,298

 
179

 
62

 
39

 
49

 
7,202

 
105

 
45

 
101

 
70

Net investment hedges:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Foreign currency contracts
1,817

 
25

 
29

 
22

 
13

 
1,944

 
35

 
10

 
36

 
41

Total derivatives designated as hedging instruments
18,015

 
204

 
91

 
64

 
395

 
18,646

 
140

 
55

 
153

 
237

Derivatives not designated as hedging instruments
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Foreign currency contracts
7,568

 
25

 
7

 
34

 
8

 
9,552

 
61

 
3

 
79

 
8

Other derivatives
107

 
2

 
—

 
—

 
—

 
96

 
1

 
—

 
—

 
—

Total derivatives not designated as hedging instruments
7,675

 
27

 
7

 
34

 
8

 
9,648

 
62

 
3

 
79

 
8

Total derivatives
$
25,690

 
$
231

 
$
98

 
$
98

 
$
403

 
$
28,294

 
$
202

 
$
58

 
$
232

 
$
245

Offsetting of Derivative Instruments
The Company recognizes all derivative instruments on a gross basis in the Condensed Consolidated Balance Sheets. The Company's derivative instruments are subject to master netting arrangements and collateral security arrangements. The Company does not offset the fair value of its derivative instruments against the fair value of cash collateral posted under collateral security agreements. As of July 31, 2018 and October 31, 2017, information related to the potential effect of the Company's use of the master netting agreements and collateral security agreements was as follows:

30
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)

 
As of July 31, 2018
 
In the Condensed 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
$
329

 
$
—

 
$
329

 
$
160

 
$
104

 
(1) 
 
$
65

Derivative liabilities
$
501

 
$
—

 
$
501

 
$
160

 
$
254

 
(2) 
 
$
87

 
As of October 31, 2017
 
In the Condensed 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
$
260

 
$
—

 
$
260

 
$
209

 
$
34

 
(1) 
 
$
17

Derivative liabilities
$
477

 
$
—

 
$
477

 
$
209

 
$
242

 
(3) 
 
$
26

 
(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 the 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. Of the $254 million of collateral posted, $205 million was in cash and, $49 million was through re-use of counterparty collateral.
(3)
Represents the collateral posted by the Company in cash or through the 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. Of the $242 million of collateral posted, $220 million was in cash and, $22 million was through re-use of counterparty collateral.
Effect of Derivative Instruments on the Condensed Consolidated Statements of Earnings
The pre-tax effect of derivative instruments and related hedged items in a fair value hedging relationship for the three and nine months ended July 31, 2018 and 2017 were as follows:
 
 
Gains (Losses) Recognized in Earnings on Derivative and Related Hedged Item
 
 
Derivative Instrument
 
Location
 
Three months ended July 31, 2018
 
Nine months ended July 31, 2018
 
Hedged Item
 
Location
 
Three months ended July 31, 2018
 
Nine months ended July 31, 2018
 
 
 
 
In millions
 
 
 
 
 
In millions
Interest rate contracts
 
Interest and other, net
 
$
16

 
$
(194
)
 
Fixed-rate debt
 
Interest and other, net
 
$
(16
)
 
$
194

 
 
Gains (Losses) Recognized in Earnings on Derivative and Related Hedged Item
 
 
Derivative Instrument
 
Location
 
Three months ended July 31, 2017
 
Nine months ended July 31, 2017
 
Hedged Item
 
Location
 
Three months ended July 31, 2017
 
Nine months ended July 31, 2017
 
 
 
 
In millions
 
 
 
 
 
In millions
Interest rate contracts
 
Interest and other, net
 
$
23

 
$
(202
)
 
Fixed-rate debt
 
Interest and other, net
 
$
(23
)
 
$
202


31
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)

The pre-tax effect of derivative instruments in cash flow and net investment hedging relationships for the three and nine months ended July 31, 2018 were as follows:
 
Gains (Losses) Recognized in Other Comprehensive Income ("OCI") on Derivatives (Effective Portion)
 
Gains (Losses) Reclassified from Accumulated
OCI Into Earnings (Effective Portion)
 
Three months ended July 31, 2018
 
Nine months ended July 31, 2018
 
Location
 
Three months ended July 31, 2018
 
Nine months ended July 31, 2018
 
In millions
 
 
 
In millions
Cash flow hedges:
 

 
 
 
 
 
 

 
 
Foreign currency contracts
$
121

 
$
59

 
Net revenue
 
$
29

 
$
(82
)
Foreign currency contracts
28

 
(9
)
 
Interest and other, net
 
14

 
4

Total cash flow hedges
$
149

 
$
50

 
Net earnings from continuing operations
 
$
43

 
$
(78
)
Net investment hedges:
 

 
 
 
 
 
 

 
 
Foreign currency contracts
$
57

 
$
31

 
Interest and other, net
 
$
—

 
$
—

The pre-tax effect of derivative instruments in cash flow and net investment hedging relationships for the three and nine months ended July 31, 2017 was as follows:
 
Gains (Losses) Recognized in Other Comprehensive Income ("OCI") on Derivatives (Effective Portion)
 
Gains (Losses) Reclassified from Accumulated
OCI Into Earnings (Effective Portion)
 
Three months ended July 31, 2017
 
Nine months ended July 31, 2017
 
Location
 
Three months ended July 31, 2017
 
Nine months ended July 31, 2017
 
In millions
 
 
 
In millions
Cash flow hedges:
 

 
 
 
 
 
 

 
 
Foreign currency contracts
$
(160
)
 
$
(163
)
 
Net revenue
 
$
(45
)
 
$
9

Foreign currency contracts
—

 
(1
)
 
Cost of products
 
—

 
—

Foreign currency contracts
28

 
170

 
Interest and other, net
 
29

 
178

Subtotal
(132
)
 
6

 
Net earnings from continuing operations
 
(16
)
 
187

Foreign currency contracts
(1
)
 
1

 
Net loss from discontinued operations
 
1

 
44

Total cash flow hedges
$
(133
)
 
$
7

 
Net earnings (loss)
 
$
(15
)
 
$
231

Net investment hedges:
 

 
 
 
 
 
 

 
 
Foreign currency contracts
$
(97
)
 
$
(107
)
 
Interest and other, net
 
$
—

 
$
—

As of July 31, 2018 and 2017, no portion of the hedging instruments' gain or loss was excluded from the assessment of effectiveness for fair value, cash flow or net investment hedges. Hedge ineffectiveness for fair value, cash flow, and net investment hedges was not material for the three and nine months ended July 31, 2018 and 2017.
As of July 31, 2018, the Company expects to reclassify an estimated net Accumulated other comprehensive gain of approximately $71 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.

32
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)

The pre-tax effect of derivative instruments not designated as hedging instruments on the Condensed Consolidated Statements of Earnings for the three and nine months ended July 31, 2018 and 2017 was as follows:
 
 
 
Gains (Losses) Recognized in Earnings on Derivatives
 
Location
 
Three months ended July 31, 2018
 
Three months ended July 31, 2017
 
Nine months ended July 31, 2018
 
Nine months ended July 31, 2017
 
 
 
In millions
Foreign currency contracts
Interest and other, net
 
$
233

 
$
(279
)
 
$
104

 
$
(525
)
Other derivatives
Interest and other, net
 
—

 
—

 
—

 
4

Total
 
 
$
233

 
$
(279
)
 
$
104

 
$
(521
)
Note 13: Borrowings
Long-Term Debt
 
As of
 
July 31, 2018
 
October 31, 2017
 
In millions
Hewlett Packard Enterprise Senior Notes
 

 
 

$2,650 issued at discount to par at a price of 99.872% in October 2015 at 2.85%, due October 5, 2018, interest payable semi-annually on April 5 and October 5 of each year(1)
$
1,050

 
$
2,648

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

 
250

$1,100 issued at discount to par at a price of 99.994% in September 2017 at 2.10%, due October 4, 2019, interest payable semi-annually on April 4 and October 4 of each year
1,100

 
1,100

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

 
3,000

$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
1,348

 
1,348

$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
2,495

 
2,495

$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

Other, including capital lease obligations, at 0.00%-5.00%, due in calendar years 2018-2030(2)
249

 
286

Fair value adjustment related to hedged debt
(336
)
 
(142
)
Unamortized debt issuance costs
(40
)
 
(47
)
Less: current portion
(1,402
)
 
(3,005
)
Total long-term debt
$
9,963

 
$
10,182

 
(1)
On June 29, 2018, the Company redeemed $1.6 billion of its $2.65 billion Senior Notes with an original maturity date of October 5, 2018. These notes were fully hedged with interest rate swaps. As part of the transaction, HPE terminated and settled a proportional amount of the hedges, as well as allocated a proportional amount of unamortized discount and debt issuance costs to the retired debt. These costs, along with the redemption price of $1.6 billion resulted in an immaterial loss.
(2)
Other, including capital lease obligations includes $143 million and $160 million as of July 31, 2018 and October 31, 2017, respectively, of borrowing- and funding-related activity associated with FS and its subsidiaries that are collateralized by receivables and underlying assets associated with the related capital and operating leases. For both the periods presented, the carrying amount of the assets approximated the carrying amount of the borrowings.
As disclosed in Note 12, "Financial Instruments", the Company uses interest rate swaps to mitigate the exposure of its debt portfolio to changes in fair value resulting from changes in interest rates by achieving a primarily U.S. dollar LIBOR-

33
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)

based floating interest expense. As of July 31, 2018, the Company had entered into interest rate swaps to reduce the exposure of $7.9 billion of aggregate principal amount of fixed rate senior notes to changes in fair value resulting from changes in interest rates by achieving LIBOR-based floating interest expense. Interest rates on long-term debt in the table above have not been adjusted to reflect the impact of any interest rate swaps.
Note 14: Stockholders' Equity
Taxes related to Other Comprehensive Income (Loss)
 
Three months ended July 31,
 
Nine months ended July 31,
 
2018
 
2017
 
2018
 
2017
 
In millions
Taxes on change in net unrealized (losses) gains on available-for-sale securities:
 

 
 

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

 
$
(1
)
 
$
—

 
$
(2
)
 
—

 
(1
)
 
—

 
(2
)
Taxes on change in net unrealized gains (losses) on cash flow hedges:
 

 
 

 
 
 
 
Tax (provision) benefit on net unrealized gains (losses) arising during the period
(20
)
 
47

 
(6
)
 
20

Tax provision (benefit) on net (gains) losses reclassified into earnings
5

 
(10
)
 
(11
)
 
35

 
(15
)
 
37

 
(17
)
 
55

Taxes on change in unrealized components of defined benefit plans:
 

 
 

 
 
 
 
Tax benefit (provision) on (losses) gains arising during the period
3

 
(13
)
 
2

 
(38
)
Tax provision on amortization of actuarial loss and prior service benefit
(4
)
 
(4
)
 
(10
)
 
(15
)
Tax provision on curtailments, settlements and other
(5
)
 
(41
)
 
(12
)
 
(55
)
 
(6
)
 
(58
)
 
(20
)
 
(108
)
Tax benefit (provision) on change in cumulative translation adjustment
2

 
(4
)
 
3

 
(3
)
Tax provision on other comprehensive income
$
(19
)
 
$
(26
)
 
$
(34
)
 
$
(58
)

34
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)

Changes and reclassifications related to Other Comprehensive Income (Loss), net of taxes
 
Three months ended July 31,
 
Nine months ended July 31,
 
2018
 
2017
 
2018
 
2017
 
In millions
Other comprehensive income, net of taxes:
 

 
 

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

 
 

 
 
 
 
Net unrealized (losses) gains arising during the period
$
(2
)
 
$
6

 
$
(1
)
 
