EX-99.1 3 d944600dex991.htm EX-99.1 EX-99.1
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Exhibit 99.1

LOGO

                    , 2015

Dear Hewlett-Packard Company Stockholder:

In October 2014, Hewlett-Packard Company (“HP Co.”) announced plans to separate into two independent, industry-leading companies.

The first, Hewlett Packard Enterprise Company (“Hewlett Packard Enterprise”), will provide the cutting-edge technology solutions customers need to optimize their traditional IT while helping them build the secure, cloud-enabled, mobile-ready future that is uniquely suited to their needs. Specifically, this company will include our best-in-class portfolio and innovation capability across our Enterprise Group, Enterprise Services, Software and Financial Services businesses.

The second, HP Inc., will own and operate our printing and personal systems businesses, which currently hold the number one position in printing, the number one position in the profitable commercial personal systems segment, and the number two position in the consumer personal systems segment (each by units shipped). HP Inc. will have an impressive portfolio and a strong innovation pipeline across areas such as multi-function printing, Ink in the Office, graphics, notebooks, mobile and desktop workstations, tablets and phablets.

Each of these companies will have strong financial foundations, compelling innovation roadmaps, sharpened strategic focus and experienced leadership teams. The separation is intended to, among other things, simplify the organizational structure of each company, facilitating faster decisionmaking. As independent companies, each of Hewlett Packard Enterprise and HP Inc. will be able to focus its capital deployment and investment strategies and implement an appropriate capital structure to meet the needs of its business.

The separation will occur by means of a pro rata distribution to HP Co. stockholders of 100% of the outstanding shares of Hewlett Packard Enterprise. In connection with the separation, HP Co. will be renamed HP Inc. Consequently, the separation will provide HP Co. stockholders with ownership interests in both HP Inc. and Hewlett Packard Enterprise.

Each HP Co. stockholder will receive one share of Hewlett Packard Enterprise common stock for every one share of HP Co. common stock held on October 21, 2015, the record date for the distribution. The distribution is expected to occur on November 1, 2015. It is intended that, for U.S. federal income tax purposes, the distribution generally will be tax-free to HP Co. stockholders.

You do not need to take any action to receive shares of Hewlett Packard Enterprise common stock to which you are entitled as an HP Co. stockholder. You do not need to pay any consideration or surrender or exchange your HP Co. common shares to participate in the spin-off.

I encourage you to read the attached information statement, which is being provided to all HP Co. stockholders who held shares on the record date for the distribution. The information statement describes the separation in detail and contains important business and financial information about Hewlett Packard Enterprise.

I believe the separation will create two compelling companies well positioned to win in the marketplace and to drive value for our stockholders. We remain committed to working on your behalf to continue to build long-term stockholder value.

Sincerely,

Margaret C. Whitman

Chairman of Board, President and Chief

Executive Officer

Hewlett-Packard Company


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LOGO

                    , 2015

Dear Future Hewlett Packard Enterprise Company Stockholder:

I am pleased to welcome you as a future stockholder of Hewlett Packard Enterprise Company (“Hewlett Packard Enterprise”). Our new company will provide the cutting-edge technology solutions customers need to optimize their traditional IT while helping them build the secure, cloud-enabled, mobile-ready future that is uniquely suited to their needs.

Over the past few years, we have strengthened the fundamentals of our business, streamlined our operations and intensified our focus on the customer. We have reignited innovation and will continue to introduce offerings designed to solve technology’s biggest challenges and shape the future of computing. As a result, we believe Hewlett Packard Enterprise is well positioned to drive growth and deliver long-term stockholder value.

Hewlett Packard Enterprise has applied to list its common stock on the New York Stock Exchange under the symbol “HPE.” I encourage you to learn more about Hewlett Packard Enterprise and our strategic initiatives by reading the attached information statement.

Sincerely,

 

Margaret C. Whitman

President and Chief Executive Officer

Hewlett Packard Enterprise Company


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Information contained herein is preliminary and subject to completion or amendment. A Registration Statement on Form 10 relating to these securities has been filed with the U.S. Securities and Exchange Commission under the U.S. Securities Exchange Act of 1934, as amended.

 

PRELIMINARY AND SUBJECT TO COMPLETION, DATED OCTOBER 6, 2015

INFORMATION STATEMENT

Hewlett Packard Enterprise Company

 

 

This information statement is being furnished to the stockholders of Hewlett-Packard Company (“HP Co.”) in connection with the distribution by HP Co. to its stockholders of all of the outstanding shares of common stock of Hewlett Packard Enterprise Company, a wholly owned subsidiary of HP Co. that will hold, directly or indirectly, the assets and liabilities associated with HP Co.’s enterprise technology infrastructure, software, services and financing businesses (“Hewlett Packard Enterprise”). To implement the distribution, HP Co. will distribute all of the shares of Hewlett Packard Enterprise common stock on a pro rata basis to HP Co. stockholders in a distribution that is intended to be tax-free to HP Co. stockholders for U.S. federal income tax purposes.

For every one share of HP Co. common stock held of record by you as of the close of business on October 21, 2015, the record date for the distribution, you will receive one share of Hewlett Packard Enterprise common stock. You will receive cash in lieu of any fractional shares of Hewlett Packard Enterprise common stock that you would otherwise have received after application of the above distribution ratio. As discussed herein under “The Separation and Distribution—Trading Between the Record Date and Distribution Date,” if you sell your HP Co. common shares “regular-way” after the record date and before the distribution, you will also be selling your right to receive shares of Hewlett Packard Enterprise common stock in connection with the separation. We expect that shares of Hewlett Packard Enterprise common stock will be distributed by HP Co. to you on November 1, 2015. We refer to the date on which HP Co. commences distribution of the Hewlett Packard Enterprise common stock to the holders of HP Co. common shares as the “distribution date.”

No vote of HP Co. stockholders is required for the distribution. Therefore, you are not being asked for a proxy, and you are requested not to send HP Co. a proxy, in connection with the distribution. You do not need to pay any consideration, exchange or surrender your existing HP Co. shares or take any other action to receive your shares of Hewlett Packard Enterprise common stock.

There is currently no trading market for Hewlett Packard Enterprise common stock, although we expect that a limited market, commonly known as a “when-issued” trading market, will develop on or shortly before the record date for the distribution. We expect “regular-way” trading of Hewlett Packard Enterprise common stock to begin on the first trading day following the distribution. Hewlett Packard Enterprise has applied to have its common stock authorized for listing on the New York Stock Exchange (the “NYSE”) under the symbol “HPE.” Shortly prior to the distribution, HP Co. will be renamed HP Inc. Following the distribution, HP Inc. will continue to trade on the NYSE under the symbol “HPQ.” We refer in this information statement to HP Co. following the separation as “HP Inc.”

 

 

In reviewing this information statement, you should carefully consider the matters described under the caption “Risk Factors” beginning on page 12.

Neither the U.S. Securities and Exchange Commission nor any state securities commission has approved or disapproved these securities or determined if this information statement is truthful or complete. Any representation to the contrary is a criminal offense.

This information statement does not constitute an offer to sell or the solicitation of an offer to buy any securities.

The date of this information statement is                     , 2015.

This information statement was first made available to HP Co. stockholders on or about                     , 2015.


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TABLE OF CONTENTS

 

     Page  

QUESTIONS AND ANSWERS ABOUT THE SEPARATION AND DISTRIBUTION

     iii   

INFORMATION STATEMENT SUMMARY

     1   

SUMMARY HISTORICAL AND UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION

     11   

RISK FACTORS

     12   

CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS

     38   

DIVIDEND POLICY

     39   

CAPITALIZATION

     40   

UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS

     41   

SELECTED HISTORICAL COMBINED FINANCIAL DATA

     51   

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     52   

BUSINESS

     88   

MANAGEMENT

     101   

DIRECTOR COMPENSATION

     116   

EXECUTIVE COMPENSATION

     117   

TREATMENT OF HP CO. EQUITY-BASED AWARDS AT THE TIME OF SEPARATION

     154   

HEWLETT PACKARD ENTERPRISE COMPANY 2015 STOCK INCENTIVE PLAN

     156   

HEWLETT PACKARD ENTERPRISE COMPANY SEVERANCE AND LONG-TERM INCENTIVE CHANGE IN CONTROL PLAN FOR EXECUTIVE OFFICERS

     161   

CERTAIN RELATIONSHIPS AND RELATED PERSON TRANSACTIONS

     163   

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     173   

THE SEPARATION AND DISTRIBUTION

     175   

MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES

     181   

DESCRIPTION OF MATERIAL INDEBTEDNESS

     185   

DESCRIPTION OF HEWLETT PACKARD ENTERPRISE’S CAPITAL STOCK

     188   

WHERE YOU CAN FIND MORE INFORMATION

     192   

INDEX TO FINANCIAL STATEMENTS

     F-1   

Presentation of Information

Except as otherwise indicated or unless the context otherwise requires, the information included in this information statement about Hewlett Packard Enterprise assumes the completion of all of the transactions referred to in this information statement in connection with the separation and distribution. Unless the context otherwise requires, references in this information statement to “Hewlett Packard Enterprise,” “we,” “us,” “our,” “our company” and “the company” refer to Hewlett Packard Enterprise Company, a Delaware corporation, and its consolidated subsidiaries. References to Hewlett Packard Enterprise’s historical business and operations refer to the business and operations of HP Co.’s enterprise technology infrastructure, software, services and financing businesses that will be transferred to Hewlett Packard Enterprise in connection with the separation and distribution. Unless the context otherwise requires, references in this information statement to “HP Co.” refer to Hewlett-Packard Company, a Delaware corporation, and its consolidated subsidiaries, which will be renamed HP Inc. shortly prior to the distribution. We refer in this information statement to HP Co. following the separation as “HP Inc.” Unless the context otherwise requires, references in this information statement to the “separation” refer to the separation of HP Co.’s enterprise technology infrastructure, software, services and financing businesses from HP Co.’s other businesses and the creation, as a result of the distribution, of an independent, publicly traded company, Hewlett Packard Enterprise, that holds the assets and liabilities associated with such businesses, as further described herein. Unless the context otherwise requires, references in this information statement to the “distribution” refer to the distribution by HP Co. to HP Co. stockholders as of the record date of 100% of the outstanding shares of Hewlett Packard Enterprise, as further described herein.

 

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Trademarks, Trade Names and Service Marks

Hewlett Packard Enterprise owns or has rights to use the trademarks, service marks and trade names that it uses in conjunction with the operation of its business. Some of the more important trademarks that Hewlett Packard Enterprise owns or has rights to use that appear in this information statement include “HEWLETT PACKARD” and “HEWLETT PACKARD ENTERPRISE,” each of which may be registered or trademarked in the United States and other jurisdictions around the world. Each trademark, trade name or service mark of any other company appearing in this information statement is, to our knowledge, owned by such other company.

 

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QUESTIONS AND ANSWERS ABOUT THE SEPARATION AND DISTRIBUTION

 

What is Hewlett Packard Enterprise Company and why is HP Co. separating Hewlett Packard Enterprise’s business and distributing Hewlett Packard Enterprise stock?

Hewlett Packard Enterprise, which is currently a wholly owned subsidiary of HP Co., was formed to hold HP Co.’s Enterprise Group, Enterprise Services, Software and Financial Services businesses. The separation of Hewlett Packard Enterprise from HP Co. and the distribution of Hewlett Packard Enterprise common stock are intended to, among other things, (i) create two sharper, stronger, more focused companies by enabling the management of each company to concentrate efforts on the unique needs of each business and the pursuit of distinct opportunities for long-term growth and profitability, (ii) simplify the organizational structure of each company, facilitating faster decisionmaking, (iii) allow each business to more effectively pursue its own distinct capital structures and capital allocation strategies and design more effective equity compensation structures and (iv) provide current HP Co. stockholders with equity investments in two separate, publicly traded companies. HP Co. and Hewlett Packard Enterprise expect that the separation will result in enhanced long-term performance of each business for the reasons discussed in the sections entitled “The Separation and Distribution—Background” and “The Separation and Distribution—Reasons for the Separation.”

 

Why am I receiving this document?

HP Co. is delivering this document to you because you are a holder of HP Co. common shares. If you are a holder of HP Co. common shares as of the close of business on October 21, 2015, the record date for the distribution, you will be entitled to receive one share of Hewlett Packard Enterprise common stock for every one share of HP Co. common stock that you held at the close of business on such date. This document will help you understand how the separation and distribution will affect your investment in HP Co. and your investment in Hewlett Packard Enterprise after the separation.

 

How will the separation of Hewlett Packard Enterprise from HP Co. work?

To accomplish the separation, HP Co. will distribute all of the outstanding shares of Hewlett Packard Enterprise common stock to HP Co. stockholders on a pro rata basis in a distribution intended to be tax-free to HP Co. stockholders for U.S. federal income tax purposes.

 

Why is the separation of Hewlett Packard Enterprise structured as a distribution?

HP Co. believes that a distribution of the shares of Hewlett Packard Enterprise common stock to HP Co. stockholders is an efficient way to separate its enterprise technology infrastructure, software, services and financing businesses in a manner that will create long-term value for HP Co. and its stockholders.

 

What is the record date for the distribution?

The record date for the distribution will be October 21, 2015.

 

When will the separation and the distribution occur?

It is expected that all of the shares of Hewlett Packard Enterprise common stock will be distributed by HP Co. on November 1, 2015 to holders of record of HP Co. common shares as of the record date for the distribution. The separation will become effective at the time of

 

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the distribution. However, no assurance can be provided as to the timing of the separation and the distribution or that all conditions to the distribution will be met.

 

What do stockholders need to do to participate in the distribution?

Stockholders of HP Co. as of the record date for the distribution will not be required to take any action to receive Hewlett Packard Enterprise common stock in the distribution, but you are urged to read this entire information statement carefully. No stockholder approval of the distribution is required. You are not being asked for a proxy. You do not need to pay any consideration, exchange or surrender your existing HP Co. common shares or take any other action to receive your shares of Hewlett Packard Enterprise common stock. Please do not send in your HP Co. stock certificates. The distribution will not affect the number of outstanding HP Co. shares or any rights of HP Co. stockholders, although it will affect the market value of each outstanding HP Co. common share. HP Co. will be renamed HP Inc. shortly prior to the distribution.

 

How will shares of Hewlett Packard Enterprise common stock be issued?

You will receive shares of Hewlett Packard Enterprise common stock through the same channels that you currently use to hold or trade HP Co. common shares, whether through a brokerage account, 401(k) plan or other channel. Receipt of shares of Hewlett Packard Enterprise common stock will be documented for you in the same manner that you typically receive stockholder updates, such as monthly broker statements and 401(k) statements.

 

  If you own HP Co. common shares as of the close of business on the record date for the distribution, including shares owned in certificate form or through the HP Co. dividend reinvestment plan, HP Co., with the assistance of Wells Fargo Shareowner Services, the settlement and distribution agent, will electronically distribute shares of Hewlett Packard Enterprise common stock to you or to your brokerage firm on your behalf in book-entry form. Wells Fargo will mail you a book-entry account statement that reflects your shares of Hewlett Packard Enterprise common stock, or your bank or brokerage firm will credit your account for the shares.

 

How many shares of Hewlett Packard Enterprise common stock will I receive in the distribution?

HP Co. will distribute to you one share of Hewlett Packard Enterprise common stock for every one share of HP Co. common stock held by you as of the record date for the distribution. Based on the number of HP Co. common shares outstanding as of September 30, 2015, a total of approximately 1.878 billion shares of Hewlett Packard Enterprise common stock are expected to be distributed. For additional information on the distribution, see “The Separation and Distribution.”

 

Will Hewlett Packard Enterprise issue fractional shares of its common stock in the distribution?

No. Hewlett Packard Enterprise will not issue fractional shares of its common stock in the distribution. Fractional shares that HP Co. stockholders would otherwise have been entitled to receive will be aggregated and sold in the public market by the distribution agent. The aggregate net cash proceeds of these sales will be distributed pro rata (based on the fractional share such holder would otherwise have been entitled to receive) to those stockholders who would otherwise

 

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have been entitled to receive fractional shares. Recipients of cash in lieu of fractional shares will not be entitled to any interest on the amounts of payments made in lieu of fractional shares. The receipt of cash in lieu of fractional shares generally will be taxable, for U.S. federal income tax purposes, to the recipient HP Co. stockholders. See “Material U.S. Federal Income Tax Consequences.”

 

What are the conditions to the distribution?

The distribution is subject to final approval by the board of directors of HP Co., as well as to a number of conditions, including, among others:

 

    the transfer of assets and liabilities to Hewlett Packard Enterprise in accordance with the separation and distribution agreement will have been completed, other than assets and liabilities intended to be transferred after the distribution;

 

    HP Co. will have received (i) a private letter ruling from the Internal Revenue Service (the “IRS”) and/or one or more opinions from its external tax advisors, in each case, satisfactory to HP Co.’s board of directors, regarding certain U.S. federal income tax matters relating to the separation and related transactions and (ii) an opinion of each of Wachtell, Lipton, Rosen & Katz and Skadden, Arps, Slate, Meagher & Flom LLP, satisfactory to HP Co.’s board of directors, regarding the qualification of the distribution, together with certain related transactions, as a transaction that is generally tax-free for U.S. federal income tax purposes under Sections 355 and 368(a)(1)(D) of the U.S. Internal Revenue Code of 1986, as amended (the “Code”);

 

    the U.S. Securities and Exchange Commission (the “SEC”) will have declared effective the registration statement of which this information statement forms a part, no stop order suspending the effectiveness of the registration statement will be in effect, no proceedings for such purpose will be pending before or threatened by the SEC and this information statement will have been made available to HP Co. stockholders;

 

    no order, injunction or decree issued by any court of competent jurisdiction or other legal restraint or prohibition preventing the consummation of the separation, the distribution or any of the related transactions will be in effect;

 

    the shares of Hewlett Packard Enterprise common stock to be distributed will have been approved for listing on the NYSE, subject to official notice of issuance;

 

    the receipt of an opinion from an independent appraisal firm confirming the solvency and financial viability of HP Co. before the distribution and each of Hewlett Packard Enterprise and HP Inc. after the distribution that is in form and substance acceptable to HP Co. in its sole discretion; and

 

    no other event or development will have occurred or exist that, in the judgment of HP Co.’s board of directors, in its sole discretion, makes it inadvisable to effect the separation, the distribution or the other related transactions.

 

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  Hewlett Packard Enterprise cannot assure you that any or all of these conditions will be met. For a complete discussion of all of the conditions to the distribution, see “The Separation and Distribution—Conditions to the Distribution.”

 

Can HP Co. decide to cancel the distribution of Hewlett Packard Enterprise common stock even if all the conditions have been met?

Yes. Until the distribution has occurred, HP Co. has the right to terminate the distribution, even if all of the conditions are satisfied. See “Certain Relationships and Related Person Transactions—The Separation and Distribution Agreement—Termination.”

 

What if I want to sell my HP Co. common stock or my Hewlett Packard Enterprise common stock?

You should consult with your financial advisors, such as your stockbroker, bank or tax advisor.

 

What is “regular-way” and “ex-distribution” trading of HP Co. stock?

Beginning on or shortly before the record date for the distribution and continuing up to the distribution date, it is expected that there will be two markets in HP Co. common shares: a “regular-way” market and an “ex-distribution” market. HP Co. common shares that trade in the “regular-way” market will trade with an entitlement to shares of Hewlett Packard Enterprise common stock to be distributed pursuant to the distribution. Shares that trade in the “ex-distribution” market will trade without an entitlement to shares of Hewlett Packard Enterprise common stock to be distributed pursuant to the distribution.

 

  If you decide to sell any HP Co. common shares before the distribution date, you should make sure your stockbroker, bank or other nominee understands whether you want to sell your HP Co. common shares with or without the entitlement to Hewlett Packard Enterprise common stock pursuant to the distribution.

 

Where will I be able to trade shares of Hewlett Packard Enterprise common stock?

Hewlett Packard Enterprise has applied to list its common stock on the NYSE under the symbol “HPE.” Hewlett Packard Enterprise anticipates that trading in shares of its common stock will begin on a “when-issued” basis on or shortly before the record date for the distribution and will continue up to the distribution date, and that “regular-way” trading in Hewlett Packard Enterprise common stock will begin on the first trading day following the distribution. If trading begins on a “when-issued” basis, you may purchase or sell Hewlett Packard Enterprise common stock up to the distribution date, but your transaction will not settle until after the distribution date. Hewlett Packard Enterprise cannot predict the trading prices for its common stock before, on or after the distribution date.

 

What will happen to the listing of HP Co. common shares?

HP Co. common stock will continue to trade on the NYSE after the distribution under the symbol “HPQ.”

 

Will the number of HP Co. common shares that I own change as a result of the distribution?

No. The number of HP Co. common shares that you own will not change as a result of the distribution.

 

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Will the distribution affect the market price of my HP Co. shares?

Yes. As a result of the distribution, it is expected that the trading price of HP Co. common shares immediately following the distribution will be lower than the “regular-way” trading price of such shares immediately prior to the distribution because the trading price will no longer reflect the value of the enterprise technology infrastructure, software, services and financing businesses to be held by Hewlett Packard Enterprise. The combined trading prices of one HP Inc. common share and one share of Hewlett Packard Enterprise common stock after the distribution (representing the number of shares of Hewlett Packard Enterprise common stock to be received per every one share of HP Co. common stock in the distribution) may be equal to, greater than or less than the trading price of one HP Co. common share before the distribution.

 

What are the material U.S. federal income tax consequences of the distribution?

It is a condition to the distribution that HP Co. receive (i) a private letter ruling from the IRS and/or one or more opinions from its external tax advisors, in each case, satisfactory to HP Co.’s board of directors, regarding certain U.S. federal income tax matters relating to the separation and related transactions, and (ii) an opinion of each of Wachtell, Lipton, Rosen & Katz and Skadden, Arps, Slate, Meagher & Flom LLP, satisfactory to HP Co.’s board of directors, regarding the qualification of the distribution, together with certain related transactions, as transactions that are generally tax-free, for U.S. federal income tax purposes, under Sections 355 and 368(a)(1)(D) of the Code. Assuming that the distribution, together with certain related transactions, so qualifies, for U.S. federal income tax purposes, no gain or loss will be recognized by you, and no amount will be included in your income, upon the receipt of shares of Hewlett Packard Enterprise common stock pursuant to the distribution. You will, however, recognize gain or loss for U.S. federal income tax purposes with respect to cash received in lieu of a fractional share of Hewlett Packard Enterprise common stock.

 

  You should consult your own tax advisor as to the particular consequences of the distribution to you, including the applicability and effect of any U.S. federal, state and local tax laws, as well as any foreign tax laws. For more information regarding the material U.S. federal income tax consequences of the distribution, see the section entitled “Material U.S. Federal Income Tax Consequences.”

 

What will Hewlett Packard Enterprise’s relationship be with HP Inc. following the separation?

Hewlett Packard Enterprise will enter into a separation and distribution agreement with HP Co. to effect the separation and provide a framework for Hewlett Packard Enterprise’s relationship with HP Inc. after the separation. Hewlett Packard Enterprise and HP Inc. will also enter into certain other agreements, including among others a tax matters agreement, an employee matters agreement, a transition services agreement, a real estate matters agreement, a commercial agreement and an IT service agreement. These agreements will provide for the allocation between Hewlett Packard Enterprise and HP Inc. of HP Co.’s assets, employees, liabilities and obligations (including its investments, property and employee benefits and tax-related assets and liabilities) attributable to periods

 

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prior to, at and after the separation and will govern certain relationships between Hewlett Packard Enterprise and HP Inc. after the separation. For additional information regarding the separation and distribution agreement and other transaction agreements, see the sections entitled “Risk Factors—Risks Related to the Separation” and “Certain Relationships and Related Person Transactions.”

 

Who will manage Hewlett Packard Enterprise after the separation?

Hewlett Packard Enterprise benefits from having in place a management team with an extensive background in the enterprise technology infrastructure, software, services and financing businesses. Led by Margaret C. Whitman, who will be Hewlett Packard Enterprise’s president and chief executive officer after the separation, Hewlett Packard Enterprise’s management team possesses deep knowledge of, and extensive experience in, its industry. Hewlett Packard Enterprise’s management team includes Martin Fink, Henry Gomez, John Hinshaw, Christopher P. Hsu, Kirt P. Karros, Alan May, Michael G. Nefkens, Antonio Neri, Jeff T. Ricci, John F. Schultz, Timothy C. Stonesifer and Robert Youngjohns, each of whom has held senior positions of responsibility at HP Co. For more information regarding Hewlett Packard Enterprise’s management, see “Management.”

 

Are there risks associated with owning Hewlett Packard Enterprise common stock?

Yes. Ownership of Hewlett Packard Enterprise common stock will be subject to both general and specific risks, including those relating to Hewlett Packard Enterprise’s business, the industry in which it operates, its separation from HP Co. and ongoing contractual relationships with HP Inc. and its status as a separate, publicly traded company. These risks are described in the “Risk Factors” section of this information statement. You are encouraged to read that section carefully.

 

Does Hewlett Packard Enterprise plan to pay dividends?

Yes. Following the separation, Hewlett Packard Enterprise and HP Inc. are each expected to maintain a dividend that, together, will be similar to that of HP Co. prior to the separation. We expect that HP Inc. will maintain a higher dividend than Hewlett Packard Enterprise initially. We currently expect Hewlett Packard Enterprise to return at least 50% of free cash flow in fiscal year 2016 to stockholders through approximately $400 million in dividends and the remainder in share repurchases. Dividend yields will be dependent on the trading price of the respective companies’ common stock following the separation. We cannot guarantee that we will pay dividends in the future. See “Dividend Policy.”

 

Will Hewlett Packard Enterprise incur any indebtedness prior to or at the time of the distribution?

Yes. In connection with our separation capitalization plan, which is intended to result in each of HP Inc. and Hewlett Packard Enterprise obtaining investment grade credit ratings, we expect to incur additional borrowings to redistribute debt between us and HP Co., such that we have total debt of approximately $16 billion immediately following the separation. See “Description of Material Indebtedness” and “Risk Factors—Risks Related to Our Business.”

 

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Who will be the distribution agent, transfer agent, registrar and information agent for the Hewlett Packard Enterprise common stock?

The distribution agent, transfer agent and registrar for Hewlett Packard Enterprise common stock will be Wells Fargo Shareowner Services. For questions relating to the transfer or mechanics of the stock distribution, you should contact:

 

  Wells Fargo Bank, N.A.

 

  Shareowner Services

 

  1110 Centre Pointe Curve, Suite 101

 

  Mendota Heights, MN 55120-4100

 

  1 (800) 286-5977 (U.S. and Canada)

 

  1 (651) 453-2122 (International)

 

Where can I find more information about HP Co. and Hewlett Packard Enterprise?

Before the distribution, if you have any questions relating to HP Co.’s business performance, you should contact:                                                                                                                                                    

 

  Hewlett-Packard Company

3000 Hanover Street

Palo Alto, CA 94304

 

  Telephone: (800) 286-5977 or (650) 857-1501

 

  Email: investor.relations@hp.com

 

  After the distribution, Hewlett Packard Enterprise stockholders who have any questions relating to Hewlett Packard Enterprise’s business performance should contact Hewlett Packard Enterprise at:

 

  Hewlett Packard Enterprise Company

3000 Hanover Street

Palo Alto, CA 94304

 

  Telephone: (800) 286-5977 or (650) 857-1501

 

  Email: investor.relations@hpe.com

 

  Hewlett Packard Enterprise’s investor website is www.hpe.com/investor/home.

 

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INFORMATION STATEMENT SUMMARY

The following is a summary of certain material information discussed in this information statement. This summary may not contain all of the details concerning the separation or other information that may be important to you. To better understand the separation and Hewlett Packard Enterprise’s business and financial position, you should carefully review this entire information statement.

This information statement describes the enterprise technology infrastructure, software, services and financing businesses to be transferred to Hewlett Packard Enterprise by HP Co. in the separation as if the transferred businesses were Hewlett Packard Enterprise’s businesses for all historical periods described. References in this information statement to Hewlett Packard Enterprise’s historical assets, liabilities, products, businesses or activities are generally intended to refer to the assets, liabilities, products, businesses or activities of the enterprise technology infrastructure, software, services and financing businesses of HP Co. and its subsidiaries prior to the distribution.

Our Company

Hewlett Packard Enterprise 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 legacy dates back to a partnership founded in 1939 by William R. Hewlett and David Packard, and we strive every day to uphold and enhance that legacy through our dedication to providing innovative technological solutions to our customers. In fiscal year 2014, we generated net income of $1.6 billion from revenues of $55 billion.

We believe that we offer the most comprehensive portfolio of enterprise solutions in the IT industry. With an industry-leading position in servers, storage, wired and wireless networking, converged systems, software and services, combined with our customized financing solutions, we believe we are best equipped to deliver the right IT solutions to help drive optimal business outcomes for our customers.

We organize our business into the following five segments:

 

    Enterprise Group. Our Enterprise Group (“EG”) provides our customers with the cutting-edge technology infrastructure they need to optimize traditional IT while building a secure, cloud-enabled and mobile-ready future.

 

    Software. Our Software allows our customers to automate IT operations to simplify, accelerate and secure business processes, and drives the analytics that turn raw data into actionable knowledge.

 

    Enterprise Services. Our Enterprise Services (“ES”) brings all of our solutions together through our consulting and support professionals to help deliver superior, comprehensive results for our customers.

 

    Hewlett Packard Financial Services. Hewlett Packard Financial Services (“Financial Services” or “FS”) enables flexible IT consumption models, financial architectures and customized investment solutions for our customers.

 

    Corporate Investments. Corporate Investments includes Hewlett Packard Enterprise Labs and certain business incubation projects, among others.

 



 

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LOGO

Our Strengths

We believe that we possess a number of competitive advantages that distinguish us from our competitors, including:

Broad and deep end-to-end solutions portfolio. We combine our infrastructure, software and services capabilities to provide what we believe is the broadest and deepest portfolio of end-to-end enterprise solutions in the IT industry. Our ability to deliver a wide range of high-quality products and high-value consulting and support services in a single package is one of our principal differentiators.

Multiyear innovation roadmap. We have been in the technology and innovation business for over 75 years. Our vast intellectual property portfolio and global research and development capabilities are part of a broader innovation roadmap designed to help organizations of all sizes journey from traditional technology platforms to the IT systems of the future—what we call the new style of IT—which we believe will be characterized by the increasing and interrelated prominence of cloud computing, big data, enterprise security, applications and mobility.

Global distribution and partner ecosystem. We are experts in delivering innovative technological solutions to our customers in complex multi-country, multi-vendor and/or multi-language environments. We have one of the largest go-to-market capabilities in our industry, including a large ecosystem of channel partners, which enables us to market and deliver our product offerings to customers located virtually anywhere in the world.

Custom financial solutions. We have developed innovative financing solutions to facilitate the delivery of our products and services to our customers. We deliver flexible investment solutions and expertise that help customers and other partners create unique technology deployments based on specific business needs.

 



 

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Experienced leadership team with track record of successful performance. Our management team has an extensive track record of performance and execution. We are led by our Chief Executive Officer Margaret C. Whitman, who has proven experience in developing transformative business models, building global brands and driving sustained growth and expansion in the technology industry, including from her leadership of HP Co. for four years prior to the separation and her prior ten years as Chief Executive Officer of eBay Inc. Our senior management team has over 100 collective years of experience in our industry and possesses extensive knowledge of and experience in the enterprise IT business and the markets in which we compete. Moreover, we have a deep bench of management and technology talent that we believe provides us with an unparalleled pipeline of future leaders and innovators.

 

LOGO

Our Strategies

Disruptive change is all around us, and we are living in an idea economy where the ability to turn an idea into a new product or a new industry is more accessible than ever. This environment requires a new style of business, underpinned by a new style of IT. Cloud, mobile, big data and analytics provide the tools enterprises need to significantly reduce the time to market for any good idea. Hewlett Packard Enterprise’s strategy is to enable customers to win in the idea economy by slashing the time it takes to turn an idea into value.

We make IT environments more efficient, more productive and more secure, enabling fast, flexible responses to a rapidly changing competitive landscape. We enable organizations to act quickly on ideas by creating, consuming and reconfiguring new solutions, experiences and business models, and deliver infrastructure that is built from components that can be composed and recomposed easily and quickly to meet the shifting demands of business applications.

Every IT journey is unique, but every customer is looking to minimize the time between initial idea and realized value. While some customers are looking for solutions that let them take the next step on this journey, the majority of customers are at the beginning of this journey and are looking for solutions that can help them take their first steps. Hewlett Packard Enterprise will leverage our leadership position in our traditional markets to lead the transition to this new style of business.

 



 

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Specifically, we are focused on delivering solutions to help customers transform four critical areas that matter most to their business.

Transform to a hybrid infrastructure. Infrastructure matters more than ever today, but customers need a new kind of infrastructure. We help customers build an on-demand infrastructure and operational foundation for all of the applications that power the enterprise. With our cloud expertise, combined with our portfolio of traditional IT infrastructure and services, we are able to provide customized and seamless IT solutions for customers of all sizes and at all levels of technological sophistication. We are able to optimize our customers’ applications regardless of form—traditional, mobile, in the cloud or in the data center.

Protect the digital enterprise. The threat landscape is wider and more diverse today than ever before. We offer complete risk management solutions, ranging from protection against security threats to data back-up and recovery, that help our customers protect themselves and their data in an increasingly volatile cybersecurity landscape. Our products and services are informed by our decades of IT security experience and enable customers to predict and disrupt threats, manage risk and compliance, and extend their internal security team.

Empower the data-driven organization. We provide open-source solutions that allow customers to use 100% of their data, including business data, human data and machine data, to generate real-time, actionable insights. The result is better and faster decisionmaking.

Enable workplace productivity. We help customers deliver rich digital and mobile experiences to their customers, employees and partners. We offer an end-to-end mobility portfolio, from cloud infrastructure to customer-facing applications. Our infrastructure offerings leverage our cloud and security expertise to provide the backbone for secure mobile networks. Our integrated software offerings leverage our application expertise to provide intuitive interfaces for end-users. We also leverage our big data expertise to enable our customers to gain insight into the mobile user experience by monitoring and analyzing customer experience analytics.

 

LOGO

 



 

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The Separation and Distribution

On October 6, 2014, HP Co. announced that it intended to separate into two new publicly traded companies: one comprising HP Co.’s industry-leading enterprise technology infrastructure, software, services and financing businesses, which will do business as Hewlett Packard Enterprise, and one that will comprise HP Co.’s industry-leading personal systems and printing businesses, which will do business as HP Inc. and retain HP Co.’s current logo.

The allocation of HP Co.’s business segments between Hewlett Packard Enterprise and HP Inc. was determined based on a variety of factors, including the nature of the markets in which each business segment competes, the customers it serves and the extent to which the businesses allocated to each company complement each other. For example, enterprise customers such as large businesses or governments operate at large scales and often have specific organizational needs, such as with respect to enterprise software. The product and service design, manufacturing and distribution channels needed to serve such customers in the enterprise IT market are substantially different from the design, manufacturing and distribution channels needed to serve retail and business customers in the personal computing and printing markets. The research and development associated with serving such markets also varies.

The process of completing the separation has been and is expected to continue to be time-consuming and involves significant costs and expenses. For example, during the nine months ended July 31, 2015, we recorded nonrecurring separation costs of $458 million, which were primarily related to third-party consulting, contractor fees and other incremental costs directly associated with the separation process. As of July 31, 2015, we expect to incur future separation costs of up to $0.6 billion during the remainder of fiscal 2015 and in fiscal 2016. In addition, we expect to make foreign tax payments of approximately $0.6 billion arising from the separation over this same time period, with subsequent tax credit amounts expected over later years. As of July 31, 2015, we expect future cash payments of up to $0.9 billion in connection with our separation costs and foreign tax payments, which are expected to be paid in the remainder of fiscal 2015 and in fiscal 2016, with subsequent tax credit amounts expected over later years. As of July 31, 2015, we also expect separation-related capital expenditures of approximately $60 million in the remainder of fiscal 2015. Additionally, following the separation, each of HP Inc. and Hewlett Packard Enterprise must maintain certain overhead and other independent corporate functions and services appropriate for a diverse global company with various business units in many parts of the world. Due to the loss of economies of scale and the necessity of establishing such independent functions for each company, the separation of HP Co. into two independent companies is expected to result in total dis-synergies of approximately $400 million to $450 million annually, which costs are primarily associated with corporate functions such as finance, legal, IT, real estate and human resources. Based on the expected similar sizes of the resulting organizations and the need for each of HP Inc. and Hewlett Packard Enterprise to establish independent corporate functions, such dis-synergies are expected to be divided approximately equally between HP Inc. and Hewlett Packard Enterprise.

Due to the scale and variety of HP Co.’s businesses and its global footprint (among other factors), the separation process is extremely complex and requires effort and attention from employees throughout the HP Co. organization. For example, thousands of employees of businesses that will become part of Hewlett Packard Enterprise must be transitioned to new payroll and other benefit platforms, and legacy programs going back decades, such as pensions, must be divided among Hewlett Packard Enterprise and HP Inc. Outside the organization, HP Co. must notify and establish separation readiness among tens of thousands of customers, business partners and suppliers so that business relationships all over the world may continue seamlessly following the completion of the separation. Administratively, the separation involves the establishment of new customer and supplier accounts, new bank accounts, legal reorganizations and contractual assignments in various jurisdictions throughout the world, and the creation and maintenance of separation management functions, led by the Separation Management Office, to plan and execute the separation process in a timely fashion. For more information on the risks involved in the separation process, see “Risk Factors—Risks Related to the Separation.”

