10-Q 1 hpe-01312017x10q.htm 10-Q Document

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________________________________________________________________________
FORM 10-Q
(Mark One)
 
 
x
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: January 31, 2017
Or
o
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from            to            
Commission file number 001-37483
_______________________________________________________________________________
HEWLETT PACKARD ENTERPRISE COMPANY
(Exact name of registrant as specified in its charter)
Delaware
 
47-3298624
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. employer
identification no.)
3000 Hanover Street, Palo Alto, California
 
94304
(Address of principal executive offices)
 
(Zip code)
(650) 687-5817
(Registrant's telephone number, including area code)
_______________________________________________________________________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 (the "Exchange Act") during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer x
 
Accelerated filer o
 
Non-accelerated filer o
 (Do not check if a smaller
reporting company)
 
Smaller reporting company o
Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act). Yes o No x
The number of shares of Hewlett Packard Enterprise Company common stock outstanding as of February 28, 2017 was 1,657,704,510 shares, par value $0.01.


HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Form 10-Q
For the Quarterly Period Ended January 31, 2017

Table of Contents


2

Forward-Looking Statements
This Quarterly Report on Form 10-Q, including "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Item 2 of Part I, contains forward-looking statements that involve risks, uncertainties and assumptions. If the risks or uncertainties ever materialize or the assumptions prove incorrect, the results of Hewlett Packard Enterprise Company and its consolidated subsidiaries ("Hewlett Packard Enterprise") may differ materially from those expressed or implied by such forward-looking statements and assumptions. The words "believe", "expect", "anticipate", "optimistic", "intend", "aim", "will", "should" and similar expressions are intended to identify such forward-looking statements. All statements other than statements of historical fact are statements that could be deemed forward-looking statements, including but not limited to any projections of revenue, margins, expenses, effective tax rates, net earnings, net earnings per share, cash flows, benefit plan funding, deferred tax assets, share repurchases, currency exchange rates or other financial items; any projections of the amount, timing or impact of cost savings or restructuring charges; any statements of the plans, strategies and objectives of management for future operations, including the completed separation transaction and the previously announced divestiture transactions, the future performance of the company following such divestitures, as well as the execution of restructuring plans and any resulting cost savings, revenue or profitability improvements; any statements concerning the expected development, performance, market share or competitive performance relating to products or services; any statements regarding current or future macroeconomic trends or events and the impact of those trends and events on Hewlett Packard Enterprise and its financial performance; any statements regarding pending investigations, claims or disputes; any statements of expectation or belief; and any statements of assumptions underlying any of the foregoing. Risks, uncertainties and assumptions include the need to address the many challenges facing Hewlett Packard Enterprise's businesses; the competitive pressures faced by Hewlett Packard Enterprise's businesses; risks associated with executing Hewlett Packard Enterprise's strategy, including the previously announced divestiture transactions; the impact of macroeconomic and geopolitical trends and events; the need to manage third-party suppliers and the distribution of Hewlett Packard Enterprise's products and the delivery of Hewlett Packard Enterprise's services effectively; the protection of Hewlett Packard Enterprise's intellectual property assets, including intellectual property licensed from third parties and intellectual property shared with its former Parent; risks associated with Hewlett Packard Enterprise's international operations; the development and transition of new products and services and the enhancement of existing products and services to meet customer needs and respond to emerging technological trends; the execution and performance of contracts by Hewlett Packard Enterprise and its suppliers, customers, clients and partners; the hiring and retention of key employees; integration and other risks associated with business combination and investment transactions; the results of the separation transaction and the execution, timing and results of any restructuring plans, including the anticipated benefits of the divestiture transactions and restructuring plans; the resolution of pending investigations, claims and disputes; and other risks that are described herein, including but not limited to the items discussed in "Risk Factors" in Item 1A of Part I of Hewlett Packard Enterprise's Annual Report on Form 10-K for the fiscal year ended October 31, 2016 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.

3

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

4

HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Condensed Consolidated Statements of Earnings
(Unaudited)
 
Three Months Ended
January 31,
 
2017
 
2016
 
In millions, except per share amounts
Net revenue:
 

 
 

Products
$
4,246

 
$
5,010

Services
7,068

 
7,626

Financing income
93

 
88

Total net revenue
11,407

 
12,724

Costs and expenses:
 

 
 

Cost of products
2,838

 
3,312

Cost of services
5,204

 
5,742

Financing interest
66

 
58

Research and development
485

 
585

Selling, general and administrative
1,759

 
1,998

Amortization of intangible assets
101

 
218

Restructuring charges
177

 
311

Acquisition and other related charges
44

 
37

Separation costs
276

 
79

Defined benefit plan settlement charges and remeasurement (benefit)(1)
(6
)
 
—

Total costs and expenses
10,944

 
12,340

Earnings from operations
463

 
384

Interest and other, net
(78
)
 
(80
)
Tax indemnification adjustments
(18
)
 
15

Loss from equity interests
(22
)
 
—

Earnings before taxes
345

 
319

Provision for taxes
(78
)
 
(52
)
Net earnings
$
267

 
$
267

Net earnings per share:
 

 
 

Basic
$
0.16

 
$
0.15

Diluted
$
0.16

 
$
0.15

Cash dividends declared per share
$
0.13

 
$
0.11

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

 
 

Basic
1,669

 
1,761

Diluted
1,700

 
1,778

 
(1)
Represents adjustment to net periodic pension cost resulting from remeasurements of certain Hewlett Packard Enterprise pension plans due to plan separations in anticipation of the spin-off and merger of Everett SpinCo, Inc. with Computer Sciences Corporation.
The accompanying notes are an integral part of these Condensed
Consolidated Financial Statements.

5

HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Condensed Consolidated Statements of Comprehensive Income
(Unaudited)
 
Three Months Ended
January 31,
 
2017
 
2016
 
 
Net earnings
$
267

 
$
267

Other comprehensive income (loss) before taxes:
 

 
 

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

 
 

Net unrealized (losses) gains arising during the period
(13
)
 
2

Losses reclassified into earnings
—

 
9


(13
)
 
11

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

 
 

Net unrealized gains arising during the period
136

 
142

Net gains reclassified into earnings
(163
)
 
(121
)

(27
)
 
21

Change in unrealized components of defined benefit plans:
 

 
 

Gains arising during the period
479

 
—

Amortization of actuarial loss and prior service benefit
97

 
72

Curtailments, settlements and other
—

 
(18
)

576

 
54

Change in cumulative translation adjustment
(25
)
 
(139
)
Other comprehensive income (loss) before taxes
511

 
(53
)
Provision for taxes
(36
)
 
(24
)
Other comprehensive income (loss), net of taxes
475

 
(77
)
Comprehensive income
$
742

 
$
190

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

6

HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
 
As of
 
January 31, 2017
 
October 31, 2016
 
In millions, except par value
 
(Unaudited)
 
 
ASSETS
 

 
 

Current assets:
 

 
 

Cash and cash equivalents
$
9,858

 
$
12,987

Accounts receivable
6,482

 
6,909

Financing receivables
2,922

 
2,923

Inventory
1,988

 
1,774

Other current assets
4,275

 
4,324

Total current assets
25,525

 
28,917

Property, plant and equipment
9,497

 
9,636

Long-term financing receivables and other assets(1)
13,604

 
13,166

Investments in equity interests
2,620

 
2,648

Goodwill
24,252

 
24,178

Intangible assets
1,164

 
1,084

Total assets
$
76,662

 
$
79,629

LIABILITIES AND STOCKHOLDERS' EQUITY
 

 
 

Current liabilities:
 

 
 

Notes payable and short-term borrowings(1)
$
3,520

 
$
3,530

Accounts payable
5,535

 
5,943

Employee compensation and benefits
1,736

 
2,364

Taxes on earnings
538

 
420

Deferred revenue
4,712

 
4,610

Accrued restructuring
510

 
671

Other accrued liabilities
5,135

 
4,991

Total current liabilities
21,686

 
22,529

Long-term debt(1)
12,270

 
12,560

Other liabilities
11,132

 
13,022

Commitments and contingencies

 

Stockholders' equity
 

 
 

HPE stockholders' equity:
 

 
 

Preferred stock, $0.01 par value (300 shares authorized; none issued and outstanding at January 31, 2017)
—

 
—

Common stock, $0.01 par value (9,600 shares authorized; 1,663 and 1,666 shares issued and outstanding at January 31, 2017 and October 31, 2016, respectively)
17

 
17

Additional paid-in capital
34,848

 
35,248

Retained earnings
2,760

 
2,782

Accumulated other comprehensive loss
(6,124
)
 
(6,599
)
Total HPE stockholders' equity
31,501

 
31,448

Non-controlling interests
73

 
70

Total stockholders' equity
31,574

 
31,518

Total liabilities and stockholders' equity
$
76,662

 
$
79,629

 
(1)
During the first quarter of fiscal 2017, the Company adopted ASU 2015-03, which simplifies the presentation of debt issuance costs by requiring debt issuance costs to be presented as a deduction from the corresponding debt liability rather than an asset that is amortized. The Company adopted the standard retrospectively for the prior period presented.
The accompanying notes are an integral part of these Condensed
Consolidated Financial Statements.

7

HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
 
Three Months Ended
January 31,
 
2017
 
2016
 
In millions
Cash flows from operating activities:
 

 
 

Net earnings
$
267

 
$
267

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

 
 

Depreciation and amortization
840

 
989

Stock-based compensation expense
145

 
165

Provision for doubtful accounts
(8
)
 
6

Provision for inventory
15

 
33

Restructuring charges
177

 
311

Deferred taxes on earnings
(125
)
 
245

Excess tax benefit from stock-based compensation
(74
)
 
(2
)
Loss from equity interests
22

 
—

Other, net
125

 
44

Changes in operating assets and liabilities, net of acquisitions:
 

 
 

Accounts receivable
466

 
612

Financing receivables
126

 
60

Inventory
(132
)
 
(182
)
Accounts payable
(231
)
 
(788
)
Taxes on earnings
(22
)
 
(440
)
Restructuring
(326
)
 
(285
)
Other assets and liabilities(1)
(2,729
)
 
(1,110
)
Net cash used in operating activities
(1,464
)
 
(75
)
Cash flows from investing activities:
 

 
 

Investment in property, plant and equipment
(923
)
 
(832
)
Proceeds from sale of property, plant and equipment
84

 
76

Purchases of available-for-sale securities and other investments
(7
)
 
(144
)
Maturities and sales of available-for-sale securities and other investments
1

 
143

Payments made in connection with business acquisitions, net of cash acquired
(292
)
 
—

(Payments) proceeds from business divestitures, net(2)
(20
)
 
65

Net cash used in investing activities
(1,157
)
 
(692
)
Cash flows from financing activities:
 

 
 

Short-term borrowings with original maturities less than 90 days, net
24

 
2

Issuance of debt
248

 
300

Payment of debt
(262
)
 
(109
)
Settlement of cash flow hedge
—

 
(8
)
Issuance of common stock under employee stock plans
158

 
4

Repurchase of common stock
(641
)
 
(1,197
)
Net transfer from former Parent
—

 
532

Excess tax benefit from stock-based compensation
74

 
2

Cash dividends paid
(109
)
 
(96
)
Net cash used in financing activities
(508
)
 
(570
)
Decrease in cash and cash equivalents
(3,129
)
 
(1,337
)
Cash and cash equivalents at beginning of period
12,987

 
9,842

Cash and cash equivalents at end of period
$
9,858

 
$
8,505

 
(1)
Includes $1.9 billion of funding payments made in the three months ended January 31, 2017 related to pension liabilities in association with the spin-off and merger of Everett SpinCo, Inc. with Computer Sciences Corporation.
(2)
Primarily relates to a H3C working capital adjustment payment in the three months ended January 31, 2017.
The accompanying notes are an integral part of these Condensed
Consolidated Financial Statements.

8

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 the industry's most comprehensive portfolio, spanning the cloud to the data center to workplace applications, its technology and services help customers around the world make information technology ("IT") more efficient, more productive and more secure. 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 ("HP Co."), of 100% of the outstanding shares of Hewlett Packard Enterprise Company to HP Inc.'s stockholders (the "Separation"). Each HP Inc. stockholder of record received one share of Hewlett Packard Enterprise common stock for each share of HP Inc. common stock held on the record date. Approximately 1.8 billion shares of Hewlett Packard Enterprise common stock were distributed on November 1, 2015 to HP Inc. stockholders. In connection with the Separation, Hewlett Packard Enterprise's common stock began trading "regular-way" under the ticker symbol "HPE" on the New York Stock Exchange on November 2, 2015.
In connection with the Separation, the Company entered into a Tax Matters Agreement with former Parent, which resulted in the indemnification of certain pre-Separation tax liabilities. During the fiscal year ended October 31, 2016, Separation-related adjustments totaling $1.2 billion were recorded in stockholders' equity. Separation-related adjustments to equity primarily reflected the impact of the income tax indemnification and the transfer of certain deferred tax assets and liabilities between former Parent and the Company. See Note 18, "Guarantees, Indemnifications and Warranties", for a full description of the Tax Matters Agreement.
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 January 31, 2017 and October 31, 2016, its results of operations for the three months ended January 31, 2017 and 2016 and its cash flows for the three months ended January 31, 2017 and 2016.
The results of operations and cash flows for the three months ended January 31, 2017 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, 2016, 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 other subsidiaries and affiliates in which the Company has a controlling financial interest or is the primary beneficiary. All intercompany transactions and accounts within the consolidated 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.
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.



9
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Notes to Condensed Consolidated and Combined Financial Statements (Continued)
(Unaudited)


September 2016 Announcement of Spin-Off and Merger of Software Segment
On September 7, 2016, the Company announced plans for a spin-off and merger of its Software segment (“Seattle Assets”) with Micro Focus International plc (“Micro Focus”) (collectively, the “Seattle Transaction”), which will create a pure-play enterprise software company. Upon the completion of the Seattle Transaction, which is currently anticipated to close on September 1, 2017, shareholders of Hewlett Packard Enterprise Company will own shares of both Hewlett Packard Enterprise and 50.1% of the new combined company. The transaction is subject to certain customary closing conditions including approval by Micro Focus shareholders, the effective filing of related registration statements, regulatory approvals, the anticipated tax treatment of the Seattle Transaction, the expiration of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and the receipt of certain required foreign anti-trust approvals.
May 2016 Announcement of Enterprise Services Business Spin-Off and Merger
On May 24, 2016, the Company announced plans for a tax-free spin-off and merger of its Enterprise Services business ("Everett" or “Everett SpinCo, Inc.” ) with Computer Sciences Corporation ("CSC") (collectively, the "Everett Transaction"), which will create a pure- play, global IT services company. Upon the completion of the transaction, which is currently targeted to be completed at or near April 1, 2017, shareholders of Hewlett Packard Enterprise Company will own shares of both Hewlett Packard Enterprise and 50.1% of the new combined company. The Everett Transaction is subject to certain customary closing conditions.
Segment Realignment and Reclassifications
The Company has implemented certain segment and business unit realignments in order to align its segment financial reporting more closely with its current business structure. Reclassifications of certain prior year segment and business unit financial information and other financial information have been made to conform to the current year presentation. None of the changes impact the Company's previously reported consolidated net revenue, earnings from operations, net earnings, or net earnings per share ("EPS"). See Note 2, "Segment Information", for a further discussion of the Company's segment realignment.
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.
Accounting Pronouncements
In October 2016, the Financial Accounting Standards Board (“FASB”) amended the existing accounting standards for income taxes. The amendments require the recognition of the income tax consequences for intra-entity transfers of assets other than inventory when the transfer occurs. Under current GAAP, current and deferred income taxes for intra-entity asset transfers are not recognized until the asset has been sold to an outside party. The amendments should be applied on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. The Company is required to adopt the guidance in the first quarter of fiscal 2019. Early adoption is permitted. The Company is currently evaluating the timing and the impact of these amendments on its Condensed Consolidated Financial Statements.
In August 2016, the FASB amended the existing accounting standards for the statement of cash flows. The amendments provide guidance on eight classification issues related to the statement of cash flows. The Company is required to adopt the guidance in the first quarter of fiscal 2019. The amendments should be applied retrospectively to all periods presented. For issues that are impracticable to apply retrospectively, the amendments may be applied prospectively as of the earliest date practicable. Early adoption is permitted, including adoption in an interim period. The Company is currently evaluating the timing and the impact of these amendments on its Condensed Consolidated Financial Statements.
In June 2016, the FASB amended the existing accounting standards for the measurement of credit losses. The amendments require an entity to estimate its lifetime expected credit loss for most financial instruments, including trade and lease receivables, and record an allowance for the portion of the amortized cost the entity does not expect to collect. The estimate of expected credit losses should consider historical information, current information, and reasonable and supportable forecasts, including estimates of prepayments. The Company is required to adopt the guidance in the first quarter of fiscal 2021.

10
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Notes to Condensed Consolidated and Combined Financial Statements (Continued)
(Unaudited)

Early adoption is permitted beginning in fiscal 2020. The Company is currently evaluating the timing and the impact of these amendments on its Condensed Consolidated Financial Statements.
In March 2016, the FASB amended the existing accounting standards for employee share-based payment arrangements. The amendments require all excess tax benefits and tax deficiencies associated with share-based payments to be recognized as income tax expense or income tax benefit, respectively, rather than as additional paid-in capital. The amendments also increase the amount an employer can withhold in order to cover income taxes on awards, allows companies to recognize forfeitures of awards as they occur, and requires companies to present excess tax benefits from stock-based compensation as an operating activity in the statement of cash flows rather than as a financing activity. The Company is required to adopt the guidance in the first quarter of fiscal 2018. Early adoption is permitted. The Company is currently evaluating the timing and the impact of these amendments on its Condensed Consolidated 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 using a modified retrospective approach. Early adoption is permitted. The Company is currently evaluating the timing and the impact of these amendments on its Condensed Consolidated Financial Statements.
In April 2015, the FASB amended the existing accounting standards for intangible assets. The amendments provide explicit guidance to customers in determining the accounting for fees paid in a cloud computing arrangement, wherein the arrangements that do not convey a software license to the customer are accounted for as service contracts. The amendments also eliminate the practice of accounting for software licenses as executory contracts which may result in more software assets being capitalized. The Company adopted the amendments in the first quarter of fiscal 2017 and applied them retrospectively to all periods presented, as permitted by the standard. The adoption of these amendments did not have a material impact on the Company's Condensed Consolidated Financial Statements.
In April 2015, the FASB amended the existing accounting standards for imputation of interest. The amendments require that debt issuance costs related to a recognized debt liability be presented on the classified balance sheet as a direct deduction from the carrying amount of the related debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs is not affected by these amendments. The Company adopted the amendments in the first quarter of fiscal 2017 and applied them retrospectively to all periods presented. For fiscal 2016, the adoption resulted in the reclassification of $50 million of debt issuance costs from Long-term financing receivables and other assets to Notes payable and short-term borrowings and Long-term debt on the Condensed Consolidated Balance Sheets. The adoption of these amendments did not have a material impact on the Company's Condensed Consolidated Financial Statements.
In May 2014, the FASB amended the existing accounting standards for revenue recognition. The amendments are based on the principle that revenue should be recognized to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. In August 2015, the FASB issued an accounting standard update for a one year deferral of the effective date, with an option of applying the standard on the original effective date, which for the Company is the first quarter of fiscal 2018. In accordance with this deferral, the Company is required to adopt these amendments in the first quarter of fiscal 2019. The amendments may be applied retrospectively to each prior period presented or retrospectively with the cumulative effect recognized as of the date of initial application. The Company plans to adopt the new revenue standard in the first quarter of fiscal 2019, beginning November 1, 2018, using the modified retrospective method, and is currently assessing the impact on its Condensed Consolidated Financial Statements.