$
(12
)
Gains reclassified into earnings
—

 
—

 
(9
)
 
—

 
(2
)
 
6

 
(10
)
 
(12
)
Change in net unrealized gains (losses) on cash flow hedges:
 

 
 

 
 
 
 
Net unrealized gains (losses) arising during the period
129

 
(86
)
 
44

 
27

Net (gains) losses reclassified into earnings(1)
(38
)
 
5

 
67

 
(196
)
 
91

 
(81
)
 
111

 
(169
)
Change in unrealized components of defined benefit plans:
 

 
 

 
 
 
 
(Losses) gains arising during the period
(22
)
 
197

 
(21
)
 
662

Amortization of actuarial gain and prior service benefit(2)
43

 
52

 
133

 
215

Curtailments, settlements and other
4

 
(35
)
 
(1
)
 
(46
)
 
25

 
214

 
111

 
831

Change in cumulative translation adjustment
(38
)
 
45

 
(37
)
 
10

Other comprehensive income, net of taxes
$
76

 
$
184

 
$
175

 
$
660

 
(1)
For more details on the reclassification of pre-tax net (gains) losses on cash flow hedges into the Condensed Consolidated Statements of Earnings, see Note 12, "Financial Instruments".
(2)
These components are included in the computation of net pension and post-retirement benefit cost in Note 6, "Retirement and Post-Retirement Benefit Plans".
The components of Accumulated other comprehensive loss, net of taxes as of July 31, 2018, and changes during the nine months ended July 31, 2018 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
$
29

 
$
(48
)
 
$
(2,690
)
 
$
(186
)
 
$
(2,895
)
Activity related to separation and merger transactions
—


—


—


(186
)

(186
)
Other comprehensive (loss) income before reclassifications
(1
)
 
44

 
(21
)
 
(37
)
 
(15
)
Reclassifications of (gains) losses into earnings
(9
)
 
67

 
132

 
—

 
190

Balance at end of period
$
19

 
$
63

 
$
(2,579
)
 
$
(409
)
 
$
(2,906
)
Share Repurchase Program
For the nine months ended July 31, 2018, the Company retired a total of 160 million shares under its share repurchase program through open market repurchases, which included 1.7 million shares that were unsettled open market repurchases as of October 31, 2017. Additionally, as of July 31, 2018, the Company had unsettled open market repurchases of 1.5 million shares. Shares repurchased during the nine months ended July 31, 2018 were recorded as a $2.6 billion reduction to stockholders' equity. On February 21, 2018, the Company's Board of Directors authorized an additional $2.5 billion under the share repurchase program. As of July 31, 2018, the Company had a remaining authorization of $5.7 billion for future share repurchases.

35
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)

On February 22, 2018, the Company announced an increase to the regular quarterly dividend from $0.075 per share to $0.1125 per share, which was effective in the third quarter of fiscal 2018.
Note 15: Net Earnings Per Share
The Company calculates basic net EPS using net earnings (loss) and the weighted-average number of shares outstanding during the reporting period. Diluted net EPS includes the weighted-average dilutive effect of 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:
 
Three months ended July 31,
 
Nine months ended July 31,
 
2018
 
2017
 
2018
 
2017
 
In millions, except per share amounts
Numerator:
 

 
 

 
 
 
 
Net earnings from continuing operations
$
452

 
$
285

 
$
2,784

 
$
58

Net loss from discontinued operations
(1
)
 
(120
)
 
(119
)
 
(238
)
Net earnings (loss)
$
451

 
$
165

 
$
2,665

 
$
(180
)
Denominator:
 

 
 

 
 
 
 
Weighted-average shares used to compute basic net EPS
1,513

 
1,641

 
1,552

 
1,656

Dilutive effect of employee stock plans
18

 
26

 
26

 
27

Weighted-average shares used to compute diluted net EPS
1,531

 
1,667

 
1,578

 
1,683

Basic net earnings (loss) per share:
 

 
 

 
 
 
 
Continuing operations
$
0.30

 
$
0.17

 
$
1.79

 
$
0.04

Discontinued operations
—

 
(0.07
)
 
(0.07
)
 
(0.15
)
Basic net earnings (loss) per share
$
0.30

 
$
0.10

 
$
1.72

 
$
(0.11
)
Diluted net earnings (loss) per share:
 
 
 
 
 
 
 
Continuing operations
$
0.29

 
$
0.17

 
$
1.76

 
$
0.03

Discontinued operations(1)
—

 
(0.07
)
 
(0.07
)
 
(0.14
)
Diluted net earnings (loss) per share
$
0.29

 
$
0.10

 
$
1.69

 
$
(0.11
)
Anti-dilutive weighted-average stock awards(2)
2

 
16

 
3

 
8

 
(1)
U.S. GAAP requires the denominator used in the diluted net EPS calculation for discontinued operations to be the same as that of continuing operations, regardless of net earnings (loss) from continuing operations.
(2)
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 16: Litigation and Contingencies
Hewlett Packard Enterprise is involved in various lawsuits, claims, investigations and proceedings including those consisting of IP, commercial, securities, employment, employee benefits and environmental matters, which arise in the ordinary course of business. In addition, as part of the Separation and Distribution Agreement, Hewlett Packard Enterprise and HP Inc. (formerly known as "Hewlett-Packard Company") agreed to cooperate with each other in managing certain existing litigation related to both parties' businesses. The Separation and Distribution Agreement included provisions that allocate liability and financial responsibility for pending litigation involving the parties, as well as provide for cross-indemnification of the parties against liabilities to one party arising out of liabilities allocated to the other party. The Separation and Distribution Agreement also included provisions that assign to the parties responsibility for managing pending and future litigation related to the general corporate matters of HP Inc. arising prior to the Separation. Hewlett Packard Enterprise records a liability when it believes that it is both probable that a liability has been incurred and the amount of loss can be reasonably estimated. Significant judgment is required to determine both the probability of having incurred a liability and the estimated amount of the liability. Hewlett Packard Enterprise reviews these matters at least quarterly and adjusts these liabilities to reflect the impact of negotiations,

36
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)

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 July 31, 2018, 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
India Directorate of Revenue Intelligence Proceedings. On April 30 and May 10, 2010, the India Directorate of Revenue Intelligence (the "DRI") issued show cause notices to Hewlett-Packard India Sales Private Ltd ("HP India"), a subsidiary of HP Inc., seven HP India employees and one former HP India employee alleging that HP India underpaid customs duties while importing products and spare parts into India and seeking to recover an aggregate of approximately $370 million, plus penalties. Prior to the issuance of the show cause notices, HP India deposited approximately $16 million with the DRI and agreed to post a provisional bond in exchange for the DRI's agreement to not seize HP India products and spare parts and to not interrupt the transaction of business by HP India.
On April 11, 2012, the Bangalore Commissioner of Customs issued an order on the products-related show cause notice affirming certain duties and penalties against HP India and the named individuals of approximately $386 million, of which HP India had already deposited $9 million. On December 11, 2012, HP India voluntarily deposited an additional $10 million in connection with the products-related show cause notice. On April 20, 2012, the Commissioner issued an order on the parts-related show cause notice affirming certain duties and penalties against HP India and certain of the named individuals of approximately $17 million, of which HP India had already deposited $7 million. After the order, HP India deposited an additional $3 million in connection with the parts-related show cause notice so as to avoid certain penalties.
HP India filed appeals of the Commissioner's orders before the Customs Tribunal along with applications for waiver of the pre-deposit of remaining demand amounts as a condition for hearing the appeals. The Customs Department has also filed cross-appeals before the Customs Tribunal. On January 24, 2013, the Customs Tribunal ordered HP India to deposit an additional $24 million against the products order, which HP India deposited in March 2013. The Customs Tribunal did not order any additional deposit to be made under the parts order. In December 2013, HP India filed applications before the Customs Tribunal seeking early hearing of the appeals as well as an extension of the stay of deposit as to HP India and the individuals already granted until final disposition of the appeals. On February 7, 2014, the application for extension of the stay of deposit was granted by the Customs Tribunal until disposal of the appeals. On October 27, 2014, the Customs Tribunal commenced hearings on the cross-appeals of the Commissioner's orders. The Customs Tribunal rejected HP India's request to remand the matter to the Commissioner on procedural grounds. The hearings were scheduled to reconvene on April 6, 2015, and again on November 3, 2015 and April 11, 2016, but were canceled at the request of the Customs Tribunal. The hearing has been rescheduled for September 12, 2018.
ECT Proceedings. In January 2011, the postal service of Brazil, Empresa Brasileira de Correios e Telégrafos ("ECT"), notified a former subsidiary of HP Inc. in Brazil ("HP Brazil") that it had initiated administrative proceedings to consider whether to suspend HP Brazil's right to bid and contract with ECT related to alleged improprieties in the bidding and contracting processes whereby employees of HP Brazil and employees of several other companies allegedly coordinated their bids and fixed results for three ECT contracts in 2007 and 2008. In late July 2011, ECT notified HP Brazil it had decided to apply the penalties against HP Brazil and suspend HP Brazil's right to bid and contract with ECT for five years, based upon the evidence before it. In August 2011, HP Brazil appealed ECT's decision. In April 2013, ECT rejected HP Brazil's appeal, and the administrative proceedings were closed with the penalties against HP Brazil remaining in place. In parallel, in September 2011, HP Brazil filed a civil action against ECT seeking to have ECT's decision revoked. HP Brazil also requested an injunction suspending the application of the penalties until a final ruling on the merits of the case. The court of first instance has not issued a decision on the merits of the case, but it has denied HP Brazil's request for injunctive relief. HP Brazil appealed the denial of its request for injunctive relief to the intermediate appellate court, which issued a preliminary ruling denying the request for injunctive relief but reducing the length of the sanctions from five to two years. HP Brazil appealed that decision and, in December 2011, obtained a ruling staying enforcement of ECT's sanctions until a final ruling on the merits of the case. HP Brazil expects the decision to be issued in 2018 and any subsequent appeal 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 alleging defendants violated the Federal Age Discrimination in Employment Act ("ADEA"), the California Fair Employment and Housing Act, California public policy and

37
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)