 



 

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In connection with our separation capitalization plan, which is intended to result in each of HP Inc. and Hewlett Packard Enterprise obtaining investment grade credit ratings, we expect to incur additional borrowings to redistribute debt between us and HP Co., such that we have total debt of approximately $16 billion immediately following the separation. To accomplish this, we anticipate issuing senior notes prior to the distribution date. We intend to use all of the net proceeds from the senior notes offering for the payment of a distribution to HP Co. in connection with the separation. HP Co. has informed Hewlett Packard Enterprise that it intends to use the cash to be distributed by Hewlett Packard Enterprise to HP Co. to redeem or repurchase certain of HP Co.’s outstanding notes. A separate cash allocation by HP Co. in connection with the separation is expected to result in Hewlett Packard Enterprise having approximately $11.5 billion of cash on hand as of the distribution date. In addition, we anticipate entering into an unsecured revolving credit facility in an aggregate principal amount of up to $4 billion prior to the distribution date, as well as commercial paper programs. See “Description of Material Indebtedness” and “Risk Factors—Risks Related to Our Business.”

Hewlett Packard Enterprise’s Post-Separation Relationship with HP Inc.

Hewlett Packard Enterprise will enter into a separation and distribution agreement with HP Co., which is referred to in this information statement as the “separation agreement” or the “separation and distribution agreement.” The separation agreement will generally provide for the transfer to us of the assets and liabilities (including litigation) to the extent related to the businesses allocated to us, while HP Inc. will retain the assets and liabilities (including litigation) to the extent related to its businesses. Certain assets and liabilities that are related to general corporate matters of HP Co. generally will be divided 50/50 between the parties.

Following a strategic review and a determination by HP Co. that the marketing optimization business would be better suited to HP Inc.’s business following the separation, the marketing optimization business, which comprised approximately 0.4% and 5.9% of Hewlett Packard Enterprise’s total revenue and Software segment revenue, respectively, in fiscal 2014, will be transferred to HP Inc. in connection with the separation. In addition, two customer contracts serviced by our Enterprise Group segment, which collectively comprised approximately 0.2% of Hewlett Packard Enterprise’s total revenue in fiscal 2014, were determined to be better suited to HP Inc.’s business following the separation and will be transferred to HP Inc. in connection with the separation.

Under the separation agreement, each of HP Inc. and Hewlett Packard Enterprise will agree to indemnify the other and each of the other’s subsidiaries and each of their respective directors, officers and employees from and against all liabilities relating to, arising out of or resulting from liabilities allocated to it under the separation agreement or breaches by it of the separation agreement or any of the ancillary agreements, among other matters.

The separation agreement will also contain certain non-compete provisions pursuant to which each of HP Inc. and us will agree, for a period of three years following the separation, generally not to compete in the other company’s businesses. These non-compete provisions are intended to enable each company to more effectively pursue its businesses and succeed in its markets, and are subject to customary exceptions (e.g., for relatively minor acquisitions). The separation agreement will also contain non-solicitation provisions generally preventing each of HP Inc. and Hewlett Packard Enterprise from soliciting the other party’s employees for 12 months from the distribution date. Additionally, to allow each company to operate independently, the agreement will contain no-hire provisions generally preventing each party from hiring the other party’s employees for six months from the distribution date.

The separation agreement will also contain a number of arrangements allocating and governing the intellectual property rights and obligations of each of Hewlett Packard Enterprise and HP Inc., including a patent cross-license agreement, pursuant to which each party will license to the other party all of the patents controlled by such party at any time during the period beginning on the distribution date and ending on the third anniversary of the distribution date. Each license will be worldwide, royalty-free and perpetual for the life of the licensed patents. The licenses will be limited to products and services in the licensee’s general area of current and

 



 

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projected future business. Each party will fully release the other party, from and after the separation, for any possible prior patent infringement claim.

Hewlett Packard Enterprise will also enter into various other agreements with HP Co. to effect the separation and provide a framework for its relationship with HP Inc. after the separation, including among others a tax matters agreement, an employee matters agreement, a transition services agreement, a real estate matters agreement, a commercial agreement and an IT service agreement. These agreements, along with the separation agreement, will provide for the allocation between Hewlett Packard Enterprise and HP Inc. of HP Co.’s assets, employees, liabilities and obligations (including its investments, property and employee benefits and tax-related assets and liabilities) attributable to periods prior to, at and after Hewlett Packard Enterprise’s separation from HP Co. and will govern certain relationships between Hewlett Packard Enterprise and HP Inc. after the separation. The commercial agreement will establish a bilateral relationship between HP Inc. and us for the purchase and sale of commercially available products and services for internal use, incorporation and bundling in OEM products and services, resale to customers and use in the provision of managed services to customers, as well as joint customer pursuits and joint development activities. The IT service agreement will establish the terms by which one of our subsidiaries will provide HP Inc. with certain application development and maintenance and IT infrastructure services following the separation. Under the transition services agreement, HP Inc. and its subsidiaries and Hewlett Packard Enterprise and its subsidiaries will provide, on an interim, transitional basis, various services to each other, including, but not limited to, finance, human resources, information technology, marketing, real estate, sales support, supply chain, and tax services. These services will generally be provided for a period of up to 24 months. The charges for the majority of services will be determined on a cost-plus basis. Hewlett Packard Enterprise does not expect to face business challenges resulting from its post-separation relationship with HP Inc. where equivalent third-party products may be available because the transaction agreements are not expected to contain exclusive arrangements that would prevent Hewlett Packard Enterprise from acquiring third-party products following the completion of the separation. For additional information regarding the separation agreement and other transaction agreements, see the sections entitled “Risk Factors—Risks Related to the Separation” and “Certain Relationships and Related Person Transactions.”

Upon completion of the separation, certain current directors of HP Co. are expected to serve as directors of HP Inc., and other current directors of HP Co. are expected to serve as directors of Hewlett Packard Enterprise (in addition to new directors that are expected to join the board of each company in connection with the separation). Margaret C. Whitman, the current Chairman and Chief Executive Officer of HP Co., is expected to serve as the Chief Executive Officer and a member of the board of directors of Hewlett Packard Enterprise and as nonexecutive Chairman of the Board of HP Inc. upon completion of the separation. See “Management.”

Reasons for the Separation

The HP Co. board of directors believes that separating the enterprise technology infrastructure, software, services and financing businesses from the remainder of HP Co. is in the best interests of HP Co. and its stockholders for a number of reasons, including that:

 

    the separation will allow each company to focus on and more effectively pursue its own distinct operating priorities and strategies, and will enable the management of each company to concentrate efforts on the unique needs of each business and pursue distinct opportunities for long-term growth and profitability;

 

    the separation will permit each company to concentrate its financial resources solely on its own operations, providing greater flexibility to invest capital in its business in a time and manner appropriate for its distinct strategy and business needs and facilitating a more efficient allocation of capital;

 

   

the separation will create two companies with a simplified organizational structure and increased focus on the unique needs of its business, facilitating faster decisionmaking and flexibility, and improving the

 



 

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ability of each company to compete against a distinct set of competitors and enabling it to respond quickly to changing customer requirements and market dynamics;

 

    the separation will create an independent equity structure that will afford HP Inc. and Hewlett Packard Enterprise direct access to capital markets and facilitate the ability of each company to capitalize on its unique growth opportunities and effect future acquisitions utilizing its common stock;

 

    the separation will facilitate incentive compensation arrangements for employees more directly tied to the performance of the relevant company’s business, and may enhance employee hiring and retention by, among other things, improving the alignment of management and employee incentives with performance and growth objectives; and

 

    the separation will allow investors to separately value HP Inc. and Hewlett Packard Enterprise based on their unique investment identities, including the merits, performance and future prospects of their respective businesses. The separation will also provide investors with two distinct and targeted investment opportunities.

The HP Co. board of directors also considered a number of potentially negative factors in evaluating the separation, including that:

 

    as part of HP Co., the enterprise technology infrastructure, software, services and financing businesses have historically benefitted from HP Co.’s larger size and purchasing power in procuring certain goods and services. Hewlett Packard Enterprise may also incur costs for certain functions previously performed by HP Co., such as accounting, tax, legal, human resources and other general administrative functions, that are higher than the amounts reflected in Hewlett Packard Enterprise’s historical financial statements, which could cause Hewlett Packard Enterprise’s financial performance to be adversely affected;

 

    we will incur costs in the transition to being a standalone public company, which include accounting, tax, legal and other professional services costs, recruiting and relocation costs associated with hiring or reassigning our personnel, costs related to establishing a new brand identity in the marketplace and costs to separate HP Co.’s information systems;

 

    certain costs and liabilities that were otherwise less significant to HP Co. as a whole will be more significant for Hewlett Packard Enterprise as a standalone company;

 

    the actions required to separate Hewlett Packard Enterprise’s and HP Inc.’s respective businesses could disrupt Hewlett Packard Enterprise’s operations;

 

    we may not achieve the anticipated benefits of the separation for a variety of reasons, including, among others: (i) the separation will require significant amounts of management’s time and effort, which may divert management’s attention from operating and growing our business; (ii) following the separation, we may be more susceptible to market fluctuations and other adverse events than if we were still a part of HP Co.; and (iii) following the separation, our business will be less diversified than HP Co.’s business prior to the separation; and

 

    to preserve the tax-free treatment of the separation and the distribution to HP Inc. for U.S. federal income tax purposes, under the tax matters agreement that Hewlett Packard Enterprise will enter into with HP Co., Hewlett Packard Enterprise will be restricted from taking actions that may cause the separation and distribution to be taxable to HP Inc. for U.S. federal income tax purposes. These restrictions may limit for a period of time Hewlett Packard Enterprise’s ability to pursue certain strategic transactions and equity issuances or engage in certain other transactions that might increase the value of its business.

 



 

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The HP Co. board of directors concluded that the potential benefits of the separation outweighed these factors. For more information, see the sections entitled “The Separation and Distribution—Reasons for the Separation” and “Risk Factors.”

Risks Related to Our Business and the Separation and Distribution

An investment in Hewlett Packard Enterprise common stock is subject to a number of risks, including risks relating to our business and the separation and distribution. The following list of certain significant risk factors is a high-level summary and is not exhaustive. Please read the information in the section captioned “Risk Factors” for a more thorough description of these and other risks.

Risks Related to Our Business

 

    If we are unsuccessful at addressing our business challenges, our business and results of operations may be adversely affected and our ability to invest in and grow our business could be limited.

 

    We operate in an intensely competitive industry and competitive pressures could harm our business and financial performance.

 

    If we cannot successfully execute our go-to-market strategy and continue to develop, manufacture and market innovative products, services and solutions, our business and financial performance may suffer.

 

    Recent global, regional and local economic weakness and uncertainty could adversely affect our business and financial performance.

 

    Due to the international nature of our business, political or economic changes or other factors could harm our business and financial performance.

 

    We are exposed to fluctuations in foreign currency exchange rates.

Risks Related to the Separation

 

    Our plan to separate into two independent publicly traded companies is subject to various risks and uncertainties and may not be completed in accordance with the expected plans or anticipated timeline, or at all, and will involve significant time and expense, which could disrupt or adversely affect our business.

 

    The combined post-separation value of HP Inc. and Hewlett Packard Enterprise common stock may not equal or exceed the pre-separation value of HP Co. common stock.

 

    The separation may not achieve some or all of the anticipated benefits.

 

    If the distribution, together with certain related transactions, does not qualify as a transaction that is generally tax-free for U.S. federal income tax purposes, HP Inc., Hewlett Packard Enterprise and HP Co. stockholders could be subject to significant tax liabilities, and, in certain circumstances, Hewlett Packard Enterprise could be required to indemnify HP Inc. for material taxes and other related amounts pursuant to indemnification obligations under the tax matters agreement.

 

    We may not be able to engage in desirable strategic or capital-raising transactions following the separation.

 

    We have no history of operating as an independent company and we expect to incur increased administrative and other costs following the separation by virtue of our status as an independent public company. Our historical and pro forma financial information is not necessarily representative of the results that we would have achieved as a separate, publicly traded company and may not be a reliable indicator of our future results.

 



 

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Risks Related to Our Common Stock

 

    We cannot be certain that an active trading market for our common stock will develop or be sustained after the separation, and following the separation, our stock price may fluctuate significantly.

 

    Shares of our common stock generally will be eligible for resale following the distribution, which may cause our stock price to decline.

 

    We cannot guarantee the payment of dividends on our common stock, or the timing or amount of any such dividends.

Corporate Information

Hewlett Packard Enterprise was incorporated in Delaware for the purpose of holding HP Co.’s enterprise technology infrastructure, software, services and financing businesses in connection with the separation and distribution. Until these businesses are transferred to us in connection with the separation, we will have no operations. The address of our principal executive offices is 3000 Hanover Street, Palo Alto, CA 94304. Our telephone number is (650) 857-1501.

Hewlett Packard Enterprise maintains an Internet site at www.hpe.com. Hewlett Packard Enterprise’s website, and the information contained therein, or connected thereto, is not incorporated by reference into this information statement or the registration statement of which this information statement forms a part.

Reason for Furnishing this Information Statement

This information statement is being furnished solely to provide information to stockholders of HP Co. who will receive shares of Hewlett Packard Enterprise common stock in the distribution. It is not, and is not to be construed as, an inducement or encouragement to buy or sell any of Hewlett Packard Enterprise’s securities. The information contained in this information statement is believed by Hewlett Packard Enterprise to be accurate as of the date set forth on its cover. Changes may occur after that date, and neither HP Co. nor Hewlett Packard Enterprise will update the information except in the normal course of their respective disclosure obligations and practices or as otherwise required by law.

 



 

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SUMMARY HISTORICAL AND UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION

The following table presents the summary historical and unaudited pro forma combined financial data for Hewlett Packard Enterprise. The Combined Statements of Earnings data and the Combined Statements of Cash Flows data for the nine months ended July 31, 2015 and 2014 and the Combined Balance Sheets data as of July 31, 2015 are derived from our unaudited Condensed Combined Financial Statements included in this information statement. The Combined Statements of Earnings data and the Combined Statements of Cash Flows data for each of the three fiscal years ended October 31, 2014 and the Combined Balance Sheets data as of October 31, 2014 and 2013 set forth below are derived from our audited Combined Financial Statements included in this information statement. The Combined Balance Sheets data as of October 31, 2012 are derived from our unaudited Combined Financial Statements that are not included in this information statement.

The summary unaudited pro forma combined financial data reflect adjustments to our historical financial results in connection with the separation and distribution. The unaudited pro forma Combined Statements of Earnings data give effect to these events as if they occurred on November 1, 2013, the beginning of our most recently completed fiscal year. The unaudited pro forma Combined Balance Sheets data gives effect to these events as if they occurred as of July 31, 2015, our latest balance sheet date.

The unaudited pro forma combined financial data are not necessarily indicative of our results of operations or financial condition had the separation and distribution been completed on the dates assumed. Also, they may not reflect the results of operations or financial condition that would have resulted had we been operating as a standalone publicly traded company during such periods. In addition, they are not necessarily indicative of our future results of operation or financial condition.

The summary financial data should be read in conjunction with the sections entitled “Capitalization,” “Unaudited Pro Forma Combined Financial Statements,” “Selected Historical Combined Financial Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the historical Combined and Condensed Combined Financial Statements and accompanying notes included in this information statement. See “Index to Financial Statements.”

 

    As of and
for the nine months ended
July 31
    As of and
for the fiscal years ended
October 31
 
    Pro Forma     Historical     Pro Forma     Historical  
    2015     2015     2014     2014     2014     2013     2012  
    In millions  

Combined Statements of Earnings:

             

Revenue

  $ 38,444      $ 38,659      $ 41,050      $ 54,807      $ 55,123      $ 57,371      $ 61,042   

Earnings (loss) from operations

  $ 1,774      $ 1,404      $ 1,509      $ 2,163      $ 2,335      $ 2,952      $ (14,139

Net earnings (loss)

  $ 1,194      $ 1,076      $ 1,132      $ 1,395      $ 1,648      $ 2,051      $ (14,761

Combined Balance Sheets:

             

Total assets

  $ 79,392      $ 68,308          $ 65,071      $ 68,775      $ 71,702   

Long-term debt

  $ 15,093      $ 493          $ 485      $ 617      $ 702   

Total debt

  $ 15,845      $ 1,245          $ 1,379      $ 1,675      $ 2,923   

Combined Statements of Cash Flows:

             

Net cash provided by operating activities

    $ 3,819      $ 5,885        $ 6,911      $ 8,739      $ 7,240   

Net cash used in investing activities

    $ (4,834   $ (2,418     $ (2,974   $ (2,227   $ (3,159

Net cash provided by (used in) financing activities

    $ 1,470      $ (2,915     $ (3,800   $ (6,464   $ (4,521

 



 

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RISK FACTORS

You should carefully consider the following risks and other information in this information statement in evaluating Hewlett Packard Enterprise and its common stock. Any of the following risks could materially and adversely affect our results of operations or financial condition. The risk factors generally have been separated into three groups: risks related to our business, risks related to the separation and risks related to our common stock.

Risks Related to Our Business

If we are unsuccessful at addressing our business challenges, our business and results of operations may be adversely affected and our ability to invest in and grow our business could be limited.

We are in the process of addressing many challenges facing our business. One set of challenges relates to dynamic and accelerating market trends, such as the market shift to cloud-related IT infrastructure, software and services, and the growth in software-as-a-service (“SaaS”) business models. Certain of our legacy hardware businesses face challenges as customers migrate to cloud-based offerings and reduce their purchases of hardware products. Additionally, our legacy software business derives a large portion of its revenues from upfront license sales, some of which over time can be expected to shift to SaaS. A second set of challenges relates to changes in the competitive landscape. Our major competitors are expanding their product and service offerings with integrated products and solutions; our business-specific competitors are exerting increased competitive pressure in targeted areas and are entering new markets; our emerging competitors are introducing new technologies and business models; and our alliance partners in some businesses are increasingly becoming our competitors in others. A third set of challenges relates to business model changes and our go-to-market execution. For example, we may fail to develop innovative products and services, maintain the manufacturing quality of our products, manage our distribution network or successfully market new products and services, any of which could adversely affect our business and financial condition.

In addition, we are facing a series of significant macroeconomic challenges, including weakness across many geographic regions, particularly in the United States, Central and Eastern Europe and Russia, and certain countries and businesses in Asia. We may experience delays in the anticipated timing of activities related to our efforts to address these challenges and higher than expected or unanticipated execution costs. In addition, we are vulnerable to increased risks associated with our efforts to address these challenges given our large and diverse portfolio of businesses, the broad range of geographic regions in which we and our customers and partners operate, and the ongoing integration of acquired businesses. If we do not succeed in these efforts, or if these efforts are more costly or time-consuming than expected, our business and results of operations may be adversely affected, which could limit our ability to invest in and grow our business.

We operate in an intensely competitive industry and competitive pressures could harm our business and financial performance.

We encounter aggressive competition from numerous and varied competitors in all areas of our business, and our competitors have targeted and are expected to continue targeting our key market segments. We compete primarily on the basis of our technology, innovation, performance, price, quality, reliability, brand, reputation, distribution, range of products and services, ease of use of our products, account relationships, customer training, service and support, security, and the availability of our application software and IT infrastructure offerings. If our products, services, support and cost structure do not enable us to compete successfully based on any of those criteria, our results of operations and business prospects could be harmed.

We have a large portfolio of products and services and must allocate our financial, personnel and other resources across all of our products and services while competing with companies that have smaller portfolios or specialize in one or more of our product or service lines. As a result, we may invest less in certain areas of our

 

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business than our competitors do, and our competitors may have greater financial, technical and marketing resources available to them compared to the resources allocated to our products and services that compete against their products and services. Industry consolidation may also affect competition by creating larger, more homogeneous and potentially stronger competitors in the markets in which we operate. Additionally, our competitors may affect our business by entering into exclusive arrangements with our existing or potential customers or suppliers.

Companies with whom we have alliances in certain areas may be or become our competitors in other areas. In addition, companies with whom we have alliances also may acquire or form alliances with our competitors, which could reduce their business with us. If we are unable to effectively manage these complicated relationships with alliance partners, our business and results of operations could be adversely affected.

We face aggressive price competition and may have to continue lowering the prices of many of our products and services to stay competitive, while at the same time trying to maintain or improve our revenue and gross margin. In addition, competitors who have a greater presence in some of the lower-cost markets in which we compete, or who can obtain better pricing, more favorable contractual terms and conditions or more favorable allocations of products and components during periods of limited supply, may be able to offer lower prices than we are able to offer. Our cash flows, results of operations and financial condition may be adversely affected by these and other industry-wide pricing pressures.

Because our business model is based on providing innovative and high-quality products, we may spend a proportionately greater amount of our revenues on research and development than some of our competitors. If we cannot proportionately decrease our cost structure (apart from research and development expenses) on a timely basis in response to competitive price pressures, our gross margin and, therefore, our profitability could be adversely affected. In addition, if our pricing and other facets of our offerings are not sufficiently competitive, or if there is an adverse reaction to our product decisions, we may lose market share in certain areas, which could adversely affect our financial performance and business prospects.

Even if we are able to maintain or increase market share for a particular product, its financial performance could decline because the product is in a maturing industry or market segment or contains technology that is becoming obsolete. For example, our Storage business unit is experiencing the effects of a market transition towards converged products and solutions, which has led to a decline in demand for our traditional storage products. In addition, the performance of our Business Critical Systems business unit has been affected by the decline in demand for UNIX servers and concerns about the development of new versions of software to support our Itanium-based products. Financial performance could decline due to increased competition from other types of products. For example, the development of cloud-based solutions has reduced demand for some of our existing hardware products.

If we cannot successfully execute our go-to-market strategy and continue to develop, manufacture and market innovative products, services and solutions, our business and financial performance may suffer.

Our long-term strategy is focused on leveraging our existing portfolio of hardware, software and services as we adapt to a new hybrid model of IT delivery and consumption driven by the growing adoption of cloud computing and increased demand for integrated IT solutions. To successfully execute this strategy, we must continue to pivot toward the delivery of integrated IT solutions and continue to invest and expand in cloud computing, enterprise security, big data, applications and mobility. Any failure to successfully execute this strategy, including any failure to invest sufficiently in strategic growth areas, could adversely affect our business, results of operations and financial condition.

The process of developing new high-technology products, software, services and solutions and enhancing existing hardware and software products, services and solutions is complex, costly and uncertain, and any failure by us to anticipate customers’ changing needs and emerging technological trends accurately could significantly harm our market share, results of operations and financial condition. For example, as the transition to an

 

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environment characterized by cloud-based computing and software being delivered as a service progresses, we must continue to successfully develop and deploy cloud-based solutions for our customers. We must make long-term investments, develop or obtain and protect appropriate intellectual property, and commit significant research and development and other resources before knowing whether our predictions will accurately reflect customer demand for our products, services and solutions. Any failure to accurately predict technological and business trends, control research and development costs or execute our innovation strategy could harm our business and financial performance. Our research and development initiatives may not be successful in whole or in part, including research and development projects which we have prioritized with respect to funding and/or personnel.

After we develop a product, we must be able to manufacture appropriate volumes quickly while also managing costs and preserving margins. To accomplish this, we must accurately forecast volumes, mixes of products and configurations that meet customer requirements, and we may not succeed at doing so within a given product’s lifecycle or at all. Any delay in the development, production or marketing of a new product, service or solution could result in us not being among the first to market, which could further harm our competitive position.

For example, our success in our software segment is dependent on our ability to address the market shift to SaaS and other go-to-market execution challenges. To be successful in addressing these challenges, we must improve our go-to-market execution with multiple product delivery models, which better address customer needs and achieve broader integration across our overall product portfolio as we work to capitalize on important market opportunities in cloud computing, big data, enterprise security, applications and mobility. Improvements in SaaS delivery, however, do not guarantee that we will achieve increased revenue or profitability. SaaS solutions often have lower margins than other software solutions throughout the subscription period and customers may elect to not renew their subscriptions upon expiration of their agreements with us.

If we cannot continue to produce quality products and services, our reputation, business and financial performance may suffer.

In the course of conducting our business, we must adequately address quality issues associated with our products, services and solutions, including defects in our engineering, design and manufacturing processes and unsatisfactory performance under service contracts, as well as defects in third-party components included in our products and unsatisfactory performance or even malicious acts by third-party contractors or subcontractors or their employees. In order to address quality issues, we work extensively with our customers and suppliers and engage in product testing to determine the causes of problems and to develop and implement appropriate solutions. However, the products, services and solutions that we offer are complex, and our regular testing and quality control efforts may not be effective in controlling or detecting all quality issues or errors, particularly with respect to faulty components manufactured by third parties. If we are unable to determine the cause, find an appropriate solution or offer a temporary fix (or “patch”) to address quality issues with our products, we may delay shipment to customers, which would delay revenue recognition and receipt of customer payments and could adversely affect our revenue, cash flows and profitability. In addition, after products are delivered, quality issues may require us to repair or replace such products. Addressing quality issues can be expensive and may result in additional warranty, repair, replacement and other costs, adversely affecting our financial performance. If new or existing customers have difficulty operating our products or are dissatisfied with our services or solutions, our results of operations could be adversely affected, and we could face possible claims if we fail to meet our customers’ expectations. In addition, quality issues can impair our relationships with new or existing customers and adversely affect our brand and reputation, which could, in turn, adversely affect our results of operations.

 

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If we fail to manage the distribution of our products and services properly, our business and financial performance could suffer.

We use a variety of distribution methods to sell our products and services around the world, including third-party resellers and distributors and both direct and indirect sales to enterprise accounts and consumers. Successfully managing the interaction of our direct and indirect channel efforts to reach various potential customer segments for our products and services is a complex process. Moreover, since each distribution method has distinct risks and gross margins, our failure to implement the most advantageous balance in the delivery model for our products and services could adversely affect our revenue and gross margins and therefore our profitability.

Our financial results could be materially adversely affected due to distribution channel conflicts or if the financial conditions of our channel partners were to weaken. Our results of operations may be adversely affected by any conflicts that might arise between our various distribution channels or the loss or deterioration of any alliance or distribution arrangement. Moreover, some of our wholesale distributors may have insufficient financial resources and may not be able to withstand changes in business conditions, including economic weakness, industry consolidation and market trends. Many of our significant distributors operate on narrow margins and have been negatively affected by business pressures in the past. Considerable trade receivables that are not covered by collateral or credit insurance are outstanding with our distribution channel partners. Revenue from indirect sales could suffer, and we could experience disruptions in distribution, if our distributors’ financial conditions, abilities to borrow funds in the credit markets or operations weaken.

Our inventory management is complex, as we continue to sell a significant mix of products through distributors. We must manage both owned and channel inventory effectively, particularly with respect to sales to distributors, which involves forecasting demand and pricing challenges. Distributors may increase orders during periods of product shortages, cancel orders if their inventory is too high or delay orders in anticipation of new products. Distributors also may adjust their orders in response to the supply of our products and the products of our competitors and seasonal fluctuations in end-user demand. Our reliance upon indirect distribution methods may reduce our visibility into demand and pricing trends and issues, and therefore make forecasting more difficult. If we have excess or obsolete inventory, we may have to reduce our prices and write down inventory. Moreover, our use of indirect distribution channels may limit our willingness or ability to adjust prices quickly and otherwise to respond to pricing changes by competitors. We also may have limited ability to estimate future product rebate redemptions in order to price our products effectively.

Recent global, regional and local economic weakness and uncertainty could adversely affect our business and financial performance.

Our business and financial performance depend significantly on worldwide economic conditions and the demand for technology hardware, software and services in the markets in which we compete. Recent economic weakness and uncertainty in various markets throughout the world have resulted, and may result in the future, in decreased revenue, gross margin, earnings or growth rates and in increased expenses and difficulty in managing inventory levels. For example, we are continuing to experience macroeconomic weakness across many geographic regions, particularly in the Europe, the Middle East and Africa region, China and certain other high-growth markets. Ongoing U.S. federal government spending limits may continue to reduce demand for our products, services and solutions from organizations that receive funding from the U.S. government, and could negatively affect macroeconomic conditions in the United States, which could further reduce demand for our products, services and solutions. Economic weakness and uncertainty may adversely affect demand for our products, services and solutions, may result in increased expenses due to higher allowances for doubtful accounts and potential goodwill and asset impairment charges, and may make it more difficult for us to make accurate forecasts of revenue, gross margin, cash flows and expenses.

Economic weakness and uncertainty could cause our expenses to vary materially from our expectations. Any financial turmoil affecting the banking system and financial markets or any significant financial services

 

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institution failures could negatively impact our treasury operations, as the financial condition of such parties may deteriorate rapidly and without notice in times of market volatility and disruption. Poor financial performance of asset markets combined with lower interest rates and the adverse effects of fluctuating currency exchange rates could lead to higher pension and post-retirement benefit expenses. Interest and other expenses could vary materially from expectations depending on changes in interest rates, borrowing costs, currency exchange rates, costs of hedging activities and the fair value of derivative instruments. Economic downturns also may lead to restructuring actions and associated expenses.

Due to the international nature of our business, political or economic changes or other factors could harm our business and financial performance.

Sales outside the United States constituted approximately 62% of our net revenue in fiscal 2014. Our future business and financial performance could suffer due to a variety of international factors, including:

 

    ongoing instability or changes in a country’s or region’s economic or political conditions, including inflation, recession, interest rate fluctuations and actual or anticipated military or political conflicts;

 

    longer collection cycles and financial instability among customers;

 

    trade regulations and procedures and actions affecting production, pricing and marketing of products, including policies adopted by countries that may champion or otherwise favor domestic companies and technologies over foreign competitors;

 

    local labor conditions and regulations, including local labor issues faced by specific suppliers and original equipment manufacturers (“OEMs”);

 

    managing our geographically dispersed workforce;

 

    changes in the international, national or local regulatory and legal environments;

 

    differing technology standards or customer requirements;

 

    import, export or other business licensing requirements or requirements relating to making foreign direct investments, which could increase our cost of doing business in certain jurisdictions, prevent us from shipping products to particular countries or markets, affect our ability to obtain favorable terms for components, increase our operating costs or lead to penalties or restrictions;

 

    difficulties associated with repatriating earnings generated or held abroad in a tax-efficient manner, and changes in tax laws; and

 

    fluctuations in freight costs, limitations on shipping and receiving capacity, and other disruptions in the transportation and shipping infrastructure at important geographic points of exit and entry for our products and shipments.

The factors described above also could disrupt our product and component manufacturing and key suppliers located outside of the United States. For example, we rely on suppliers in Asia for product assembly and manufacture.

In many foreign countries, particularly in those with developing economies, there are companies that engage in business practices prohibited by laws and regulations applicable to us, such as the Foreign Corrupt Practices Act of 1977, as amended (the “FCPA”). Although we implement policies, procedures and training designed to facilitate compliance with these laws, our employees, contractors and agents, as well as those of the companies to which we outsource certain of our business operations, may take actions in violation of our policies. Any such violation, even if prohibited by our policies, could have an adverse effect on our business and reputation.

We are exposed to fluctuations in foreign currency exchange rates.

Currencies other than the U.S. dollar, including the euro, the British pound, Chinese yuan (renminbi) and the Japanese yen, can have an impact on our results as expressed in U.S. dollars. In particular, the economic

 

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uncertainties relating to European sovereign and other debt obligations and the related European financial restructuring efforts may cause the value of the euro to fluctuate. Currency volatility also contributes to variations in our sales of products and services in impacted jurisdictions. For example, in the event that one or more European countries were to replace the euro with another currency, our sales into such countries, or into Europe generally, would likely be adversely affected until stable exchange rates are established. Accordingly, fluctuations in foreign currency exchange rates, most notably the strengthening of the U.S. dollar against the euro, could adversely affect our revenue growth in future periods. In addition, currency variations can adversely affect margins on sales of our products in countries outside of the United States and margins on sales of products that include components obtained from suppliers located outside of the United States.

From time to time, we may use forward contracts and options designated as cash flow hedges to protect against foreign currency exchange rate risks. The effectiveness of our hedges depends on our ability to accurately forecast future cash flows, which is particularly difficult during periods of uncertain demand for our products and services and highly volatile exchange rates. We may incur significant losses from our hedging activities due to factors such as demand volatility and currency variations. In addition, certain or all of our hedging activities may be ineffective, may expire and not be renewed or may not offset any or more than a portion of the adverse financial impact resulting from currency variations. Losses associated with hedging activities also may impact our revenue and to a lesser extent our cost of sales and financial condition.

The revenue and profitability of our operations have historically varied, which makes our future financial results less predictable.

Our revenue, gross margin and profit vary among our diverse products and services, customer groups and geographic markets and therefore will likely be different in future periods than our current results. Our revenue depends on the overall demand for our products and services. Delays or reductions in IT spending by our customers or potential customers could have a material adverse effect on demand for our products and services, which could result in a significant decline in revenue. In addition, revenue declines in some of our businesses, particularly our services businesses, may affect revenue in our other businesses as we may lose cross-selling opportunities. Overall gross margins and profitability in any given period are dependent partially on the product, service, customer and geographic mix reflected in that period’s net revenue. Competition, lawsuits, investigations, increases in component and manufacturing costs that we are unable to pass on to our customers, component supply disruptions and other risks affecting those businesses therefore may have a significant impact on our overall gross margin and profitability. Certain segments have a higher fixed cost structure and more variation in gross margins across their business units and product portfolios than others and may therefore experience significant operating profit volatility on a quarterly or annual basis. In addition, newer geographic markets may be relatively less profitable due to our investments associated with entering those markets and local pricing pressures, and we may have difficulty establishing and maintaining the operating infrastructure necessary to support the high growth rate associated with some of those markets. Market trends, industry shifts, competitive pressures, commoditization of products, increased component or shipping costs, regulatory impacts and other factors may result in reductions in revenue or pressure on gross margins of certain segments in a given period, which may lead to adjustments to our operations. Moreover, our efforts to address the challenges facing our business could increase the level of variability in our financial results because the rate at which we are able to realize the benefits from those efforts may vary from period to period. See also the risk factor below entitled “We have no history of operating as an independent company and we expect to incur increased administrative and other costs following the separation by virtue of our status as an independent public company. Our historical and pro forma financial information is not necessarily representative of the results that we would have achieved as a separate, publicly traded company and may not be a reliable indicator of our future results.”

We depend on third-party suppliers, and our financial results could suffer if we fail to manage our suppliers properly.

Our operations depend on our ability to anticipate our needs for components, products and services, as well as our suppliers’ ability to deliver sufficient quantities of quality components, products and services at reasonable

 

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prices and in time for us to meet critical schedules for the delivery of our own products and services. Given the wide variety of systems, products and services that we offer, the large number of our suppliers and contract manufacturers that are located around the world, and the long lead times required to manufacture, assemble and deliver certain components and products, problems could arise in production, planning and inventory management that could seriously harm our business. In addition, our ongoing efforts to optimize the efficiency of our supply chain could cause supply disruptions and be more expensive, time-consuming and resource-intensive than expected. Furthermore, certain of our suppliers may decide to discontinue conducting business with us. Other supplier problems that we could face include component shortages, excess supply, risks related to the terms of our contracts with suppliers, risks associated with contingent workers, and risks related to our relationships with single-source suppliers, each of which is described below.

 

    Component shortages. We may experience a shortage of, or a delay in receiving, certain components as a result of strong demand, capacity constraints, supplier financial weaknesses, the inability of suppliers to borrow funds in the credit markets, disputes with suppliers (some of whom are also our customers), disruptions in the operations of component suppliers, other problems experienced by suppliers or problems faced during the transition to new suppliers. If shortages or delays persist, the price of certain components may increase, we may be exposed to quality issues, or the components may not be available at all. We may not be able to secure enough components at reasonable prices or of acceptable quality to build products or provide services in a timely manner in the quantities needed or according to our specifications. Accordingly, our business and financial performance could suffer if we lose time-sensitive sales, incur additional freight costs or are unable to pass on price increases to our customers. If we cannot adequately address supply issues, we might have to reengineer some product or service offerings, which could result in further costs and delays.

 

    Excess supply. In order to secure components for our products or services, at times we may make advance payments to suppliers or enter into non-cancelable commitments with vendors. In addition, we may purchase components strategically in advance of demand to take advantage of favorable pricing or to address concerns about the availability of future components. If we fail to anticipate customer demand properly, a temporary oversupply could result in excess or obsolete components, which could adversely affect our business and financial performance.

 

    Contractual terms. As a result of binding long-term price or purchase commitments with vendors, we may be obligated to purchase components or services at prices that are higher than those available in the current market and be limited in our ability to respond to changing market conditions. If we commit to purchasing components or services for prices in excess of the then-current market price, we may be at a disadvantage to competitors who have access to components or services at lower prices, our gross margin could suffer, and we could incur additional charges relating to inventory obsolescence. Any of these developments could adversely affect our future results of operations and financial condition.

 

    Contingent workers. We also rely on third-party suppliers for the provision of contingent workers, and our failure to manage our use of such workers effectively could adversely affect our results of operations. We have been exposed to various legal claims relating to the status of contingent workers in the past and could face similar claims in the future. We may be subject to shortages, oversupply or fixed contractual terms relating to contingent workers. Our ability to manage the size of, and costs associated with, the contingent workforce may be subject to additional constraints imposed by local laws.

 

   

Single-source suppliers. We obtain a significant number of components from single sources due to technology, availability, price, quality or other considerations. New products that we introduce may utilize custom components obtained from only one source initially until we have evaluated whether there is a need for additional suppliers. Replacing a single-source supplier could delay production of some products as replacement suppliers may be subject to capacity constraints or other output limitations. For some components, such as customized components, alternative sources either may not exist or may be unable to produce the quantities of those components necessary to satisfy our production requirements. In addition, we sometimes purchase components from single-source suppliers under short-term agreements that contain favorable pricing and other terms but that may be unilaterally

 

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modified or terminated by the supplier with limited notice and with little or no penalty. The performance of such single-source suppliers under those agreements (and the renewal or extension of those agreements upon similar terms) may affect the quality, quantity and price of our components. The loss of a single-source supplier, the deterioration of our relationship with a single-source supplier or any unilateral modification to the contractual terms under which we are supplied components by a single-source supplier could adversely affect our business and financial performance.

Business disruptions could seriously harm our future revenue and financial condition and increase our costs and expenses.