11
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)

Note 2: Segment Information
Hewlett Packard Enterprise's operations are organized into five segments for financial reporting purposes: the Enterprise Group ("EG"), Enterprise Services ("ES"), Software, Financial Services ("FS"), and Corporate Investments. Hewlett Packard Enterprise's organizational structure is based on a number of factors that the Chief Operating Decision Maker ("CODM"), Meg Whitman, uses to evaluate, view and run its business operations, which include, but are not limited to, customer base and homogeneity of products and technology. The segments are based on this organizational structure and information reviewed by Hewlett Packard Enterprise's management to evaluate segment results.
A summary description of each segment follows.
The Enterprise Group provides servers, storage, networking, and technology services that, when combined with Hewlett Packard Enterprise's Cloud solutions, enable customers to manage applications across virtual private cloud, private cloud and traditional IT environments. Described below are the business units and capabilities within EG.
•
Servers offers both Industry Standard Servers ("ISS") as well as Mission-Critical Servers ("MCS") to address the full array of the Company's customers' computing needs. ISS provides a range of products, from entry level servers through premium HPE ProLiant servers, which run primarily on Windows, Linux and virtualization platforms from software providers including Microsoft Corporation ("Microsoft") and VMware, Inc. ("VMware") and open sourced software from other major vendors while leveraging x86 processors from Intel Corporation ("Intel") and Advanced Micro Devices ("AMD"). For the most mission-critical workloads, HPE delivers Integrity servers based on the Intel® Itanium® processor, HPE Integrity NonStop solutions and mission critical x86 ProLiant servers.

•
Storage offers Converged Storage solutions and traditional storage. Converged Storage solutions include 3PAR all-flash arrays, 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, EVA and XP.

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

•
Technology Services creates preferred IT experiences that power a digital business. The Technology Services 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 for Hybrid IT and at the IT Edge. Technology Services is also a provider of on-premises flexible consumption models that enable IT agility, simplify operations and align costs to business value. Some of the offerings include Data Center Care, Proactive Care, Technology Consulting, Aruba Services, and Communications and Media Solutions ("CMS").

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

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

•
Application and Business Services helps clients develop, revitalize and manage their applications and information assets and provides end-to-end, industry-specific business process services.
Software provides comprehensive solutions across application testing and delivery management, big data analytics and applications, enterprise security, information management and governance and IT operations management for organizations of varying sizes, from small- to medium- to large-scale enterprises. These software offerings include licenses, support, professional services, and software-as-a-service ("SaaS").
Financial Services provides flexible investment solutions, such as leasing, financing, IT consumption, and utility programs and asset management services, for customers to enable the creation of unique technology deployment models and acquire complete IT solutions, including hardware, software and services from Hewlett Packard Enterprise and others. Providing flexible services and capabilities that support the entire IT life cycle, FS partners with customers globally to help

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

build investment strategies that enhance their business agility and support their business transformation. FS offers a wide selection of investment solution capabilities for large enterprise customers and channel partners, along with an array of financial options to SMBs and educational and governmental entities.
Corporate Investments includes Hewlett Packard Labs and certain cloud-related business incubation projects, among others.
Segment Policy
Hewlett Packard Enterprise derives the results of the business segments directly from its internal management reporting system. The accounting policies that Hewlett Packard Enterprise uses to derive segment results are substantially the same as those the consolidated company uses. The CODM measures the performance of each segment based on several metrics, including earnings from operations. The CODM uses these results, in part, to evaluate the performance of, and to allocate resources to, each of the segments.
Segment revenue includes revenues from sales to external customers and intersegment revenues that reflect transactions between the segments on an arm's-length basis. Intersegment revenues primarily consist of sales of hardware and software that are sourced internally and, in the majority of the cases, are financed as operating leases by FS to our customers. Hewlett Packard Enterprise's consolidated net revenue is derived and reported after the elimination of intersegment revenues from such arrangements.
Hewlett Packard Enterprise periodically engages in intercompany advanced royalty payment and licensing arrangements that may result in advance payments between subsidiaries. Revenues from these intercompany arrangements are deferred and recognized as earned over the term of the arrangement by the Hewlett Packard Enterprise legal entities involved in such transactions; however, these advanced payments are eliminated from revenues as reported by Hewlett Packard Enterprise and its business segments. As disclosed in Note 6, "Taxes on Earnings", Hewlett Packard Enterprise executed intercompany advanced royalty payment arrangements resulting in advanced payments of $439 million during the first quarter of fiscal 2017 and $3.7 billion during fiscal 2016. In these transactions, the payments were received in the U.S. from a foreign consolidated affiliate, with a deferral of intercompany revenues over the term of the arrangements, approximately 5 years. The impact of these intercompany arrangements are eliminated from both Hewlett Packard Enterprise consolidated and segment net revenues.
Financing interest in the Condensed Consolidated Statements of Earnings reflects interest expense on borrowing- and funding-related activities associated with FS and its subsidiaries, and debt issued by Hewlett Packard Enterprise, a portion of the proceeds of which benefited FS.
Hewlett Packard Enterprise does not allocate to its segments certain operating expenses, which it manages at the corporate level. These unallocated costs include separation costs, restructuring charges, stock-based compensation expense, amortization of intangible assets, certain corporate governance costs, acquisition and other related charges, and defined benefit plan settlement charges and remeasurement benefit.

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

Segment Realignment
Effective at the beginning of the first quarter of fiscal 2017, the Company implemented organizational changes to align its segment financial reporting more closely with its current business structure. These organizational changes resulted in: (i) within the Enterprise Group segment, primarily, the transfer of the big data storage product group previously reported within the Servers business unit to the Storage business unit; the transfer of the Aruba services capabilities previously reported within the Networking business unit to the Technology Services business unit; and (ii) the transfer of the Communications and Media Solutions product group previously reported within the Enterprise Services segment to the Technology Services business unit within the Enterprise Group segment.
The Company reflected these changes to its segment information retrospectively to the earliest period presented, which resulted in: (i) within the Enterprise Group segment, primarily, the transfer of net revenue from the big data storage product group previously reported within the Servers business unit to the Storage business unit; the transfer of net revenue from the Aruba services capabilities previously reported within the Networking business unit to the Technology Services business unit; and (ii) the transfer of net revenue, related eliminations of intersegment revenues and operating profit from the Communications and Media Solutions product group previously reported within the Application and Business Services business unit in the Enterprise Services segment to the Technology Services business unit within the Enterprise Group segment.
The changes within the Enterprise Group segment had no impact on Hewlett Packard Enterprise's previously reported Enterprise Group segment net revenue and earnings from operations. The change between the Enterprise Services and Enterprise Group segments had no impact on Hewlett Packard Enterprise's previously reported consolidated net revenue, earnings from operations, net earnings or net earnings per share.
There have been no material changes to the total assets of Hewlett Packard Enterprise's individual segments since October 31, 2016.


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

Segment Operating Results
 
Enterprise
Group
 
Enterprise
Services
 
Software
 
Financial
Services
 
Corporate
Investments
 
Total
 
In millions
Three months ended January 31, 2017
 

 
 

 
 

 
 

 
 

 
 

Net revenue
$
6,097

 
$
3,852

 
$
654

 
$
804

 
$
—

 
$
11,407

Intersegment net revenue and other
228

 
185

 
67

 
19

 
—

 
499

Total segment net revenue
$
6,325

 
$
4,037

 
$
721

 
$
823

 
$
—

 
$
11,906

Segment earnings (loss) from operations
$
802

 
$
283

 
$
154

 
$
78

 
$
(43
)
 
$
1,274

Three months ended January 31, 2016
 

 
 

 
 

 
 

 
 

 
 

Net revenue
$
6,882

 
$
4,367

 
$
720

 
$
754

 
$
1

 
$
12,724

Intersegment net revenue and other
300

 
188

 
60

 
22

 
—

 
570

Total segment net revenue
$
7,182

 
$
4,555

 
$
780

 
$
776

 
$
1

 
$
13,294

Segment earnings (loss) from operations
$
964

 
$
218

 
$
136

 
$
100

 
$
(99
)
 
$
1,319

The reconciliation of segment operating results to Hewlett Packard Enterprise condensed consolidated results was as follows:
 
Three Months Ended
January 31,
 
2017
 
2016
 
In millions
Net Revenue:
 

 
 

Total segments
$
11,906

 
$
13,294

Elimination of intersegment net revenue and other
(499
)
 
(570
)
Total Hewlett Packard Enterprise condensed consolidated net revenue
$
11,407

 
$
12,724

Earnings before taxes:
 

 
 

Total segment earnings from operations
$
1,274

 
$
1,319

Corporate and unallocated costs and eliminations
(74
)
 
(125
)
Stock-based compensation expense
(145
)
 
(165
)
Amortization of intangible assets
(101
)
 
(218
)
Restructuring charges
(177
)
 
(311
)
Acquisition and other related charges
(44
)
 
(37
)
Separation costs
(276
)
 
(79
)
Defined benefit plan settlement charges and remeasurement benefit
6

 
—

Interest and other, net
(78
)
 
(80
)
Tax indemnification adjustments
(18
)
 
15

Loss from equity interests
(22
)
 
—

Total Hewlett Packard Enterprise condensed consolidated earnings before taxes
$
345

 
$
319


15
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
January 31,
 
2017
 
2016
 
In millions
Servers
$
3,103

 
$
3,536

Technology Services
1,943

 
1,985

Storage
730

 
837

Networking
549

 
824

Enterprise Group
6,325

 
7,182

Infrastructure Technology Outsourcing
2,637

 
2,874

Application and Business Services
1,400

 
1,681

Enterprise Services
4,037

 
4,555

Software
721

 
780

Financial Services
823

 
776

Corporate Investments
—

 
1

Total segment net revenue
11,906

 
13,294

Elimination of intersegment net revenue and other        
(499
)
 
(570
)
Total Hewlett Packard Enterprise condensed consolidated net revenue
$
11,407

 
$
12,724

Note 3: Restructuring
Summary of Restructuring Plans
Restructuring charges of $177 million and $311 million have been recorded by the Company for the three months ended January 31, 2017 and 2016, respectively, based on restructuring activities impacting the Company's employees and infrastructure. Restructuring activities related to the Company's employees and infrastructure, summarized by plan, are presented in the table below:
 
Fiscal 2015 Plan
 
Fiscal 2012 Plan
 
Other Plans
 
 
 
Employee
Severance
 
Infrastructure
and other
 
Employee
Severance
and EER
 
Infrastructure
and other
 
Employee
Severance
 
Infrastructure
and other
 
Total
 
In millions
Liability as of October 31, 2016
$
629

 
$
35

 
$
139

 
$
23

 
$
1

 
$
10

 
$
837

Charges
123

 
58

 
—

 
—

 
—

 
(4
)
 
177

Cash payments
(260
)
 
(37
)
 
(26
)
 
(2
)
 
—

 
(1
)
 
(326
)
Non-cash items
(18
)
 
(22
)
 
(3
)
 
—

 
—

 
—

 
(43
)
Liability as of January 31, 2017
$
474

 
$
34

 
$
110

 
$
21

 
$
1

 
$
5

 
$
645

Total costs incurred to date, as of January 31, 2017
$
1,406

 
$
276

 
$
3,980

 
$
546

 
$
1,997

 
$
1,123

 
$
9,328

Total costs expected to be incurred, as of January 31, 2017
$
2,158

 
$
451

 
$
3,980

 
$
546

 
$
1,997

 
$
1,123

 
$
10,255

The current restructuring liability reported in Accrued restructuring in the Condensed Consolidated Balance Sheets at January 31, 2017 and October 31, 2016 was $510 million and $671 million, respectively. The non-current restructuring liability reported in Other liabilities in the Condensed Consolidated Balance Sheets at January 31, 2017 and October 31, 2016 was $135 million and $166 million, respectively.

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

Fiscal 2015 Restructuring Plan
On September 14, 2015, former Parent's Board of Directors approved a restructuring plan (the "2015 Plan") in connection with the Separation, which will be implemented through fiscal 2018. As of January 31, 2017, the Company expects up to approximately 30,000 employees to exit the Company by the end of 2018. The changes to the workforce will vary by country, based on local legal requirements and consultations with employee work councils and other employee representatives, as appropriate. As of January 31, 2017, the Company estimates that it will incur aggregate pre-tax charges of approximately $2.6 billion through fiscal 2018 in connection with the 2015 Plan, of which approximately $2.2 billion relates to workforce reductions and approximately $0.4 billion primarily relates to real estate consolidation and asset impairments.
In May 2016, the Company announced plans for the Everett Transaction. The completion of this transaction will result in lower costs being incurred by the Company in connection with the 2015 Plan, the extent of which will depend on a number of factors.
Fiscal 2012 Restructuring Plan
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, 2015, the Company had eliminated 42,100 positions in connection with the 2012 Plan, with a portion of those employees exiting the Company as part of voluntary enhanced early retirement ("EER") programs in the U.S. and in certain other countries. As of January 31, 2017, the plan is substantially complete, with no further positions being eliminated. The Company recognized $4.5 billion in total aggregate charges in connection with the 2012 Plan, with approximately $4.0 billion related to workforce reductions, including the EER programs, and approximately $0.5 billion related to infrastructure, including data center and real estate consolidation and other items. The severance- and infrastructure-related cash payments associated with the 2012 Plan are expected to be paid out through fiscal 2021.
Other Plans
As of January 31, 2017, restructuring plans initiated by former Parent in fiscal 2008 and 2010 are substantially complete. Severance- and infrastructure-related cash payments associated with these plans are expected to be paid out through fiscal 2019.
Note 4: Retirement and Post-Retirement Benefit Plans
Pension Benefit Expense
The Company's total net pension benefit cost recognized in the Condensed Consolidated Statement of Earnings was $65 million and $29 million for the three months ended January 31, 2017 and 2016, respectively. The amount for the first quarter of fiscal 2017 includes pre-tax expense of $33 million related to the Everett Transaction, which has been recorded within Separation costs in the Condensed Consolidated Statements of Earnings and a pre-tax benefit of $6 million resulting from remeasurements of certain Hewlett Packard Enterprise pension plans in association with the Everett Transaction, which has been recorded within Defined benefit plan settlement charges and remeasurement benefit in the Condensed Consolidated Statements of Earnings.

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

 
Three months ended January 31,
 
Non-U.S. Defined
Benefit Plans
 
Post-Retirement
Benefit Plans
 
2017
 
2016
 
2017
 
2016
 
 
Service cost
$
55

 
$
64

 
$
1

 
$
1

Interest cost
91

 
141

 
1

 
2

Expected return on plan assets
(181
)
 
(254
)
 
—

 
(1
)
Amortization and deferrals:
 

 
 

 
 

 
 

Actuarial loss (gain)
104

 
79

 
(1
)
 
(1
)
Prior service benefit
(6
)
 
(6
)
 
—

 
—

Net periodic benefit cost
63

 
24

 
1

 
1

Settlement loss
—

 
4

 
—

 
—

Special termination benefits
1

 
—

 
—

 
—

Net benefit cost
$
64

 
$
28

 
$
1

 
$
1

Employer Contributions and Funding Policy
The Company's policy is to fund its pension plans so that it makes at least the minimum contribution required by local government, funding and taxing authorities.
HPE previously disclosed in its Consolidated Financial Statements for the fiscal year ended October 31, 2016 that it expected to contribute approximately $348 million in fiscal 2017 to its non-U.S. pension plans, approximately $2 million to cover benefit payments to its U.S. non-qualified plan participants and approximately $3 million to cover benefit claims for the Company's post-retirement benefit plans. During the remainder of fiscal 2017, HPE now anticipates making additional contributions of approximately $290 million to its non-U.S. pension plans, approximately $2 million to its U.S. non-qualified plan participants and expects to pay approximately $2 million to cover benefit claims under the Company's post-retirement benefit plans.
In connection with the Everett Transaction, there will be a transfer of pension liabilities for certain pension plans to Everett SpinCo, Inc. As of January 31, 2017, the transfer is targeted to be completed at or near April 1, 2017. The approximate net pension liability to be transferred is pursuant to the transaction agreements, wherein the Company is obligated to fund the transferred net pension liability in excess of $570 million. The Company initially estimated the total funding amount to be in the range of $2.0 billion to $3.0 billion. The Company currently estimates the total funding amount to be approximately $1.9 billion, which equals the payment made by the Company in the first quarter of fiscal 2017. However, the exact amount of the funding will not be known until the transaction completion date.
During the three months ended January 31, 2017, the Company contributed $1,943 million to its non-U.S. pension plans, which includes the $1,885 million of funding payment associated with the Everett Transaction, and paid $1 million to cover benefit claims under the Company's post-retirement benefit plans.
The Company's pension and other post-retirement benefit costs and obligations depend on various assumptions. Differences between expected and actual returns on investments and changes in discount rates and other actuarial assumptions are reflected as unrecognized gains or losses, and such gains or losses are amortized to earnings in future periods. A deterioration in the funded status of a plan could result in a need for additional company contributions or an increase in net pension and post-retirement benefit costs in future periods. Actuarial gains or losses are determined at the measurement date and amortized over the remaining service life for active plans or the life expectancy of plan participants for closed plans. During the first quarter of fiscal 2017, the Company changed its method used to estimate the service and interest cost components of net periodic benefit cost for defined benefit plans to a full yield curve approach with costs calculated at individual annual spot rates.
Note 5: Stock-Based Compensation
In conjunction with the Separation, the Company adopted the Hewlett Packard Enterprise Company 2015 Stock Incentive Plan (the "Plan"). The Plan became effective on November 1, 2015. The total number of shares of the Company's common

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

stock authorized under the Plan was 260 million. On January 25, 2017, the Company amended the Plan and reduced the authorized shares of common stock to 210 million shares. The Plan provides for the grant of various types of awards including restricted stock awards, stock options and performance-based awards. These awards generally vest over 3 years from the grant date.
In connection with the Separation, the Company granted one-time retention stock awards, with a total grant date fair value of approximately $137 million to certain executives in the first quarter of fiscal 2016. These awards generally vest over 3 years from the grant date.
Stock-Based Compensation Expense
Stock-based compensation expense and the resulting tax benefits were as follows:
 
Three Months Ended
January 31,
 
2017
 
2016
 
In millions
Stock-based compensation expense
$
174

 
$
165

Income tax benefit
(59
)
 
(50
)
Stock-based compensation expense, net of tax
$
115

 
$
115

In May 2016, in connection with the announcement of the Everett Transaction, the Company modified its stock-based compensation program such that certain unvested equity awards outstanding on May 24, 2016 will vest upon the earlier of: (i) the termination of an employee’s employment with HPE as a direct result of an announced sale, divestiture or spin-off of a subsidiary, division or other business; (ii) the termination of an employee’s employment with HPE without cause; or (iii) June 1, 2018. This modification also includes changes to the performance and market conditions of certain performance-based awards. As a result, for the three months ended January 31, 2017, stock-based compensation expense in the table above includes pre-tax expense of $12 million, which has been recorded within Separation costs, $12 million related to workforce reductions, which has been recorded within Restructuring charges and $5 million related to the acquisition of Silicon Graphics International Corp. ("SGI"), which has been recorded within Acquisition and other related charges in the Condensed Consolidated Statements of Earnings.
Restricted Stock Units
Restricted stock units have forfeitable dividend equivalent rights equal to the dividend paid on common stock. Restricted stock units do not have the voting rights of common stock, and the shares underlying restricted stock units are not considered issued and outstanding upon grant. The fair value of the restricted stock units is the close price of the Company's common stock on the grant date of the award. The Company expenses the fair value of restricted stock units ratably over the period during which the restrictions lapse.
A summary of restricted stock unit activity is as follows:
 
Three Months Ended
January 31, 2017
 
Shares
 
Weighted-Average Grant Date Fair Value Per Share
 
In thousands
 
 
Outstanding at beginning of period
57,321

 
$
15

Granted and assumed through acquisition
10,077

 
$
24

Vested
(24,209
)
 
$
15

Forfeited
(787
)
 
$
16

Outstanding at end of period
42,402

 
$
17

At January 31, 2017, there was $529 million of unrecognized pre-tax stock-based compensation expense related to unvested restricted stock units, which the Company expects to recognize over the remaining weighted-average vesting period of 1.3 years.