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 aged 40 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. On September 20, 2017, the court granted the defendants' motion to compel arbitration and stayed the case pending resolution of the arbitration proceedings. On November 30, 2017, three named plaintiffs and twelve opt-in plaintiffs filed a single arbitration demand.  On December 22, 2017, defendants filed a motion to (1) stay the case pending arbitrations and (2) enjoin the demanded arbitration and require each plaintiff to file a separate arbitration demand. On February 6, 2018, the court granted the motion to stay and denied the motion to enjoin.
Jackson, et al. v. HP Inc. and Hewlett Packard Enterprise. This putative nationwide class action was filed on July 24, 2017 in United States District Court for the Northern District of California. Plaintiffs purport to bring the lawsuit on behalf of themselves and other similarly situated African-Americans and individuals over the age of forty. Plaintiffs allege that defendants engaged in a pattern and practice of racial and age discrimination in lay-offs and promotions. Plaintiffs filed an amended complaint on September 29, 2017. On January 12, 2018, defendants moved to transfer the matter to the federal district court in the Northern District of Georgia. Defendants also moved to dismiss the claims on various grounds and to strike certain aspects of the proposed class definition. On July 11, 2018, the court granted defendants' motion to dismiss this action for improper venue, and also partially dismissed and struck certain claims without prejudice to re-filing in the appropriate venue. On July 23, 2018, plaintiffs re-filed their lawsuit in the United States District Court for the Northern District of Georgia. On August 9, 2018, Plaintiffs filed a notice of appeal of the dismissal of the Northern District of California action with the Ninth Circuit Court of Appeals. On August 15, 2018, Plaintiffs filed a motion to stay their lawsuit in the Northern District of Georgia. Defendants do not oppose this motion.
Wall v. Hewlett Packard Enterprise Company and HP Inc. This certified California class action and Private Attorney General Act action was filed against Hewlett-Packard Company on January 17, 2012 and the fifth amended (and operative) complaint was filed against HP Inc. and Hewlett Packard Enterprise on June 28, 2016. The complaint alleges that the defendants paid earned incentive compensation late and failed to timely pay final wages in violation of the California Labor Code. On August 9, 2016, the court ordered the class certified without prejudice to a future motion to amend or modify the class certification order or to decertify. The scheduled January 22, 2018 trial date was vacated following the parties’ notification to the court that they had reached a preliminary agreement to resolve the dispute. The parties subsequently finalized and executed a settlement agreement and, on May 9, 2018, plaintiff filed a motion seeking preliminary approval of the settlement. On July 2, 2018, the court issued an order granting preliminary approval of the settlement. The final approval hearing date has not yet been scheduled.
Hewlett-Packard Company v. Oracle (Itanium). On June 15, 2011, HP Inc. filed suit against Oracle in Santa Clara Superior Court 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. The matter eventually progressed to trial, which 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 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 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 HP 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 filed a notice of cross-appeal challenging the trial court’s denial of prejudgment interest. The schedule for appellate briefing and argument has not yet been established. The Company expects that any appeal could take several years to be resolved and could materially affect the amount ultimately recovered by the Company. The amounts ultimately awarded, if any, would be recorded in the period received. Pursuant to the terms of the Separation and Distribution Agreement, HP Inc. and Hewlett Packard Enterprise will share equally in any recovery from Oracle once Hewlett Packard Enterprise has been reimbursed for all costs incurred in the prosecution of the action prior to the HP Inc./Hewlett Packard Enterprise separation on November 1, 2015.

38
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)

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 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 June 14, 2018, the court heard oral argument on HPE's and Oracle's cross-motions for summary judgment. The court has not yet ruled on the parties' motions. The scheduled start of the trial has been moved from October 29, 2018, to March 4, 2019. Pursuant to the Separation and Distribution agreement between Hewlett-Packard Enterprise and DXC, this is a shared litigation as it relates to both parties’ businesses.
Network-1 Technologies, Inc. v. Alcatel-Lucent USA Inc., et al. This patent infringement action was filed in September 2011 in the United States District Court for the Eastern District of Texas and alleges that various Hewlett Packard Enterprise switches and access points infringe Network-1’s patent relating to the 802.3af and 802.3at “Power over Ethernet” standards. The Network-1 patent at issue expires in 2020. A jury trial was conducted beginning on November 6, 2017. On November 13, 2017, the jury returned a verdict in favor of HPE, finding that HPE did not infringe Network-1’s patent and that the patent was invalid. On August 29 2018, the court denied Network-1's motion for a new trial on infringement and entered the jury's verdict finding that HPE does not infringe the relevant Network-1 patent. The court also granted Network-1's motion for Judgment as a Matter of Law on validity. Network-1 has stated it intends to appeal the jury verdict of non-infringement to the United States Court of Appeals for the Federal Circuit.
DXC Technology Indemnification Demand. On March 27, 2018, DXC Technology (“DXC”) served an arbitration demand on HPE under the Separation and Distribution Agreement by and between HPE and DXC (f/k/a Everett SpinCo, Inc.) dated May 24, 2016, relating to the separation of HPE’s Enterprise Services business (the “ES Business”). The arbitration demand asserts that HPE is required to indemnify DXC for any transferred long-term capitalized lease obligations of the ES Business that exceed the threshold amount of $250 million. DXC contends that this $250 million threshold was exceeded by approximately $1.0 billion because the valuation of the assets underlying certain leases did not justify their classification as operating leases based on the terms of such leases, thereby rendering them long-term capitalized lease obligations. The arbitration demand follows DXC's November 8, 2017 request for indemnification on this same issue. The arbitration is scheduled to begin on February 4, 2019. HPE believes the relevant leases were properly classified as operating leases, DXC’s arbitration claim has no merit, and there is no basis for indemnification. HPE intends to vigorously defend its interests in this matter.
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.
Note 17: Indemnifications
General Cross-indemnification and Tax Matters Agreements with HP Inc., DXC and Micro Focus
In connection with the Separation and the Everett and Seattle Transactions, the Company entered into a Separation and Distribution Agreement and Tax Matters Agreement with each of HP Inc., DXC and affiliates, and Micro Focus and affiliates, effective November 1, 2015, March 31, 2017 and September 1, 2017, respectively. For further details on these agreements, see the Company's Annual Report on Form 10-K for the fiscal year ended October 31, 2017.

39
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)

As of July 31, 2018 and October 31, 2017, 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
 
July 31, 2018
 
October 31, 2017
 
In millions
Litigation matters and other contingencies
 
 
 
Receivable
$
116

 
$
150

Payable
$
89

 
$
91

 
 
 
 
Income tax related indemnification(1)
 
 
 
Net indemnification receivable - long-term
$
111

 
$
1,430

Net indemnification payable - short-term
$
2

 
$
36

 
(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.

40
Table of Contents

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


HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES

This Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") is organized as follows:
•
Overview.  A discussion of our business and overall analysis of financial and other highlights affecting the Company to provide context for the remainder of MD&A. The overview analysis compares the three and nine months ended July 31, 2018 to the prior-year periods.
•
Critical Accounting Policies and Estimates.  A discussion of accounting policies and estimates that we believe are important to understanding the assumptions and judgments incorporated in our reported financial results.
•
Results of Operations.  An analysis of our financial results comparing the three and nine months ended July 31, 2018 to the prior-year periods. A discussion of the results of operations at the consolidated level is followed by a discussion of the results of operations at the segment level.
•
Liquidity and Capital Resources.  An analysis of changes in our cash flows and a discussion of our financial condition and liquidity.
•
Contractual and Other Obligations.  An overview of contractual obligations, retirement and post-retirement benefit plan funding, restructuring plans, uncertain tax positions, cross-indemnifications with HP Inc. (formerly known as "Hewlett-Packard Company"), DXC Technology Company ("DXC"), and Micro Focus International plc ("Micro Focus") and off-balance sheet arrangements.
We intend the discussion of our financial condition and results of operations that follows to provide information that will assist the reader in understanding our Condensed Consolidated Financial Statements, the changes in certain key items in those financial statements from year to year, and the primary factors that accounted for those changes, as well as how certain accounting principles, policies and estimates affect our Condensed Consolidated Financial Statements. This discussion should be read in conjunction with our Condensed Consolidated Financial Statements and the related notes that appear elsewhere in this document.
On November 1, 2015, we became an independent publicly-traded company through a pro rata distribution by HP Inc. ("former Parent" or "HPI"), formerly known as Hewlett-Packard Company, of 100% of our outstanding shares to HP Inc.'s stockholders (the "Separation").
On April 1, 2017 and September 1, 2017, we completed the separation and merger of our Enterprise Services business with Computer Sciences Corporation ("CSC") (collectively, the "Everett Transaction") and the separation and merger of our Software business segment with Micro Focus (collectively, the “Seattle Transaction”), respectively. The historical financial results of Everett and Seattle are reported as Net loss from discontinued operations in the Condensed Consolidated Statements of Earnings. For further information on discontinued operations, see Note 2, "Discontinued Operations".
The following Overview, Results of Operations and Liquidity discussions and analysis compare the three and nine months ended July 31, 2018 to the prior-year periods, unless otherwise noted. The Capital Resources and Contractual and Other Obligations discussions present information as of July 31, 2018, unless otherwise noted.
        For purposes of this MD&A section, we use the terms "Hewlett Packard Enterprise," "HPE," "the Company," "we," "us" and "our" to refer to Hewlett Packard Enterprise Company.
OVERVIEW
We are an industry leading technology company that enables customers to go further, faster. With a deep and comprehensive portfolio, spanning the cloud to the data center to the intelligent edge, our technology and services help customers around the world deliver business outcomes. Our legacy dates back to a partnership founded in 1939 by William R. Hewlett and David Packard, and we strive every day to uphold and enhance that legacy through our dedication to providing innovative technological solutions to our customers.

41
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)



We organize our business into four segments for financial reporting purposes: Hybrid IT, Intelligent Edge, Financial Services ("FS") and Corporate Investments. The following provides an overview of our key financial metrics by segment for the three months ended July 31, 2018, as compared to the prior-year period:
 
HPE
Consolidated
 
Hybrid IT
 
Intelligent Edge
 
Financial Services
 
Corporate
Investments(3)
 
Dollars in millions, except for per share amounts
Net revenue(1)
$
7,764

 
$
6,243

 
$
785

 
$
928

 
$
—

Year-over-year change %
 
3.5
%
 
 
2.7
%
 
 
10.4
%
 
 
3.5
%
 
 
NM

Earnings (loss) from continuing operations(2)
$
516

 
$
661

 
$
91

 
$
73

 
$
(24
)
Earnings (loss) from continuing operations as a % of net revenue
 
6.6
%
 
 
10.6
%
 
 
11.6
%
 
 
7.9
%
 
 
NM

Year-over-year change percentage points
 
3.9pts

 
 
2.7
pts
 
 
(3.0)pts

 
 
0.2pts

 
 
NM

Net earnings from continuing operations
$
452

 
 
 

 
 
 

 
 
 

 
 
 

Net earnings per share
 
 
 
 
 

 
 
 

 
 
 

 
 
 

Basic net EPS from continuing operations
$
0.30

 
 
 

 
 
 

 
 
 

 
 
 

Diluted net EPS from continuing operations
$
0.29

 
 
 
 
 
 
 
 
 
 
 
 
 
(1)
HPE consolidated net revenue excludes intersegment net revenue and other.
(2)
Segment earnings from operations exclude certain unallocated corporate costs and eliminations, stock-based compensation expense related to corporate and certain global functions, transformation costs, amortization of intangible assets, acquisition and other related charges, restructuring charges, separation costs and defined benefit plan settlement charges and remeasurement (benefit).
(3)
"NM" represents not meaningful.

Three months ended July 31, 2018 compared with three months ended July 31, 2017
Net revenue increased by $263 million, or 3.5% (increased 1.2% on a constant currency basis), for the three months ended July 31, 2018, as compared to the prior-year period. The leading contributor to the net revenue increase was higher product revenue of $176 million in Hybrid IT due to favorable currency fluctuations and growth in Compute from core Industry Standard Servers ("ISS") due to higher average unit selling prices ("AUPs") and increased market demand for IT products. Additionally, we had revenue growth in Intelligent Edge from campus switching products and in Financial Services from higher asset management activity. We continue to execute on our HPE Next initiative, which includes streamlining our offerings and business processes, and shifting investments in innovation towards high growth and higher margin solutions and services, which is providing a favorable impact to the performance of our business units in the current period.
Gross margin was 30.7% ($2.4 billion) and 29.3% ($2.2 billion) for the three months ended July 31, 2018 and 2017, respectively. The 1.4 percentage point increase in gross margin was due primarily to Hybrid IT product as a result of a lower mix of revenue from Tier-1 server sales, higher AUPs in Compute from core ISS products, favorable currency fluctuations and the moderation of recent price increases for commodity costs, particularly dynamic random-access memory ("DRAM"). We continue to experience gross margin pressure resulting from a competitive pricing environment across our hardware portfolio. Operating margin increased by 3.9 percentage points in the three months ended July 31, 2018, as compared to the prior-year period, due primarily to the combination of the gross margin increase, lower selling, general and administrative expense as a percentage of net revenue, and lower restructuring expense, partially offset by higher transformation costs related to the HPE Next initiative and higher research and development expense as a percentage of net revenue.