Our worldwide operations could be disrupted by earthquakes, telecommunications failures, power or water shortages, tsunamis, floods, hurricanes, typhoons, fires, extreme weather conditions, medical epidemics or pandemics and other natural or manmade disasters or catastrophic events, for which we are predominantly self-insured. The occurrence of any of these business disruptions could result in significant losses, seriously harm our revenue, profitability and financial condition, adversely affect our competitive position, increase our costs and expenses, and require substantial expenditures and recovery time in order to fully resume operations. Our corporate headquarters and a portion of our research and development activities are located in California, and other critical business operations and some of our suppliers are located in California and Asia, near major earthquake faults known for seismic activity. In addition, our principal worldwide IT data centers are located in the southern United States, making our operations more vulnerable to natural disasters or other business disruptions occurring in that geographical area. The manufacture of product components, the final assembly of our products and other critical operations are concentrated in certain geographic locations, including the Czech Republic, Mexico, Shanghai and Singapore. We also rely on major logistics hubs, primarily in Asia to manufacture and distribute our products, and primarily in the southwestern United States to import products into the Americas region. Our operations could be adversely affected if manufacturing, logistics or other operations in these locations are disrupted for any reason, including natural disasters, IT system failures, military actions or economic, business, labor, environmental, public health, regulatory or political issues. The ultimate impact on us, our significant suppliers and our general infrastructure of being located near locations more vulnerable to the occurrence of the aforementioned business disruptions, such as near major earthquake faults, and being consolidated in certain geographical areas is unknown and remains uncertain.

Our uneven sales cycle makes planning and inventory management difficult and future financial results less predictable.

In some of our segments, our quarterly sales often have reflected a pattern in which a disproportionate percentage of each quarter’s total sales occurs towards the end of the quarter. This uneven sales pattern makes predicting revenue, earnings, cash flow from operations and working capital for each financial period difficult, increases the risk of unanticipated variations in our quarterly results and financial condition and places pressure on our inventory management and logistics systems. If predicted demand is substantially greater than orders, there may be excess inventory. Alternatively, if orders substantially exceed predicted demand, we may not be able to fulfill all of the orders received in each quarter and such orders may be cancelled. Depending on when they occur in a quarter, developments such as a systems failure, component pricing movements, component shortages or global logistics disruptions, could adversely impact our inventory levels and results of operations in a manner that is disproportionate to the number of days in the quarter affected.

We experience some seasonal trends in the sale of our products that also may produce variations in our quarterly results and financial condition. For example, sales to governments (particularly sales to the U.S. government) are often stronger in the third calendar quarter, and many customers whose fiscal year is the calendar year spend their remaining capital budget authorizations in the fourth calendar quarter prior to new budget constraints in the first calendar quarter of the following year. European sales are often weaker during the summer months. Typically, our third fiscal quarter is our weakest and our fourth fiscal quarter is our strongest. Many of the factors that create and affect seasonal trends are beyond our control.

 

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Any failure by us to identify, manage and complete acquisitions, divestitures and other significant transactions successfully could harm our financial results, business and prospects.

As part of our business strategy, we may acquire companies or businesses, divest businesses or assets, enter into strategic alliances and joint ventures and make investments to further our business (collectively, “business combination and investment transactions”). For example, in May 2015, we acquired Aruba Networks, Inc., which provides next-generation network access solutions for mobile enterprise. Also in May 2015, we announced a partnership with Tsinghua Holdings Co., Ltd. (“Tsinghua”), the asset management arm of Tsinghua University in China, pursuant to which we will sell to Tsinghua a 51% interest in our wholly owned subsidiary that owns and operates H3C Technologies and our China-based server, storage and technology services businesses for approximately $2.3 billion, subject to the terms and conditions of the share purchase agreement among Tsinghua, Tsignhua’s subsidiary Unispendour Corporation and our subsidiary H3C Holdings Limited. The transaction with Tsinghua is expected to close near the end of calendar 2015 (potentially after the completion of the separation).

Risks associated with business combination and investment transactions include the following, any of which could adversely affect our revenue, gross margin, profitability and financial results:

 

    Managing business combination and investment transactions requires varying levels of management resources, which may divert our attention from other business operations.

 

    We may not fully realize all of the anticipated benefits of any particular business combination and investment transaction, and the timeframe for realizing the benefits of a particular business combination and investment transaction may depend partially upon the actions of employees, advisors, suppliers, other third parties or market trends.

 

    Certain prior HP Co. business combination and investment transactions have resulted, and in the future any such transactions by us may result, in significant costs and expenses, including those related to severance pay, early retirement costs, employee benefit costs, charges from the elimination of duplicative facilities and contracts, inventory adjustments, assumed litigation and other liabilities, legal, accounting and financial advisory fees, and required payments to executive officers and key employees under retention plans.

 

    Any increased or unexpected costs, unanticipated delays or failure to meet contractual obligations could make business combination and investment transactions less profitable or unprofitable.

 

    Our ability to conduct due diligence with respect to business combination and investment transactions, and our ability to evaluate the results of such due diligence, is dependent upon the veracity and completeness of statements and disclosures made or actions taken by third parties or their representatives.

 

    Our due diligence process may fail to identify significant issues with the acquired company’s product quality, financial disclosures, accounting practices or internal control deficiencies.

 

    The pricing and other terms of our contracts for business combination and investment transactions require us to make estimates and assumptions at the time we enter into these contracts, and, during the course of our due diligence, we may not identify all of the factors necessary to estimate accurately our costs, timing and other matters or we may incur costs if a business combination is not consummated.

 

    In order to complete a business combination and investment transaction, we may issue common stock, potentially creating dilution for our existing stockholders.

 

    We may borrow to finance business combination and investment transactions, and the amount and terms of any potential future acquisition-related or other borrowings, as well as other factors, could affect our liquidity and financial condition.

 

    Our effective tax rate on an ongoing basis is uncertain, and business combination and investment transactions could adversely impact our effective tax rate.

 

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    An announced business combination and investment transaction may not close on the expected timeframe or at all, which may cause our financial results to differ from expectations in a given quarter.

 

    Business combination and investment transactions may lead to litigation, which could impact our financial condition and results of operations.

 

    If we fail to identify and successfully complete and integrate business combination and investment transactions that further our strategic objectives, we may be required to expend resources to develop products, services and technology internally, which may put us at a competitive disadvantage.

We have incurred and will incur additional depreciation and amortization expense over the useful lives of certain assets acquired in connection with business combination and investment transactions and, to the extent that the value of goodwill or intangible assets acquired in connection with a business combination and investment transaction becomes impaired, we may be required to incur additional material charges relating to the impairment of those assets. For example, in our third fiscal quarter of 2012, we recorded an $8.0 billion impairment charge related to the goodwill associated with our enterprise services reporting unit within our Enterprise Services segment. In addition, in our fourth fiscal quarter of 2012, we recorded an $8.8 billion impairment charge relating to the goodwill and intangible assets associated with the Autonomy reporting unit within our Software segment. See Note 10 to the Combined Financial Statements included elsewhere in this information statement. If there are future decreases in our stock price or significant changes in the business climate or results of operations of our reporting units, we may incur additional charges, which may include goodwill impairment or intangible asset charges.

As part of our business strategy, we regularly evaluate the potential disposition of assets and businesses that may no longer help us meet our objectives. When we decide to sell assets or a business, we may encounter difficulty in finding buyers or alternative exit strategies on acceptable terms in a timely manner, which could delay the achievement of our strategic objectives. We may also dispose of a business at a price or on terms that are less desirable than we had anticipated. In addition, we may experience greater dis-synergies than expected, and the impact of the divestiture on our revenue growth may be larger than projected. After reaching an agreement with a buyer or seller for the acquisition or disposition of a business, we are subject to satisfaction of pre-closing conditions as well as to necessary regulatory and governmental approvals on acceptable terms, which, if not satisfied or obtained, may prevent us from completing the transaction. Dispositions may also involve continued financial involvement in the divested business, such as through continuing equity ownership, guarantees, indemnities or other financial obligations. Under these arrangements, performance by the divested businesses or other conditions outside of our control could affect our future financial results.

Integrating acquisitions may be difficult and time-consuming. Any failure by us to integrate acquired companies, products or services into our overall business in a timely manner could harm our financial results, business and prospects.

In order to pursue our strategy successfully, we must identify candidates for and successfully complete business combination and investment transactions, some of which may be large or complex, and manage post-closing issues such as the integration of acquired businesses, products, services or employees. Integration issues are often time-consuming and expensive and, without proper planning and implementation, could significantly disrupt our business and the acquired business. The challenges involved in integration include:

 

    successfully combining product and service offerings, including under a single new Hewlett Packard Enterprise brand, and entering or expanding into markets in which we are not experienced or are developing expertise;

 

    convincing customers and distributors that the transaction will not diminish customer service standards or business focus;

 

    persuading customers and distributors to not defer purchasing decisions or switch to other suppliers (which could result in our incurring additional obligations in order to address customer uncertainty), minimizing sales force attrition and expanding and coordinating sales, marketing and distribution efforts;

 

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    consolidating and rationalizing corporate IT infrastructure, which may include multiple legacy systems from various acquisitions and integrating software code and business processes;

 

    minimizing the diversion of management attention from ongoing business concerns;

 

    persuading employees that business cultures are compatible, maintaining employee morale and retaining key employees, engaging with employee works councils representing an acquired company’s non-U.S. employees, integrating employees, correctly estimating employee benefit costs and implementing restructuring programs;

 

    coordinating and combining administrative, manufacturing, research and development and other operations, subsidiaries, facilities and relationships with third parties in accordance with local laws and other obligations while maintaining adequate standards, controls and procedures;

 

    achieving savings from supply chain integration; and

 

    managing integration issues shortly after or pending the completion of other independent transactions.

We may not achieve some or all of the expected benefits of our restructuring plans and our restructuring may adversely affect our business.

We have announced restructuring plans, including the 2012 Plan and the 2015 Plan (each as defined below), in order to realign our cost structure due to the changing nature of our business and to achieve operating efficiencies that we expect to reduce costs. We may not be able to obtain the cost savings and benefits that were initially anticipated in connection with our restructuring. Additionally, as a result of our restructuring, we may experience a loss of continuity, loss of accumulated knowledge and/or inefficiency during transitional periods. Reorganization and restructuring can require a significant amount of management and other employees’ time and focus, which may divert attention from operating and growing our business. If we fail to achieve some or all of the expected benefits of restructuring, it could have a material adverse effect on our competitive position, business, financial condition, results of operations and cash flows. For more information about our restructuring plans, including details regarding the 2012 Plan and the 2015 Plan, see Note 4 to our Combined Financial Statements and Notes 3 and 18 to our Condensed Combined Financial Statements.

Our financial performance may suffer if we cannot continue to develop, license or enforce the intellectual property rights on which our businesses depend.

We rely upon patent, copyright, trademark, trade secret and other intellectual property laws in the United States, similar laws in other countries, and agreements with our employees, customers, suppliers and other parties, to establish and maintain intellectual property rights in the products and services we sell, provide or otherwise use in our operations. However, any of our intellectual property rights could be challenged, invalidated, infringed or circumvented, or such intellectual property rights may not be sufficient to permit us to take advantage of current market trends or to otherwise provide competitive advantages, either of which could result in costly product redesign efforts, discontinuance of certain product offerings or other harm to our competitive position. Further, the laws of certain countries do not protect proprietary rights to the same extent as the laws of the United States. Therefore, in certain jurisdictions we may be unable to protect our proprietary technology adequately against unauthorized third-party copying or use; this, too, could adversely affect our ability to sell products or services and our competitive position.

Our products and services depend in part on intellectual property and technology licensed from third parties.

Much of our business and many of our products rely on key technologies developed or licensed by third parties. For example, many of our software offerings are developed using software components or other intellectual property licensed from third parties, including through both proprietary and open source licenses. These third-party software components may become obsolete, defective or incompatible with future versions of our products, or our relationship with the third party may deteriorate, or our agreements with the third party may expire or be terminated. We may face legal or business disputes with licensors that may threaten or lead to the

 

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disruption of inbound licensing relationships. In order to remain in compliance with the terms of our licenses, we must carefully monitor and manage our use of third-party software components, including both proprietary and open source license terms that may require the licensing or public disclosure of our intellectual property without compensation or on undesirable terms. Additionally, some of these licenses may not be available to us in the future on terms that are acceptable or that allow our product offerings to remain competitive. Our inability to obtain licenses or rights on favorable terms could have a material effect on our business, including our financial condition and results of operations. In addition, it is possible that as a consequence of a merger or acquisition,

third parties may obtain licenses to some of our intellectual property rights or our business may be subject to certain restrictions that were not in place prior to such transaction. Because the availability and cost of licenses from third parties depends upon the willingness of third parties to deal with us on the terms we request, there is a risk that third parties who license to our competitors will either refuse to license us at all, or refuse to license us on terms equally favorable to those granted to our competitors. Consequently, we may lose a competitive advantage with respect to these intellectual property rights or we may be required to enter into costly arrangements in order to terminate or limit these rights.

Third-party claims of intellectual property infringement, including patent infringement, are commonplace in the IT industry and successful third-party claims may limit or disrupt our ability to sell our products and services.

Third parties also may claim that we or customers indemnified by us are infringing upon their intellectual property rights. For example, patent assertion entities may purchase intellectual property assets for the purpose of asserting claims of infringement and attempting to extract settlements from companies such as Hewlett Packard Enterprise and its customers. If we cannot or do not license allegedly infringed intellectual property at all or on reasonable terms, or if we are required to substitute similar technology from another source, our operations could be adversely affected. Even if we believe that intellectual property claims are without merit, they can be time-consuming and costly to defend against and may divert management’s attention and resources away from our business. Claims of intellectual property infringement also might require us to redesign affected products, enter into costly settlement or license agreements, pay costly damage awards or face a temporary or permanent injunction prohibiting us from importing, marketing or selling certain of our products. Even if we have an agreement to indemnify us against such costs, the indemnifying party may be unable or unwilling to uphold its contractual obligations to us.

The allocation of intellectual property rights between Hewlett Packard Enterprise and HP Inc. as part of the separation, and the shared use of certain intellectual property rights following the separation, could adversely impact our reputation, our ability to enforce certain intellectual property rights that are important to us and our competitive position.

In connection with the separation, HP Co. will allocate to each of Hewlett Packard Enterprise and HP Inc. the intellectual property assets relevant to their businesses. The terms of the separation include cross-licenses and other arrangements to provide for certain ongoing use of intellectual property in the existing operations of both businesses. For example, through a joint brand holding structure, both Hewlett Packard Enterprise and HP Inc. will retain the ability to make ongoing use of certain variations of the legacy Hewlett-Packard and HP branding, respectively. As a result of this shared use of the legacy branding there is a risk that conduct or events adversely affecting the reputation of HP Inc. could also adversely affect the reputation of Hewlett Packard Enterprise. In addition, as a result of the allocation of intellectual property as part of the separation, Hewlett Packard Enterprise will no longer have ownership of intellectual property allocated to HP Inc. and our resulting intellectual property ownership position could adversely affect our position and options relating to patent enforcement and patent licensing, our ability to sell our products or services and our competitive position in the industry.

 

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Our business and financial performance could suffer if we do not manage the risks associated with our Enterprise Services business properly.

The success of our ES segment is to a significant degree dependent on our ability to retain our significant services clients and maintain or increase the level of revenues from these clients. We may lose clients due to their merger or acquisition, business failure, contract expiration or their selection of a competing service provider or decision to in-source services. In addition, we may not be able to retain or renew relationships with our significant clients. As a result of business downturns or for other business reasons, we are also vulnerable to reduced processing volumes from our clients, which can reduce the scope of services provided and the prices for those services. We may not be able to replace the revenue and earnings from any such lost clients or reductions in services. In addition, our contracts may allow a client to terminate the contract for convenience, and we may not be able to fully recover our investments in such circumstances.

The pricing and other terms of some of our IT service agreements, particularly our long-term IT outsourcing services agreements, require us to make estimates and assumptions at the time we enter into these contracts that could differ from actual results. Any increased or unexpected costs or unanticipated delays in connection with the performance of these engagements, including delays caused by factors outside our control, could make these agreements less profitable or unprofitable, which could have an adverse effect on the profit margin of our IT services business.

Some of our IT service agreements require significant investment in the early stages that is expected to be recovered through billings over the life of the agreement. These agreements often involve the construction of new IT systems and communications networks and the development and deployment of new technologies. Substantial performance risk exists in each agreement with these characteristics, and some or all elements of service delivery under these agreements are dependent upon successful completion of the development, construction and deployment phases. Any failure to perform satisfactorily under these agreements may expose us to legal liability, result in the loss of customers and harm our reputation, which could harm the financial performance of our IT services business.

Some of our IT outsourcing services agreements contain pricing provisions that permit a client to request a benchmark study by a mutually acceptable third party. The benchmarking process typically compares the contractual price of our services against the price of similar services offered by other specified providers in a peer comparison group, subject to agreed-upon adjustment and normalization factors. Generally, if the benchmarking study shows that our pricing differs from our peer group outside a specified range, and the difference is not due to the unique requirements of the client, then the parties will negotiate in good faith appropriate adjustments to the pricing. This may result in the reduction of our rates for the benchmarked services performed after the implementation of those pricing adjustments, which could harm the financial performance of our IT services business.

If we do not hire, train, motivate and effectively utilize employees with the right mix of skills and experience in the right geographic regions to meet the needs of our services clients, our financial performance could suffer. For example, if our employee utilization rate is too low, our profitability and the level of engagement of our employees could suffer. If that utilization rate is too high, it could have an adverse effect on employee engagement and attrition and the quality of the work performed, as well as our ability to staff projects. If we are unable to hire and retain a sufficient number of employees with the skills or backgrounds to meet current demand, we might need to redeploy existing personnel, increase our reliance on subcontractors or increase employee compensation levels, all of which could also negatively affect our profitability. In addition, if we have more employees than we need with certain skill sets or in certain geographies, we may incur increased costs as we work to rebalance our supply of skills and resources with client demand in those geographies.

Failure to comply with our customer contracts or government contracting regulations could adversely affect our business and results of operations.

Our contracts with our customers may include unique and specialized performance requirements. In particular, our contracts with federal, state, provincial and local governmental customers are subject to various

 

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procurement regulations, contract provisions and other requirements relating to their formation, administration and performance. Any failure by us to comply with the specific provisions in our customer contracts or any violation of government contracting regulations could result in the imposition of various civil and criminal penalties, which may include termination of contracts, forfeiture of profits, suspension of payments and, in the case of our government contracts, fines and suspension from future government contracting. Such failures could also cause reputational damage to our business. In addition, HP Co. has in the past been, and we may in the future be, subject to qui tam litigation brought by private individuals on behalf of the government relating to our government contracts, which could include claims for treble damages. Further, any negative publicity related to our customer contracts or any proceedings surrounding them, regardless of its accuracy, may damage our business by affecting our ability to compete for new contracts. If our customer contracts are terminated, if we are suspended or disbarred from government work, or if our ability to compete for new contracts is adversely affected, our financial performance could suffer.

We make estimates and assumptions in connection with the preparation of our Combined Financial Statements and Condensed Combined Financial Statements (Unaudited), and any changes to those estimates and assumptions could adversely affect our results of operations.

In connection with the preparation of our Combined Financial Statements and Condensed Combined Financial Statements (Unaudited), we use certain estimates and assumptions based on historical experience and other factors. Our most critical accounting estimates are described in the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” In addition, as discussed in Note 16 to our Combined Financial Statements, we make certain estimates, including decisions related to provisions for legal proceedings and other contingencies. While we believe that these estimates and assumptions are reasonable under the circumstances, they are subject to significant uncertainties, some of which are beyond our control. Should any of these estimates and assumptions change or prove to have been incorrect, it could adversely affect our results of operations.

Unanticipated changes in our tax provisions, the adoption of new tax legislation or exposure to additional tax liabilities could affect our financial performance.

We are subject to income and other taxes in the United States and numerous foreign jurisdictions. Our tax liabilities are affected by the amounts we charge in intercompany transactions for inventory, services, licenses, funding and other items. We are subject to ongoing tax audits in various jurisdictions. Tax authorities may disagree with our intercompany charges, cross-jurisdictional transfer pricing or other matters, and may assess additional taxes as a result. We regularly assess the likely outcomes of these audits in order to determine the appropriateness of our tax provision. However, there can be no assurance that we will accurately predict the outcomes of these audits, and the amounts ultimately paid upon resolution of audits could be materially different from the amounts previously included in our income tax expense and therefore could have a material impact on our tax provision, net income and cash flows. In addition, our effective tax rate in the future could be adversely affected by changes to our operating structure, changes in the mix of earnings in countries with differing statutory tax rates, changes in the valuation of deferred tax assets and liabilities, changes in tax laws and the discovery of new information in the course of our tax return preparation process. In particular, if circumstances change such that we are unable to indefinitely reinvest our foreign earnings outside the United States, future income tax expense and payments may differ significantly from historical amounts and could materially adversely affect our results of operations. As of October 31, 2014, we had $25 billion of undistributed earnings from non-U.S. operations indefinitely reinvested outside of the United States. See Note 7 to our Combined Financial Statements included elsewhere in this information statement. The carrying value of our deferred tax assets, which are predominantly in the United States, is dependent on our ability to generate future taxable income in the United States. In addition, there are proposals for tax legislation that have been introduced or that are being considered that could have a significant adverse effect on our tax rate, the carrying value of deferred tax assets, or our deferred tax liabilities. Any of these changes could affect our financial performance.

 

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In order to be successful, we must attract, retain, train, motivate, develop and transition key employees, and failure to do so could seriously harm us.

In order to be successful, we must attract, retain, train, motivate, develop and transition qualified executives and other key employees, including those in managerial, technical, development, sales, marketing and IT support positions. Identifying, developing internally or hiring externally, training and retaining qualified executives, engineers, skilled solutions providers in the IT support business and qualified sales representatives are critical to our future, and competition for experienced employees in the IT industry can be intense. In order to attract and retain executives and other key employees in a competitive marketplace, we must provide a competitive compensation package, including cash- and equity-based compensation. Our equity-based incentive awards may contain conditions relating to our stock price performance and our long-term financial performance that make the future value of those awards uncertain. If the anticipated value of such equity-based incentive awards does not materialize, if our equity-based compensation otherwise ceases to be viewed as a valuable benefit, if our total compensation package is not viewed as being competitive, or if we do not obtain the stockholder approval needed to continue granting equity-based incentive awards in the amounts we believe are necessary, our ability to attract, retain, and motivate executives and key employees could be weakened. Our failure to successfully hire executives and key employees or the loss of any executives and key employees could have a significant impact on our operations. Further, changes in our management team may be disruptive to our business, and any failure to successfully transition and assimilate key new hires or promoted employees could adversely affect our business and results of operations.

System security risks, data protection breaches, cyberattacks and systems integration issues could disrupt our internal operations or IT services provided to customers, and any such disruption could reduce our revenue, increase our expenses, damage our reputation and adversely affect our stock price.

Experienced computer programmers and hackers may be able to penetrate our network security and misappropriate or compromise our confidential information or that of third parties, create system disruptions or cause shutdowns. Computer programmers and hackers also may be able to develop and deploy viruses, worms and other malicious software programs that attack our products or otherwise exploit any security vulnerabilities of our products. In addition, sophisticated hardware and operating system software and applications that we produce or procure from third parties may contain defects in design or manufacture, including “bugs” and other problems that could unexpectedly interfere with the operation of the system. The costs to us to eliminate or alleviate cyber or other security problems, including bugs, viruses, worms, malicious software programs and other security vulnerabilities, could be significant, and our efforts to address these problems may not be successful and could result in interruptions, delays, cessation of service and loss of existing or potential customers that may impede our sales, manufacturing, distribution or other critical functions.

We manage and store various proprietary information and sensitive or confidential data relating to our business. In addition, our outsourcing services business routinely processes, stores and transmits large amounts of data for our clients, including sensitive and personally identifiable information. Breaches of our security measures or the accidental loss, inadvertent disclosure or unapproved dissemination of proprietary information or sensitive or confidential data about us, our clients or our customers, including the potential loss or disclosure of such information or data as a result of fraud, trickery or other forms of deception, could expose us, our customers or the individuals affected to a risk of loss or misuse of this information, result in litigation and potential liability for us, damage our brand and reputation or otherwise harm our business. We also could lose existing or potential customers of outsourcing services or other IT solutions or incur significant expenses in connection with our customers’ system failures or any actual or perceived security vulnerabilities in our products and services. In addition, the cost and operational consequences of implementing further data protection measures could be significant.

Portions of our IT infrastructure also may experience interruptions, delays or cessations of service or produce errors in connection with systems integration or migration work that takes place from time to time. We

 

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may not be successful in implementing new systems and transitioning data, which could cause business disruptions and be more expensive, time-consuming, disruptive and resource intensive. Such disruptions could adversely impact our ability to fulfill orders and respond to customer requests and interrupt other processes. Delayed sales, lower margins or lost customers resulting from these disruptions could reduce our revenue, increase our expenses, damage our reputation and adversely affect our stock price.

Terrorist acts, conflicts, wars and geopolitical uncertainties may seriously harm our business and revenue, costs and expenses and financial condition and stock price.

Terrorist acts, conflicts or wars (wherever located around the world) may cause damage or disruption to our business, our employees, facilities, partners, suppliers, distributors, resellers or customers or adversely affect our ability to manage logistics, operate our transportation and communication systems or conduct certain other critical business operations. The potential for future attacks, the national and international responses to attacks or perceived threats to national security, and other actual or potential conflicts or wars have created many economic and political uncertainties. In addition, as a major multinational company with headquarters and significant operations located in the United States, actions against or by the United States may impact our business or employees. Although it is impossible to predict the occurrences or consequences of any such events, if they occur, they could result in a decrease in demand for our products, make it difficult or impossible to provide services or deliver products to our customers or to receive components from our suppliers, create delays and inefficiencies in our supply chain and result in the need to impose employee travel restrictions. We are predominantly uninsured for losses and interruptions caused by terrorist acts, conflicts and wars.

Our business is subject to various federal, state, local and foreign laws and regulations that could result in costs or other sanctions that adversely affect our business and results of operations.

We are subject to various federal, state, local and foreign laws and regulations. For example, we are subject to laws and regulations concerning environmental protection, including laws addressing the discharge of pollutants into the air and water, the management and disposal of hazardous substances and wastes, the clean-up of contaminated sites, the content of our products and the recycling, treatment and disposal of our products. In particular, we face increasing complexity in our product design and procurement operations as we adjust to new and future requirements relating to the chemical and materials composition of our products, their safe use, the energy consumption associated with those products, climate change laws and regulations and product take-back legislation. If we were to violate or become liable under environmental laws or if our products become non-compliant with environmental laws, we could incur substantial costs or face other sanctions, which may include restrictions on our products entering certain jurisdictions. Our potential exposure includes fines and civil or criminal sanctions, third-party property damage, personal injury claims and clean-up costs. Further, liability under some environmental laws relating to contaminated sites can be imposed retroactively, on a joint and several basis, and without any finding of noncompliance or fault. The amount and timing of costs to comply with environmental laws are difficult to predict.

In addition, our business is subject to laws addressing privacy and information security. In particular, we face an increasingly complex regulatory environment in our big data offerings as we adjust to new and future requirements relating to the security of our offerings. If we were to violate or become liable under laws or regulations associated with security, we could incur substantial costs or face other sanctions. Our potential exposure includes fines and civil or criminal sanctions, and third-party claims.

Failure by Hewlett Packard Enterprise to obtain or maintain a satisfactory credit rating could adversely affect its liquidity, capital position, borrowing costs and access to capital markets.

In connection with our separation capitalization plan, which is intended to result in each of HP Inc. and Hewlett Packard Enterprise obtaining investment grade credit ratings, we expect to incur additional borrowings to redistribute debt between us and HP Co., such that we have total debt of approximately $16 billion immediately following the separation. In August 2015, Moody’s Investor Services, Inc. assigned a Baa2 senior

 

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unsecured issuer rating with a stable outlook, Standard & Poor’s announced that it will likely assign a BBB corporate credit rating with a stable outlook, and Fitch Ratings announced that it expects to assign long-term issuer default ratings of A-, in each case to Hewlett Packard Enterprise in anticipation of the separation. Despite these anticipated investment grade credit ratings following the separation, any future downgrades could increase the cost of borrowing under any indebtedness we may incur in connection with the separation or otherwise, reduce market capacity for our commercial paper or require the posting of additional collateral under our derivative contracts. Additionally, increased borrowing costs, including those arising from a credit rating downgrade, can potentially reduce the competitiveness of our financing business. There can be no assurance that we will be able to maintain our credit ratings once established, and any additional actual or anticipated changes or downgrades in our credit ratings, including any announcement that our ratings are under review for a downgrade, may have a negative impact on our liquidity, capital position and access to capital markets.

After our separation from HP Co., we will have debt obligations that could adversely affect our business and our ability to meet our obligations and pay dividends.

Immediately following the separation, Hewlett Packard Enterprise expects to carry net debt. See “Description of Material Indebtedness.” We may also incur additional indebtedness in the future. This significant amount of debt could have important adverse consequences to us and our investors, including:

 

    requiring a substantial portion of our cash flow from operations to make principal and interest payments;

 

    making it more difficult to satisfy other obligations;

 

    increasing the risk of a future credit ratings downgrade of our debt, which could increase future debt costs and limit the future availability of debt financing;

 

    increasing our vulnerability to general adverse economic and industry conditions;

 

    reducing the cash flows available to fund capital expenditures and other corporate purposes and to grow our business;

 

    limiting our flexibility in planning for, or reacting to, changes in our business and industry; and

 

    limiting our ability to borrow additional funds as needed or take advantage of business opportunities as they arise, pay cash dividends or repurchase our common stock.

To the extent that we incur additional indebtedness, the risks described above could increase. In addition, our actual cash requirements in the future may be greater than expected. Our cash flow from operations may not be sufficient to service our outstanding debt or to repay our outstanding debt as it becomes due, and we may not be able to borrow money, sell assets or otherwise raise funds on acceptable terms, or at all, to service or refinance our debt.

Risks Related to the Separation

Our plan to separate into two independent publicly traded companies is subject to various risks and uncertainties and may not be completed in accordance with the expected plans or anticipated timeline, or at all, and will involve significant time and expense, which could disrupt or adversely affect our business.

On October 6, 2014, we announced plans to separate into two independent publicly traded companies. The separation is subject to approval by the HP Co. board of directors of the final terms of the separation and market, regulatory and certain other conditions. Unanticipated developments, including changes in the competitive conditions of Hewlett Packard Enterprise’s and HP Inc.’s respective markets, regulatory approvals or clearances, the uncertainty of the financial markets and challenges in executing the separation, could delay or prevent the completion of the proposed separation, or cause the separation to occur on terms or conditions that are different or less favorable than expected.

 

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HP Co. has established a Separation Management Office tasked with driving the separation process. The process of completing the proposed separation has been and is expected to continue to be time-consuming and involves significant costs and expenses. For example, during the nine months ended July 31, 2015, we recorded nonrecurring separation costs of $458 million, which were primarily related to third-party consulting, contractor fees and other incremental costs directly associated with the separation process. As of July 31, 2015, we expect to incur future separation costs of up to $0.6 billion during the remainder of fiscal 2015 and in fiscal 2016. In addition, we expect to make foreign tax payments of approximately $0.6 billion arising from the separation over this same time period, with subsequent tax credit amounts expected over later years. As of July 31, 2015, we expect future cash payments of up to $0.9 billion in connection with our separation costs and foreign tax payments, which are expected to be paid in the remainder of fiscal 2015 and in fiscal 2016, with subsequent tax credit amounts expected over later years. As of July 31, 2015, we also expect separation-related capital expenditures of approximately $60 million in the remainder of fiscal 2015. The separation costs may be significantly higher than what we currently anticipate and may not yield a discernible benefit if the separation is not completed or is not well executed. Executing the proposed separation will also require significant amounts of management’s time and effort, which may divert management’s attention from operating and growing our business. Due to the scale and variety of HP Co.’s businesses and its global footprint (among other factors), the separation process is extremely complex and requires effort and attention from employees throughout the HP Co. organization. For example, thousands of employees of businesses that will become part of Hewlett Packard Enterprise must be transitioned to new payroll and other benefit platforms, and legacy programs going back decades, such as pensions, must be divided among Hewlett Packard Enterprise and HP Inc. Outside the organization, HP Co. must notify and establish separation readiness among tens of thousands of customers, business partners and suppliers so that business relationships all over the world may continue seamlessly following the completion of the separation. Administratively, the separation involves the establishment of new customer and supplier accounts, new bank accounts, legal reorganizations and contractual assignments in various jurisdictions throughout the world, and the creation and maintenance of separation management functions, led by the Separation Management Office, to plan and execute the separation process in a timely fashion. Other challenges associated with effectively executing the separation include attracting, retaining and motivating employees during the pendency of the separation and following its completion; addressing disruptions to our supply chain, manufacturing and other operations resulting from splitting HP Co. into two large but independent companies; separating HP Co.’s information systems; and establishing a new brand identity in the marketplace.

The combined post-separation value of HP Inc. and Hewlett Packard Enterprise common stock may not equal or exceed the pre-separation value of HP Co. common stock.

As a result of the distribution, HP Co. expects the trading price of HP Inc. common stock immediately following the distribution to be lower than the “regular-way” trading price of such common stock immediately prior to the distribution because the trading price will no longer reflect the value of the businesses held by Hewlett Packard Enterprise. The aggregate market value of HP Inc. common stock and the Hewlett Packard Enterprise common stock following the separation may be higher or lower than the market value of HP Co. common stock immediately prior to the separation.

The separation may not achieve some or all of the anticipated benefits.

We may not realize some or all of the anticipated strategic, financial, operational, marketing or other benefits from the separation. As independent publicly traded companies, Hewlett Packard Enterprise and HP Inc. will be smaller, less diversified companies with a narrower business focus and may be more vulnerable to changing market conditions, which could materially and adversely affect their respective business, financial condition and results of operations.

 

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If the distribution, together with certain related transactions, does not qualify as a transaction that is generally tax-free for U.S. federal income tax purposes, HP Inc., Hewlett Packard Enterprise and HP Co. stockholders could be subject to significant tax liabilities, and, in certain circumstances, Hewlett Packard Enterprise could be required to indemnify HP Inc. for material taxes and other related amounts pursuant to indemnification obligations under the tax matters agreement.

It is a condition to the distribution that HP Co. receive (i) a private letter ruling from the IRS and/or one or more opinions from its external tax advisors, in each case, satisfactory to HP Co.’s board of directors, regarding certain U.S. federal income tax matters relating to the separation and related transactions, and (ii) an opinion of each of Wachtell, Lipton, Rosen & Katz and Skadden, Arps, Slate, Meagher & Flom LLP, satisfactory to HP Co.’s board of directors, regarding the qualification of the distribution, together with certain related transactions, as a transaction that is generally tax-free, for U.S. federal income tax purposes, under Sections 355 and 368(a)(1)(D) of the Code. Any opinions of outside counsel or other external tax advisors and any IRS private letter ruling will be based, among other things, on various facts and assumptions, as well as certain representations, statements and undertakings of HP Co. and Hewlett Packard Enterprise (including those relating to the past and future conduct of HP Co. and Hewlett Packard Enterprise). If any of these facts, assumptions, representations, statements or undertakings is, or becomes, inaccurate or incomplete, or if HP Co. or Hewlett Packard Enterprise breach any of their respective covenants contained in any of the separation-related agreements or in the documents relating to the IRS private letter ruling and/or any tax opinion, the IRS private letter ruling and/or any tax opinion may be invalid. Accordingly, notwithstanding receipt of the IRS private letter ruling and/or opinions of counsel or other external tax advisors, the IRS could determine that the distribution and certain related transactions should be treated as taxable transactions for U.S. federal income tax purposes if it determines that any of the facts, assumptions, representations, statements or undertakings that were included in the request for the IRS private letter ruling or on which any opinion was based are false or have been violated. In addition, the IRS private letter ruling will not address all of the issues that are relevant to determining whether the distribution, together with certain related transactions, qualifies as a transaction that is generally tax-free for U.S. federal income tax purposes, and an opinion of outside counsel or other external tax advisor represents the judgment of such counsel or advisor which is not binding on the IRS or any court. Accordingly, notwithstanding receipt by HP Co. of the IRS private letter ruling and the tax opinions referred to above, there can be no assurance that the IRS will not assert that the distribution and/or certain related transactions do not qualify for tax-free treatment for U.S. federal income tax purposes or that a court would not sustain such a challenge. In the event the IRS were to prevail with such challenge, HP Co., Hewlett Packard Enterprise and HP Co.’s stockholders could be subject to significant U.S. federal income tax liability.

If the distribution, together with certain related transactions, fails to qualify as a transaction that is generally tax-free under Sections 355 and 368(a)(1)(D) of the Code, in general, for U.S. federal income tax purposes, HP Inc. would recognize taxable gain as if it has sold the Hewlett Packard Enterprise common stock in a taxable sale for its fair market value and HP Co. stockholders who receive shares of Hewlett Packard Enterprise common stock in the distribution would be subject to tax as if they had received a taxable distribution equal to the fair market value of such shares. For more information, see “Material U.S. Federal Income Tax Consequences.”

Under the tax matters agreement to be entered into by HP Inc. and Hewlett Packard Enterprise in connection with the separation, Hewlett Packard Enterprise generally would be required to indemnify HP Inc. for any taxes resulting from the separation (and any related costs and other damages) to the extent such amounts resulted from (i) an acquisition of all or a portion of the equity securities or assets of Hewlett Packard Enterprise, whether by merger or otherwise (and regardless of whether Hewlett Packard Enterprise participated in or otherwise facilitated the acquisition), (ii) other actions or failures to act by Hewlett Packard Enterprise or (iii) any of the representations or undertakings of Hewlett Packard Enterprise contained in any of the separation-related agreements or in the documents relating to the IRS private letter ruling and/or any tax opinion being incorrect or violated. Any such indemnity obligations could be material. For a more detailed discussion, see “Certain Relationships and Related Person Transactions—Tax Matters Agreement.”

 

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In addition, HP Co., Hewlett Packard Enterprise and their respective subsidiaries may incur certain tax costs in connection with the separation, including non-U.S. tax costs resulting from separations in multiple non-U.S. jurisdictions that do not legally provide for tax-free separations, which may be material.

We may not be able to engage in desirable strategic or capital-raising transactions following the separation.

