10-Q 1 a2228788z10-q.htm 10-Q

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



FORM 10-Q

(Mark One)    

ý

 

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

For the quarterly period ended: April 30, 2016

Or

o

 

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

For the transition period from            to            

Commission file number 001-37483



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

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

3000 Hanover Street, Palo Alto, California

 

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

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



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

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

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

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

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

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


Table of Contents


HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES

Form 10-Q

For the Quarterly Period Ended April 30, 2016


Table of Contents

1


Table of Contents

Forward-Looking Statements

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

2


Table of Contents

Part I. Financial Information

Item 1. Financial Statements and Supplementary Data.


Index

 
  Page  

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

    4  

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

   
5
 

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

   
6
 

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

   
7
 

Notes to Condensed Consolidated and Combined Financial Statements (Unaudited)

   
8
 

Note 1: Overview and Basis of Presentation

   
8
 

Note 2: Segment Information

   
12
 

Note 3: Restructuring

   
17
 

Note 4: Retirement and Post-Retirement Benefit Plans

   
19
 

Note 5: Stock-Based Compensation

   
21
 

Note 6: Taxes on Earnings

   
25
 

Note 7: Balance Sheet Details

   
27
 

Note 8: Financing Receivables and Operating Leases

   
29
 

Note 9: Acquisitions and Divestitures

   
32
 

Note 10: Goodwill and Intangible Assets

   
35
 

Note 11: Fair Value

   
37
 

Note 12: Financial Instruments

   
40
 

Note 13: Borrowings

   
48
 

Note 14: Related Party Transactions and Former Parent Company Investment

   
51
 

Note 15: Stockholders' Equity

   
53
 

Note 16: Net Earnings Per Share

   
55
 

Note 17: Litigation and Contingencies

   
57
 

Note 18: Guarantees, Indemnifications and Warranties

   
61
 

3


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HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES

Condensed Consolidated and Combined Statements of Earnings

(Unaudited)

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

Net revenue:

                         

Products

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

Services

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

Financing income

    88     89     176     184  

Total net revenue

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

Costs and expenses:

                         

Cost of products

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

Cost of services

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

Financing interest

    60     61     118     124  

Research and development

    624     552     1,209     1,084  

Selling, general and administrative

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

Amortization of intangible assets

    201     204     419     407  

Restructuring charges

    161     248     472     380  

Acquisition and other related charges

    53     19     90     23  

Separation costs

    91     159     170     203  

Total costs and expenses

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

Earnings from operations

    492     428     876     1,160  

Interest and other, net

    (129 )   (30 )   (194 )   (48 )

Earnings before taxes

    363     398     682     1,112  

Provision for taxes

    (43 )   (93 )   (95 )   (260 )

Net earnings

  $ 320   $ 305   $ 587   $ 852  

Net earnings per share:(1):

                         

Basic

  $ 0.19   $ 0.17   $ 0.34   $ 0.47  

Diluted

  $ 0.18   $ 0.16   $ 0.33   $ 0.46  

Cash dividends declared per share

  $ 0.06   $   $ 0.17   $  

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

                         

Basic

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

Diluted

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

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

   

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

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HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES

Condensed Consolidated and Combined Statements of Comprehensive Income

(Unaudited)

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

Net earnings

  $ 320   $ 305   $ 587   $ 852  

Other comprehensive income before taxes:

                         

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

                         

Net unrealized gains (losses) arising during the period

    2     (11 )   4     (9 )

(Gains) losses reclassified into earnings

    (5 )       4      

    (3 )   (11 )   8     (9 )

Change in net unrealized losses on cash flow hedges:

                         

Net unrealized (losses) gains arising during the period

    (206 )   4     (64 )   232  

Net gains reclassified into earnings

    (70 )   (191 )   (191 )   (299 )

    (276 )   (187 )   (255 )   (67 )

Change in unrealized components of defined benefit plans:

                         

Losses arising during the period

    (1 )       (1 )    

Amortization of actuarial loss and prior service benefit

    70     34     142     70  

Curtailments, settlements and other

    1     1     (17 )   1  

    70     35     124     71  

Change in cumulative translation adjustment

    57         (82 )   (68 )