42
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)



The following provides an overview of our key financial metrics by segment for the nine months ended July 31, 2018, as compared to the prior-year period:
 
HPE Consolidated
 
Hybrid IT
 
Intelligent Edge
 
Financial Services
 
Corporate
Investments(4)
 
 
Dollars in millions, except for per share amounts
Net revenue(1)
$
22,906

 
$
18,597

 
$
2,115

 
$
2,732

 
$
(1
)
Year-over-year change %
 
8.0
%
 
 
6.4
%
 
 
12.1
%
 
 
5.4
%
 
 
NM

Earnings (loss) from continuing operations(2)
$
1,174

 
$
1,890

 
$
155

 
$
217

 
$
(67)

Earnings (loss) from continuing operations as a % of net revenue
 
5.1
%
 
 
10.2
%
 
 
7.3
%
 
 
7.9
%
 
 
NM

Year-over-year change percentage points
 
1.1pts

 
 
0.6pts

 
 
(1.5)pts

 
 
(0.7)pts

 
 
NM

Net earnings from continuing operations(3)
$
2,784

 
 
 

 
 
 

 
 
 

 
 
 

Net earnings per share
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Basic net EPS from continuing operations
$
1.79

 
 
 
 
 
 
 
 
 
 
 
 
Diluted net EPS from continuing operations
$
1.76

 
 
 
 
 
 
 
 
 
 
 
 
(1)
HPE consolidated net revenue excludes intersegment net revenue and other.
(2)
Segment earnings from operations exclude certain unallocated corporate costs and eliminations, stock-based compensation expense related to corporate and certain global functions, transformation costs, amortization of intangible assets, acquisition and other related charges, restructuring charges, separation costs and defined benefit plan settlement charges and remeasurement (benefit).
(3)
Includes a net benefit from taxes and tax indemnifications of $1.9 billion, primarily relating to tax amounts incurred in connection with the settlement of certain pre-Separation Hewlett-Packard Company income tax liabilities indemnified through the Tax Matters Agreement with HP Inc., U.S. tax reform, the Everett and Seattle Transactions, and excess tax benefits associated with stock-based compensation.
(4)
"NM" represents not meaningful.

Nine months ended July 31, 2018 compared with nine months ended July 31, 2017
Net revenue increased by $1.7 billion, or 8.0% (increased 5.6% on a constant currency basis), for the nine months ended July 31, 2018, as compared to the prior-year period. The leading contributor to the net revenue increase was higher product revenue of $1.1 billion in Hybrid IT due to revenue growth in Compute from core ISS products due to higher AUPs and increased market demand for IT products, favorable currency fluctuations and growth in Storage as a result of the Nimble Storage acquisition. The HPE net revenue increase was also due to growth in Intelligent Edge from campus switching products and growth in Financial Services due primarily to favorable foreign currency fluctuations and higher asset management revenue.
Gross margin was 29.8% ($6.8 billion) and 30.3% ($6.4 billion) for the nine months ended July 31, 2018 and 2017, respectively. The 0.5 percentage point decrease in gross margin was due primarily to a decline in Hybrid IT as a result of a higher mix of lower margin solutions and higher variable compensation expense. Operating margin increased by 1.1 percentage points in the nine months ended July 31, 2018, as compared to the prior-year period, due primarily to lower selling, general and administrative expense as a percentage of net revenue and lower restructuring expense partially offset by the gross margin decrease and higher transformation costs related to the HPE Next initiative.
As of July 31, 2018, cash and cash equivalents and long-term cash investments were $5.2 billion, representing a decrease of approximately $4.4 billion from the October 31, 2017 balance of $9.6 billion. The decrease in cash and cash equivalents and long-term cash investments during the nine months ended July 31, 2018 was due primarily to the following: share repurchases and cash dividend payments of $3.0 billion, debt payments of $2.5 billion, investments in property, plant and equipment, net of sales proceeds, of $1.6 billion, partially offset by $1.6 billion of cash provided by operating activities and proceeds from debt issuances of $0.9 billion.
Trends and Uncertainties
We are in the process of addressing many challenges facing our business, a discussion of which is available in our Annual Report on Form 10-K for the fiscal year ended October 31, 2017.

43
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)



For a further discussion of trends, uncertainties and other factors that could impact our operating results, see the section entitled "Risk Factors" in Item 1A.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Management's Discussion and Analysis of Financial Condition and Results of Operations is based on our Condensed Consolidated Financial Statements, which have been prepared in accordance with United States ("U.S.") Generally Accepted Accounting Principles ("GAAP"). The preparation of these financial statements requires management to make estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, net revenues and expenses, and disclosure of contingent liabilities. Management believes that there have been no significant changes during the nine months ended July 31, 2018, to the items that we disclosed as our critical accounting policies and estimates in Management's Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the fiscal year ended October 31, 2017.
ACCOUNTING PRONOUNCEMENTS
For a summary of recent accounting pronouncements applicable to our Condensed Consolidated Financial Statements, see Note 1, "Overview and Basis of Presentation".
RESULTS OF OPERATIONS
Revenue from our international operations has historically represented, and we expect will continue to represent, a majority of our overall net revenue. As a result, our revenue growth has been impacted, and we expect will continue to be impacted, by fluctuations in foreign currency exchange rates. In order to provide a framework for assessing performance excluding the impact of foreign currency fluctuations, we present the year-over-year percentage change in revenue on a constant currency basis, which assumes no change in foreign currency exchange rates from the prior-year period and doesn't adjust for any repricing or demand impacts from changes in foreign currency exchange rates. This change in revenue on a constant currency basis is calculated as the quotient of (a) current year revenue converted to U.S. dollars using the prior-year period's foreign currency exchange rates divided by (b) prior-year period revenue. This information is provided so that revenue can be viewed without the effect of fluctuations in foreign currency exchange rates, which is consistent with how management evaluates our revenue results and trends. This constant currency disclosure is provided in addition to, and not as a substitute for, the year-over-year percentage change in revenue on a GAAP basis. Other companies may calculate and define similarly labeled items differently, which may limit the usefulness of this measure for comparative purposes.

44
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)



Results of operations in dollars and as a percentage of net revenue were as follows:
 
Three months ended July 31,
 
Nine months ended July 31,
 
2018
 
2017
 
2018
 
2017
 
Dollars
 
% of
Revenue
 
Dollars
 
% of
Revenue
 
Dollars

% of
Revenue

Dollars

% of
Revenue
 
Dollars in millions
Net revenue
$
7,764

 
100.0
 %
 
$
7,501

 
100.0
 %
 
$
22,906

 
100.0
 %
 
$
21,211

 
100.0
 %
Cost of sales
5,384

 
69.3

 
5,306

 
70.7

 
16,071

 
70.2

 
14,794

 
69.7

Gross profit
2,380

 
30.7

 
2,195

 
29.3

 
6,835

 
29.8

 
6,417

 
30.3

Research and development
434

 
5.6

 
390

 
5.2

 
1,224

 
5.3

 
1,122

 
5.3

Selling, general and administrative
1,203

 
15.5

 
1,285

 
17.1

 
3,632

 
15.9

 
3,718

 
17.6

Amortization of intangible assets
72

 
0.9

 
97

 
1.3

 
222

 
0.9

 
235

 
1.1

Restructuring charges
2

 
—

 
152

 
2.0

 
14

 
0.1

 
304

 
1.4

Transformation costs
131

 
1.8

 
31

 
0.4

 
499

 
2.2

 
31

 
0.1

Acquisition and other related charges
24

 
0.3

 
56

 
0.7

 
70

 
0.3

 
150

 
0.7

Separation costs
(2
)
 
—

 
5

 
0.1

 
—

 
—

 
46

 
0.2

Defined benefit plan settlement charges and remeasurement (benefit)
—

 
—

 
(22
)
 
(0.2
)
 
—

 
—

 
(38
)
 
(0.1
)
Earnings from continuing operations
516

 
6.6

 
201

 
2.7

 
1,174

 
5.1

 
849

 
4.0

Interest and other, net
(64
)
 
(0.7
)
 
(87
)
 
(1.1
)
 
(163
)
 
(0.6
)
 
(251
)
 
(1.2
)
Tax indemnification adjustments
2

 
—

 
10

 
0.1

 
(1,342
)
 
(5.9
)
 
(1
)
 
—

Earnings (loss) from equity interests
11

 
0.1

 
1

 
—

 
23

 
0.1

 
(24
)
 
(0.1
)
Earnings (loss) from continuing operations before taxes
465

 
6.0

 
125

 
1.7

 
(308
)
 
(1.3
)
 
573

 
2.7

(Provision) benefit for taxes
(13
)
 
(0.2
)
 
160

 
2.1

 
3,092

 
13.5

 
(515
)
 
(2.4
)
Net earnings from continuing operations
452

 
5.8

 
285

 
3.8

 
2,784

 
12.2

 
58

 
0.3

Net loss from discontinued operations
(1
)
 
—

 
(120
)
 
(1.6
)
 
(119
)
 
(0.6
)
 
(238
)
 
(1.1
)
Net earnings (loss)
$
451

 
5.8
 %
 
$
165

 
2.2
 %
 
$
2,665

 
11.6
 %
 
$
(180
)
 
(0.8
)%
Stock-based compensation expense is included within costs and expenses presented in the table above as follows:
 
Three months ended July 31,
 
Nine months ended July 31,
 
2018
 
2017
 
2018
 
2017
 
Dollars in millions
Cost of sales
$
7

 
$
7

 
$
34

 
$
33

Research and development
14

 
21

 
60

 
55

Selling, general and administrative
35

 
58

 
148

 
194

Restructuring charges
—

 
10

 
—

 
29

Transformation costs
—

 
—

 
3

 
—

Acquisition and other related charges
1

 
14

 
10

 
21

Separation costs
—

 
5

 
10

 
34

Stock-based compensation expense from continuing operations
$
57

 
$
115

 
$
265

 
$
366

Stock-based compensation expense from discontinued operations
$
—

 
$
13

 
$
—

 
$
140


45
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)



Net Revenue
Prior period revenue was reclassified between the regions to conform with the current period presentation. For the three months ended July 31, 2018, as compared to the prior-year period, total net revenue increased by $263 million, or 3.5% (increased 1.2% on a constant currency basis). U.S. net revenue decreased by $82 million, or 3.0%, from $2,719 million to $2,637 million, and net revenue from outside of the U.S. increased by $345 million, or 7.2%, from $4,782 million to $5,127 million. For the nine months ended July 31, 2018, as compared to the prior-year period, total net revenue increased by $1,695 million, or 8.0% (increased 5.6% on a constant currency basis). U.S. net revenue increased by $84 million, or 1.1%, from $7,365 million to $7,449 million and net revenue from outside of the U.S. increased by $1,611 million, or 11.6%, from $13,846 million to $15,457 million.
The components of the weighted net revenue change by segment were as follows:
 