To preserve the tax-free treatment of the separation and the distribution for U.S. federal income tax purposes, for the two-year period following the separation, we will be prohibited under the tax matters agreement, except in specific circumstances, from: (i) entering into any transaction pursuant to which all or a portion of the shares of Hewlett Packard Enterprise common stock would be acquired, whether by merger or otherwise, (ii) issuing equity securities beyond certain thresholds, (iii) repurchasing shares of our common stock other than in certain open-market transactions, (iv) ceasing to actively conduct certain of our businesses or (v) taking or failing to take any other action that would prevent the distribution and certain related transactions from qualifying as a transaction that is generally tax-free for U.S. federal income tax purposes under Sections 355 and 368(a)(1)(D) of the Code. These restrictions may limit for a period of time our ability to pursue certain strategic transactions, equity issuances or repurchases or other transactions that we may believe to be in the best interests of our stockholders or that might increase the value of our business. For more information, see “Certain Relationships and Related Person Transactions—Tax Matters Agreement.”

We have no history of operating as an independent company and we expect to incur increased administrative and other costs following the separation by virtue of our status as an independent public company. Our historical and pro forma financial information is not necessarily representative of the results that we would have achieved as a separate, publicly traded company and may not be a reliable indicator of our future results.

The historical information about Hewlett Packard Enterprise in this information statement refers to our business as operated by and integrated with HP Co. Our historical and pro forma financial information included in this information statement is derived from the consolidated financial statements and accounting records of HP Co. Accordingly, our historical and pro forma financial information included in this information statement does not necessarily reflect the financial condition, results of operations or cash flows that we would have achieved as a separate, publicly traded company during the periods presented or those that we will achieve in the future primarily as a result of the following factors, among others:

 

    Prior to the separation, our business has been operated by HP Co. as part of its broader corporate organization, rather than as an independent company. HP Co. or one of its affiliates performed various corporate functions for us such as legal, treasury, accounting, internal auditing, human resources and corporate affairs, and also provided our IT and other corporate infrastructure. Our historical and pro forma financial results reflect allocations of corporate expenses from HP Co. for such functions and are likely to be less than the expenses we would have incurred had we operated as a separate publicly traded company. Following the separation, our costs related to such functions previously performed by HP Co. may increase.

 

    Currently, our business is integrated with the other businesses of HP Co. Historically, we have shared economies of scope and scale in costs, employees, vendor relationships and customer relationships. Although we will enter into certain agreements (including a transition services agreement) with HP Inc. in connection with the separation, these arrangements may not fully capture the benefits that we enjoyed as a result of being integrated with HP Co. and may result in us paying higher charges than in the past for these services. This could have an adverse effect on our results of operations and financial condition following the completion of the separation.

 

   

Generally, our working capital requirements and capital for our general corporate purposes, including acquisitions and capital expenditures, have historically been satisfied as part of the corporate-wide cash management policies of HP Co. In connection with the separation, we intend to enter into the financing arrangements described under the section entitled “Description of Material Indebtedness” as part of our transition to becoming a standalone company. Following the completion of the separation, we may

 

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need to obtain additional financing from banks, through public offerings or private placements of debt or equity securities, strategic relationships or other arrangements.

 

    After the completion of the separation, the cost of capital for our business may be higher than HP Co.’s cost of capital prior to the separation.

 

    Our historical combined and condensed combined financial information does not reflect the debt or the associated interest expense that we will incur as part of the separation and distribution. See “Description of Material Indebtedness.”

Other significant changes may occur in our cost structure, management, financing and business operations as a result of operating as a company separate from HP Co. For additional information about the past financial performance of our business and the basis of presentation of the historical combined financial statements and the unaudited pro forma combined financial statements of our business, see “Unaudited Pro Forma Combined Financial Statements,” “Selected Historical Combined Financial Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the historical combined and condensed combined financial statements and accompanying notes included elsewhere in this information statement.

The separation agreement that we will enter into with HP Co. may limit our ability to compete in certain markets and may impose limitations on our recruiting efforts for a period of time following the separation.

The separation agreement will include non-compete provisions pursuant to which we will generally agree to not compete with HP Inc. in certain product and service categories that comprise the HP Inc. business, including personal computers and printers, worldwide for three years from the distribution date. Such restrictions will be subject to certain exceptions set forth in the separation agreement. See “Certain Relationships and Related Person Transactions—The Separation and Distribution Agreement—Non-Competition.”

In addition, the separation agreement will contain (i) non-solicitation provisions preventing us from soliciting HP Inc. employees to work for us for 12 months from the distribution date and (ii) no-hire provisions preventing us from hiring HP Inc. employees for six months from the distribution date, in each case subject to certain exceptions. See “Certain Relationships and Related Person Transactions—The Separation and Distribution Agreement—Non-Solicitation and No-Hire.”

The foregoing restrictions may limit our ability to compete in certain markets and may impose limitations on our recruiting efforts. These factors could materially and adversely affect our business, financial condition and results of operations.

Hewlett Packard Enterprise or HP Inc. may fail to perform under the transition services agreement and other transaction agreements that will be executed as part of the separation, and we may not have necessary systems and services in place when these transaction agreements expire.

In connection with the separation, Hewlett Packard Enterprise and HP Co. will enter into several agreements, including among others a transition services agreement, a separation agreement, a tax matters agreement, an employee matters agreement, a real estate matters agreement, a commercial agreement and an IT service agreement. The transition services agreement will provide for the performance of certain services by each company for the benefit of the other for a transition period after the separation. The separation agreement, tax matters agreement, employee matters agreement and real estate matters agreement will determine the allocation of assets and liabilities between the companies following the separation for those respective areas and include any necessary indemnifications related to liabilities and obligations. The commercial agreement will establish a bilateral relationship between HP Inc. and us for the purchase and sale of commercially available products and services for internal use, incorporation and bundling in OEM products and services, resale to customers and use in the provision of managed services to customers, as well as joint customer pursuits and joint development activities. The IT service agreement will provide for the performance by one of our subsidiaries of certain application development and maintenance and IT infrastructure services for HP Inc. We will rely on HP Inc. to

 

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satisfy its performance and payment obligations under these agreements. If HP Inc. is unable to satisfy its obligations under these agreements, including its obligations with respect to the provision of transition services, we could incur operational difficulties or losses that could have a material and adverse effect on our business, financial condition and results of operations.

In addition, if we do not have in place our own systems and services, or if we do not have agreements with other providers of these services in place once certain transition services expire, we may not be able to operate our business effectively and our profitability may decline. We are in the process of creating our own, or engaging third parties to provide, systems and services to replace many of the systems and services that HP Co. currently provides to us and/or will provide to us under the transition services agreement. However, we may not be successful in implementing these systems and services or in transitioning from HP Co.’s systems to our own systems, and may pay more for such systems and services that we currently pay or that we will pay under the transition services agreement.

The proposed separation may result in disruptions to, and negatively impact our relationships with, our customers and other business partners. In addition, certain contracts that will need to be assigned from HP Co. or its affiliates to Hewlett Packard Enterprise in connection with the separation require the consent of the counterparty to such an assignment, and failure to obtain these consents could increase our expenses or otherwise harm our business and financial performance.

Uncertainty related to the proposed separation may lead customers and other parties with which we currently do business or may do business in the future to terminate or attempt to negotiate changes in our existing business relationships, or cause them to consider entering into business relationships with parties other than us. These disruptions could have a material and adverse effect on our businesses, financial condition, results of operations and prospects. The effect of such disruptions could be exacerbated by any delays in the completion of the separation.

In addition, the separation agreement will provide that a number of contracts are to be assigned from HP Co. or its affiliates to us or our affiliates. A minority of our customer contracts require the contractual counterparty’s consent to assignment, a small number of which remain outstanding. We are currently on track to obtain most of these outstanding consents prior to the completion of the separation. However, it is possible that some parties may use the consent requirement to seek more favorable contractual terms from us. If we are unable to obtain these consents, we may be unable to obtain some of the benefits, assets and contractual commitments that are intended to be allocated to us as part of the separation. If we are unable to obtain these consents, the loss of these contracts could increase our expenses or otherwise reduce our profitability.

Potential indemnification liabilities to HP Inc. pursuant to the separation agreement could materially and adversely affect our business, financial condition, results of operations and cash flows.

The separation agreement will provide for, among other things, indemnification obligations generally designed to make us financially responsible for (i) liabilities primarily associated with the Hewlett Packard Enterprise business; (ii) our failure to pay, perform or otherwise promptly discharge any such liabilities or contracts, in accordance with their respective terms, whether prior to, at or after the distribution; (iii) any guarantee, indemnification obligation, surety bond or other credit support agreement, arrangement, commitment or understanding by HP Inc. for our benefit, unless related to liabilities primarily associated with the HP Inc. business; (iv) any breach by us of the separation agreement or any of the ancillary agreements or any action by us in contravention of our amended and restated certificate of incorporation or amended and restated bylaws; and (v) any untrue statement or alleged untrue statement of a material fact or omission or alleged omission to state a material fact required to be stated therein or necessary to make the statements therein not misleading, with respect to all information contained in the registration statement of which this information statement forms a part (as amended or supplemented) or any other disclosure document that describes the separation or the distribution or Hewlett Packard Enterprise and its subsidiaries or primarily relates to the transactions contemplated by the separation agreement, subject to certain exceptions. If we are required to indemnify HP Inc. under the

 

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circumstances set forth in the separation agreement, we may be subject to substantial liabilities. See “Certain Relationships and Related Person Transactions—The Separation and Distribution Agreement—Indemnification.”

In connection with the separation, HP Inc. will indemnify us for certain liabilities. However, there can be no assurance that the indemnity will be sufficient to insure us against the full amount of such liabilities, or that HP Inc.’s ability to satisfy its indemnification obligation will not be impaired in the future.

Pursuant to the separation agreement and certain other agreements we will enter into with HP Co., HP Inc. will indemnify Hewlett Packard Enterprise for certain liabilities as discussed further in “Certain Relationships and Related Person Transactions—The Separation and Distribution Agreement—Indemnification.” However, third parties could also seek to hold us responsible for any of the liabilities that HP Inc. has agreed to retain, and there can be no assurance that the indemnity from HP Inc. will be sufficient to protect us against the full amount of such liabilities, or that HP Inc. will be able to fully satisfy its indemnification obligations. In addition, HP Inc.’s insurers may attempt to deny us coverage for liabilities associated with certain occurrences of indemnified liabilities prior to the separation. Moreover, even if we ultimately succeed in recovering from HP Inc. or such insurance providers any amounts for which we are held liable, we may be temporarily required to bear these losses. Each of these risks could negatively affect our business, financial position, results of operations and cash flows.

We will be subject to continuing contingent liabilities following the separation.

After the separation, there will be several significant areas where the liabilities of HP Co. may become our obligations. For example, under the Code and the related rules and regulations, each corporation that was a member of the HP Co. consolidated U.S. federal income tax return group during a taxable period or portion of a taxable period ending on or before the effective date of the distribution is severally liable for the U.S. federal income tax liability of the HP Co. consolidated U.S. federal income tax return group for that taxable period. Consequently, if HP Inc. is unable to pay the consolidated U.S. federal income tax liability for a pre-separation period, we could be required to pay the amount of such tax, which could be substantial and in excess of the amount allocated to us under the tax matters agreement. For a discussion of the tax matters agreement, see “Certain Relationships and Related Person Transactions—Tax Matters Agreement.” Other provisions of federal law establish similar liability for other matters, including laws governing tax-qualified pension plans, as well as other contingent liabilities.

Potential liabilities may arise due to fraudulent transfer considerations, which would adversely affect our financial condition and results of operations.

In connection with the separation and distribution, HP Co. has undertaken and will undertake several corporate reorganization transactions involving its subsidiaries which, along with the separation and distribution, may be subject to federal and state fraudulent conveyance and transfer laws. If, under these laws, a court were to determine that, at the time of the separation and distribution, any entity involved in these reorganization transactions or the separation and distribution:

 

    was insolvent;

 

    was rendered insolvent by reason of the separation and distribution;

 

    had remaining assets constituting unreasonably small capital; or

 

    intended to incur, or believed it would incur, debts beyond its ability to pay these debts as they matured,

then the court could void the separation and distribution, in whole or in part, as a fraudulent conveyance or transfer. The court could then require our stockholders to return to HP Inc. some or all of the shares of Hewlett Packard Enterprise common stock issued in the distribution, or require HP Inc. or Hewlett Packard Enterprise, as the case may be, to fund liabilities of the other company for the benefit of creditors. The measure of insolvency will vary depending upon the jurisdiction whose law is being applied. Generally, however, an entity would be

 

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considered insolvent if the fair value of its assets was less than the amount of its liabilities, or if it incurred debt beyond its ability to repay the debt as it matures.

Risks Related to Our Common Stock

We cannot be certain that an active trading market for our common stock will develop or be sustained after the separation, and following the separation, our stock price may fluctuate significantly.

A public market for Hewlett Packard Enterprise common stock does not currently exist. We anticipate that on or shortly before the record date for the distribution, trading of shares of our common stock will begin on a “when-issued” basis and will continue through the distribution date. However, we cannot guarantee that an active trading market will develop or be sustained for our common stock after the separation. Nor can we predict the prices at which shares of our common stock may trade after the separation. Similarly, we cannot predict whether the combined market value of the outstanding shares of our common stock and HP Inc. common stock will be less than, equal to or greater than the market value of the outstanding HP Co. common shares prior to the separation.

The market price of our common stock may fluctuate significantly due to a number of factors, some of which may be beyond our control, including:

 

    actual or anticipated fluctuations in our operating results;

 

    changes in earnings estimated by securities analysts or our ability to meet those estimates;

 

    the operating and stock price performance of comparable companies;

 

    changes to the regulatory and legal environment in which we operate; and

 

    domestic and worldwide economic conditions.

Shares of our common stock generally will be eligible for resale following the distribution, which may cause our stock price to decline.

Any sales of substantial amounts of Hewlett Packard Enterprise common stock in the public market or the perception that such sales might occur, in connection with the separation or otherwise, may cause the market price of our common stock to decline. Upon completion of the distribution, based on the number of HP Co. common shares outstanding as of September 30, 2015, we expect that we will have an aggregate of approximately 1.878 billion shares of our common stock issued and outstanding. These shares will be freely tradable without restriction or further registration under the U.S. Securities Act of 1933, as amended (“Securities Act”), unless the shares are owned by one or more of our “affiliates,” as that term is defined in Rule 405 under the Securities Act. We are unable to predict whether large amounts of our common stock will be sold in the open market following the distribution. We are also unable to predict whether a sufficient number of buyers would be in the market at that time.

We cannot guarantee the payment of dividends on our common stock, or the timing or amount of any such dividends.

Following the separation, Hewlett Packard Enterprise and HP Inc. are each expected to maintain a dividend that, together, will be similar to that of HP Co. prior to the separation. We expect that HP Inc. will maintain a higher dividend than Hewlett Packard Enterprise initially. We currently expect Hewlett Packard Enterprise to return at least 50% of free cash flow in fiscal year 2016 to stockholders through approximately $400 million in dividends and the remainder in share repurchases. Dividend yields will be dependent on the trading price of the respective companies’ common stock following the separation.

However, the payment of any dividends in the future, and the timing and amount thereof, to our stockholders will fall within the discretion of our board of directors. Our board of directors’ decisions regarding the payment of dividends will depend on many factors, such as our financial condition, earnings, capital requirements, debt service obligations, restrictive covenants in our debt, industry practice, legal requirements,

 

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regulatory constraints and other factors that our board of directors deems relevant. For more information, see “Dividend Policy.” Our ability to pay dividends will depend on our ongoing ability to generate cash from operations and on our access to the capital markets. We cannot guarantee that we will pay a dividend in the future or continue to pay any dividends if and when we commence paying dividends.

Your percentage ownership in Hewlett Packard Enterprise may be diluted in the future.

In the future, your percentage ownership in Hewlett Packard Enterprise may be diluted because of equity issuances for acquisitions, capital market transactions or otherwise, including equity awards that we will be granting to our directors, officers and employees and purchases of shares from Hewlett Packard Enterprise through our employee stock purchase plan. We anticipate that the compensation committee of our board of directors will grant stock options or other stock-based awards to our employees and directors after the distribution, from time to time, under our employee benefits plans. Such awards will have a dilutive effect on our earnings per share, which could adversely affect the market price of our common stock.

In addition, our amended and restated certificate of incorporation will authorize us to issue, without the approval of our stockholders, one or more classes or series of preferred stock having such designation, powers, preferences and relative, participating, optional and other special rights, including preferences over our common stock with respect to dividends and distributions, as our board of directors may generally determine. The terms of one or more classes or series of preferred stock could dilute the voting power or reduce the value of our common stock. For example, we could grant the holders of preferred stock the right to elect some number of the members of our board of directors in all events or upon the happening of specified events, or the right to veto specified transactions. Similarly, the repurchase or redemption rights or liquidation preferences that we could assign to holders of preferred stock could affect the residual value of our common stock. See “Description of Hewlett Packard Enterprise’s Capital Stock.”

Certain provisions in our amended and restated certificate of incorporation and amended and restated bylaws, and of Delaware law, may prevent or delay an acquisition of Hewlett Packard Enterprise, which could decrease the trading price of our common stock.

Our amended and restated certificate of incorporation and amended and restated bylaws will contain, and Delaware law contains, provisions that are intended to deter coercive takeover practices and inadequate takeover bids and to encourage prospective acquirers to negotiate with our board of directors rather than to attempt a hostile takeover. These provisions include, among others:

 

    the fact that special meetings of our stockholders may only be called by our board of directors (or the chairman of our board of directors, our chief executive officer or our secretary with the concurrence of a majority of our board of directors) or our stockholders holding at least 20% of our outstanding shares;

 

    the inability of our stockholders to act without a meeting of stockholders;

 

    rules regarding how our stockholders may present proposals or nominate directors for election at stockholder meetings; and

 

    the right of our board of directors to issue preferred stock without stockholder approval.

In addition, because we have not chosen to be exempt from Section 203 of the Delaware General Corporation Law (the “DGCL”), this provision could also delay or prevent a change of control that a stockholder may favor. Section 203 provides that, subject to limited exceptions, persons that acquire, or are affiliated with a person that acquires, more than 15% of the outstanding voting stock of a Delaware corporation (an “interested stockholder”) shall not engage in any business combination with that corporation, including by merger, consolidation or acquisitions of additional shares, for a three-year period following the date on which the person became an interested stockholder, unless (i) prior to such time, the board of directors of such corporation approved either the business combination or the transaction that resulted in the stockholder becoming an

 

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interested stockholder; (ii) upon consummation of the transaction that resulted in the stockholder becoming an interested stockholder, the interested stockholder owned at least 85% of the voting stock of such corporation at the time the transaction commenced (excluding for purposes of determining the voting stock outstanding (but not the outstanding voting stock owned by the interested stockholder) the voting stock owned by directors who are also officers or held in employee benefit plans in which the employees do not have a confidential right to tender or vote stock held by the plan); or (iii) on or subsequent to such time the business combination is approved by the board of directors of such corporation and authorized at a meeting of stockholders by the affirmative vote of at least two-thirds of the outstanding voting stock of such corporation not owned by the interested stockholder.

We believe these provisions will protect our stockholders from coercive or otherwise unfair takeover tactics by requiring potential acquirers to negotiate with our board of directors and by providing our board of directors with more time to assess any acquisition proposal. These provisions are not intended to make us immune from takeovers and will apply even if the offer may be considered beneficial by some stockholders, but could delay or prevent an acquisition that our board of directors determines is not in the best interests of our company and our stockholders. These provisions may also prevent or discourage attempts to remove and replace incumbent directors.

In addition, an acquisition or further issuance of our common stock could trigger the application of Section 355(e) of the Code, causing the distribution to be taxable to HP Inc. For a discussion of Section 355(e), see “Material U.S. Federal Income Tax Consequences.” Under the tax matters agreement, we would be required to indemnify HP Inc. for the resulting tax, and this indemnity obligation might discourage, delay or prevent a change of control that you may consider favorable.

 

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CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS

This information statement and other materials HP Co. and Hewlett Packard Enterprise have filed or will file with the SEC contain, or will contain, certain forward-looking statements regarding business strategies, market potential, future financial performance and other matters. The words “will,” “should,” “believe,” “expect,” “anticipate,” “project” and similar expressions, among others, generally identify “forward-looking statements,” which speak only as of the date the statements were made. The matters discussed in these forward-looking statements are subject to risks, uncertainties and other factors that could cause actual results to differ materially from those projected, anticipated or implied in the forward-looking statements. In particular, information included under “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Business” and “The Separation and Distribution” contain forward-looking statements. Where, in any forward-looking statement, an expectation or belief as to future results or events is expressed, such expectation or belief is based on the current plans and expectations of Hewlett Packard Enterprise’s management and expressed in good faith and believed to have a reasonable basis, but there can be no assurance that the expectation or belief will result or be achieved or accomplished. Except as may be required by law, we undertake no obligation to modify or revise any forward-looking statements to reflect events or circumstances occurring after the date of this information statement. Factors that could cause actual results or events to differ materially from those anticipated include, but are not limited to, the matters described under “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 

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DIVIDEND POLICY

Following the separation, Hewlett Packard Enterprise and HP Inc. are each expected to maintain a dividend that, together, will be similar to that of HP Co. prior to the separation. We expect that HP Inc. will maintain a higher dividend than Hewlett Packard Enterprise initially. We currently expect Hewlett Packard Enterprise to return at least 50% of free cash flow in fiscal year 2016 to stockholders through approximately $400 million in dividends and the remainder in share repurchases. Dividend yields will be dependent on the trading price of the respective companies’ common stock following the separation.

The payment of any dividends in the future, and the timing and amount thereof, is within the discretion of our board of directors. Our board of directors’ decisions regarding the payment of dividends will depend on many factors, such as our financial condition, earnings, capital requirements, debt service obligations, restrictive covenants in our debt, industry practice, legal requirements, regulatory constraints and other factors that our board of directors deems relevant. Our ability to pay dividends will depend on our ongoing ability to generate cash from operations and on our access to the capital markets. We cannot guarantee that we will pay a dividend in the future or continue to pay any dividends if and when we commence paying dividends.

 

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CAPITALIZATION

The following table presents our historical cash and capitalization at July 31, 2015 and our pro forma cash and capitalization at that date reflecting the pro forma adjustments described in the notes to our unaudited pro forma condensed combined balance sheet as if the separation and distribution, including the financing transactions that we expect to enter into in connection with the separation, had occurred on July 31, 2015. You can find an explanation of the pro forma adjustments made to our historical combined financial statements under “Unaudited Pro Forma Combined Financial Statements.” You should review the following table in conjunction with our “Unaudited Pro Forma Combined Financial Statements,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our historical Combined and Condensed Combined Financial Statements and accompanying notes included elsewhere in this information statement. See “Index to Financial Statements.”

We are providing the capitalization table below for informational purposes only. It should not be construed to be indicative of our capitalization or financial condition had the separation been completed on the date assumed. The capitalization table below may not reflect the capitalization or financial condition that would have resulted had we operated as a standalone public company at that date and is not necessarily indicative of our future capitalization or financial position.

 

     As of July 31, 2015  
     Historical      Pro Forma  
    

(Unaudited)

In millions

 

Cash and cash equivalents

   $ 2,774       $ 11,500   
  

 

 

    

 

 

 

Liabilities:

     

Notes payable and short-term borrowings

   $ 752       $ 752   

Long-term debt

     493         15,093   
  

 

 

    

 

 

 

Total debt

   $ 1,245       $ 15,845   
  

 

 

    

 

 

 

Equity:

     

Common stock ($0.01 par value)

   $ —         $ 18  

Additional paid-in capital

     —           37,113   

Parent company investment

     42,568         —     

Accumulated other comprehensive loss

     (2,250      (4,821
  

 

 

    

 

 

 

Equity attributable to the Company

     40,318         32,310   

Non-controlling interests

     408         408   
  

 

 

    

 

 

 

Total equity

   $ 40,726       $ 32,718   
  

 

 

    

 

 

 

Total capitalization

   $ 41,971       $ 48,563   
  

 

 

    

 

 

 

 

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UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS

The following unaudited pro forma combined financial statements of the enterprise technology infrastructure, software, services and financing businesses of HP Co. consist of the unaudited pro forma condensed combined statements of earnings for the nine months ended July 31, 2015 and the unaudited pro forma combined statements of earnings for the fiscal year ended October 31, 2014, and an unaudited pro forma condensed combined balance sheet as of July 31, 2015, which have been derived from our historical Combined and Condensed Combined Financial Statements included elsewhere in this information statement. See “Index to Financial Statements.”

The unaudited pro forma combined financial statements reflect adjustments to our historical financial results in connection with the separation and distribution. The unaudited pro forma combined statements of earnings give effect to the separation and distribution as if they had occurred on November 1, 2013, the beginning of our most recently completed fiscal year. The unaudited pro forma condensed combined balance sheet gives effect to these events as if they occurred as of July 31, 2015, our latest balance sheet date.

Our unaudited pro forma combined financial statements have been prepared to reflect adjustments to our historical Combined and Condensed Combined Financial Statements that are: (i) factually supportable, (ii) directly attributable to the separation and distribution and (iii) for purposes of the pro forma condensed combined statements of earnings, expected to have a continuing impact on our results of operations following the completion of the separation and distribution. The unaudited pro forma condensed combined financial statements have been adjusted to give effect to the following (collectively, the “Pro Forma Transactions”):

 

    The incurrence of debt and the allocation of cash between us and HP Co. as part of our plan to capitalize our company with estimated (as of July 31, 2015) total cash of approximately $11.5 billion (which estimate is based on several factors subject to change, including fiscal 2015 free cash flow estimates) and total debt of approximately $16 billion and secure an investment grade credit rating;

 

    The transfer of certain pension and postretirement benefit obligations, net of any related assets, associated with our active, retired and other former employees from HP Co.;

 

    The transfer of certain corporate and other assets and liabilities from HP Co., including a portion of HP Co.’s global real estate portfolio and a portion of HP Co.’s IT assets;

 

    The retention by HP Co. of our marketing optimization software product group, which was historically included in our Software segment, as well as the retention by HP Co. of a very limited number of customer contracts historically included in our EG segment;

 

    The removal of non-recurring separation costs, which were incurred during the nine months ended July 31, 2015;

 

    The incurrence of income and transaction taxes in certain jurisdictions as a result of an internal reorganization undertaken for the sole purpose of facilitating the separation and distribution; and

 

    The tax-free distribution, for U.S. federal income tax purposes, of shares of our common stock to HP Co. stockholders, based on the distribution of one share of our common stock for each HP Co. common share outstanding as of the record date for the distribution, and the resulting redesignation of HP Co.’s historical net investment as common stock and additional paid-in capital.

Our historical Combined Statements of Earnings and Comprehensive Income include allocations of general corporate expenses from HP Co., including, but not limited to, executive management, finance, legal, IT, employee benefits administration, treasury, risk management, procurement and other shared services. To operate as an independent public company, we expect to incur costs to replace certain services previously provided by HP Co., which may be higher than those reflected in our historical financial statements, in addition to increased administrative and other costs (for example, in complying with securities laws). Due to the scope and complexity

 

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of these activities, the amount and timing of these incremental costs could vary. Due to the regulations governing the preparation of pro forma financial statements, the pro forma financial statements do not reflect these incremental costs associated with being an independent, public company because they are projected amounts based on judgmental estimates and are not factually supportable.

The unaudited pro forma combined financial statements do not contain pro forma adjustments with respect to certain recent and pending transactions, including our proposed divestiture of a majority stake in H3C Technologies in connection with our agreement with Tsinghua. Nor do the unaudited pro forma combined financial statements contain any adjustments to our historical results for currency fluctuations or other macroeconomic events.

In connection with the separation of Hewlett Packard Enterprise from HP Co., the Board of Directors of HP Co. approved a restructuring plan (the “2015 Plan”) on September 14, 2015. We anticipate incurring labor and non-labor costs which will result in aggregate pre-tax charges through fiscal 2018 of approximately $2.7 billion. The unaudited combined pro forma financial information does not reflect the expected charges or the expected realization of any cost savings or other synergies.

The unaudited pro forma combined financial statements should be read together with our Combined Financial Statements, Condensed Combined Financial Statements and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this information statement. The unaudited pro forma combined financial statements are provided for illustrative and informational purposes only and are not intended to represent what our results of operations or financial position would have been had the separation and distribution been completed on the dates assumed. The unaudited pro forma combined financial statements also may not be indicative of our future results of operations or financial position as a standalone public company.

 

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HEWLETT PACKARD ENTERPRISE COMPANY

THE ENTERPRISE TECHNOLOGY INFRASTRUCTURE, SOFTWARE, SERVICES

AND FINANCING BUSINESS OF HEWLETT-PACKARD COMPANY

Unaudited Pro Forma Combined Statement of Earnings

Fiscal year ended October 31, 2014

 

     Historical     Pro Forma
Adjustments
    Notes      Pro Forma  
     In millions  

Net revenue:

         

Products

   $ 19,171      $ (54     (d)       $ 19,117   

Services

     35,551        (262     (d)         35,289   

Financing income

     401        —             401   
  

 

 

   

 

 

      

 

 

 

Total net revenue

     55,123        (316        54,807   
  

 

 

   

 

 

      

 

 

 

Costs and expenses:

         

Cost of products

     12,394        (14     (d)         12,380   

Cost of services

     26,815        (97     (d)         26,718   

Financing interest

     277        —             277   

Research and development

     2,197        (40     (d)         2,157   

Selling, general and administrative

     8,717        42        (b)(d)         8,759   

Amortization of intangible assets

     906        (35     (d)         871   

Restructuring charges

     1,471        —             1,471   

Acquisition-related charges

     11        —             11   
  

 

 

   

 

 

      

 

 

 

Total operating expenses

     52,788        (144        52,644   
  

 

 

   

 

 

      

 

 

 

Earnings from operations

     2,335        (172        2,163   
  

 

 

   

 

 

      

 

 

 

Interest and other, net

     (91     (188     (a)         (279
  

 

 

   

 

 

      

 

 

 

Earnings before taxes

     2,244        (360        1,884   

Provision for taxes

     (596     107        (g)         (489
  

 

 

   

 

 

      

 

 

 

Net earnings

   $ 1,648      $ (253      $ 1,395   
  

 

 

   

 

 

      

 

 

 

Pro forma earnings per share:

         

Basic

         (i)       $ 0.76   
         

 

 

 

Diluted

         (j)       $ 0.75   
         

 

 

 

Pro forma weighted-average shares outstanding:

         

Basic

         (i)         1,839   
         

 

 

 

Diluted

         (j)         1,869   
         

 

 

 

The accompanying notes are an integral part of these Unaudited Pro Forma

Combined Financial Statements.

 

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HEWLETT PACKARD ENTERPRISE COMPANY

THE ENTERPRISE TECHNOLOGY INFRASTRUCTURE, SOFTWARE, SERVICES

AND FINANCING BUSINESS OF HEWLETT-PACKARD COMPANY

Unaudited Pro Forma Condensed Combined Statement of Earnings

Nine months ended July 31, 2015

 

     Historical     Pro Forma
Adjustments
    Notes      Pro Forma  
     In millions  

Net revenue:

         

Products

   $ 14,190      $ (40     (d)       $ 14,150   

Services

     24,196        (175     (d)         24,021   

Financing income

     273        —             273   
  

 

 

   

 

 

      

 

 

 

Total net revenue

     38,659        (215        38,444   
  

 

 

   

 

 

      

 

 

 

Costs and expenses:

         

Cost of products

     9,446        (9     (d)         9,437   

Cost of services

     18,077        (73     (d)         18,004   

Financing interest

     182        —             182   

Research and development

     1,686        (26     (d)         1,660   

Selling, general and administrative

     5,987        4        (b)(d)         5,991   

Amortization of intangible assets

     632        (23     (d)         609   

Restructuring charges

     404        —             404   

Acquisition-related charges

     69        —             69   

Separation costs

     458        (458     (e)         —     

Defined benefit plan settlement charges

     178        —             178   

Impairment of data center assets

     136        —             136   
  

 

 

   

 

 

      

 

 

 

Total operating expenses

     37,255        (585        36,670   
  

 

 

   

 

 

      

 

 

 

Earnings from operations

     1,404        370           1,774   
  

 

 

   

 

 

      

 

 

 

Interest and other, net

     (44     (172     (a)         (216
  

 

 

   

 

 

      

 

 

 

Earnings before taxes

     1,360        198           1,558   

Provision for taxes

     (284     (80     (g)         (364
  

 

 

   

 

 

      

 

 

 

Net earnings

   $ 1,076      $ 118         $ 1,194   
  

 

 

   

 

 

      

 

 

 

Pro forma earnings per share:

         

Basic

         (i)       $ 0.66   
         

 

 

 

Diluted

         (j)       $ 0.65   
         

 

 

 

Pro forma weighted-average shares outstanding:

         

Basic

         (i)         1,801   
         

 

 

 

Diluted

         (j)         1,826   
         

 

 

 

The accompanying notes are an integral part of these Unaudited Pro Forma

Combined Financial Statements.

 

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HEWLETT PACKARD ENTERPRISE COMPANY

THE ENTERPRISE TECHNOLOGY INFRASTRUCTURE, SOFTWARE, SERVICES

AND FINANCING BUSINESS OF HEWLETT-PACKARD COMPANY

Unaudited Pro Forma Condensed Combined Balance Sheet

As of July 31, 2015

 

    Historical     Pro Forma
Adjustments
    Notes      Pro Forma  
    In millions  
ASSETS         

Current assets:

        

Cash and cash equivalents

  $ 2,774      $ 8,726        (a)       $ 11,500   

Accounts receivable

    7,957        (30     (d)         7,927   

Financing receivables

    2,804        —             2,804   

Inventory

    2,299        —             2,299   

Other current assets

    6,959        716        (c)(d)(g)         7,675   
 

 

 

   

 

 

      

 

 

 

Total current assets

    22,793        9,412           32,205   
 

 

 

   

 

 

      

 

 

 

Property, plant and equipment

    8,459        1,641        (c)(d)         10,100   

Long-term financing receivables and other assets

    6,968        634        (a)(b)(c)(g)         7,602   

Goodwill

    27,857        (512     (d)         27,345   

Intangible assets

    2,231        (91     (d)         2,140   
 

 

 

   

 

 

      

 

 

 

Total assets

  $ 68,308      $ 11,084         $ 79,392   
 

 

 

   

 

 

      

 

 

 
LIABILITIES AND EQUITY         

Current liabilities:

        

Notes payable and short-term borrowings

  $ 752      $ —           $ 752   

Accounts payable

    4,884        (2     (d)         4,882   

Employee compensation and benefits

    2,277        315        (b)(c)(d)         2,592   

Taxes on earnings

    756        600        (f)         1,356   

Deferred revenue

    5,321        (56     (d)         5,265   

Accrued restructuring

    306        (25     (c)         281   

Other accrued liabilities

    4,610        823        (c)(d)(e)(g)         5,433   
 

 

 

   

 

 

      

 

 

 

Total current liabilities

    18,906        1,655           20,561   
 

 

 

   

 

 

      

 

 

 

Long-term debt

    493        14,600        (a)         15,093   

Other liabilities

    8,183        2,837        (b)(c)(d)(g)         11,020   

Commitments and contingencies

        

Equity:

        

Common stock ($0.01 par value)

    —          18        (h)         18   

Additional paid-in capital

    —          37,113        (h)         37,113   

Parent company investment

    42,568        (42,568     (a)(b)(c)(d)(e)(f)(g)(h)         —     

Accumulated other comprehensive loss

    (2,250     (2,571     (b)         (4,821
 

 

 

   

 

 

      

 

 

 

Equity attributable to the Company

    40,318        (8,008        32,310   

Non-controlling interests

    408        —             408   
 

 

 

   

 

 

      

 

 

 

Total equity

    40,726        (8,008        32,718   
 

 

 

   

 

 

      

 

 

 

Total liabilities and equity

  $ 68,308      $ 11,084         $ 79,392   
 

 

 

   

 

 

      

 

 

 

The accompanying notes are an integral part of these Unaudited Pro Forma

Combined Financial Statements.

 

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HEWLETT PACKARD ENTERPRISE COMPANY

THE ENTERPRISE TECHNOLOGY INFRASTRUCTURE, SOFTWARE, SERVICES

AND FINANCING BUSINESS OF HEWLETT-PACKARD COMPANY

Notes to Unaudited Pro Forma Combined Financial Statements

The unaudited pro forma condensed combined financial statements as of and for the nine months ended July 31, 2015 and the unaudited pro forma combined financial statements for the year ended October 31, 2014 include the following adjustments:

 

  (a) In connection with our separation capitalization plan, which is intended to result in each of HP Inc. and Hewlett Packard Enterprise obtaining investment grade credit ratings, we expect to incur additional borrowings to redistribute debt between us and HP Co., such that we have total debt of approximately $16 billion immediately following the separation. To accomplish this, on September 30, 2015, we commenced an offering of $14.6 billion aggregate principal amount of senior notes consisting of the following series:

 

    $2.25 billion aggregate principal amount of 2.45% senior notes due 2017

 

    $2.65 billion aggregate principal amount of 2.85% senior notes due 2018

 

    $3.0 billion aggregate principal amount of 3.60% senior notes due 2020

 

    $1.35 billion aggregate principal amount of 4.40% senior notes due 2022

 

    $2.50 billion aggregate principal amount of 4.90% senior notes due 2025

 

    $750 million aggregate principal amount of 6.20% senior notes due 2035

 

    $1.5 billion aggregate principal amount of 6.35% senior notes due 2045

 

    $350 million aggregate principal amount of floating rate notes due 2017 (3 month USD LIBOR +1.74%)

 

    $250 million aggregate principal amount of floating rate notes due 2018 (3 month USD LIBOR +1.93%)

We intend to use all of the net proceeds from the senior notes offering for the payment of a distribution to HP Co. in connection with the separation. HP Co. has informed Hewlett Packard Enterprise that it intends to use the cash to be distributed by Hewlett Packard Enterprise to HP Co. to redeem or repurchase certain of HP Co.’s outstanding notes. A separate cash allocation by HP Co. in connection with the separation is expected to result in Hewlett Packard Enterprise having approximately $11.5 billion of cash on hand as of the distribution date.

