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: •COVID-19 Update. A discussion of our response to the novel coronavirus pandemic ("COVID-19"), including our efforts to protect the health and well-being of our workforce, community and customers. •Overview. A discussion of our business and summary analysis of financial and other highlights, including non-GAAP financial measures, affecting the Company in order to provide context to the remainder of the MD&A, financial statements and footnotes. The Overview analysis compares the three and six months endedApril 30, 2020 to the prior-year periods. •Critical Accounting Policies and Estimates. A discussion of accounting policies and estimates that we believe are important to understanding the assumptions and judgments incorporated in our reported financial results. •Results of Operations. An analysis of our financial results comparing the three and six months endedApril 30, 2020 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. The following Overview, Results of Operations and Liquidity discussions and analysis compare the three and six months endedApril 30, 2020 to the prior-year periods, unless otherwise noted. The Capital Resources and Contractual and Other Obligations discussions present information as ofApril 30, 2020 , 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 toHewlett Packard Enterprise Company . COVID-19 UPDATE The outbreak of COVID-19 has resulted in a global slowdown of economic activity including worldwide travel restrictions, prohibitions of non-essential work activities, disruption and shutdown of businesses and greater uncertainty in global financial markets. Our financial results for the three months endedApril 30, 2020 represent a full quarter of operating during the COVID-19 crisis. These dynamics had a significant impact on our financial performance this quarter as the pandemic intensified. We are currently unable to predict the extent to which COVID-19 may adversely impact our future business operations, financial performance and results of operations. The full extent of the impact of COVID-19 on the Company's operational and financial performance is currently uncertain and will depend on many factors outside the Company's control, including, without limitation, the timing, extent, trajectory and duration of the pandemic, the development and availability of effective treatments and vaccines, the imposition of protective public safety measures, and the impact of the pandemic on the global economy and demand for our enterprise technology solutions. For a further discussion of the risks, 44 --------------------------------------------------------------------------------
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) uncertainties and actions taken in response to COVID-19, see risks identified in the section entitled " Risk Factors" in Part II, Item 1A.The Company believes its existing balances of cash, cash equivalents and marketable securities, along with commercial paper and other short-term liquidity arrangements, will be sufficient to satisfy its working capital needs, capital asset purchases, dividends, share repurchases, debt repayments and other liquidity requirements associated with its existing operations. During this unprecedented time, our purpose as a company of advancing the way people live and work is more important than it has ever been. We have prioritized protecting the health and safety of our team members, supporting the global communities in which we live and work and supporting our customers and partners to help them adjust to new and emerging needs. We implemented a global work-from-home policy until further notice, with the exception of team members performing essential activities necessary to maintain minimum business operations. We have also made additional education and support resources and personal protective supplies available to team members. In the event of a confirmed or probable case of COVID-19 among our team members and contractors, we have implemented a confidential reporting process to trace and notify close contacts-including third parties-that maintains the anonymity of all involved. We also responded with important initiatives to address key needs created by the pandemic including: •We launched special HPE Gives matching campaigns to provide team members with opportunities to make financial donations to global and local initiatives addressing COVID-19 that theHPE Foundation is matching dollar for dollar. •Our Aruba networking capabilities have been deployed in drive-up and virtual healthcare clinics and in schools that are facilitating distance learning. •Our high-performance computing ("HPC") solutions are helping scientists at leading research institutions speed up drug discovery with complex modeling, simulation, AI and machine learning capabilities. •We joined forces with theU.S. government and other high tech companies to form theCOVID-19 High Performance Computing Consortium giving COVID-19 researchers access to HPC resources. •We also signed the Open COVID Pledge, granting free access to all of our patented technologies for the purpose of diagnosing, preventing, and treating the virus. We are delivering relevant capabilities and experiences to aid our customers' transformations as they navigate this challenging time. Our technology is enabling secure and productive operations in distributed and remote locations. Our unique intellectual property at the edge is Aruba Central, which is the industry's only cloud-native, simple-to-use and secure platform that unifies network management for wired, wireless, and wide area networks, and soon 5G network. This allows organizations to manage and deliver the optimal experience at all of their edges. In addition, our HPE GreenLake business provides flexible as-a-service offerings reducing information technology complexity and increasing speed and innovation. In earlyMay 2020 , we announced the general availability of HPE GreenLake Central, our advanced cloud-native software platform that provides customers with a consistent cloud experience for all their applications and data, through an online operations console that runs, manages, and optimizes their entire hybrid cloud estate. While we are actively working to mitigate the impact on our business and operations to address the near-term uncertainty, we are taking a number of actions to ensure HPE is well positioned to emerge stronger, more agile and digitally enabled for a post-COVID-19 world. •OnMay 19, 2020 , the Board of Directors of HPE (the "Board") approved a cost optimization and prioritization plan (the "Plan") in order to focus our investments, realign our workforce to areas of growth and simplify and evolve our product portfolio strategy, go-to-market configurations, supply chain structures, digital customer support model, marketing experiences, and real estate strategies. We expect that the Plan will be implemented through fiscal year 2022 and estimate that it will include gross savings of at least$1.0 billion as a result of changes to our workforce, real estate model and business process improvements, with the Plan being expected to deliver annualized net run-rate savings of at least$800 million by the end of fiscal year 2022, in both cases relative to our fiscal 2019 exit. In order to achieve this level of cost savings, we estimate cash funding payments between$1.0 billion to$1.3 billion over the next three years. 45 --------------------------------------------------------------------------------
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) •OnMay 19, 2020 , the Board approved temporary base salary adjustments or unpaid leave for certain employees beginningJuly 1, 2020 through the remainder of fiscal year 2020. In addition, we implemented cost containment measures across the Company, including restrictions on external hiring and salary increases through the end of our fiscal year. •OnApril 9, 2020 , we issued$2.25 billion aggregate principal amount of unsecured senior notes to enhance our liquidity and strengthen our capital. The net proceeds from this offering will be used for general corporate purposes, including the repayment of indebtedness. •OnApril 6, 2020 , we announced that we suspended purchases under our share repurchase program in response to the global economic uncertainty that resulted from the worldwide spread of COVID-19. OVERVIEW We are a global technology leader focused on developing intelligent solutions that allow customers to capture, analyze and act upon data seamlessly from edge to cloud. We enable customers to accelerate business outcomes by driving new business models, creating new customer and employee experiences, and increasing operational efficiency today and into the future. Our legacy dates back to a partnership founded in 1939 byWilliam R. Hewlett andDavid Packard , and we strive every day to uphold and enhance that legacy through our dedication to providing innovative technological solutions to our customers. As described in Item 1, Note 1, "Overview and Summary of Significant Accounting Policies", effective at the beginning of the first quarter of fiscal 2020, we implemented certain organizational changes to align our segment financial reporting more closely with our current business structure. As a result,Hewlett Packard Enterprise's operations are now organized into seven segments for financial reporting purposes: Compute, High Performance Compute &Mission-Critical Systems ("HPC & MCS"), Storage, Advisory and Professional Services ("A & PS"), 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"), who is the Chief Executive Officer ("CEO"), uses to evaluate, view and run our business operations, which include, but are not limited to, customer base and homogeneity of products and technology. The segments are based on this organizational structure and information reviewed byHewlett Packard Enterprise's management to evaluate segment results. The following provides an overview of our key financial metrics by segment for the three months endedApril 30, 2020 , as compared to the prior-year period: Financial Corporate HPE Consolidated Compute HPC & MCS Storage A & PS Intelligent Edge Services Investments
Dollars in millions, except for per share amounts Net revenue(1)
$ 6,009 $ 2,640 $ 589 $ 1,086 $ 237 $ 665$ 833 $ 124 Year-over-year change % (16.0) % (20.4) % (18.3) % (17.6) % (8.8) % (2.9) % (7.0) % (0.8) % (Loss) earnings from operations(2) $ (834)$ 125 $ 33 $ 145 $ 2 $ 73$ 75 $ (28) (Loss) earnings from operations as a % of net revenue (13.9) % 4.7 % 5.6 % 13.4 % 0.8 % 11.0 % 9.0 % (22.6) % Year-over-year change percentage points (20.0) pts (4.6) pts (7.2) pts (5.1) pts 6.2 pts 5.7 pts 0.4 pts 0.6 pts Net loss $ (821) Diluted net loss per share$ (0.64) Supplemental Non-GAAP information: Non-GAAP earnings from operations $ 365 Non-GAAP earnings from operations as a % of net revenue 6.1 % Non-GAAP net earnings $ 285 Non-GAAP diluted net earnings per share $ 0.22 46
