Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________________________________________________________________________
FORM 10-Q
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| | |
(Mark One) | | |
x | | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended: July 31, 2018 |
Or |
o | | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to |
Commission file number 001-37483 |
_______________________________________________________________________________
HEWLETT PACKARD ENTERPRISE COMPANY
(Exact name of registrant as specified in its charter)
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| | |
Delaware | | 47-3298624 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. employer identification no.) |
3000 Hanover Street, Palo Alto, California | | 94304 |
(Address of principal executive offices) | | (Zip code) |
(650) 687-5817 (Registrant's telephone number, including area code) |
_______________________________________________________________________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 (the "Exchange Act") during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer", "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act.
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| | | | | | |
Large accelerated filer x | | Accelerated filer o | | Non-accelerated filer o (Do not check if a smaller reporting company) | | Smaller reporting company o |
| | | | | | Emerging growth company o
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act). Yes o No x
The number of shares of Hewlett Packard Enterprise Company common stock outstanding as of August 20, 2018 was 1,471,648,283 shares, par value $0.01.
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Form 10-Q
For the Quarterly Period Ended July 31, 2018
Table of Contents
Forward-Looking Statements
This Quarterly Report on Form 10-Q, including "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Item 2 of Part I, contains forward-looking statements that involve risks, uncertainties and assumptions. If the risks or uncertainties ever materialize or the assumptions prove incorrect, the results of Hewlett Packard Enterprise Company and its consolidated subsidiaries ("Hewlett Packard Enterprise") may differ materially from those expressed or implied by such forward-looking statements and assumptions. The words "believe", "expect", "anticipate", "optimistic", "intend", "aim", "will", "should" and similar expressions are intended to identify such forward-looking statements. All statements other than statements of historical fact are statements that could be deemed forward-looking statements, including but not limited to any projections of revenue, margins, expenses, effective tax rates, the impact of the U.S. Tax Cuts and Jobs Act of 2017, including the effect on deferred tax assets and the one-time transition tax on unremitted foreign earnings, net earnings, net earnings per share, cash flows, benefit plan funding, deferred tax assets, share repurchases, currency exchange rates or other financial items; any projections of the amount, timing or impact of cost savings or restructuring charges; any statements of the plans, strategies and objectives of management for future operations, as well as the execution of transformation and restructuring plans and any resulting cost savings, revenue or profitability improvements; any statements concerning the expected development, performance, market share or competitive performance relating to products or services; any statements regarding current or future macroeconomic trends or events and the impact of those trends and events on Hewlett Packard Enterprise and its financial performance; any statements regarding pending investigations, claims or disputes; any statements of expectation or belief; and any statements of assumptions underlying any of the foregoing. Risks, uncertainties and assumptions include the need to address the many challenges facing Hewlett Packard Enterprise's businesses; the competitive pressures faced by Hewlett Packard Enterprise's businesses; risks associated with executing Hewlett Packard Enterprise's strategy; the impact of macroeconomic and geopolitical trends and events; the need to manage third-party suppliers and the distribution of Hewlett Packard Enterprise's products and the delivery of Hewlett Packard Enterprise's services effectively; the protection of Hewlett Packard Enterprise's intellectual property assets, including intellectual property licensed from third parties and intellectual property shared with HP Inc.; risks associated with Hewlett Packard Enterprise's international operations; the development and transition of new products and services and the enhancement of existing products and services to meet customer needs and respond to emerging technological trends; the execution and performance of contracts by Hewlett Packard Enterprise and its suppliers, customers, clients and partners; the hiring and retention of key employees; integration and other risks associated with business combination and investment transactions; the execution, timing and results of any transformation or restructuring plans, including estimates and assumptions related to the costs and anticipated benefits of implementing the transformation and restructuring plans; the effects of the U.S. Tax Cuts and Jobs Act and related guidance and regulations that may be implemented; the resolution of pending investigations, claims and disputes; and other risks that are described herein, including but not limited to the items discussed or referenced in "Risk Factors" in Item 1A of Part II of this Quarterly Report on Form 10-Q and that are otherwise described or updated from time to time in Hewlett Packard Enterprise's reports filed with the Securities and Exchange Commission. Hewlett Packard Enterprise assumes no obligation and does not intend to update these forward-looking statements.
Part I. Financial Information
Item 1. Financial Statements and Supplementary Data.
Index
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Condensed Consolidated Statements of Earnings
(Unaudited) |
| | | | | | | | | | | | | | | |
| Three Months Ended July 31, | | Nine Months Ended July 31, |
| 2018 | | 2017 | | 2018 | | 2017 |
| In millions, except per share amounts |
Net revenue: | |
| | |
| | | | |
Products | $ | 4,944 |
| | $ | 4,691 |
| | $ | 14,414 |
| | $ | 12,920 |
|
Services | 2,711 |
| | 2,708 |
| | 8,160 |
| | 8,000 |
|
Financing income | 109 |
| | 102 |
| | 332 |
| | 291 |
|
Total net revenue | 7,764 |
| | 7,501 |
| | 22,906 |
| | 21,211 |
|
Costs and expenses: | |
| | |
| | | | |
Cost of products | 3,515 |
| | 3,447 |
| | 10,428 |
| | 9,329 |
|
Cost of services | 1,800 |
| | 1,793 |
| | 5,436 |
| | 5,268 |
|
Financing interest | 69 |
| | 66 |
| | 207 |
| | 197 |
|
Research and development | 434 |
| | 390 |
| | 1,224 |
| | 1,122 |
|
Selling, general and administrative | 1,203 |
| | 1,285 |
| | 3,632 |
| | 3,718 |
|
Amortization of intangible assets | 72 |
| | 97 |
| | 222 |
| | 235 |
|
Restructuring charges | 2 |
| | 152 |
| | 14 |
| | 304 |
|
Transformation costs | 131 |
| | 31 |
| | 499 |
| | 31 |
|
Acquisition and other related charges | 24 |
| | 56 |
| | 70 |
| | 150 |
|
Separation costs | (2 | ) | | 5 |
| | — |
| | 46 |
|
Defined benefit plan settlement charges and remeasurement (benefit) | — |
| | (22 | ) | | — |
| | (38 | ) |
Total costs and expenses | 7,248 |
| | 7,300 |
| | 21,732 |
| | 20,362 |
|
Earnings from continuing operations | 516 |
| | 201 |
| | 1,174 |
| | 849 |
|
Interest and other, net | (64 | ) | | (87 | ) | | (163 | ) | | (251 | ) |
Tax indemnification adjustments | 2 |
| | 10 |
| | (1,342 | ) | | (1 | ) |
Earnings (loss) from equity interests | 11 |
| | 1 |
| | 23 |
| | (24 | ) |
Earnings (loss) from continuing operations before taxes | 465 |
| | 125 |
| | (308 | ) | | 573 |
|
(Provision) benefit for taxes | (13 | ) | | 160 |
| | 3,092 |
| | (515 | ) |
Net earnings from continuing operations | 452 |
| | 285 |
| | 2,784 |
| | 58 |
|
Net loss from discontinued operations | (1 | ) | | (120 | ) | | (119 | ) | | (238 | ) |
Net earnings (loss) | $ | 451 |
| | $ | 165 |
| | $ | 2,665 |
| | $ | (180 | ) |
Net earnings (loss) per share: | |
| | |
| | | | |
Basic | | | | | | | |
Continuing operations | $ | 0.30 |
| | $ | 0.17 |
| | $ | 1.79 |
| | $ | 0.04 |
|
Discontinued operations | — |
| | (0.07 | ) | | (0.07 | ) | | (0.15 | ) |
Total basic net earnings (loss) per share | $ | 0.30 |
| | $ | 0.10 |
| | $ | 1.72 |
| | $ | (0.11 | ) |
Diluted | | | | | | | |
Continuing operations | $ | 0.29 |
| | $ | 0.17 |
| | $ | 1.76 |
| | $ | 0.03 |
|
Discontinued operations | — |
| | (0.07 | ) | | (0.07 | ) | | (0.14 | ) |
Total diluted net earnings (loss) per share | $ | 0.29 |
| | $ | 0.10 |
| | $ | 1.69 |
| | $ | (0.11 | ) |
Cash dividends declared per share | $ | 0.1125 |
| | $ | 0.0650 |
| | $ | 0.3750 |
| | $ | 0.2600 |
|
Weighted-average shares used to compute net earnings (loss) per share: | |
| | |
| | | | |
Basic | 1,513 |
| | 1,641 |
| | 1,552 |
| | 1,656 |
|
Diluted | 1,531 |
| | 1,667 |
| | 1,578 |
| | 1,683 |
|
The accompanying notes are an integral part of these Condensed
Consolidated Financial Statements.