Other comprehensive loss before taxes

    (152 )   (163 )   (205 )   (73 )

Benefit (provision) for taxes

    77     44     53     (22 )

Other comprehensive loss, net of tax

    (75 )   (119 )   (152 )   (95 )

Comprehensive income

  $ 245   $ 186   $ 435   $ 757  

   

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

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HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

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

 
 
  (Unaudited)
   
 

ASSETS

             

Current assets:

             

Cash and cash equivalents

  $ 9,010   $ 9,842  

Accounts receivable

    7,707     8,538  

Financing receivables

    3,017     2,918  

Inventory

    2,099     2,198  

Assets held for sale

    4,077      

Other current assets

    5,237     6,468  

Total current assets

    31,147     29,964  

Property, plant and equipment

    9,674     9,886  

Long-term financing receivables and other assets

    11,563     10,875  

Goodwill

    24,244     27,261  

Intangible assets

    1,436     1,930  

Total assets

  $ 78,064   $ 79,916  

LIABILITIES AND STOCKHOLDERS' EQUITY

             

Current liabilities:

             

Notes payable and short-term borrowings

  $ 965   $ 691  

Accounts payable

    5,289     5,828  

Employee compensation and benefits

    2,212     2,902  

Taxes on earnings

    462     476  

Deferred revenue

    4,817     5,154  

Accrued restructuring

    613     628  

Liabilities held for sale

    727      

Other accrued liabilities

    5,512     6,314  

Total current liabilities

    20,597     21,993  

Long-term debt

    15,247     15,103  

Other liabilities

    10,196     8,902  

Commitments and contingencies

             

Stockholders' equity

             

HPE stockholders' equity:

             

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

         

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

    17      

Additional paid-in capital

    36,483      

Retained earnings

    301      

Former Parent company investment

        38,550  

Accumulated other comprehensive loss

    (5,167 )   (5,015 )

Total HPE stockholders' equity

    31,634     33,535  

Non-controlling interests

    390     383  

Total stockholders' equity

    32,024     33,918  

Total liabilities and stockholders' equity

  $ 78,064   $ 79,916  

   

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

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HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES

Condensed Consolidated and Combined Statements of Cash Flows

(Unaudited)

 
  Six months
ended April 30
 
 
  2016   2015  
 
  In millions
 

Cash flows from operating activities:

             

Net earnings

  $ 587   $ 852  

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

             

Depreciation and amortization

    1,949     1,970  

Stock-based compensation expense

    303     236  

Provision for doubtful accounts

    26     17  

Provision for inventory

    83     57  

Restructuring charges

    472     380  

Deferred taxes on earnings

    (31 )   (950 )

Excess tax benefit from stock-based compensation

    (4 )   (88 )

Other, net

    79     5  

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

             

Accounts receivable

    366     482  

Financing receivables

    (209 )   (71 )

Inventory

    (186 )   (219 )

Accounts payable

    (412 )   (577 )

Taxes on earnings

    (347 )   1,368  

Restructuring

    (489 )   (569 )

Other assets and liabilities

    (1,155 )   (1,137 )

Net cash provided by operating activities

    1,032     1,756  

Cash flows from investing activities:

             

Investment in property, plant and equipment

    (1,552 )   (1,432 )

Proceeds from sale of property, plant and equipment

    200     175  

Purchases of available-for-sale securities and other investments

    (341 )   (106 )

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

    270     119  

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

    (13 )   (139 )

Proceeds from business divestitures, net

    315      

Net cash used in investing activities

    (1,121 )   (1,383 )

Cash flows from financing activities:

             

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

    (36 )   99  

Issuance of debt

    570     508  

Payment of debt

    (354 )   (467 )

Settlement of cash flow hedge

    3      

Issuance of common stock under employee stock plans

    18      

Repurchase of common stock

    (1,212 )    

Net transfer from (to) former Parent

    491     (191 )

Excess tax benefit from stock-based compensation

    4     88  

Cash dividends paid

    (190 )   (10 )

Net cash (used in) provided by financing activities

    (706 )   27  

(Decrease) increase in cash and cash equivalents

    (795 )   400  

Cash held for sale(a)