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

Stock Options
Stock options granted under the Company's principal equity plans are generally non-qualified stock options, but the principal equity plans permitted some options granted to qualify as incentive stock options under the U.S. Internal Revenue Code. The exercise price of a stock option is equal to the closing price of the Company's common stock on the option grant date. The majority of the stock options issued by the Company contain only service vesting conditions. The Company also issued performance-contingent stock options that vest only on the satisfaction of both service and market conditions.
The Company utilizes the Black-Scholes-Merton option pricing formula to estimate the fair value of stock options subject to service-based vesting conditions. The Company estimates the fair value of stock options subject to performance-contingent vesting conditions using a combination of a Monte Carlo simulation model and a lattice model, as these awards contain market conditions. The weighted-average fair value and the assumptions used to measure fair value were as follows:
 
Three Months Ended
January 31, 2017
Weighted-average fair value(1)
$
6

Expected volatility(2)
25.7
%
Risk-free interest rate(3)
2.0
%
Expected dividend yield(4)
1.0
%
Expected term in years(5)
6.1

 
(1)
The weighted-average fair value was based on the fair value of stock options granted during the period.
(2)
The expected volatility was estimated using the average historical volatility of selected peer companies.
(3)
The risk-free interest rate was estimated based on the yield on U.S. Treasury zero-coupon issues.
(4)
The expected dividend yield represents a constant dividend yield applied for the duration of the expected term of the award.
(5)
For awards subject to service-based vesting, the expected term was estimated using the simplified method detailed in SEC Staff Accounting Bulletin No. 110, for performance-contingent awards the expected term represents an output from the lattice model.
A summary of stock option activity is as follows:
 
Three months ended January 31, 2017
 
Shares
 
Weighted-
Average
Exercise
Price
 
Weighted-
Average
Remaining
Contractual
Term
 
Aggregate
Intrinsic
Value
 
In thousands
 
 
 
In years
 
In millions
Outstanding at beginning of period
57,498

 
$
15

 
 
 
 

Granted and assumed through acquisition
4,888

 
$
25

 
 
 
 

Exercised
(8,432
)
 
$
15

 
 
 
 

Forfeited/canceled/expired
(368
)
 
$
16

 
 
 
 

Outstanding at end of period
53,586

 
$
16

 
5.1
 
$
379

Vested and expected to vest at end of period
52,377

 
$
16

 
5.1
 
$
374

Exercisable at end of period
34,524

 
$
14

 
4.0
 
$
292

The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value that option holders would have realized had all option holders exercised their options on the last trading day of the first quarter of fiscal 2017. The aggregate intrinsic value is the difference between the Company's closing common stock price on the last trading day of the first quarter of fiscal 2017 and the exercise price, multiplied by the number of in-the-money options. The total intrinsic value of options exercised for the three months ended January 31, 2017 was $73 million.
At January 31, 2017, there was $63 million of unrecognized pre-tax, stock-based compensation expense related to stock options, which the Company expects to recognize over the remaining weighted-average vesting period of 2.0 years.

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

Employee Stock Purchase Plan
Effective November 1, 2015, the Company adopted the Hewlett Packard Enterprise Company 2015 Employee Stock Purchase Plan ("ESPP"). The total number of shares of Company's common stock authorized under the ESPP was 80 million. The ESPP allows eligible employees to contribute up to 10% of their eligible compensation to purchase Hewlett Packard Enterprise's common stock. The ESPP provides for a discount not to exceed 15% and an offering period of up to 24 months. The Company currently offers 6-month offering periods during which employees have the ability to purchase shares at 95% of the closing market price on the purchase date. No stock-based compensation expense was recorded in connection with those purchases, as the criteria of a non-compensatory plan were met.
Note 6: Taxes on Earnings
Provision for Taxes
The Company's effective tax rate was 22.6% and 16.3% for the three months ended January 31, 2017 and 2016, respectively. HPE's effective tax rate generally differs from the U.S. federal statutory rate of 35% due to favorable tax rates associated with certain earnings from the Company's operations in lower-tax jurisdictions throughout the world. HPE has not provided U.S. taxes for all foreign earnings because the Company plans to reinvest some of those earnings indefinitely outside the U.S.
For the three months ended January 31, 2017, HPE recorded $108 million of net income tax benefits related to various items discrete to the period. The amounts primarily included a tax benefit of $138 million on restructuring charges, separation costs and acquisition and other related charges, partially offset by $19 million of income tax charges related to pre-Separation tax matters.
For the three months ended January 31, 2016, HPE recorded $110 million of net income tax benefits related to various items discrete to the period. These amounts primarily included a tax benefit of $104 million on restructuring charges, separation costs and acquisition and other related charges.
Uncertain Tax Positions
The Company is subject to income tax in the U.S. and approximately 110 other countries and is subject to routine corporate income tax audits in many of these jurisdictions. In addition, former Parent, whose liabilities for which the Company is jointly and severally liable, is subject to numerous ongoing audits by federal, state and foreign tax authorities. The Company believes it has provided adequate reserves for all tax deficiencies or reductions in tax benefits that could result from federal, state and foreign tax audits. The Company regularly assesses the likely outcomes of these audits in order to determine the appropriateness of the Company’s tax provision. The Company adjusts its uncertain tax positions to reflect the impact of negotiations, settlements, rulings, advice of legal counsel, and other information and events pertaining to a particular audit. However, income tax audits are inherently unpredictable and there can be no assurance that the Company will accurately predict the outcome of these audits. The amounts ultimately paid on resolution of an audit could be materially different from the amounts previously included in the Provision for taxes and therefore the resolution of one or more of these uncertainties in any particular period could have a material impact on net income or cash flows.
As of January 31, 2017 and October 31, 2016, the amount of unrecognized tax benefits was $11.7 billion and $11.6 billion, respectively, of which up to $3.1 billion would affect the Company's effective tax rate if realized as of their respective periods.
Hewlett Packard Enterprise recognizes interest income from favorable settlements and interest expense and penalties accrued on unrecognized tax benefits in Provision for taxes in the Condensed Consolidated Statements of Earnings. As of January 31, 2017 and October 31, 2016, the Company recorded $426 million and $423 million, respectively, for interest and penalties in the Condensed Consolidated Balance Sheets.
Hewlett Packard Enterprise engages in continuous discussions and negotiations with taxing authorities regarding tax matters in various jurisdictions. Hewlett Packard Enterprise does not expect complete resolution of any U.S. Internal Revenue Service ("IRS") audit cycle within the next 12 months. However, it is reasonably possible that certain federal, foreign and state tax issues may be concluded in the next 12 months, including issues involving transfer pricing and other matters. Accordingly, Hewlett Packard Enterprise believes it is reasonably possible that its existing unrecognized tax benefits may be reduced by an amount up to $2.7 billion within the next 12 months.

21
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
 
January 31, 2017
 
October 31, 2016
 
In millions
Deferred tax assets - long-term
$
4,477

 
$
4,430

Deferred tax liabilities - long-term
(140
)
 
(143
)
Deferred tax assets net of deferred tax liabilities
$
4,337

 
$
4,287

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 U.S. GAAP treatment, deferred taxes are recognized. Hewlett Packard Enterprise executed intercompany advanced royalty payment arrangements resulting in advanced payments of $439 million during the first quarter of fiscal 2017 and $3.7 billion during fiscal 2016. In these transactions, the payments were received in the U.S. from a foreign consolidated affiliate, with a deferral of intercompany revenues over the term of the arrangements, approximately 5 years. Intercompany royalty revenue and the amortization expense related to the licensing rights are eliminated in consolidation.
Tax Matters Agreement and Other Income Tax Matters
In connection with the Separation, the Company entered into a Tax Matters Agreement with HP Inc., formerly Hewlett-Packard Company. See Note 18, "Guarantees, Indemnifications and Warranties", for a full description of the Tax Matters Agreement.
Note 7: Balance Sheet Details
Balance sheet details were as follows:
Accounts Receivable, Net
 
As of
 
January 31, 2017
 
October 31, 2016
 
In millions
Accounts receivable, billed
$
5,411

 
$
5,907

Unbilled receivable
1,140

 
1,086

Accounts receivable, gross
6,551

 
6,993

Allowance for doubtful accounts
(69
)
 
(84
)
Total
$
6,482

 
$
6,909

The allowance for doubtful accounts related to accounts receivable and changes to the allowance were as follows:
 
Three Months Ended
January 31, 2017
 
In millions
Balance at beginning of year
$
84

Deductions, net of recoveries
(16
)
Addition from acquisition
1

Balance at end of period
$
69

The Company has third-party revolving short-term financing arrangements intended to facilitate the working capital requirements of certain customers. The recourse obligations associated with these short-term financing arrangements as of January 31, 2017 and October 31, 2016 were not material.

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

The activity related to Hewlett Packard Enterprise's revolving short-term financing arrangements was as follows:
 
Three Months Ended
January 31, 2017
 
In millions
Balance at beginning of period(1)
$
145

Trade receivables sold
838

Cash receipts
(886
)
Foreign currency and other
(2
)
Balance at end of period(1)
$
95

 
(1)
Beginning and ending balances represent amounts for trade receivables sold, but not yet collected.
Inventory
 
As of
 
January 31, 2017
 
October 31, 2016
 
In millions
Finished goods
$
1,245

 
$
1,202

Purchased parts and fabricated assemblies
743

 
572

Total
$
1,988

 
$
1,774

For the three months ended January 31, 2017, the increase in Inventory was due primarily to $86 million of inventory added as a result of the acquisition of SGI, along with higher inventory resulting from an increase in memory component prices due to supply constraints.
Property, Plant and Equipment
 
As of
 
January 31, 2017
 
October 31, 2016
 
In millions
Land
$
498

 
$
497

Buildings and leasehold improvements
6,977

 
6,948

Machinery and equipment, including equipment held for lease
14,330

 
14,300

 
21,805

 
21,745

Accumulated depreciation
(12,308
)
 
(12,109
)
Total
$
9,497

 
$
9,636

For the three months ended January 31, 2017, the change in gross property, plant and equipment was due primarily to $724 million of purchases and a $93 million addition of certain property, plant and equipment resulting from the SGI acquisition, partially offset by $737 million of sales and retirements and $18 million of unfavorable currency impacts. Accumulated depreciation associated with the assets sold and retired was $607 million.

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

Long-Term Financing Receivables and Other Assets
 
As of
 
January 31, 2017
 
October 31, 2016
 
In millions
Financing receivables, net
$
3,811

 
$
3,938

Deferred tax assets
4,477

 
4,430

Prepaid pension assets
965

 
377

Deferred costs - long-term
826

 
822

Other
3,525

 
3,599

Total
$
13,604

 
$
13,166

For the three months ended January 31, 2017, the change in Long-term financing receivables and other assets was due primarily to an increase in Prepaid pension assets. The increase was due primarily to pension funding payments in anticipation of the Everett Transaction.
Other Accrued Liabilities
 
As of
 
January 31, 2017
 
October 31, 2016
 
In millions
Accrued taxes - other
$
1,156

 
$
1,297

Warranty - short-term
281

 
258

Sales and marketing programs
755

 
858

Other
2,943

 
2,578

Total
$
5,135

 
$
4,991

Other Liabilities
 
As of
 
January 31, 2017
 
October 31, 2016
 
In millions
Pension, post-retirement and post-employment liabilities
$
2,352

 
$
4,230

Deferred revenue - long-term
3,450

 
3,408

Deferred tax liability - long-term
140

 
143

Tax liability - long-term
3,910

 
4,057

Other long-term liabilities
1,280

 
1,184

Total
$
11,132

 
$
13,022

For the three months ended January 31, 2017, the change in Other liabilities was due primarily to a decrease in Pension, post-retirement and post-employment liabilities. The decrease was due primarily to pension funding payments in anticipation of the Everett Transaction.

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

Note 8: Financing Receivables and Operating Leases
Financing receivables represent sales-type and direct-financing leases of the Company and third-party products. These receivables typically have terms ranging from two to five years and are usually collateralized by a security interest in the underlying assets. Financing receivables also include billed receivables from operating leases. The components of financing receivables were as follows:
 
As of
 
January 31, 2017
 
October 31, 2016
 
In millions
Minimum lease payments receivable
$
7,158

 
$
7,293

Unguaranteed residual value
235

 
231

Unearned income
(576
)
 
(574
)
Financing receivables, gross
6,817

 
6,950

Allowance for doubtful accounts
(84
)
 
(89
)
Financing receivables, net
6,733

 
6,861

Less: current portion(1)
(2,922
)
 
(2,923
)
Amounts due after one year, net(1)
$
3,811

 
$
3,938

 
(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.
Credit Quality Indicators
Due to the homogeneous nature of its leasing transactions, the Company manages its financing receivables on an aggregate basis when assessing and monitoring credit risk. Credit risk is generally diversified due to the large number of entities comprising the Company's customer base and their dispersion across many different industries and geographic regions. The Company evaluates the credit quality of an obligor at lease inception and monitors that credit quality over the term of a transaction. The Company assigns risk ratings to each lease based on the creditworthiness of the obligor and other variables that augment or mitigate the inherent credit risk of a particular transaction. Such variables include the underlying value and liquidity of the collateral, the essential use of the equipment, the term of the lease, and the inclusion of credit enhancements, such as guarantees, letters of credit or security deposits.
The credit risk profile of gross financing receivables, based upon internal risk ratings, was as follows:
 
As of
 
January 31, 2017
 
October 31, 2016
 
In millions
Risk Rating:
 

 
 

     Low
$
3,378

 
$
3,484

     Moderate
3,355

 
3,382

     High
84

 
84

        Total
$
6,817

 
$
6,950

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.

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

Allowance for Doubtful Accounts
The allowance for doubtful accounts for financing receivables is comprised of a general reserve and a specific reserve. The Company maintains general reserve percentages on a regional basis and bases such percentages on several factors, including consideration of historical credit losses and portfolio delinquencies, trends in the overall weighted-average risk rating of the portfolio, current economic conditions and information derived from competitive benchmarking. The Company excludes accounts evaluated as part of the specific reserve from the general reserve analysis. The Company establishes a specific reserve for financing receivables with identified exposures, such as customer defaults, bankruptcy or other events, that make it unlikely the Company will recover its investment. For individually evaluated receivables, the Company determines the expected cash flow for the receivable, which includes consideration of estimated proceeds from disposition of the collateral, and calculates an estimate of the potential loss and the probability of loss. For those accounts where a loss is considered probable, the Company records a specific reserve. The Company generally writes off a receivable or records a specific reserve when a receivable becomes 180 days past due, or sooner if the Company determines that the receivable is not collectible.
The allowance for doubtful accounts for financing receivables as of January 31, 2017 and October 31, 2016 and the respective changes during the three and twelve months then ended were as follows:
 
As of
 
January 31, 2017
 
October 31, 2016
 
In millions
Balance at beginning of period
$
89

 
$
95

Provision for doubtful accounts
2

 
11

Write-offs
(7
)
 
(17
)
   Balance at end of period
$
84

 
$
89

The gross financing receivables and related allowance evaluated for loss were as follows:
 
As of
 
January 31, 2017
 
October 31, 2016
 
In millions
Gross financing receivables collectively evaluated for loss
$
6,546

 
$
6,667

Gross financing receivables individually evaluated for loss
271

 
283

Total
$
6,817

 
$
6,950

Allowance for financing receivables collectively evaluated for loss
$
66

 
$
73

Allowance for financing receivables individually evaluated for loss
18

 
16

Total
$
84

 
$
89

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

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

The following table summarizes the aging and non-accrual status of gross financing receivables:
 
As of
 
January 31, 2017
 
October 31, 2016
 
In millions
Billed:(1)
 

 
 

Current 1-30 days
$
302

 
$
337

Past due 31-60 days
47

 
47

Past due 61-90 days
23

 
12

Past due > 90 days
63

 
59

Unbilled sales-type and direct-financing lease receivables
6,382

 
6,495

Total gross financing receivables
$
6,817

 
$
6,950

Gross financing receivables on non-accrual status(2)
$
180

 
$
163

Gross financing receivables 90 days past due and still accruing interest(2)
$
91

 
$
120

 
(1)
Includes billed operating lease receivables and billed sales-type and direct-financing lease receivables.
(2)
Includes billed operating lease receivables and billed and unbilled sales-type and direct-financing lease receivables.
Operating Leases
Operating lease assets included in machinery and equipment in the Condensed Consolidated Balance Sheets were as follows:
 
As of
 
January 31, 2017
 
October 31, 2016
 
In millions
Equipment leased to customers
$
5,481

 
$
5,467

Accumulated depreciation
(2,176
)
 
(2,134
)
Total
$
3,305

 
$
3,333

Note 9: Acquisitions
Acquisitions
During the first three months of fiscal 2017, the Company completed the acquisition of SGI, a global leader in high-performance solutions for computer data analytics and data management. SGI's results of operations are included within the EG segment. The acquisition date fair value consideration of $349 million consisted of cash paid for outstanding common stock, debt and the estimated fair value of earned unvested stock awards assumed by the Company. In connection with this acquisition, the Company recorded approximately $76 million of goodwill, $150 million of intangible assets, and $30 million of in-process research and development. The Company will amortize the intangible assets on a straight-line basis over an estimated weighted-average useful life of five years. Goodwill is not deductible for tax purposes.
The purchase price allocation for acquisitions may reflect various preliminary fair value estimates and analysis, including preliminary work performed by third-party valuation specialists, certain tangible assets and liabilities acquired, the valuation of intangible assets acquired, certain legal matters, income and income based taxes, and residual goodwill, which are subject to change within the measurement period as valuations are finalized. Measurement period adjustments are recorded in the reporting period in which the estimates are finalized and adjustment amounts are determined.
In January 2017, the Company entered into a definitive agreement to acquire SimpliVity, a leading provider of software-defined, hyperconverged infrastructure, for $650 million in cash. SimpliVity's results of operations will be included within the EG segment. The transaction closed on February 17, 2017.