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Condensed Consolidated Statements of Comprehensive Income
(Unaudited)
|
| | | | | | | | | | | | | | | |
| Three Months Ended July 31, | | Nine Months Ended July 31, |
| 2018 | | 2017 | | 2018 | | 2017 |
| In millions |
Net earnings (loss) | $ | 451 |
| | $ | 165 |
| | $ | 2,665 |
| | $ | (180 | ) |
Other comprehensive income before taxes: | |
| | |
| | | | |
Change in net unrealized (losses) gains on available-for-sale securities: | |
| | |
| | | | |
Net unrealized (losses) gains arising during the period | (2 | ) | | 7 |
| | (1 | ) | | (10 | ) |
Gains reclassified into earnings | — |
| | — |
| | (9 | ) | | — |
|
| (2 | ) | | 7 |
| | (10 | ) | | (10 | ) |
Change in net unrealized gains (losses) on cash flow hedges: | |
| | |
| | | | |
Net unrealized gains (losses) arising during the period | 149 |
| | (133 | ) | | 50 |
| | 7 |
|
Net (gains) losses reclassified into earnings | (43 | ) | | 15 |
| | 78 |
| | (231 | ) |
| 106 |
| | (118 | ) | | 128 |
| | (224 | ) |
Change in unrealized components of defined benefit plans: | |
| | |
| | | | |
(Losses) gains arising during the period | (25 | ) | | 210 |
| | (23 | ) | | 700 |
|
Amortization of actuarial loss and prior service benefit | 47 |
| | 56 |
| | 143 |
| | 230 |
|
Curtailments, settlements and other | 9 |
| | 6 |
| | 11 |
| | 9 |
|
| 31 |
| | 272 |
| | 131 |
| | 939 |
|
Change in cumulative translation adjustment | (40 | ) | | 49 |
| | (40 | ) | | 13 |
|
Other comprehensive income before taxes | 95 |
| | 210 |
| | 209 |
| | 718 |
|
Provision for taxes | (19 | ) | | (26 | ) | | (34 | ) | | (58 | ) |
Other comprehensive income, net of taxes | 76 |
| | 184 |
| | 175 |
| | 660 |
|
Comprehensive income | $ | 527 |
| | $ | 349 |
| | $ | 2,840 |
| | $ | 480 |
|
The accompanying notes are an integral part of these Condensed
Consolidated Financial Statements.
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Unaudited) |
| | | | | | | |
| As of |
| July 31, 2018 | | October 31, 2017 |
| In millions, except par value |
ASSETS | |
| | |
|
Current assets: | |
| | |
|
Cash and cash equivalents | $ | 5,193 |
| | $ | 9,579 |
|
Accounts receivable, net of allowance for doubtful accounts(1) | 2,906 |
| | 3,073 |
|
Financing receivables | 3,435 |
| | 3,378 |
|
Inventory | 2,771 |
| | 2,315 |
|
Assets held for sale(2) | 6 |
| | 14 |
|
Other current assets | 3,156 |
| | 3,085 |
|
Total current assets | 17,467 |
| | 21,444 |
|
Property, plant and equipment | 6,184 |
| | 6,269 |
|
Long-term financing receivables and other assets | 12,863 |
| | 12,600 |
|
Investments in equity interests | 2,513 |
| | 2,535 |
|
Goodwill | 17,626 |
| | 17,516 |
|
Intangible assets | 860 |
| | 1,042 |
|
Total assets | $ | 57,513 |
| | $ | 61,406 |
|
LIABILITIES AND STOCKHOLDERS' EQUITY | |
| | |
|
Current liabilities: | |
| | |
|
Notes payable and short-term borrowings | $ | 2,326 |
| | $ | 3,850 |
|
Accounts payable | 6,143 |
| | 6,072 |
|
Employee compensation and benefits | 1,187 |
| | 1,156 |
|
Taxes on earnings | 484 |
| | 429 |
|
Deferred revenue | 3,168 |
| | 3,128 |
|
Accrued restructuring | 256 |
| | 445 |
|
Other accrued liabilities | 3,843 |
| | 3,844 |
|
Total current liabilities | 17,407 |
| | 18,924 |
|
Long-term debt | 9,963 |
| | 10,182 |
|
Other non-current liabilities | 6,681 |
| | 8,795 |
|
Commitments and contingencies |
| |
|
Stockholders' equity | |
| | |
|
HPE stockholders' equity: | |
| | |
|
Preferred stock, $0.01 par value (300 shares authorized; none issued and outstanding at July 31, 2018) | — |
| | — |
|
Common stock, $0.01 par value (9,600 shares authorized; 1,482 and 1,595 shares issued and outstanding at July 31, 2018 and October 31, 2017, respectively) | 15 |
| | 16 |
|
Additional paid-in capital | 31,338 |
| | 33,583 |
|
Accumulated deficit | (5,021 | ) | | (7,238 | ) |
Accumulated other comprehensive loss | (2,906 | ) | | (2,895 | ) |
Total HPE stockholders' equity | 23,426 |
| | 23,466 |
|
Non-controlling interests | 36 |
| | 39 |
|
Total stockholders' equity | 23,462 |
| | 23,505 |
|
Total liabilities and stockholders' equity | $ | 57,513 |
| | $ | 61,406 |
|
| |
(1) | The allowance for doubtful accounts related to accounts receivable was $42 million at both July 31, 2018 and October 31, 2017. |
| |
(2) | In connection with the HPE Next initiative, the Company determined that certain properties within its real estate portfolio met the criteria to be classified as Assets held for sale. The Company expects these properties to be sold within the next twelve months. |
The accompanying notes are an integral part of these Condensed
Consolidated Financial Statements.
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
|
| | | | | | | |
| Nine Months Ended July 31, |
| 2018 | | 2017 |
| In millions |
Cash flows from operating activities: | |
| | |
|
Net earnings (loss) | $ | 2,665 |
| | $ | (180 | ) |
Adjustments to reconcile net earnings (loss) to net cash provided by operating activities: | |
| | |
|
Depreciation and amortization | 1,931 |
| | 2,369 |
|
Stock-based compensation expense | 242 |
| | 349 |
|
Provision for inventory and doubtful accounts | 137 |
| | 82 |
|
Restructuring charges | 399 |
| | 558 |
|
Deferred taxes on earnings | (1,215 | ) | | 145 |
|
(Earnings) loss from equity interests | (23 | ) | | 24 |
|
Dividends received from equity investees | 47 |
| | — |
|
Other, net | 55 |
| | 392 |
|
Changes in operating assets and liabilities, net of acquisitions: | |
| | |
|
Accounts receivable | 137 |
| | 250 |
|
Financing receivables | (228 | ) | | (127 | ) |
Inventory | (545 | ) | | (341 | ) |
Accounts payable | 72 |
| | 652 |
|
Taxes on earnings | (2,271 | ) | | (602 | ) |
Restructuring | (540 | ) | | (688 | ) |
Other assets and liabilities(1) | 775 |
| | (2,379 | ) |
Net cash provided by operating activities | 1,638 |
| | 504 |
|
Cash flows from investing activities: | |
| | |
|
Investment in property, plant and equipment | (2,129 | ) | | (2,405 | ) |
Proceeds from sale of property, plant and equipment | 561 |
| | 403 |
|
Purchases of available-for-sale securities and other investments | (32 | ) | | (31 | ) |
Maturities and sales of available-for-sale securities and other investments | 96 |
| | 14 |
|
Financial collateral posted | (1,318 | ) | | (384 | ) |
Financial collateral returned | 1,333 |
| | 49 |
|
Payments made in connection with business acquisitions, net of cash acquired | (207 | ) | | (2,050 | ) |
Proceeds from (payments to) business divestitures, net | 13 |
| | (20 | ) |
Net cash used in investing activities | (1,683 | ) | | (4,424 | ) |
Cash flows from financing activities: | |
| | |
|
Short-term borrowings with original maturities less than 90 days, net | 84 |
| | 30 |
|
Proceeds from debt, net of issuance costs | 894 |
| | 3,340 |
|
Restricted cash - Seattle debt issuance (2) | — |
| | (2,620 | ) |
Payment of debt | (2,538 | ) | | (2,296 | ) |
Settlement of cash flow hedge | — |
| | 5 |
|
Net proceeds related to stock-based award activities | 104 |
| | 41 |
|
Repurchase of common stock | (2,585 | ) | | (1,936 | ) |
|
| | | | | | | |
Cash dividend from Everett | — |
| | 3,008 |
|
Net transfer of cash and cash equivalents to Everett | (41 | ) | | (559 | ) |
Net transfer of cash and cash equivalents from Seattle | 156 |
| | — |
|
Cash dividends paid to non-controlling interests | (9 | ) | | — |
|
Cash dividends paid | (406 | ) | | (323 | ) |
Net cash used in financing activities | (4,341 | ) | | (1,310 | ) |
Decrease in cash and cash equivalents | (4,386 | ) | | (5,230 | ) |
Cash and cash equivalents at beginning of period | 9,579 |
| | 12,987 |
|
Cash and cash equivalents at end of period | $ | 5,193 |
| | $ | 7,757 |
|
| |
(1) | For the nine months ended July 31, 2017, this amount includes $1.9 billion of pension funding payments associated with the separation and merger of Everett SpinCo, Inc. with Computer Sciences Corporation. |
| |
(2) | For the nine months ended July 31, 2017, this amount represents a $2.6 billion Seattle SpinCo, Inc. term loan facility. The proceeds from the term loan were used to fund a $2.5 billion dividend payment from Seattle SpinCo, Inc. to HPE. The obligation under the term loan facility was retained by Seattle SpinCo, Inc. |
The accompanying notes are an integral part of these Condensed
Consolidated Financial Statements.