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HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) (1)HPE consolidated net revenue excludes intersegment net revenue. (2)Segment earnings from operations exclude certain unallocated corporate costs and eliminations, stock-based compensation expense related to corporate and certain global functions, amortization of initial direct costs, amortization of intangible assets, impairment of goodwill, transformation costs, disaster (recovery) charges and acquisition, disposition and other related charges. The following provides an overview of our key financial metrics by segment for the six months endedApril 30, 2020 , as compared to the prior-year period: Financial Corporate HPE Consolidated Compute HPC & MCS Storage A & PS Intelligent Edge Services Investments
Dollars in millions, except for per share amounts Net revenue(1)
$ 12,958 $ 5,651 $ 1,412 $ 2,336 $ 480 $ 1,385 $ 1,692 $ 245 Year-over-year change % (11.9) % (18.0) % (5.9) % (12.6) % (4.2) % (0.4) % (6.8) % 0.8 % (Loss) earnings from operations(2) $ (486)$ 411 $ 82 $ 371 $ - $ 143$ 148 $ (55) (Loss) earnings from operations as a % of net revenue (3.8) % 7.3 % 5.8 % 15.9 % - % 10.3 % 8.7 % (22.4) % Year-over-year change percentage points (9.9) pts (2.1) pts (6.9) pts (2.7) pts 9.2 pts 6.0 pts 0.2 pts 1.1 pts Net loss $ (488) Diluted net loss per share $ (0.38) Supplemental Non-GAAP information: Non-GAAP earnings from operations $ 967 Non-GAAP earnings from operations as a % of net revenue 7.5 % Non-GAAP net earnings $ 860 Non-GAAP diluted net earnings per share $ 0.66 (1)HPE consolidated net revenue excludes intersegment net revenue. (2)Segment earnings from operations exclude certain unallocated corporate costs and eliminations, stock-based compensation expense related to corporate and certain global functions, amortization of initial direct costs, amortization of intangible assets, impairment of goodwill, transformation costs, disaster (recovery) charges and acquisition, disposition and other related charges. 47
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HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued)
The following table provides reconciliation of GAAP to non-GAAP measures for the
three and six months ended
Diluted net Diluted net Three Months Ended earnings per Six Months Ended earnings per April 30, 2020 share April 30, 2020 share In millions In millions GAAP net loss $ (821)$ (0.64) $ (488) $ (0.38) Non-GAAP adjustments: Amortization of initial direct costs 3 - 6 - Amortization of intangible assets 84 0.07 204 0.17 Impairment of goodwill 865 0.67 865 0.67 Transformation costs 200 0.15 289 0.22 Disaster charges 22 0.02 22 0.02 Acquisition, disposition and other related charges 25 0.02 67 0.05 Tax indemnification adjustments 35 0.03 56 0.04 Non-service net periodic benefit credit (36) (0.03) (73) (0.06) Loss from equity interests(1) 37 0.03 74 0.06 Adjustments for taxes (129) (0.10) (162) (0.13) Non-GAAP net earnings $ 285$ 0.22 $ 860$ 0.66 GAAP loss from operations $ (834)$ (486) Non-GAAP adjustments: Amortization of initial direct costs 3 6 Amortization of intangible assets 84 204 Impairment of goodwill 865 865 Transformation costs 200 289 Disaster charges 22 22 Acquisition, disposition and other related charges 25 67 Non-GAAP earnings from operations $ 365 $ 967 GAAP operating profit margin (13.9) % (3.8) % Non-GAAP adjustments 20.0 % 11.3 % Non-GAAP operating profit margin 6.1 % 7.5 % GAAP Net revenue$ 6,009 $ 12,958 GAAP Cost of Sales 4,095 8,762 GAAP Gross profit$ 1,914 $ 4,196 Non-GAAP adjustments Amortization of initial direct costs $ 3 $ 6 Acquisition, disposition and other related charges(2) $ 7 $ 27 Non-GAAP Gross Profit$ 1,924 $ 4,229 GAAP gross profit margin 31.9 % 32.4 % Non-GAAP adjustments 0.1 % 0.2 % Non-GAAP gross profit margin 32.0 % 32.6 % (1) Represents the amortization of basis difference adjustments related to the H3C divestiture. (2) For the periods presented, amounts represent Acquisition, disposition and other related charges related to a non-cash inventory fair value adjustment in connection with the acquisition ofCray, Inc. , which was included in Cost of Sales. 48 --------------------------------------------------------------------------------
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) Non-GAAP financial measures The non-GAAP financial measures presented are net revenue on a constant currency basis, non-GAAP gross profit, non-GAAP gross profit margin, non-GAAP operating profit margin (non-GAAP earnings from operations as a percentage of net revenue), non-GAAP net earnings and non-GAAP diluted net earnings per share. These non-GAAP financial measures are used by management for purposes of evaluating our historical and prospective financial performance, as well as evaluating our performance relative to our competitors. These non-GAAP financial measures are not computed in accordance with, or as an alternative to, generally accepted accounting principles inthe United States . The GAAP measure most directly comparable to net revenue on a constant currency basis is net revenue. The GAAP measure most directly comparable to non-GAAP gross profit is gross profit. The GAAP measure most directly comparable to non-GAAP gross profit margin is gross profit margin. The GAAP measure most directly comparable to non-GAAP earnings from operations is earnings from operations. The GAAP measure most directly comparable to non-GAAP operating profit margin (non-GAAP earnings from operations as a percentage of net revenue) is operating profit margin (Earnings from operations as a percentage of net revenue). The GAAP measure most directly comparable to non-GAAP net earnings is net earnings. The GAAP measure most directly comparable to non-GAAP diluted net earnings per share is diluted net earnings per share. Net revenue on a constant currency basis assumes no change in the foreign exchange rate from the prior-year period. Non-GAAP gross profit margin is defined to exclude charges relating to the amortization of initial direct costs and certain acquisition, disposition and other related charges. Non-GAAP earnings from operations and non-GAAP operating profit margin (non-GAAP earnings from operations as a percentage of net revenue) consist of earnings from operations excluding any charges relating to the amortization of initial direct costs, amortization of intangible assets, impairment of goodwill, transformation costs, disaster charges (recovery) and acquisition, disposition and other related charges. Non-GAAP net earnings and Non-GAAP diluted net earnings per share consist of net earnings or diluted net earnings per share excluding those same charges, as well as an adjustment to tax indemnification adjustments, non-service net periodic benefit credit, loss from equity interests, certain income tax valuation allowances and separation taxes, the impact ofU.S. tax reform, structural rate adjustment and excess tax benefit from stock-based compensation. In addition, non-GAAP net earnings and non-GAAP diluted net earnings per share are adjusted by the amount of additional taxes or tax benefits associated with each non-GAAP item. We believe that excluding the items mentioned above from these non-GAAP financial measures allows management to better understand our consolidated financial performance in relation to the operating results of our segments. Management does not believe that the excluded items are reflective of ongoing operating results, and excluding them facilitates a more meaningful evaluation of our current operating performance in comparison to our peers. The excluded items can be inconsistent in amount and frequency and/or not reflective of the operational performance of the business. These non-GAAP financial measures have limitations as analytical tools, and these measures should not be considered in isolation or as a substitute for analysis of our results as reported under GAAP. Some of the limitations in relying on these non-GAAP financial measures are that they can have a material impact on the equivalent GAAP earnings measures and cash flows, they may be calculated differently by other companies and may not reflect the full economic effect of the loss in value of certain assets. We compensate for these limitations on the use of non-GAAP financial measures by relying primarily on our GAAP results and using non-GAAP financial measures only as a supplement. We also provide a reconciliation of each non-GAAP financial measure to its most directly comparable GAAP measure. We believe that providing net revenue on a constant currency basis, non-GAAP gross profit, non-GAAP gross profit margin, non-GAAP earnings from operations, non-GAAP operating profit margin, non-GAAP net earnings and non-GAAP diluted net earnings per share in addition to the related GAAP measures provides greater transparency to the information used in our financial and operational decision making and allows the reader of our Condensed Consolidated Financial Statements to see our financial results "through the eyes" of management. Three months endedApril 30, 2020 compared with three months endedApril 30, 2019 The three months endedApril 30, 2020 represented our first full quarter of operating under COVID-19, as such our results in the quarter were heavily impacted by the global pandemic on both the demand and the supply chain side of our business operations. The extent to which COVID-19 related events continue to affect our operational performance will depend primarily on the duration of lockdown actions taking place across the globe and access restrictions at customer sites, along with the time it takes for the demand environment to rebound. 49 --------------------------------------------------------------------------------
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) Net revenue decreased by$1.1 billion , or 16.0% (decreased 14.6% on a constant currency basis), for the three months endedApril 30, 2020 , as compared to the prior-year period, as each of our segments experienced a net revenue decline. From a segment perspective, the net revenue decline was primarily driven by decreases in Compute, Storage and HPC & MCS. The net revenue decline in Compute was pronounced as we experienced supply chain constraints and with customer acceptance challenges due to lockdown actions taking place across the globe related to COVID-19 and competitive pricing pressures. Storage net revenue was impacted by the aforementioned COVID-19 related events coupled with uneven demand and lower revenue from the expiration of a one-time legacy contract. HPC & MCS also experienced COVID-19 related challenges, in particular with performing on-site installations and meeting customer acceptance milestones given lockdown constraints and delays with order fulfillment. Net revenue declined inHPE Financial Services due to a decrease in rental revenue due to lower average operating lease assets and unfavorable currency fluctuations. COVID-19 related constraints also contributed to the relatively small net revenue decline we experienced in A & PS. Net revenue declined in the Intelligent Edge segment due to unfavorable currency fluctuations and market weakness in the switching products sector of the market. We experienced supply chain challenges related to the unfavorable impact of COVID-19. Our gross profit margin was 31.9% ($1.9 billion ) and 32.2% ($2.3 billion ) for the three months endedApril 30, 2020 and 2019, respectively, representing a decline of 0.3 percentage points. The decline in the gross profit margin was due to multiple factors led by competitive pricing pressures, the scale of the net revenue decline