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

In March 2017, the Company entered into a definitive agreement to acquire Nimble Storage, Inc. ("Nimble"), a provider of predictive all-flash and hybrid-flash storage solutions. The Company will pay $12.50 per share in cash, representing a net cash purchase price at closing of $1.0 billion. Nimble's results of operations will be included within the EG segment.
Note 10: Goodwill and Intangible Assets
Goodwill
Goodwill allocated to the Company's reportable segments as of January 31, 2017 and changes in the respective carrying amounts during the three months then ended were as follows:
 
Enterprise
Group
 
Enterprise
Services(1)
 
Software
 
Financial
Services
 
Total
 
In millions
Balance at October 31, 2016(1)
$
15,945

 
$
—

 
$
8,089

 
$
144

 
$
24,178

Goodwill acquired during the period
76

 
—

 
—

 
—

 
76

Changes due to foreign currency
(1
)
 
—

 
—

 
—

 
(1
)
Goodwill adjustments
(1
)
 
—

 
—

 
—

 
(1
)
Balance at January 31, 2017(1)
$
16,019

 
$
—

 
$
8,089

 
$
144

 
$
24,252

 
(1)
Goodwill is net of accumulated impairment losses of $13.7 billion which were recorded prior to October 31, 2016. Of that amount, $8.0 billion relates to the Enterprise Services segment and the remaining $5.7 billion relates to the Software segment.

Goodwill is tested for impairment at the reporting unit level. As of January 31, 2017, the Company's reporting units are consistent with the reportable segments identified in Note 2. The Company will continue to evaluate the recoverability of goodwill on an annual basis as of the beginning of its fourth fiscal quarter and whenever events or changes in circumstances indicate there may be a potential impairment.
Intangible Assets
The Company's intangible assets are composed of:
 
As of January 31, 2017
 
As of October 31, 2016
 
Gross
 
Accumulated
Amortization
 
Accumulated
Impairment
Loss
 
Net
 
Gross
 
Accumulated
Amortization
 
Accumulated
Impairment
Loss
 
Net
 
In millions
Customer contracts, customer lists and distribution agreements
$
1,453

 
$
(342
)
 
$
(856
)
 
$
255

 
$
1,394

 
$
(322
)
 
$
(856
)
 
$
216

Developed and core technology and patents
4,261

 
(1,304
)
 
(2,138
)
 
819

 
4,190

 
(1,232
)
 
(2,138
)
 
820

Trade name and trademarks
193

 
(24
)
 
(109
)
 
60

 
178

 
(21
)
 
(109
)
 
48

In-process research and development
30

 
—

 
—

 
30

 
—

 
—

 
—

 
—

Total intangible assets
$
5,937

 
$
(1,670
)
 
$
(3,103
)
 
$
1,164

 
$
5,762

 
$
(1,575
)
 
$
(3,103
)
 
$
1,084

The increase in gross intangible assets during the first three months of fiscal 2017 was due primarily to $150 million of intangible assets and $30 million of in-process research and development in connection with the SGI acquisition. Intangible asset amortization expense for the three months ended January 31, 2017 and 2016 was $101 million and $218 million, respectively.

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

In-process research and development consists of efforts that are in process on the date the Company acquires a business. Under the accounting guidance for intangible assets, in-process research and development acquired in a business combination is considered an indefinite-lived intangible asset until completion or abandonment of the associated research and development efforts. The Company begins amortizing its in-process research and development intangible assets upon completion of the projects. If an in-process research and development project is abandoned, the Company records an expense for the value of the related intangible asset to its Condensed Consolidated Statement of Earnings in the period of abandonment. No in-process research and development projects were completed or abandoned during the three months ended January 31, 2017.
As of January 31, 2017, estimated future amortization expense related to finite-lived intangible assets was as follows:
Fiscal year:
 
In millions
2017 (remaining 9 months)
 
$
279

2018
 
278

2019
 
231

2020
 
202

2021
 
62

2022
 
34

Thereafter
 
48

Total
 
$
1,134

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.

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

The following table presents the Company's assets and liabilities that are measured at fair value on a recurring basis:
 
As of January 31, 2017
 
As of October 31, 2016
 
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
$
—

 
$
3,662

 
$
—

 
$
3,662

 
$
—

 
$
4,085

 
$
—

 
$
4,085

Money market funds
3,069

 
—

 
—

 
3,069

 
6,549

 
—

 
—

 
6,549

Equity securities in public companies
22

 
—

 
—

 
22

 
17

 
—

 
—

 
17

Foreign bonds
8

 
263

 
—

 
271

 
8

 
279

 
—

 
287

Other debt securities
—

 
—

 
35

 
35

 
—

 
—

 
35

 
35

Derivative Instruments:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Interest rate contracts
—

 
—

 
—

 
—

 
—

 
109

 
—

 
109

Foreign exchange contracts
—

 
550

 
—

 
550

 
—

 
660

 
—

 
660

Other derivatives
—

 
1

 
—

 
1

 
—

 
—

 
—

 
—

Total assets
$
3,099

 
$
4,476

 
$
35

 
$
7,610

 
$
6,574

 
$
5,133

 
$
35

 
$
11,742

Liabilities
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Derivative Instruments:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Interest rate contracts
$
—

 
$
159

 
$
—

 
$
159

 
$
—

 
$
6

 
$
—

 
$
6

Foreign exchange contracts
—

 
238

 
—

 
238

 
—

 
220

 
—

 
220

Other derivatives
—

 
—

 
—

 
—

 
—

 
2

 
—

 
2

Total liabilities
$
—

 
$
397

 
$
—

 
$
397

 
$
—

 
$
228

 
$
—

 
$
228

During the three months ended January 31, 2017, there were no transfers between levels within the fair value hierarchy.
Valuation Techniques
Cash Equivalents and Investments: The Company holds time deposits, money market funds, other debt securities primarily consisting of corporate and foreign government notes and bonds, and common stock and equivalents. The Company values cash equivalents and equity investments using quoted market prices, alternative pricing sources, including net asset value, or models utilizing market observable inputs. The fair value of debt investments was based on quoted market prices or model-driven valuations using inputs primarily derived from or corroborated by observable market data, and, in certain instances, valuation models that utilize assumptions which cannot be corroborated with observable market data.
Derivative Instruments: The Company uses forward contracts, interest rate and total return swaps to hedge certain foreign currency and interest rate exposures. The Company uses 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, the Company and counterparties' credit risk, foreign currency exchange rates, and forward and spot prices for currencies and interest rates. See Note 12, "Financial Instruments", for a further discussion of the Company's use of derivative instruments.

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

Other Fair Value Disclosures
Short- and Long-Term Debt: The Company estimates the fair value of its debt primarily using an expected present value technique, which is based on observable market inputs using interest rates currently available to companies of similar credit standing for similar terms and remaining maturities, and considering its own credit risk. The portion of the Company's debt that is hedged is reflected in the Condensed Consolidated Balance Sheets as an amount equal to the debt's carrying amount and a fair value adjustment representing changes in the fair value of the hedged debt obligations arising from movements in benchmark interest rates. At January 31, 2017, the estimated fair value of the Company's short-term and long-term debt was $16.0 billion and the carrying value was $15.8 billion. At October 31, 2016, the estimated fair value of the Company's short-term and long-term debt was $16.3 billion and the carrying value was $16.1 billion. If measured at fair value in the Condensed Consolidated Balance Sheets, short-term and long-term debt would be classified as Level 2 in the fair value hierarchy.
Other Financial Instruments: For the balance of the Company's financial instruments, primarily accounts receivable, accounts payable and financial liabilities included in other accrued liabilities, the carrying amounts approximate fair value due to their short periods of time to maturity. If measured at fair value in the Condensed Consolidated Balance Sheets, these other financial instruments would be classified as Level 2 or Level 3 in the fair value hierarchy.
Non-Marketable Equity Investments and Non-Financial Assets: The Company's non-marketable equity investments and non-financial assets, such as intangible assets, goodwill and property, plant and equipment, are recorded at fair value in the period an impairment charge is recognized. If measured at fair value in the Condensed Consolidated Balance Sheets, these would generally be classified as Level 3 in the fair value hierarchy.
Note 12: Financial Instruments
Cash Equivalents and Available-for-Sale Investments
Cash equivalents and available-for-sale investments were as follows:
 
As of January 31, 2017
 
As of October 31, 2016
 
Cost
 
Gross
Unrealized
Gain
 
Gross
Unrealized
Loss
 
Fair
Value
 
Cost
 
Gross
Unrealized
Gain
 
Gross
Unrealized
Loss
 
Fair
Value
 
In millions
Cash Equivalents:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Time deposits
$
3,651

 
$
—

 
$
—

 
$
3,651

 
$
4,074

 
$
—

 
$
—

 
$
4,074

Money market funds
3,069

 
—

 
—

 
3,069

 
6,549

 
—

 
—

 
6,549

Total cash equivalents
6,720

 
—

 
—

 
6,720

 
10,623

 
—

 
—

 
10,623

Available-for-Sale Investments:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Debt securities:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Time deposits
11

 
—

 
—

 
11

 
11

 
—

 
—

 
11

Foreign bonds
219

 
52

 
—

 
271

 
218

 
69

 
—

 
287

Other debt securities
47

 
—

 
(12
)
 
35

 
47

 
—

 
(12
)
 
35

Total debt securities
277

 
52

 
(12
)
 
317

 
276

 
69

 
(12
)
 
333

Equity securities:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Equity securities in public companies
22

 
—

 
—

 
22

 
21

 
—

 
(4
)
 
17

Total equity securities
22

 
—

 
—

 
22

 
21

 
—

 
(4
)
 
17

Total available-for-sale investments
299

 
52

 
(12
)
 
339

 
297

 
69

 
(16
)
 
350

Total cash equivalents and available-for-sale investments
$
7,019

 
$
52

 
$
(12
)
 
$
7,059

 
$
10,920

 
$
69

 
$
(16
)
 
$
10,973


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

All highly liquid investments with original maturities of three months or less at the date of acquisition are considered cash equivalents. As of January 31, 2017 and October 31, 2016, the carrying amount of cash equivalents approximated fair value due to the short period of time to maturity. Time deposits were primarily issued by institutions outside the U.S. as of January 31, 2017 and October 31, 2016. The estimated fair value of the available-for-sale investments may not be representative of values that will be realized in the future.
The gross unrealized loss as of January 31, 2017 and October 31, 2016 was due primarily to a decline in the fair value of a debt security of $12 million for both periods, which has been in a continuous loss position for more than twelve months. The Company does not intend to sell this debt security, and it is not likely that the Company will be required to sell this debt security prior to the recovery of the amortized cost.
Contractual maturities of investments in available-for-sale debt securities were as follows:
 
January 31, 2017
 
Amortized
Cost
 
Fair Value
 
In millions
Due in more than five years
$
277

 
$
317

Equity securities in privately held companies that are accounted for as cost basis investments are included in Long-term financing receivables and other assets in the Condensed Consolidated Balance Sheets. These investments amounted to $129 million and $128 million at January 31, 2017 and October 31, 2016, respectively.
Investments in equity securities that are accounted for using the equity method are included in Investments in equity interests in the Condensed Consolidated Balance Sheets. These investments amounted to $2.6 billion at both January 31, 2017 and October 31, 2016. For further details, see Note 19, "Equity Method Investments".
Derivative Instruments
Hewlett Packard Enterprise is a global company exposed to foreign currency exchange rate fluctuations and interest rate changes in the normal course of its business. As part of its risk management strategy, the Company uses derivative instruments, primarily forward contracts, interest rate swaps and total return swaps to hedge certain foreign currency, interest rate and, to a lesser extent, equity exposures. The Company's objective is to offset gains and losses resulting from these exposures with losses and gains on the derivative contracts used to hedge them, thereby reducing volatility of earnings or protecting the fair value of assets and liabilities. The Company does not have any leveraged derivatives and does not use derivative contracts for speculative purposes. The Company may designate its derivative contracts as fair value hedges, cash flow hedges or hedges of the foreign currency exposure of a net investment in a foreign operation ("net investment hedges"). Additionally, for derivatives not designated as hedging instruments, the Company categorizes those economic hedges as other derivatives. Derivative instruments directly attributable to the Company are recognized at fair value in the Condensed Consolidated Balance Sheets. The change in fair value of the derivative instruments is recognized in the Condensed Consolidated Statements of Earnings or Condensed Consolidated Statements of Comprehensive Income depending upon the type of hedge, as further discussed below. The Company classifies cash flows from its derivative programs with the activities that correspond to the underlying hedged items in the Condensed Consolidated Statements of Cash Flows.
As a result of its use of derivative instruments, the Company is exposed to the risk that its counterparties will fail to meet their contractual obligations. To mitigate counterparty credit risk, the Company has a policy of only entering into derivative contracts with carefully selected major financial institutions based on their credit ratings and other factors, and the Company maintains dollar risk limits that correspond to each financial institution's credit rating and other factors. The Company's established policies and procedures for mitigating credit risk include reviewing and establishing limits for credit exposure and periodically reassessing the creditworthiness of its counterparties. Master netting agreements also mitigate credit exposure to counterparties by permitting the Company to net amounts due from the Company to a counterparty against amounts due to the Company from the same counterparty under certain conditions.
To further mitigate credit exposure to counterparties, the Company has collateral security agreements, which allow the Company to hold collateral from, or require the Company to post collateral to, counterparties when aggregate derivative fair values exceed contractually established thresholds which are generally based on the credit ratings of the Company and its counterparties. If the Company's credit rating falls below a specified credit rating, the counterparty has the right to request full collateralization of the derivatives' net liability position. Conversely, if the counterparty's credit rating falls below a specified credit rating, the Company has the right to request full collateralization of the derivatives' net liability position. Collateral is

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

generally posted within two business days. The fair value of the Company's derivatives, with credit contingent features, in a net liability position was $135 million and $9 million at January 31, 2017 and October 31, 2016, respectively, all of which were fully collateralized within two business days.
Under the Company's derivative contracts, the counterparty can terminate all outstanding trades following a covered change of control event affecting the Company that results in the surviving entity being rated below a specified credit rating. This credit contingent provision did not affect the Company's financial position or cash flows as of January 31, 2017 and October 31, 2016.
Fair Value Hedges
The Company issues long-term debt in U.S. dollars based on market conditions at the time of financing. The Company may enter into fair value hedges, such as interest rate swaps, to reduce the exposure of its debt portfolio to changes in fair value resulting from changes in interest rates by achieving a primarily U.S. dollar LIBOR-based floating interest rate. The swap transactions generally involve principal and interest obligations for U.S. dollar-denominated amounts. Alternatively, the Company may choose not to swap fixed for floating interest payments or may terminate a previously executed swap if it believes a larger proportion of fixed-rate debt would be beneficial. When investing in fixed-rate instruments, the Company may enter into interest rate swaps that convert the fixed interest payments into variable interest payments and may designate these swaps as fair value hedges.
For derivative instruments that are designated and qualify as fair value hedges, the Company recognizes the change in fair value of the derivative instrument, as well as the offsetting change in the fair value of the hedged item, in Interest and other, net in the Condensed Consolidated Statements of Earnings in the period of change.
Cash Flow Hedges
The Company uses forward contracts designated as cash flow hedges to protect against the foreign currency exchange rate risks inherent in its forecasted net revenue and, to a lesser extent, cost of sales, operating expenses, and intercompany loans denominated in currencies other than the U.S. dollar. The Company's foreign currency cash flow hedges mature generally within twelve months; however, forward contracts associated with sales-type and direct-financing leases and intercompany loans extend for the duration of the lease or loan term, which typically range from two to five years.
For derivative instruments that are designated and qualify as cash flow hedges, the Company initially records changes in fair value for the effective portion of the derivative instrument in Accumulated other comprehensive loss as a separate component of equity in the Condensed Consolidated Balance Sheets and subsequently reclassifies these amounts into earnings in the period during which the hedged transaction is recognized in earnings. The Company reports the effective portion of its cash flow hedges in the same financial statement line item as changes in the fair value of the hedged item.
Net Investment Hedges
The Company uses forward contracts designated as net investment hedges to hedge net investments in certain foreign subsidiaries whose functional currency is the local currency. The Company records the effective portion of such derivative instruments together with changes in the fair value of the hedged items in Cumulative translation adjustment as a separate component of Equity in the Condensed Consolidated Balance Sheets.
Other Derivatives
Other derivatives not designated as hedging instruments consist primarily of forward contracts used to hedge foreign currency-denominated balance sheet exposures. The Company also uses total return swaps and, to a lesser extent, interest rate swaps, based on equity or fixed income indices, to hedge its executive deferred compensation plan liability.
For derivative instruments not designated as hedging instruments, the Company recognizes changes in fair value of the derivative instrument, as well as the offsetting change in the fair value of the hedged item, in Interest and other, net in the Condensed Consolidated Statements of Earnings in the period of change.
Hedge Effectiveness
For interest rate swaps designated as fair value hedges, the Company measures hedge effectiveness by offsetting the change in fair value of the hedged items with the change in fair value of the derivative. For forward contracts designated as cash flow or net investment hedges, the Company measures hedge effectiveness by comparing the cumulative change in fair value of the hedge contract with the cumulative change in fair value of the hedged item, both of which are based on forward rates. The

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

Company recognizes any ineffective portion of the hedge in the Condensed Consolidated Statements of Earnings in the same period in which ineffectiveness occurs. Amounts excluded from the assessment of effectiveness are recognized in the Condensed Consolidated Statements of Earnings in the period they arise.
Fair Value of Derivative Instruments in the Condensed Consolidated Balance Sheets
The gross notional and fair value of derivative instruments in the Condensed Consolidated Balance Sheets were as follows:
 
As of January 31, 2017
 
As of October 31, 2016
 
 
 
Fair Value
 
 
 
Fair Value
 
Outstanding
Gross
Notional
 
Other
Current
Assets
 
Long-Term
Financing
Receivables
and Other
Assets
 
Other
Accrued
Liabilities
 
Long-Term
Other
Liabilities
 
Outstanding
Gross
Notional
 
Other
Current
Assets
 
Long-Term
Financing
Receivables
and Other
Assets
 
Other
Accrued
Liabilities
 
Long-Term
Other
Liabilities
 
In millions
Derivatives designated as hedging instruments
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Fair value hedges:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Interest rate contracts
$
9,500

 
$
—

 
$
—

 
$
—

 
$
159

 
$
9,500

 
$
—

 
$
109

 
$
—

 
$
6

Cash flow hedges:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Foreign currency contracts
6,716

 
242

 
149

 
32

 
20

 
7,255

 
296

 
172

 
40

 
15

Net investment hedges:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Foreign currency contracts
1,929

 
43

 
21

 
17

 
38

 
1,891

 
53

 
28

 
23

 
28

Total derivatives designated as hedging instruments
18,145

 
285

 
170

 
49

 
217

 
18,646

 
349

 
309

 
63

 
49

Derivatives not designated as hedging instruments
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Foreign currency contracts
11,801