Concurrent with issuing the senior notes, we are entering into interest rate swaps to reduce the exposure of $9.5 billion of aggregate principal amount of fixed rate senior notes to changes in fair value resulting from changes in interest rates by achieving LIBOR-based floating interest expense.

Expected debt issuance costs of approximately $55 million will be capitalized as a component of Long-term financing receivables and other assets and amortized over 8.5 years, the weighted-average term of the senior notes. The amount of cash and debt allocated to us at the distribution date will depend on a number of factors, including the total HP Co. cash balance at the distribution date.

Based on the signed term sheets for the $14.6 billion aggregate principal amount of senior notes and the anticipated interest rate swaps, we have assumed an annual blended interest rate of 3.18% and

 

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HEWLETT PACKARD ENTERPRISE COMPANY

THE ENTERPRISE TECHNOLOGY INFRASTRUCTURE, SOFTWARE, SERVICES

AND FINANCING BUSINESS OF HEWLETT-PACKARD COMPANY

Notes to Unaudited Pro Forma Combined Financial Statements

 

3.13% for the nine months ended July 31, 2015 and the fiscal year ended October 31, 2014. The adjustment to our historical interest expense to give effect to the issuance of the senior notes and our concurrently entering into interest rate swaps (net of financing interest included in the historical combined statements of earnings for the applicable period) is presented below:

 

     Nine months
ended July 31,
2015
     Fiscal year
ended October 31,
2014
 
     In millions  

Interest on additional debt

   $ 166       $ 180   

Amortization of debt issuance costs

     6         8   
  

 

 

    

 

 

 
   $ 172       $ 188   
  

 

 

    

 

 

 

Each 1% change in the applicable interest rate above the LIBOR floor (which was 0.31% for the nine months ended July 31, 2015 and 0.23% for the fiscal year ended October 31, 2014) would cause pro forma interest expense to change by approximately $100 million on an annual basis.

In accordance with the SEC’s rules governing pro forma adjustments, no pro forma adjustment for imputed interest income on incremental cash balances has been recorded.

For purposes of these unaudited pro forma Combined Financial Statements, the adjustment to Parent company investment represents the distribution to HP Co. of all of the net proceeds from the senior note issuance net of the separate cash allocation by HP Co. in connection with the separation. The pro forma adjustment related to our separation capitalization plan is reflected in the unaudited pro forma Condensed Combined Balance Sheet as of July 31, 2015 as follows (in millions):

 

Cash and cash equivalents

   $ 8,726   

Long-term financing receivables and other assets

   $ 55   

Long-term debt

   $ 14,600   

Parent company investment

   $ (5,819

 

  (b) Certain of our eligible employees, retirees and other former employees participate in the pension and postretirement benefit plans offered by HP Co. In connection with the separation, HP Co. will transfer to us plan assets and liabilities primarily associated with our active, retired and other former employees in certain jurisdictions and we will provide the benefits directly. The net benefit obligations we will assume will result in our recording estimated net benefit plan liabilities of $0.3 billion and accumulated other comprehensive income, net of tax, of $2.6 billion. We have recognized incremental pro forma pension and postretirement expense of $131 million and $70 million during the fiscal year ended October 31, 2014 and the nine months ended July 31, 2015, respectively, as a result of these transfers. Our estimates may change as we approach the distribution date and continue to refine our estimates of the net liability transfers as of that date. The actual assumed net benefit plan obligations and related expense could change significantly from our estimates, including as a result of the requirement that all of our benefit plans (both historical and newly assumed) are expected to be revalued as of October 31, 2015 in accordance with U.S. GAAP. The assumptions utilized in all actuarial valuations will be based on market conditions at the time of the measurement and the most current available plan participant data.

 

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HEWLETT PACKARD ENTERPRISE COMPANY

THE ENTERPRISE TECHNOLOGY INFRASTRUCTURE, SOFTWARE, SERVICES

AND FINANCING BUSINESS OF HEWLETT-PACKARD COMPANY

Notes to Unaudited Pro Forma Combined Financial Statements

 

The pro forma adjustment related to our pension and postretirement benefit plans is reflected in the unaudited pro forma Condensed Combined Balance Sheet as of July 31, 2015 as follows (in millions):

 

Long-term financing receivables and other assets

   $ 406   

Employee compensation and benefits

   $ (1

Other liabilities

   $ 738   

Parent company investment

   $ 2,240   

Accumulated other comprehensive loss

   $ (2,571

 

  (c) In connection with the separation, HP Co. will transfer certain corporate and other assets and liabilities, including certain indemnification assets and liabilities between us and HP Co., to us prior to the distribution date. The transfers will include a portion of HP Co.’s global real estate portfolio and IT assets, and associated assets and liabilities, as well as a portion of HP Co.’s corporate accrued employee compensation and benefits. There may be additional assets and liabilities, including certain indemnifications between us and HP Co., to be transferred to us in connection with the separation for which the allocation and transfer procedures have not been finalized. The expenses, including depreciation, related to those assets and liabilities to be transferred to us were previously charged to us through allocations from HP Co.; accordingly, no incremental expenses are included in the pro forma financial statements.

The pro forma adjustment related to the transfer of these corporate and other assets and liabilities is reflected in the unaudited pro forma Condensed Combined Balance Sheet as of July 31, 2015 as follows (in millions):

 

Other current assets

   $ 719   

Property, plant and equipment

   $ 1,642   

Long-term financing receivables and other assets

   $ 101   

Employee compensation and benefits

   $ 318   

Accrued restructuring

   $ (25

Other accrued liabilities

   $ 669   

Other liabilities

   $ 2,121   

Parent company investment

   $ (621

 

  (d)

HP Co. will retain the marketing optimization software product group, a continuing business which has historically been managed by us and included in our Software segment. The pro forma adjustment reflects the impact of removing that business from our historical results of operations and balance sheet including the related goodwill allocated on a fair value basis. The marketing optimization business, which comprised approximately 0.4% and 5.9% of Hewlett Packard Enterprise’s total revenue and Software segment revenue, respectively, in fiscal year 2014, is a collection of software assets that enables integrated marketing capabilities. HP Co. conducted a strategic review of the Hewlett Packard Enterprise software business and decided these software assets no longer aligned with the software business’s strategic charter, as they were outside the go-to-market focus of selling to IT departments. However, HP Co. determined that these software assets primarily aligned with a document management and solutions ecosystem that would complement its printing business. As a result of this strategic review process, the marketing optimization software business was realigned within HP Co. to become a part of HP Inc. following the separation, enabling HP Inc. to expand into the adjacent markets of document management and solutions. In addition, two customer contracts serviced by our

 

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HEWLETT PACKARD ENTERPRISE COMPANY

THE ENTERPRISE TECHNOLOGY INFRASTRUCTURE, SOFTWARE, SERVICES

AND FINANCING BUSINESS OF HEWLETT-PACKARD COMPANY

Notes to Unaudited Pro Forma Combined Financial Statements

 

  Enterprise Group segment, which collectively comprised approximately 0.2% of Hewlett Packard Enterprise’s total revenue in fiscal 2014, were determined to be better suited to HP Inc.’s business following the separation and will be transferred to HP Inc. in connection with the separation.

The pro forma adjustment related to the marketing optimization software product group is reflected in the unaudited pro forma Condensed Combined Balance Sheet as of July 31, 2015 as follows (in millions):

 

Accounts receivable

   $ (30

Other current assets

   $ 1   

Property, plant and equipment

   $ (1

Goodwill

   $ (512

Intangible assets

   $ (91

Accounts payable

   $ (2

Employee compensation and benefits

   $ (2

Deferred revenue

   $ (56

Other accrued liabilities

   $ (2

Other liabilities

   $ (2

Parent company investment

   $ (569

 

  (e) This adjustment removes non-recurring separation costs incurred during the nine months ended July 31, 2015 that are directly related to the separation and the associated deferred income tax balances. These costs are included in our historical results of operations for the nine months ended July 31, 2015 but are not expected to have a continuing impact on our results of operations following the completion of the separation. As of July 31, 2015, we expect to incur future separation costs of up to $0.6 billion during the remainder of fiscal 2015 and in fiscal 2016. In addition, we expect to make foreign tax payments of approximately $0.6 billion arising from the separation over this same time period, with subsequent tax credit amounts expected over later years. As of July 31, 2015, we expect future cash payments of up to $0.9 billion in connection with our separation costs and foreign tax payments, which are expected to be paid in the remainder of fiscal 2015 and in fiscal 2016, with subsequent tax credit amounts expected over later years. As of July 31, 2015, we also expect separation-related capital expenditures of approximately $60 million in the remainder of fiscal 2015.

The pro forma adjustment related to non-recurring separation costs and the associated deferred income tax balances is reflected in the unaudited pro forma Condensed Combined Balance Sheet as of July 31, 2015 as follows (in millions):

 

Other accrued liabilities

   $ 160   

Parent company investment

   $ (160

 

  (f) HP Co. will undertake an internal reorganization for the sole purpose of facilitating the separation and distribution. This internal reorganization will result in the incurrence of various income and transaction taxes in certain jurisdictions.

The pro forma adjustment related to this internal reorganization is reflected in the unaudited pro forma Condensed Combined Balance Sheet as of July 31, 2015 as follows (in millions):

 

Taxes on earnings

   $ 600   

Parent company investment

   $ (600)   

 

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HEWLETT PACKARD ENTERPRISE COMPANY

THE ENTERPRISE TECHNOLOGY INFRASTRUCTURE, SOFTWARE, SERVICES

AND FINANCING BUSINESS OF HEWLETT-PACKARD COMPANY

Notes to Unaudited Pro Forma Combined Financial Statements

 

  (g) The pro forma income tax adjustments were determined using the statutory tax rate in effect in the respective tax jurisdictions during the periods presented.

The pro forma adjustment related to income taxes is reflected in the unaudited pro forma Condensed Combined Balance Sheet as of July 31, 2015 as follows (in millions):

 

Other current assets

   $ (4

Long-term financing receivables and other assets

   $ 72   

Other accrued liabilities

   $ (4

Other liabilities

   $ (20

Parent company investment

   $ 92   

 

  (h) Reflects the pro forma recapitalization of our equity. As of the distribution date, HP Co.’s investment in our business will be redesignated as our stockholders’ equity and will be allocated between common stock and additional paid-in capital based on the number of shares of our common stock outstanding at the distribution date. HP Co. stockholders will receive shares based on a distribution ratio of one share of our common stock for each HP Co. common share outstanding as of the record date for the distribution.

The pro forma adjustment related to recapitalization of our equity is reflected in the unaudited pro forma Condensed Combined Balance Sheet as of July 31, 2015 as follows (in millions):

 

Common stock ($0.01 par value)

   $ 18   

Additional paid-in capital

   $ 37,113   

Parent company investment

   $ (37,131

 

  (i) The number of shares of our common stock used to compute basic earnings per share for the nine months ended July 31, 2015 and the year ended October 31, 2014 is based on the number of HP Co. common shares outstanding on July 31, 2015 and October 31, 2014, respectively, assuming a distribution ratio of one share of our common stock for each HP Co. common share outstanding. The number of HP Co. shares used to determine the assumed distribution reflects the HP Co. shares outstanding as of each balance sheet date, which is the most current information as of the date of those financial statements.

 

  (j) The number of shares used to compute diluted earnings per share is based on the number of basic shares of our common stock as described in Note (i) above, plus incremental shares assuming exercise of dilutive outstanding stock options and restricted stock awards granted to our employees under HP Co.’s stock-based compensation plans. The actual effect following the completion of the separation will depend on various factors, including employees who may change employment between HP Co. and us. We cannot fully estimate the dilutive effects at this time, although we believe an estimate based on applying the distribution ratio to the HP Co. weighted-average dilutive effect of employee stock plans used to compute HP Co. diluted EPS provides a reasonable approximation of the potential dilutive effect of the equity awards.

 

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Table of Contents

SELECTED HISTORICAL COMBINED FINANCIAL DATA

The following table presents the selected historical combined financial data for Hewlett Packard Enterprise. The Combined Statements of Earnings data for the nine months ended July 31, 2015 and 2014 and the Combined Balance Sheets data as of July 31, 2015 are derived from our unaudited Condensed Combined Financial Statements included in this information statement. The Combined Statements of Earnings data for each of the three fiscal years ended October 31, 2014 and the Combined Balance Sheets data as of October 31, 2014 and 2013 set forth below are derived from our audited Combined Financial Statements included in this information statement. The Combined Statements of Earnings data for the fiscal years ended October 31, 2011 and 2010 and the Combined Balance Sheets data as of October 31, 2012, 2011 and 2010 are derived from our unaudited Combined Financial Statements that are not included in this information statement.

The selected historical condensed combined financial data presented below should be read in conjunction with our Combined and Condensed Combined Financial Statements and accompanying notes, “Capitalization” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this information statement. Our condensed combined financial data may not be indicative of our future performance and do not necessarily reflect what our financial position and results of operations would have been had we been operating as a standalone public company during the periods presented, including changes that will occur in our operations and capitalization as a result of the separation and distribution. See “Unaudited Pro Forma Combined Financial Statements” for a further description of the anticipated changes.

 

     As of and for the nine
months ended July 31
     As of and for the fiscal years ended October 31  
         2015              2014          2014      2013      2012     2011      2010  
     In millions  

Combined Statements of Earnings:

                 

Net revenue

   $ 38,659       $ 41,050       $ 55,123       $ 57,371       $ 61,042      $ 62,512       $ 59,481   

Earnings (loss) from operations(1)

   $ 1,404       $ 1,509       $ 2,335       $ 2,952       $ (14,139   $ 6,049       $ 5,644   

Net earnings (loss)(1)

   $ 1,076       $ 1,132       $ 1,648       $ 2,051       $ (14,761   $ 4,119       $ 3,887   

Combined Balance Sheets:

                   

Total assets(2)

   $ 68,308          $ 65,071       $ 68,775       $ 71,702      $ 91,878       $ 81,275   

Long-term debt

   $ 493          $ 485       $ 617       $ 702      $ 1,966       $ 2,055   

Total debt(3)

   $ 1,245          $ 1,379       $ 1,675       $ 2,923      $ 3,062       $ 2,882   

 

(1) Earnings (loss) from operations and net earnings (loss) include the following items:

 

    Nine months ended
July 31
     For the fiscal years ended October 31  
      2015          2014        2014      2013      2012      2011      2010  
    In millions  

Amortization of intangible assets

  $ 632       $ 700       $ 906       $ 1,228       $ 1,641       $ 1,469       $ 1,385   

Impairment of goodwill and intangible assets

    —           —           —           —           16,808         —           —     

Restructuring charges

    404         924         1,471         983         1,756         553         1,032   

Acquisition-related charges

    69         8         11         21         35         158         274   

Separation costs

    458         —           —           —           —           —           —     

Defined benefit plan settlement charges

    178         —           —           —           —           —           —     

Impairment of data center assets

    136         —           —           —           —           —           —     
 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total charges before taxes

  $ 1,877       $ 1,632       $ 2,388       $ 2,232       $ 20,240       $ 2,180       $ 2,691   
 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total charges, net of taxes

  $ 1,453       $ 1,316       $ 1,878       $ 1,742       $ 18,462       $ 1,553       $ 1,970   
 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(2) Total assets decreased in fiscal 2012 due primarily to goodwill and intangible asset impairment charges associated with the Autonomy reporting unit within the Software segment and a goodwill impairment charge associated with the Enterprise Services segment. Total assets increased in fiscal 2011 due primarily to the acquisition of Autonomy Corporation plc (“Autonomy”).
(3) In fiscal 2013, total debt decreased due to maturities.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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

 

    Overview. A discussion of our business and overall analysis of financial and other highlights affecting the Company to provide context for the remainder of MD&A. The overview analysis compares the nine months ended July 31, 2015 to the nine months ended July 31, 2014 and fiscal 2014 to fiscal 2013.

 

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

 

    Results of Operations. An analysis of our financial results comparing (a) the nine months ended July 31, 2015 to the comparable prior-year period and (b) fiscal 2014 and fiscal 2013 to the prior years, respectively. A discussion of the results of operations at the combined level is followed by a more detailed discussion of the results of operations by segment.

 

    Liquidity and Capital Resources. An analysis of changes in our cash flows and a discussion of our financial condition and liquidity. The Capital Resources discussions present information as of July 31, 2015 and October 31, 2014, 2013 and 2012, unless otherwise noted.

 

    Contractual and Other Obligations. An overview of contractual obligations, retirement benefit plan funding, restructuring plans, uncertain tax positions, separation costs and off balance sheet arrangements.

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

For purposes of this MD&A section, we use the terms “Hewlett Packard Enterprise Company,” “Hewlett Packard Enterprise,” “the Company,” “we,” “us” and “our” to refer to the enterprise technology infrastructure, software, services and financing business of Hewlett-Packard Company. References in this MD&A section to “Parent” refer to Hewlett-Packard Company, collectively with its consolidated subsidiaries.

October 2014 Announcement of Separation Transaction

On October 6, 2014, Parent announced plans to separate into two independent publicly traded companies: one comprising its enterprise technology infrastructure, software, services and financing businesses, which will conduct business as Hewlett Packard Enterprise, and one comprising its printing and personal systems businesses, which will conduct business as HP Inc. The proposed separation is intended to take the form of a spin-off to Parent’s stockholders of 100% of the shares of Hewlett Packard Enterprise Company. In connection with the separation, Parent will be renamed and continue as HP Inc. The separation is subject to certain conditions, including, among others, obtaining final approval from Parent’s board of directors, receipt of a private letter ruling from the IRS and one or more opinions with respect to certain U.S. federal income tax matters relating to the separation and the SEC declaring the effectiveness of the registration statement of which this information statement forms a part. See “The Separation and Distribution—Conditions to the Distribution.”

The process of completing the separation has been and is expected to continue to be time-consuming and involves significant costs and expenses. For example, during the nine months ended July 31, 2015, we recorded

 

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nonrecurring separation costs of $458 million, which were primarily related to third-party consulting, contractor fees and other incremental costs directly associated with the separation process. As of July 31, 2015, we expect to incur future separation costs of up to $0.6 billion during the remainder of fiscal 2015 and in fiscal 2016. In addition, we expect to make foreign tax payments of approximately $0.6 billion arising from the separation over this same time period, with subsequent tax credit amounts expected over later years. As of July 31, 2015, we expect future cash payments of up to $0.9 billion in connection with our separation costs and foreign tax payments, which are expected to be paid in the remainder of fiscal 2015 and in fiscal 2016, with subsequent tax credit amounts expected over later years. As of July 31, 2015, we also expect separation-related capital expenditures of approximately $60 million in the remainder of fiscal 2015. Additionally, following the separation, each of HP Inc. and Hewlett Packard Enterprise must maintain an independent corporate overhead appropriate for a diverse global company with various business units in many parts of the world. Due to the loss of economies of scale and the necessity of establishing independent functions for each company, the separation of Parent into two independent companies is expected to result in total dis-synergies of approximately $400 million to $450 million annually, which costs are primarily associated with corporate functions such as finance, legal, IT, real estate and human resources. Based on the expected similar sizes of the resulting organizations and the need for each of HP Inc. and Hewlett Packard Enterprise to establish independent corporate functions, such dis-synergies are expected to be divided approximately equally between HP Inc. and Hewlett Packard Enterprise.

Due to the scale and variety of Parent’s businesses and its global footprint (among other factors), the separation process is extremely complex and requires effort and attention from employees throughout Parent’s organization. For example, thousands of employees of businesses that will become part of Hewlett Packard Enterprise must be transitioned to new payroll and other benefit platforms, and legacy programs going back decades, such as pensions, must be divided among Hewlett Packard Enterprise and HP Inc. Outside the organization, Parent must notify and establish separation readiness among tens of thousands of customers, business partners and suppliers so that business relationships all over the world may continue seamlessly following the completion of the separation. Administratively, the separation involves the establishment of new customer and supplier accounts, new bank accounts, legal reorganizations and contractual assignments in various jurisdictions throughout the world, and the creation and maintenance of separation management functions, led by the Separation Management Office, to plan and execute the separation process in a timely fashion. For more information on the risks involved in the separation process, see “Risk Factors—Risks Related to the Separation.”

Basis of Presentation

The Combined Financial Statements of the Company have been derived from the Consolidated Financial Statements and accounting records of Parent as if we operated on a standalone basis during the periods presented and were prepared in accordance with U.S. generally accepted accounting principles (“GAAP”).

The Combined Statements of Earnings and Comprehensive Income of the Company reflect allocations of general corporate expenses from Parent including, but not limited to, executive management, finance, legal, information technology, employee benefits administration, treasury, risk management, procurement and other shared services. These allocations were made on a direct usage basis when identifiable, with the remainder allocated on the basis of revenue, expenses, headcount or other relevant measures. Management of the Company and Parent consider these allocations to be a reasonable reflection of the utilization of services by, or the benefits provided to, us. The allocations may not, however, reflect the expense we would have incurred as a standalone company for the periods presented. Actual costs that may have been incurred if we had been a standalone company would depend on a number of factors, including the chosen organizational structure, what functions were outsourced or performed by employees and strategic decisions made in areas such as information technology and infrastructure.

The Combined Balance Sheets of the Company include Parent assets and liabilities that are specifically identifiable or otherwise attributable to us, including subsidiaries and affiliates in which Parent has a controlling financial interest or is the primary beneficiary. Parent’s cash has not been assigned to us for any of the periods

 

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presented because those cash balances are not directly attributable to us. We reflect transfers of cash to and from Parent’s cash management system as a component of Parent company investment on the Combined Balance Sheets. Parent’s long-term debt has not been attributed to us for any of the periods presented because Parent’s borrowings are neither directly attributable to our combined businesses which comprise the Company, nor is the Company the legal obligor of such borrowings.

Parent maintains various benefit and stock-based compensation plans at a corporate level and other benefit plans at a subsidiary level. Our employees participate in those programs and a portion of the cost of those plans is included in our financial statements. However, our Combined Balance Sheets do not include any net benefit plan obligations unless the benefit plan covers only our active, retired and other former employees or any equity related to stock-based compensation plans. See Notes 5 and 6 to the Combined Financial Statements for a further description of the accounting for our benefit plans and stock-based compensation, respectively.

Overview

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

We organize our business into five segments for financial reporting purposes: the Enterprise Group (“EG”), Enterprise Services (“ES”), Software, Financial Services (“FS”) and Corporate Investments.

Nine Months ended July 31, 2015

The following table provides an overview of our key financial metrics by segment for the nine months ended July 31, 2015:

 

     Hewlett
Packard
Enterprise
Combined
    Enterprise
Group
    Enterprise
Services
    Software     Financial
Services
    Corporate
Investments(3)
 
     Dollars in millions  

Net revenue(1)

   $ 38,659      $ 20,549      $ 14,786      $ 2,663      $ 2,415      $ 6   

Year-over-year change %

     (5.8 )%      0.4     (12.4 )%      (6.4 )%      (6.8 )%      50.0

Earnings (loss) from operations(2)

   $ 1,404      $ 2,952      $ 607      $ 501      $ 262      $ (398

Earnings (loss) from operations as a % of net revenue

     3.6     14.4     4.1     18.8     10.8     NM   

Year-over-year change percentage points

     (0.1 )pts      0.2 pts      1.5 pts      0.0 pts      0.0 pts      NM   

Net earnings

   $ 1,076             

 

(1) The Company’s combined net revenue excludes intersegment net revenue and other.
(2) Segment earnings from operations exclude corporate and unallocated costs, stock-based compensation expense, amortization of intangible assets, restructuring charges, acquisition-related charges, separation costs, defined benefit plan settlement charges and impairment of data center assets.
(3) “NM” represents not meaningful.

The Company’s condensed combined net revenue decreased 5.8% (decreased 0.7% on a constant currency basis) in the nine months ended July 31, 2015, as compared to the prior-year period. The leading contributors to the net revenue decrease were unfavorable currency impacts and key account runoff and soft demand in Infrastructure Technology Outsourcing (“ITO”) in ES. Partially offsetting these decreases was growth within the EG segment from sales of ISS servers. Gross margin was 28.3% ($11.0 billion) and 27.6% ($11.3 billion) for the nine months ended July 31, 2015 and 2014, respectively. The 0.7 percentage point increase in gross margin was

 

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due primarily to service delivery efficiencies and improvements in underperforming contracts in ES. Partially offsetting the gross margin increase was a higher mix of ISS products in EG. We continue to experience gross margin pressures resulting from a competitive pricing environment across our hardware portfolio. Operating margin decreased by 0.1 percentage points in the nine months ended July 31, 2015 as compared to the prior-year period due primarily to higher expenses resulting from separation activities, defined benefit plan settlement charges, and an impairment of data center assets, partially offset by the gross margin increase, lower SG&A expenses and lower restructuring charges.

As of July 31, 2015, cash and cash equivalents and short- and long-term investments were approximately $3.0 billion, representing an increase of approximately $400 million from the October 31, 2014 balance of approximately $2.6 billion. For the nine months ended July 31, 2015, we generated $3.8 billion of cash flows from operations, we invested $2.3 billion in property, plant and equipment, net of proceeds from sales, and we utilized $2.6 billion to acquire 4 companies, the largest of which was Aruba Networks, Inc. (“Aruba”).

Fiscal Year ended October 31, 2014

The following table provides an overview of our key financial metrics by segment for fiscal 2014:

 

     Hewlett
Packard
Enterprise
Combined
    Enterprise
Group
    Enterprise
Services
    Software     Financial
Services
    Corporate
Investments(3)
 
     Dollars in millions  

Net revenue(1)

   $ 55,123      $ 27,727      $ 22,398      $ 3,933      $ 3,498      $ 4   

Year-over-year change %

     (3.9 )%      (0.9 )%      (7.0 )%      (2.5 )%      (3.6 )%      (50.0 )% 

Earnings (loss) from operations(2)

   $ 2,335      $ 4,005      $ 818      $ 871      $ 389      $ (341

Earnings (loss) from operations as a % of net revenue

     4.2     14.4     3.7     22.1     11.1     NM   

Year-over-year change percentage points

     (0.9 )pts      (0.7 )pts      0.4 pts      0.1 pts      0.2 pts      NM   

Net earnings

   $ 1,648         

 

(1) The Company’s combined net revenue excludes intersegment net revenue and other.
(2) Segment earnings from operations exclude corporate and unallocated costs, stock-based compensation expense, amortization of intangible assets, restructuring charges and acquisition related charges.
(3) “NM” represents not meaningful.

The Company’s combined net revenue decreased 3.9% (decreased 3.7% on a constant currency basis) in fiscal 2014 as compared to fiscal 2013. The leading contributor to this net revenue decrease was key account runoff in ES. The Company’s gross profit was $15.6 billion (28.4% of net revenue) and $15.7 billion (27.4% of net revenue) for the years ended October 31, 2014 and 2013, respectively. The 1.0 percentage point increase in gross margin was due primarily to service delivery efficiencies and improvements in underperforming contracts in ES. The Company’s operating margin decreased 0.9 percentage points for fiscal 2014 as compared to fiscal 2013 due to higher restructuring charges, investments in R&D and higher SG&A expenses, partially offset by the gross margin increase and lower intangible asset amortization.

As of October 31, 2014, cash and cash equivalents and short- and long-term investments were approximately $2.6 billion, representing an increase of approximately $100 million from the October 31, 2013 balance of approximately $2.5 billion. For the fiscal year ended October 31, 2014, we generated $6.9 billion of cash flows from operations and we invested $3.0 billion in property, plant and equipment, net of proceeds from sales.

Trends and Uncertainties

We are in the process of addressing many challenges facing our business. One set of challenges relates to dynamic and accelerating market trends, such as the market shift to cloud-related IT infrastructure, software and

 

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services, and the growth in software-as-a-service (“SaaS”) business models. Certain of our legacy hardware businesses face challenges as customers migrate to cloud-based offerings and reduce their purchases of hardware products. Additionally, our legacy software business derives a large portion of its revenues from upfront license sales, some of which over time can be expected to shift to SaaS. Another set of challenges relates to changes in the competitive landscape. Our major competitors are expanding their product and service offerings with integrated products and solutions, our business-specific competitors are exerting increased competitive pressure in targeted areas and are entering new markets, our emerging competitors are introducing new technologies and business models, and our alliance partners in some businesses are increasingly becoming our competitors in others. A third set of challenges relate to business model changes and our go-to-market execution.

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

 

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

 

    In ES, we are facing challenges, including managing the revenue runoff from several large contracts, pressured public sector spending, a competitive pricing environment and market pressures from a mixed economic recovery in Europe, the Middle East and Africa (“EMEA”). We are also experiencing commoditization in the IT infrastructure services market that is placing pressure on traditional ITO pricing and cost structures. There is also an industry-wide shift to highly automated, asset-light delivery of IT infrastructure and applications leading to headcount consolidation. To be successful in addressing these challenges, we must execute on the ES multi-year turnaround plan, which includes a cost reduction initiative to align our costs to our revenue trajectory, a focus on new logo wins and Strategic Enterprise Services (“SES”) and initiatives to improve execution in sales performance and accountability, contracting practices and pricing.

 

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

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

For a further discussion of trends, uncertainties and other factors that could impact our operating results, see the section entitled “Risk Factors” included elsewhere in this information statement.

 

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Critical Accounting Policies and Estimates

General

The Combined Financial Statements of the Company are prepared in accordance with U.S. GAAP, which requires management to make estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, net revenue and expenses, and the disclosure of contingent liabilities. Management bases its estimates on historical experience and on various other assumptions that it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying amount of assets and liabilities that are not readily apparent from other sources. Management has discussed the development, selection and disclosure of these estimates with the Audit Committee of Parent’s board of directors. Management believes that the accounting estimates employed and the resulting amounts are reasonable; however, actual results may differ from these estimates. Making estimates and judgments about future events is inherently unpredictable and is subject to significant uncertainties, some of which are beyond our control. Should any of these estimates and assumptions change or prove to have been incorrect, it could have a material impact on our results of operations, financial position and cash flows.

A summary of significant accounting policies is included in Note 2 to the Combined Financial Statements. An accounting policy is deemed to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, if different estimates reasonably could have been used, or if changes in the estimate that are reasonably possible could materially impact the financial statements. Management believes the following critical accounting policies reflect the significant estimates and assumptions used in the preparation of the Combined Financial Statements.

Revenue Recognition

We recognize revenue when persuasive evidence of an arrangement exists, delivery has occurred or services are rendered, the sales price or fee is fixed or determinable and collectability is reasonably assured, as well as other revenue recognition principles, including industry-specific revenue recognition guidance.

We enter into contracts to sell our products and services, and while many of our sales agreements contain standard terms and conditions, there are agreements we enter into which contain nonstandard terms and conditions. Further, many of our arrangements include multiple elements. As a result, significant contract interpretation may be required to determine the appropriate accounting, including the identification of deliverables considered to be separate units of accounting, the allocation of the transaction price among elements in the arrangement and the timing of revenue recognition for each of those elements.

We recognize revenue for delivered elements as separate units of accounting when the delivered elements have standalone value to the customer. For elements with no standalone value, we recognize revenue consistent with the pattern of the undelivered elements. If the arrangement includes a customer negotiated refund or return right or other contingency relative to the delivered items and the delivery and performance of the undelivered items is considered probable and substantially within our control, the delivered element constitutes a separate unit of accounting. In arrangements with combined units of accounting, changes in the allocation of the transaction price between elements may impact the timing of revenue recognition for the contract but will not change the total revenue recognized for the contract.

We establish the selling prices used for each deliverable based on vendor-specific objective evidence (“VSOE”) of selling price, if available, third-party evidence (“TPE”), if VSOE of selling price is not available, or estimated selling price (“ESP”), if neither VSOE of selling price nor TPE is available. We establish VSOE of selling price using the price charged for a deliverable when sold separately and, in rare instances, using the price established by management having the relevant authority. TPE of selling price is established by evaluating largely similar and interchangeable competitor products or services in standalone sales to similarly situated customers. ESP is established based on management’s judgment considering internal factors such as margin objectives, pricing practices and controls, customer segment pricing strategies and the product lifecycle.

 

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Consideration is also given to market conditions such as competitor pricing strategies and industry technology lifecycles. We may modify or develop new go-to-market practices in the future, which may result in changes in selling prices, impacting both VSOE of selling price and ESP. In most arrangements with multiple elements, the transaction price is allocated to the individual units of accounting at inception of the arrangement based on their relative selling price. However, the aforementioned factors may result in a different allocation of the transaction price to deliverables in multiple element arrangements entered into in future periods. This may change the pattern and timing of revenue recognition for identical arrangements executed in future periods, but will not change the total revenue recognized for any given arrangement.

We reduce revenue for customer and distributor programs and incentive offerings, including price protection, promotions, other volume-based incentives and expected returns. Future market conditions and product transitions may require us to take actions to increase customer incentive offerings, possibly resulting in an incremental reduction of revenue at the time the incentive is offered. For certain incentive programs, we estimate the number of customers expected to redeem the incentive based on historical experience and the specific terms and conditions of the incentive.

For hardware products, we recognize revenue generated from direct sales to end customers and indirect sales to channel partners (including resellers, distributors and value-added solution providers) when the revenue recognition criteria are satisfied. For indirect sales to channel partners, we recognize revenue at the time of delivery when the channel partner has economic substance apart from the Company and the Company has completed its obligations related to the sale.

For the various software products we sell (e.g., big data analytics and applications, application delivery management, enterprise security and IT operations management), we assess whether the software products were sold standalone or with hardware products. If the software sold with a hardware product is not essential to the functionality of the hardware and is more than incidental, we treat it as a software deliverable.

We recognize revenue from the sale of perpetual software licenses at inception of the license term, assuming all revenue recognition criteria have been satisfied. Term-based software license revenue is generally recognized ratably over the term of the license. We use the residual method to allocate revenue to software licenses at inception of the arrangement when VSOE of fair value for all undelivered elements, such as post-contract support, exists and all other revenue recognition criteria have been satisfied. Revenue from maintenance and unspecified upgrades or updates provided on an if and when available basis is recognized ratably over the period during which such items are delivered.

For hosting or SaaS arrangements, we recognize revenue as the service is delivered, generally on a straight line basis, over the contractual period of performance. In hosting arrangements where software licenses are sold, license revenue is generally recognized according to whether perpetual or term licenses are sold, when all other revenue recognition criteria are satisfied. In hosting arrangements that include software licenses, we consider the rights provided to the customer (e.g., ownership of a license, contract termination provisions and feasibility of the customer to operate the software) in determining when to recognize revenue for the licenses.

We recognize revenue from fixed price support or maintenance contracts, including extended warranty contracts and software post-contract customer support agreements, ratably over the contract period. For certain fixed price contracts, such as consulting arrangements, we recognize revenue as work progresses using a proportional performance method. We estimate the total expected labor costs in order to determine the amount of revenue earned to date. We apply a proportional performance method because reasonably dependable estimates of the labor costs applicable to various stages of a contract can be made. On fixed price contracts for design and build projects (to design, develop and construct software infrastructure and systems), we recognize revenue as work progresses using the percentage of completion method. We use the cost to cost method to measure progress toward completion as determined by the percentage of costs incurred to date compared to the total estimated costs of the project. Total project costs are subject to revision throughout the life of a fixed price contract. Provisions for estimated losses on fixed price contracts are recognized in the period when such losses become

 

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known and are recorded as a component of cost of sales. In circumstances when reasonable and reliable cost estimates for a project cannot be made we recognize revenue using the completed contract method.

Outsourcing services revenue is generally recognized in the period when the service is provided and the amount earned is not contingent on the occurrence of any future event. We recognize revenue using an objective measure of output for per unit priced contracts. Revenue for fixed price outsourcing contracts with periodic billings is recognized on a straight line basis if the service is provided evenly over the contract term. Provisions for estimated losses on outsourcing arrangements are recognized in the period when such losses become probable and estimable and are recorded as a component of cost of sales.

Warranty

We accrue the estimated cost of product warranties at the time we recognize revenue. We evaluate our warranty obligations on a product group basis. Our standard product warranty terms generally include post-sales support and repairs or replacement of a product at no additional charge for a specified period of time. While we engage in extensive product quality programs and processes, including actively monitoring and evaluating the quality of our component suppliers, we base our estimated warranty obligation on contractual warranty terms, repair costs, product call rates, average cost per call, current period product shipments and ongoing product failure rates, as well as specific product class failure outside of our baseline experience. Warranty terms generally range from one to five years for parts and labor, depending upon the product. Over the last three fiscal years, the annual warranty expense and actual warranty costs have averaged approximately 2.7% and 2.9% of annual net product revenue, respectively.

Restructuring

We have engaged in restructuring actions which require management to estimate the timing and amount of severance and other employee separation costs for workforce reduction and enhanced early retirement programs, the fair value of assets made redundant or obsolete, and the fair value of lease cancellation and other exit costs. We accrue for severance and other employee separation costs under these actions when it is probable that benefits will be paid and the amount is reasonably estimable. The rates used in determining severance accruals are based on existing plans, historical experiences and negotiated settlements. For a full description of our restructuring actions, refer to our discussions of restructuring in “Results of Operations” below and in Note 4 to the Combined Financial Statements.

Retirement and Post-Retirement Benefits

Parent provides various defined benefit and other contributory and noncontributory retirement and post-retirement plans to our eligible employees and retirees. Plans whose participants include both our employees and other employees of Parent (“Shared” plans) are accounted for as multiemployer benefit plans and the related net benefit plan obligations are not included in our Combined Balance Sheets. The related benefit plan expense has been allocated to us based on our labor costs and allocations of corporate and other shared functional personnel.

Certain benefit plans in our operations include only active, retired and other former Company employees (“Direct” plans) and are accounted for as single employer benefit plans. Accordingly, the net benefit plan obligations and the related benefit plan expense of those plans have been recorded in our Combined Financial Statements.