which resulted in higher fixed overhead costs as a percentage of net revenue and higher supply chain costs related to COVID-19, partially offset by our continued shift to higher margin products and services and lower variable compensation expense. Our operating profit margin was (13.9%) and 6.1% for the three months endedApril 30, 2020 and 2019, respectively, representing a decline of 20.0 percentage points. The decrease was due primarily to a goodwill impairment charge of$865 million impacting our HPC & MCS segment due in part to market conditions and business trends caused by the impact of COVID-19 and higher transformation costs. Six months endedApril 30, 2020 compared with six months endedApril 30, 2019 Net revenue decreased by$1.7 billion , or 11.9% (decreased 10.7% on a constant currency basis), for the six months endedApril 30, 2020 , as compared to the prior-year period. In the first three months of fiscal 2020, we experienced a net revenue decline due to weak market demand along with commodity and North American manufacturing capacity constraints. The second quarter of fiscal 2020 represented our first full quarter of operating under COVID-19 and as such our financial results were heavily impacted by the global pandemic on both the demand and the supply-chain side of our business operations. From a segment perspective, the net revenue decrease for the first six months of fiscal 2020, as compared to the prior year period was primarily driven by declines in Compute and Storage. The net revenue decline in Compute was pronounced as we experienced a combination of factors including supply chain and customer acceptance constraints due to COVID-19 along with commodity and manufacturing capacity constraints, and competitive pricing pressures. Storage net revenue was primarily impacted by uneven demand, supply chain and customer acceptance constraints related to COVID-19 along with lower revenue from the expiration of a one-time legacy contract. Financial services net revenue was impacted due to a decrease in rental revenue due to lower average operating lease assets and unfavorable currency fluctuations. HPC & MCS experienced a net revenue decline from the impact of COVID-19 related challenges, in particular with completing on-site installations and meeting customer acceptance milestones given lockdown constraints taking place across the globe, partially offset by the addition of revenue from the acquisition ofCray Inc. ("Cray") in the fourth quarter of fiscal 2019. COVID-19 related constraints also contributed to the relatively small net revenue declines we experienced in the A & PS and Intelligent Edge segments. We experienced supply chain challenges related to the unfavorable impact of COVID-19. Gross profit margin was 32.4% ($4.2 billion ) and 31.6% ($4.7 billion ) for the six months endedApril 30, 2020 and 2019, respectively. The 0.8 percentage point increase to the gross profit margin was primarily driven by our overall shift to higher margin products and services along with improved service delivery costs, lower commodity costs and lower variable compensation expense. Our operating profit margin was (3.8%) and 6.1% for the six months endedApril 30, 2020 and 2019, respectively, representing a decrease of 9.9 percentage points. The decrease was due to an increase in operating expenses as a percentage of net revenue partially offset by the gross profit margin increase. The increase in operating expenses was due to the goodwill impairment charge impacting our HPC & MCS segment, in part due to market conditions and business trends caused by the impact of COVID-19 and higher transformation costs. As ofApril 30, 2020 , cash, cash equivalents and restricted cash were$6.0 billion , representing an increase of approximately$1.9 billion from theOctober 31, 2019 balance of$4.1 billion . The increase was due primarily to the following: proceeds from debt, net of repayments and issuance costs of$2.7 billion and net financial collateral received of$562 million 50 --------------------------------------------------------------------------------
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) partially offset by share repurchases and cash dividend payments of$665 million and investments in property, plant and equipment, net of sales proceeds, of$608 million . 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 endedOctober 31, 2019 . 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 of Part II. 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 withUnited 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. Estimates are assessed each period and updated to reflect current information, such as the economic considerations related to the impact that COVID-19 could have on our significant accounting estimates. As the extent and duration of the impacts from COVID-19 remain unclear, the Company's estimates, judgements and assumptions may evolve as conditions change. Management believes that there have been no significant changes during the six months endedApril 30, 2020 , with the exception of certain accounting policies that were updated resulting from our adoption of the new leasing standard (See Note 1 in Item 1, "Overview and Summary of Significant Accounting Policies"), 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 endedOctober 31, 2019 . ACCOUNTING PRONOUNCEMENTS For a summary of recent accounting pronouncements applicable to our Condensed Consolidated Financial Statements, see Note 1 in Item 1, "Overview and Summary of Significant Accounting Policies". 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 toU.S. dollars using the prior-year period's foreign currency exchange rates divided by (b) the 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. 51 --------------------------------------------------------------------------------
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 endedApril 30 , Six months endedApril 30, 2020 2019 2020 2019 % of % of % of % of Dollars Revenue Dollars Revenue Dollars Revenue Dollars Revenue Dollars in millions Net revenue$ 6,009 100.0 %$ 7,150 100.0 %$ 12,958 100.0 %$ 14,703 100.0 % Cost of sales 4,095 68.1 4,845 67.8 8,762 67.6 10,052 68.4 Gross profit 1,914 31.9 2,305 32.2 4,196 32.4 4,651 31.6 Research and development 450 7.5 457 6.4 935 7.2 923 6.3 Selling, general and administrative 1,109 18.4 1,214 16.9 2,327 17.9 2,425 16.4 Amortization of intangible assets 84 1.5 69 0.9 204 1.6 141 0.9 Impairment of goodwill 865 14.4 - - 865 6.7 - - Transformation costs 200 3.3 54 0.8 289 2.3 132 0.9 Disaster charges (recovery) 22 0.4 (7) (0.1) 22 0.2 (7) - Acquisition, disposition and other related charges 18 0.3 84 1.2 40 0.3 147 1.0 (Loss) earnings from operations (834) (13.9) 434 6.1 (486) (3.8) 890 6.1 Interest and other, net (68) (1.1) (18) (0.3) (87) (0.7) (69) (0.5) Tax indemnification adjustments (35) (0.6) 4 0.1 (56) (0.4) 223 1.5 Non-service net periodic benefit credit 36 0.6 17 0.3 73 0.6 33 0.2 (Loss) earnings from equity interests (10) (0.2) 3 - 23 0.2 18 0.1 (Loss) earnings before taxes (911) (15.2) 440 6.2 (533) (4.1) 1,095 7.4 Benefit (provision) for taxes 90 1.5 (21) (0.3) 45 0.3 (499) (3.3) Net (loss) earnings$ (821) (13.7) %$ 419 5.9 %$ (488) (3.8) %$ 596 4.1 %
Stock-based compensation expense is included within costs and expenses presented in the table above as follows:
Six months ended April Three months ended April 30, 30, 2020 2019 2020 2019 In millions Cost of sales $ 9$ 11 $ 22 $ 23 Research and development 19 19 46 40 Selling, general and administrative 39 44 92 86 Transformation costs - - - 2 Acquisition, disposition and other related charges 1 - 1 - Stock-based compensation expense $ 68
During the three months endedApril 30, 2020 the Company reversed$20 million of previously recognized compensation costs for the performance based awards that are no longer probable of vesting. Net Revenue For the three months endedApril 30, 2020 , as compared to the prior-year period, total net revenue decreased by$1.1 billion , or 16.0% (decreased 14.6% on a constant currency basis).U.S. net revenue decreased by$278 million , or 12.7%, to$1.9 billion , and net revenue from outside of theU.S. decreased by$863 million , or 17.4%, to$4.1 billion . For the six months endedApril 30, 2020 , as compared to the prior-year period, total net revenue decreased by$1.7 billion , or 11.9% (decreased 10.7% on a constant currency basis).U.S. net revenue decreased by$461 million , or 9.8%, to$4.2 billion , and net revenue from outside of theU.S. decreased by$1.3 billion , or 12.8%, to$8.7 billion . 52 --------------------------------------------------------------------------------
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) The components of the weighted net revenue change by segment were as follows: Three months ended Six months ended April 30, 2020 April 30, 2020 Percentage points Compute (9.5) (8.6) Storage (3.2) (2.3) HPC & MCS (1.9) (0.6) Financial Services (0.9) (0.8) A & PS (0.3) (0.1) Intelligent Edge (0.3) - Corporate Investments/Other (1) 0.1 0.5 Total HPE (16.0) (11.9) (1) Other primarily relates to the elimination of intersegment net revenue. Three months endedApril 30, 2020 compared with three months endedApril 30, 2019 From a segment perspective, the primary factors contributing to the change in total net revenue are summarized as follows: •Compute net revenue declined due primarily to supply chain constraints and customer acceptance challenges related to COVID-19, and competitive pricing pressures; •HPC & MCS net revenue decreased due to challenges performing on-site installations and meeting customer acceptance milestones, and delays with order fulfillment related to COVID-19 and lower services attach; •Storage net revenue decreased due primarily to uneven demand, and supply chain constraints and customer acceptance challenges due to COVID-19 and lower revenue from the expiration of a one-time legacy contract; •A & PS net revenue decreased due primarily to demand weakness and delivery delays inEurope and America given lockdown restrictions due to COVID-19; •Intelligent Edge net revenue decreased due primarily to unfavorable foreign currency fluctuations, market weakness for switching products and lower revenue from software; and •HPE Financial Services net revenue decreased due primarily to a decrease in rental revenue due to lower average operating lease assets and unfavorable currency fluctuations. Six months endedApril 30, 2020 compared with six months endedApril 30, 2019 From a segment perspective, the primary factors contributing to the change in total net revenue are summarized as follows: •Compute net revenue declined due primarily to multiple factors including supply chain and customer acceptance constraints from COVID-19, commodity and manufacturing capacity constraints, and competitive pricing pressures; •HPC & MCS net revenue decreased due to challenges performing on-site installations and meeting customer acceptance milestones, and delays with order fulfillment related to COVID-19, unfavorable large deal linearity, and lower services attach; •Storage net revenue decreased due primarily to uneven demand, supply chain and customer acceptance constraints partially related to COVID-19, commodity and North American manufacturing capacity constraints. and lower revenue from the expiration of a one-time legacy contract; •A & PS net revenue decreased due primarily to demand weakness and delivery delays inEurope and America due to lockdown restrictions related to COVID-19 ; •Intelligent Edge net revenue decreased due primarily to unfavorable foreign currency fluctuations and lower revenue from switching products driven by market weakness; and •HPE Financial Services net revenue decreased due primarily to a decrease in rental revenue due to lower average operating lease assets, unfavorable currency fluctuation, and lower lease equipment buyout revenue. A more detailed discussion of segment revenue is included under "Segment Information" below. 53 --------------------------------------------------------------------------------