 
90

 
5

 
123

 
8

 
16,496

 
100

 
11

 
103

 
11

Other derivatives
160

 
1

 
—

 
—

 
—

 
158

 
—

 
—

 
2

 
—

Total derivatives not designated as hedging instruments
11,961

 
91

 
5

 
123

 
8

 
16,654

 
100

 
11

 
105

 
11

Total derivatives
$
30,106

 
$
376

 
$
175

 
$
172

 
$
225

 
$
35,300

 
$
449

 
$
320

 
$
168

 
$
60

Offsetting of Derivative Instruments
The Company recognizes all derivative instruments on a gross basis in the Condensed Consolidated Balance Sheets. The Company's derivative instruments are subject to master netting arrangements and collateral security arrangements. The Company does not offset the fair value of its derivative instruments against the fair value of cash collateral posted under collateral security agreements. As of January 31, 2017 and October 31, 2016, information related to the potential effect of the Company's use of the master netting agreements and collateral security agreements was as follows:

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

 
As of January 31, 2017
 
In the Condensed Consolidated Balance Sheets
 
 
 
 
 
(i)
 
(ii)
 
(iii) = (i)–(ii)
 
(iv)
 
(v)
 
 
 
(vi) = (iii)–(iv)–(v)
 
 
 
 
 
 
 
Gross Amounts Not Offset
 
 
 
 
 
Gross
Amount
Recognized
 
Gross Amount
Offset
 
Net Amount
Presented
 
Derivatives
 
Financial
Collateral
 
 
 
Net Amount
 
In millions
Derivative assets
$
551

 
$
—

 
$
551

 
$
260

 
$
260

 
(1) 
 
$
31

Derivative liabilities
$
397

 
$
—

 
$
397

 
$
260

 
$
48

 
(2) 
 
$
89

 
As of October 31, 2016
 
In the Condensed Consolidated Balance Sheets
 
 
 
 
 
(i)
 
(ii)
 
(iii) = (i)–(ii)
 
(iv)
 
(v)
 
 
 
(vi) = (iii)–(iv)–(v)
 
 
 
 
 
 
 
Gross Amounts Not Offset
 
 
 
 
 
Gross
Amount
Recognized
 
Gross
Amount
Offset
 
Net Amount
Presented
 
Derivatives
 
Financial
Collateral
 
 
 
Net Amount
 
In millions
Derivative assets
$
769

 
$
—

 
$
769

 
$
214

 
$
465

 
(1) 
 
$
90

Derivative liabilities
$
228

 
$
—

 
$
228

 
$
214

 
$
10

 
(2) 
 
$
4

 
(1)
Represents the cash collateral posted by counterparties as of the respective reporting date for the Company's asset position, net of derivative amounts that could be offset, as of, generally, two business days prior to the respective reporting date.
(2)
Represents the collateral posted by the Company through re-use of counterparty cash collateral as of the respective reporting date for the Company's liability position, net of derivative amounts that could be offset, as of, generally, two business days prior to the respective reporting date.
Effect of Derivative Instruments on the Condensed Consolidated Statements of Earnings
The pre-tax effect of derivative instruments and related hedged items in a fair value hedging relationship for the three months ended January 31, 2017 and 2016 were as follows:
 
 
Gains (Losses) Recognized in Earnings on Derivative and Related Hedged Item
Derivative Instrument
 
Location
 
Three months ended January 31, 2017
 
Hedged Item
 
Location
 
Three months ended January 31, 2017
 
 
 
 
In millions
 
 
 
 
In millions
Interest rate contracts
 
Interest and other, net
 
$
(262
)
 
Fixed-rate debt
 
Interest and other, net
 
$
262

 
 
Gains (Losses) Recognized in Earnings on Derivative and Related Hedged Item
Derivative Instrument
 
Location
 
Three months ended January 31, 2016
 
Hedged Item
 
Location
 
Three months ended January 31, 2016
 
 
 
 
In millions
 
 
 
 
In millions
Interest rate contracts
 
Interest and other, net
 
$
133

 
Fixed-rate debt
 
Interest and other, net
 
$
(133
)

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

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

 
 
 
 

Foreign currency contracts
$
60

 
Net revenue
 
$
79

Foreign currency contracts
—

 
Cost of products
 
1

Foreign currency contracts
76

 
Interest and other, net
 
83

Total cash flow hedges
$
136

 
 
 
$
163

Net investment hedges:
 

 
 
 
 

Foreign currency contracts
$
(2
)
 
Interest and other, net
 
$
—

The pre-tax effect of derivative instruments in cash flow and net investment hedging relationships for the three months ended January 31, 2016 was as follows:
 
Gains (Losses) Recognized
in Other Comprehensive
Income ("OCI") on Derivatives
(Effective Portion)
 
Gains (Losses) Reclassified from Accumulated
OCI Into Earnings (Effective Portion)
 
Three months ended January 31, 2016
 
Location
 
Three months ended January 31, 2016
 
In millions
 
 
 
In millions
Cash flow hedges:
 

 
 
 
 

Foreign currency contracts
$
91

 
Net revenue
 
$
61

Foreign currency contracts
(6
)
 
Cost of products
 
1

Foreign currency contracts
(1
)
 
Other operating expenses
 
—

Foreign currency contracts
58

 
Interest and other, net
 
59

Total cash flow hedges
$
142

 
 
 
$
121

Net investment hedges:
 

 
 
 
 

Foreign currency contracts
$
57

 
Interest and other, net
 
$
—

As of January 31, 2017 and 2016, no portion of the hedging instruments' gain or loss was excluded from the assessment of effectiveness for fair value, cash flow or net investment hedges. For the three months ended January 31, 2017, there was no hedge ineffectiveness for fair value, cash flow and net investment hedges. For the three months ended January 31, 2016, hedge ineffectiveness for fair value, cash flow and net investment hedges was not material.
As of January 31, 2017, the Company expects to reclassify an estimated net Accumulated other comprehensive gain of approximately $16 million, net of taxes, to earnings in the next twelve months, along with the earnings effects of the related forecasted transactions associated with cash flow hedges.

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

The pre-tax effect of derivative instruments not designated as hedging instruments on the Condensed Consolidated Statements of Earnings for the three months ended January 31, 2017 and 2016 was as follows:
 
Gains (Losses) Recognized in Earnings on Derivatives
 
Location
 
Three months ended January 31, 2017
 
 
 
In millions
Foreign currency contracts
Interest and other, net
 
$
(47
)
Other derivatives
Interest and other, net
 
3

Total
 
 
$
(44
)

 
Gains (Losses) Recognized in Earnings on Derivatives
 
Location
 
Three months ended January 31, 2016
 
 
 
In millions
Foreign currency contracts
Interest and other, net
 
$
8

Other derivatives
Interest and other, net
 
(5
)
Total
 
 
$
3


Note 13: Borrowings
Notes Payable and Short-Term Borrowings
Notes payable and short-term borrowings, including the current portion of long-term debt, were as follows:
 
As of
 
January 31, 2017
 
October 31, 2016
 
Amount
Outstanding
 
Weighted-Average
Interest Rate
 
Amount
Outstanding
 
Weighted-Average
Interest Rate
 
Dollars in millions
Current portion of long-term debt
$
2,732

 
2.5
%
 
$
2,774

 
1.7
%
FS Commercial paper
336

 
0.02
%
 
326

 
0.1
%
Notes payable to banks, lines of credit and other(1)
452

 
2.3
%
 
430

 
2.0
%
Total notes payable and short-term borrowings
$
3,520

 
 

 
$
3,530

 
 

 
(1)
Notes payable to banks, lines of credit and other includes $406 million and $381 million at January 31, 2017 and October 31, 2016, respectively, of borrowing- and funding-related activity associated with FS and its subsidiaries.


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

Long-Term Debt
 
As of
 
January 31, 2017
 
October 31, 2016
 
In millions
Hewlett Packard Enterprise Senior Notes(1)
 

 
 

$2,250 issued at discount to par at a price of 99.944% in October 2015 at 2.45%, due October 5, 2017, interest payable semi-annually on April 5 and October 5 of each year
$
2,249

 
$
2,249

$2,650 issued at discount to par at a price of 99.872% in October 2015 at 2.85%, due October 5, 2018, interest payable semi-annually on April 5 and October 5 of each year
2,648

 
2,648

$3,000 issued at discount to par at a price of 99.972% in October 2015 at 3.6%, due October 15, 2020, interest payable semi-annually on April 15 and October 15 of each year
2,999

 
2,999

$1,350 issued at discount to par at a price of 99.802% in October 2015 at 4.4%, due October 15, 2022, interest payable semi-annually on April 15 and October 15 of each year
1,348

 
1,348

$2,500 issued at discount to par at a price of 99.725% in October 2015 at 4.9%, due October 15, 2025, interest payable semi-annually on April 15 and October 15 of each year
2,494

 
2,494

$750 issued at discount to par at a price of 99.942% in October 2015 at 6.2%, due October 15, 2035, interest payable semi-annually on April 15 and October 15 of each year
750

 
750

$1,500 issued at discount to par at a price of 99.932% in October 2015 at 6.35%, due October 15, 2045, interest payable semi-annually on April 15 and October 15 of each year
1,499

 
1,499

$350 issued at par in October 2015 at three-month USD LIBOR plus 1.74%, due October 5, 2017, interest payable quarterly on January 5, April 5, July 5 and October 5 of each year
350

 
350

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

 
250

EDS Senior Notes(1)
 

 
 

$300 issued October 1999 at 7.45%, due October 2029
312

 
312

Other, including capital lease obligations, at 0.00%-7.40%, due in calendar years 2017-2022(2)
315

 
382

Fair value adjustment related to hedged debt
(159
)
 
103

Unamortized debt issuance costs(3)
(53
)
 
(50
)
Less: current portion
(2,732
)
 
(2,774
)
Total long-term debt
$
12,270

 
$
12,560

 
(1)
The Company may redeem some or all of the fixed-rate Hewlett Packard Enterprise Senior Notes and the EDS Senior Notes at any time in accordance with the terms thereof.
(2)
Other, including capital lease obligations includes $170 million and $181 million as of January 31, 2017 and October 31, 2016, respectively, of borrowing- and funding-related activity associated with FS and its subsidiaries that are collateralized by receivables and underlying assets associated with the related capital and operating leases. For both the periods presented, the carrying amount of the assets approximated the carrying amount of the borrowings.
(3)
In April 2015, the FASB issued ASU 2015-03, which simplifies the presentation of debt issuance costs by requiring debt issuance costs to be presented as a deduction from the corresponding debt liability rather than an asset that is amortized. During the first quarter of fiscal 2017, the Company adopted the standard retrospectively for the prior period presented.
Hewlett Packard Enterprise Senior Notes
On November 23, 2016, Hewlett Packard Enterprise launched an offer to exchange new registered notes for all of the outstanding $14.6 billion of unregistered Senior Notes. The terms of the new registered Notes in the exchange offer are substantially identical to the terms of the previously unregistered Senior Notes, except that the new Notes are registered under the Securities Act, and certain transfer restrictions, registration rights and additional interest provisions relating to the outstanding Senior Notes do not apply to the new Notes. On December 30, 2016, the exchange offer for the registered Notes was completed.
As disclosed in Note 12, "Financial Instruments", the Company uses interest rate swaps to mitigate the exposure of its debt portfolio to changes in fair value resulting from changes in interest rates by achieving a primarily U.S. dollar LIBOR-based floating interest expense. As of January 31, 2017, the Company had entered 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. Interest rates on long-term debt in the table above have not been adjusted to reflect the impact of any interest rate swaps.

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

Interest expense on borrowings recognized in the Condensed Consolidated Statements of Earnings was as follows:
 
 
 
 
Three months ended January 31,
Expense
 
Location
 
2017
 
2016
 
 
 
 
In millions
Financing interest
 
Financing interest
 
$
66

 
$
58

Interest expense
 
Interest and other, net
 
92

 
80

Total interest expense
 
 
 
$
158

 
$
138

Available Borrowing Resources
The Company had the following resources available to obtain short- or long-term additional liquidity if needed:
 
As of January 31, 2017
 
In millions
Commercial paper programs
$
4,164

Uncommitted lines of credit
$
1,740

Commercial Paper
Hewlett Packard Enterprise's Board of Directors has authorized the issuance of up to $4.0 billion in aggregate principal amount of commercial paper by Hewlett Packard Enterprise. Hewlett Packard Enterprise's subsidiaries are authorized to issue up to an additional $500 million in aggregate principal amount of commercial paper. Hewlett Packard Enterprise maintains two commercial paper programs, and a wholly-owned subsidiary maintains a third program. Hewlett Packard Enterprise's U.S. program provides for the issuance of U.S. dollar-denominated commercial paper up to a maximum aggregate principal amount of $4.0 billion. Hewlett Packard Enterprise's euro commercial paper program provides for the issuance of commercial paper outside of the U.S. denominated in U.S. dollars, euros or British pounds up to a maximum aggregate principal amount of $3.0 billion or the equivalent in those alternative currencies. The combined aggregate principal amount of commercial paper outstanding under those programs at any one time cannot exceed the $4.0 billion authorized by Hewlett Packard Enterprise's Board of Directors. The Hewlett Packard Enterprise subsidiary's euro Commercial Paper/Certificate of Deposit Program provides for the issuance of commercial paper in various currencies of up to a maximum aggregate principal amount of $500 million.
Revolving Credit Facility
On November 1, 2015, the Company entered into a revolving credit facility (the "Credit Agreement"), together with the lenders named therein, JPMorgan Chase Bank, N.A. ("JPMorgan"), as co-administrative agent and administrative processing agent, and Citibank, N.A., as co-administrative agent, providing for a senior, unsecured revolving credit facility with aggregate lending commitments of $4.0 billion. Loans under the revolving credit facility may be used for general corporate purposes. Commitments under the Credit Agreement are available for a period of five years, which period may be extended, subject to satisfaction of certain conditions, by up to two one-year periods. Commitment fees, interest rates and other terms of borrowing under the credit facility vary based on Hewlett Packard Enterprise's external credit rating.
As contemplated by the Everett Transaction, during the first quarter of fiscal 2017, Everett SpinCo, Inc., the Company's wholly owned subsidiary, entered into a term loan facility in the principal amount of $2.0 billion. Everett SpinCo, Inc. also intends to issue Senior Notes in the principal amount of $1.05 billion. Funds to be borrowed under these arrangements will be used by Everett SpinCo, Inc. to fund a $3.0 billion dividend to Hewlett Packard Enterprise. Borrowings under these arrangements will either be transferred in connection with the Everett Transaction or repaid in the event that the merger does not occur.
Note 14: Related Party Transactions and Former Parent Company Investment
Prior to November 1, 2015, the Company consisted of the enterprise technology infrastructure, software, services and financing businesses of former Parent and thus, transactions with former Parent were considered related party transactions. Following November 1, 2015, in connection with the Separation, the Company became an independent publicly-traded company. As a result, transactions with HP Inc. are no longer considered related party transactions.

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

On October 31, 2015 and November 1, 2015, in connection with the Separation, the Company entered into several agreements with former Parent that govern the relationship between the Company and former Parent following the Distribution, including the following:
•
Separation and Distribution Agreement;
•
Transition Services Agreement;
•
Tax Matters Agreement;
•
Employee Matters Agreement;
•
Real Estate Matters Agreement;
•
Master Commercial Agreement; and
•
Information Technology Service Agreement.
These agreements provided the allocation between the Company and former Parent'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 the Separation. Obligations under the service and commercial contracts generally extend through five years.
Final Cash Allocation from former Parent
In December 2015, and in connection with the Separation and Distribution Agreement, the Company received a net cash allocation of $526 million from former Parent. The cash allocation was based on the projected cash requirements of the Company, in light of the intended investment grade credit rating, business plan and anticipated operations and activities.
Net Transfers from former Parent
Net transfers from former Parent are included within former Parent company investment in the Condensed Consolidated Balance Sheets. Former Parent historically used a centralized approach to cash management and the financing of its operations. Prior to the Separation, transactions between the Company and former Parent were considered to be effectively settled for cash at the time the transaction was recorded. The net effect of these transactions is included in Net transfer from former Parent in Condensed Consolidated Statements of Cash Flows.
Note 15: Stockholders' Equity
Taxes related to Other Comprehensive Income (Loss)
 
Three months ended January 31,
 
2017
 
2016
 
In millions
Taxes on change in net unrealized (losses) gains on available-for-sale securities:
 

 
 

Tax (provision) benefit on net unrealized (losses) gains arising during the period
$
(1
)
 
$
1

Tax benefit on losses reclassified into earnings
—

 
(3
)
 
(1
)
 
(2
)
Taxes on change in net unrealized (losses) gains on cash flow hedges:
 

 
 

Tax provision on net unrealized gains arising during the period
(31
)
 
(15
)
Tax provision on net gains reclassified into earnings
32

 
19

 
1

 
4

Taxes on change in unrealized components of defined benefit plans:
 

 
 

Tax provision on gains arising during the period
(24
)
 
—

Tax benefit on amortization of actuarial loss and prior service benefit
(6
)
 
(5
)
Tax provision on curtailments, settlements and other
(7
)
 
(1
)
 
(37
)
 
(6
)
Tax benefit (provision) on change in cumulative translation adjustment
1

 
(20
)
Tax provision on other comprehensive income
$
(36
)
 
$
(24
)

40
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)

Changes and reclassifications related to Other Comprehensive Income (Loss), net of taxes
 
Three months ended January 31,
 
2017
 
2016
 
In millions
Other comprehensive income (loss), net of taxes:
 

 
 

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

 
 

Net unrealized (losses) gains arising during the period
$
(14
)
 
$
3

Losses reclassified into earnings
—

 
6

 
(14
)
 
9

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

 
 

Net unrealized gains arising during the period
105

 
127

Net gains reclassified into earnings(1)
(131
)
 
(102
)
 
(26
)
 
25

Change in unrealized components of defined benefit plans:
 

 
 

Gains arising during the period
455

 
—

Amortization of actuarial loss and prior service benefit(2)
91

 
67

Curtailments, settlements and other
(7
)
 
(19
)
 
539

 
48

Change in cumulative translation adjustment
(24
)
 
(159
)
Other comprehensive income (loss), net of taxes
$
475

 
$
(77
)
 
(1)
Reclassification of pre-tax net gains on cash flow hedges into the Condensed Consolidated Statements of Earnings was as follows:
 
Three months ended January 31,
 
2017
 
2016
 
In millions
Net revenue
$
(79
)
 
$
(61
)
Cost of products
(1
)
 
(1
)
Other operating expenses
—

 
—

Interest and other, net
(83
)
 
(59
)
 
$
(163
)
 
$
(121
)
(2)
These components are included in the computation of net pension and post-retirement benefit (credit) cost in Note 4, "Retirement and Post-Retirement Benefit Plans."
The components of Accumulated other comprehensive loss, net of taxes as of January 31, 2017, and changes during the three months ended January 31, 2017 were as follows:
 
Net unrealized
gains (losses) on
available-for-sale
securities
 
Net unrealized
gains (losses)
on cash
flow hedges
 
Unrealized
components
of defined
benefit plans
 
Cumulative
translation
adjustment
 
Accumulated
other
comprehensive
loss
 
In millions
Balance at beginning of period
$
54

 
$
35

 
$
(5,642
)
 
$
(1,046
)
 
$
(6,599
)
Other comprehensive (loss) income before reclassifications
(14
)
 
105

 
539

 
(24
)
 
606

Reclassifications of gains into earnings
—

 
(131
)
 
—

 
—

 
(131
)
Balance at end of period
$
40

 
$
9

 
$
(5,103
)
 
$
(1,070
)
 
$
(6,124
)

41
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)