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 1: Overview and Basis of Presentation
Background
Hewlett Packard Enterprise Company ("Hewlett Packard Enterprise", "HPE" or "the Company") is an industry leading technology company that enables customers to go further, faster. With a deep and comprehensive portfolio, spanning the cloud to the data center to the intelligent edge, its technology and services help customers around the world make better business outcomes. Hewlett Packard Enterprise's customers range from small- and medium-sized businesses ("SMBs") to large global enterprises. On November 1, 2015, the Company became an independent publicly-traded company through a pro rata distribution by HP Inc. ("former Parent" or "HPI"), formerly known as Hewlett-Packard Company, of 100% of the outstanding shares of Hewlett Packard Enterprise Company to HP Inc.'s stockholders (the "Separation").
Discontinued Operations
On April 1, 2017, HPE completed the separation and merger of its Enterprise Services business with Computer Sciences Corporation ("CSC") (collectively, the "Everett Transaction"). HPE transferred its Enterprise Services business to Everett SpinCo, Inc. (a wholly-owned subsidiary of HPE) ("Everett") and distributed all of the shares of Everett to HPE stockholders. Following the distribution, New Everett Merger Sub Inc., a wholly-owned subsidiary of Everett, merged with and into CSC and Everett changed its name to DXC Technology Company ("DXC").
On September 1, 2017, the Company completed the separation and merger of its Software business segment with Micro Focus International plc (“Micro Focus”) (collectively, the “Seattle Transaction”). HPE transferred its Software business segment to Seattle SpinCo, Inc. (a wholly-owned subsidiary of HPE) ("Seattle"), and distributed all of the shares of Seattle to HPE stockholders. Following the share distribution, Seattle MergerSub, Inc., an indirect, wholly-owned subsidiary of Micro Focus, merged with and into Seattle.
The historical financial results of Everett and Seattle are reported as Net loss from discontinued operations in the Condensed Consolidated Statements of Earnings. For further information on discontinued operations, see Note 2, "Discontinued Operations".
Basis of Presentation
These Condensed Consolidated Financial Statements of the Company were prepared in accordance with United States ("U.S.") Generally Accepted Accounting Principles ("GAAP"). In the opinion of management, the accompanying unaudited Condensed Consolidated Financial Statements of Hewlett Packard Enterprise contain all adjustments, including normal recurring adjustments, necessary to present fairly the Company's financial position as of July 31, 2018 and October 31, 2017, its results of operations for the three and nine months ended July 31, 2018 and 2017 and its cash flows for the nine months ended July 31, 2018 and 2017.
The results of operations for the three and nine months ended July 31, 2018 and its cash flows for the nine months ended July 31, 2018, are not necessarily indicative of the results to be expected for the full year. The information included in this Quarterly Report on Form 10-Q should be read in conjunction with the Company's Annual Report on Form 10-K for the fiscal year ended October 31, 2017, including "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Quantitative and Qualitative Disclosures About Market Risk" and the Consolidated and Combined Financial Statements and notes thereto included in Items 7, 7A and 8, respectively, included therein.
Principles of Consolidation
The accompanying unaudited Condensed Consolidated Financial Statements include the accounts of the Company and all subsidiaries and affiliates in which the Company has a controlling financial interest or is the primary beneficiary. All intercompany transactions and accounts within the consolidated businesses of the Company have been eliminated.
The Company accounts for investments in companies over which it has the ability to exercise significant influence but does not hold a controlling interest under the equity method of accounting, and the Company records its proportionate share of income or losses in Earnings (loss) from equity interests in the Condensed Consolidated Statements of Earnings.
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
Non-controlling interests are presented as a separate component within Total stockholders' equity in the Condensed Consolidated Balance Sheets. Net earnings attributable to non-controlling interests are recorded within Interest and other, net in the Condensed Consolidated Statements of Earnings and are not presented separately, as they were not material for any period presented.
Segment Realignment and Reclassifications
See Note 3, "Segment Information", for a discussion of the Company's segment realignment.
Use of Estimates
The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the Company's Condensed Consolidated Financial Statements and accompanying notes. Actual results could differ materially from those estimates.
Acquisition
On June 1, 2018 the Company completed the acquisition of Plexxi, a leading provider of software-defined data fabric networking technology. Plexxi's results of operations have been included within the Hybrid IT segment from the date of the acquisition.
Recent Tax Legislation
On December 22, 2017, the Tax Cuts and Jobs Act (the “Tax Act”) was enacted into law. The Tax Act includes significant changes to the U.S. corporate income tax structure, including a federal corporate rate reduction from 35% to 21% effective January 1, 2018; limitations on the deductibility of interest expense and executive compensation; creation of new minimum taxes such as the Base Erosion Anti-abuse Tax (“BEAT”) and the Global Intangible Low Taxed Income (“GILTI”) tax; and the transition of U.S. international taxation from a worldwide tax system to a modified territorial tax system, which will result in a one-time U.S. tax liability on those earnings which have not previously been repatriated to the U.S. (the “Transition Tax”).
In December 2017, the U.S. Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act (“SAB 118”), which allows the Company to record provisional amounts during a measurement period not to extend beyond one year of the enactment date. Due to the complexity involved in applying the provisions of the Tax Act, the Company has not completed the accounting for the effects of the Tax Act, but has made reasonable estimates of the effects and recorded provisional amounts in its Condensed Consolidated Financial Statements for the three and nine months ended July 31, 2018. The accounting for the tax effects of the Tax Act will be completed during the measurement period in accordance with SAB 118. For further details, see Note 7, "Taxes on Earnings".
Recently Adopted Accounting Pronouncements
In March 2018, the Financial Accounting Standards Board (“FASB”) issued guidance that amends ASC 740, Income Taxes, to reflect and codify SAB 118. The guidance became effective upon issuance. The Company applied SAB 118 upon the original issuance in December 2017 prior to the codification. See Note 7, “Taxes on Earnings” for a full description of the impact of the Tax Act to the Company's operations.
In March 2016, the FASB amended the existing accounting standards for employee share-based payment arrangements. The new guidance requires excess tax benefits and tax deficiencies to be recorded in the income statement when stock awards vest or are settled. In addition, cash flows related to excess tax benefits will no longer be separately classified as an inflow from financing activities, with a corresponding outflow from operating activities, but will be classified along with other income tax cash flows as an operating activity. The standard also allows the Company to repurchase more of an employee’s vesting shares for tax withholding purposes without triggering liability accounting and clarifies that all cash payments made to tax authorities on an employee’s behalf for withheld shares should be presented as a financing activity on the statement of cash flows. The Company adopted the guidance in the first quarter of fiscal 2018 and prospectively recorded all excess tax benefits and tax deficiencies arising from stock awards vesting or settled as income tax expense or benefit, rather than in equity. For the three and nine months ended July 31, 2018, the impact of the adoption was the recognition of $26 million and $68 million respectively, of net excess tax benefits as a component of the (provision) benefit for income taxes. The Company elected to continue to estimate forfeitures of awards in determining stock-based compensation expense. The Company elected to apply the presentation requirements for cash flows retrospectively, which resulted in an increase to Net cash provided by operating activities of $441 million and a corresponding increase to Net cash used in financing activities for the nine months ended July
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
31, 2017. There were no other material impacts to the Company's Condensed Consolidated Financial Statements as a result of adopting this standard.
Recently Enacted Accounting Pronouncements
In February 2018, the FASB issued guidance that allows companies to reclassify stranded tax effects resulting from the Tax Act, from accumulated other comprehensive income to retained earnings. The guidance also requires certain new disclosures regardless of the election. The Company is required to adopt the guidance in the first quarter of fiscal 2020. Early adoption is permitted. The Company is currently evaluating the timing and the impact of these amendments to its Condensed Consolidated Financial Statements.
In February 2016, the FASB amended the existing accounting standards for leases. The amendments require lessees to record, at lease inception, a lease liability for the obligation to make lease payments and a right-of-use ("ROU") asset for the right to use the underlying asset for the lease term on their balance sheets. Lessees may elect to not recognize lease liabilities and ROU assets for most leases with terms of 12 months or less. The lease liability is measured at the present value of the lease payments over the lease term. The ROU asset will be based on the liability, adjusted for lease prepayments, lease incentives received, and the lessee's initial direct costs. For finance leases, lease expense will be the sum of interest on the lease obligation and amortization of the ROU asset, resulting in a front-loaded expense pattern. For operating leases, lease expense will generally be recognized on a straight-line basis over the lease term. The amended lessor accounting model is similar to the current model, updated to align with certain changes to the lessee model and the new revenue standard. The current sale-leaseback guidance, including guidance applicable to real estate, is also replaced with a new model for both lessees and lessors. The Company is required to adopt the guidance in the first quarter of fiscal 2020 and early adoption is permitted. In addition, the FASB provided a practical expedient transition method to adopt the new lease requirements by allowing companies to recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption that would enable the Company to not provide comparative period financial statements. Instead, the Company would apply the transition provisions at its effective date. The Company is currently evaluating the timing and the impact of these amendments on its Condensed Consolidated Financial Statements.