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) Gross Profit For the three months endedApril 30, 2020 , as compared to the prior-year period, total gross profit margin decreased 0.3 percentage points. The decline in gross profit margin was due to multiple factors led by competitive pricing pressures, the scale of the net revenue decline which resulted in higher fixed overhead costs as a percentage of net revenue and higher supply chain costs related to COVID-19. These increases were partially offset by our continued shift to higher margin products and services and lower variable compensation expense. For the six months endedApril 30, 2020 , as compared to the prior-year period, total gross margin increased 0.8 percentage points. The gross margin increase was primarily due to a favorable mix of revenue from higher margin products and services along with improved service delivery costs, lower commodity costs and lower variable compensation expense. These increases were partially offset primarily by competitive pricing pressures and supply chain costs related to COVID-19. Research and Development Research and development ("R&D") expense decreased by$7 million or 2% for the three months endedApril 30, 2020 , as compared to the prior-year period, due primarily to lower variable compensation expense, partially offset by on-going expenses from business acquisitions. Research and development ("R&D") expense increased by$12 million or 1% for the six months endedApril 30, 2020 , as compared to the prior-year period, due primarily to on-going expenses from business acquisitions, partially offset by lower variable compensation expense. Selling, General and Administrative Selling, general and administrative expense decreased by$105 million or 9%, and by$98 million or 4% for the three and six months endedApril 30, 2020 , respectively, as compared to the prior-year periods, due primarily to lower variable compensation expense, favorable currency fluctuations, partially offset by on-going expenses from business acquisitions. Amortization of Intangible Assets Amortization of intangible assets increased by$15 million or 22%, for the three months endedApril 30, 2020 , as compared to the prior-year period, due to an increase in the amortization of intangible assets from recent business acquisitions, partially offset by certain intangible assets associated with prior acquisitions reaching the end of their amortization period. Amortization of intangible assets increased by$63 million or 45%, for the six months endedApril 30, 2020 , as compared to the prior-year period, due to an increase in the amortization of intangible assets from recent acquisitions and the write-off of certain intangible assets, partially offset by certain intangible assets associated with prior acquisitions reaching the end of their amortization period. Impairment ofGoodwill The Company recorded a partial goodwill impairment charge of$865 million in the second quarter of fiscal 2020 as it was determined that the fair value of the HPC & MCS reporting unit was below the carrying value of its net assets. While the other reporting units were negatively impacted by COVID-19, their fair values continued to exceed the carrying value of their net assets and did not result in impairment. In order to evaluate the sensitivity of the estimated fair value of other reporting units for the quantitative goodwill impairment test, the Company applied a hypothetical 10% reduction to the estimated fair value of each of these other reporting units. Based on the results of this hypothetical 10% reduction to the estimated fair value, each of these other reporting units had an excess of fair value over carrying value of their net assets. However, should economic conditions deteriorate further or remain depressed for a prolonged period of time, estimates of future cash flows for each of our reporting units may be insufficient to support the carrying value and the goodwill assigned to them, requiring impairment charges, including additional impairment charges for the HPC & MCS reporting unit. Further impairment charges, if any, may be material to our results of operations and financial position. See Part II, Item 1A, Risk Factors for a discussion of the potential impacts of COVID-19 on the fair value of our assets. Transformation Costs HPE Next transformation costs increased by$146 million or 270%, and by$157 million or 119%, for the three and six months endedApril 30, 2020 , respectively, as compared to the prior-year periods, due to higher restructuring costs, partially offset by higher gains from the sale of real estate during the six months endedApril 30, 2020 . 54 --------------------------------------------------------------------------------
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) Given an uncertain business environment, inMarch 2020 , the Company announced the extension of the HPE Next initiative to fiscal 2021. Disaster charges (recovery) Disaster charges for the three and six months endedApril 30, 2020 , represent direct costs resulting from COVID-19 for HPE hosted, co-hosted, or sponsored events which were converted to a virtual format or cancelled. For the three and six months endedApril 30, 2019 , disaster recovery amounts represent insurance recoveries in relation to damage to our facilities inHouston, Texas due to Hurricane Harvey in fiscal 2017. Acquisition, Disposition and Other Related Charges Acquisition, disposition and other related charges decreased by$66 million or 79%, and by$107 million or 73%, for the three and six months endedApril 30, 2020 , respectively, as compared with the prior-year periods, due primarily to higher costs in the prior-year period for legal fees and disposition activities, partially offset by recent business acquisition costs related to retention bonuses and integration activities. Interest and Other, Net Interest and other, net expense increased by$50 million for the three months endedApril 30, 2020 , as compared with the prior-year period, due primarily to unfavorable currency fluctuations. Interest and other, net expense increased by$18 million for the six months endedApril 30, 2020 , as compared with the prior-year period, due primarily to unfavorable currency fluctuations and higher net interest expense, partially offset by a gain on the sale of certain assets in the current year. Tax Indemnification Adjustments We recorded tax indemnification expense of$35 million and tax indemnification income of$4 million for the three months endedApril 30, 2020 and 2019, respectively, and tax indemnification expense of$56 million and tax indemnification income of$223 million for the six months endedApril 30, 2020 and 2019, respectively. For the three and six months endedApril 30, 2020 , the amount resulted from changes in certain pre-Separation tax liabilities for which we share joint and several liability with HP Inc. and for which we are indemnified by HP Inc. For the six months endedApril 30, 2019 , the amount was due primarily to the effects ofU.S. tax reform on tax attributes related to fiscal periods prior to the Separation. Non-service net periodic benefit Non-service net periodic benefit credit increased by$19 million and$40 million for the three and six months endedApril 30, 2020 , respectively, as compared with the prior-year period, due primarily to lower interest rates. (Loss) earnings from Equity Interests Earnings from equity interests primarily represents our 49% interest inH3C Technologies' ("H3C") earnings and the amortization of our interest in a basis difference. For the three months endedApril 30, 2020 , earnings from equity interests decreased by$13 million , as compared to the prior-year period, due to lower net income earned by H3C. For the six months endedApril 30, 2020 , earnings from equity interests increased by$5 million , as compared to the prior-year period, due to higher net income earned by H3C. Provision for Taxes Our effective tax rate was 9.9% and 4.8% for the three months endedApril 30, 2020 and 2019, respectively, and 8.4% and 45.6% for the six months endedApril 30, 2020 , and 2019, respectively. The effective tax rates for the three and six months endedApril 30, 2020 differed from the statutory tax rate due to favorable tax rates associated with certain earnings from our operations in lower tax jurisdictions throughout the world, tax rate changes, and the effects of the non-deductible goodwill impairment. The effective tax rates for the three and six months endedApril 30, 2019 were significantly impacted by the Tax Act. Our effective tax rate is based on forecasted annual results which may fluctuate significantly through the remainder of fiscal 2020 due to the uncertain economic impact of COVID-19 on our operating results. Segment Information Effective in the first quarter of fiscal 2020, we implemented certain organizational changes to align our segment financial reporting more closely with our current business structure. We replaced the Hybrid IT segment with four new financial reporting segments, Compute, High Performance Compute &Mission-Critical Systems , Storage and Advisory and Professional Services as follows: 55 --------------------------------------------------------------------------------
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) •we created the Compute segment consisting of the general purpose server and workload optimized server portfolios that were previously a part of the Hybrid IT-Compute business unit and the related operational services business that was previously a part of the Hybrid IT-HPE Pointnext business unit; • we created the HPC & MCS segment consisting of the high performance compute, mission-critical systems and edge compute offerings that were previously a part of the Hybrid IT-Compute business unit and the related operational services business that was previously a part of the Hybrid IT-HPE Pointnext business unit; •we created the Storage segment consisting of the former Hybrid IT-Storage business unit and the related operational services business that was previously a part of the Hybrid IT-HPE Pointnext business unit and the hyperconverged infrastructure products that were previously a part of the Hybrid IT-Compute business unit; •we created the A & PS segment consisting of the consultative-led services that were previously a part of the Hybrid IT-HPE Pointnext business unit; and •we transferred the DC Networking operational services business that was previously a part of the Hybrid IT-HPE Pointnext business unit to the Intelligent Edge segment. As a result of these realignments, our operations are now organized into seven segments for financial reporting purposes: Compute, HPC & MCS, Storage, A & PS, Intelligent Edge, FS, and Corporate Investments. For additional information related to these realignments and for a description of the products and services for each segment, see Note 2, "Segment Information". Compute Three months ended April 30, 2020 2019 % Change Dollars in millions Net revenue$ 2,640 $ 3,318 (20.4) % Earnings from operations$ 125 $ 307 (59.3) % Earnings from operations as a % of net revenue 4.7 % 9.3 % Six months ended April 30, 2020 2019 % Change Dollars in millions Net revenue$ 5,651 $ 6,893 (18.0) % Earnings from operations$ 411 $ 647 (36.5) % Earnings from operations as a % of net revenue 7.3 %