Three Months Ended
July 31, 2018
Nine Months Ended
July 31, 2018
 
Percentage Points
Hybrid IT
2.2

5.3
Intelligent Edge
1.0

1.1
Financial Services
0.4

0.7
Corporate Investments/Other (1)
(0.1
)
0.9
Total HPE
3.5

8.0
 
(1)
Other primarily relates to the elimination of intersegment net revenue.
Three months ended July 31, 2018 compared with the three months ended July 31, 2017
From a segment perspective, the primary factors contributing to the change in total net revenue are summarized as follows:
•
Hybrid IT net revenue increased as a result of favorable currency fluctuations and growth in Compute from core ISS products due to higher AUPs and increased market demand for IT products;
•
Intelligent Edge net revenue increased due primarily to revenue growth in HPE Aruba Product from campus switching products; and
•
FS net revenue increased due primarily to higher asset management revenue and favorable currency fluctuations.
Nine months ended July 31, 2018 compared with the nine months ended July 31, 2017
From a segment perspective, the primary factors contributing to the change in total net revenue are summarized as follows:
•
Hybrid IT net revenue increased due to growth in Compute from core ISS due primarily to higher AUPs and increased market demand for IT products, favorable currency fluctuations and incremental revenue from the Nimble Storage acquisition;
•
Intelligent Edge net revenue increased due primarily to revenue growth in HPE Aruba Product from campus switching products; and
•
FS net revenue increased due primarily to favorable currency fluctuations and higher asset management revenue.
A more detailed discussion of segment revenue is included under "Segment Information" below.
Gross Margin
For the three months ended July 31, 2018, as compared to the prior-year period, total gross margin increased 1.4 percentage points. From a segment perspective, the primary factors impacting gross margin performance are summarized as follows:

46
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)



•
Hybrid IT gross margin increased for the three months ended July 31, 2018, as compared to the prior-year period, due to multiple factors including: a lower mix of revenue from Tier-1 server sales, as we streamline the business to focus on high margin solutions, higher AUPs in Compute from core ISS products, favorable currency impacts and the moderation of recent price increases for DRAM;
•
Intelligent Edge gross margin decreased for the three months ended July 31, 2018, as compared to the prior-year period, due primarily to a higher mix of revenue from lower margin edge compute products and a lower mix of revenue from WLAN products; and
•
FS gross margin increased for the three months ended July 31, 2018, as compared to the prior-year period due primarily to increased revenue from higher asset management activity.
For the nine months ended July 31, 2018, as compared to the prior-year period, total gross margin decreased 0.5 percentage points. From a segment perspective, the primary factors impacting gross margin performance are summarized as follows:
•
Hybrid IT gross margin decreased for the nine months ended July 31, 2018, as compared to the prior-year period, due primarily to a higher mix of lower margin solutions and higher variable compensation expense;
•
Intelligent Edge gross margin remained flat for the nine months ended July 31, 2018, as compared to the prior-year period due to the impact of a one-time tax duty in the prior-year period offset by a higher mix of revenue from lower margin edge compute products.
•
FS gross margin decreased for the nine months ended July 31, 2018, as compared to the prior-year period, due primarily to the combined impact of an increase in the bad debt reserve in the current period and a bad debt reserve release in the prior-year period.
A more detailed discussion of segment gross margins and operating margins is included under "Segment Information" below.
Operating Expenses
Research and Development
Research and development ("R&D") expense increased by $44 million or 11.3% for the three months ended July 31, 2018, as compared to the prior-year period due to higher variable compensation expense and as we increase investment in new product development in the Hybrid IT and Intelligent Edge segments.
R&D expense increased by $102 million or 9.1%, for the nine months ended July 31, 2018, as compared to the prior-year period, due to higher variable compensation expense and incremental R&D expense related to business acquisitions.
Selling, General and Administrative
Selling, general and administrative expense decreased by $82 million, or 6.4% and by $86 million, or 2.3% for the three and nine months ended July 31, 2018, respectively, as compared to the prior-year periods. The decrease during both periods was due primarily to lower administrative expenses as a result of the HPE Next initiative, partially offset by higher field selling costs and marketing expenses as a result of higher variable compensation expense and unfavorable currency fluctuations. The decrease during the nine months ended July 31, 2018 was also partially offset by higher costs related to business acquisitions.
Amortization of Intangible Assets
For the three months ended July 31, 2018, as compared to the prior-year period, amortization expense decreased by $25 million or 25.8% due to certain intangible assets associated with acquisitions reaching the end of their amortization periods.
For the nine months ended July 31, 2018, as compared to the prior-year period, amortization expense decreased by $13 million, or 5.5%, due to certain intangible assets associated with acquisitions reaching the end of their amortization periods, partially offset by higher amortization expense in the current period related to intangible assets from business acquisitions in fiscal 2017.
Restructuring Charges

47
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)



Restructuring charges decreased for the three and nine months ended July 31, 2018, as compared to the prior-year periods, due to the completion of the restructuring plan we announced in September 2015 (the "2015 Plan") in connection with the Separation and the plan initially announced in May 2012 (the "2012 Plan").
Transformation Costs
For the three and nine months ended July 31, 2018, HPE Next transformation costs of $131 million and $499 million, respectively, primarily include restructuring charges related to the HPE Next plan, consulting fees and IT costs, partially offset by the gains from the sales of real estate.
Acquisition and Other Related Charges
Acquisition and other related charges decreased for the three and nine months ended July 31, 2018, as compared to the prior-year periods, due primarily to reduced costs related to retention bonuses and integration activities.
Separation Costs
Separation costs for the three and nine months ended July 31, 2018 represent amounts related to the Seattle and Everett Transactions partially offset by a tax credit related to the Separation.
Separation costs for the three and nine months ended July 31, 2017 represent amounts in connection with the Separation and the Seattle Transaction.
Defined Benefit Plan Settlement Charges and Remeasurement (Benefit)
Defined benefit plan settlement charges and remeasurement (benefit) for the three and nine months ended July 31, 2017 represent adjustments to the net periodic pension benefit cost resulting from the remeasurement of certain Hewlett Packard Enterprise pension plans due to plan separations in connection with the Everett and Seattle Transactions.
Interest and Other, Net
Interest and other, net expense decreased by $23 million and $88 million for the three and nine months ended July 31 2018, respectively, as compared to the prior-year periods. The decrease for the three months ended July 31, 2018 as compared to the prior-year period was due primarily to a gain on the sale of Internet Protocol addresses and lower currency transaction losses. The decrease for the nine months ended July 31, 2018, as compared to the prior-year period, was due primarily to lower currency transaction losses, a gain on the sale of Internet Protocol addresses and the sale of certain tax assets.

Tax Indemnification Adjustments
Tax indemnification income of $2 million and $10 million for the three months ended July 31, 2018 and 2017, respectively, and tax indemnification expense of $1.3 billion and $1 million for the nine months ended July 31, 2018 and 2017, respectively, resulted from the settlement of certain pre-Separation tax liabilities for which we share joint and several liability with HP Inc., and for which we are partially indemnified by HP Inc. under the Tax Matters Agreement.
Earnings (loss) from Equity Interests
Earnings (loss) from equity interests primarily represents our 49% interest in H3C. For the three and nine months ended July 31 2018, earnings from equity interests increased compared to the prior-year periods. For the three month period, the increase in earnings from equity interests is the result of higher net income earned by H3C. For the nine month period, earnings from equity interests increased due primarily to an increase in H3C net earnings in the first quarter and third quarter of fiscal 2018, partially offset by lower H3C net earnings in the second quarter of fiscal 2018.
Provision for Taxes
Our effective tax rate was 2.8% and (128.0)% for the three months ended July 31, 2018 and 2017, respectively, and 1003.9% and 89.9% for the nine months ended July 31, 2018 and 2017, respectively. The effective tax rate for the three months ended July 31, 2018 was impacted by various items discrete to the quarter. The effective tax rate for the nine months ended July 31, 2018 was significantly impacted by the U.S. Tax Cuts and Jobs Act ("Tax Act") and the settlement of certain pre-Separation tax liabilities of HP Inc., for which we are joint and severally liable.
On December 22, 2017, the Tax Act was enacted into law, which significantly changes existing U.S. tax law and includes numerous provisions that affect our business, such as imposing a one-time transition tax on deemed repatriation of deferred

48
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)



foreign income, reducing the U.S. federal statutory tax rate, and adopting a modified territorial tax system. See Note 7, "Taxes on Earnings", for a full description of the impact of the Tax Act to our operations.
Segment Information
Effective at the beginning of the first quarter of fiscal 2018, the Company implemented organizational changes to align its segment financial reporting more closely with its current business structure. For additional information related to these realignments and for a description of the products and services for each segment, see Note 3, "Segment Information".
Hybrid IT
 
Three months ended July 31,
 
2018
 
2017
 
% Change
 
Dollars in millions
 
 
Net revenue
$
6,243

 
$
6,080

 
2.7
%
Earnings from operations
$
661

 
$
482

 
37.1
%
Earnings from operations as a % of net revenue
10.6
%
 
7.9
%
 
 

 
Nine months ended July 31,
 
2018
 
2017
 
% Change
 
Dollars in millions
 
 
Net revenue
$
18,597

 
$
17,472

 
6.4
%
Earnings from operations
$
1,890

 
$
1,672

 
13.0
%
Earnings from operations as a % of net revenue
10.2
%
 
9.6
%
 
 

The components of the weighted net revenue change by business unit were as follows:
 
Three months ended July 31,
 
Net Revenue
 
Weighted
Net Revenue
Change
Percentage
Points
 
2018
 
2017
 
2018
 
Dollars in millions
 
 
Compute
$
3,510

 
$
3,340

 
2.8

Storage
887

 
877

 
0.2

DC Networking
59

 
63

 
(0.1
)
Hybrid IT Product
4,456

 
4,280

 
2.9

HPE Pointnext
1,787

 
1,800

 
(0.2
)
Total Hybrid IT
$
6,243

 
$
6,080

 
2.7


49
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)



 
Nine months ended July 31,
 
Net Revenue
 
Weighted
Net Revenue
Change
Percentage
Points
 
2018
 
2017
 
2018
 
Dollars in millions
 
 
Compute
$
10,215

 
$
9,516

 
4.0

Storage
2,747

 
2,375

 
2.1

DC Networking
167

 
157

 
0.1

Hybrid IT Product
13,129

 
12,048

 
6.2

HPE Pointnext
5,468

 
5,424

 
0.2

Total Hybrid IT
$
18,597

 
$
17,472

 
6.4

Three months ended July 31, 2018 compared with three months ended July 31, 2017
Hybrid IT net revenue increased by $163 million, or 2.7% (increased 0.3% on a constant currency basis), for the three months ended July 31, 2018. The increase in Hybrid IT net revenue was due primarily to favorable currency fluctuations and growth in Compute from core ISS products due to higher AUPs and increased market demand for IT products. Partially offsetting these increases was lower revenue in HPE Pointnext and DC Networking. The HPE Next initiative, which includes focusing on high growth and high margin solutions and services is providing a favorable impact to the overall performance of the segment in the current period.
Hybrid IT Product net revenue increased by $176 million, or 4%, with growth of 5% and 1% in Compute and Storage, respectively, while net revenue decreased by 6% in DC Networking.
•
The net revenue increase in Compute was due primarily to favorable currency fluctuations and growth in core ISS products. Mission-critical servers ("MCS") also experienced a net revenue increase for the period. The increase in Compute net revenue was partially offset by a decline in Tier-1 server sales as we continue to exit less profitable product categories. The growth in core ISS revenue was driven by an increase in AUPs across core products due to several factors including Generation 10 servers representing a higher mix of overall core ISS server products, the cost of certain commodities and improved server configurations. The increase in AUPs was partially offset by a decline in unit shipments, primarily in the rack, tower and blade categories. MCS revenue increased as a result of higher revenue from NonStop products.
•
The net revenue increase in Storage was due to favorable currency fluctuations. Revenue in converged storage increased due to growth in big data products partially offset by lower revenue from All-Flash Array and HPE Nimble Storage products. Traditional storage revenue increased due to growth in networking products.
•
Lower revenue in DC Networking was due primarily to a decline in switching products partially offset by favorable currency fluctuations.
HPE Pointnext net revenue decreased by $13 million, or 1%, due to a revenue decline in Advisory and Professional Services in part as a result of our HPE Next initiative to streamline our go-to-market approach in certain countries. This revenue decline was partially offset by growth in Operational Services and Communication and Media Services and favorable currency fluctuations. The revenue increase in Operational Services was due primarily to growth in HPE Datacenter Care and HPE Proactive Care support, partially offset by a reduction in support for legacy server and storage solutions.
Hybrid IT earnings from operations as a percentage of net revenue increased by 2.7 percentage points for the three months ended July 31, 2018, as compared to the prior-year period. The increase was due to a higher gross margin and lower operating expenses as a percentage of net revenue. The increase in gross margin was due to multiple factors including: a lower mix of revenue from Tier-1 server sales, as we streamline the business to focus on high margin solutions, higher AUPs in Compute from core ISS products, favorable currency impacts and the moderation of recent price increases for DRAM, partially offset by a higher mix of lower margin solutions in HPE Pointnext. Operating expenses as a percentage of net revenue decreased as a result of cost reduction and streamlining initiatives, and cost efficiencies resulting from the integration of recent business combinations partially offset by higher variable compensation expense.