    (37 )    

Cash and cash equivalents at beginning of period

    9,842     2,319  

Cash and cash equivalents at end of period

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

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

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HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES

Notes to Condensed Consolidated and Combined Financial Statements

(Unaudited)

Note 1: Overview and Basis of Presentation

Background

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

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

Basis of Presentation

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

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

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

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HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES

Notes to Condensed Consolidated and Combined Financial Statements (Continued)

(Unaudited)

Note 1: Overview and Basis of Presentation (Continued)

Principles of Consolidation and Combination

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

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

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

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

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

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

Segment Realignment

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

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HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES

Notes to Condensed Consolidated and Combined Financial Statements (Continued)

(Unaudited)

Note 1: Overview and Basis of Presentation (Continued)

Use of Estimates

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

Accounting Pronouncements

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

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

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

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HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES

Notes to Condensed Consolidated and Combined Financial Statements (Continued)

(Unaudited)

Note 1: Overview and Basis of Presentation (Continued)

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

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

Other current assets

  $ 7,677   $ (1,209 ) $ 6,468  

Long-term financing receivables and other assets

  $ 11,020   $ (145 ) $ 10,875  

Taxes on earnings

  $ (634 ) $ 158   $ (476 )

Other liabilities

  $ (10,098 ) $ 1,196   $ (8,902 )

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

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

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

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

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Notes to Condensed Consolidated and Combined Financial Statements (Continued)

(Unaudited)

Note 1: Overview and Basis of Presentation (Continued)

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

Note 2: Segment Information

        Hewlett Packard Enterprise's operations are organized into five segments for financial reporting purposes: the Enterprise Group ("EG"), Enterprise Services ("ES"), Software, Financial Services ("FS") and Corporate Investments. Hewlett Packard Enterprise's organizational structure is based on a number of factors that management uses to evaluate, view and run its business operations, which include, but are not limited to, customer base and homogeneity of products and technology. The segments are based on this organizational structure and information reviewed by Hewlett Packard Enterprise's management to evaluate segment results.

        A summary description of each segment follows.

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

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

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

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

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

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Notes to Condensed Consolidated and Combined Financial Statements (Continued)

(Unaudited)

Note 2: Segment Information (Continued)

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

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

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

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

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

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

Segment Policy

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

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

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

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Notes to Condensed Consolidated and Combined Financial Statements (Continued)

(Unaudited)

Note 2: Segment Information (Continued)

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

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

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

Segment Realignment

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

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

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

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

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Notes to Condensed Consolidated and Combined Financial Statements (Continued)

(Unaudited)

Note 2: Segment Information (Continued)

Segment Operating Results

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

Three months ended April 30, 2016

                                     

Net revenue

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

Intersegment net revenue and other

    294     197     71     24         586  

Total segment net revenue

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

Segment earnings (loss) from operations

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

Three months ended April 30, 2015

                                     

Net revenue

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

Intersegment net revenue and other

    233     195     73     25         526  

Total segment net revenue

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

Segment earnings (loss) from operations

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

Six months ended April 30, 2016

                                     

Net revenue

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

Intersegment net revenue and other

    595     386     131     46         1,158  

Total segment net revenue

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

Segment earnings (loss) from operations

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

Six months ended April 30, 2015

                                     

Net revenue

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

Intersegment net revenue and other

    533     410     131     51         1,125  

Total segment net revenue

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

Segment earnings (loss) from operations

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

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Notes to Condensed Consolidated and Combined Financial Statements (Continued)

(Unaudited)

Note 2: Segment Information (Continued)

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

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

Net Revenue:

                         

Total segments

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

Elimination of intersegment net revenue and other

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

Total Hewlett Packard Enterprise consolidated and combined net revenue

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

Earnings before taxes:

                         

Total segment earnings from operations

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

Corporate and unallocated costs and eliminations

    (176 )   (76 )   (301 )   (186 )

Stock-based compensation expense

    (138 )   (97 )   (303 )   (236 )

Amortization of intangible assets

    (201 )   (204 )   (419 )   (407 )