9.4 %
Three months endedApril 30, 2020 compared with three months endedApril 30, 2019 Compute net revenue decreased by$678 million , or 20.4% (decreased 19.1% on a constant currency basis), for the three months endedApril 30, 2020 as compared to the prior-year period. Net revenue in Compute was impacted by supply chain constraints and customer acceptance challenges given lockdown actions taking place across the globe related to COVID-19 and competitive pricing pressures. As a result, Compute experienced a decline in unit shipments and lower average unit selling prices. 56 --------------------------------------------------------------------------------
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) Compute earnings from operations as a percentage of net revenue decreased 4.6 percentage points for the three months endedApril 30, 2020 , as compared to the prior-year period, due to an increase in cost of products and services as a percentage of net revenue and an increase in operating expenses as a percentage of net revenue. The increase to cost of products as a percentage of net revenue was due primarily to competitive pricing pressures and increased supply chain logistic costs resulting from COVID-19, partially offset by lower commodity costs and variable compensation expense. The increase in operating expense as a percentage of net revenue was due to the scale of the net revenue decline while total operating expenses declined year-over-year due primarily to lower variable compensation expense and restricted discretionary spending during the period on travel and hiring due to COVID-19. These declines were partially offset by higher field selling costs. Six months endedApril 30, 2020 compared with six months endedApril 30, 2019 Compute net revenue decreased by$1.2 billion or 18.0% (decreased 16.8% on a constant currency basis), for the six months endedApril 30, 2020 , as compared to the prior-year period. In the second quarter of fiscal 2020, as compared to the prior-year period, net revenue in Compute was impacted by supply chain and customer acceptance constraints given lockdown actions taking place across the globe related to COVID-19, and competitive pricing pressures. In the first quarter of fiscal 2020, as compared to the prior-year period, Compute experienced challenges with commodity and North American manufacturing capacity constraints. As a result, for the first six months of fiscal 2020, as compared to the prior-year period, Compute experienced a decline in unit shipments and average unit selling prices. Compute earnings from operations as a percentage of net revenue decreased 2.1 percentage points for the six months endedApril 30, 2020 , as compared to the prior-year period due primarily to an increase in operating expenses as a percentage of net revenue while the total cost of products and services as a percentage of net revenue was mostly unchanged. The increase in operating expense as a percentage of net revenue was due to the scale of the net revenue decline while total operating expenses declined year-over-year due primarily to lower variable compensation expense partially offset by higher field selling costs. The cost of products and services as a percentage of net revenue remained mostly unchanged as competitive pricing pressures and higher supply chain logistics costs were offset by a combination of lower commodity costs, variable compensation expense and mix of Tier-1 server sales. HPC & MCS Three Months Ended April 30, 2020 2019 % Change Dollars in millions Net revenue$ 589 $ 721 (18.3) % Earnings from operations $ 33$ 92 (64.1) % Earnings from operations as a % of net revenue 5.6 % 12.8 % Six Months Ended April 30, 2020 2019 % Change Dollars in millions Net revenue$ 1,412 $ 1,500 (5.9) % Earnings from operations $ 82$ 190 (56.8) % Earnings from operations as a % of net revenue 5.8 %
12.7 %
Three months endedApril 30, 2020 compared with three months endedApril 30, 2019 HPC & MCS net revenue decreased by$132 million , or 18.3% (decreased 17.8% on a constant currency basis), for the three months endedApril 30, 2020 , as compared to the prior-year period. 57 --------------------------------------------------------------------------------
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) Net revenue in HPC & MCS decreased due to challenges performing on-site installations and meeting customer acceptance milestones, and delays with order fulfillment as a result of supply chain constraints due to COVID-19. Additionally, lower services attachment resulting from historical hardware revenue declines also contributed to the net revenue decline. These decreases were partially offset by the addition of revenue resulting from the acquisition of Cray which continues to perform consistent with our expectations. HPC & MCS earnings from operations as a percentage of net revenue decreased 7.2 percentage points for the three months endedApril 30, 2020 , as compared to the prior-year period, due to an increase in operating expenses as a percentage of net revenue, partially offset by lower cost of products and services as a percentage of net revenue. The increase in operating expenses as a percentage of net revenue was due to the scale of the net revenue decline and the increase in total operating expenses due to the addition of expenses resulting from the acquisition of Cray. The decrease in cost of products and services as a percentage of net revenue was due primarily to a higher mix of lower-cost MCS product and a higher mix of lower-cost services, and lower variable compensation expense. Six months endedApril 30, 2020 compared with six months endedApril 30, 2019 HPC & MCS net revenue decreased by$88 million , or 5.9% (decreased 5.4% on a constant currency basis), for the six months endedApril 30, 2020 , as compared to the prior-year period. Net revenue decreased due to challenges performing on-site installations and meeting customer acceptance milestones, and delays with order fulfillment as a result of supply chain constraints from COVID-19, unfavorable large deal linearity, and lower services attachment resulting from historical hardware revenue declines. These decreases were partially offset by the addition of revenue resulting from Cray which continues to perform consistent with our expectations. HPC & MCS earnings from operations as a percentage of net revenue decreased 6.9 percentage points for the six months endedApril 30, 2020 , as compared to the prior-year period, due to an increase to operating expenses as a percentage of net revenue partially offset by lower cost of products and services as a percentage of net revenue. The increase in operating expenses as a percentage of net revenue was due to the addition of expenses resulting from the acquisition of Cray. The decrease in cost of products and services as a percentage of net revenue was due primarily to lower variable compensation expense, a higher mix of lower-cost MCS products and a higher mix of services. Storage
Three Months Ended
2020 2019 % Change Dollars in millions Net revenue$ 1,086 $ 1,318 (17.6) % Earnings from operations$ 145 $ 244 (40.6) % Earnings from operations as a % of net revenue 13.4 % 18.5 % Six Months Ended April 30, 2020 2019 % Change Dollars in millions Net revenue$ 2,336 $ 2,674 (12.6) % Earnings from operations$ 371 $ 498 (25.5) % Earnings from operations as a % of net revenue 15.9 %
18.6 %
Three months endedApril 30, 2020 compared with three months endedApril 30, 2019 Storage net revenue decreased by$232 million or 17.6% (decreased 16.4% on a constant currency basis), for the three months endedApril 30, 2020 as compared to the prior-year period. Net revenue in Storage was impacted by uneven demand and supply chain constraints and customer acceptance challenges given lockdown actions taking place across the globe related to COVID-19 and lower revenue from the expiration of a one-time legacy contract. Partially offsetting the net revenue decline was higher revenue from Big Data and Storage services. 58 --------------------------------------------------------------------------------
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) Storage earnings from operations as a percentage of net revenue decreased 5.1 percentage points for the three months endedApril 30, 2020 , as compared to the prior-year period, due to an increase in cost of product as a percentage of net revenue and an increase in operating expenses as a percentage of net revenue. The increase in cost of product as a percentage of net revenue was due primarily to the scale of the net revenue decline which resulted in higher fixed overhead costs as a percentage of net revenue, and competitive pricing pressure, the effects of which were partially offset by lower variable compensation expense and lower cost of services. The increase in operating expense as a percentage of net revenue was due primarily to the scale of the net revenue decline, while total operating expenses declined during the period due to restrictions on travel and hiring due to COVID-19 and lower variable compensation expense. Six months endedApril 30, 2020 compared with six months endedApril 30, 2019 Storage net revenue decreased by$338 million or 12.6% (decreased 11.4% on a constant currency basis), for the six months endedApril 30, 2020 , as compared to the prior-year period. Net revenue in Storage was impacted by uneven demand, and supply chain and customer acceptance constraints in the first half of fiscal 2020, coupled with commodity and North American manufacturing capacity constraints in the first quarter of fiscal 2020. Additionally, lower revenue from the expiration of a one-time legacy contract contributed to the net revenue decline. Partially offsetting the net revenue decrease was revenue growth from Big Data and Storage services. Storage earnings from operations as a percentage of net revenue decreased 2.7 percentage points for the six months endedApril 30, 2020 , as compared to the prior-year period, due to an increase in operating expenses as a percentage of net revenue, partially offset by a decrease in cost of product and services as a percentage of net revenue. The increase in operating expenses as a percentage of net revenue was due primarily to the scale of the net revenue decline, which was partially offset by lower variable compensation expense and lower field selling costs. The decrease in the cost of product and services as a percentage of net revenue was due primarily to lower commodity costs, lower cost of services as a result of delivery efficiencies and lower variable compensation expense.