In May 2014, the FASB amended the existing accounting standards for revenue recognition. The Company plans to adopt the new revenue standard in the first quarter of fiscal 2019, beginning November 1, 2018, using the modified retrospective method. The Company has completed a review of the accounting systems and processes required to apply the modified retrospective method. In response, the Company is in the process of implementing a new IT solution as part of the adoption of the new standard. The Company expects revenue recognition for its broad portfolio of hardware, software and services offerings to remain largely unchanged. However, the guidance is expected to change the timing of revenue recognition in certain areas, including accounting for certain software licenses. The Company is still assessing the impact of these changes. Since the Company currently expenses sales commissions as incurred, the requirement in the new standard to capitalize certain sales commissions will result in an accounting change for the Company. The Company is in the process of quantifying the impact on its Consolidated Financial Statements. The Company will continue to assess the impact of the new revenue standard as it works through the adoption in fiscal 2018, and there still remain areas to be fully concluded upon.
There have been no other significant changes to the Company's accounting policies or recently adopted or enacted accounting pronouncements disclosed in the Company's Annual Report on Form 10-K for the fiscal year ended October 31, 2017.
Note 2: Discontinued Operations
On April 1, 2017 and September 1, 2017, the Company completed the Everett and Seattle Transactions, respectively. As a result, the financial results of Everett and Seattle are presented as Net loss from discontinued operations in the Condensed Consolidated Statements of Earnings.
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
The following table presents the financial results for HPE's discontinued operations.
|
| | | | | | | | | | | | | | | |
| Three Months Ended July 31, | | Nine Months Ended July 31, |
| 2018 | | 2017 | | 2018 | | 2017 |
| In millions |
Net revenue | $ | — |
| | $ | 708 |
| | $ | — |
| | $ | 8,337 |
|
Cost of revenue(1) | — |
| | 218 |
| | — |
| | 5,838 |
|
Expenses(2) | — |
| | 647 |
| | 51 |
| | 2,888 |
|
Interest and other, net(3) | — |
| | 10 |
| | 68 |
| | 13 |
|
Loss from discontinued operations before taxes | — |
| | (167 | ) | | (119 | ) | | (402 | ) |
(Provision) benefit for taxes | (1 | ) | | 47 |
| | — |
| | 164 |
|
Net loss from discontinued operations | $ | (1 | ) | | $ | (120 | ) | | $ | (119 | ) | | $ | (238 | ) |
| |
(1) | Cost of revenue includes cost of products and services. |
| |
(2) | Expenses for the nine months ended July 31, 2018 primarily consist of separation costs. Expenses for the three and nine months ended July 31, 2017 primarily consist of selling, general and administrative (“SG&A”) expenses, research and development (“R&D”) expenses, restructuring charges, separation costs, amortization of intangible assets, acquisition and other related charges, and defined benefit plan settlement charges and remeasurement (benefit). |
| |
(3) | Interest and other, net for the nine months ended July 31, 2018 primarily consists of tax indemnification adjustments in connection with the Everett and Seattle Transactions. |
For the three and nine months ended July 31, 2017, significant non-cash items of discontinued operations consisted of depreciation and amortization of $44 million and $514 million, respectively. For the nine months ended July 31, 2017, purchases of property, plant and equipment of discontinued operations consisted of $153 million.
Note 3: Segment Information
Hewlett Packard Enterprise's operations are organized into four segments for financial reporting purposes: Hybrid IT, Intelligent Edge, Financial Services ("FS"), and Corporate Investments. Hewlett Packard Enterprise's organizational structure is based on a number of factors that the Chief Operating Decision Maker ("CODM"), the Chief Executive Officer ("CEO"), uses to evaluate, view and run its business operations, which include, but are not limited to, customer base and homogeneity of products and technology. The segments are based on this organizational structure and information reviewed by Hewlett Packard Enterprise's management to evaluate segment results.
A summary description of each segment follows.
Hybrid IT provides a broad portfolio of services-led and software-enabled infrastructure and solutions including secure, software-defined servers, storage, data center networking and HPE Pointnext services, thereby combining HPE's hardware, software and services capabilities to make Hybrid IT simple for its customers. Described below are the business units and capabilities within Hybrid IT.
| |
• | Hybrid IT Product includes Compute, Storage and Data Center Networking ("DC Networking"). |
| |
◦ | Compute offers both Industry Standard Servers ("ISS") as well as Mission-Critical Servers ("MCS") to address the full array of the Company's customers' computing needs. ISS provides a range of products, from entry level servers through premium HPE ProLiant servers. For the most mission-critical workloads, HPE delivers Integrity servers based on the Intel® Itanium® processor, HPE Integrity NonStop solutions and mission-critical x86 ProLiant servers. |
| |
◦ | Storage offers Converged Storage solutions and traditional storage. Converged Storage solutions include All-Flash Arrays and hybrid storage solutions like HPE Nimble Storage, 3PAR StoreServe, StoreOnce, Big Data, StoreVirtual, and Software Defined and Cloud Group storage products. Traditional storage includes tape, storage networking and legacy external disk products such as MSA and XP. |
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
| |
◦ | DC Networking offerings include top-of-rack switches, core switches, and open networking switches. The Company offers a full stack of networking solutions that deliver open, scalable, secure, and agile solutions, by enabling programmable fabric, network virtualization, and network management products. |
| |
• | HPE Pointnext creates preferred IT experiences that power a digital business. The HPE Pointnext team and the Company's extensive partner network provide value across the IT life cycle delivering advice, transformation projects, professional services, support services, and operational services. HPE Pointnext is also a provider of on-premises flexible consumption models that enable IT agility, simplify operations and align costs to business value. HPE Pointnext offerings includes Operational Services, Advisory and Professional Services, and Communications and Media Solutions ("CMS"). |
Intelligent Edge offers unified, software-defined Aruba Mobile First architecture solutions for connectivity in the campus and branch environments, including wireless local area network equipment, mobility and security software, switches, routers, network management products, and associated customer support, as well as industrial IoT solutions.
Financial Services provides flexible investment solutions, such as leasing, financing, IT consumption, and utility programs and asset management services, for customers to enable the creation of unique technology deployment models and acquire complete IT solutions, including hardware, software and services from HPE and others. Providing flexible services and capabilities that support the entire IT life cycle, FS partners with customers globally to help build investment strategies that enhance their business agility and support their business transformation. FS offers a wide selection of investment solution capabilities for large enterprise customers and channel partners, along with an array of financial options to SMBs and educational and governmental entities.
Corporate Investments includes Hewlett Packard Labs and certain business incubation projects.
Segment Policy
There have been no significant changes to the Company's segment accounting policies disclosed in the Company's Annual Report on Form 10-K for the fiscal year ended October 31, 2017, except as described in the 'Segment Realignment' section below.
Hewlett Packard Enterprise periodically engages in intercompany advanced royalty payment and licensing arrangements that may result in advance payments between subsidiaries. Revenues from these intercompany arrangements are deferred and recognized as earned over the term of the arrangement by the Hewlett Packard Enterprise legal entities involved in such transactions; however, these advanced payments are eliminated from revenues as reported by Hewlett Packard Enterprise and its business segments. Hewlett Packard Enterprise executed intercompany advanced royalty payment arrangements resulting in advanced payments of $439 million during the first nine months of fiscal 2017. In these transactions, the payments were received in the U.S. from a foreign consolidated affiliate, with a deferral of intercompany revenues over the term of the arrangements, approximately 15 years. The impact of these intercompany arrangements is eliminated from both Hewlett Packard Enterprise's consolidated and segment net revenues.
Hewlett Packard Enterprise does not allocate to its segments certain operating expenses, which it manages at the corporate level. These unallocated costs include certain corporate costs and eliminations, stock-based compensation expense related to corporate and certain global functions, transformation costs, amortization of intangible assets, acquisition and other related charges, restructuring charges, separation costs and defined benefit plan settlement charges and remeasurement (benefit).
Segment Realignment
Effective at the beginning of the first quarter of fiscal 2018, the Company implemented organizational changes to align its segment financial reporting more closely with its current business structure. These organizational changes primarily include: (i) the transfer of the former Servers and Storage business units, the HPE Pointnext and CMS businesses within the former Technology Services business unit, and the data center networking business within the former Networking business unit, all of which were previously reported within the former Enterprise Group ("EG") segment, to the newly formed Hybrid IT segment; (ii) the transfer of the remaining networking products businesses, which include wireless local area network, campus and branch switching and edge compute within the former Networking business unit, and Aruba services within the former Technology Services business unit, all of which were previously reported within the former EG segment, to the newly formed Intelligent Edge segment; and (iii) the transfer of cloud-related activities previously reported within Corporate Investments to the Hybrid IT segment.
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
The Company reflected these changes to its segment information retrospectively to the earliest period presented, which primarily resulted in the transfer of net revenue, related eliminations of intersegment revenues and operating profit or loss from the former business units and segments to the newly formed business units and segments as described above.