Share Repurchase Program
On October 13, 2015, the Hewlett Packard Enterprise Board of Directors announced the authorization of a $3.0 billion share repurchase program. On May 24, 2016, the Board of Directors announced the authorization of an additional $3.0 billion under the share repurchase program. The Company's share repurchase program authorizes both open market and private repurchase transactions and does not have a specific expiration date. The Company may choose to repurchase shares when sufficient liquidity exists and the shares are trading at a discount relative to estimated intrinsic value.
For the three months ended January 31, 2017, the Company retired a total of 27 million shares in connection with its share repurchase programs through open market repurchases, which were recorded as a $641 million reduction to stockholders' equity. Additionally, for the three months ended January 31, 2017, the Company had unsettled open market repurchases of 1.5 million shares, which were recorded as a $34 million reduction to stockholders' equity. As of January 31, 2017, the Company had a remaining authorization of $2.7 billion for future share repurchases.
Note 16: Net Earnings Per Share
The Company calculates basic net EPS using net earnings and the weighted-average number of shares outstanding during the reporting period. Diluted net EPS includes the weighted-average dilutive effect of restricted stock awards, stock options, and performance-based awards.
The reconciliations of the numerators and denominators of each of the basic and diluted net EPS calculations were as follows:
 
Three months ended January 31,
 
2017
 
2016
 
In millions, except per share amounts
Numerator:
 

 
 

Net earnings
$
267

 
$
267

Denominator:
 

 
 

Weighted-average shares used to compute basic net EPS
1,669

 
1,761

Dilutive effect of employee stock plans
31

 
17

Weighted-average shares used to compute diluted net EPS
1,700

 
1,778

Net earnings per share:
 

 
 

Basic
$
0.16

 
$
0.15

Diluted
$
0.16

 
$
0.15

Anti-dilutive weighted-average stock awards(1)
7

 
64

 
(1)
The Company excludes stock awards where the assumed proceeds exceed the average market price from the calculation of diluted net EPS, because their effect would be anti-dilutive. The assumed proceeds of a stock award include the sum of its exercise price (if the award is an option), average unrecognized compensation cost and excess tax benefit.
Note 17: Litigation and Contingencies
Hewlett Packard Enterprise is involved in various lawsuits, claims, investigations and proceedings including those consisting of IP, commercial, securities, employment, employee benefits and environmental matters, which arise in the ordinary course of business. In addition, as part of the Separation and Distribution Agreement, Hewlett Packard Enterprise and HP Inc. (formerly known as "Hewlett-Packard Company") agreed to cooperate with each other in managing certain existing litigation related to both parties' businesses. The Separation and Distribution Agreement included provisions that allocate liability and financial responsibility for pending litigation involving the parties, as well as provide for cross-indemnification of the parties against liabilities to one party arising out of liabilities allocated to the other party. The Separation and Distribution Agreement also included provisions that assign to the parties responsibility for managing pending and future litigation related to the general corporate matters of HP Inc. arising prior to the Separation. Hewlett Packard Enterprise records a liability when it believes that it is both probable that a liability has been incurred and the amount of loss can be reasonably estimated. Significant judgment is required to determine both the probability of having incurred a liability and the estimated amount of the liability. Hewlett

42
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)

Packard Enterprise reviews these matters at least quarterly and adjusts these liabilities to reflect the impact of negotiations, settlements, rulings, advice of legal counsel and other updated information and events pertaining to a particular matter. Litigation is inherently unpredictable. However, Hewlett Packard Enterprise believes it has valid defenses with respect to legal matters pending against the Company. Nevertheless, cash flows or results of operations could be materially affected in any particular period by the resolution of one or more of these contingencies. Hewlett Packard Enterprise believes it has recorded adequate provisions for any such matters and, as of January 31, 2017, it was not reasonably possible that a material loss had been incurred in connection with such matters in excess of the amounts recognized in its financial statements.
Litigation, Proceedings and Investigations
Benedict v. Hewlett-Packard Company. This purported class action was filed on January 10, 2013 in the United States District Court for the Northern District of California alleging that certain technical support employees allegedly involved in installing, maintaining and/or supporting computer software and/or hardware for HP Inc. were misclassified as exempt employees under the FLSA. The plaintiffs also alleged that HP Inc. violated California law by, among other things, allegedly improperly classifying these employees as exempt. On February 13, 2014, the court granted plaintiffs' motion for conditional class certification. On May 7, 2015, plaintiffs filed a motion to certify a Rule 23 state class of certain Technical Solutions Consultants in California, Massachusetts, and Colorado that they claim were improperly classified as exempt from overtime under state law. On July 30, 2015, the court dismissed the Technology Consultant and certain Field Technical Support Consultant opt-ins from the conditionally certified FLSA collective action. The court denied plaintiffs' motion for Rule 23 class certification on March 29, 2016. On April 12, 2016, plaintiffs filed a notice of appeal of that decision to the United States Court of Appeal for the Ninth Circuit, which was denied. On July 13, 2016, the court granted HP’s motion to decertify the FLSA class that had been conditionally certified on February 13, 2014. Currently, only the claims of the three individual named plaintiffs remain in the district court. HP has reached settlements with each of the three individual named plaintiffs, pursuant to which this litigation will be voluntarily dismissed.
India Directorate of Revenue Intelligence Proceedings. On April 30 and May 10, 2010, the India Directorate of Revenue Intelligence (the "DRI") issued show cause notices to Hewlett-Packard India Sales Private Ltd ("HP India"), a subsidiary of HP Inc., seven HP India employees and one former HP India employee alleging that HP India underpaid customs duties while importing products and spare parts into India and seeking to recover an aggregate of approximately $370 million, plus penalties. Prior to the issuance of the show cause notices, HP India deposited approximately $16 million with the DRI and agreed to post a provisional bond in exchange for the DRI's agreement to not seize HP India products and spare parts and to not interrupt the transaction of business by HP India.
On April 11, 2012, the Bangalore Commissioner of Customs issued an order on the products-related show cause notice affirming certain duties and penalties against HP India and the named individuals of approximately $386 million, of which HP India had already deposited $9 million. On December 11, 2012, HP India voluntarily deposited an additional $10 million in connection with the products-related show cause notice. On April 20, 2012, the Commissioner issued an order on the parts-related show cause notice affirming certain duties and penalties against HP India and certain of the named individuals of approximately $17 million, of which HP India had already deposited $7 million. After the order, HP India deposited an additional $3 million in connection with the parts-related show cause notice so as to avoid certain penalties.
HP India filed appeals of the Commissioner's orders before the Customs Tribunal along with applications for waiver of the pre-deposit of remaining demand amounts as a condition for hearing the appeals. The Customs Department has also filed cross-appeals before the Customs Tribunal. On January 24, 2013, the Customs Tribunal ordered HP India to deposit an additional $24 million against the products order, which HP India deposited in March 2013. The Customs Tribunal did not order any additional deposit to be made under the parts order. In December 2013, HP India filed applications before the Customs Tribunal seeking early hearing of the appeals as well as an extension of the stay of deposit as to HP India and the individuals already granted until final disposition of the appeals. On February 7, 2014, the application for extension of the stay of deposit was granted by the Customs Tribunal until disposal of the appeals. On October 27, 2014, the Customs Tribunal commenced hearings on the cross-appeals of the Commissioner's orders. The Customs Tribunal rejected HP India's request to remand the matter to the Commissioner on procedural grounds. The hearings were scheduled to reconvene on April 6, 2015, and again on November 3, 2015 and April 11, 2016, but were canceled at the request of the Customs Tribunal. No new hearing date has been set.
Department of Justice, Securities and Exchange Commission Proceedings. In April 2014, HP Inc. and HP Inc. subsidiaries in Russia, Poland, and Mexico collectively entered into agreements with the U.S. Department of Justice ("DOJ") and the Securities and Exchange Commission ("SEC") to resolve claims of Foreign Corrupt Practices Act ("FCPA") violations. Pursuant to the terms of the resolutions with the DOJ and SEC, HP Inc. was required to undertake certain compliance, reporting

43
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)

and cooperation obligations for a three-year period. In October of 2015, Hewlett Packard Enterprise contractually undertook the same compliance, reporting and cooperation obligations that were held by HP Inc. under the DOJ resolutions for the balance of the three-year period. Hewlett Packard Enterprise has reached a similar agreement with the Staff of the SEC, which is set forth in an amended SEC administrative order dated July 15, 2016.
ECT Proceedings. In January 2011, the postal service of Brazil, Empresa Brasileira de Correios e Telégrafos ("ECT"), notified a former subsidiary of HP Inc. in Brazil ("HP Brazil") that it had initiated administrative proceedings to consider whether to suspend HP Brazil's right to bid and contract with ECT related to alleged improprieties in the bidding and contracting processes whereby employees of HP Brazil and employees of several other companies allegedly coordinated their bids and fixed results for three ECT contracts in 2007 and 2008. In late July 2011, ECT notified HP Brazil it had decided to apply the penalties against HP Brazil and suspend HP Brazil's right to bid and contract with ECT for five years, based upon the evidence before it. In August 2011, HP Brazil appealed ECT's decision. In April 2013, ECT rejected HP Brazil's appeal, and the administrative proceedings were closed with the penalties against HP Brazil remaining in place. In parallel, in September 2011, HP Brazil filed a civil action against ECT seeking to have ECT's decision revoked. HP Brazil also requested an injunction suspending the application of the penalties until a final ruling on the merits of the case. The court of first instance has not issued a decision on the merits of the case, but it has denied HP Brazil's request for injunctive relief. HP Brazil appealed the denial of its request for injunctive relief to the intermediate appellate court, which issued a preliminary ruling denying the request for injunctive relief but reducing the length of the sanctions from five to two years. HP Brazil appealed that decision and, in December 2011, obtained a ruling staying enforcement of ECT's sanctions until a final ruling on the merits of the case. HP Brazil expects the decision to be issued in 2017 and any subsequent appeal on the merits to last several years.
Cisco Systems. On August 21, 2015, Cisco Systems, Inc. ("Cisco Systems") and Cisco Systems Capital Corporation ("Cisco Capital") filed an action in Santa Clara County Superior Court for declaratory judgment and breach of contract against HP Inc. in connection with a dispute arising out of a third-party's termination of a services contract with HP Inc. As part of that third-party services contract, HP Inc. separately contracted with Cisco on an agreement to utilize Cisco products and services. HP Inc. prepaid the entire amount due Cisco through a financing arrangement with Cisco Capital. Following the termination of HP Inc.'s services contract with the third-party, HP Inc. no longer required Cisco's products and services, and, accordingly, exercised its contractual termination rights under the agreement with Cisco, and requested that Cisco apply the appropriate credit toward the remaining balance owed Cisco Capital. This lawsuit relates to the calculation of that credit under the agreement between Cisco and HP Inc. Cisco contends that after the credit is applied, HP Inc. still owes Cisco Capital approximately $58 million. HP Inc. contends that under a proper reading of the agreement, HP Inc. owes nothing to Cisco Capital, and that Cisco owes a significant amounts to HP Inc. On December 18, 2015, the court held a status conference at which it lifted the responsive pleading and discovery stay. Following the conference, Cisco filed an amended complaint that abandons the claim for breach of contract set forth in the original complaint, and asserts a single cause of action for declaratory relief concerning the proper calculation of the cancellation credit. On January 19, 2016, HP Inc. filed a counterclaim for breach of contract simultaneously with its answer to the amended complaint. Expert discovery is scheduled to be completed by May 1, 2017. The court has set a trial date of November 6, 2017.
Washington DC Navy Yard Litigation: In December 2013, HP Enterprise Services, LLC ("HPES") was named in the first lawsuit arising out of the September 2013 Washington DC Navy Yard shooting that resulted in the deaths of twelve individuals. The perpetrator was an employee of The Experts, HPES's now-terminated subcontractor on HPES's IT services contract with the U.S. Navy. This initial action was filed in the Middle District of Florida but was transferred in February 2015 to the United States District Court for the District of Columbia so that it and all other known cases arising out of the shooting could be heard before the same Judge. A total of fifteen lawsuits have been filed, all of which are now pending in the United States District Court for the District of Columbia. All cases assert various negligence claims against HPES and The Experts. On September 15, 2016, the court issued an opinion, applicable to the first nine actions filed, granting in part and denying in part HPES's and The Experts' motions to dismiss. Defendants have moved to dismiss the remaining six actions.
Forsyth, et al. v. HP Inc. and Hewlett Packard Enterprise: This purported class and collective action was filed on August 18, 2016 and an amended complaint was filed on December 19, 2016 in the United States District Court for the Northern District of California, against HP Inc. and Hewlett Packard Enterprise alleging defendants violated the Federal Age Discrimination in Employment Act ("ADEA"), the California Fair Employment and Housing Act, California public policy and the California Business and Professions Code by terminating older workers and replacing them with younger workers.  Plaintiffs seek to certify a nationwide collective action under the ADEA comprised of all individuals aged 40 and older who had their employment terminated by an HP entity pursuant to a work force reduction ("WFR") plan on or after December 9, 2014 for individuals terminated in deferral states and on or after April 8, 2015 in non-deferral states. Plaintiffs also seek to certify a Rule 23 class under California law comprised of all persons 40 years or older employed by defendants in the state of California

44
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)

and terminated pursuant to a WFR plan on or after August 18, 2012.

Wall v. Hewlett-Packard Enterprise Company and HP Inc. This certified California class action and Private Attorney General Act action was filed against Hewlett-Packard Company on January17, 2012 and the fifth amended (and operative) complaint was filed against HP Inc. and Hewlett Packard Enterprise on June 24, 2016. The complaint alleges that the defendants paid earned incentive compensation late and failed to timely pay final wages in violation of the California Labor Code. On August 9, 2016, the court ordered the class certified without prejudice to a future motion to amend or modify the class certification order or to decertify. Trial is set to begin on May 22, 2017.

Hewlett-Packard Company v. Oracle (Itanium). On June 15, 2011, HP Inc. filed suit against Oracle in Santa Clara Superior Court in connection with Oracle's March 2011 announcement that it was discontinuing software support for HP Inc.’s Itanium-based line of mission critical servers.  HP Inc. asserted, among other things, that Oracle’s actions breached the contract that was signed by the parties as part of the settlement of the litigation relating to Oracle’s hiring of Mark Hurd.   The matter eventually progressed to trial, which was bifurcated into two phases.  HP Inc. prevailed in the first phase of the trial, in which the court ruled that the contract at issue required Oracle to continue to offer its software products on HP Inc.'s Itanium-based servers for as long as HP Inc. decided to sell such servers.  Phase 2 of the trial was then postponed by Oracle’s appeal of the trial court’s denial of Oracle’s “anti-SLAPP” motion, in which Oracle argued that HP Inc.’s damages claim infringed on Oracle’s First Amendment rights.  On August 27, 2015, the Court of Appeal rejected Oracle’s appeal.  The matter was remanded to the trial court for Phase 2 of the trial, which began on May 23, 2016, and was submitted to the jury on June 29, 2016.  On June 30, 2016, the jury returned a verdict in favor of HP Inc., awarding HP Inc. $3 billion in damages:  $1.7 billion for past lost profits and $1.3 billion for future lost profits. On December 19, 2016, the trial court denied Oracle's request for a new trial. On January 17, 2017 Oracle filed a notice of appeal. On February 2, 2017, HP Inc. filed a cross-appeal. The Company expects that any appeal could take several years to be resolved and could materially affect the amount ultimately recovered by the Company. The amounts ultimately awarded, if any, would be recorded in the period received. Pursuant to the terms of the Separation and Distribution Agreement, HP Inc. and Hewlett Packard Enterprise will share equally in any recovery from Oracle once Hewlett Packard Enterprise has been reimbursed for all costs incurred in the prosecution of the action prior to the HP Inc./Hewlett Packard Enterprise separation on November 1, 2015.
Environmental
The Company's operations and products are or may in the future become subject to various federal, state, local and foreign 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 substances and materials used in the Company's products, the energy consumption of products, services and operations and the operational or financial responsibility for recycling, treatment and disposal of those products. This includes legislation 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"). The Company could incur substantial costs, its products could be restricted from entering certain jurisdictions, and it could face other sanctions, if it were to violate or become liable under environmental laws or if its products become non-compliant with environmental laws. The Company's potential exposure includes impacts on revenue, fines and civil or criminal sanctions, third-party property damage or personal injury claims and clean-up costs. The amount and timing of costs to comply with environmental laws are difficult to predict.
In particular, the Company may become a party to, or otherwise involved in, proceedings brought by U.S. or state environmental agencies under the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA"), known as "Superfund," or other federal, state or foreign laws and regulations addressing the clean-up of contaminated sites, and may become a party to, or otherwise involved in, proceedings brought by private parties for contribution towards clean-up costs. The Company is also contractually obligated to make financial contributions to address actions related to certain environmental liabilities, both ongoing and arising in the future, pursuant to its separation and distribution agreement with HP Inc.