Our pension and other post-retirement benefit costs and obligations depend on various assumptions. Our major assumptions relate primarily to discount rates, mortality rates, expected increases in compensation levels and the expected long-term return on plan assets. The discount rate assumption is based on current investment yields of high quality fixed income securities with maturities similar to the expected benefits payment period. Mortality rates help predict the expected life of plan participants and are based on a historical demographic study of the plan. The expected increase in the compensation levels assumption reflects our long-term actual experience and future expectations. The expected long-term return on plan assets is determined based on asset

 

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allocations, historical portfolio results, historical asset correlations and management’s expected returns for each asset class. In any fiscal year, significant differences may arise between the actual return and the expected long-term return on plan assets. Historically, differences between the actual return and expected long-term return on plan assets have resulted from changes in target or actual asset allocation, short-term performance relative to expected long-term performance, and to a lesser extent, differences between target and actual investment allocations, the timing of benefit payments compared to expectations, and the use of derivatives intended to effect asset allocation changes or hedge certain investment or liability exposures. For the recognition of net periodic benefit cost, the calculation of the expected long-term return on plan assets uses the fair value of plan assets as of the beginning of the fiscal year.

Our major assumptions vary by plan, and the weighted average rates used are set forth in Note 5 to the Combined Financial Statements. The following table provides the impact of changes in the weighted average assumptions of discount rates, the expected increase in compensation levels and the expected long-term return on plan assets would have had on our net periodic benefit cost for Direct plans for fiscal 2014:

 

     Change in
percentage points
     Change in
Net Periodic
Benefit Cost
in millions
 

Assumptions:

     

Discount rate

     (25    $ 28   

Expected increase in compensation levels

     25       $ 11   

Expected long-term return on plan assets

     (25    $ 11   

Taxes on Earnings

Our operations have historically been included in the tax returns filed by the respective Parent entities of which our businesses are a part. Income tax expense and other income tax related information contained in our Combined Financial Statements are presented on a separate return basis as if we filed our own tax returns. The separate return method applies the accounting guidance for income taxes to the standalone financial statements as if we were a separate taxpayer and a standalone enterprise for the periods presented. The calculation of our income taxes on a separate return basis requires a considerable amount of judgment and use of both estimates and allocations. Current income tax liabilities related to entities which file jointly with Parent are assumed to be immediately settled with Parent and are relieved through the Parent company investment account and the Net transfers to Parent in the Combined Statements of Cash Flows.

We calculate our current and deferred tax provisions based on estimates and assumptions that could differ from the final positions reflected in Parent’s income tax returns. We adjust our current and deferred tax provisions based on Parent’s income tax returns which are generally filed in the third or fourth quarters of the subsequent fiscal year.

We recognize deferred tax assets and liabilities for the expected tax consequences of temporary differences between the tax bases of assets and liabilities and their reported amounts using enacted tax rates in effect for the year in which we expect the differences to reverse.

We record a valuation allowance to reduce deferred tax assets to the amount that we are more likely than not to realize. In determining the need for a valuation allowance, we consider future market growth, forecasted earnings, future taxable income, the mix of earnings in the jurisdictions in which we operate and prudent and feasible tax planning strategies. In the event we were to determine that it is more likely than not that we will be unable to realize all or part of our deferred tax assets in the future, we would increase the valuation allowance and recognize a corresponding charge to earnings or other comprehensive income in the period in which we make such a determination. Likewise, if we later determine that we are more likely than not to realize the deferred tax assets, we would reverse the applicable portion of the previously recognized valuation allowance. In

 

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order for us to realize our deferred tax assets, we must be able to generate sufficient taxable income in the jurisdictions in which the deferred tax assets are located.

Our effective tax rate includes the impact of certain undistributed foreign earnings for which we have not provided for U.S. federal taxes because we plan to reinvest such earnings indefinitely outside the U.S. We plan distributions of foreign earnings based on projected cash flow needs as well as the working capital and long-term investment requirements of our foreign subsidiaries and our domestic operations. Based on these assumptions, we estimate the amount we expect to indefinitely invest outside the U.S. and the amounts we expect to distribute to the U.S. and provide for the U.S. federal taxes due on amounts expected to be distributed to the U.S. Further, as a result of certain employment actions and capital investments we have undertaken, income from manufacturing activities in certain jurisdictions is subject to reduced tax rates and, in some cases, is wholly exempt from taxes for fiscal years through 2024. Material changes in our estimates of cash, working capital and long-term investment requirements in the various jurisdictions in which we do business could impact how future earnings are repatriated to the U.S., and our related future effective tax rate.

We are subject to income taxes in the U.S. and approximately 105 other countries, and we are subject to routine corporate income tax audits in many of these jurisdictions. We believe that positions taken on our tax returns are fully supported, but tax authorities may challenge these positions, which may not be fully sustained on examination by the relevant tax authorities. Accordingly, our income tax provision includes amounts intended to satisfy assessments that may result from these challenges. Determining the income tax provision for these potential assessments and recording the related effects requires management judgments and estimates. The amounts ultimately paid on resolution of an audit could be materially different from the amounts previously included in our income tax provision and, therefore, could have a material impact on our income tax provision, net income and cash flows. Our accrual for uncertain tax positions is attributable primarily to uncertainties concerning the tax treatment of our international operations, including the allocation of income among different jurisdictions, intercompany transactions and related interest. For a further discussion on taxes on earnings, refer to Note 7 to the Combined Financial Statements.

Inventory

We state our inventory at the lower of cost or market on a first in, first out basis. We make adjustments to reduce the cost of inventory to its net realizable value at the product group level for estimated excess, obsolescence or impaired balances. Factors influencing these adjustments include changes in demand, technological changes, product lifecycle and development plans, component cost trends, product pricing, physical deterioration and quality issues.

Goodwill

We review goodwill for impairment annually and whenever events or changes in circumstances indicate the carrying amount of goodwill may not be recoverable. We are permitted to conduct a qualitative assessment to determine whether it is necessary to perform a two step quantitative goodwill impairment test. For our annual goodwill impairment test in the fourth quarter of each fiscal year, we perform a quantitative test for each of our reporting units.

Goodwill is tested for impairment at the reporting unit level. As of October 31, 2014, our reporting units are consistent with the reportable segments identified in Note 3 to the Combined Financial Statements, except for ES, which includes two reporting units: (1) MphasiS Limited and (2) the remainder of ES. In the first step of the goodwill impairment test, we compare the fair value of each reporting unit to its carrying amount. We estimate the fair value of our reporting units using a weighting of fair values derived most significantly from the income approach and, to a lesser extent, the market approach. Under the income approach, we estimate the fair value of a reporting unit based on the present value of estimated future cash flows. Cash flow projections are based on management’s estimates of revenue growth rates and operating margins, taking into consideration industry and market conditions. The discount rate used is based on the weighted average cost of capital adjusted for the relevant risk associated with business specific characteristics and the uncertainty related to the reporting unit’s

 

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ability to execute on the projected cash flows. Under the market approach, we estimate fair value based on market multiples of revenue and earnings derived from comparable publicly traded companies with operating and investment characteristics similar to the reporting unit. We weight the fair value derived from the market approach depending on the level of comparability of these publicly traded companies to the reporting unit. When market comparables are not meaningful or not available, we estimate the fair value of a reporting unit using only the income approach. For the MphasiS Limited reporting unit, we utilized the quoted market price in an active market to estimate fair value. After the separation, our common stock price and associated total company market capitalization will also be considered in the determination of reporting unit fair value. A prolonged or significant decline in our stock price could provide evidence of a need to record a goodwill impairment charge.

Estimating the fair value of a reporting unit is judgmental in nature and involves the use of significant estimates and assumptions. These estimates and assumptions include revenue growth rates and operating margins used to calculate projected future cash flows, risk adjusted discount rates, future economic and market conditions and the determination of appropriate comparable publicly traded companies. In addition, we make certain judgments and assumptions in allocating shared assets and liabilities to individual reporting units to determine the carrying amount of each reporting unit.

If the fair value of a reporting unit exceeds the carrying amount of the net assets assigned to that reporting unit, goodwill is not impaired and no further testing is required. If the fair value of the reporting unit is less than its carrying amount, then we perform the second step of the goodwill impairment test to measure the amount of impairment loss, if any. In the second step, the reporting unit’s assets, including any unrecognized intangible assets, liabilities and noncontrolling interests are measured at fair value in a hypothetical analysis to calculate the implied fair value of goodwill for the reporting unit in the same manner as if the reporting unit was being acquired in a business combination. If the implied fair value of the reporting unit’s goodwill is less than its carrying amount, the difference is recorded as an impairment loss.

Our annual goodwill impairment analysis, which we performed as of the first day of the fourth quarter of fiscal 2014, did not result in any impairment charges. The excess of fair value over carrying amount for our reporting units ranged from 18% to approximately 160% of carrying amounts. The Software reporting unit has the lowest excess of fair value over carrying amount at 18%.

In order to evaluate the sensitivity of the estimated fair value of our reporting units in the goodwill impairment test, we applied a hypothetical 10% decrease to the fair value of each reporting unit. This hypothetical 10% decrease resulted in an excess of fair value over carrying amount for our reporting units ranging from 6% to approximately 134% of the carrying amounts with the Software reporting unit having the lowest excess of fair value over carrying amount of 6%. The fair value of the Software reporting unit is estimated using a weighting of both the income and market approaches. Our Software business is facing multiple challenges including the market shift to SaaS and go-to-market execution challenges. If we are not successful in addressing these challenges, our projected revenue growth rates could decline resulting in a decrease in the fair value of the Software reporting unit. The fair value of the Software reporting unit could also be negatively impacted by declines in market multiples of revenue for comparable publicly traded companies, a higher discount rate driven by higher interest rates, changes in management’s business strategy or significant declines in our stock price following the separation, which could result in an indicator of impairment.

Intangible Assets

We review intangible assets with finite lives for impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. Recoverability of our finite lived intangible assets is assessed based on the estimated undiscounted future cash flows expected to result from the use and eventual disposition of the asset. If the undiscounted future cash flows are less than the carrying amount, the finite lived intangible assets are considered to be impaired. The amount of the impairment loss, if any, is measured as the difference between the carrying amount of the asset and its fair value. We estimate the fair value of finite lived intangible assets by using an income approach or, when available and appropriate, using a market approach.

 

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Fair Value of Derivative Instruments

We use derivative instruments to manage a variety of risks, including risks related to foreign currency exchange rates and interest rates. We use forwards, swaps and options to hedge certain foreign currency and interest rate exposures. We do not use derivative financial instruments for speculative purposes. At October 31, 2014, the gross notional amount of our derivative portfolio was $10.5 billion. Assets and liabilities related to derivative instruments are measured at fair value, and were $445 million and $75 million, respectively, as of October 31, 2014.

Fair value is the price we would receive to sell an asset or pay to transfer a liability in an orderly transaction between market participants at the measurement date. In the absence of active markets for identical assets or liabilities, such measurements involve developing assumptions based on market observable data and, in the absence of such data, internal information that is consistent with what market participants would use in a hypothetical transaction that occurs at the measurement date. The determination of fair value often involves significant judgments about assumptions such as determining an appropriate discount rate that factors in both risk and liquidity premiums, identifying the similarities and differences in market transactions, weighting those differences accordingly and then making the appropriate adjustments to those market transactions to reflect the risks specific to the asset or liability being valued. We generally use industry standard valuation models to measure the fair value of our derivative positions. When prices in active markets are not available for an identical asset or liability, we use industry standard valuation models to measure fair value. Where applicable, these models project future cash flows and discount the future amounts to present value using market based observable inputs, including interest rate curves, Company and counterparty credit risk, foreign currency exchange rates, and forward and spot prices.

For a further discussion of fair value measurements and derivative instruments, refer to Note 11 and Note 12, respectively, to the Combined Financial Statements.

Loss Contingencies

We are involved in various lawsuits, claims, investigations and proceedings including those consisting of IP, commercial, securities, employment, employee benefits and environmental matters, which arise in the ordinary course of business. We record a liability when we believe that it is both probable that a liability has been incurred and the amount of loss can be reasonably estimated. Significant judgment is required to determine both the probability of having incurred a liability and the estimated amount of the liability. We review these matters at least quarterly and adjust these liabilities to reflect the impact of negotiations, settlements, rulings, advice of legal counsel and other updated information and events, pertaining to a particular case. Based on our experience, we believe that any damage amounts claimed in the specific litigation and contingencies matters further discussed in Note 16 to the Combined Financial Statements are not a meaningful indicator of the Company’s potential liability. Litigation is inherently unpredictable. However, we believe we have valid defenses with respect to legal matters pending against us. Nevertheless, cash flows or results of operations could be materially affected in any particular period by the resolution of one or more of these contingencies. We believe we have recorded adequate provisions for any such matters and, as of October 31, 2014, it was not reasonably possible that a material loss had been incurred in connection with such matters in excess of the amounts recognized in our financial statements.

Accounting Pronouncements

For a summary of recent accounting pronouncements applicable to us, see Note 2 to the Combined Financial Statements and Note 1 to the Condensed Combined Financial Statements.

Results of Operations

Revenue from our international operations has historically represented, and we expect will continue to represent, a majority of our overall net revenue. As a result, our revenue growth has been impacted, and we expect

 

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will continue to be impacted, by fluctuations in foreign currency exchange rates. In order to provide a framework for assessing performance excluding the impact of foreign currency fluctuations, we present the year over year percentage change in revenue on a constant currency basis, which assumes no change in foreign currency exchange rates from the prior year period and doesn’t adjust for any repricing or demand impacts from changes in foreign currency exchange rates. This information is provided so that revenue can be viewed without the effect of fluctuations in foreign currency exchange rates, which is consistent with how management evaluates our revenue results and trends. This constant currency disclosure is provided in addition to, and not as a substitute for, the year over year percentage change in revenue on a GAAP basis. Other companies may calculate and define similarly labeled items differently, which may limit the usefulness of this measure for comparative purposes.

Results of Operations—Nine Months ended July 31, 2015 and 2014

Results of operations in dollars and as a percentage of net revenue were as follows:

 

     Nine months ended July 31  
     2015     2014  
     Dollars in millions  

Net revenue

   $ 38,659         100.0   $ 41,050         100.0

Cost of sales(1)

     27,705         71.7     29,719         72.4
  

 

 

    

 

 

   

 

 

    

 

 

 

Gross profit

     10,954         28.3     11,331         27.6

Research and development

     1,686         4.4     1,649         4.0

Selling, general and administrative

     5,987         15.5     6,541         15.9

Amortization of intangible assets

     632         1.6     700         1.7

Restructuring charges

     404         1.0     924         2.3

Acquisition-related charges

     69         0.2     8         —     

Separation costs

     458         1.2     —           —     

Defined benefit plan settlement charges

     178         0.5     —           —     

Impairment of data center assets

     136         0.3     —           —     
  

 

 

    

 

 

   

 

 

    

 

 

 

Earnings from operations

     1,404         3.6     1,509         3.7

Interest and other, net

     (44      (0.1 )%      (63      (0.2 )% 
  

 

 

    

 

 

   

 

 

    

 

 

 

Earnings before taxes

     1,360         3.5     1,446         3.5

Provision for taxes

     (284      (0.7 )%      (314      0.7
  

 

 

    

 

 

   

 

 

    

 

 

 

Net earnings

   $ 1,076         2.8   $ 1,132         2.8
  

 

 

    

 

 

   

 

 

    

 

 

 

 

(1) Cost of products, cost of services and financing interest.

Net Revenue

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

 

     Nine months ended
July 31, 2015
 
     Percentage Points  

Enterprise Services

     (5.2

Financial Services

     (0.4

Software

     (0.4

Enterprise Group

     0.2   

Corporate Investments

     —     
  

 

 

 

Total

     (5.8
  

 

 

 

 

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For the nine months ended July 31, 2015, total Company combined net revenue decreased 5.8% as compared with the prior-year period. U.S. net revenue decreased 3.9% to $14.8 billion and net revenue from outside the U.S. decreased 7% to $23.9 billion.

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

 

    ES net revenue decreased due primarily to unfavorable currency impacts and revenue runoff in two key accounts;

 

    FS net revenue decreased due primarily to unfavorable currency impacts, lower asset management activity and lower portfolio revenue as a result of lower interest rate yields;

 

    Software net revenue decreased due primarily to unfavorable currency impacts and declines in license revenue; and

 

    EG net revenue increased due to growth in ISS.

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

Gross Margin

For the nine months ended July 31, 2015, total gross margin increased 0.7 percentage points. From a segment perspective, the primary factors impacting gross margin performance are summarized as follows:

 

    ES gross margin increased due primarily to service delivery efficiencies and improving profit performance in underperforming contracts;

 

    FS gross margin increased due primarily to higher margins in asset management activity primarily from asset recovery services and the result of a customer billing adjustment in the prior-year period;

 

    EG gross margin decreased due primarily to a higher mix of ISS products, unfavorable currency impacts and competitive pricing; and

 

    Software gross margin decreased due primarily to an unfavorable mix of license revenue.

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

Operating Expenses

Research and Development

R&D expense increased by 2% for the nine months ended July 31, 2015, due primarily to increases in TS and Networking (primarily due to the acquisition of Aruba) in the EG segment and Hewlett Packard Enterprise Labs, partially offset by favorable currency impacts.

Selling, General and Administrative

SG&A expense decreased 8% for the nine months ended July 31, 2015, due primarily to favorable currency impacts and decreases in go-to-market costs as a result of lower commissions and productivity initiatives. The decrease was partially offset by higher administrative expenses due to a gain from the sale of real estate in the prior-year period.

Amortization of Intangible Assets

Amortization expense decreased 10% for the nine months ended July 31, 2015, due primarily to certain intangible assets associated with prior acquisitions reaching the end of their respective amortization periods.

 

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Restructuring Charges

Restructuring charges decreased for the nine months ended July 31, 2015, due primarily to lower charges from the multi-year restructuring plan initially announced in May 2012 (the “2012 Plan”).

Acquisition-Related Charges

Acquisition-related charges increased for the nine months ended July 31, 2015, due primarily to a non-cash inventory fair value adjustment charge and professional services and legal fees associated with the acquisition of Aruba.

Separation Costs

Separation costs for the nine months ended July 31, 2015, were primarily related to third-party consulting, contractor fees and other incremental costs.

Defined Benefit Plan Settlement Charges

Defined benefit plan settlement charges for the nine months ended July 31, 2015 were related to U.S. defined benefit plan settlement expense and net periodic benefit cost resulting from Parent’s voluntary lump sum program announced in January 2015.

Impairment of Data Center Assets

Impairment of data center assets for the nine months ended July 31, 2015, was related to our exit from several ES data centers.

Interest and Other, Net

Interest and other, net expense decreased by $19 million for the nine months ended July 31, 2015. The decrease was driven by lower interest expense due to lower average borrowings and a decrease in miscellaneous other expense partially offset by higher foreign currency transaction losses.

Provision for Taxes

Our effective tax rate was 20.9% and 21.7% for the nine months ended July 31, 2015 and 2014, respectively. Our effective tax rate generally differs from the U.S. federal statutory rate of 35% due to favorable tax rates associated with certain earnings from our operations in lower-tax jurisdictions throughout the world. We have not provided U.S. taxes for all foreign earnings because we plan to reinvest some of those earnings indefinitely outside the U.S.

For the nine months ended July 31, 2015, we recorded $146 million of net tax benefits related to discrete items. These amounts included a tax benefit of $140 million on separation costs and a tax benefit of $48 million on restructuring charges. These tax benefits were partially offset by various tax charges of $42 million.

For the nine months ended July 31, 2014, we recorded $220 million of net tax benefits related to discrete items, which included $122 million of tax benefits on restructuring charges.

Segment Information

A description of the products and services for each segment can be found in Note 2 to the Condensed Combined Financial Statements included elsewhere in this information statement. Future changes to this organizational structure may result in changes to the segments disclosed.

 

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Enterprise Group

 

     Nine months ended July 31  
     2015     2014     % Change  
     Dollars in millions  

Net revenue

   $ 20,549      $ 20,477        0.4

Earnings from operations

   $ 2,952      $ 2,914        1.3

Earnings from operations as a % of net revenue

     14.4     14.2  

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

 

     Net Revenue
Nine months ended July 31
     Weighted Net
Revenue Change

%
 
             2015                      2014             
     Dollars in millions  

Industry Standard Servers

   $ 9,860       $ 9,102         3.7   

Networking

     1,941         1,959         (0.1

Storage

     2,361         2,437         (0.3

Business Critical Systems

     587         691         (0.5

Technology Services

     5,800         6,288         (2.4
  

 

 

    

 

 

    

 

 

 

Total Enterprise Group

   $ 20,549       $ 20,477         0.4   
  

 

 

    

 

 

    

 

 

 

EG net revenue increased 0.4% (increased 5.5% on a constant currency basis) for the nine months ended July 31, 2015. We continued to experience challenges due to market trends, including the transition to cloud computing, as well as product and technology transitions, along with a highly competitive pricing environment. For the nine months ended July 31, 2015, the net revenue increase was due primarily to growth in ISS partially offset by unfavorable currency impacts.

ISS net revenue increased by 8% for the nine months ended July 31, 2015, due primarily to higher average unit prices (“AUPs”) in rack server products driven by higher option attach rates for memory, processors and hard drives, a mix shift to high-end HP ProLiant Gen9 servers and higher revenue from density optimized servers. These increases were partially offset by lower revenue from blade and tower server products due primarily to competitive pricing pressure. Networking net revenue decreased by 1.0% for the nine months ended July 31, 2015. The decrease for the nine months ended July 31, 2015 was due primarily to lower revenue from switching and routing products, particularly in China as a result of competitive pricing pressures, the effects of which were partially offset by higher revenue from WLAN products as a result of the acquisition of Aruba. Storage net revenue decreased by 3% for the nine months ended July 31, 2015. We experienced a net revenue decline in traditional storage products, the effect of which was partially offset by net revenue growth in Converged Storage solutions due primarily to the 3PAR StoreServ products particularly All-flash arrays, and StoreOnce. BCS net revenue decreased by 15% for the nine months ended July 31, 2015, largely a result of ongoing challenges from the overall UNIX market contraction. TS net revenue decreased by 8% for the nine months ended July 31, 2015 due primarily to a reduction in support for BCS and traditional storage products along with lower revenue from consulting services, the effects of which were partially offset by growth in HP Data Center Care and HP Proactive Care support solutions.

EG earnings from operations as a percentage of net revenue increased by 0.2 percentage points for the nine months ended July 31, 2015 due to a decrease in operating expenses as a percentage of net revenue partially offset by a decrease in gross margin. The decrease in gross margin was due primarily to a higher mix of ISS products, unfavorable currency impacts, and competitive pricing, the effects of which were partially offset by improved cost management and improved pricing in Storage. The decrease in operating expenses as a percentage of net revenue for the nine months ended July 31, 2015 was due primarily to favorable currency impacts, partially offset by operating expenses from Aruba.

 

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Enterprise Services

 

     Nine months ended July 31  
     2015     2014     % Change  
     Dollars in millions  

Net revenue

   $ 14,786      $ 16,887        (12.4 )% 

Earnings from operations

   $ 607      $ 432        40.5

Earnings from operations as a % of net revenue

     4.1     2.6  

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

 

     Net Revenue
Nine months ended July 31
     Weighted Net
Revenue Change

%
 
             2015                      2014             
     Dollars in millions  

Infrastructure Technology Outsourcing

   $ 9,039       $ 10,592         (9.2

Application and Business Services

     5,747         6,295         (3.2
  

 

 

    

 

 

    

 

 

 

Total Enterprise Services

   $ 14,786       $ 16,887         (12.4
  

 

 

    

 

 

    

 

 

 

ES net revenue decreased 12.4% (decreased 6.8% on a constant currency basis) for the nine months ended July 31, 2015. Performance in ES remained challenged by the impact of several large contracts winding down. The net revenue decrease in ES was due primarily to unfavorable currency impacts, revenue runoff in two key accounts and soft demand in ITO in new and existing accounts, partially offset by growth in our SES portfolio which includes information management and analytics, security and cloud services.

Net revenue in ITO decreased by 15% for the nine months ended July 31, 2015 due to unfavorable currency impacts, revenue runoff in two key accounts and weak growth in new and existing accounts, particularly in EMEA, partially offset by growth in SES revenue. Net revenue in Application and Business Services (“ABS”) declined by 9% for the nine months ended July 31, 2015 primarily due to unfavorable currency impacts and weak growth in new and existing accounts.

For the nine months ended July 31, 2015 as compared to the prior-year period, ES earnings from operations as a percentage of net revenue increased 1.5 percentage points. The increase in operating margin for the nine months ended July 31, 2015 was due to an increase in gross margin and a decrease in operating expense as a percentage of net revenue. Gross margin increased due primarily to service delivery efficiencies and improving profit performance in underperforming contracts. The decrease in operating expenses as a percentage of net revenue was primarily driven by lower field selling costs, which was due to favorable currency impacts and our sales transformation initiatives.

Software

 

     Nine months ended July 31  
     2015     2014     % Change  
     Dollars in millions  

Net revenue

   $ 2,663      $ 2,846        (6.4 )% 

Earnings from operations

   $ 501      $ 535        (6.4 )% 

Earnings from operations as a % of net revenue

     18.8     18.8  

Software net revenue decreased 6.4% (decreased 2.9% on a constant currency basis) for the nine months ended July 31, 2015. Revenue growth in Software is being challenged by the overall market and customer shift to SaaS solutions and execution challenges, both of which are impacting growth in license and support revenue. Net revenue growth was negatively impacted by foreign currency fluctuations across all regions, led primarily by weakness in the euro.

 

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For the nine months ended July 31, 2015, net revenue from licenses, professional services, SaaS and support decreased by 15%, 10%, 3% and 2%, respectively. The decrease in license revenue was due primarily to the market shift to SaaS solutions and sales execution challenges and, as a result, we experienced lower revenue in IT management. Professional services net revenue decreased due primarily to unfavorable currency impacts and our continued focus on higher-margin engagements, and as a result, we experienced a net revenue decrease in big data solutions and IT management. SaaS net revenue decreased due primarily to sales execution issues, which resulted in lower revenue from big data solutions, partially offset by net revenue growth in IT management. The decrease in support revenue was due primarily to unfavorable currency impacts partially offset by growth in revenue for security products.

For the nine months ended July 31, 2015 as compared to the prior year period, Software earnings from operations as a percentage of net revenue was flat due to a decrease in operating expenses as a percentage of net revenue, offset by a decrease in gross margin. The decrease in gross margin was due primarily to an unfavorable mix of license revenue. The decrease in operating expenses as a percentage of net revenue was due to lower SG&A expenses as a result of lower field selling costs driven by expense management.

Financial Services

 

     Nine months ended July 31  
     2015     2014     % Change  
     Dollars in millions  

Net revenue

   $ 2,415      $ 2,592        (6.8 )% 

Earnings from operations

   $ 262      $ 280        (6.4 )% 

Earnings from operations as a % of net revenue

     10.8     10.8  

FS net revenue decreased 6.8% (decreased 0.7% on a constant currency basis) for the nine months ended July 31, 2015. The net revenue decrease for the nine months ended July 31, 2015 was due primarily to unfavorable currency impacts led primarily by weakness in the euro, lower asset management activity and lower portfolio revenue as a result of lower interest rate yields.

For the nine months ended July 31, 2015 as compared to the prior year period, FS earnings from operations as a percentage of net revenue was flat, due primarily to an increase in gross margin offset by an increase in operating expenses as a percentage of net revenue. The increase in gross margin was the result of higher margins in asset management activity primarily from asset recovery services and a customer billing adjustment in the prior-year period, partially offset by unfavorable currency impacts and lower portfolio margins due to competitive pricing. The increase in operating expenses as a percentage of net revenue was due primarily to the size of the revenue decline.

Financing Volume

 

     Nine months ended July 31  
         2015              2014      
     In millions  

Total financing volume

   $ 4,678       $ 4,532   

New financing volume, which represents the amount of financing provided to customers for equipment and related software and services, including intercompany activity, increased 3.2% for the nine months ended July 31, 2015 driven by higher financing associated with product sales and related services offerings, partially offset by unfavorable currency impacts led primarily by weakness in the euro.

 

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Portfolio Assets and Ratios

The FS business model is asset intensive and uses certain internal metrics to measure its performance against other financial services companies, including a segment balance sheet that is derived from our internal management reporting system. The accounting policies used to derive FS amounts are substantially the same as those used by the Company. However, intercompany loans and certain accounts that are reflected in the segment balances are eliminated in our Condensed Combined Financial Statements included elsewhere in this information statement.

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

 

     As of  
     July 31,
2015
    October 31,
2014
 
     Dollars in millions  

Financing receivables, gross

   $ 6,462      $ 6,718   

Net equipment under operating leases

     2,844        2,792   

Capitalized profit on intercompany equipment transactions(1)

     825        764   

Intercompany leases(1)

     1,948        2,002   
  

 

 

   

 

 

 

Gross portfolio assets

     12,079        12,276   
  

 

 

   

 

 

 

Allowance for doubtful accounts(2)

     96        111   

Operating lease equipment reserve

     59        68   
  

 

 

   

 

 

 

Total reserves

     155        179   
  

 

 

   

 

 

 

Net portfolio assets

   $ 11,924      $ 12,097   
  

 

 

   

 

 

 

Reserve coverage

     1.3     1.5

Debt-to-equity ratio(3)

     7.0x        7.0x   

 

(1) Intercompany activity is eliminated in the Combined and Condensed Combined Financial Statements.
(2) Allowance for doubtful accounts for financing receivables includes both the short and long-term portions.
(3) Debt benefiting FS consists of borrowing and funding-related activity associated with FS and its subsidiaries, and debt issued by Parent for which a portion of the proceeds benefited Financial Services. Such Parent debt, consisting of long-term notes, has not been attributed to the Company for any periods presented because Parent’s borrowings are not the legal obligation of the Company. Debt benefiting FS totaled $10.6 billion and $10.7 billion at July 31, 2015 and October 31, 2014, respectively, and was determined by applying an assumed debt to equity ratio, which management believes is comparable to that of other similar financing companies, to FS equity.

At July 31, 2015 and October 31, 2014, FS cash and cash equivalent balances were $615 million and $952 million, respectively.

Net portfolio assets at July 31, 2015 decreased 1.4% from October 31, 2014. The decrease generally resulted from unfavorable currency impacts, partially offset by new financing volume in excess of portfolio runoff.

FS recorded net bad debt expenses and operating lease equipment reserves of $30 million and $32 million, for the nine months ended July 31, 2015 and 2014, respectively.

 

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Corporate Investments

 

     Nine months ended July 31  
     2015      2014      % Change  
     Dollars in millions  

Net revenue

   $ 6       $ 4         50.0

Loss from operations

   $ (398    $ (280      (42.1 )% 

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

     NM         NM      

 

(1) “NM” represents not meaningful.

The increase in the loss from operations for the nine months ended July 31, 2015 was due primarily to higher expenses associated with incubation activities and Hewlett Packard Enterprise Labs.

Results of Operations—Fiscal Years ended October 31, 2014, 2013 and 2012

Results of operations in dollars and as a percentage of net revenue were as follows:

 

     For the Fiscal years ended October 31  
     2014     2013     2012  
     Dollars in millions  

Net revenue

   $ 55,123        100.0   $ 57,371        100.0   $ 61,042        100.0

Cost of sales(1)

     39,486        71.6     41,630        72.6     44,143        72.3
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     15,637        28.4     15,741        27.4     16,899        27.7

Research and development

     2,197        4.0     1,956        3.4     2,120        3.5

Selling, general and administrative

     8,717        15.8     8,601        15.0     8,678        14.2

Amortization of intangible assets

     906        1.7     1,228        2.2     1,641        2.7

Impairment of goodwill and intangible assets(2)

     —          —          —          —          16,808        27.5

Restructuring charges

     1,471        2.7     983        1.7     1,756        2.9

Acquisition-related charges

     11        —          21        —          35        0.1
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Earnings (loss) from operations

     2,335        4.2     2,952        5.1     (14,139     (23.2 )% 

Interest and other, net

     (91     (0.1 )%      (81     (0.1 )%      (175     (0.3 )% 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Earnings (loss) before taxes

     2,244        4.1     2,871        5.0     (14,314     (23.5 )% 

Provision for taxes

     (596     (1.1 )%      (820     (1.4 )%      (447     (0.7 )% 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net earnings (loss)

   $ 1,648        3.0   $ 2,051        3.6   $ (14,761     (24.2 )% 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Cost of products, cost of services and financing interest.
(2) Fiscal 2012 includes an $8.8 billion goodwill and intangible asset impairment charge associated with the Autonomy reporting unit within the Software segment and an $8.0 billion goodwill impairment charge within the ES reporting unit and segment.

Net Revenue

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

 

     Fiscal years ended October 31  
     2014      2013  
     Percentage Points  

Enterprise Services

     (3.0      (3.3

Enterprise Group

     (0.4      (2.2

Financial Services

     (0.3      (0.3

Software

     (0.2      (0.2

Corporate Investments

     —           —     
  

 

 

    

 

 

 

Total

     (3.9      (6.0
  

 

 

    

 

 

 

 

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Fiscal 2014 compared with Fiscal 2013

In fiscal 2014, total Company combined net revenue decreased 3.9% (decreased 3.7% on a constant currency basis) as compared with fiscal 2013. U.S. net revenue decreased 7.5% to $20.8 billion, while net revenue from outside of the U.S. decreased 1.6% to $34.3 billion.

From a segment perspective, the primary factors contributing to the change in total Company net revenue for fiscal 2014 compared with fiscal 2013 are summarized as follows:

 

    ES net revenue decreased due primarily to revenue runoff in key accounts, soft demand for Infrastructure Technology Outsourcing, weak growth in new and existing accounts, particularly in EMEA, and contractual price declines;

 

    EG net revenue decreased due to net revenue decreases in TS, BCS and Storage;

 

    FS net revenue decreased due primarily to lower portfolio revenue from lower average portfolio assets and lower asset management activity, primarily in customer buyouts; and

 

    Software net revenue decreased due to lower net revenue from licenses, support and professional services.

Fiscal 2013 compared with Fiscal 2012

In fiscal 2013, total Company combined net revenue decreased 6.0% (decreased 5.0% on a constant currency basis) as compared with fiscal 2012. U.S. net revenue decreased 5.5% to $22.5 billion, while net revenue from outside of the U.S. decreased 6.3% to $34.8 billion.

From a segment perspective, the primary factors contributing to the change in total Company net revenue for fiscal 2013 compared with fiscal 2012 are summarized as follows:

 

    ES net revenue decreased due primarily to net service revenue runoff and contractual price declines in ongoing contracts due in part to weak public sector spending and enterprise IT demand;

 

    EG net revenue decreased due to multiple factors, including competitive pricing challenges in Industry Standard Servers (“ISS”), a market decline for UNIX products impacting BCS, decreases in TS due in part to lower support for BCS products, product transitions in Storage and overall weak enterprise IT demand;

 

    FS net revenue decreased due primarily to lower rental revenue from a decrease in operating lease assets; and

 

    Software net revenue decreased due to lower license and professional services revenues primarily from IT management products.

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

Gross Margin

Fiscal 2014 compared with Fiscal 2013

Gross margin increased by 1.0 percentage point for fiscal year 2014 compared with fiscal 2013. From a segment perspective, the primary factors impacting gross margin performance are summarized as follows:

 

    ES gross margin increased due primarily to our continued focus on service delivery efficiencies and, improving profit performance in underperforming contracts;

 

    Software gross margin increased due to the shift to more profitable contracts and improved workforce utilization in professional services;

 

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    FS gross margin increased due to a higher portfolio margin, primarily from lower bad debt expense, a lower cost of funds and improved margins in remarketing sales; and

 

    EG gross margin decreased due primarily to the impact of a higher mix of ISS products, a lower mix of BCS products and competitive pricing pressure in ISS and Networking.

Fiscal 2013 compared with Fiscal 2012

Gross margin decreased by 0.3 percentage points for fiscal 2013 compared with fiscal 2012. From a segment perspective, the primary factors impacting gross margin performance are summarized as follows:

 

    EG experienced a gross margin decrease due primarily to competitive pricing pressures in ISS, and to a lesser extent, mix impacts from lower BCS and Storage revenue;

 

    Software gross margin decreased slightly due to higher development costs in IT management products;

 

    FS gross margin increased slightly due primarily to higher portfolio margins from a lower mix of operating leases and higher margins on early buyouts; and

 

    ES gross margin increased due to profit improvement on underperforming contracts.

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

Operating Expenses

Research and Development

R&D expense increased 12% in fiscal 2014 as compared to fiscal 2013 with increases across each of our segments as we made investments in our strategic focus areas of cloud, security, big data and mobility.

R&D expense decreased 8% in fiscal 2013 as compared to fiscal 2012 due primarily to the rationalization of R&D in EG for BCS, cost savings from restructuring and higher value added R&D tax subsidy credits. The decrease was partially offset by increased R&D expense in our Storage and ISS business units and in Software for innovation focused spending in the areas of converged infrastructure and cloud.

Selling, General and Administrative

SG&A expense increased 1% in fiscal 2014 as compared to fiscal 2013 due primarily to higher compensation costs and higher selling costs from investments in the areas of cloud, networking and storage, partially offset by a gain from the sale of real estate.

SG&A expense decreased 1% in fiscal 2013 as compared to fiscal 2012. Cost savings associated with our ongoing restructuring efforts that impacted all of our segments were partially offset by increased administrative expenses due in part to higher consulting project spending.

Amortization of Intangible Assets

Amortization expense decreased in fiscal 2014 due primarily to certain intangible assets associated with prior acquisitions reaching the end of their respective amortization periods.

Amortization expense decreased in fiscal 2013 due primarily to the intangible asset impairment recorded in the fourth quarter of fiscal 2012 related to Autonomy and certain intangible assets associated with prior acquisitions reaching the end of their amortization periods.

 

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Impairment of Goodwill and Intangible Assets

In fiscal 2012, we recorded goodwill impairment charges of $8.0 billion and $5.7 billion associated with ES and the acquisition of Autonomy, respectively. In addition, we recorded an intangible asset impairment charge of $3.1 billion associated with the acquisition of Autonomy. For more information on our impairment charges, see Note 10 to the Combined Financial Statements.