A & PS
Three Months Ended
2020 2019 % Change Dollars in millions Net revenue$ 237 $ 260 (8.8) % Earnings (loss) from operations $ 2$ (14) 114.3 % Earnings (loss) from operations as a % of net revenue 0.8 % (5.4) % Six Months Ended April 30, 2020 2019 % Change Dollars in millions Net revenue$ 480 $ 501 (4.2) % Earnings (loss) from operations $ -$ (46) 100.0 %
Earnings (loss) from operations as a % of net revenue - %
(9.2) %
Three months endedApril 30, 2020 compared with three months endedApril 30, 2019 A & PS net revenue decreased by$23 million , or 8.8% (decreased 7.7% on a constant currency basis), for the three months endedApril 30, 2020 as compared to the prior-year period. The decrease in A & PS net revenue was due primarily to demand weakness and delivery delays inEurope and theAmericas regions given the lockdown actions and constraints taking place across the globe as a result of COVID-19 partially offset by strength in theAsia Pacific andJapan region driven by strong revenue growth inJapan . 59 --------------------------------------------------------------------------------
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) A & PS earnings from operations as a percentage of net revenue improved 6.2 percentage points for the three months endedApril 30, 2020 , as compared to the prior-year period, due to lower cost of services as a percentage of net revenue coupled with a decrease in operating expenses as a percentage of net revenue. The decrease to cost of services as a percentage of net revenue was due primarily to lower variable compensation expense and improved service delivery and overhead efficiencies. The decrease to operating expenses as a percentage of net revenue was due primarily to a reduction in field selling costs. Six months endedApril 30, 2020 compared with six months endedApril 30, 2019 A & PS net revenue decreased by$21 million , or 4.2% (decreased 3.8% on a constant currency basis), for the six months endedApril 30, 2020 as compared to the prior-year period. The decrease in A & PS net revenue was due primarily to demand weakness and delivery delays inEurope and theAmericas regions given the lockdown actions and constraints taking place across the globe as a result of COVID-19 partially offset by strength in theAsia Pacific andJapan region driven by strong revenue growth inJapan . A & PS earnings from operations as a percentage of net revenue improved 9.2 percentage points for the six months endedApril 30, 2020 , as compared to the prior-year period, due to lower cost of services as a percentage of net revenue coupled with a decrease in operating expenses as a percentage of net revenue. The decrease to cost of services as a percentage of net revenue was due primarily to improved service delivery and overhead efficiencies. The decrease to operating expenses as a percentage of net revenue was due primarily to a reduction in research and development and field selling costs. Intelligent Edge
Three Months Ended
2020 2019 % Change Dollars in millions Net revenue$ 665 $ 685 (2.9) % Earnings from operations $ 73$ 36 102.8 % Earnings from operations as a % of net revenue 11.0 % 5.3 % Six Months Ended April 30, 2020 2019 % Change Dollars in millions Net revenue$ 1,385 $ 1,390 (0.4) % Earnings from operations$ 143 $ 60 138.3 % Earnings from operations as a % of net revenue 10.3 %
4.3 %
Three months endedApril 30, 2020 compared with three months endedApril 30, 2019 Intelligent Edge net revenue decreased by$20 million , or 2.9% (decreased 1.6% on a constant currency basis), for the three months endedApril 30, 2020 , as compared to the prior-year period. The decrease in Intelligent Edge net revenue was due primarily to unfavorable foreign currency fluctuations, market weakness for switching products and lower software net revenue, partially offset by an increase in net revenue from service renewals and WLAN products inNorth America . Intelligent Edge earnings from operations as a percentage of net revenue increased 5.7 percentage points for the three months endedApril 30, 2020 as compared to the prior year period due primarily to a decrease in operating expenses as a percentage of net revenue. The cost of products and services as a percentage of net revenue were largely unchanged. The decrease in operating expenses as a percentage of net revenue was due primarily to lower field selling costs. The cost of product and services as a percentage of net revenue were largely unchanged due primarily to cost improvements in WLAN and switching products offset by higher costs in services and software. Six months endedApril 30, 2020 compared with Six months endedApril 30, 2019 Intelligent Edge net revenue decreased by$5 million , or 0.4% (increased 1.0% on a constant currency basis), for the six months endedApril 30, 2020 , as compared to the prior-year period. 60 --------------------------------------------------------------------------------
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) The small decrease in Intelligent Edge net revenue was due primarily to unfavorable foreign currency fluctuations and lower revenue from switching products driven by market weakness, partially offset by higher revenue from WLAN products, service renewals and support services. Intelligent Edge earnings from operations as a percentage of net revenue increased 6.0 percentage points for the six months endedApril 30, 2020 as compared to the prior year period due primarily to lower cost of products and services as a percentage of net revenue, and lower operating expenses as a percentage of net revenue. The decrease in cost of products and services as a percentage of net revenue was due primarily to cost improvements in switches and a higher mix of revenue from lower cost WLAN products and services. The decrease in operating expense as a percentage of net revenue was due primarily to lower field selling costs. Financial Services
Three months ended
2020 2019 % Change Dollars in millions Net revenue$ 833 $ 896 (7.0) % Earnings from operations $ 75$ 77 (2.6) % Earnings from operations as a % of net revenue 9.0 % 8.6 %
Six months ended
2020 2019 % Change Dollars in millions Net revenue$ 1,692 $ 1,815 (6.8) % Earnings from operations$ 148 $ 154 (3.9) % Earnings from operations as a % of net revenue 8.7 %
8.5 %
Three months endedApril 30, 2020 compared with three months endedApril 30, 2019 FS net revenue decreased by$63 million , or 7.0% (decreased 4.7% on a constant currency basis), for the three months endedApril 30, 2020 , as compared to the prior-year period. The decrease in net revenue was due primarily to a decrease in rental revenue due to lower average operating lease assets and unfavorable currency fluctuations, partially offset by higher asset management revenue from lease extensions. FS earnings from operations as a percentage of net revenue increased 0.4 percentage points for the three months endedApril 30, 2020 , as compared to the prior-year period, due primarily to lower cost of services as a percentage of net revenue, partially offset by an increase to operating expenses as a percentage of net revenue. The decrease to cost of services as a percentage of net revenue resulted from lower depreciation expense. The increase to operating expenses as a percentage of net revenue was due primarily to lower capitalized initial direct costs as a result of adopting the new lease accounting standard, along with the overall decrease in net revenue. Six months endedApril 30, 2020 compared with six months endedApril 30, 2019 FS net revenue decreased by$123 million , or 6.8% (decreased 5.3% on a constant currency basis), for the six months endedApril 30, 2020 , as compared to the prior-year period. The decrease in net revenue was due primarily to a decrease in rental revenue due to lower average operating lease assets, unfavorable currency fluctuations, along with lower lease equipment buyout revenue, partially offset by higher asset management revenue from lease extensions. FS earnings from operations as a percentage of net revenue increased 0.2 percentage point for the six months endedApril 30, 2020 , as compared to the prior-year period, due primarily to lower cost of services as a percentage of net revenue, partially offset by an increase to operating expenses as a percentage of net revenue. The decrease to cost of services as a percentage of net revenue resulted from lower depreciation expense. The increase to operating expenses as a percentage of net revenue was 61 --------------------------------------------------------------------------------
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) due primarily to lower capitalized initial direct costs as a result of adopting the new lease accounting standard, along with the overall decrease in net revenue. Financing Volume Six months ended April Three months ended April 30, 30, 2020 2019 2020 2019 In millions Total financing volume$ 1,493 $ 1,395 $ 2,901 $ 2,784 New financing volume, which represents the amount of financing provided to customers for equipment and related software and services, including intercompany activity, increased by 7.0% and 4.2% for the three and six months endedApril 30, 2020 as compared to the prior-year periods. For both three and six months endedApril 30, 2020 , the increase was primarily driven by higher financing associated with third-party product sales and related service offerings, partially offset by unfavorable currency fluctuations. The growth in financing volume in the six month period was partially offset by lower financing associated with HPE product sales and related service offerings. Portfolio Assets and Ratios The portfolio assets and ratios derived from the segment balance sheets for FS were as follows: As of April 30, 2020 October 31, 2019 Dollars in millions Financing receivables, gross$ 8,678 $ 8,652 Net equipment under operating leases 3,887 4,084 Capitalized profit on intercompany equipment transactions(1) 325 382 Intercompany leases(1) 93 100 Gross portfolio assets 12,983 13,218 Allowance for doubtful accounts(2) 126 131 Operating lease equipment reserve 53 60 Total reserves 179 191 Net portfolio assets$ 12,804 $ 13,027 Reserve coverage 1.4 % 1.4 % Debt-to-equity ratio(3) 7.0x 7.0x (1)Intercompany activity is eliminated in consolidation. (2)Allowance for doubtful accounts for financing receivables includes both the short- and long-term portions. (3)Debt benefiting FS consists of intercompany equity that is treated as debt for segment reporting purposes, intercompany debt, and borrowing- and funding-related activity associated with FS and its subsidiaries. Debt benefiting FS totaled$11.5 billion and$11.4 billion atApril 30, 2020 andOctober 31, 2019 , respectively, and was determined by applying an assumed debt-to-equity ratio, which management believes to be comparable to that of other similar financing companies. FS equity at bothApril 30, 2020 andOctober 31, 2019 was$1.6 billion . As ofApril 30, 2020 andOctober 31, 2019 , FS net cash and cash equivalents balances were approximately$676 million and$711 million , respectively. Net portfolio assets as ofApril 30, 2020 decreased 1.7% fromOctober 31, 2019 . The decrease generally resulted from unfavorable currency fluctuations, partially offset by new financing volume exceeding portfolio runoff during the period. FS bad debt expense includes charges to general reserves and specific reserves for sales-type, direct-financing and operating leases. For the three and six months endedApril 30, 2020 , FS recorded net bad debt expense of$19 million and$33 million , respectively. For the three and six months endedApril 30, 2019 , FS recorded net bad debt expense of$17 million and$32 million , respectively. 62 --------------------------------------------------------------------------------