50
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)



Nine months ended July 31, 2018 compared with nine months ended July 31, 2017
Hybrid IT net revenue increased by $1.1 billion, or 6.4% (increased 4.1% on a constant currency basis), for the nine months ended July 31, 2018. The increase in Hybrid IT net revenue was due primarily to growth in Compute from core ISS due to higher AUPs and increased market demand for IT products, favorable currency fluctuations and incremental revenue from HPE Nimble Storage.
Hybrid IT Product net revenue increased by $1.1 billion, or 9%, with growth of 7% in Compute, 16% in Storage and 6% in DC Networking.
•
The net revenue increase in Compute was due primarily to growth in ISS, favorable currency impacts and growth in MCS. ISS revenue increased due to growth in core ISS, primarily in the rack server category, partially offset by a decline in Tier-1 server sales. The growth in core ISS revenue was driven by higher AUPs, primarily in the rack category, in part as they include the cost of certain commodities, partially offset by a unit decline in the tower, rack and blade categories.
•
The net revenue increase in Storage was driven by growth in our converged and traditional storage products. Converged storage revenue growth was due primarily to revenue from HPE Nimble Storage and growth in big data and All-Flash Array products. Traditional storage revenue increased as a result of growth in networking and MSA products.
•
Higher revenue in DC Networking was due primarily to growth in switching products.
HPE Pointnext net revenue increased by $44 million, or 1%, due primarily to favorable currency fluctuations and revenue growth in Operational Services, partially offset by a revenue decline in Advisory and Professional Services and Communications and Media Services. Revenue in Operational Services increased due to growth in HPE Datacenter Care and HPE Proactive Care support solutions, partially offset by a reduction in support for legacy server and storage solutions.
Hybrid IT earnings from operations as a percentage of net revenue increased by 0.6 percentage points for the nine months ended July 31, 2018, as compared to the prior-year period. The increase was due to a decrease in operating expenses as a percentage of net revenue partially offset by a decline in gross margin. The gross margin decline was due primarily to a higher mix of lower margin solutions and higher variable compensation expense. The gross margin decline was partially offset by a lower mix of revenue from lower margin Tier-1 server sales. Operating expenses as a percentage of net revenue decreased due to lower expenses as a result of cost reduction and streamlining initiatives partially offset by higher variable compensation expense.

51
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)



Intelligent Edge
 
Three months ended July 31,
 
2018
 
2017
 
% Change
 
Dollars in millions
 
 
Net revenue
$
785

 
$
711

 
10.4
 %
Earnings from operations
$
91

 
$
104

 
(12.5
)%
Earnings from operations as a % of net revenue
11.6
%
 
14.6
%
 
 


 
Nine months ended July 31,
 
2018
 
2017
 
% Change
 
Dollars in millions
 
 
Net revenue
$
2,115

 
$
1,887

 
12.1
 %
Earnings from operations
$
155

 
$
166

 
(6.6
)%
Earnings from operations as a % of net revenue
7.3
%
 
8.8
%
 
 


The components of the weighted net revenue change by business unit were as follows:
 
Three months ended July 31,
 
Net Revenue
 
Weighted
Net Revenue Change Percentage Points
 
2018
 
2017
 
2018
 
Dollars in millions
 
 
HPE Aruba Product
$
706

 
$
642

 
9.0

HPE Aruba Services
79

 
69

 
1.4

Total Intelligent Edge
$
785

 
$
711

 
10.4


 
Nine months ended July 31,
 
Net Revenue
 
Weighted
Net Revenue
Change
Percentage
Points
 
2018
 
2017
 
2018
 
Dollars in millions
 
 
HPE Aruba Product
$
1,890

 
$
1,683

 
11.0
HPE Aruba Services
225

 
204

 
1.1
Total Intelligent Edge
$
2,115

 
$
1,887

 
12.1

Three months ended July 31, 2018 compared with three months ended July 31, 2017
Intelligent Edge net revenue increased by $74 million, or 10.4% (increased 8.0% on a constant currency basis), for the three months ended July 31, 2018. The increase in Intelligent Edge net revenue was due primarily to a net increase in HPE Aruba Product revenue of $64 million, or 10%. The increase in HPE Aruba Product revenue was due primarily to revenue growth in campus switching products as a result of increased sales of legacy HPE campus switching products into the Aruba customer base leading to growth across all regions, as well as revenue growth in our edge computing technology products, partially offset by a decline in revenue from WLAN products. HPE Aruba Services net revenue increased by $10 million, or 14%, due primarily to services attach on a growing product installed base.

52
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)



Intelligent Edge earnings from operations as a percentage of net revenue decreased 3.0 percentage points for the three months ended July 31, 2018 due to a decrease in gross margin and an increase in operating expenses as a percentage of net revenue. The decrease in gross margin was due primarily to a higher mix of revenue from lower margin edge compute products and a lower mix of revenue from WLAN products partially offset by favorable currency fluctuations. The increase in operating expenses as a percentage of net revenue was due primarily to higher R&D and field selling costs.
Nine months ended July 31, 2018 compared with nine months ended July 31, 2017
Intelligent Edge net revenue increased by $228 million, or 12.1% (increased 9.6% on a constant currency basis), for the nine months ended July 31, 2018. The increase in Intelligent Edge net revenue was due primarily to a net increase in HPE Aruba Product revenue of $207 million, or 12%. The increase in HPE Aruba Product revenue was due primarily to revenue growth in campus switching products as a result of increased sales of legacy HPE campus switching products into the Aruba customer base leading to growth across all regions, as well as revenue growth in our edge computing technology products, partially offset by a decline in revenue from WLAN products. HPE Aruba Services net revenue increased by $21 million, or 10%, due primarily to services attach on a growing product installed base.
Intelligent Edge earnings from operations as a percentage of net revenue decreased 1.5 percentage points for the nine months ended July 31, 2018. The decrease was due to a flat gross margin and an increase in operating expenses as a percentage of net revenue. The gross margin was impacted by a one-time tax duty in the prior-year period offset by a higher mix of revenue from lower margin edge compute products. The increase in operating expenses as a percentage of net revenue was due primarily to higher R&D and field selling costs.
Financial Services
 
Three months ended July 31,
 
2018
 
2017
 
% Change
 
Dollars in millions
 
 
Net revenue
$
928

 
$
897

 
3.5
%
Earnings from operations
$
73

 
$
69

 
5.8
%
Earnings from operations as a % of net revenue
7.9
%
 
7.7
%
 



 
Nine months ended July 31,
 
2018
 
2017
 
% Change
 
Dollars in millions
 
 
Net revenue
$
2,732

 
$
2,592

 
5.4
 %
Earnings from operations
$
217

 
$
222

 
(2.3
)%
Earnings from operations as a % of net revenue
7.9
%
 
8.6
%
 
 


Three months ended July 31, 2018 compared with three months ended July 31, 2017
FS net revenue increased by $31 million, or 3.5% (increased 2.6% on a constant currency basis), for the three months ended July 31, 2018. The increase in net revenue was due primarily to higher asset management revenue from lease buyouts, end-of-lease monthly rentals and lease extensions, along with favorable foreign currency fluctuations, partially offset by a decrease in rental revenue due to lower average operating leases.
FS earnings from operations as a percentage of net revenue increased 0.2 percentage points for the three months ended July 31, 2018 due to an increase in gross margin, partially offset by an increase in operating expenses as a percentage of net revenue. The increase in gross margin was due primarily to higher asset management activity related to lease extensions, buyouts and higher margins on remarketing sales, partially offset by higher bad debt expense. Operating expenses as a percentage of net revenue increased due primarily to higher marketing expenses.

53
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)



Nine months ended July 31, 2018 compared with nine months ended July 31, 2017
FS net revenue increased by $140 million, or 5.4% (increased 2.6% on a constant currency basis), for the nine months ended July 31, 2018. The increase in net revenue was due primarily to favorable foreign currency fluctuations and higher asset management revenue from end-of-lease monthly rentals, remarketing sales and lease extensions, partially offset by a decrease in rental revenue due to lower average operating leases.
FS earnings from operations as a percentage of net revenue decreased 0.7 percentage points for the nine months ended July 31, 2018 due to an increase in operating expenses as a percentage of net revenue and a decrease in gross margin. Operating expenses as a percentage of net revenue increased due primarily to higher marketing, administrative and field selling costs. The decrease in gross margin was due primarily to the combined impact of an increase in the bad debt reserve in the current period and a bad debt reserve release in the prior-year period, which was partially offset by favorable foreign currency fluctuations, higher asset management activity related to lease extensions and higher margins on lease buyouts and remarketing sales.
Financing Volume
 
Three months ended July 31,
 
Nine months ended July 31,
 
2018
 
2017
 
2018
 
2017
 
In millions
Total financing volume
$
1,658

 
$
1,448

 
$
4,636

 
$
4,337

New financing volume, which represents the amount of financing provided to customers for equipment and related software and services, including intercompany activity, increased 14.5% and 6.9% for the three and nine months ended July 31, 2018, respectively, as compared to the prior-year periods. The increase was primarily driven by higher financing associated with third-party product sales and related service offerings.
Portfolio Assets and Ratios
The portfolio assets and ratios derived from the segment balance sheets for FS were as follows:
 
As of
 
July 31, 2018
 
October 31, 2017
 
Dollars in millions
Financing receivables, gross
$
8,115

 
$
7,844

Net equipment under operating leases
4,311

 
4,413

Capitalized profit on intercompany equipment transactions
534

 
656

Intercompany leases
85

 
115

Gross portfolio assets
13,045

 
13,028

Allowance for doubtful accounts(1)
103

 
86

Operating lease equipment reserve
55

 
49

Total reserves
158

 
135

Net portfolio assets
$
12,887

 
$
12,893

Reserve coverage
1.2
%
 
1.0
%
Debt-to-equity ratio(2)
7.0x

 
7.0x

 
(1)
Allowance for doubtful accounts for financing receivables includes both the short- and long-term portions.
(2)
Debt benefiting FS consists of intercompany equity that is treated as debt for segment reporting purposes, intercompany debt, and borrowing- and funding-related activity associated with FS and its subsidiaries. Debt benefiting FS totaled $11.6 billion and $11.2 billion at July 31, 2018 and October 31, 2017, respectively, and was determined by applying an assumed debt-to-equity ratio, which management believes to be comparable to that of other similar financing companies. FS equity at July 31, 2018 and October 31, 2017 was $1.7 billion and $1.6 billion, respectively.
At July 31, 2018 and October 31, 2017, FS cash and cash equivalents balances were approximately $925 million and $873 million, respectively.