45
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)

Note 18: Guarantees, Indemnifications and Warranties
Guarantees
In the ordinary course of business, the Company may issue performance guarantees to certain of its clients, customers and other parties pursuant to which the Company has guaranteed the performance obligations of third parties. Some of those guarantees may be backed by standby letters of credit or surety bonds. In general, the Company would be obligated to perform over the term of the guarantee in the event a specified triggering event occurs as defined by the guarantee. The Company believes the likelihood of having to perform under a material guarantee is remote.
The Company has entered into service contracts with certain of its clients that are supported by financing arrangements. If a service contract is terminated as a result of the Company's non-performance under the contract or failure to comply with the terms of the financing arrangement, the Company could, under certain circumstances, be required to acquire certain assets related to the service contract. The Company believes the likelihood of having to acquire a material amount of assets under these arrangements is remote.
Indemnifications
In the ordinary course of business, the Company enters into contractual arrangements under which the Company may agree to indemnify a third party to such arrangement from any losses incurred relating to the services they perform on behalf of the Company or for losses arising from certain events as defined within the particular contract, which may include, for example, litigation or claims relating to past performance. The Company also provides indemnifications to certain vendors and customers against claims of IP infringement made by third parties arising from the use by such vendors and customers of the Company's software products and services and certain other matters. Some indemnifications may not be subject to maximum loss clauses. Historically, payments made related to these indemnifications have been immaterial.
General Cross-indemnification
In connection with the Separation, the Company entered into a Separation and Distribution Agreement with HP Inc. effective November 1, 2015 where the Company agreed to indemnify HP Inc., each of its subsidiaries and each of their respective directors, officers and employees from and against all liabilities relating to, arising out of or resulting from, among other matters, the liabilities allocated to the Company as part of the Separation. HP Inc. similarly agreed to indemnify the Company, each of its subsidiaries and each of their respective directors, officers and employees from and against all claims and liabilities relating to, arising out of or resulting from, among other matters, the liabilities allocated to HP Inc. as part of the Separation. As a result, as of January 31, 2017 and October 31, 2016, the Company has recorded both a receivable from HP Inc. of $55 million and $56 million, respectively, and a payable to HP Inc. of $40 million and $41 million, respectively, related to litigation matters and other contingencies.
Shared Litigation with HP Inc.
As part of the Separation and Distribution Agreement, the Company and HP Inc. agreed to cooperate with each other in managing certain existing litigation related to both parties' businesses. The Separation and Distribution Agreement also included provisions that assign to the parties responsibility for managing pending and future litigation related to general corporate matters of HP Inc. arising prior to the Separation.
Tax Matters Agreement and Other Income Tax Matters
In connection with the Separation, the Company entered into a Tax Matters Agreement (the "Tax Matters Agreement") with HP Inc. effective November 1, 2015 that governs the rights and obligations of the Company and HP Inc. for certain pre-Separation tax liabilities. The Tax Matters Agreement provides that the Company and HP Inc. will share certain pre-Separation income tax liabilities that arise from adjustments made by tax authorities to the Company and HP Inc.'s U.S. and certain non-U.S. income tax returns. In certain jurisdictions, the Company and HP Inc. have joint and several liability for past income tax liabilities and accordingly, the Company could be legally liable under applicable tax law for such liabilities and required to make additional tax payments. In these cases, the Company records the entire liability, which is partially offset by the indemnification receivable from HP Inc., thereby reflecting the Company's net exposure in its Condensed Consolidated Balance Sheet.
In addition, if the Distribution of Hewlett Packard Enterprise's common shares to the HP Inc. stockholders are determined to be taxable, the Company and HP Inc. would share the tax liability equally, unless the taxability of the Distribution is the

46
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)

direct result of action taken by either the Company or HP Inc. subsequent to the Distribution in which case the party causing the Distribution to be taxable would be responsible for any taxes imposed on the Distribution.
As of January 31, 2017, the Company recorded a net long-term receivable of $1.3 billion from HP Inc. for certain tax liabilities that the Company is joint and severally liable for, but for which it is indemnified by HP Inc. under the Tax Matters Agreement. The actual amount that the Company may receive could vary depending upon the outcome of certain unresolved tax matters, which may not be resolved for several years.
Warranties
The Company accrues the estimated cost of product warranties at the time it recognizes revenue. The Company engages in extensive product quality programs and processes, including actively monitoring and evaluating the quality of its component suppliers; however, 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 failures outside of the Company's baseline experience, affect the estimated warranty obligation.
The Company's aggregate product warranty liabilities as of January 31, 2017, and changes during the three months ended January 31, 2017 were as follows:
 
Three months ended January 31, 2017
 
In millions
Balance at beginning of period
$
497

Accruals for warranties issued
84

Adjustments related to pre-existing warranties (including changes in estimates)
(3
)
Settlements made (in cash or in kind)
(61
)
Balance at end of period
$
517


Note 19: Equity Method Investments
The Company includes investments which are accounted for using the equity method, under Investments in equity interests on the Company's Condensed Consolidated Balance Sheets. As of January 31, 2017, the Company's Investments in equity interests primarily included $2.6 billion related to a 49% interest in H3C.

Investment in H3C
In May 2016, Tsinghua Holdings’ subsidiary, Unisplendour Corporation, purchased 51% of the new business named H3C, comprising Hewlett Packard Enterprise’s former H3C Technologies and China-based servers, storage and technology services business which were previously reported within the EG segment. The Company retained a 49% interest in the new company, which it records as an equity method investment.
During the three months ended January 31, 2017, the Company recorded a Loss from equity interests of $22 million in the Condensed Consolidated Statement of Earnings, $35 million of which represented basis difference amortization and $13 million primarily represented the Company's share of H3C's net income. This loss was reflected as a reduction in the carrying amount of Investments in equity interests in the Condensed Consolidated Balance Sheet as of January 31, 2017.
The Company also has commercial arrangements with H3C to buy and sell HPE branded servers, storage and technology
services. During the three months ended January 31, 2017, HPE recorded approximately $260 million in sales to H3C, $91 million in purchases from H3C and $81 million in net payables due to H3C.

47

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



HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES

This Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") is organized as follows:
•
Overview.  A discussion of our business and overall analysis of financial and other highlights affecting the Company to provide context for the remainder of MD&A. The overview analysis compares the three months ended January 31, 2017 to the prior-year period.
•
Critical Accounting Policies and Estimates.  A discussion of accounting policies and estimates that we believe are important to understanding the assumptions and judgments incorporated in our reported financial results.
•
Results of Operations.  An analysis of our financial results comparing the three months ended January 31, 2017 to the prior-year period. A discussion of the results of operations at the consolidated level is followed by a discussion of the results of operations at the segment level.
•
Liquidity and Capital Resources.  An analysis of changes in our cash flows and a discussion of our financial condition and liquidity.
•
Contractual and Other Obligations.  An overview of contractual obligations, retirement and post-retirement benefit plan funding, restructuring plans, uncertain tax positions, cross-indemnifications with HP Inc. (formerly known as "Hewlett-Packard Company" and also referred to in this Quarterly Report as "former Parent"), and off-balance sheet arrangements.
We intend the discussion of our financial condition and results of operations that follows to provide information that will assist the reader in understanding our Condensed Consolidated Financial Statements, the changes in certain key items in those financial statements from year to year, and the primary factors that accounted for those changes, as well as how certain accounting principles, policies and estimates affect our Condensed Consolidated Financial Statements. This discussion should be read in conjunction with our Condensed Consolidated Financial Statements and the related notes that appear elsewhere in this document.
On November 1, 2015, HP Inc. spun-off Hewlett Packard Enterprise Company ("the Separation"). To effect the spin-off, HP Inc. distributed all of the shares of Hewlett Packard Enterprise Company common stock owned by HP Inc. to its stockholders on November 1, 2015. Holders of HP Inc. common stock received one share of Hewlett Packard Enterprise Company for every share of HP Inc. stock held as of the record date. As a result of the spin-off, we now operate as an independent, publicly-traded company.
September 2016 Announcement of Spin-Off and Merger of Software Segment
On September 7, 2016, we announced plans to spin-off and merge our Software segment (“Seattle”) with Micro Focus International plc (“Micro Focus”), a global software company dedicated to delivering and supporting enterprise software solutions (collectively, the “Seattle Transaction”). Our decision will create two businesses that are stronger, more focused and better able to innovate and adapt in today's market, delivering faster outcomes to our customers. The combination of Seattle with Micro Focus will create one of the world's largest pure-play enterprise software companies. Upon the completion of the Seattle Transaction, which we currently anticipate to close on September 1, 2017, shareholders of Hewlett Packard Enterprise Company will own shares of both Hewlett Packard Enterprise and approximately 50.1% of the new combined company. The transaction also includes a cash dividend of $2.5 billion to Hewlett Packard Enterprise. Preceding the close of the Seattle Transaction, we expect to incur one-time costs of approximately $700 million to separate the Software segment from Hewlett Packard Enterprise. The Seattle Transaction is subject to certain customary closing conditions, including approval by Micro Focus shareholders, the effective filing of certain registration statements, regulatory approvals, the anticipated tax treatment of the Seattle Transaction, the expiration of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and the receipt of certain required foreign anti-trust approvals.
We will record a deferred tax asset on the Seattle Transaction costs and expenses as they are incurred through fiscal 2017. We expect that a portion of these deferred tax assets associated with the Seattle Transaction costs and expenses will be eliminated, as non-deductible expenses, at the time the Seattle Transaction is executed.

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


May 2016 Announcement of Enterprise Services Business Spin-Off and Merger
On May 24, 2016, we announced plans for a tax-free spin-off and merger of our Enterprise Services business ("Everett" or "Everett SpinCo, Inc.") with Computer Sciences Corporation ("CSC") (collectively, the "Everett Transaction"). Immediately following the Everett Transaction, which is currently targeted to be completed at or near April 1, 2017, shareholders of Hewlett Packard Enterprise Company will own shares of both Hewlett Packard Enterprise Company and approximately 50.1% of the new combined company. Mr. J. Michael Lawrie, the current head of CSC, will become chairman, president and CEO of the new combined company and Ms. Margaret C. Whitman, President and CEO of HPE, will join the Board of Directors. The transaction also includes a cash dividend of $3.0 billion to Hewlett Packard Enterprise. Preceding the close of the Everett Transaction, we expect to incur one-time costs of approximately $900 million to separate the Enterprise Services business from Hewlett Packard Enterprise. The majority of these costs will be offset by lower costs associated with the Fiscal 2015 Restructuring Plan. The Everett Transaction is subject to certain customary closing conditions.
We will record a deferred tax asset on the Everett Transaction costs and expenses as they are incurred through fiscal 2017. We expect that a portion of these deferred tax assets associated with the Everett Transaction costs and expenses will be eliminated, as non-deductible expenses, at the time the Everett Transaction is executed. Furthermore, we expect to effect certain internal reorganizations of, and transactions among, our wholly-owned subsidiaries and operating activities in preparation for the Everett Transaction. As a result, the divestiture of the Everett business may result in a decrease to deferred tax assets in future periods. Our results of operations could be materially impacted in any future period by these matters.
The following Overview, Results of Operations and Liquidity discussions and analysis compare the three months ended January 31, 2017 to the prior-year period, unless otherwise noted. The Capital Resources and Contractual and Other Obligations discussions present information as of January 31, 2017, unless otherwise noted.
        For purposes of this MD&A section, we use the terms "Hewlett Packard Enterprise," "HPE," "the Company," "we," "us" and "our" to refer to Hewlett Packard Enterprise Company. References in this MD&A section to "former Parent" refer to HP Inc.
OVERVIEW
We are an industry leading technology company that enables customers to go further, faster. With the industry's most comprehensive portfolio, spanning the cloud to the data center to workplace applications, our technology and services help customers around the world make information technology ("IT") more efficient, more productive and more secure. 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. The following provides an overview of our key financial metrics by segment for the three months ended January 31, 2017, as compared to the prior-year period:

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


 
HPE
Consolidated
 
Enterprise
Group
 
Enterprise
Services
 
Software
 
Financial Services
 
Corporate
Investments(3)
 
 
Dollars in millions, except for per share amounts
Net revenue(1)
$
11,407

 
$
6,325

 
$
4,037

 
$
721

 
$
823
 
$
—

Year-over-year change %
 
(10.4)%

 
 
(11.9)%

 
 
(11.4)%

 
 
(7.6)%

 
 
6.1%
 
 
NM

Earnings from operations(2)
$
463

 
$
802

 
$
283

 
$
154

 
$
78
 
$
(43
)
Earnings from operations as a % of net revenue
 
4.1%

 
 
12.7%

 
 
7.0%

 
 
21.4%

 
 
9.5%
 
 
NM

Year-over-year change percentage points
 
1.1pts

 
 
(0.7
)pts
 
 
2.2pts

 
 
4.0pts

 
 
(3.4)pts
 
 
NM

Net earnings
$
267

 
 
 

 
 
 

 
 
 

 
 
 
 
 
 

Net earnings per share
 
 

 
 
 

 
 
 

 
 
 

 
 
 
 
 
 

Basic
$
0.16

 
 
 

 
 
 

 
 
 

 
 
 
 
 
 

Diluted
$
0.16

 
 
 

 
 
 

 
 
 

 
 
 
 
 
 

 
(1)
HPE consolidated net revenue excludes intersegment net revenue and other.
(2)
Segment earnings from operations exclude corporate and unallocated costs and eliminations, stock-based compensation expense, amortization of intangible assets, restructuring charges, separation costs, acquisition and other related charges, and defined benefit plan settlement charges and remeasurement benefit.
(3)
"NM" represents not meaningful.
Net revenue decreased 10.4% (decreased 9.0% on a constant currency basis) in the three months ended January 31, 2017, as compared to the prior-year period. The leading contributor to the net revenue decrease was lower EG revenue due to a combination of factors, including the impact of the divestiture of our controlling interest in the H3C Technologies and China-based Server, Storage and Technology Services businesses ("H3C divestiture") and lower revenue from Servers and Storage due to market demand challenges and execution issues. Additionally, net revenue decreased as a result of lower ES revenue due to the impact of the divestiture of the MphasiS business and weak demand across the Europe, Middle East and Africa ("EMEA") region. Gross margin was 28.9% ($3.3 billion) and 28.4% ($3.6 billion) for the three months ended January 31, 2017 and 2016, respectively. The 0.5 percentage point increase in gross margin was due primarily to service delivery efficiencies as a result of cost savings associated with our ongoing restructuring programs in ES, partially offset by lower gross margins in EG and FS. We continue to experience gross margin pressures resulting from a competitive pricing environment across our hardware portfolio. Operating margin increased 1.1 percentage points in the three months ended January 31, 2017, as compared to the prior-year period, due to an increase in gross margin and lower selling, general and administrative ("SG&A") and research and development ("R&D") expenses as a percentage of net revenue, due to improved expense management.
As of January 31, 2017, cash and cash equivalents and short-term and long-term investments were $9.9 billion, representing a decrease of approximately $3.1 billion from the October 31, 2016 balance of $13.0 billion. The decrease in cash and cash equivalents and short-term and long-term investments during the three months ended January 31, 2017 was due primarily to the following factors: net cash used in operating cash flows of $1.5 billion, which includes $1.9 billion of pension funding payments in anticipation of the Everett Transaction, investments in property, plant and equipment net of sales proceeds of $0.8 billion and cash utilization for share repurchases and dividends of $0.75 billion.
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. 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 relates to business model changes and our go-to-market execution.

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


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 shift of workloads to cloud deployment models, emergence of software-defined architectures, growth in IT consumption models and a highly competitive pricing environment. In addition, demand for core server products and traditional storage has weakened. The effect of lower traditional compute and storage revenue is impacting support attach opportunities in Technology Services ("TS"). To be successful in overcoming these challenges, we must address business model shifts and optimize go-to-market execution by improving cost structure, aligning sales incentives with strategic goals, improving channel execution, and strengthening our capabilities in our areas of strategic focus, 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, converged storage, high-performance compute, and wireless networking.
•
In ES, we are facing challenges, including weak demand across the EMEA region, particularly the UK public sector business, managing the revenue runoff from several large contracts and a competitive pricing environment. We are also experiencing commoditization in the IT infrastructure services market that is placing pressure on traditional infrastructure technology outsourcing ("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 continue to be successful in addressing these challenges, we must continue to 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. On May 24, 2016, we announced plans for a tax-free spin-off and merger of our Enterprise Services business with Computer Sciences Corporation.
•
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. On September 7, 2016, we announced plans for a spin-off and merger of our Software segment with Micro Focus International plc.
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" in Item 1A, which is incorporated herein by reference.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Management's Discussion and Analysis of Financial Condition and Results of Operations is based on our Condensed Consolidated Financial Statements, which have been prepared in accordance with United States ("U.S.") Generally Accepted Accounting Principles ("GAAP"). The preparation of these financial statements requires management to make estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, net revenues and expenses, and disclosure of contingent liabilities. Management believes that there have been no significant changes during three months ended January 31, 2017, to the items that we disclosed as our critical accounting policies and estimates in Management's Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the fiscal year ended October 31, 2016, which is incorporated herein by reference.
ACCOUNTING PRONOUNCEMENTS
For a summary of recent accounting pronouncements applicable to our Condensed Consolidated Financial Statements, see Note 1, "Overview and Basis of Presentation", to the Condensed Consolidated Financial Statements in Item 1, which is incorporated herein by reference.

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


RESULTS OF OPERATIONS
Revenue from our international operations has historically represented, and we expect will continue to represent, a majority of our overall net revenue. As a result, our revenue growth has been impacted, and we expect will continue to be impacted, by fluctuations in foreign currency exchange rates. In order to provide a framework for assessing performance excluding the impact of foreign currency fluctuations, we present the year-over-year percentage change in revenue on a constant currency basis, which assumes no change in foreign currency exchange rates from the prior-year period and doesn't adjust for any repricing or demand impacts from changes in foreign currency exchange rates. This 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 in dollars and as a percentage of net revenue were as follows:
 
Three months ended January 31,
 
2017
 
2016
 
Dollars
 
% of
Revenue
 
Dollars
 
% of
Revenue
 
Dollars in millions
Net revenue
$
11,407

 
100.0
 %
 
$
12,724

 
100.0
 %
Cost of sales
8,108

 
71.1
 %
 
9,112

 
71.6
 %
Gross profit
3,299

 
28.9
 %
 
3,612

 
28.4
 %
Research and development
485

 
4.3
 %
 
585

 
4.6
 %
Selling, general and administrative
1,759

 
15.4
 %
 
1,998

 
15.7
 %
Amortization of intangible assets
101

 
0.8
 %
 
218

 
1.8
 %
Restructuring charges
177

 
1.6
 %
 
311

 
2.4
 %
Acquisition and other related charges
44

 
0.4
 %
 
37

 
0.3
 %
Separation costs
276

 
2.4
 %
 
79

 
0.6
 %
Defined benefit plan settlement charges and remeasurement (benefit)
(6
)
 
(0.1
)%
 
—

 
—

Earnings from operations
463

 
4.1
 %
 
384

 
3.0
 %
Interest and other, net
(78
)
 
(0.6
)%
 
(80
)
 
(0.6
)%
Tax indemnification adjustments
(18
)
 
(0.3
)%
 
15

 
0.1
 %
Loss from equity interests
(22
)
 
(0.2
)%
 
—

 
—

Earnings before taxes
345

 
3.0
 %
 
319

 
2.5
 %
Provision for taxes
(78
)
 
(0.7
)%
 
(52
)
 
(0.4
)%
Net earnings
$
267

 
2.3
 %
 
$
267

 
2.1
 %
Net Revenue
For the three months ended January 31, 2017, as compared to the prior-year period, total net revenue decreased 10.4% (decreased 9.0% on a constant currency basis). U.S. net revenue decreased 5.9% to $4.4 billion, while net revenue from outside of the U.S. decreased 13.0% to $7.0 billion.

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


The components of the weighted net revenue change by segment were as follows:
 
Three months ended January 31, 2017
 
Percentage Points
Enterprise Group
(6.7
)
Enterprise Services
(4.1
)
Software
(0.5
)
Financial Services
0.4

Corporate Investments/Other(1)
0.5

Total HPE
(10.4
)
 
(1)
Primarily related to the elimination of intersegment net revenue.
Three months ended January 31, 2017 compared with three months ended January 31, 2016
From a segment perspective, the primary factors contributing to the change in total Company net revenue are summarized as follows:
•
EG net revenue decreased due to a combination of factors including the impact of the H3C divestiture in May 2016, which resulted in revenue declines in each of the EG business units, a decline in Servers and Storage revenues due to market and customer demand challenges, competitive pricing pressure, and execution issues;
•
ES net revenue decreased due primarily to the divestiture of the MphasiS business during the fourth quarter of fiscal 2016, weak business demand in the EMEA region, particularly in our U.K. public sector business, revenue run-off from several large contracts in the Americas ("AMS") region, and unfavorable currency fluctuations, primarily the euro and the British pound;
•
Software net revenue decreased due primarily to a business divestiture in the prior year, unfavorable foreign currency fluctuations and an ongoing decline in license revenue as a result of the market shift to SaaS solutions; and
•
FS net revenue increased due primarily to higher rental revenue resulting from an increase in average operating lease assets, along with higher asset management revenue from lease buyouts.
A more detailed discussion of segment revenue is included under "Segment Information" below.
Gross Margin
Three months ended January 31, 2017 compared with three months ended January 31, 2016
For the three months ended January 31, 2017, as compared to the prior-year period, total gross margin increased 0.5 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 as a result of cost savings associated with our ongoing restructuring programs, including improvements in our headcount cost location mix that resulted in a higher percentage of our headcount in lower cost locations;
•
Software gross margin decreased due primarily to an unfavorable revenue mix resulting from lower support and higher SaaS revenue as our support products carry higher gross margins;
•
EG gross margin decreased due to the impact of the H3C divestiture, commodity supply constraints and competitive pricing pressures, particularly in Storage, and unfavorable currency fluctuations; and
•
FS gross margin decreased due primarily to the impact of a bad debt reserve release in the prior-year period, along with lower portfolio margins due to higher borrowing costs.