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) As ofApril 30, 2020 , FS experienced an increase in billed finance receivables compared toOctober 31, 2019 , which included some impact to collections from customers as a result of COVID-19. We are currently unable to fully predict the extent to which COVID-19 may adversely impact future collections of our receivables. Corporate Investments
Three months ended
2020 2019 % Change Dollars in millions Net revenue$ 124 $ 125 (0.8) % Loss from operations$ (28) $ (29) 3.4 % Loss from operations as a % of net revenue (22.6) % (23.2) %
Six months ended
2020 2019 % Change Dollars in millions Net revenue$ 245 $ 243 0.8 % Loss from operations$ (55) $ (57) 3.5 % Loss from operations as a % of net revenue (22.4) %
(23.5) %
Three months endedApril 30, 2020 compared with three months endedApril 30, 2019 Corporate Investments net revenue decreased by$1 million , or 0.8% (increased 0.7% on a constant currency basis), for the three months endedApril 30, 2020 as compared to the prior-year period. The decrease in Corporate Investments net revenue was due primarily to unfavorable currency fluctuations. Revenue in the Corporate Investments segment represents revenue from our Communications and Media Solutions ("CMS") business. Corporate Investments loss from operations as a percentage of net revenue decreased 0.6 percentage points for the three months endedApril 30, 2020 , as compared to the prior-year period. The decrease was due primarily to lower cost of services, partially offset by higher legal expenses. Six Months EndedApril 30, 2020 compared with six months endedApril 30, 2019 Corporate Investments net revenue increased by$2 million , or 0.8% (increased 1.6% on a constant currency basis), for the six months endedApril 30, 2020 as compared to the prior-year period. The increase in Corporate Investments net revenue was due primarily to higher services revenue from the CMS business, partially offset by unfavorable currency fluctuations. Corporate Investments loss from operations as a percentage of net revenue decreased 1.1 percentage points for the six months endedApril 30, 2020 , as compared to the prior-year period. The decrease was due primarily to lower cost of services, partially offset by higher legal expenses. LIQUIDITY AND CAPITAL RESOURCES We use cash generated by operations as our primary source of liquidity. We believe that internally generated cash flows will be generally sufficient to support our operating businesses, capital expenditures, product development initiatives, acquisitions and disposal activities including legal settlements, restructuring activities, transformation costs, indemnifications, maturing debt, interest payments, and income tax payments, in addition to any future investments, share repurchases and stockholder dividend payments. We expect to supplement this short-term liquidity, if necessary, by accessing the capital markets, issuing commercial paper, and borrowing under credit facilities made available by various domestic and foreign financial institutions. However, our access to capital markets may be constrained and our cost of borrowing may increase under certain business, market and economic conditions. Our liquidity is subject to various risks including the risks identified in the section entitled "Risk Factors" in Item 1A of Part II and market risks identified in the section entitled "Quantitative and Qualitative Disclosures about Market Risk" in Item 3 of Part I. 63 --------------------------------------------------------------------------------
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) COVID-19 has severely impacted global economic activity and caused significant volatility and negative pressure in the capital markets, which increases the cost of capital and adversely impacts access to capital. In addition, our businesses may be adversely affected, which may have a material adverse impact on our profitability and cash flows, and the timing and collectability of payments may be adversely affected as a result of the impact of COVID-19 on our customers. As a result of the continued uncertainty generated by COVID-19, onApril 9, 2020 , we issued$2.25 billion aggregate principal amount of unsecured senior notes to enhance our liquidity and strengthen our capital. The net proceeds from this offering will be used for general corporate purposes, which may include the repayment of indebtedness. The pricing on our undrawn$4.75 billion revolving credit facility, maturing inAugust 2024 , remains unchanged. We continue to monitor the severity and duration of the pandemic and its impact on theU.S. and global economies, consumer behavior, our businesses, results of operations, financial condition and cash flows. OnMay 19, 2020 , our Board of Directors approved a cost optimization and prioritization plan in order to focus our investments and realign the workforce to areas of growth and measures to simplify and evolve its product portfolio strategy, go-to-market configurations, supply chain structures, digital customer support model, marketing experiences, and real estate strategies. We expect that the Plan will be implemented through fiscal year 2022 and estimate it will include gross savings of at least$1.0 billion as a result of changes to our workforce, real estate model and business process improvements, with the Plan expected to deliver annualized net run-rate savings of at least$800 million by end of fiscal year 2022, in both cases relative to our fiscal year 2019 exit. In order to achieve this level of cost savings, we estimate cash funding payments between$1.0 billion to$1.3 billion over the next three years. Our cash and cash equivalent balances are held in numerous locations throughout the world, with a majority of the amount held in theU.S. We utilize a variety of planning and financing strategies in an effort to ensure that our worldwide cash is available when and where it is needed. Our cash position is strong and we expect that our cash and cash equivalent balances, anticipated cash flow generated from operations and access to capital markets will be sufficient to cover our expected near-term cash outlays. Amounts held outside of theU.S. are generally utilized to support non-U.S. liquidity needs. Repatriations of amounts held outside theU.S. generally will not be taxable from aU.S. federal tax perspective, but may be subject to state income or foreign withholding tax. Where local restrictions prevent an efficient intercompany transfer of funds, our intent is to keep cash balances outside of theU.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 theU.S. to have a material effect on our overall liquidity, financial condition or results of operations. In connection with the share repurchase program previously authorized by our Board of Directors, during the first six months of fiscal 2020, we repurchased 25.3 million shares for an aggregate amount of$355 million . As ofApril 30, 2020 , we had a remaining authorization of$2.1 billion for future share repurchases. As a result of increased uncertainty due to COVID-19, we have suspended purchases under our share repurchase program. For more information on our share repurchase program, refer to the section entitled "Unregistered Sales ofEquity Securities and Use of Proceeds" in Item 2 of Part II. Liquidity Our cash flow metrics were as follows: Six months ended April 30, 2020 2020 2019 In millions Net cash provided by operating activities $ 21$ 1,369 Net cash used in investing activities (104) (1,064) Net cash provided by (used in) financing activities 1,997 (1,600) Net increase (decrease) in cash, cash equivalents and restricted cash$ 1,914 $ (1,295) Operating Activities For the six months endedApril 30, 2020 , net cash from operating activities decreased by$1.3 billion , as compared to the prior-year period. The decrease was due primarily to lower net earnings from operations and unfavorable net working capital, as compared to the prior-year period. 64 --------------------------------------------------------------------------------
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued)
Working capital metrics for the three months ended
Three months ended
2020 2019 Change Days of sales outstanding in accounts receivable ("DSO") 39 40 (1) Days of supply in inventory ("DOS") 76 41 35 Days of purchases outstanding in accounts payable ("DPO") (120) (102) (18) Cash conversion cycle (5) (21) 16 The cash conversion cycle is the sum of DSO and DOS less DPO. Items which may cause the cash conversion cycle in a particular period to differ include, but are not limited to, changes in business mix, changes in payment terms (including extended payment terms from suppliers), the extent of receivables factoring, seasonal trends, the timing of the revenue recognition and inventory purchases within the period, the impact of commodity costs and acquisition activity. For the three months endedApril 30, 2020 , as compared to the corresponding three month period in fiscal 2019, the cash conversion cycle was impacted by COVID-19 related events involving supply chain and customer acceptance constraints given lockdown actions taking place across the globe. DSO measures the average number of days our receivables are outstanding. DSO is calculated by dividing ending accounts receivable, net of allowance for doubtful accounts, by a 90-day average of net revenue. Compared to the corresponding three month period in fiscal 2019, DSO decreased due primarily to favorable billing linearity partially offset by lower customer participation in enhanced early payment programs and factoring. DOS measures the average number of days from procurement to sale of our products. DOS is calculated by dividing ending inventory by a 90-day average of cost of goods sold. Compared to the corresponding three month