54
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)



Net portfolio assets at July 31, 2018 remained flat when compared to October 31, 2017.
FS bad debt expense includes charges to general reserves and specific reserves for sales-type, direct-financing and operating leases. For the three and nine months ended July 31, 2018, FS recorded net bad debt expense of $22 million and $56 million, respectively. For the three and nine months ended July 31, 2017, FS recorded net bad debt expense of $13 million and $31 million respectively. The prior-year included the release of previously recorded bad debt reserves in the first quarter of fiscal 2017.
Corporate Investments
 
Three months ended July 31,
 
2018
 
2017
 
% Change(1)
 
Dollars in millions
Net revenue
$
—

 
$
—

 
NM

Loss from operations
$
(24
)
 
$
(24
)
 
—
%
Loss from operations as a % of net revenue(1)
NM

 
NM

 
NM

 
(1)
"NM" represents not meaningful.

 
Nine months ended July 31,
 
2018
 
2017
 
% Change(1)
 
Dollars in millions
Net revenue
$
(1
)
 
$
—

 
NM

Loss from operations
$
(67
)
 
$
(85
)
 
(21.2
)%
Loss from operations as a % of net revenue(1)
NM

 
NM

 
NM

 
(1)
"NM" represents not meaningful.
For the nine months ended July 31, 2018, as compared to the prior-year period, Corporate Investments loss from operations decreased by $18 million, or 21.2%, due to lower spending in Hewlett Packard Labs.
LIQUIDITY AND CAPITAL RESOURCES
We use cash generated by operations as our primary source of liquidity. We believe that internally generated cash flows will be generally sufficient to support our operating businesses, capital expenditures, product development initiatives, acquisitions, restructuring activities, remaining divestiture transaction costs, including indemnifications, transformation costs, maturing debt, interest payments, and income tax payments, in addition to any future investments and any future share repurchases, and future stockholder dividend payments. We expect to supplement this short-term liquidity, if necessary, by accessing the capital markets, issuing commercial paper, and borrowing under credit facilities made available by various domestic and foreign financial institutions. However, our access to capital markets may be constrained and our cost of borrowing may increase under certain business, market and economic conditions. Our liquidity is subject to various risks including the risks identified in the section entitled "Risk Factors" in Item 1A of Part II and market risks identified in the section entitled "Quantitative and Qualitative Disclosures about Market Risk" in Item 3 of Part I.
Our cash balances are held in numerous locations throughout the world, with a substantial amount held outside of the U.S. We utilize a variety of planning and financing strategies in an effort to ensure that our worldwide cash is available when and where it is needed. Our cash position is strong and we expect that our cash balances, anticipated cash flow generated from operations and access to capital markets will be sufficient to cover our expected near-term cash outlays.
Amounts held outside of the U.S. are generally utilized to support non-U.S. liquidity needs, although a portion of those amounts may, from time to time, be subject to short-term intercompany loans into the U.S. Due to the enactment of the Tax Act, all of our cash, cash equivalents and investments held by foreign subsidiaries were subject to U.S. taxation under the one-time Transition Tax as further discussed in Note 7, “Taxes on Earnings”. Subsequent repatriations will not be taxable from a U.S. federal tax perspective but may be subject to state or foreign withholding tax. Where local restrictions prevent an efficient

55
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)



intercompany transfer of funds, our intent is to keep cash balances outside of the U.S. and to meet liquidity needs through ongoing cash flows, external borrowings, or both. We do not expect restrictions or potential taxes incurred on repatriation of amounts held outside of the U.S. to have a material effect on our overall liquidity, financial condition or results of operations.
In connection with the share repurchase program previously authorized by our Board of Directors, during the first nine months of fiscal 2018, we repurchased an aggregate amount of $2.6 billion. On February 21, 2018, our Board of Directors authorized an additional $2.5 billion under the share repurchase program. On February 22, 2018, we announced an increase to the regular quarterly dividend from $0.075 per share to $0.1125 per share, which was effective in the third quarter of fiscal 2018. For more information on our share repurchase program, refer to Item 2. Unregistered Sales of Equity Securities in Part II. Other Information.
Liquidity
Our historical statements of cash flows represent the combined cash flows and metrics of HPE and have not been revised to reflect the effect of discontinued operations. For further information on discontinued operations, refer to Note 2, "Discontinued Operations".
Our key cash flow metrics were as follows:
 
Nine months ended July 31,
 
2018
 
2017
 
In millions
Net cash provided by operating activities
$
1,638

 
$
504

Net cash used in investing activities
(1,683
)
 
(4,424
)
Net cash used in financing activities
(4,341
)
 
(1,310
)
Net decrease in cash and cash equivalents
$
(4,386
)
 
$
(5,230
)
Operating Activities
For the nine months ended July 31, 2018, net cash provided by operating activities increased by $1.1 billion, as compared to the prior-year period. The increase was due primarily to a payment of $1.9 billion for pension funding in connection with the Everett Transaction in the prior-year period partially offset by higher cash usage for net working capital management and financing receivables in the current period.
Working capital metrics for the three months ended July 31, 2018 compared with the three months ended July 31, 2017
Our key working capital metrics have been revised to reflect the effect of discontinued operations and were as follows:
 
Three months ended July 31,
 
2018
 
2017
 
Change
Days of sales outstanding in accounts receivable ("DSO")
34

 
39

 
(5
)
Days of supply in inventory ("DOS")
46

 
36

 
10

Days of purchases outstanding in accounts payable ("DPO")
(103
)
 
(96
)
 
(7
)
Cash conversion cycle
(23
)
 
(21
)
 
(2
)
DSO measures the average number of days our receivables are outstanding. DSO is calculated by dividing ending accounts receivable, net of allowance for doubtful accounts, by a 90-day average of net revenue. Compared to the corresponding period in fiscal 2017, DSO declined due to a lower accounts receivable balance as a result of an increase in early payments and factoring, and a reduction in customers on extended payments terms.
DOS measures the average number of days from procurement to sale of our product. DOS is calculated by dividing ending inventory by a 90-day average of cost of goods sold. Compared to the corresponding period in fiscal 2017, the increase in DOS was due primarily to higher levels of strategic commodities inventory to support customer demand, increases in memory component costs, particularly DRAM, and higher inventory of server solutions which have longer time-to-shipment cycles.

56
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)



DPO measures the average number of days our accounts payable balances are outstanding. DPO is calculated by dividing ending accounts payable by a 90-day average of cost of goods sold. Compared to the corresponding period in fiscal 2017, the increase in DPO was primarily the result of increased inventory purchases to support customer demand, higher commodity costs and an extension of payment terms with our suppliers.
The cash conversion cycle is the sum of DSO and DOS less DPO. Items which may cause the cash conversion cycle in a particular period to differ include, but are not limited to, changes in business mix, changes in payment terms (including extended payment terms from suppliers), the extent of receivables factoring, seasonal trends, the timing of revenue recognition and inventory purchases within the period, acquisition activity and the impact of increased commodity costs.
Investing Activities
For the nine months ended July 31, 2018, net cash used in investing activities decreased by $2.7 billion, as compared to the corresponding period in fiscal 2017. The decrease was due primarily to payments of $2.1 billion in the prior period in connection with business acquisitions and in the current period a decrease of $0.4 billion of cash used for investments in property, plant and equipment, net of proceeds from sales.
Financing Activities
For the nine months ended July 31, 2018, as compared to the corresponding period in fiscal 2017, net cash used in financing activities increased by $3.0 billion. The increase was due primarily to a $3.0 billion cash dividend from Everett in the prior period, higher cash used in the current period for share repurchase activity of $0.6 billion, partially offset by cash and cash equivalents transferred to Everett of $0.5 billion in the prior period and cash and cash equivalents of $0.2 billion transferred from Seattle in the current period.
Capital Resources
Debt Levels
We maintain debt levels that we establish through consideration of a number of factors, including cash flow expectations, cash requirements for operations, investment plans (including acquisitions), share repurchase activities, and our cost of capital and targeted capital structure.
On June 29, 2018 we redeemed $1.6 billion face value of $2.65 billion Senior Notes with an original maturity date of October 5, 2018. During the first nine months of fiscal 2018, we issued $17.0 billion and repaid $16.9 billion of commercial paper. For more information on our borrowings, see Note 13, "Borrowings".
Our weighted-average interest rate reflects the average effective rate on our borrowings prevailing during the period and reflects the impact of interest rate swaps. For more information on our interest rate swaps, see Note 12, "Financial Instruments".
In December 2017, we filed a shelf registration statement with the Securities and Exchange Commission that allows us to sell, at any time and from time to time, in one or more offerings, debt securities, preferred stock, common stock, warrants, depositary shares, purchase contracts, guarantees or units.
Revolving Credit Facility
On November 1, 2015, the Company entered into a revolving credit facility providing for a senior, unsecured revolving credit facility with aggregate lending commitments of $4.0 billion. Loans under the revolving credit facility may be used for general corporate purposes. Commitments under the Credit Agreement are available for a period of five years, which may be extended. Commitment fees, interest rates and other terms of borrowing under the credit facility vary based on Hewlett Packard Enterprise's external credit rating.
Available Borrowing Resources
As of July 31, 2018, we had the following additional liquidity resources available if needed:
 
As of
July 31, 2018
 
In millions
Commercial paper programs
$
4,058

Uncommitted lines of credit
$
1,299

CONTRACTUAL AND OTHER OBLIGATIONS
Contractual Obligations
Our contractual obligations have not changed materially since October 31, 2017. For further information see "Contractual and Other Obligations" in Item 7 of Part II of our Annual Report on Form 10-K for the fiscal year ended October 31, 2017.
Retirement and Post-Retirement Benefit Plan Funding
For the remainder of fiscal 2018, we anticipate making contributions of approximately $41 million to our non-U.S. pension plans. Our policy is to fund our pension plans so that we meet at least the minimum contribution requirements, as established by local government, funding and taxing authorities. For more information on our retirement and post-retirement benefit plans, see Note 6, "Retirement and Post-Retirement Benefit Plans".
Restructuring Plans
As of July 31, 2018, we expect to make future cash payments of approximately $0.6 billion in connection with our approved restructuring plans, which includes $0.2 billion expected to be paid through the remainder of fiscal 2018 and $0.4 billion expected to be paid through fiscal 2021. For more information on our restructuring activities, see Note 4, "Restructuring", and Note 5, "HPE Next".
Uncertain Tax Positions
As of July 31, 2018, we had approximately $1.6 billion of recorded liabilities and related interest and penalties pertaining to uncertain tax positions. These liabilities and related interest and penalties include $113 million to be paid within one year. For the remaining amounts, we are unable to make a reasonable estimate as to when cash settlement with the tax authorities might occur due to the uncertainties related to these tax matters. Payments of these obligations would result from settlements with taxing authorities. For more information on our uncertain tax positions, see Note 7, "Taxes on Earnings".
Cross-indemnification with HP Inc., DXC and Micro Focus
As of July 31, 2018, we had approximately $183 million of recorded liabilities, offset with $170 million of recorded receivables pertaining to income tax indemnifications with HP Inc. These liabilities include $78 million expected to be paid within one year. For the remaining amount, we are unable to make a reasonable estimate as to when cash settlement with HP Inc. might occur due to the uncertainties related to the underlying tax matters. Payments of these obligations would result from settlements under the Tax Matters Agreement with HP Inc. For further details related to our tax indemnification balances, see Note 17, "Indemnifications". For details on the Separation and Distribution Agreements and Tax Matters Agreements with HP Inc., DXC and Micro Focus, see our Annual Report on Form 10-K for the fiscal year ended October 31, 2017.
Off-Balance Sheet Arrangements
As part of our ongoing business, we have not participated in transactions that generate material relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.
Item 3.    Quantitative and Qualitative Disclosures About Market Risk.
For quantitative and qualitative disclosures about market risk affecting HPE, see "Quantitative and Qualitative Disclosures About Market Risk" in Item 7A of Part II of our Annual Report on Form 10-K for the fiscal year ended October 31, 2017. Our exposure to market risk has not changed materially since October 31, 2017.