Restructuring charges

    (161 )   (248 )   (472 )   (380 )

Acquisition and other related charges

    (53 )   (19 )   (90 )   (23 )

Separation costs

    (91 )   (159 )   (170 )   (203 )

Interest and other, net

    (129 )   (30 )   (194 )   (48 )

Total Hewlett Packard Enterprise consolidated and combined earnings before taxes

  $ 363   $ 398   $ 682   $ 1,112  

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Notes to Condensed Consolidated and Combined Financial Statements (Continued)

(Unaudited)

Note 2: Segment Information (Continued)

        Net revenue by segment and business unit was as follows:

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

Servers

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

Technology Services

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

Networking

    874     556     1,737     1,118  

Storage

    752     740     1,562     1,577  

Enterprise Group

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

Infrastructure Technology Outsourcing

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

Application and Business Services

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

Enterprise Services

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

Software

    774     892     1,554     1,762  

Financial Services

    788     805     1,564     1,608  

Corporate Investments

    2     1     3     5  

Total segment net revenue

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

Eliminations of intersegment net revenue and other        

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

Total net revenue

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

Note 3: Restructuring

    Summary of Restructuring Plans

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

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Notes to Condensed Consolidated and Combined Financial Statements (Continued)

(Unaudited)

Note 3: Restructuring (Continued)

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

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

Liability as of October 31, 2015

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

Charges

    280     122     71     1         (2 )   472  

Cash payments

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

Non-cash items

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

Liability as of April 30, 2016

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

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

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

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

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

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

    Fiscal 2015 Restructuring Plan

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

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Notes to Condensed Consolidated and Combined Financial Statements (Continued)

(Unaudited)

Note 3: Restructuring (Continued)

    Fiscal 2012 Restructuring Plan

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

    Other Plans

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

Note 4: Retirement and Post-Retirement Benefit Plans

    Pension Benefit Expense

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

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

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Notes to Condensed Consolidated and Combined Financial Statements (Continued)

(Unaudited)

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

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

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

Service cost

  $   $   $ 64   $ 18   $ 1   $  

Interest cost

        4     136     62     2      

Expected return on plan assets

            (240 )   (96 )        

Amortization and deferrals:

                                     

Actuarial loss (gain)

            77     34     (1 )    

Prior service benefit

            (6 )            

Net periodic benefit cost

  $   $ 4   $ 31   $ 18   $ 2   $  

Settlement loss

            1     1          

Special termination benefits

            7     4          

Net benefit cost

  $   $ 4   $ 39   $ 23   $ 2   $  

 

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

Service cost

  $   $   $ 128   $ 36   $ 2   $  

Interest cost

        8     277     128     4      

Expected return on plan assets

            (494 )   (197 )   (1 )    

Amortization and deferrals:

                                     

Actuarial loss (gain)

        1     156     69     (2 )    

Prior service benefit

            (12 )            

Net periodic benefit cost

  $   $ 9   $ 55   $ 36   $ 3   $  

Settlement loss

            1     1          

Special termination benefits

            11     6          

Net benefit cost

  $   $ 9   $ 67   $ 43   $ 3   $  

    Employer Contributions and Funding Policy

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

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

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Notes to Condensed Consolidated and Combined Financial Statements (Continued)

(Unaudited)

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

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

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

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

Note 5: Stock-Based Compensation

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

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

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

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Notes to Condensed Consolidated and Combined Financial Statements (Continued)

(Unaudited)

Note 5: Stock-Based Compensation (Continued)

Stock-based Compensation Expense

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

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

Stock-based compensation expense

  $ 138   $ 97   $ 303   $ 236  

Income tax benefit

    (39 )   (32 )   (89 )   (78 )

Stock-based compensation expense, net of tax

  $ 99   $ 65   $ 214   $ 158  

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

Restricted Stock Awards

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

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Notes to Condensed Consolidated and Combined Financial Statements (Continued)

(Unaudited)

Note 5: Stock-Based Compensation (Continued)

        A summary of restricted stock award activity is as follows:

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

Outstanding at beginning of period

      $  

Converted from former Parent's plan

    42,012   $ 15  

Granted(1)