period in fiscal 2019, DOS increased as we experienced a lower consumption of inventory due to constraints with accessing certain key components. Additionally, purchases of inventory increased as we position inventory to fulfill planned future shipments. DPO measures the average number of days our accounts payable balances are outstanding. DPO is calculated by dividing ending accounts payable by a 90-day average of cost of goods sold. Compared to the corresponding three month period in fiscal 2019, DPO increased due primarily to higher inventory purchases in order to fulfill planned future shipments, extended payment terms and a further shift of production to design manufacturing partners. Investing Activities For the six months endedApril 30, 2020 , net cash used in investing activities decreased by$1.0 billion , as compared to the corresponding period in fiscal 2019. The decrease was due primarily to lower investment in and higher sales proceeds from property, plant and equipment and higher cash generated from net financial collateral activities as compared to the prior-year period. Financing Activities For the six months endedApril 30, 2020 , net cash provided by financing activities increased by$3.6 billion , as compared to the corresponding period in fiscal 2019. The increase was due primarily to higher cash generated from debt issuance and lower cash utilization for share repurchases as compared to the prior-year period. Capital Resources Debt Levels We maintain debt levels that we establish through consideration of a number of factors, including cash flow expectations, cash requirements for operations, investment plans (including acquisitions), share repurchase activities, our cost of capital and targeted capital structure. We plan to redeem$3.0 billion of Senior Notes that mature onOctober 15, 2020 , either on or before that date. During the first six months of fiscal 2020, we issued$367 million and repaid$448 million of commercial paper. 65 --------------------------------------------------------------------------------
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) OnApril 9, 2020 , we completed our offering of$1.25 billion aggregate principal amount of 4.45% Senior Notes dueOctober 2, 2023 (the "2023 Notes") and$1.0 billion aggregate principal amount of 4.65% notes dueOctober 1, 2024 (the "2024 Notes"). We will pay interest semi-annually on the 2023 Notes on eachApril 2 andOctober 2 , beginning onOctober 2, 2020 . We will pay interest semi-annually on the 2024 Notes on eachApril 1 andOctober 1 , beginning onOctober 1, 2020 . The net proceeds from this offering will be used for general corporate purposes, including repayment of existing debt. OnFebruary 20, 2020 , we issued$755 million of asset-backed debt securities in six tranches at a weighted average price of 99.99% and a weighted average interest rate of 1.87%, payable monthly fromApril 2020 with a stated final maturity date ofFebruary 2030 . As ofApril 30, 2020 , the outstanding balance of these asset-backed debt securities was$704 million and future principal payments will be based on the underlying loan and lease payment streams. For more information on the asset-backed debt securities and related Variable Interest Entities, see Note 8 "Accounting for Leases as a Lessor". Our weighted-average interest rate reflects the average effective rate on our borrowings prevailing during the period and reflects the impact of interest rate swaps. For more information on our interest rate swaps, see Note 11, "Financial Instruments". InDecember 2017 , we filed a shelf registration statement with theSecurities and Exchange Commission that allows us to sell, at any time and from time to time, in one or more offerings, debt securities, preferred stock, common stock, warrants, depository shares, purchase contracts, guarantees or units consisting of any of these securities. Commercial Paper We maintain two commercial paper programs, and a wholly-owned subsidiary maintains a third program. OurU.S. program provides for the issuance ofU.S. dollar-denominated commercial paper up to a maximum aggregate principal amount of$4.75 billion which was increased from$4.0 billion inMarch 2020 . Our euro commercial paper program provides for the issuance of commercial paper outside of theU.S. denominated inU.S. dollars, euros or British pounds up to a maximum aggregate principal amount of$3.0 billion or the equivalent in those alternative currencies. The combined aggregate principal amount of commercial paper outstanding under those programs at any one time cannot exceed$4.75 billion . In addition, our subsidiary's euro Commercial Paper/Certificate of Deposit Program provides for the issuance of commercial paper in various currencies of up to a maximum aggregate principal amount of$1.0 billion . As ofApril 30, 2020 andOctober 31, 2019 , no borrowings were outstanding under our commercial paper programs, and$605 million and$698 million , respectively, were outstanding under our subsidiary's program. Revolving Credit Facility We maintain a$4.75 billion five year senior unsecured committed credit facility that was entered into inAugust 2019 . Loans under the revolving credit facility may be used for general corporate purposes, including support of the commercial paper program. Commitments under the Credit Agreement are available for a period of five years, which period may be extended, subject to the satisfaction of certain conditions, by up to two, one-year periods. Commitment Fees, interest rates and other terms of borrowing under the credit facility vary based onHewlett Packard Enterprise's external credit rating. As ofApril 30, 2020 andOctober 31, 2019 , no borrowings were outstanding under the Credit Agreement. Available Borrowing Resources As ofApril 30, 2020 , we had the following additional liquidity resources available if needed: As of April 30, 2020 In millions Commercial paper programs$ 5,145 Uncommitted lines of credit$ 1,285 CONTRACTUAL AND OTHER OBLIGATIONS Contractual Obligations OnApril 9, 2020 , we completed our offering of the 2023 Notes and 2024 Notes. We will pay interest semi-annually on the 2023 Notes on eachApril 2 andOctober 2 , beginning onOctober 2, 2020 . We will pay interest semi-annually on the 2024 Notes on eachApril 1 andOctober 1 , beginning onOctober 1, 2020 . 66 --------------------------------------------------------------------------------
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) OnFebruary 20, 2020 , we issued$755 million of asset-backed debt securities in six tranches at a weighted average price of 99.99% and a weighted average interest rate of 1.87%, payable monthly fromApril 2020 with a stated final maturity date ofFebruary 2030 . As ofApril 30, 2020 , the outstanding balance of these asset-backed debt securities was$704 million and future principal payments will be based on the underlying loan and lease payment streams. For more information on the asset-backed debt securities and related Variable Interest Entities, see Note 8 "Accounting for Leases as a Lessor". Our other contractual obligations have not changed materially sinceOctober 31, 2019 . For further information see "Contractual and Other Obligations" in Item 7 of Part II of our Annual Report on Form 10-K for the fiscal year endedOctober 31, 2019 . Retirement Benefit Plan Funding For the remainder of fiscal 2020, we anticipate making contributions of approximately$92 million to our non-U.S. pension plans. Our policy is to fund our pension plans so that we meet at least the minimum contribution requirements, as established by local government, funding and tax authorities. Restructuring Plans As ofApril 30, 2020 , we expect to make future cash payments of approximately$345 million in connection with our approved restructuring plans, which includes$142 million expected to be paid through the remainder of fiscal 2020 and$203 million expected to substantially be paid through fiscal 2022. For more information on our HPE Next restructuring activities, see Note 3, "HPE Next". OnMay 19, 2020 , our Board of Directors approved a cost optimization and prioritization plan in order to focus our investments and realign the workforce to areas of growth and measures to simplify and evolve its product portfolio strategy, go-to-market configurations, supply chain structures, digital customer support model, marketing experiences, and real estate strategies. We expect that the Plan will be implemented through fiscal year 2022 and estimate it will include gross savings of at least$1.0 billion as a result of changes to our workforce, real estate model and business process improvements, with the Plan expected to deliver annualized net run-rate savings of at least$800 million by end of fiscal year 2022, in both cases relative to our fiscal year 2019 exit. In order to achieve this level of cost savings, we estimate cash funding payments between$1.0 billion to$1.3 billion over the next three years. Uncertain Tax Positions As ofApril 30, 2020 , we had approximately$477 million of recorded liabilities and related interest and penalties pertaining to uncertain tax positions. These liabilities and related interest and penalties include$15 million expected to be paid within one year. For the remaining amount, we are unable to make a reasonable estimate as to when cash settlement with tax authorities might occur due to the uncertainties related to these tax matters. Payments of these obligations would result from settlements with tax authorities. For more information on our uncertain tax positions, see Note 5, "Taxes on Earnings". Cross-indemnification with HP Inc., DXC and Micro Focus As ofApril 30, 2020 , we had approximately$175 million of recorded net receivables pertaining to income tax indemnifications with HP Inc., including$75 million related to certain state income tax liabilities for which we are joint and severally liable. These amounts include$50 million expected to be received within one year. For the amounts related to the joint and several state tax liabilities, we are unable to make a reasonable estimate as to when cash settlement with HP Inc. might occur due to the uncertainties related to the underlying tax matters. Realization of these obligations would result from payments to tax authorities and the resulting settlements with HP Inc. under the Termination and Mutual Release Agreement. For details on the Separation and Distribution Agreements and Tax Matters Agreement with HP Inc., DXC and Micro Focus, see our Annual Report on Form 10-K for the fiscal year endedOctober 31, 2019 . Off-Balance Sheet Arrangements As part of our ongoing business, we have not participated in transactions that generate material relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. 67
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