The Company also implemented certain changes to its allocation methodology for stock-based compensation expense and certain corporate costs, which align to its segment financial reporting and are consistent with the manner in which the operating segments will be evaluated for performance on a prospective basis.
The Company reflected these changes retrospectively to the earliest period presented, which resulted in: (i) the transfer of a portion of stock-based compensation expense, which under the prior allocation methodology was not allocated to the segments, to the Hybrid IT, Intelligent Edge and Financial Services segments; and (ii) the transfer of certain corporate function costs previously allocated to the segments to unallocated corporate costs.
These changes had no impact on Hewlett Packard Enterprise's previously reported net revenue, earnings from operations, net earnings, or net earnings per share.
Segment Operating Results
|
| | | | | | | | | | | | | | | | | | | |
| Hybrid IT | | Intelligent Edge | | Financial Services | | Corporate Investments | | Total |
| In millions |
Three months ended July 31, 2018 | |
| | |
| | |
| | |
| | |
|
Net revenue | $ | 6,058 |
| | $ | 784 |
| | $ | 922 |
| | $ | — |
| | $ | 7,764 |
|
Intersegment net revenue and other | 185 |
| | 1 |
| | 6 |
| | — |
| | 192 |
|
Total segment net revenue | $ | 6,243 |
| | $ | 785 |
| | $ | 928 |
| | $ | — |
| | $ | 7,956 |
|
Segment earnings (loss) from operations | $ | 661 |
| | $ | 91 |
| | $ | 73 |
| | $ | (24 | ) | | $ | 801 |
|
Three months ended July 31, 2017 | |
| | |
| | |
| | |
| | |
|
Net revenue | $ | 5,898 |
| | $ | 707 |
| | $ | 896 |
| | $ | — |
| | $ | 7,501 |
|
Intersegment net revenue and other(1) | 182 |
| | 4 |
| | 1 |
| | — |
| | 187 |
|
Total segment net revenue | $ | 6,080 |
| | $ | 711 |
| | $ | 897 |
| | $ | — |
| | $ | 7,688 |
|
Segment earnings (loss) from operations | $ | 482 |
| | $ | 104 |
| | $ | 69 |
| | $ | (24 | ) | | $ | 631 |
|
Nine months ended July 31, 2018 | |
| | |
| |
|
| | |
| | |
|
Net revenue | $ | 18,086 |
| | $ | 2,100 |
| | $ | 2,721 |
| | $ | (1 | ) | | $ | 22,906 |
|
Intersegment net revenue and other | 511 |
| | 15 |
| | 11 |
| | — |
| | 537 |
|
Total segment net revenue | $ | 18,597 |
| | $ | 2,115 |
| | $ | 2,732 |
| | $ | (1 | ) | | $ | 23,443 |
|
Segment earnings (loss) from operations | $ | 1,890 |
| | $ | 155 |
| | $ | 217 |
| | $ | (67 | ) | | $ | 2,195 |
|
Nine months ended July 31, 2017 | |
| | |
| | |
| | |
| | |
|
Net revenue | $ | 16,782 |
| | $ | 1,864 |
| | $ | 2,565 |
| | $ | — |
| | $ | 21,211 |
|
Intersegment net revenue and other(1) | 690 |
| | 23 |
| | 27 |
| | — |
| | 740 |
|
Total segment net revenue | $ | 17,472 |
| | $ | 1,887 |
| | $ | 2,592 |
| | $ | — |
| | $ | 21,951 |
|
Segment earnings (loss) from operations | $ | 1,672 |
| | $ | 166 |
| | $ | 222 |
| | $ | (85 | ) | | $ | 1,975 |
|
| |
(1) | For the three and nine months ended July 31, 2017, the amounts include the elimination of pre-separation intercompany sales to the former Software segment, which are included within Net loss from discontinued operations in the Condensed Consolidated Statements of Earnings. The nine months ended July 31, 2017 also includes the elimination of pre-separation intercompany sales to the former Enterprise Services segment. |
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
The reconciliation of segment operating results to Hewlett Packard Enterprise condensed consolidated results was as follows:
|
| | | | | | | | | | | | | | | |
| Three Months Ended July 31, | | Nine Months Ended July 31, |
| 2018 | | 2017 | | 2018 | | 2017 |
| In millions |
Net Revenue: | | | |
| | |
| | |
|
Total segments | $ | 7,956 |
| | $ | 7,688 |
| | $ | 23,443 |
| | $ | 21,951 |
|
Eliminations of intersegment net revenue and other | (192 | ) | | (187 | ) | | (537 | ) | | (740 | ) |
Total Hewlett Packard Enterprise condensed consolidated net revenue | $ | 7,764 |
| | $ | 7,501 |
| | $ | 22,906 |
| | $ | 21,211 |
|
Earnings before taxes: | |
| | |
| | |
| | |
|
Total segment earnings from operations | $ | 801 |
| | $ | 631 |
| | $ | 2,195 |
| | $ | 1,975 |
|
Unallocated corporate costs and eliminations | (44 | ) | | (88 | ) | | (152 | ) | | (308 | ) |
Unallocated stock-based compensation expense | (14 | ) | | (23 | ) | | (64 | ) | | (90 | ) |
Amortization of intangible assets | (72 | ) | | (97 | ) | | (222 | ) | | (235 | ) |
Restructuring charges | (2 | ) | | (152 | ) | | (14 | ) | | (304 | ) |
Transformation costs | (131 | ) | | (31 | ) | | (499 | ) | | (31 | ) |
Acquisition and other related charges | (24 | ) | | (56 | ) | | (70 | ) | | (150 | ) |
Separation costs | 2 |
| | (5 | ) | | — |
| | (46 | ) |
Defined benefit plan settlement (charges) and remeasurement benefit | — |
| | 22 |
| | — |
| | 38 |
|
Interest and other, net | (64 | ) | | (87 | ) | | (163 | ) | | (251 | ) |
Tax indemnification adjustments | 2 |
| | 10 |
| | (1,342 | ) | | (1 | ) |
Earnings (loss) from equity interests | 11 |
| | 1 |
| | 23 |
| | (24 | ) |
Total Hewlett Packard Enterprise condensed consolidated earnings (loss) from continuing operations before taxes | $ | 465 |
| | $ | 125 |
| | $ | (308 | ) | | $ | 573 |
|
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
Net revenue by segment and business unit was as follows:
|
| | | | | | | | | | | | | | | |
| Three Months Ended July 31, | | Nine Months Ended July 31, |
| 2018 | | 2017 | | 2018 | | 2017 |
| In millions |
Hybrid IT | | | | | | | |
Hybrid IT Product | | | | | | | |
Compute | $ | 3,510 |
| | $ | 3,340 |
| | $ | 10,215 |
| | $ | 9,516 |
|
Storage | 887 |
| | 877 |
| | 2,747 |
| | 2,375 |
|
DC Networking | 59 |
| | 63 |
| | 167 |
| | 157 |
|
Total Hybrid IT Product | 4,456 |
| | 4,280 |
| | 13,129 |
| | 12,048 |
|
HPE Pointnext | 1,787 |
| | 1,800 |
| | 5,468 |
| | 5,424 |
|
Total Hybrid IT | 6,243 |
| | 6,080 |
| | 18,597 |
| | 17,472 |
|
Intelligent Edge | | | | | | | |
HPE Aruba Product | 706 |
| | 642 |
| | 1,890 |
| | 1,683 |
|
HPE Aruba Services | 79 |
| | 69 |
| | 225 |
| | 204 |
|
Total Intelligent Edge | 785 |
| | 711 |
| | 2,115 |
| | 1,887 |
|
Financial Services | 928 |
| | 897 |
| | 2,732 |
| | 2,592 |
|
Corporate Investments | — |
| | — |
| | (1 | ) | | — |
|
Total segment net revenue | 7,956 |
| | 7,688 |
| | 23,443 |
| | 21,951 |
|
Eliminations of intersegment net revenue and other | (192 | ) | | (187 | ) | | (537 | ) | | (740 | ) |
Total Hewlett Packard Enterprise condensed consolidated net revenue | $ | 7,764 |
| | $ | 7,501 |
| | $ | 22,906 |
| | $ | 21,211 |
|
Note 4: Restructuring
Summary of Restructuring Plans
On September 14, 2015, former Parent's Board of Directors approved a restructuring plan (the "2015 Plan") in connection with the Separation. On May 23, 2012, former Parent adopted a multi-year restructuring plan (the "2012 Plan") designed to simplify business processes, accelerate innovation and deliver better results for customers, employees and stockholders. As of October 31, 2017, the 2015 and 2012 Plans were complete.
Restructuring Activity
In connection with the 2015 and 2012 Plans, restructuring charges of $2 million and $152 million have been recorded by the Company for the three months ended July 31, 2018 and 2017, respectively, and $14 million and $304 million for the nine months ended July 31, 2018 and 2017, respectively, based on restructuring activities impacting the Company's employees and infrastructure. For details on restructuring charges related to HPE Next, see Note 5, "HPE Next".