    31,175   $ 15  

Vested

    (5,175 ) $ 15  

Forfeited

    (2,319 ) $ 15  

Outstanding at end of period

    65,693   $ 15  

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

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

Stock Options

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

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

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Notes to Condensed Consolidated and Combined Financial Statements (Continued)

(Unaudited)

Note 5: Stock-Based Compensation (Continued)

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

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

Weighted-average fair value(1)

  $3   $4  

Expected volatility(2)

  29.3 % 31.1 %

Risk-free interest rate(3)

  1.2 % 1.7 %

Expected dividend yield(4)

  1.6 % 1.5 %

Expected term in years(5)

  5.3   5.4  

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

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

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

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

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

        A summary of stock option activity is as follows:

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

Outstanding at beginning of period

      $              

Converted from former Parent's plan

    42,579   $ 15              

Granted(1)

    25,283   $ 15              

Exercised

    (1,925 ) $ 9              

Forfeited/cancelled/expired

    (1,305 ) $ 20              

Outstanding at end of period

    64,632   $ 15     5.9   $ 180  

Vested and expected to vest at end of period

    59,547   $ 15     5.8   $ 172  

Exercisable at end of period

    28,029   $ 13     4.2   $ 120  

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

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

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Notes to Condensed Consolidated and Combined Financial Statements (Continued)

(Unaudited)

Note 5: Stock-Based Compensation (Continued)

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

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

Employee Stock Purchase Plan

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

Note 6: Taxes on Earnings

    Provision for Taxes

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

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

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

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

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Notes to Condensed Consolidated and Combined Financial Statements (Continued)

(Unaudited)

Note 6: Taxes on Earnings (Continued)

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

    Uncertain Tax Positions

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

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

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

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

    Deferred Tax Assets and Liabilities

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

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Notes to Condensed Consolidated and Combined Financial Statements (Continued)

(Unaudited)

Note 6: Taxes on Earnings (Continued)

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

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

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

Long-term deferred tax assets

  $ 3,084   $ 3,925  

Long-term deferred tax liabilities

    (91 )   (41 )

Deferred tax assets net of deferred tax liabilities

  $ 2,993   $ 3,884  

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

Tax Matters Agreement and Other Income Tax Matters

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

Note 7: Balance Sheet Details

        Balance sheet details were as follows:

Accounts Receivable

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

Accounts receivable

  $ 7,814   $ 8,647  

Allowance for doubtful accounts

    (107 )   (109 )

  $ 7,707   $ 8,538  

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Notes to Condensed Consolidated and Combined Financial Statements (Continued)

(Unaudited)

Note 7: Balance Sheet Details (Continued)

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

 
  Six months ended
April 30, 2016
 
 
  In millions
 

Balance at beginning of year

  $ 109  

Provision for doubtful accounts

    32  

Deductions, net of recoveries

    (34 )

Balance at end of period

  $ 107  

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

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

 
  Six months ended
April 30, 2016
 
 
  In millions
 

Balance at beginning of period(1)

  $ 68  

Trade receivables sold

    1,331  

Cash receipts

    (1,340 )

Foreign currency and other

    (1 )

Balance at end of period(1)

  $ 58  

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

Inventory

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

Finished goods

  $ 1,338   $ 1,518  

Purchased parts and fabricated assemblies

    761     680  

  $ 2,099   $ 2,198  

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Notes to Condensed Consolidated and Combined Financial Statements (Continued)

(Unaudited)

Note 7: Balance Sheet Details (Continued)

Property, Plant and Equipment

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

Land

  $ 492   $ 514  

Buildings and leasehold improvements

    6,830     6,924  

Machinery and equipment, including equipment held for lease

    14,406     13,986  

    21,728     21,424  

Accumulated depreciation

    (12,054 )   (11,538 )

  $ 9,674   $ 9,886  

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

Note 8: Financing Receivables and Operating Leases

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

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

Minimum lease payments receivable

  $ 7,194   $ 6,941  

Unguaranteed residual value

    229     217  

Unearned income

    (554 )   (503 )

Financing receivables, gross

    6,869     6,655  

Allowance for doubtful accounts

    (83 )   (95 )