Restructuring Charges

Restructuring charges increased in fiscal 2014 due primarily to higher charges in connection with the multiyear restructuring plan initially announced in May 2012 (the “2012 Plan”) and from increases to the 2012 Plan announced in fiscal 2014. During fiscal 2014, Parent increased the total number of Company positions expected to be eliminated under the 2012 Plan to 42,100 positions.

Restructuring charges decreased in fiscal 2013 due primarily to a $1.8 billion charge recorded in fiscal 2012 for the 2012 Plan. Restructuring charges for fiscal 2013 were $983 million, which included approximately $1.0 billion of charges related to the 2012 Plan that were partially offset by a reversal of $40 million of charges related to our other restructuring plans.

Interest and Other, Net

Interest and other, net expense increased by $10 million in fiscal 2014. The increase was due primarily to lower gains on sales of investments, partially offset by lower net earnings attributable to non-controlling interests in fiscal 2014.

Interest and other, net expense decreased by $94 million in fiscal 2013. The decrease was due primarily to gains on sales of investments in fiscal 2013 as compared with losses on sales of investments in fiscal 2012 and lower net earnings attributable to non-controlling interests in fiscal 2013.

Provision for Taxes

Our effective tax rates were 26.6%, 28.6%, and (3.1)% in fiscal 2014, 2013 and 2012, respectively. Our effective tax rate generally differs from the U.S. federal statutory rate of 35% due to favorable tax rates associated with certain earnings from our operations in lower tax jurisdictions throughout the world. The jurisdictions with favorable tax rates that had the most significant effective tax rate impact in the periods presented were Puerto Rico, Singapore, Netherlands, China and Ireland. We plan to reinvest certain earnings of these jurisdictions indefinitely outside the U.S. and therefore have not provided for U.S. taxes on those indefinitely reinvested earnings.

In fiscal 2014, we recorded $113 million of net income tax benefits related to items unique to the year. These amounts included $66 million of income tax benefits related to provision to return adjustments and $35 million of income tax benefits related to state rate changes.

In fiscal 2013, we recorded $283 million of net income tax charges related to items unique to the year. These amounts included $231 million of income tax charges for adjustments related to uncertain tax positions and $54 million related to the settlement of tax audit matters.

In fiscal 2012, we recorded a $1.3 billion income tax charge to record valuation allowances on certain U.S. deferred tax assets related to the ES segment, which was unique to the year. Other unique items included $821 million of income tax benefits related to the Autonomy impairment, as well as $552 million of income tax benefits related to restructuring.

For a reconciliation of our effective tax rate to the U.S. federal statutory rate of 35% and further explanation of our provision for taxes, see Note 7 to the Combined Financial Statements.

 

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Segment Information

A description of the products and services for each segment can be found in Note 3 to the Combined Financial Statements. Future changes to this organizational structure may result in changes to the segments disclosed.

Enterprise Group

 

     Fiscal years ended October 31  
     2014     2013     2012  
     Dollars in millions  

Net revenue

   $ 27,727      $ 27,989      $ 29,588   

Earnings from operations

   $ 4,005      $ 4,234      $ 5,088   

Earnings from operations as a % of net revenue

     14.4     15.1     17.2

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

 

     Net Revenue
Fiscal Year Ended October 31
     Weighted Net
Revenue Change %
 
     2014      2013      2012      2014     2013  
     Dollars in millions               

Technology Services

   $ 8,383       $ 8,700       $ 9,096         (1.1     (1.3

Business Critical Systems

     929         1,190         1,612         (0.9     (1.4

Storage

     3,315         3,474         3,815         (0.6     (1.2

Networking

     2,628         2,525         2,482         0.4        0.1   

Industry Standard Servers

     12,472         12,100         12,583         1.3        (1.6
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total Enterprise Group

   $ 27,727       $ 27,989       $ 29,588         (0.9     (5.4
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Fiscal 2014 compared with Fiscal 2013

EG net revenue decreased 0.9% (decreased 0.5% on a constant currency basis) in fiscal 2014. In EG, we continue to experience revenue challenges due to market trends, including the transition to cloud computing, as well as product and technology transitions, along with a highly competitive pricing environment. The decline in EG net revenue was due to net revenue declines in TS, BCS and Storage partially offset by net revenue growth in ISS and Networking.

TS net revenue decreased 4% due primarily to a continued reduction in support for BCS, traditional storage products and lower support in networking services, partially offset by growth in support solutions for Converged Storage solutions and ISS. BCS net revenue decreased 22% as a result of ongoing pressures from the overall UNIX market contraction. Storage net revenue decreased by 5% as we continue to experience multiple challenges including product transitions from traditional storage products which include our tape, storage networking and legacy external disk products, to converged solutions, which include our 3PAR StoreServ, StoreOnce, and StoreVirtual products, other challenges include market weakness in high end converged solutions and sales execution challenges, the effects of which were partially offset by revenue growth in our Converged Storage solutions. Networking net revenue increased 4% due to higher switching product revenue as a result of growth in our data center products, partially offset by lower revenue from wireless local area network products. ISS net revenue increased by 3% due primarily to higher volume and higher average unit prices in rack and blade server products driven by higher option attach rates for memory, processors and hard drives.

EG earnings from operations as a percentage of net revenue decreased by 0.7 percentage points in fiscal 2014 due to a decrease in gross margin coupled with an increase in operating expenses as a percentage of net

 

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revenue. The gross margin decline was due primarily to a higher mix of ISS products, a lower mix of BCS products and competitive pricing pressures, partially offset by supply chain cost optimization and improved cost management. The increase in operating expenses as a percentage of net revenue was driven by higher R&D investments, partially offset by continued cost savings associated with our ongoing restructuring efforts.

Fiscal 2013 compared with Fiscal 2012

EG net revenue decreased 5.4% (decreased 4.3% on a constant currency basis) in fiscal 2013 due primarily to the macroeconomic demand challenges the business faced during the fiscal year. Additionally, new product and technology transitions in Storage and ISS and a competitive pricing environment contributed to the revenue decline. EG also experienced execution challenges that impacted revenue growth in fiscal 2013, although those challenges moderated in the fourth quarter due to improved sales execution. Each of the business units within EG experienced year over year revenue declines in fiscal 2013 except Networking. ISS net revenue decreased by 4% due to competitive pricing and soft demand. Within ISS, we experienced a revenue decline in our core mainstream products that was partially offset by revenue growth in our hyperscale server products. TS net revenue decreased by 4% due to lower revenue in the support and consulting businesses and, to a lesser extent, to unfavorable currency impacts. Support revenue decreased due to past hardware revenue declines. The consulting revenue decrease was a result of unfavorable currency impacts, the divestiture of a service product line and a shift to more profitable services such as data center and storage consulting. BCS net revenue decreased by 26% as a result of ongoing pressures from the decline in the overall UNIX market along with lower demand for our Itanium based servers. Storage net revenue decreased by 9% due to declines in traditional storage products, which include our tape, storage networking, and legacy external disk products, the effects of which were partially offset by growth in Converged Storage solutions, which include our 3PAR, StoreOnce, StoreVirtual and StoreAll products. Networking revenue increased by 2% due to higher demand for our switching, routing, and wireless products, the effect of which was partially offset by the impact of the divestiture of our video surveillance business in the first quarter of fiscal 2012.

EG earnings from operations as a percentage of net revenue decreased by 2.1 percentage points in fiscal 2013 driven by a decrease in gross margin and, to a lesser extent, an increase in operating expenses as a percentage of net revenue. The gross margin decrease was due primarily to competitive pricing pressures and an unfavorable mix in BCS revenue. Operating expenses as a percentage of net revenue increased due to the decrease in EG net revenue and increased field selling costs and administrative expenses. R&D expenses as a percentage of net revenue decreased due primarily to the rationalization of R&D specifically for BCS. EG also benefited from cost savings resulting from our ongoing restructuring efforts.

Enterprise Services

 

     Fiscal years ended October 31  
     2014     2013     2012  
     Dollars in millions  

Net revenue

   $ 22,398      $ 24,080      $ 25,973   

Earnings from operations

   $ 818      $ 805      $ 930   

Earnings from operations as a % of net revenue

     3.7     3.3     3.6

 

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

 

     Net Revenue
Fiscal Year Ended October 31
     Weighted Net
Revenue
Change %
 
     2014      2013      2012      2014     2013  
     Dollars in millions               

Infrastructure Technology Outsourcing

   $ 14,038       $ 15,221       $ 16,174         (4.9     (3.7

Application and Business Services

     8,360         8,859         9,799         (2.1     (3.6
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total Enterprise Services

   $ 22,398       $ 24,080       $ 25,973         (7.0     (7.3
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Fiscal 2014 compared with Fiscal 2013

ES net revenue decreased 7.0% (decreased 6.9% on a constant currency basis) in fiscal 2014. Performance in ES remained challenged by the impact of several large contracts winding down and lower public sector spending in EMEA, particularly in the United Kingdom. The net revenue decrease in ES was due primarily to revenue runoff in key accounts, weak growth in new and existing accounts, particularly in EMEA, and contractual price declines. These effects were partially offset by net revenue growth in our SES portfolio, which includes information management and analytics, security and cloud services. Net revenue in Infrastructure Technology Outsourcing (“ITO”) decreased by 8% in fiscal 2014 due to revenue runoff in key accounts, weak growth in new and existing accounts, particularly in EMEA, and contractual price declines in ongoing contracts partially offset by growth in cloud and security revenue and favorable currency impacts. Net revenue in Application and Business Services (“ABS”) decreased by 6% in fiscal 2014, due to revenue runoff in a key account, weak growth in new and existing accounts, particularly in EMEA, and unfavorable currency impacts, partially offset by growth in information management and analytics and cloud revenue.

ES earnings from operations as a percentage of net revenue increased 0.4 percentage points in fiscal 2014. The increase in operating margin was due to an increase in gross margin, partially offset by an increase in operating expenses as a percentage of net revenue. Gross margin increased due primarily to our continued focus on service delivery efficiencies and improving profit performance in underperforming contracts, partially offset by unfavorable impacts from revenue runoff in key accounts and weak growth in new and existing accounts. The increase in operating expenses as a percentage of net revenue was primarily driven by the size of the revenue decline and higher administrative expenses and field selling costs. The increase in current year administrative expenses was due to the prior year period containing higher bad debt recoveries and insurance recoveries. The increase in selling costs was the result of expanding the sales force coverage as we transition from a reactive sales model to a more proactive approach.

Fiscal 2013 compared with Fiscal 2012

ES net revenue decreased 7.3% (decreased 6.2% on a constant currency basis) in fiscal 2013. Revenue performance in ES continued to be challenged by several factors that impact the demand environment, including weak public sector spending in the U.S. and austerity measures in other countries, particularly in the United Kingdom, and weak IT services spend due to the mixed global recovery, particularly in the EMEA region. The net revenue decrease in ES was driven primarily by net service revenue runoff, contractual price declines in ongoing contracts and unfavorable currency impacts. ITO net revenue decreased by 6% in fiscal 2013, due to net service revenue runoff, contractual price declines in ongoing contracts and unfavorable currency impacts, the effects of which were partially offset by net revenue growth in security and cloud offerings. ABS net revenue decreased 10% in fiscal 2013. The net revenue decrease was due primarily to net service revenue runoff and unfavorable currency impacts, the effects of which were partially offset by revenue growth in cloud and information and analytics offerings. Revenue in ABS was also negatively impacted by weakness in public sector spending.

 

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ES earnings from operations as a percentage of net revenue decreased 0.3 percentage points in fiscal 2013. The decrease was due to an increase in operating expenses as a percentage of net revenue, partially offset by an increase in gross margin. The increase in gross margin was primarily due to profit improvement on underperforming contracts, partially offset by net service revenue runoff and contractual price declines. Operating expenses as a percentage of net revenue increased due to higher administrative, marketing and R&D costs. These effects were partially offset by reduced field selling costs due to lower headcount related costs during the year and other savings from our ongoing restructuring efforts.

Software

 

     Fiscal years ended October 31  
     2014     2013     2012  
     Dollars in millions  

Net revenue

   $ 3,933      $ 4,035      $ 4,126   

Earnings from operations

   $ 871      $ 889      $ 821   

Earnings from operations as a % of net revenue

     22.1     22.0     19.9

Fiscal 2014 compared with Fiscal 2013

Software net revenue decreased 2.5% (decreased 2.4% on a constant currency basis) in fiscal 2014. Revenue growth in Software is being challenged by the overall market and customer shift to SaaS solutions, which is impacting growth in license and support revenue. In fiscal 2014, net revenue from licenses, support and professional services decreased by 4%, 2% and 5%, respectively, while SaaS net revenue increased by 5%.

The decrease in license net revenue was due to the market and customer shift to SaaS solutions, which resulted in lower revenue, primarily from IT management products, partially offset by strength in some of our key focus areas of big data analytics and security. The decrease in support net revenue was due to declines in prior period license revenue. Professional services net revenue decreased as we continued our focus on higher margin engagements. These decreases were partially offset by higher SaaS revenue due to improving demand for our SaaS solutions in IT management and security products.

In fiscal 2014, Software earnings from operations as a percentage of net revenue increased by 0.1 percentage point due to an increase in gross margin, partially offset by higher operating expenses as a percentage of net revenue. The increase in gross margin was due to the shift to more profitable contracts and improved workforce utilization in professional services. The increase in operating expenses as a percentage of net revenue was due primarily to investments in R&D, partially offset by lower SG&A expenses due to cost savings associated with our ongoing restructuring efforts and improved operational expense management.

Fiscal 2013 compared with Fiscal 2012

Software net revenue decreased 2.2% (decreased 1.9% on a constant currency basis) in fiscal 2013. Net revenue from licenses and professional services each decreased by 13%, while net revenue from SaaS and support increased by 10% and 7%, respectively.

The decrease in software revenue was driven primarily by lower license revenue due primarily to a large deal entered into in the prior year and the market shift to SaaS offerings. The revenue decrease was also due to lower professional service revenue as we manage the professional services portfolio to focus on higher margin solutions. These decreases were partially offset by higher growth in support revenue and higher revenue growth in our SaaS offerings as we shift with the market to providing more SaaS offerings.

Software earnings from operations as a percentage of net revenue increased by 2.1 percentage points in fiscal 2013 due to a decrease in operating expense as a percentage of net revenue, the effect of which was

 

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partially offset by a decrease in gross margin. The decrease in gross margin was due primarily to higher development costs in IT management products and the comparative impact of a highly profitable software deal entered into in the prior year. These decreases were partially offset by a lower mix of lower margin professional services revenue. The decrease in operating expense as a percentage of revenue was driven primarily by lower field selling costs due to cost savings associated with our ongoing restructuring efforts.

Financial Services

 

     Fiscal years ended October 31  
     2014     2013     2012  
     Dollars in millions  

Net revenue

   $ 3,498      $ 3,629      $ 3,819   

Earnings from operations

   $ 389      $ 397      $ 388   

Earnings from operations as a % of net revenue

     11.1     10.9     10.2

Fiscal 2014 compared with Fiscal 2013

FS net revenue decreased by 3.6% (decreased 3.3% on a constant currency basis) in fiscal 2014 due primarily to lower portfolio revenue from lower average portfolio assets and lower asset management activity, primarily in customer buyouts.

FS earnings from operations as a percentage of net revenue increased by 0.2 percentage points in fiscal 2014. The increase was due primarily to an increase in gross margin, partially offset by an increase in operating expenses as a percentage of net revenue. The increase in gross margin was the result of a higher portfolio margin, primarily from lower bad debt expense and a lower cost of funds and improved margins in remarketing sales. The increase in operating expenses as a percentage of net revenue was due primarily to higher go-to-market investments.

Fiscal 2013 compared with Fiscal 2012

FS net revenue decreased by 5.0% (decreased 4.2% on a constant currency basis) in fiscal 2013 due primarily to lower rental revenue from a decrease in average operating lease assets, lower asset recovery services revenue, and unfavorable currency impacts. These effects were partially offset by higher revenue from remarketing sales and higher finance income from an increase in finance lease assets.

FS earnings from operations as a percentage of net revenue increased by 0.7 percentage points in fiscal 2013. The increase was due primarily to an increase in gross margin, the effect of which was partially offset by an increase in operating expenses as a percentage of net revenue as a result of higher IT investments. The increase in gross margin was the result of higher portfolio margin from a lower mix of operating leases, higher margin on early buyouts and lower bad debt expense.

Financing Volume

 

     Fiscal years ended October 31  
     2014      2013      2012  
     Dollars in millions  

Total financing volume

   $ 6,425       $ 5,603       $ 6,590   

New financing volume, which represent the amount of financing provided to customers for equipment and related software and services, including intercompany activity, increased 14.7% in fiscal 2014 and decreased 15.0% in fiscal 2013, respectively. The increase in fiscal 2014 was driven by higher financing associated with

 

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product sales and related services offerings, while the decrease in fiscal 2013 was primarily driven by lower financing associated with product sales and services offerings, and to a lesser extent unfavorable currency impacts.

Portfolio Assets and Ratios

The FS business model is asset intensive and uses certain internal metrics to measure its performance against other financial services companies, including a segment balance sheet that is derived from our internal management reporting system. The accounting policies used to derive FS amounts are substantially the same as those used by the Company. However, intercompany loans and certain accounts that are reflected in the segment balances are eliminated in our Combined Financial Statements included elsewhere in this information statement.

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

 

     As of October 31  
     2014     2013  
     Dollars in millions  

Financing receivables, gross

   $ 6,718      $ 7,196   

Net equipment under operating leases

     2,792        2,544   

Capitalized profit on intercompany equipment transactions(1)

     764        698   

Intercompany leases(1)

     2,002        2,028   
  

 

 

   

 

 

 

Gross portfolio assets

     12,276        12,466   
  

 

 

   

 

 

 

Allowance for doubtful accounts(2)

     111        131   

Operating lease equipment reserve

     68        76   
  

 

 

   

 

 

 

Total reserves

     179        207   
  

 

 

   

 

 

 

Net portfolio assets

   $ 12,097      $ 12,259   
  

 

 

   

 

 

 

Reserve coverage

     1.5     1.7

Debt-to-equity ratio(3)

     7.0x        7.0x   

 

(1) Intercompany activity is eliminated in the Combined Financial Statements.
(2) Allowance for doubtful accounts for financing receivables includes both the short and long-term portions.
(3) Debt benefiting FS consists of borrowing and funding related activity associated with FS and its subsidiaries, and debt issued by Parent for which a portion of the proceeds benefited Financial Services. Such Parent debt, consisting of long-term notes, has not been attributed to the Company for any of the periods presented because Parent’s borrowings are not the legal obligation of the Company. Debt benefiting FS, totaled $10.7 billion and $10.8 billion at October 31, 2014 and 2013, respectively, and was determined by applying an assumed debt-to-equity ratio, which management believes to be comparable to that of other similar financing companies, to FS equity.

At October 31, 2014 and 2013, FS cash and cash equivalents and short-term investments were $952 million and $808 million, respectively.

Net portfolio assets at October 31, 2014 decreased 1.3% from October 31, 2013. The decrease generally resulted from unfavorable currency impacts, partially offset by new financing volume in excess of portfolio runoff.

FS recorded net bad debt expenses and operating lease equipment reserves of $40 million, $50 million and $62 million in fiscal 2014, 2013 and 2012, respectively.

 

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Corporate Investments

 

     Fiscal years ended October 31  
       2014          2013          2012    
     Dollars in millions  

Net revenue

   $ 4       $ 8       $ 8   

Loss from operations

   $ (341    $ (222    $ (166

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

     NM         NM         NM   

 

(1) “NM” represents not meaningful.

Fiscal 2014 compared with Fiscal 2013

The increase in the loss from operations for fiscal 2014 was due primarily to higher expenses associated with incubation activities and Hewlett Packard Enterprise Labs.

Fiscal 2013 compared with Fiscal 2012

The increase in the loss from operations for fiscal 2013 was due primarily to higher expenses associated with incubation activities, partially offset by lower expenses related to Hewlett Packard Enterprise Labs.

Subsequent Event

Fiscal 2015 Restructuring Plan

On September 14, 2015, Parent’s Board of Directors approved a restructuring plan (the “2015 Plan”) in connection with the separation which will be implemented through fiscal 2018. As part of the 2015 Plan, we expect up to 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 $2.7 billion in connection with the 2015 Plan, of which approximately $2.2 billion relates to workforce reductions and approximately $500 million primarily relates to real estate consolidation. We do not intend to exit any lines of business in connection with the 2015 Plan nor do we expect the 2015 Plan to adversely impact future revenues as the related capabilities will be migrated to lower cost regions.

Liquidity and Capital Resources

Historical Liquidity

Historically, we have generated positive cash flow from operations. Our operations have historically participated in cash management and funding arrangements managed by Parent. Cash flows related to financing activities primarily reflect changes in Parent’s investment in the Company. Parent’s cash has not been assigned to the Company for any of the periods presented because those cash balances are not directly attributable to the Company.

Future Liquidity

Following the separation from Parent, our capital structure and sources of liquidity will change significantly from our historical capital structure. Subsequent to the separation, we will no longer participate in cash management and funding arrangements managed by Parent. We intend to enter into certain financing arrangements prior to or in connection with the separation to capitalize our company with estimated (as of July 31, 2015) total cash of approximately $11.5 billion (which estimate is based on several factors subject to change, including fiscal 2015 free cash flow estimates) and total debt of approximately $16 billion and secure an

 

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investment grade credit rating. We also anticipate entering into an unsecured credit facility in an aggregate principal amount of up to $4 billion prior to the distribution date, as well as commercial paper programs. See “Description of Material Indebtedness.”

Our approximately $11.5 billion of cash at the distribution date will be held in numerous locations throughout the world, with substantially all of those amounts held outside of the U.S. We utilize a variety of planning and financing strategies in an effort to ensure that our worldwide cash is available when and where it is needed. We do not expect restrictions or potential taxes incurred on repatriation of amounts held outside of the U.S. to have a material effect on our overall liquidity, financial condition or results of operations.

On September 30, 2015, we commenced an offering of $14.6 billion aggregate principal amount of senior notes consisting of the following series:

 

    $2.25 billion aggregate principal amount of 2.45% senior notes due 2017

 

    $2.65 billion aggregate principal amount of 2.85% senior notes due 2018

 

    $3.0 billion aggregate principal amount of 3.60% senior notes due 2020

 

    $1.35 billion aggregate principal amount of 4.40% senior notes due 2022

 

    $2.50 billion aggregate principal amount of 4.90% senior notes due 2025

 

    $750 million aggregate principal amount of 6.20% senior notes due 2035

 

    $1.5 billion aggregate principal amount of 6.35% senior notes due 2045

 

    $350 million aggregate principal amount of floating rate notes due 2017 (3 month USD LIBOR +1.74%)

 

    $250 million aggregate principal amount of floating rate notes due 2018 (3 month USD LIBOR +1.93%)

The senior notes are expected to be the Company’s unsecured, unsubordinated obligations. Parent is expected to guarantee each series of senior notes on an unsecured, unsubordinated basis. Parent’s guarantee of each series of senior notes is expected to be automatically and unconditionally released at such time as (i) Parent no longer owns any equity securities of the Company, including upon the distribution, and (ii) beneficial ownership of substantially all of the assets intended to be included in the Company has been transferred to the Company.

If the distribution has not been completed on or before February 1, 2016 or, if prior to such date, Parent has abandoned the distribution, then the Company has agreed to guarantee each series of Parent’s then outstanding senior unsecured notes as well as the obligations of Parent under the applicable indentures governing such notes.

Concurrent with issuing the senior notes, we are entering into interest rate swaps to reduce the exposure of $9.5 billion of aggregate principal amount of fixed rate senior notes to changes in fair value resulting from changes in interest rates by achieving LIBOR-based floating interest expense.

Following the separation, we expect to use cash flows generated by operations as our primary source of liquidity. We believe that internally generated cash flows will be generally sufficient to support our operating businesses, capital expenditures, restructuring activities, separation costs, maturing debt, interest payments, income tax payments and the payment of stockholder dividends (if and when declared by our board of directors consistent with the “Dividend Policy” discussion on page 39), in addition to any investments and share repurchases conducted by the Company. This belief includes consideration of the impact of the offering of $14.6 billion aggregate principal amount of senior notes on September 30, 2015. We will supplement this short-term liquidity, if necessary, with access to capital markets. Our access to capital markets may be constrained and our cost of borrowing may increase under certain business, market and economic conditions. For example, under the tax matters agreement to be entered into in connection with the separation, we will generally be prohibited,

 

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except in specific circumstances, from issuing equity securities beyond certain thresholds for a two-year period following the separation. However, our access to a variety of funding sources to meet our liquidity needs is designed to facilitate continued access to capital resources under all such conditions. Our liquidity is subject to various risks including the risks identified in “Risk Factors” and market risks identified in “Quantitative and Qualitative Disclosures about Market Risk.”

Our cash and cash equivalents and total debt were as follows:

 

     As of July 31,
2015
     As of October 31  
        2014      2013      2012  
     In millions  

Cash and cash equivalents

   $ 2,774       $ 2,319       $ 2,182       $ 2,134   

Total debt

   $ 1,245       $ 1,379       $ 1,675       $ 2,923   

Cash Flow

Our key cash flow metrics were as follows:

 

     Nine months ended
July 31
    Fiscal years ended October 31  
     2015     2014     2014     2013     2012  
     In millions  

Net cash provided by operating activities

   $ 3,819      $ 5,885      $ 6,911      $ 8,739      $ 7,240   

Net cash used in investing activities

     (4,834     (2,418     (2,974     (2,227     (3,159

Net cash provided by (used in) financing activities

     1,470        (2,915     (3,800     (6,464     (4,521
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

   $ 455      $ 552      $ 137      $ 48      $ (440
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating Activities

Net cash provided by operating activities decreased by $2.1 billion for the nine months ended July 31, 2015 as compared to the nine months ended July 31, 2014, due primarily to a lengthening of the cash conversion cycle during the current year period versus a shortening of the cash conversion cycle in the prior year period and an increase in financing receivables. Net cash provided by operating activities decreased by $1.8 billion for fiscal 2014 as compared to fiscal 2013 due primarily to higher cash payments for accrued expenses and lower net earnings, partially offset by a reduction in the cash conversion cycle. Net cash provided by operating activities increased by $1.5 billion for fiscal 2013 as compared to fiscal 2012 due primarily to reduction in the cash conversion cycle and a decrease in financing receivables.

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

 

     As of July 31     As of October 31  
     2015     2014     2014     2013     2012  

Days of sales outstanding in accounts receivable

     55        58        54        58        60   

Days of supply in inventory

     22        17        17        17        16   

Days of purchases outstanding in accounts payable

     (47     (40     (44     (35     (30
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash conversion cycle

     30        35        27        40        46   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Days of sales outstanding in accounts receivable (“DSO”) measures the average number of days our receivables are outstanding. DSO is calculated by dividing ending accounts receivable, net of allowance for doubtful accounts, by a 90 day average of net revenue. For the nine months ended July 31, 2015 as compared to the prior-year period and for fiscal 2014 as compared to the prior-year period, the decrease in DSO was due primarily to improved accounts receivable management and the impact of currency.

 

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Days of supply in inventory (“DOS”) measures the average number of days from procurement to sale of our product. DOS is calculated by dividing ending inventory by a 90 day average of cost of goods sold. For the nine months ended July 31, 2015 as compared to the prior-year period, the increase in DOS was driven by business continuity planning associated with our internal systems separation and higher inventory to support service levels. For fiscal 2014, 2013 and 2012, DOS has remained generally consistent.

Days of purchases outstanding in accounts payable (“DPO”) measures the average number of days our accounts payable balances are outstanding. DPO is calculated by dividing ending accounts payable by a 90 day average of cost of goods sold. For the nine months ended July 31, 2015 and for fiscal 2014 and 2013, the increase in DPO as compared to the prior-year periods was primarily the result of an extension of payment terms with our suppliers.

The cash conversion cycle is the sum of DSO and DOS less DPO. Items which may cause the cash conversion cycle in a particular period to differ include, but are not limited to, changes in business mix, changes in payment terms, the extent of receivables factoring, seasonal trends and the timing of revenue recognition and inventory purchases within the period.

Investing Activities

Net cash used in investing activities increased by $2.4 billion for the nine months ended July 31, 2015 as compared to the nine months ended July 31, 2014 primarily due to the acquisition of Aruba. Net cash used in investing activities increased by $747 million in fiscal 2014 as compared to fiscal 2013 due primarily to higher cash utilization for purchases of property, plant and equipment, net of proceeds from sales. Net cash used in investing activities decreased by $932 million for fiscal 2013 as compared to fiscal 2012 due primarily to lower investments in property, plant and equipment, net of proceeds from sales.

Financing Activities

Cash flows from financing activities for the nine months ended July 31, 2015 and 2014, as well as for fiscal 2014, 2013 and 2012 primarily represent Net transfers from (to) Parent and net payments on debt. As cash and the financing of our operations have historically been managed by Parent, the components of Net transfers from (to) Parent include cash transfers from us to Parent and payments by Parent to settle our obligations. These transactions are considered to be effectively settled for cash at the time the transaction is recorded.

Capital Resources

Debt Levels

 

     As of
July 31,
2015
    As of October 31  
       2014     2013     2012  
     Dollars in millions  

Short-term debt

   $ 752      $ 894      $ 1,058      $ 2,221   

Long-term debt

   $ 493      $ 485      $ 617      $ 702   

Weighted-average interest rate

     2.70     2.63     2.51     4.08

Our historical debt levels reflect only those debt balances which are the legal obligation of the subsidiaries comprising the businesses of the Company. We intend to enter into certain financing arrangements prior to or in connection with the separation. See “Description of Material Indebtedness.”

Our weighted-average interest rate reflects the effective interest rate on our borrowings prevailing during the period and reflects the effect of interest rate swaps outstanding during fiscal 2013 and 2012. For more information on our interest rate swaps, see Note 12 to the Combined Financial Statements.

 

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Contractual and Other Obligations

Following the separation from Parent, our contractual and other obligations will change significantly from our historical amounts. We intend to enter into certain financing arrangements and incur additional purchase obligations prior to or in connection with the separation.

On September 30, 2015, we commenced an offering of $14.6 billion aggregate principal amount of senior notes. The following table represents the expected contractual obligations for the principal cash payments and interest payments related to those senior notes for the periods presented.

 

            Payments Due by Fiscal Year  
     Total      2016      2017-2018      2019-2020      Thereafter  
     In millions  

Principal payments(1)

   $ 14,600       $ —         $ 5,500       $ 3,000       $ 6,100   

Interest payments(1)

     6,330         575         1,082         863         3,810   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 20,930       $ 575       $ 6,582       $ 3,863       $ 9,910   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Amounts represent the expected cash payments based on the signed term sheets for the $14.6 billion aggregate principal amount of senior notes and do not include unamortized bond premiums or discounts.

Our contractual and other obligations as of October 31, 2014, were as follows and have not changed materially as of July 31, 2015:

 

            Payments Due by Period  
     Total      1 Year or
Less
     1-3 Years      3-5 Years      More than
5 Years
 
     In millions  

Principal payments on long-term debt(1)

   $ 587       $ 124       $ 90       $ 14       $ 359   

Interest payments on long-term debt(2)

     345         28         49         45         223   

Operating lease obligations

     2,093         527         677         407         482   

Purchase obligations(3)

     848         483         270         95         —     

Capital lease obligations

     12         3         4         4         1   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total(4)(5)(6)(7)

   $ 3,885       $ 1,165       $ 1,090       $ 565       $ 1,065   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Amounts represent the principal cash payments relating to our long-term debt and do not include any fair value adjustments, discounts or premiums.
(2) Amounts represent the expected interest payments relating to our long-term debt.
(3) Purchase obligations include agreements to purchase goods or services that are enforceable and legally binding on us and that specify all significant terms, including fixed or minimum quantities to be purchased; fixed, minimum or variable price provisions; and the approximate timing of the transaction. These purchase obligations are related principally to software maintenance and support services and other items. Purchase obligations exclude agreements that are cancelable without penalty. Purchase obligations also exclude open purchase orders that are routine arrangements entered into in the ordinary course of business as they are difficult to quantify in a meaningful way. Even though open purchase orders are considered enforceable and legally binding, the terms generally allow us the option to cancel, reschedule, and adjust terms based on our business needs prior to the delivery of goods or performance of services.
(4)

As of October 31, 2014, we anticipated making fiscal 2015 contributions of $129 million to our Direct non-U.S. pension plans and expected to pay benefits of $20 million to our Direct U.S. nonqualified pension plan participants during fiscal 2015. As of July 31, 2015, we expect fiscal 2015 contributions to our Direct non-U.S. pension plans of approximately $116 million and expect to pay approximately $20 million to cover benefit payments to Direct U.S. non-qualified pension plan participants. As of July 31, 2015, we anticipate making remaining contributions of approximately $24 million to our Direct non-U.S. pension plans and

 

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  approximately $5 million to Direct U.S. non-qualified plan participants. Our policy is to fund our pension plans so that we meet at least the minimum contribution requirements, as established by local government, funding and taxing authorities. Expected contributions and payments to our pension and post-retirement benefit plans are excluded from the contractual obligations table because they do not represent contractual cash outflows as they are dependent on numerous factors which may result in a wide range of outcomes. For more information on our retirement and post-retirement benefit plans, see Note 5 to the Combined Financial Statements and Note 4 to the Condensed Combined Financial Statements.
(5) As of October 31, 2014, we expected future cash payments of $1.5 billion in connection with our approved 2012 Plan and prior restructuring plans. As of July 31, 2015, we expect future cash payments of approximately $600 million in connection with our approved restructuring plans which include $200 million expected to be paid in the remainder of fiscal 2015 and $400 million expected to be paid through fiscal 2021. Payments for restructuring have been excluded from the contractual obligations table, because they do not represent contractual cash outflows and there is uncertainty as to the timing of these payments. For more information on our restructuring activities, see Note 4 to the Combined Financial Statements and Note 3 and Note 18 to the Condensed Combined Financial Statements.
(6) As of October 31, 2014, we had approximately $1.8 billion of recorded liabilities and related interest and penalties pertaining to uncertain tax positions. These liabilities and related interest and penalties include $12 million expected to be paid within one year. As of July 31, 2015, we had approximately $1.8 billion of recorded liabilities and related interest and penalties pertaining to uncertain tax positions. These liabilities and related interest and penalties include $13 million expected to be paid within one year. For the remaining amount, we are unable to make a reasonable estimate as to when cash settlement with the tax authorities might occur due to the uncertainties related to these tax matters. Payments of these obligations would result from settlements with taxing authorities. For more information on our uncertain tax positions, see Note 7 to the Combined Financial Statements and Note 6 to the Condensed Combined Financial Statements.
(7) As of July 31, 2015, we expect future cash payments of up to $0.9 billion in connection with our separation costs and foreign tax payments, which are expected to be paid in the remainder of fiscal 2015 and in fiscal 2016, with subsequent tax credit amounts expected over later years. As of July 31, 2015, we also expect separation-related capital expenditures of approximately $60 million in the remainder of fiscal 2015. Payments for separation costs have been excluded from the contractual obligations table, because they do not represent contractual cash outflows and there is uncertainty as to the timing of these payments.

Off Balance Sheet Arrangements

As part of our ongoing business, we have not participated in transactions that generate material relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, established for the purpose of facilitating off balance sheet arrangements or other contractually narrow or limited purposes.

We participate in Parent’s third-party revolving short-term financing arrangements intended to facilitate the working capital requirements of certain customers. For more information on our third-party revolving short-term financing arrangements, see Note 8 to the Combined Financial Statements and Note 7 to the Condensed Combined Financial Statements.

Quantitative and Qualitative Disclosures About Market Risk

In the normal course of business, we are exposed to foreign currency exchange rate and interest rate risks that could impact our financial position and results of operations. Our risk management strategy with respect to these market risks may include the use of derivative financial instruments. We use derivative contracts only to manage existing underlying exposures. Accordingly, we do not use derivative contracts for speculative purposes. Our risks, risk management strategy and a sensitivity analysis estimating the effects of changes in fair value for each of these exposures is outlined below.

 

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Actual gains and losses in the future may differ materially from the sensitivity analyses based on changes in the timing and amount of foreign currency exchange rate and interest rate movements and our actual exposures and derivatives in place at the time of the change, as well as the effectiveness of the derivative to hedge the related exposure.

Foreign Currency Exchange Rate Risk

We are exposed to foreign currency exchange rate risk inherent in our sales commitments, anticipated sales, anticipated purchases and assets and liabilities denominated in currencies other than the U.S. dollar. We transact business in approximately 75 currencies worldwide, of which the most significant foreign currencies to our operations for fiscal 2014 were the euro, the British pound, the Chinese yuan (renminbi) and the Japanese yen. For most foreign currencies, we are a net receiver of the currency and therefore benefit from a weaker U.S. dollar and are adversely affected by a stronger U.S. dollar relative to the foreign currency. Even where we are a net receiver of the foreign currency, a weaker U.S. dollar may adversely affect certain expense figures, if taken alone.

We use a combination of forward contracts and, from time to time, options designated as cash flow hedges to protect against the foreign currency exchange rate risks inherent in our forecasted net revenue and, to a lesser extent, cost of sales and intercompany loans denominated in currencies other than the U.S. dollar. We also use other derivatives not designated as hedging instruments consisting primarily of forward contracts to hedge foreign currency balance sheet exposures. Alternatively, we may choose not to hedge the risk associated with our foreign currency exposures, primarily if such exposure acts as a natural hedge for offsetting amounts denominated in the same currency or if the currency is too difficult or too expensive to hedge.

We have performed sensitivity analyses as of October 31, 2014 and 2013, using a modeling technique that measures the change in the fair values arising from a hypothetical 10% adverse movement in the levels of foreign currency exchange rates relative to the U.S. dollar, with all other variables held constant. The analyses cover all of our foreign currency derivative contracts offset by underlying exposures. The foreign currency exchange rates we used in performing the sensitivity analysis were based on market rates in effect at October 31, 2014 and 2013. The sensitivity analyses indicated that a hypothetical 10% adverse movement in foreign currency exchange rates would result in a foreign exchange fair value loss of $14 million and $17 million at October 31, 2014 and 2013, respectively.