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
Restructuring activities related to the Company's employees and infrastructure for the 2015 and 2012 Plans are presented in the table below:
|
| | | | | | | | | | | | | | | | | | | |
| 2015 Plan | | 2012 Plan | | |
| Employee Severance | | Infrastructure and other | | Employee Severance and EER | | Infrastructure and other | | Total |
| In millions |
Liability as of October 31, 2017 | $ | 219 |
| | $ | 17 |
| | $ | 16 |
| | $ | 2 |
| | $ | 254 |
|
Charges | 5 |
| | (2 | ) | | 12 |
| | (1 | ) | | 14 |
|
Cash payments | (147 | ) | | (8 | ) | | (12 | ) | | — |
| | (167 | ) |
Non-cash items | (3 | ) | | 4 |
| | (1 | ) | | — |
| | — |
|
Liability as of July 31, 2018 | $ | 74 |
| | $ | 11 |
| | $ | 15 |
| | $ | 1 |
| | $ | 101 |
|
Total costs incurred to date, as of July 31, 2018 | $ | 747 |
| | $ | 78 |
| | $ | 1,267 |
| | $ | 145 |
| | $ | 2,237 |
|
Total costs expected to be incurred, as of July 31, 2018 | $ | 747 |
| | $ | 78 |
| | $ | 1,267 |
| | $ | 145 |
| | $ | 2,237 |
|
The current restructuring liabilities related to the plans in the table above, reported in Accrued restructuring in the Condensed Consolidated Balance Sheets at July 31, 2018 and October 31, 2017, were $31 million and $158 million, respectively. The non-current restructuring liabilities related to the plans in the table above, reported in Other liabilities in the Condensed Consolidated Balance Sheets at July 31, 2018 and October 31, 2017, were $70 million and $96 million, respectively.
Note 5: HPE Next
Transformation Costs
The HPE Next initiative is expected to be implemented through fiscal 2020, during which time the Company expects to incur expenses for workforce reductions, to upgrade and simplify its IT infrastructure, and for other non-labor actions. These costs will be partially offset by proceeds resulting from real estate sales.
During the three and nine months ended July 31, 2018, the Company incurred $131 million and $499 million in net charges associated with the HPE Next initiative, which were recorded within Transformation costs in the Condensed Consolidated Statements of Earnings and include the following:
|
| | | | | | | |
| Three months ended July 31, 2018 | | Nine months ended July 31, 2018 |
| In millions |
Program management(1) | $ | 28 |
| | $ | 82 |
|
IT costs | 38 |
| | 107 |
|
Restructuring charges | 129 |
| | 385 |
|
Gain on real estate sales | (77 | ) | | (114 | ) |
Other | 13 |
| | 39 |
|
Total | $ | 131 |
| | $ | 499 |
|
| |
(1) | Primarily consists of consulting fees and other direct costs attributable to the design and execution of the HPE Next initiative. |
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
Restructuring Plan
On October 16, 2017, the Company's Board of Directors approved a restructuring plan in connection with the HPE Next initiative (the "HPE Next Plan"), which will be implemented through fiscal 2020. The changes to the workforce will vary by country, based on business needs, local legal requirements and consultations with employee work councils and other employee representatives, as appropriate, and are expected to be completed during fiscal 2019. As of July 31, 2018, the Company estimates that it will incur aggregate pre-tax restructuring charges of approximately $0.9 billion through fiscal 2020 in connection with the HPE Next Plan, of which approximately $0.7 billion relates to workforce reductions and approximately $0.2 billion relates to infrastructure, primarily real estate site exits.
|
| | | | | | | |
| Employee Severance | | Infrastructure and other |
| In millions |
Liability as of October 31, 2017 | $ | 296 |
| | $ | — |
|
Charges | 347 |
| | 38 |
|
Cash payments | (365 | ) | | (8 | ) |
Non-cash items | (13 | ) | | (8 | ) |
Liability as of July 31, 2018 | $ | 265 |
| | $ | 22 |
|
Total costs incurred to date, as of July 31, 2018 | $ | 643 |
| | $ | 38 |
|
Total costs expected to be incurred, as of July 31, 2018 | $ | 750 |
| | $ | 180 |
|
As of July 31, 2018 and October 31, 2017, the current restructuring liability related to the HPE Next Plan, reported in Accrued restructuring in the Condensed Consolidated Balance Sheets, was $225 million and $287 million, respectively. The non-current restructuring liability related to the HPE Next Plan, reported in Other liabilities in the Condensed Consolidated Balance Sheets as of July 31, 2018 and October 31, 2017 was $62 million and $9 million, respectively.
Note 6: Retirement and Post-Retirement Benefit Plans
The Company's net pension benefit cost for defined benefit plans recognized in the Condensed Consolidated Statements of Earnings for the three and nine months ended July 31, 2018 and 2017, was as follows: |
| | | | | | | | | | | | | | | |
| Three months ended July 31, | | Nine months ended July 31, |
| 2018 | | 2017 | | 2018 | | 2017 |
| In millions |
Service cost | $ | 26 |
| | $ | 36 |
| | $ | 79 |
| | $ | 106 |
|
Interest cost | 55 |
| | 53 |
| | 168 |
| | 155 |
|
Expected return on plan assets | (139 | ) | | (137 | ) | | (423 | ) | | (401 | ) |
Amortization and deferrals: | |
| | |
| | | | |
|
Actuarial loss | 52 |
| | 60 |
| | 158 |
| | 200 |
|
Prior service benefit | (4 | ) | | (4 | ) | | (12 | ) | | (12 | ) |
Net periodic benefit (credit) cost | (10 | ) | | 8 |
| | (30 | ) | | 48 |
|
Settlement loss | 9 |
| | 6 |
| | 11 |
| | 9 |
|
Special termination benefits | 1 |
| | 1 |
| | 5 |
| | 3 |
|
Plan expense allocation(1) | — |
| | (1 | ) | | — |
| | (17 | ) |
Net benefit (credit) cost from continuing operations | — |
| | 14 |
| | (14 | ) | | 43 |
|
Summary of net benefit (credit) cost: | | | | | | | |
Continuing operations | — |
| | 14 |
| | (14 | ) | | 43 |
|
Discontinued operations | — |
| | 3 |
| | — |
| | 83 |
|
Net benefit (credit) cost | $ | — |
| | $ | 17 |
| | $ | (14 | ) | | $ | 126 |
|
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
| |
(1) | Plan expense allocation represents the net cost impact of employees of HPE covered under Everett or Seattle plans and employees of Everett or Seattle covered under HPE plans. |
Net pension benefit cost for the Company's post-retirement benefit plans was not material for the three and nine months ended July 31, 2018 and 2017.
401(k) Plan
Effective January 1, 2018, the Hewlett Packard Enterprise Company 401(k) Plan ("HPE 401(k) Plan") was amended such that quarterly employer matching contributions will be 100% of an employee's contributions, up to a maximum of 4% of eligible compensation. During 2017, the Company's active U.S. employees were eligible to participate in the HPE 401(k) Plan, under which the annual employer matching contribution was 50% of an employee’s contributions, on a maximum of 6% of eligible compensation.
Note 7: Taxes on Earnings
Provision for Taxes
The Company's effective tax rate was 2.8% and (128.0)% for the three months ended July 31, 2018 and 2017, respectively, and 1,003.9% and 89.9% for the nine months ended July 31, 2018 and 2017, respectively. The effective tax rate for three months ended July 31, 2018 was impacted by various items discrete to the quarter. The effective tax rate for nine months ended July 31, 2018 was significantly impacted by the Tax Act and the settlement of certain pre-Separation tax liabilities of HP Inc.
For the three and nine months ended July 31, 2018, the Company recorded $68 million and $3.3 billion of net income tax benefits, respectively, related to various items discrete to the period. For the three months ended July 31, 2018 this amount primarily included $38 million of income tax benefits from the release of non-U.S. valuation allowances on deferred tax assets following changes in foreign tax laws, $33 million of net income tax benefits for impacts related to U.S. tax reform and $26 million of net excess tax benefits related to stock-based compensation partially offset by $7 million of income tax charges related to tax indemnification with HP Inc. For the nine months ended July 31, 2018, this amount primarily included $2.0 billion of income tax benefits for the effects of the settlement of certain pre-Separation income tax liabilities, $713 million of net income tax benefits for impacts related to U.S. tax reform, $228 million of income tax benefits from foreign tax credits and from the release of non-U.S. valuation allowances on deferred tax assets and liabilities established in connection with the Everett Transaction following changes in foreign tax laws, $203 million of income tax benefits related to the liquidation of an insolvent non-U.S. subsidiary, $74 million of net income tax benefits on restructuring charges, separation costs and acquisition and other related charges, $68 million of net excess tax benefits related to stock-based compensation and $38 million of income tax benefits from the release of non-U.S. valuation allowances on deferred tax assets following changes in foreign tax laws.