Financing receivables, net

    6,786     6,560  

Less: current portion(1)

    (3,017 )   (2,918 )

Amounts due after one year, net(1)

  $ 3,769   $ 3,642  

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

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Notes to Condensed Consolidated and Combined Financial Statements (Continued)

(Unaudited)

Note 8: Financing Receivables and Operating Leases (Continued)

    Credit Quality Indicators

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

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

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

Risk Rating:

             

Low

  $ 3,478   $ 3,467  

Moderate

    3,312     3,115  

High

    79     73  

Total

  $ 6,869   $ 6,655  

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

    Allowance for Doubtful Accounts

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

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Notes to Condensed Consolidated and Combined Financial Statements (Continued)

(Unaudited)

Note 8: Financing Receivables and Operating Leases (Continued)

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

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

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

Balance at beginning of period

  $ 95   $ 111  

Provision for doubtful accounts

    (6 )   25  

Write-offs

    (6 )   (41 )

Balance at end of period

  $ 83   $ 95  

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

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

Gross financing receivables collectively evaluated for loss

  $ 6,546   $ 6,399  

Gross financing receivables individually evaluated for loss

    323     256  

Total

  $ 6,869   $ 6,655  

Allowance for financing receivables collectively evaluated for loss

  $ 70   $ 82  

Allowance for financing receivables individually evaluated for loss

    13     13  

Total

  $ 83   $ 95  

    Non-Accrual and Past-Due Financing Receivables

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

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Notes to Condensed Consolidated and Combined Financial Statements (Continued)

(Unaudited)

Note 8: Financing Receivables and Operating Leases (Continued)

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

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

Billed(1):

             

Current 1-30 days

  $ 334   $ 358  

Past due 31-60 days

    29     52  

Past due 61-90 days

    22     14  

Past due > 90 days

    59     57  

Unbilled sales-type and direct-financing lease receivables

    6,425     6,174  

Total gross financing receivables

  $ 6,869   $ 6,655  

Gross financing receivables on non-accrual status(2)

  $ 187   $ 154  

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

  $ 136   $ 102  

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

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

    Operating Leases

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

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

Equipment leased to customers

  $ 5,278   $ 4,428  

Accumulated depreciation

    (2,072 )   (1,513 )

  $ 3,206   $ 2,915  

Note 9: Acquisitions and Divestitures

    Acquisitions

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

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Notes to Condensed Consolidated and Combined Financial Statements (Continued)

(Unaudited)

Note 9: Acquisitions and Divestitures (Continued)

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

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

    Divestitures

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

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

    Assets and Liabilities Held for Sale

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

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

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Notes to Condensed Consolidated and Combined Financial Statements (Continued)

(Unaudited)

Note 9: Acquisitions and Divestitures (Continued)

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

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

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

 
  As of
April 30, 2016
 

Cash and cash equivalents

  $ 37  

Accounts receivable

    440  

Inventory

    200  

Other current assets

    59  

Goodwill

    3,022  

Other assets

    319  

Total assets held for sale

  $ 4,077  

Accounts payable

  $ 129  

Deferred revenue

    223  

Other current liabilities

    258  

Other liabilities

    117  

Total liabilities held for sale

  $ 727  

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Table of Contents


HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES

Notes to Condensed Consolidated and Combined Financial Statements (Continued)

(Unaudited)

Note 10: Goodwill and Intangible Assets

    Goodwill

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

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

Balance at October 31, 2015(1)

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

Goodwill acquired during the period

            10         10  

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

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

Changes due to foreign currency

    (29 )   (2 )           (31 )

Goodwill adjustments(4)

    260                 260  

Balance at April 30, 2016(1)

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

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

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

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

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

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

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Table of Contents


HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES

Notes to Condensed Consolidated and Combined Financial Statements (Continued)

(Unaudited)

Note 10: Goodwill and Intangible Assets (Continued)

    Intangible Assets

        The Company's intangible assets are composed of:

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

Customer contracts, customer lists and distribution agreements

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

Developed and core technology and patents

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

Trade name and trademarks

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

In-process research and development

    24             24     159             159  

Total intangible assets

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