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Table of Contents

Item 4.    Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act as of the end of the period covered by this report (the "Evaluation Date"). Based on this evaluation, our principal executive officer and principal financial officer concluded as of the Evaluation Date that our disclosure controls and procedures were effective such that the information relating to the Company, including our consolidated subsidiaries, required to be disclosed in our SEC reports (i) is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and (ii) is accumulated and communicated to the Company's management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control Over Financial Reporting
There were no changes to our internal control over financial reporting during the first nine months of fiscal 2018 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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Table of Contents

PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
Information with respect to this item may be found in Note 16, "Litigation and Contingencies".
Item 1A. Risk Factors.
Our operations and financial results are subject to various risks and uncertainties which could adversely affect our business, financial condition, results of operations, cash flows, and the trading price of our common stock, including those described in Part I, Item 1A, "Risk Factors" in our Annual Report on Form 10-K for the fiscal period ended October 31, 2017, and in Part II, Item 1A, "Risk Factors"  in our Quarterly Report on Form 10-Q for the fiscal quarter ended January 31, 2018.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Recent Sales of Unregistered Securities
There were no unregistered sales of equity securities during the period covered by this report.
Issuer Purchases of Equity Securities
Period
Total Number
of Shares
Purchased
 
Average
Price Paid
per Share
 
Total Number of
Shares Purchased as
Part of Publicly
Announced Plans
or Programs
 
Approximate Dollar Value of
Shares that May Yet Be
Purchased under the Plans
or Programs
 
In thousands, except per share amounts
Month #1 (May 2018)
19,536

 
$
17.02

 
19,536

 
$
6,299,228

Month #2 (June 2018)
19,927

 
$
15.59

 
19,927

 
$
5,988,591

Month #3 (July 2018)
19,093

 
$
15.32

 
19,093

 
$
5,695,989

Total
58,556

 
$
15.98

 
58,556

 
 

During the three months ended July 31, 2018, the Company repurchased and settled 59 million shares of the Company's common stock, which included 1.4 million shares that were unsettled open market purchases as of April 30, 2018. Additionally, as of July 31, 2018, the Company had unsettled open market repurchases of 1.5 million shares. Shares repurchased during the quarter were recorded as a $935 million reduction to stockholders' equity. During the nine months ended July 31, 2018, the Company repurchased and settled 160 million shares of the Company's common stock, which included 1.7 million shares that were unsettled open market purchases as of October 31, 2017. Shares repurchased during the nine months ended July 31, 2018 were recorded as a $2.6 billion reduction to stockholders' equity.
On October 13, 2015, our 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. As of July 31, 2018, the Company had a remaining authorization of $5.7 billion for future share repurchases. The Company may choose to repurchase shares when sufficient liquidity exists and the shares are trading at a discount relative to estimated intrinsic value. This program, which does not have a specific expiration date, authorizes repurchases in the open market or in private transactions. Share repurchases settled in the third quarter of fiscal 2018 were open market repurchases.
Item 5. Other Information.
None.
Item 6. Exhibits.
The Exhibit Index beginning on page 61 of this report sets forth a list of exhibits.

59
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HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
EXHIBIT INDEX
 
 
 
 
Incorporated by Reference
Exhibit
Number
 
Exhibit Description
 
Form
 
File No.
 
Exhibit(s)
 
Filing Date
2.1
 
 
8-K
 
001-37483
 
2.1
 
November 5, 2015
2.2
 
 
8-K
 
001-37483
 
2.2
 
November 5, 2015
2.3
 
 
8-K
 
001-37483
 
2.3
 
November 5, 2015
2.4
 
 
8-K
 
001-37483
 
2.4
 
November 5, 2015
2.5
 
 
8-K
 
001-37483
 
2.5
 
November 5, 2015
2.6
 
 
8-K
 
001-37483
 
2.6
 
November 5, 2015
2.7
 
 
8-K
 
001-37483
 
2.7
 
November 5, 2015
2.8
 
 
8-K
 
001-37483
 
2.1
 
May 26, 2016
2.9
 
 
8-K
 
001-37483
 
2.2
 
May 26, 2016
2.10
 
 
8-K
 
001-37483
 
2.1
 
September 7, 2016
2.11
 
 
8-K
 
001-37483
 
2.2
 
September 7, 2016
2.12
 
 
8-K
 
001-37483
 
2.3
 
September 7, 2016
2.13
 
 
8-K
 
001-37483
 
2.1
 
November 2, 2016
2.14
 
 
8-K
 
001-37483
 
2.2
 
November 2, 2016
2.15
 
 
8-K
 
001-37483
 
99.1
 
March 7, 2017

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Table of Contents

2.16
 
 
8-K
 
001-37483
 
99.2
 
March 7, 2017
2.17
 
 
8-K
 
001-38033
 
2.1
 
April 6, 2017
2.18
 
 
8-K
 
001-38033
 
2.2
 
April 6, 2017
2.19
 
 
8-K
 
001-38033
 
2.3
 
April 6, 2017
2.20
 
 
8-K
 
001-38033
 
2.4
 
April 6, 2017
2.21
 
 
8-K
 
001-38033
 
2.5
 
April 6, 2017
2.22
 
 
8-K
 
001-38033
 
2.6
 
April 6, 2017
2.23
 
 
8-K
 
001-37483

 
2.1
 
September 1, 2017
2.24
 
 
8-K
 
001-37483

 
2.2
 
September 1, 2017
2.25
 
 
8-K
 
001-37483

 
2.3
 
September 1, 2017
2.26
 
 
8-K
 
001-37483

 
2.4
 
September 1, 2017
3.1
 
 
8-K
 
001-37483
 
3.1
 
November 5, 2015
3.2
 
 
8-K
 
001-37483
 
3.2
 
November 5, 2015
3.3
 
 
8-K
 
001-37483
 
3.1
 
March 20, 2017
3.4
 

 
8-K
 
001-37483
 
3.2
 
March 20, 2017
4.1
 
 
8-K
 
001-37483
 
4.1
 
October 13, 2015
4.2
 
 
8-K
 
001-37483
 
4.2
 
October 13, 2015

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Table of Contents

4.3
 
 
8-K
 
001-37483
 
4.3
 
October 13, 2015
4.4
 
 
8-K
 
001-37483
 
4.4
 
October 13, 2015
4.5
 
 
8-K
 
001-37483
 
4.5
 
October 13, 2015
4.6
 
 
8-K
 
001-37483
 
4.6
 
October 13, 2015
4.7
 
 
8-K
 
001-37483
 
4.7
 
October 13, 2015
4.8
 
 
8-K
 
001-37483
 
4.8
 
October 13, 2015
4.9
 
 
8-K
 
001-37483
 
4.9
 
October 13, 2015
4.10
 
 
8-K
 
001-37483
 
4.10
 
October 13, 2015
4.11
 
 
8-K
 
001-37483
 
4.11
 
October 13, 2015
4.12
 
 
8-K
 
001-37483
 
4.12
 
October 13, 2015
4.13
 
 
10-K
 
001-04423
 
4.13
 
December 17, 2015
4.14
 
 
S-8
 
333-207680
 
4.3
 
October 30, 2015
4.15
 
 
8-K
 
001-37483

 
10.1
 
December 22, 2016


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Table of Contents

4.16
 
 
8-K
 
001-37483

 
4.1
 
September 20, 2017
4.17
 
 
S-3ASR
 
333-222102
 
4.5
 
December 15, 2017
10.1
 
 
8-K
 
001-37483
 
10.1
 
January 30, 2017
10.2
 
 
10
 
001-37483
 
10.2
 
September 28, 2015
10.3
 
 
10
 
001-37483
 
10.4
 
September 28, 2015
10.4
 
 
S-8
 
333-207679
 
4.3
 
October 30, 2015
10.5
 
 
S-8
 
333-207679
 
4.4
 
October 30, 2015
10.6
 
 
8-K
 
001-37483
 
10.4
 
November 5, 2015
10.7
 
 
8-K
 
001-37483
 
10.5
 
November 5, 2015
10.8
 
 
8-K
 
001-37483
 
10.6
 
November 5, 2015
10.9
 
 
8-K
 
001-37483
 
10.7
 
November 5, 2015
10.10
 
 
8-K
 
001-37483
 
10.8
 
November 5, 2015
10.11
 
 
8-K
 
001-37483
 
10.9
 
November 5, 2015
10.12
 
 
8-K
 
001-37483
 
10.10
 
November 5, 2015
10.13
 
 
8-K
 
001-37483
 
10.1
 
November 5, 2015
10.14
 
 
10-Q
 
001-37483
 
10.14
 
March 10, 2016
10.15
 
 
10-Q
 
001-37483
 
10.15
 
March 10, 2016
10.16
 
 
8-K
 
001-37483
 
10.1
 
May 26, 2016
10.17
 
 
S-8
 
333-207679
 
4.3
 
March 6, 2017
10.18
 
 
S-8
 
001-37483
 
4.3
 
April 18, 2017
10.19
 
 
S-8
 
001-37483
 
4.4
 
April 18, 2017
10.20
 
 
S-8
 
001-37483
 
4.3
 
April 24, 2017
10.21
 
 
10-Q
 
000-51333
 
10.1
 
January 29, 2016
10.22
 
 
10-K
 
000-51333
 
10.48
 
February 28, 2007
10.23
 
 
10-K
 
000-51333
 
10.3
 
September 10, 2012
10.24
 
 
S-1
 
000-51333
 
10.10
 
February 4, 2005

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Table of Contents

10.25
 
 
S-8
 
333-221254
 
4.3
 
October 31, 2017
10.26
 
 
S-8
 
333-221254
 
4.4
 
October 31, 2017
10.27
 
 
10-Q
 
001-37483
 
10.27
 
June 7, 2018
10.28
 
 
S-8
 
333-226181
 
4.3
 
July 16, 2018
10.29
 
 
 
 
 
 
 
 
 
10.30
 
 
 
 
 
 
 
 
 
31.1
 
 
 
 
 
 
 
 
 
31.2
 
 
 
 
 
 
 
 
 
32
 
 
 
 
 
 
 
 
 
101.INS
 
XBRL Instance Document‡
 
 
 
 
 
 
 
 
101.SCH
 
XBRL Taxonomy Extension Schema Document‡
 
 
 
 
 
 
 
 
101.CAL
 
XBRL Taxonomy Extension Calculation Linkbase Document‡
 
 
 
 
 
 
 
 
101.DEF
 
XBRL Taxonomy Extension Definition Linkbase Document‡
 
 
 
 
 
 
 
 
101.LAB
 
XBRL Taxonomy Extension Label Linkbase Document‡
 
 
 
 
 
 
 
 
101.PRE
 
XBRL Taxonomy Extension Presentation Linkbase Document‡
 
 
 
 
 
 
 
 
*
Indicates management contract or compensation plan, contract or arrangement
‡
Filed herewith
†
Furnished herewith
The registrant agrees to furnish to the Commission supplementally upon request a copy of (1) any instrument with respect to long-term debt not filed herewith as to which the total amount of securities authorized thereunder does not exceed 10% of the total assets of the registrant and its subsidiaries on a consolidated basis and (ii) schedules or exhibits omitted pursuant to Item 601(b)(2) of Regulation S-K of any material plan of acquisition, disposition or reorganization set forth above.

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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
HEWLETT PACKARD ENTERPRISE COMPANY
 
 
/s/ TIMOTHY C. STONESIFER
 
 
Timothy C. Stonesifer
 Executive Vice President and Chief Financial Officer
(Principal Financial Officer and Authorized
Signatory)
Date: September 4, 2018

65