Interest Rate Risk

We also are exposed to interest rate risk related to debt we have issued, our investment portfolio and financing receivables.

We have performed sensitivity analyses as of October 31, 2014 and 2013, using a modeling technique that measures the change in the fair values arising from a hypothetical 10% adverse movement in the levels of interest rates across the entire yield curve, with all other variables held constant. The analyses cover our debt, investments and financing receivables using actual or approximate maturities. The discount rates used were based on the market interest rates in effect at October 31, 2014 and 2013. The sensitivity analyses indicated that a hypothetical 10% adverse movement in interest rates would result in a loss in the fair values of our debt, investments and financing receivables of $7 million at October 31, 2014 and $3 million at October 31, 2013.

 

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BUSINESS

Hewlett Packard Enterprise is a leading global provider of the cutting-edge technology solutions customers need to optimize their traditional IT while helping them build the secure, cloud-enabled, mobile-ready future that is uniquely suited to their needs. Our legacy dates back to a partnership founded in 1939 by William R. Hewlett and David Packard, and we strive every day to uphold and enhance that legacy through our dedication to providing innovative technological solutions to our customers. In fiscal year 2014, we generated net income of $1.6 billion from revenues of $55 billion.

We believe that we offer the most comprehensive portfolio of enterprise solutions in the IT industry. With an industry-leading position in servers, storage, networking, converged systems, software and services, combined with our customized financing solutions, we believe we are best equipped to deliver the right IT solutions to help drive optimal business outcomes for our customers.

Initial Announcement of the Separation

On October 6, 2014, HP Co. announced plans to separate into two independent publicly traded companies: one comprising its enterprise technology infrastructure, software, services and financing businesses, which will conduct business as Hewlett Packard Enterprise, and one comprising its printing and personal systems business, which will conduct business as HP Inc. The separation is subject to certain conditions, including, among others, obtaining final approval from HP Co.’s board of directors, receipt of a private letter ruling from the IRS and one or more opinions with respect to certain U.S. federal income tax matters relating to the separation and the SEC declaring the effectiveness of the registration statement of which this information statement forms a part. See “The Separation and Distribution—Conditions to the Distribution.”

Our Business Segments, Products and Services

We organize our business into the following five segments:

 

    Enterprise Group. Our Enterprise Group (“EG”) provides our customers with the cutting-edge technology infrastructure they need to optimize traditional IT while building a secure, cloud-enabled and mobile-ready future.

 

    Software. Our Software allows our customers to automate IT operations to simplify, accelerate and secure business processes and drives the analytics that turn raw data into actionable knowledge.

 

    Enterprise Services. Our Enterprise Services (“ES”) brings all of our solutions together through our consulting and support professionals to deliver superior, comprehensive results for our customers.

 

    Hewlett Packard Financial Services. FS enables flexible IT consumption models, financial architectures and customized investment solutions for our customers.

 

    Corporate Investments. Corporate Investments includes Hewlett Packard Enterprise Labs and certain business incubation projects, among others.

 

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LOGO

A summary of our net revenue, earnings from operations and assets for our segments can be found in Note 3 to our Combined Financial Statements. A discussion of certain factors potentially affecting our operations is set forth in “Risk Factors.”

Enterprise Group

EG offers a broad portfolio of enterprise technology solutions that enable our customers to build the foundation for the next generation of applications, web services and user experiences—which ultimately are only as rich, impactful and world-changing as their underlying infrastructure platforms allow them to be. EG technology addresses a wide range of customer challenges, including supporting new types of applications and new approaches to IT operations and by offering new insights into consumer behavior. Our technology enables customers to capitalize on emerging trends and opportunities, from spotting new business opportunities and revealing changing buying behaviors earlier to inventing new consumption models and creating new revenue streams. Our EG portfolio improves customer outcomes through innovative product and service offerings, including high-quality servers, storage, networking, management software, converged infrastructure solutions and technology services. In today’s rapidly changing technology landscape, customers face twin challenges when building and maintaining the IT infrastructure of their organization: they must optimize their “traditional IT” to support legacy applications, and they must simultaneously invest in “cloud-native, mobile-ready” infrastructure that will support the next generation of applications, services and connected devices. Our EG portfolio delivers products and services that help customers reduce costs while maintaining the integrity and performance of their traditional IT infrastructure and enabling the transition to the new style of IT. For tomorrow’s cloud-native, mobile-ready world, our EG portfolio offers products and services that provide converged solutions engineered for the world’s most important cloud, mobility, infrastructure-as-a-service and big data workloads. For example, OneView is the industry’s only “single-pane of glass” software-defined data center management solution; Helion offers an open-source-based portfolio of hybrid cloud solutions, including our flagship private cloud platform; and our technology services provide customers with critical information and advice to transform their enterprises for the emerging digital era.

 

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Industry-Standard Servers. Our Industry-Standard Servers group offers a range of products, from entry-level servers to premium ProLiant servers, which run primarily Windows, Linux and virtualization platforms from software providers such as Microsoft Corporation (“Microsoft”) and VMware, Inc. (“VMware”), and-open source software from other major vendors, while also leveraging x86 processors from Intel Corporation (“Intel”) and Advanced Micro Devices, Inc. (“AMD”). Our server business spans a range of product lines, including microservers, towers, traditional racks and density-optimized racks and blades—which together offer a variety of solutions for large, distributed computing companies who buy and deploy nodes at a large scale.

Business Critical Systems. Our Business Critical Systems group delivers our mission-critical systems through a portfolio of HP Integrity servers based on the Intel Itanium processor that run the HP-UX and OpenVMS operating systems, as well as HP Integrity NonStop solutions and mission-critical x86 ProLiant servers.

Storage. Our storage offerings include platforms optimized for enterprise and small- and medium-size business (“SMB”) environments. Our flagship product is the 3PAR StoreServ Storage Platform, which is designed for virtualization, cloud and IT-as-a-service. Our Traditional Storage solutions include tape, storage networking and legacy external disk products such as EVA and XP. Our Converged Storage solutions include 3PAR StoreServ, StoreOnce and StoreVirtual products. These offerings enable our customers to optimize their existing storage systems, build new virtualization solutions and facilitate their transition to cloud computing.

Networking. Our networking offerings include switches, routers, and wireless local area network (“WLAN”) and network management products that together deliver open, scalable, secure, agile and consistent networking solutions for data centers, campuses and branch environments. We also offer software-defined networking and unified communications capabilities. Our unified wired and wireless networking offerings include WLAN access points, controllers and switches. Our networking solutions are based on our FlexNetwork architecture, which is designed to enable simplified server virtualization, unified communications and business application delivery for enterprises of all types and sizes. Software-defined networking provides an end-to-end solution to automate enterprise networks, whether it is a data center, a campus or a branch. Moreover, in May 2015, we completed the acquisition of Aruba Networks, Inc. a leading provider of next-generation network access solutions for the mobile enterprise. By combining Aruba’s wireless mobility solutions with our switching portfolio, we offer simpler, more secure networking solutions to help enterprises easily deploy next-generation mobile networks.

Technology Services. Our Technology Services group helps customers mitigate risks and ensure maximum return on their IT investments through our support and consulting services. Through our Support Services, we have a portfolio of proactive and connected offerings designed to address problems before they occur, including HP Foundation Care, our portfolio of reactive hardware and software support services; HP Proactive Care, a solution that utilizes remote support technology for real-time IT monitoring with rapid access to our technical experts; and HP Datacenter Care, an end-to-end solution enabling our customers to customize contracts that fit the needs of their unique IT environments.

Through our Consulting Services, we help customers make lasting IT performance improvements and realize their most important business outcomes. This transformation to a digital enterprise involves a wide spectrum of services, including advisory, transformation, integration and support solutions.

Software

Our Software portfolio provides big data analytics and applications, enterprise security, application delivery management and IT operations management solutions for businesses and other enterprises of all sizes. Our Software offerings include licenses, support, professional services and software-as-a- service (“SaaS”). Our global business capabilities within Software are described below.

Big Data. Our Big Data group provides a full suite of software designed to help organizations capture, store, explore, analyze, protect and share information and insights within and outside their organizations to improve business outcomes, while also enabling them to manage risks and meet legal obligations. Our Big Data suite

 

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includes HP Vertica, the leading analytics database technology for machine, structured and semi-structured data; HP IDOL, a unique analytics tool for human information; as well as solutions for archiving, data protection, eDiscovery, information governance and enterprise content management.

Our big data platform, Haven, brings these unique assets together for processing and understanding machine and sensor data, business data and unstructured human information in distinctly profitable ways. A growing ecosystem of customers, partners and developers use this platform to build big-data driven analytic applications. Our Software segment also leverages Haven’s unique analytic assets to deliver purpose-built solutions for a variety of markets, including application testing and delivery, big data analytics and applications, IT operations management and enterprise security. These solutions are designed for businesses and enterprises of all sizes, and are available via on-premise, as well as via SaaS and hybrid delivery models. Software’s Haven big data platform and purpose-built applications are augmented by our support and professional services offerings that provide an end-to-end solution for our customers.

Application Delivery Management. Our Application Delivery Management group provides software that enables organizations to deliver high-performance applications by automating and testing the processes required to ensure the quality and scalability of desktop, web, mobile and cloud-based applications.

Enterprise Security. Our Enterprise Security software is designed to disrupt fraud, hackers and cyber criminals by scanning software and websites for security vulnerabilities, improving network defenses and security, implementing security controls for software and data (regardless of where software and data resides) and providing real-time warnings of threats as they emerge.

IT Operations Management. Our IT Operations Management group provides the software required to automate routine IT tasks and to pinpoint IT problems as they occur, helping enterprises to reduce operational costs and improve the reliability of applications running in a traditional, cloud or hybrid environment.

Enterprise Services

ES provides technology consulting, outsourcing and support services across infrastructure, applications and business process domains. ES leverages our investments in our consulting and support professionals, infrastructure technology, applications, standardized methodologies and global supply and delivery capabilities. ES also creates opportunities for us to market additional hardware and software by offering solutions that leverage our other products and services in order to meet our clients’ needs.

Infrastructure Technology Outsourcing. Our Infrastructure Technology Outsourcing group delivers comprehensive services that streamline and help optimize our clients’ technology infrastructure to efficiently enhance performance, reduce costs, mitigate risk and enable business optimization. These services encompass the management of data centers, IT security, cloud computing, workplace technology, networks, unified communications and enterprise service management. We also offer a set of managed services that provide a cross-section of our broader infrastructure services for smaller, discrete engagements.

Application and Business Services. Our Application and Business Services portfolio helps our clients develop, revitalize and manage their applications and information assets. Our complete application lifecycle approach encompasses application development, testing, modernization, system integration, maintenance and management for both packaged and custom-built applications and cloud offerings. Our Application and Business Services portfolio also includes intellectual property-based industry solutions, along with technologies and related services, all of which help our clients better manage their critical industry processes for customer relationship management, finance and administration, human resources, payroll and document processing.

 

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Hewlett Packard Financial Services

FS provides flexible investment solutions for our customers—such as leasing, financing, IT consumption and utility programs—and asset management services that facilitate unique technology deployment models and the acquisition of complete IT solutions, including hardware, software and services from us and others. In order to provide flexible services and capabilities that support the entire IT lifecycle, FS partners with our 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

Corporate Investments includes Hewlett Packard Enterprise Labs and certain business incubation projects among others.

Our Strengths

We believe that we possess a number of competitive advantages that distinguish us from our competitors, including:

Broad and deep end-to-end solutions portfolio. We combine our infrastructure, software and services capabilities to provide what we believe is the broadest and deepest portfolio of end-to-end enterprise solutions in the IT industry. Our ability to deliver a wide range of high-quality products and high-value consulting and support services in a single package is one of our principal differentiators.

Multiyear innovation roadmap. We have been in the technology and innovation business for over 75 years. Our vast intellectual property portfolio and global research and development capabilities are part of a broader innovation roadmap designed to help organizations of all sizes journey from traditional technology platforms to the IT systems of the future—what we call the new style of IT—which we believe will be characterized by the increasing and interrelated prominence of cloud computing, big data, enterprise security, applications and mobility.

Global distribution and partner ecosystem. We are experts in delivering innovative technological solutions to our customers in complex multi-country, multi-vendor and/or multi-language environments. We have one of the largest go-to-market capabilities in our industry, including a large ecosystem of channel partners, which enables us to market and deliver our product offerings to customers located virtually anywhere in the world.

Custom financial solutions. We have developed innovative financing solutions to facilitate the delivery of our products and services to our customers. We deliver flexible investment solutions and expertise that help customers and other partners create unique technology deployments based on specific business needs.

Experienced leadership team with track record of successful performance. Our management team has an extensive track record of performance and execution. We are led by our Chief Executive Officer Margaret C. Whitman, who has proven experience in developing transformative business models, building global brands and driving sustained growth and expansion in the technology industry, including from her leadership of HP Co. for four years prior to the separation and her prior ten years as Chief Executive Officer of eBay Inc. Our senior management team has over 100 collective years of experience in our industry and possesses extensive knowledge of and experience in the enterprise IT business and the markets in which we compete. Moreover, we have a deep bench of management and technology talent that we believe provides us with an unparalleled pipeline of future leaders and innovators.

 

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LOGO

Our Strategies

Disruptive change is all around us, and we are living in an idea economy where the ability to turn an idea into a new product or a new industry is more accessible than ever. This environment requires a new style of business, underpinned by a new style of IT. Cloud, mobile, big data and analytics provide the tools enterprises need to significantly reduce the time to market for any good idea. Hewlett Packard Enterprise’s strategy is to enable customers to win in the idea economy by slashing the time it takes to turn an idea into value.

We make IT environments more efficient, more productive and more secure, enabling fast, flexible responses to a rapidly changing competitive landscape. We enable organizations to act quickly on ideas by creating, consuming and reconfiguring new solutions, experiences and business models, and deliver infrastructure that is built from components that can be composed and recomposed easily and quickly to meet the shifting demands of business applications.

Every IT journey is unique, but every customer is looking to minimize the time between initial idea and realized value. While some customers are looking for solutions that let them take the next step on this journey, the majority of customers are at the beginning of this journey and are looking for solutions that can help them take their first steps. Hewlett Packard Enterprise will leverage our leadership position in our traditional markets to lead the transition to this new style of business.

Specifically, we are focused on delivering solutions to help customers transform four critical areas that matter most to their business.

Transform to a hybrid infrastructure. Infrastructure matters more than ever today, but customers need a new kind of infrastructure. We help customers build an on-demand infrastructure and operational foundation for all of the applications that power the enterprise. With our cloud expertise, combined with our portfolio of traditional IT infrastructure and services, we are able to provide customized and seamless IT solutions for customers of all sizes and at all levels of technological sophistication. We are able to optimize our customers’ applications regardless of form—traditional, mobile, in the cloud or in the data center.

Protect the digital enterprise. The threat landscape is wider and more diverse today than ever before. We offer complete risk management solutions, ranging from protection against security threats to data back-up and

 

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recovery, that help our customers protect themselves and their data in an increasingly volatile cybersecurity landscape. Our products and services are informed by our decades of IT security experience and enable customers to predict and disrupt threats, manage risk and compliance, and extend their internal security team.

Empower the data-driven organization. We provide open-source solutions that allow customers to use 100% of their data, including business data, human data and machine data, to generate real-time, actionable insights. The result is better and faster decisionmaking.

Enable workplace productivity. We help customers deliver rich digital and mobile experiences to their customers, employees and partners. We offer an end-to-end mobility portfolio, from cloud infrastructure to customer-facing applications. Our infrastructure offerings leverage our cloud and security expertise to provide the backbone for secure mobile networks. Our integrated software offerings leverage our application expertise to provide intuitive interfaces for end-users. We also leverage our big data expertise to enable our customers to gain insight into the mobile user experience by monitoring and analyzing customer experience analytics.

 

LOGO

Sales, Marketing and Distribution

We manage our business and report our financial results based on the segments described above. Our customers are organized by commercial and large enterprise groups, including business and public sector enterprises, and purchases of our products, solutions and services may be fulfilled directly by us or indirectly through a variety of partners, including:

 

    resellers that sell our products and services, frequently with their own value-added products or services, to targeted customer groups;

 

    distribution partners that supply our solutions to resellers;

 

    OEMs that integrate our products and services with their own products and services, and sell the integrated solution;

 

    independent software vendors that provide their clients with specialized software products and often assist us in selling our products and services to clients purchasing their products;

 

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    systems integrators that provide expertise in designing and implementing custom IT solutions and often partner with us to extend their expertise or influence the sale of our products and services; and

 

    advisory firms that provide various levels of management and IT consulting, including some systems integration work, and typically partner with us on client solutions that require our unique products and services.

The mix of our business conducted by direct sales or channel differs substantially by business and region. We believe that customer buying patterns and different regional market conditions require us to tailor our sales, marketing and distribution efforts accordingly. We are focused on driving the depth and breadth of our coverage, in addition to identifying efficiencies and productivity gains, in both our direct and indirect businesses. While each of our business segments manages the execution of its own go-to-market and distribution strategy, our business segments also collaborate to ensure strategic and process alignment where appropriate. For example, we typically assign an account manager, generally from EG or ES, to manage relationships across our business with large enterprise customers. The account manager is supported by a team of specialists with product and services expertise. For other customers and for consumers, our business segments collaborate to manage relationships with commercial resellers targeting SMBs where appropriate.

Manufacturing and Materials

We utilize a significant number of outsourced manufacturers around the world to manufacture products that we design. The use of outsourced manufacturers is intended to generate cost efficiencies and reduce time to market for our products as well as maintain flexibility in our supply chain and manufacturing processes. In some circumstances, third-party OEMs produce products that we purchase and resell under our brand. In addition to our use of outsourced manufacturers, we currently manufacture a limited number of finished products from components and subassemblies that we acquire from a wide range of vendors.

We utilize two primary methods of fulfilling demand for products: building products to order and configuring products to order. We build products to order to maximize manufacturing and logistics efficiencies by producing high volumes of basic product configurations. Alternatively, configuring products to order enables units to match a customer’s particular hardware and software customization requirements. Our inventory management and distribution practices in both building products to order and configuring products to order seek to minimize inventory holding periods by taking delivery of the inventory and manufacturing shortly before the sale or distribution of products to our customers.

We purchase materials, supplies and product subassemblies from a substantial number of vendors. For most of our products, we have existing alternate sources of supply or such alternate sources of supply are readily available. However, we do rely on sole sources for certain customized parts (although some of these sources have operations in multiple locations in the event of a disruption). We are dependent upon Intel and AMD as suppliers of x86 processors; however, we believe that disruptions with these suppliers would result in industry-wide dislocations and therefore would not disproportionately disadvantage us relative to our competitors.

Like other participants in the IT industry, we ordinarily acquire materials and components through a combination of blanket and scheduled purchase orders to support our demand requirements for periods averaging 90 to 120 days. From time to time, we may experience significant price volatility or supply constraints for certain components that are not available from multiple sources or where our suppliers are geographically concentrated. When necessary, we are often able to obtain scarce components for somewhat higher prices on the open market, which may have an impact on our gross margin but does not generally disrupt production. We also may acquire component inventory in anticipation of supply constraints or enter into longer-term pricing commitments with vendors to improve the priority, price and availability of supply. See “Risk Factors—We depend on third-party suppliers, and our financial results could suffer if we fail to manage our suppliers properly.”

 

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International

Our products and services are available worldwide. We believe this geographic diversity allows us to meet demand on a worldwide basis for our customers, draws on business and technical expertise from a worldwide workforce, provides stability to our operations, provides revenue streams that may offset geographic economic trends and offers us an opportunity to access new markets for maturing products. In addition, we believe that our future growth is dependent in part on our ability to develop products and sales models that target developing countries. In this regard, we believe that our broad geographic presence gives us a solid base on which to build such future growth.

A summary of our domestic and international net revenue and net property, plant and equipment is set forth in Note 3 to the Combined Financial Statements. Approximately 62% of our overall net revenue in fiscal 2014 came from outside the United States.

For a discussion of certain risks attendant to our international operations, see “Risk Factors—Due to the international nature of our business, political or economic changes or other factors could harm our business and financial performance,” “—Recent global, regional and local economic weakness and uncertainty could adversely affect our business and financial performance,” “—We are exposed to fluctuations in foreign currency exchange rates” —and Note 12 to our Combined Financial Statements.

Research and Development

Innovation is a key element of our culture and critical to our success. Our research and development efforts are focused on designing and developing products, services and solutions that anticipate customers’ changing needs and desires and emerging technological trends. Our efforts also are focused on identifying the areas where we believe we can make a unique contribution and where partnering with other leading technology companies will leverage our cost structure and maximize our customers’ experiences.

Hewlett Packard Enterprise Labs, together with the various research and development groups within our business segments, is responsible for our research and development efforts. Hewlett Packard Enterprise Labs is part of our Corporate Investments segment.

Expenditures for research and development were $2.2 billion in fiscal 2014, $2.0 billion in fiscal 2013 and $2.1 billion in fiscal 2012. We anticipate that we will continue to have significant research and development expenditures in the future to support the design and development of innovative, high-quality products, services and solutions to maintain and enhance our competitive position. For a discussion of risks attendant to our research and development activities, see “Risk Factors—If we cannot successfully execute our go-to-market strategy and continue to develop, manufacture and market innovative products, services and solutions, our business and financial performance may suffer.”

Patents

Our general policy is to seek patent protection for those inventions likely to be incorporated into our products and services or where obtaining such proprietary rights will improve our competitive position. At present, our worldwide patent portfolio includes approximately 15,000 patents (including approximately 2,500 patents attributable to H3C).

Patents generally have a term of twenty years from the date they are filed. As our patent portfolio has been built over time, the remaining terms of the individual patents across our patent portfolio vary. We believe that our patents and patent applications are important for maintaining the competitive differentiation of our products and services, enhancing our freedom of action to sell our products and services in markets in which we choose to participate, and maximizing our return on research and development investments. No single patent is in itself essential to our company as a whole or to any of our business segments.

 

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In addition to developing our patent portfolio, we license intellectual property from third parties as we deem appropriate. We have also granted and continue to grant to others licenses, and other rights, under our patents when we consider these arrangements to be in our interest. These license arrangements include a number of cross-licenses with third parties.

For a discussion of risks attendant to intellectual property rights, see “Risk Factors—Our financial performance may suffer if we cannot continue to develop, license or enforce the intellectual property rights on which our businesses depend” and “—Our products and services depend in part on intellectual property and technology licensed from third parties.”

Backlog

We believe that our backlog is not a meaningful indicator of our future business prospects due to our diverse product and service portfolio, including the large volume of products delivered from finished goods or channel partner inventories and the shortening of product lifecycles. Therefore, we believe that backlog information is not material to an understanding of our overall business.

Seasonality

General economic conditions have an impact on our business and financial results. From time to time, the markets in which we sell our products, services and solutions experience weak economic conditions that may negatively affect sales. We experience some seasonal trends in the sale of our products and services. For example, European sales are often weaker in the summer months. See “Risk Factors—Our uneven sales cycle makes planning and inventory management difficult and future financial results less predictable.”

Competition

We have a broad technology portfolio of enterprise IT infrastructure products and solutions, multi-vendor customer services and IT management software and solutions. We believe we are the leader or among the leaders in each of our business segments. Nevertheless, we encounter strong competition in all areas of our business. We compete primarily on the basis of technology, innovation, performance, price, quality, reliability, brand, reputation, distribution, range of products and services, ease of use of our products, account relationships, customer training, service and support, security and the availability of our application software and IT infrastructure offerings.

The markets for each of our business segments are characterized by strong competition among major corporations with long-established positions and a large number of new and rapidly growing firms. Most product lifecycles are relatively short, and to remain competitive we must develop new products and services, periodically enhance our existing products and services and compete effectively on the basis of the factors listed above, among others. In addition, we compete with many of our current and potential partners, including OEMs that design, manufacture and market their products under their own brand names. Our successful management of these competitive partner relationships is critical to our future success. Moreover, we anticipate that we will have to continue to adjust prices on many of our products and services to stay competitive.

The competitive environments in which each segment operates are described below:

Enterprise Group. EG operates in the highly competitive enterprise technology infrastructure market, which is characterized by rapid and ongoing technological innovation and price competition. Our primary competitors include technology vendors such as International Business Machines Corporation (“IBM”), Dell Inc. (“Dell”), EMC Corporation (“EMC”), Cisco Systems, Inc. (“Cisco”), Lenovo Group Ltd., Oracle Corporation (“Oracle”), Fujitsu Limited (“Fujitsu”), Inspur Co., Ltd., Huawei Technologies Co. Ltd., NetApp, Inc., Hitachi Ltd., Juniper Networks, Inc., Arista Networks, Inc., Extreme Networks, Inc., Brocade Communications Systems, Inc.,

 

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VMware, Microsoft, Google Inc., Rackspace Inc. and Amazon.com, Inc. (“Amazon”). In certain regions, we also experience competition from local companies and from generically branded or “white-box” manufacturers. Our strategy is to deliver superior products, high-value technology support services and differentiated integrated solutions that combine our infrastructure, software and services capabilities. Our competitive advantages include our broad end-to-end solutions portfolio, supported by our strong intellectual property portfolio and research and development capabilities, coupled with our global reach and partner ecosystem.

Enterprise Services. ES competes in the IT services, consulting and integration, infrastructure technology outsourcing, business process outsourcing and application services markets. Our primary competitors include IBM Global Services, Computer Sciences Corporation, systems integration firms such as Accenture plc and offshore companies such as Fujitsu and India-based competitors Wipro Limited, Infosys Limited and Tata Consultancy Services Ltd. We also compete with other traditional hardware providers, such as Dell, which are increasingly offering services to support their products, new players in emerging areas like cloud such as Amazon, and smaller local players. Many of our competitors offer a wide range of global services, and some of our competitors enjoy significant brand recognition. ES teams with many companies to offer services, and those arrangements allow us to extend our reach and augment our capabilities. Our competitive advantages include our deep technology expertise, especially in complex multi-country, multi-vendor and/or multi-language environments, our differentiated intellectual property, our strong track record of collaboration with clients and partners, and the combination of our expertise in infrastructure management with skilled global resources on platforms from SAP AG (“SAP”), Oracle and Microsoft, among others.

Software. The markets in which our Software segment operates are characterized by rapidly changing customer requirements and technologies. We design and develop enterprise IT management software in competition with IBM, CA Technologies, Inc., VMware, BMC Software, Inc. and others. Our big data solutions, which include data analytics and information governance offerings incorporating both structured and unstructured data, compete with products from companies like Adobe Systems Inc., IBM, EMC, Open Text Corporation, Oracle and Symantec Corporation. We also deliver enterprise security/risk intelligence solutions that compete with products from EMC, IBM, Cisco and Intel. As customers are becoming increasingly comfortable with newer delivery mechanisms such as SaaS, we are facing competition from smaller, less traditional competitors, particularly for customers with smaller IT organizations. Our differentiation lies in the breadth and depth of our software and services portfolio, our collaboration with EG and ES to provide comprehensive IT solutions and the scope of our market coverage.

Hewlett Packard Financial Services. In our financing business, our competitors are captive financing companies, mainly IBM Global Financing, as well as banks and other financial institutions. We believe our competitive advantage over banks and other financial institutions in our financing business is our ability to deliver flexible investment solutions and expertise that help customers and other partners create unique technology deployments based on specific business needs.

For a discussion of certain risks attendant to these competitive environments, see “Risk Factors—We operate in an intensely competitive industry and competitive pressures could harm our business and financial performance.”

Environment

Our operations are subject to regulation under various federal, state, local and foreign laws concerning the environment, including laws addressing the discharge of pollutants into the air and water, the management and disposal of hazardous substances and wastes, and the clean-up of contaminated sites. We could incur substantial costs, including clean-up costs, fines and civil or criminal sanctions, and third-party damage or personal injury claims, if we were to violate or become liable under environmental laws.

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electronics products and in some cases laws regulating the manufacture and distribution of chemical substances. Some of our products and services also are, or may in the future be, subject to requirements applicable to their energy consumption. In addition, we face increasing complexity in our product design and procurement operations as we adjust to new and future requirements relating to the chemical and materials composition of our products, their safe use, and their energy efficiency, including requirements relating to climate change. We are also subject to legislation in an increasing number of jurisdictions that makes producers of electrical goods, including servers and networking equipment, financially responsible for specified collection, recycling, treatment and disposal of past and future covered products (sometimes referred to as “product take-back legislation”). In the event our products become non-compliant with these laws, our products could be restricted from entering certain jurisdictions and we could face other sanctions, including fines.

Our operations, services and ultimately our products are expected to become increasingly subject to federal, state, local and foreign laws, regulations and international treaties relating to climate change. As these laws, regulations, treaties and similar initiatives and programs are adopted and implemented throughout the world, we will be required to comply or potentially face market access limitations or other sanctions, including fines. However, we believe that technology will be fundamental to finding solutions to achieve compliance with and manage those requirements, and we are collaborating with industry and business groups and governments to find and promote ways that our technology can be used to address climate change and to facilitate compliance with related laws, regulations and treaties.

We are committed to maintaining compliance with all environmental laws applicable to our operations, products and services and to reducing our environmental impact across all aspects of our business. We meet this commitment with a comprehensive environmental, health and safety policy, strict environmental management of our operations and worldwide environmental programs and services.

A liability for environmental remediation and other environmental costs is accrued when we consider it probable that a liability has been incurred and the amount of loss can be reasonably estimated. Environmental costs and accruals are presently not material to our operations, cash flows or financial position. Although there is no assurance that existing or future environmental laws applicable to our operations or products will not have a material adverse effect on our operations, cash flows or financial condition, we do not currently anticipate material capital expenditures for environmental control facilities. We and HP Inc. have allocated responsibility and liability for ongoing environmental remediations and environmental costs in the separation agreement. See “Certain Relationships and Related Person Transactions—The Separation and Distribution Agreement—Environmental Matters.”

Employees

We had approximately 252,000 employees as of July 31, 2015.

Additional Information

Microsoft® and Windows® are U.S.-registered trademarks of Microsoft Corporation. Intel®, Itanium®, Intel® AtomTM, and Intel® Itanium® are trademarks of Intel Corporation in the United States and other countries. AMD is a trademark of Advanced Micro Devices, Inc. ARM® is a registered trademark of ARM Limited. UNIX® is a registered trademark of The Open Group.

Properties

As of October 31, 2014, we owned or leased approximately 48 million square feet of space worldwide, a summary of which is provided below. We believe that our existing properties are in good condition and are suitable for the conduct of our business.

 

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     Fiscal year
ended October 31, 2014
 
     Owned     Leased     Total  
     (square feet in millions)  

Administration and support

     9        19        28   

(Percentage)

     32     68     100

Core data centers, manufacturing plants, research and development facilities and warehouse operations

     10        5        15   

(Percentage)

     67     33     100
  

 

 

   

 

 

   

 

 

 

Total(1)

     19        24        43   

(Percentage)

     44     56     100

 

(1) Excludes 5 million square feet of vacated space, of which 1 million square feet is leased to third parties.

Because of the interrelation of our business segments, a majority of these segments use substantially all of the properties described above at least in part, and we retain the flexibility to use each of the properties in whole or in part for each of our segments.

Principal Executive Offices

Our principal executive offices, including our global headquarters, are located at 3000 Hanover Street, Palo Alto, California 94304, United States of America.

Headquarters of Geographic Operations

The locations of our geographic headquarters are as follows:

 

Americas   Europe, Middle East, Africa   Asia Pacific
Houston, United States
Mississauga, Canada
  Geneva, Switzerland   Singapore
Tokyo, Japan

Product Development, Services and Manufacturing

The locations of our major product development, manufacturing, data centers and Hewlett Packard Enterprise Labs facilities are as follows:

 

Americas

 

Brazil—Sao Paulo

 

Canada—Markham, Mississauga

 

Puerto Rico—Aguadilla

 

United States—Alpharetta, Andover, Auburn Hills, Austin, Cincinnati, Charlotte, Colorado Springs, Des Moines, Fort Collins, Hockley, Houston, Palo Alto, Plano, Rancho Cordova, Roseville, Suwanee, Tulsa

  

Europe, Middle East, Africa

 

France—Grenoble

 

Germany—Frankfurt

 

Spain—Sant Cugat del Valles

 

United Kingdom—Billingham, Erskine, Norwich, Sunderland

Asia Pacific

 

India—Bangalore

 

Japan—Tokyo

 

New Zealand—Auckland

 

Singapore—Singapore

  

Hewlett Packard Enterprise Labs

 

Israel—Haifa

 

United Kingdom—Bristol

 

United States—Palo Alto

Legal Proceedings

Information with respect to this item may be found in Note 16 to our Combined Financial Statements and Note 16 to our Condensed Combined Financial Statements.

 

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MANAGEMENT

Our Executive Officers Following the Separation

The following table sets forth certain information regarding the individuals who are expected to serve as our executive officers and their anticipated positions following the separation. After the separation, none of these individuals will continue to be employees of HP Inc. However, Ms. Whitman is expected to serve as non-executive chairperson of HP Inc.

 

Name

   Age     

Position

Margaret C. Whitman

     59       President and Chief Executive Officer

Martin Fink

     50       Executive Vice President and Chief Technology Officer

Henry Gomez

     52       Executive Vice President, Chief Marketing and Communications Officer

John M. Hinshaw

     45       Executive Vice President, Technology and Operations

Christopher P. Hsu

     44       Executive Vice President and Chief Operating Officer

Kirt P. Karros

     46       Senior Vice President, Finance and Treasurer

Alan May

     57       Executive Vice President, Human Resources

Michael G. Nefkens

     45       Executive Vice President, Enterprise Services

Antonio Neri

     48       Executive Vice President and General Manager, Enterprise Group

Jeff T. Ricci

     54       Senior Vice President, Controller and Principal Accounting Officer

John F. Schultz

     51       Executive Vice President, General Counsel and Secretary

Timothy C. Stonesifer

     48       Executive Vice President and Chief Financial Officer

Robert Youngjohns

     63       Executive Vice President and General Manager, HP Software

Margaret C. Whitman; age 59; President and Chief Executive Officer

Ms. Whitman has served as Chairman of HP Co. since July 2014, President and Chief Executive Officer of HP Co. since September 2011 and as a member of HP Co.’s board of directors since January 2011. From March 2011 to September 2011, Ms. Whitman served as a part-time strategic advisor to Kleiner Perkins Caufield & Byers, a private equity firm. Previously, Ms. Whitman served as President and Chief Executive Officer of eBay Inc., from 1998 to 2008. Prior to joining eBay, Ms. Whitman held executive-level positions at Hasbro Inc., FTD, Inc., The Stride Rite Corporation, The Walt Disney Company, and Bain & Company. Ms. Whitman also serves as a director of The Procter & Gamble Company and is a former director of Zipcar, Inc.

Martin Fink; age 50; Executive Vice President and Chief Technology Officer

Mr. Fink has served as Executive Vice President, Chief Technology Officer and Director of HP Labs since November 2012. Prior to that, he served as Senior Vice President and General Manager of the Business Critical Systems and Converged Application Systems at HP Co. from April 2005 to October 2012. During his 30-year career at HP Co., Mr. Fink has worked in a wide range of roles across HP Co. He also serves as a director of Hortonworks, Inc.

Henry Gomez; age 52; Executive Vice President, Chief Marketing and Communications Officer

Mr. Gomez has served as Executive Vice President and Chief Marketing and Communications Officer of HP Co. since August 2013. Previously, he served as Chief Communications Officer and Executive Vice President of HP Co. from January 2012 to July 2013. Prior to that, he ran HSG Communications, a consulting business that he founded in September 2008. He also served on the leadership team of Ms. Whitman’s gubernatorial campaign from February 2009 to November 2010. For most of the previous decade, he worked at eBay Inc. in a variety of roles including Senior Vice President for Corporate Communications and President of Skype. From September 2011 to September 2013 he served as a director of BJ’s Restaurants, Inc.

 

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John M. Hinshaw; age 45; Executive Vice President, Technology and Operations

Mr. Hinshaw has served as Executive Vice President, Technology and Operations at HP Co. since November 2011. Prior to joining HP Co., Mr. Hinshaw served as Vice President and General Manager of Information Solutions at The Boeing Company, an aerospace company, from January 2011 to October 2011 and as Global Chief Information Officer for Boeing from June 2007 to December 2010. He also serves as a director of Bank of New York Mellon.

Christopher P. Hsu; age 44; Executive Vice President and Chief Operating Officer

Mr. Hsu has served as Senior Vice President, Organizational Performance and Hewlett Packard Enterprise Separation Leader since May 2014. Prior to joining HP Co., he served as Managing Director at Kohlberg Kravis Roberts (“KKR”), an investment firm, from December 2013 to May 2014 and as Director of KKR Capstone from November 2008 to December 2013, having joined KKR as a Principal in May 2007. Previously, Mr. Hsu served as an Associate Principal at McKinsey and Company, a consultancy firm, from July 2001 to April 2007.

Kirt P. Karros; age 46; Senior Vice President, Finance and Treasurer

Mr. Karros has served as Senior Vice President, Finance and Treasurer since May 2015. He also leads Investor Relations. Previously, Mr. Karros served as a Principal and Managing Director of Research for Relational Investors LLC, an investment fund, from 2001 to May 2015. Mr. Karros served as a director of PMC-Sierra, a semiconductor company, from August 2013 to May 2015.

Alan May; age 57; Executive Vice President, Human Resources

Mr. May has served as Executive Vice President, Human Resources at HP since June 2015. Prior to joining HP Co., Mr. May served as VP, Human Resources at Boeing Commercial Aircraft, a division of The Boeing Company, from April 2013 to June 2015. Previously, Mr. May served as VP of Human Resources for Boeing Defense, Space and Security at Boeing from April 2011 to June 2015 and as VP of Compensation, Benefits and Strategy at Boeing from August 2007 to April 2011. Prior to joining Boeing, Mr. May served as Chief Talent and Human Resources Officer at Cerberus Capital Management from September 2006 to August 2007. Mr. May served in a number of Human Resources executive roles at PepsiCo from November 1991 to August 2006.

Michael G. Nefkens; age 45; Executive Vice President, Enterprise Services