For the three and nine months ended July 31, 2017, the Company recorded $290 million of net income tax benefits and $236 million of net income tax charges, respectively, related to various items discrete to the period. For the three months ended July 31, 2017, this amount primarily included $189 million of income tax benefits related to the Everett transaction, $61 million of income tax benefits on restructuring charges, separation costs and acquisition and other related charges, $29 million of income tax benefits related to U.S. provision-to-return adjustments, and $25 million of income tax benefits related to the expiration of the statute of limitations on uncertain tax reserves partially offset by $26 million related to tax indemnification with HP Inc. For the nine months ended July 31, 2017, this amount primarily included $473 million of income tax charges from valuation allowances on U.S. state deferred tax assets and $57 million of income tax charges related to tax indemnification with HP Inc., partially offset by $129 million of net income tax benefits on restructuring charges, separation costs and acquisition and other related charges, $79 million of income tax benefits related to the Everett transaction, $29 million of income tax benefits related to U.S. provision-to-return adjustments and $25 million income tax benefits related to the expiration of the statute of limitations on uncertain tax reserves.
Recent Tax Legislation
See Note 1, "Overview and Basis of Presentation", for details related to the Tax Act. The Tax Act requires the Company to incur a one-time Transition Tax on deferred foreign income not previously subject to U.S. income tax at a rate of 15.5% for foreign cash and certain other net current assets and 8% on the remaining income. The GILTI and BEAT provisions of the Tax Act will be effective for the Company beginning November 1, 2018.
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
The Company has an October 31 fiscal year end; therefore, the lower corporate tax rate enacted by the Tax Act will be phased in, resulting in a U.S. statutory federal rate of 23.3% for the fiscal year ending October 31, 2018 and 21% for subsequent fiscal years.
The Company has not completed its accounting for the tax effects of the Tax Act. Reasonable estimates of the impacts of the Tax Act are provided in accordance with guidance from the SEC that allows for a measurement period of up to one year after the enactment date of the Tax Act to finalize the recording of the related tax impacts. Adjustments may materially impact the Company’s provision for income taxes and effective tax rate in the period in which the adjustments are made. The Company expects to complete the accounting under the Tax Act as soon as practicable, but in no event later than one year from the enactment date of the Tax Act.
For the nine months ended July 31, 2018, the Company recorded a provisional estimate of $1.1 billion related to the Transition Tax, which was included in (Provision) benefit for taxes in the Condensed Consolidated Statements of Earnings. The adjustments made in the third quarter of fiscal 2018 were not significant. The final calculations of the Transition Tax may differ from estimates, potentially materially, due to, among other things, changes in interpretations of the Tax Act, analysis of proposed regulations and current and additional guidance from the Internal Revenue Service ("IRS"), the Company’s analysis of the Tax Act, or any updates or changes to estimates that the Company utilized to calculate the transition impacts, including impacts from changes to current year earnings estimates and assertions. No cash payment is anticipated due to the availability of tax attributes to offset the Transition Tax.
In addition, for the nine months ended July 31, 2018, the Company recorded a net $1.8 billion provisional tax benefit related to the remeasurement of U.S. deferred tax assets and liabilities as a result of the reduction of the U.S. corporate tax rate, which was included in (Provision) benefit for taxes in the Condensed Consolidated Statements of Earnings. The adjustments made in the third quarter of fiscal 2018 were not significant. As part of the remeasurement of the net U.S. deferred tax assets, the Company will need to reassess the realizability of certain deferred tax assets, including tax credits and other non-credit deferred tax assets, based on the new method of taxation on non-U.S. earnings applicable beginning in fiscal 2019 and such change may have a material impact. The Company's analysis of the future realization of the deferred tax assets is incomplete.
Regarding the new GILTI tax rules, the Company is required to make an accounting policy election to either treat taxes due on future GILTI inclusions in U.S. taxable income as a current period expense when incurred or reflect such portion of the future GILTI inclusions in U.S. taxable income that relate to existing basis differences in the Company's current measurement of deferred taxes. The Company's analysis of the new GILTI tax rules and how they may impact the Company is in process. Accordingly, the Company has not made a policy election regarding the treatment of the GILTI tax.
Uncertain Tax Positions
As of July 31, 2018 and October 31, 2017, the amount of unrecognized tax benefits was $8.7 billion and $11.3 billion, respectively, of which up to $1.1 billion and $3.0 billion would affect the Company's effective tax rate if realized as of their respective periods. The Company is joint and severally liable for certain pre-Separation tax liabilities of HP Inc. HP Inc. is subject to numerous ongoing audits by federal, state and foreign tax authorities. During the nine months ended July 31, 2018, HP Inc. settled with the IRS on certain matters and closed pre-Separation Hewlett-Packard Company audits for fiscal years 2009 through 2012, for which the Company had been joint and severally liable, resulting in a reduction in the Company's unrecognized tax benefits of $2.6 billion.
The Company recognizes interest income from favorable settlements and interest expense and penalties accrued on unrecognized tax benefits in (Provision) benefit for taxes in the Condensed Consolidated Statements of Earnings. As of July 31, 2018 and October 31, 2017, the Company recorded $179 million and $304 million, respectively, for interest and penalties in the Condensed Consolidated Balance Sheets.
The Company engages in continuous discussions and negotiations with taxing authorities regarding tax matters in various jurisdictions. The Company does not expect complete resolution of any audit cycle within the next 12 months. However, it is reasonably possible that certain federal, foreign and state tax issues may be concluded in the next 12 months, including issues involving transfer pricing, joint and several tax liabilities related to the Separation from HP Inc. and other matters. Accordingly, the Company believes it is reasonably possible that its existing unrecognized tax benefits may be reduced by an amount up to $85 million within the next 12 months.
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
Deferred Tax Assets and Liabilities
Deferred tax assets and liabilities included in the Condensed Consolidated Balance Sheets were as follows:
|
| | | | | | | |
| As of |
| July 31, 2018 | | October 31, 2017 |
| In millions |
Deferred tax assets - long-term | $ | 5,933 |
| | $ | 4,663 |
|
Deferred tax liabilities - long-term | (235 | ) | | (104 | ) |
Deferred tax assets net of deferred tax liabilities | $ | 5,698 |
| | $ | 4,559 |
|
The Company periodically engages in intercompany advanced royalty payment and licensing arrangements that may result in advance payments between subsidiaries in different tax jurisdictions. When the local tax treatment of the intercompany licensing arrangements differs from the U.S. GAAP treatment, deferred taxes are recognized. For further details, see Note 3, "Segment Information".
Tax Matters Agreement and Other Income Tax Matters
In connection with the Separation, the Company entered into a Tax Matters Agreement with HP Inc. In connection with the Everett and Seattle Transactions, the Company entered into a Tax Matters Agreement with DXC and a Tax Matters Agreement with Micro Focus, respectively. For more details, see the Company's Annual Report on Form 10-K for the fiscal year ended October 31, 2017.
Note 8: Balance Sheet Details
Balance sheet details were as follows:
Inventory
|
| | | | | | | |
| As of |
| July 31, 2018 | | October 31, 2017 |
| In millions |
Finished goods | $ | 1,382 |
| | $ | 1,236 |
|
Purchased parts and fabricated assemblies | 1,389 |
| | 1,079 |
|
Total | $ | 2,771 |
| | $ | 2,315 |
|
For the nine months ended July 31, 2018, the increase in inventory was due primarily to higher levels of strategic commodities inventory to support customer demand, increases in memory component costs, and higher inventory of server solutions which have longer time-to-shipment cycles.
Property, Plant and Equipment
|
| | | | | | | |
| As of |
| July 31, 2018 | | October 31, 2017 |
| In millions |
Land | $ | 296 |
| | $ | 312 |
|
Buildings and leasehold improvements | 2,260 |
| | 2,371 |
|
Machinery and equipment, including equipment held for lease | 9,577 |
| | 9,194 |
|
| 12,133 |
| | 11,877 |
|
Accumulated depreciation | (5,949 | ) | | (5,608 | ) |
Total | $ | 6,184 |
| | $ | 6,269 |
|
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
Notes Payable and Short-Term Borrowings
|
| | | | | | | |
| As of |
| July 31, 2018 | | October 31, 2017 |
| In millions |
Current portion of long-term debt | $ | 1,402 |
| | $ | 3,005 |
|
FS commercial paper | 442 |
| | 401 |
|
Notes payable to banks, lines of credit and other(1) | 482 |
| | 444 |
|
Total | $ | 2,326 |
| | $ | 3,850 |
|
| |
(1) | As of July 31, 2018 and October 31, 2017, notes payable to banks, lines of credit and other includes $369 million and $390 million, respectively, of borrowing and funding-related activity associated with FS and its subsidiaries and $113 million and $52 million, respectively, of receivables transferred under factoring arrangements, recorded as short-term borrowings. |
Warranties
The Company's aggregate product warranty liability as of July 31, 2018, and changes during the nine months ended July 31, 2018 were as follows:
|
| | | |
| Nine Months Ended July 31, 2018 |
| In millions |
Balance at beginning of period | $ | 475 |
|
Accruals for warranties issued | 201 |
|
Adjustments related to pre-existing warranties | (6 | ) |
Settlements made | (230 | ) |
Balance at end of period | $ | 440 |
|
Note 9: Financing Receivables and Operating Leases
Financing receivables represent sales-type and direct-financing leases of the Company and third-party products. These receivables typically have terms ranging from two to five years and are usually collateralized by a security interest in the underlying assets. Financing receivables also include billed receivables from operating leases. The components of financing receivables were as follows:
|
| | | | | | | |
| As of |
| July 31, 2018 | | October 31, 2017 |
| In millions |
Minimum lease payments receivable | $ | 8,530 |
| | $ | 8,226 |
|
Unguaranteed residual value | 290 |
| | 272 |
|
Unearned income | (705 | ) | | (654 | ) |
Financing receivables, gross | 8,115 |
| | 7,844 |
|
Allowance for doubtful accounts | (103 | ) | | (86 | ) |
Financing receivables, net | 8,012 |
| | 7,758 |
|
Less: current portion(1) | (3,435 | ) | | (3,378 | ) |
Amounts due after one year, net(1) | $ | 4,577 |
| | $ | 4,380 |
|
| |
(1) | The Company includes the current portion in Financing receivables, and amounts due after one year, net in Long-term financing receivables and other assets, in the accompanying Condensed Consolidated Balance Sheets. |
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
Sale of Financing Receivables
During the three and nine months ended July 31, 2018 and 2017, the Company entered into arrangements to transfer the contractual payments due under certain financing receivables to third party financial institutions. During the nine months ended July 31, 2018 and 2017, the Company sold $127 million and $130 million, respectively, of financing receivables. The gains recognized on the sales of financing receivables were not material for both periods.
Credit Quality Indicators
The credit risk profile of gross financing receivables, based upon internal risk ratings, was as follows:
|
| | | | | | | |
| As of |
| July 31, 2018 | | October 31, 2017 |
| In millions |
Risk Rating: | |
| | |
|
Low | $ | 4,236 |
| | $ | 4,156 |
|
Moderate | 3,697 |
| | 3,556 |
|
High | 182 |
| | 132 |
|
Total | $ | 8,115 |
| | $ | 7,844 |
|
Accounts rated low risk typically have the equivalent of a Standard & Poor's rating of BBB– or higher, while accounts rated moderate risk generally have the equivalent of BB+ or lower. The Company classifies accounts as high risk when it considers the financing receivable to be impaired or when management believes there is a significant near-term risk of impairment.
Allowance for Doubtful Accounts
The allowance for doubtful accounts for financing receivables as of July 31, 2018 and October 31, 2017 and the respective changes during the nine and twelve months then ended were as follows:
|
| | | | | | | |
| As of |
| July 31, 2018 | | October 31, 2017 |
| In millions |
Balance at beginning of period | $ | 86 |
| | $ | 89 |
|
Provision for doubtful accounts | 27 |
| | 23 |
|
Write-offs, net of recoveries | (10 | ) | | (26 | ) |
Balance at end of period | $ | 103 |
| | $ | 86 |
|
The gross financing receivables and related allowance evaluated for loss were as follows:
|
| | | | | | | |
| As of |
| July 31, 2018 | | October 31, 2017 |
| In millions |
Gross financing receivables collectively evaluated for loss | $ | 7,708 |
| | $ | 7,523 |
|
Gross financing receivables individually evaluated for loss | 407 |
| | 321 |
|
Total | $ | 8,115 |
| | $ | 7,844 |
|
Allowance for financing receivables collectively evaluated for loss | $ | 75 |
| | $ | 67 |
|
Allowance for financing receivables individually evaluated for loss | 28 |
| | 19 |
|
Total | $ | 103 |
| | $ | 86 |
|
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
Non-Accrual and Past-Due Financing Receivables
The following table summarizes the aging and non-accrual status of gross financing receivables:
|
| | | | | | | |
| As of |
| July 31, 2018 | | October 31, 2017 |
| In millions |
Billed:(1) | |
| | |
|
Current 1-30 days | $ | 274 |
| | $ | 257 |
|
Past due 31-60 days | 59 |
| | 52 |
|
Past due 61-90 days | 15 |
| | 15 |
|
Past due > 90 days | 84 |
| | 58 |
|
Unbilled sales-type and direct-financing lease receivables | 7,683 |
| | 7,462 |
|
Total gross financing receivables | $ | 8,115 |
| | $ | 7,844 |
|
Gross financing receivables on non-accrual status(2) | $ | 246 |
| | $ | 188 |
|
Gross financing receivables 90 days past due and still accruing interest(2) | $ | 161 |
| | $ | 133 |
|
| |
(1) | Includes billed operating lease receivables and billed sales-type and direct-financing lease receivables. |
| |
(2) | Includes billed operating lease receivables and billed and unbilled sales-type and direct-financing lease receivables. |
Operating Leases
Operating lease assets included in Property, plant and equipment in the Condensed Consolidated Balance Sheets were as follows:
|
| | | | | | | |
| As of |
| July 31, 2018 | | October 31, 2017 |
| In millions |
Equipment leased to customers | $ | 7,486 |
| | $ | 7,356 |
|
Accumulated depreciation | (3,175 | ) | | (2,943 | ) |
Total | $ | 4,311 |
| | $ | 4,413 |
|
Note 10: Goodwill
Goodwill allocated to the Company's reportable segments as of July 31, 2018 and the change in the respective carrying amounts during the nine months then ended were as follows:
|
| | | | | | | | | | | | | | | |
| Hybrid IT | | Intelligent Edge | | Financial Services | | Total |
| In millions |
Balance at October 31, 2017 | $ | 15,454 |
| | $ | 1,918 |
| | $ | 144 |
| | $ | 17,516 |
|
Goodwill acquired during the period | 102 |
| | 3 |
| | — |
| | 105 |
|
Changes due to foreign currency | (1 | ) | | — |
| | — |
| | (1 | ) |
Goodwill adjustments | 6 |
| | — |
| | — |
| | 6 |
|
Balance at July 31, 2018 | $ | 15,561 |
| | $ | 1,921 |
| | $ | 144 |
| | $ | 17,626 |
|
On November 1, 2017, the Company’s former EG segment was realigned into two new reportable segments, Hybrid IT and Intelligent Edge. The Company's reporting units are consistent with the reportable segments identified in Note 3, "Segment Information". As a result of this realignment, the Company performed an interim goodwill impairment analysis for Hybrid IT and Intelligent Edge as of November 1, 2017, which did not result in any impairment charges. The Company will continue to evaluate the recoverability of goodwill at the reporting unit level on an annual basis as of the beginning of its fourth fiscal quarter and whenever events or changes in circumstances indicate there may be a potential impairment.
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
Note 11: Fair Value
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the measurement date.
Fair Value Hierarchy
The Company uses valuation techniques that are based upon observable and unobservable inputs. Observable inputs are developed using market data such as publicly available information and reflect the assumptions market participants would use, while unobservable inputs are developed using the best information available about the assumptions market participants would use.
Assets and liabilities are classified in the fair value hierarchy based on the lowest level input that is significant to the fair value measurement:
Level 1—Quoted prices (unadjusted) in active markets for identical assets or liabilities.
Level 2—Quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability and market-corroborated inputs.
Level 3—Unobservable inputs for the asset or liability.
The fair value hierarchy gives the highest priority to observable inputs and lowest priority to unobservable inputs.
The following table presents the Company's assets and liabilities that are measured at fair value on a recurring basis:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| As of July 31, 2018 | | As of October 31, 2017 |
| Fair Value Measured Using | | | | Fair Value Measured Using | | |
| Level 1 | | Level 2 | | Level 3 | | Total | | Level 1 | | Level 2 | | Level 3 | | Total |
| In millions |
Assets | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
Cash Equivalents and Investments: | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
Time deposits | $ | — |
| | $ | 954 |
| | $ | — |
| | $ | 954 |
| | $ | — |
| | $ | 1,159 |
| | $ | — |
| | $ | 1,159 |
|
Money market funds | 2,461 |
| | — |
| | — |
| | 2,461 |
| | 5,592 |
| | — |
| | — |
| | 5,592 |
|
Foreign bonds | 8 |
| | 129 |
| | — |
| | 137 |
| | 9 |
| | 214 |
| | — |
| | 223 |
|
Other debt securities | — |
| | — |
| | 25 |
| | 25 |
| | — |
| | — |
| | 26 |
| | 26 |
|
Derivative Instruments: | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
Foreign exchange contracts | — |
| | 327 |
| | — |
| | 327 |
| | — |
| | 259 |
| | — |
| | 259 |
|
Other derivatives | — |
| | 2 |
| | — |
| | 2 |
| | — |
| | 1 |
| | — |
| | 1 |
|
Total assets | $ | 2,469 |
| | $ | 1,412 |
| | $ | 25 |
| | $ | 3,906 |
| | $ | 5,601 |
| | $ | 1,633 |
| | $ | 26 |
| | $ | 7,260 |
|
Liabilities | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
Derivative Instruments: | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
Interest rate contracts | $ | — |
| | $ | 336 |
| | $ | — |
| | $ | 336 |
| | $ | — |
| | $ | 142 |
| | $ | — |
| | $ | 142 |
|
Foreign exchange contracts | — |
| | 165 |
| | — |
| | 165 |
| | — |
| | 335 |
| | — |
| | 335 |
|
Total liabilities | $ | — |
| | $ | 501 |
| | $ | — |
| | $ | 501 |
| | $ | — |
| | $ | 477 |
| | $ | |