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


A more detailed discussion of segment gross margins and operating margins is included under "Segment Information" below.
Operating Expenses
Research and Development
Research and development expense decreased 17% for the three months ended January 31, 2017, as compared to the prior-year period. The decrease was due primarily to business divestitures, primarily the H3C divestiture, and lower spending in Hewlett Packard Labs and cloud-related activities.
Selling, General and Administrative
Selling, general and administrative expense decreased 12% for the three months ended January 31, 2017, as compared to the prior-year period, due to a combination of factors including the absence of expenses in the current period from businesses divested subsequent to the prior-year period, in particular H3C, favorable foreign currency fluctuations, lower bad debt expense resulting from a larger reserve release in the current period, and improved expense management. This decrease was partially offset by the impact of a gain from a business divestiture in the prior-year period.
Amortization of Intangible Assets
Amortization expense decreased 54% for the three months ended January 31, 2017, as compared to the prior-year period, due primarily to certain intangible assets associated with prior acquisitions reaching the end of their respective amortization periods.
Restructuring Charges
Restructuring charges decreased for the three months ended January 31, 2017, as compared to the prior-year period, due to charges in the prior-year period from the multi-year restructuring plan initially announced in May 2012 (the “2012 Plan”) and lower charges in the current period from the restructuring plan we announced in September 2015 (the “2015 Plan”). As of October 31, 2016, the 2012 Plan was substantially complete.
Acquisition and Other Related Charges
Acquisition and other related charges increased for the three months ended January 31, 2017, as compared to the prior-year period, due primarily to charges resulting from the acquisition of Silicon Graphics International Corp. ("SGI"), including a non-cash inventory fair value adjustment charge, retention costs and professional services and legal fees.
Separation Costs
Separation costs includes costs resulting from the Everett and Seattle Transactions and costs resulting from the Separation in fiscal 2015.
Separation costs increased for the three months ended January 31, 2017, as compared to the prior-year period, due to higher costs from the Everett and Seattle Transactions in the current period, partially offset by lower costs from the Separation. The costs from the Everett and Seattle Transactions consist primarily of amounts for third-party consulting and contractor expenses. The decline in costs resulting from the Separation was due to costs associated with this transaction winding down.
Defined Benefit Plan Settlement Charges and Remeasurement Benefit
Defined benefit plan settlement charges and remeasurement benefit in fiscal 2017 represents an adjustment to net periodic pension benefit cost resulting from the remeasurement of certain Hewlett-Packard Enterprise pension plans due to plan separations in anticipation of the Everett Transaction.
Interest and Other, Net
Interest and other, net expense decreased by $2 million for the three months ended January 31, 2017, as compared to the prior-year period. The change from period to period is due primarily to the favorable impact from an other-than-temporary impairment of a public equity investment in the prior-year period, partially offset by the unfavorable impact of higher foreign currency exchange losses in the current period.


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


Tax Indemnification Adjustments
Tax indemnification expense of $18 million for the three months ended January 31, 2017 resulted from the settlement of certain pre-Separation tax liabilities for which the Company and HP Inc. share joint and several liability, and for which the Company is partially indemnified by HP Inc. under the Tax Matters Agreement.
Loss from Equity Interests
Loss from equity interests represents our 49% interest in the H3C partnership with Tsinghua Holdings. The loss of $22 million for the three months ended January 31, 2017 was due primarily to the $35 million amortization of our interest in a basis difference.
Provision for Taxes
Our effective tax rate was 22.6% and 16.3% for the three months ended January 31, 2017 and 2016, 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.
The effective tax rate was higher for the three months ended January 31, 2017 as compared to the prior-year period due to the impact of varying tax rates on certain discrete items, primarily separation costs and restructuring charges.
For the three months ended January 31, 2017, we recorded $108 million of net income tax benefits related to items discrete to the period. These amounts primarily included a tax benefit of $138 million on separation costs, restructuring charges, and acquisition and other related charges, partially offset by $19 million of income tax charges related to pre-Separation tax matters.
For the three months ended January 31, 2016, we recorded $110 million of net income tax benefits related to various items discrete to the period. These amounts primarily included a tax benefit of $104 million on restructuring charges, separation costs, and acquisition and other related charges.
Segment Information
A description of the products and services for each segment can be found in Note 2, "Segment Information", to the Condensed Consolidated Financial Statements in Item 1 of Part I, which is incorporated herein by reference. Future changes to this organizational structure may result in changes to the segments disclosed.
Effective at the beginning of the first quarter of fiscal 2017, we implemented organizational changes to align our segment financial reporting more closely with our current business structure. These organizational changes resulted in: (i) within the Enterprise Group segment, primarily, the transfer of the big data storage product group previously reported within the Servers business unit to the Storage business unit; the transfer of the Aruba services capabilities previously reported within the Networking business unit into the Technology Services business unit; and (ii) the transfer of the Communications and Media Solutions product group previously reported within the Enterprise Services segment to the Technology Services business unit within the Enterprise Group segment.
We reflected these changes to our segment information retrospectively to the earliest period presented, which resulted in: (i) within the Enterprise Group Segment, primarily, the transfer of net revenue from the big data storage product group previously reported within the Servers business unit to the Storage business unit; the transfer of net revenue from the Aruba services capabilities previously reported within the Networking business unit to the Technology Services business unit; and (ii) the transfer of net revenue, related eliminations of intersegment revenues and operating profit related to the Communications and Media Solutions product group previously reported within the Application and Business Services ("ABS") business unit in the Enterprise Services segment to the Technology Services business unit within the Enterprise Group segment.
These changes had no impact on our previously reported consolidated net revenue, earnings from operations, net earnings or net earnings per share.

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


Enterprise Group
 
Three months ended January 31,
 
2017
 
2016
 
% Change
 
Dollars in millions
 
 
Net revenue
$
6,325

 
$
7,182

 
(11.9
)%
Earnings from operations
$
802

 
$
964

 
(16.8
)%
Earnings from operations as a % of net revenue
12.7
%
 
13.4
%
 
 

The components of the weighted net revenue change by business unit were as follows:
 
Three months ended January 31,
 
Net Revenue
 
Weighted
Net Revenue
Change
Percentage
Points
 
2017
 
2016
 
2017
 
Dollars in millions
 
 
Servers
$
3,103

 
$
3,536

 
(6.0
)
Networking
549

 
824

 
(3.8
)
Storage
730

 
837

 
(1.5
)
Technology Services
1,943

 
1,985

 
(0.6
)
Total Enterprise Group
$
6,325

 
$
7,182

 
(11.9
)
Three months ended January 31, 2017 compared with three months ended January 31, 2016
EG net revenue decreased 11.9% (decreased 11.0% on a constant currency basis) for the three months ended January 31, 2017. The decrease in EG net revenue was due to a combination of factors including the impact of the H3C divestiture in May 2016, which resulted in revenue declines in each of the EG business units, a decline in Servers and Storage revenues due to market and customer demand challenges, competitive pricing pressure, and execution issues. EG continues to experience revenue growth challenges due to market trends, including the shift of workloads to cloud deployment models, emergence of software-defined architectures, growth in IT consumption models, and a highly competitive pricing environment. Partially offsetting the decrease in net revenue was the revenue contribution in the current period from our acquisition of SGI.
Servers net revenue decreased 12% due primarily to a contraction in the market for core server products, sales go-to-market execution issues and unfavorable currency fluctuations. These decreases were partially offset by growth in Mission Critical Servers ("MCS"), in part, as a result of the revenue contribution from SGI. Industry standard servers unit volumes decreased 17%, partially offset by a 3% increase in average unit prices ("AUPs"). The decrease in unit volumes was primarily in the Rack and Density Optimized product categories as a result of market softness in the enterprise and small and medium business market sectors. The increase in AUPs was experienced primarily in the Density Optimized product category, resulting from increased option attach activity. The increase in MCS revenue was due to growth in the Non-Stop and MCS x86 product categories. Networking net revenue decreased 33% due primarily to the impact of the H3C divestiture, partially offset by revenue growth in Aruba hardware products, primarily campus switching and wireless local area network products. Storage net revenue decreased 13% as a result of a decline in converged storage and traditional storage solutions as a result of continued market weakness and internal go-to-market sales execution issues, partially offset by growth in 3PAR All-Flash Array products. TS net revenue declined 2% due primarily to the impact of the H3C divestiture and unfavorable currency fluctuations. Partially offsetting the TS revenue decrease was growth in HPE Data Center Care, HPE Proactive Care support solutions, Aruba services, and revenue from SGI.
For the three months ended January 31, 2017, EG earnings from operations as a percentage of net revenue decreased 0.7 percentage points. The decrease was due to a decline in gross margin and an increase in operating expenses as percentage of net revenue. The gross margin decline was due to the impact of the H3C divestiture, commodity supply constraints and competitive pricing pressures, particularly in Storage, and unfavorable currency fluctuations, partially offset by higher option attach rates in Servers and improved gross margin in TS. Operating expense as a percentage of net revenue slightly increased, as the revenue decline outpaced the reduction in operating expense. The decrease in operating expenses was due primarily to the impact of the H3C divestiture, partially offset by expenses from SGI.

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


Enterprise Services
 
Three months ended January 31,
 
2017
 
2016
 
% Change
 
Dollars in millions
 
 
Net revenue
$
4,037

 
$
4,555

 
(11.4
)%
Earnings from operations
$
283

 
$
218

 
29.8
 %
Earnings from operations as a % of net revenue
7.0
%
 
4.8
%
 
 

The components of the weighted net revenue change by business unit were as follows:
 
Three months ended January 31,
 
Net Revenue
 
Weighted
Net Revenue
Change
Percentage
Points
 
2017
 
2016
 
2017
 
Dollars in millions
 
 
Application and Business Services
$
1,400

 
$
1,681

 
(6.2
)
Infrastructure Technology Outsourcing
2,637

 
2,874

 
(5.2
)
Total Enterprise Services
$
4,037

 
$
4,555

 
(11.4
)
Three months ended January 31, 2017 compared with three months ended January 31, 2016
ES net revenue decreased 11.4% (decreased 9.4% on a constant currency basis) for the three months ended January 31, 2017. The net revenue decrease in ES was due primarily to the divestiture of the MphasiS business during the fourth quarter of fiscal 2016, weak business demand in the EMEA region, particularly in our U.K. public sector business, revenue run-off from several large contracts in the AMS region, and unfavorable currency fluctuations, primarily the euro and the British pound. The net revenue decrease was partially offset by growth in our SES portfolio, driven by our helion managed cloud and analytics and data management services. SES revenue growth was across all regions, led by the AMS and EMEA regions.
Net revenue in ABS declined 17% for the three months ended January 31, 2017, due primarily to the divestiture of the MphasiS business, revenue run-off from several large contracts in the AMS region and the U.S. public sector business, weak demand across the EMEA region, particularly the U.K. public sector business, and unfavorable currency fluctuations. Partially offsetting the decrease in ABS was revenue growth in our SES portfolio, driven by analytics and data management services. Net revenue in ITO decreased 8% for the three months ended January 31, 2017 due primarily to weakness in the EMEA region, particularly the U.K. public sector business, revenue run-off from several large contracts in the AMS region, and unfavorable currency fluctuations, particularly the euro and the British pound. This decline was partially offset by revenue growth in our SES portfolio driven by our helion managed cloud services.
For the three months ended January 31, 2017, ES earnings from operations as a percentage of net revenue increased 2.2 percentage points. The increase in operating margin was due to an increase in gross margin which was partially offset by a slight increase in operating expense as a percentage of net revenue. Gross margin increased due primarily to service delivery efficiencies as a result of cost savings associated with our ongoing restructuring programs, including improvements in our headcount cost location mix that resulted in a higher percentage of our headcount in lower cost locations. Operating expense as a percentage of net revenue slightly increased as the reduction in operating expenses matched the revenue decline. The decrease in operating expenses was due primarily to lower field selling costs and administrative expenses resulting from the divestiture of the MphasiS business and cost structure reductions, partially offset by the impact of a gain from a business divestiture in the prior-year period.

57
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)


Software
 
Three months ended January 31,
 
2017

2016

% Change
 
Dollars in millions

 
Net revenue
$
721


$
780


(7.6
)%
Earnings from operations
$
154


$
136


13.2
 %
Earnings from operations as a % of net revenue
21.4
%

17.4
%

 

Three months ended January 31, 2017 compared with three months ended January 31, 2016
Software net revenue decreased 7.6% (decreased 6.4% on a constant currency basis) for the three months ended January 31, 2017. Revenue growth in Software is being challenged by the overall market shift to SaaS solutions which is impacting growth in license and support revenue. For the three months ended January 31, 2017, net revenue growth was also negatively impacted by a business divestiture in the prior year, and unfavorable foreign currency fluctuations. As a result, net revenue from licenses, support and professional services decreased by 9%, 9% and 7%, respectively, while net revenue from SaaS increased by 4%.
The decrease in license net revenue was due primarily to the divestiture of the TippingPoint business during the second quarter of fiscal 2016. The decline in license revenue was also attributable to the market shift to SaaS solutions, which resulted in lower revenue, particularly from big data analytics platform licenses, offset by license revenue growth in enterprise security products. The decrease in support net revenue was due primarily to the divestiture of the TippingPoint business, ongoing declines in license revenue and unfavorable currency fluctuations. Professional services net revenue decreased during the period due primarily to lower revenue within the big data analytics portfolio. SaaS net revenue increased during the period driven primarily by growth in IT operations management and enterprise security products, reflecting the overall market shift to SaaS solutions.
For the three months ended January 31, 2017, Software earnings from operations as a percentage of net revenue increased 4.0 percentage points due primarily to a decrease in operating expense as a percentage of net revenue, partially offset by a decrease in gross margin. The decrease in operating expense as a percentage of net revenue was driven primarily by improved expense management resulting in reduced marketing program and R&D expenses. The decrease in operating expenses as a percentage of net revenue was also driven by reduced litigation costs and the divestiture of the TippingPoint business during the second quarter of fiscal 2016. The decrease in gross margin was due primarily to an unfavorable revenue mix resulting from lower support and higher SaaS revenue as our support products carry higher gross margins.
Financial Services
 
Three months ended January 31,
 
2017
 
2016
 
% Change
 
Dollars in millions
 
 
Net revenue
$
823

 
$
776

 
6.1
 %
Earnings from operations
$
78

 
$
100

 
(22.0
)%
Earnings from operations as a % of net revenue
9.5
%
 
12.9
%
 
 

Three months ended January 31, 2017 compared with three months ended January 31, 2016
FS net revenue increased by 6.1% (increased 7.5% on a constant currency basis) for the three months ended January 31, 2017. The net revenue increase was due primarily to higher rental revenue resulting from an increase in average operating lease assets, along with higher asset management revenue from lease buyouts. These increases were partially offset by unfavorable currency fluctuations.
FS earnings from operations as a percentage of net revenue decreased 3.4 percentage points for the three months ended January 31, 2017 due to a decrease in gross margin, partially offset by a decrease in operating expense as a percentage of net revenue. The decrease in gross margin was due primarily to the impact of a bad debt reserve release in the prior-year period

58
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)


along with lower portfolio margins due to higher borrowing costs. Operating expense as a percentage of net revenue decreased primarily as a result of the net revenue increase.
Financing Volume
 
Three months ended January 31,
 
2017
 
2016
 
In millions
Total financing volume
$
1,343

 
$
1,498

New financing volume, which represents the amount of financing provided to customers for equipment and related software and services, including intercompany activity, decreased 10.3% for the three months ended January 31, 2017 due primarily to lower financing associated with HPE and third-party product sales and related service offerings, along with unfavorable currency fluctuations.
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 Consolidated Financial Statements.
The portfolio assets and ratios derived from the segment balance sheets for FS were as follows:
 
As of
 
January 31, 2017
 
October 31, 2016
 
Dollars in millions
Financing receivables, gross
$
6,817

 
$
6,950

Net equipment under operating leases
3,305

 
3,333

Capitalized profit on intercompany equipment transactions(1)
631

 
612

Intercompany leases(1)
1,878

 
2,057

Gross portfolio assets
12,631

 
12,952

Allowance for doubtful accounts(2)
84

 
89

Operating lease equipment reserve
45

 
45

Total reserves
129

 
134

Net portfolio assets
$
12,502

 
$
12,818

Reserve coverage
1.0
%
 
1.0
%
Debt-to-equity ratio(3)
7.0x

 
7.0x

 
(1)
Intercompany activity is eliminated in consolidation.
(2)
Allowance for doubtful accounts for financing receivables includes both the short- and long-term portions.
(3)
Debt benefiting FS consists of intercompany equity that is treated as debt for segment reporting purposes, intercompany debt, and borrowing- and funding-related activity associated with FS and its subsidiaries. Debt benefiting FS totaled $11.2 billion and $11.4 billion at January 31, 2017 and October 31, 2016, respectively, and was determined by applying an assumed debt-to-equity ratio, which management believes to be comparable to that of other similar financing companies. FS equity at both January 31, 2017 and October 31, 2016 was $1.6 billion.
At January 31, 2017 and October 31, 2016, FS cash and cash equivalents balances were approximately $816 million and $788 million, respectively.
Net portfolio assets at January 31, 2017 decreased 2.5% from October 31, 2016. The decrease generally resulted from portfolio runoff in excess of new financing volume, along with unfavorable currency impacts.
FS bad debt expense includes charges to general reserves and specific reserves for sales-type, direct-financing and operating leases. For the three months ended January 31, 2017, FS recorded net bad debt expense of $4.8 million. For the three

59
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)


months ended January 31, 2016, FS recorded a $15 million benefit to the bad debt expense as a result of the release of previously recorded general reserve and lower charges recorded for specific reserves. 
Corporate Investments
 
Three months ended January 31,
 
2017
 
2016
 
% Change
 
Dollars in millions
Net revenue
$
—

 
$
1

 
NM

Loss from operations
$
(43
)
 
$
(99
)
 
(57
)%
Loss from operations as a % of net revenue(1)
NM

 
NM

 
NM

 
(1)
"NM" represents not meaningful.
Corporate Investments net revenue represents IP-related royalty revenue and residual activity from certain cloud-related incubation projects.
For the three months ended January 31, 2017, as compared to the prior-year period, Corporate Investments loss from operations decreased by 57% due to lower spending on certain cloud-related incubation activities and lower expenses in Hewlett Packard Labs.
LIQUIDITY AND CAPITAL RESOURCES
We use cash generated by operations as our primary source of liquidity. We believe that internally generated cash flows will be generally sufficient to support our operating businesses, capital expenditures, acquisitions, restructuring activities, remaining separation costs, divestiture transaction costs, maturing debt, interest payments, income tax payments, and the payment of future stockholder dividends, in addition to any future investments and any future share repurchases. We expect to supplement this short-term liquidity, if necessary, by accessing the capital markets and borrowing under credit facilities made available by various domestic and foreign financial institutions. However, our access to capital markets may be constrained and our cost of borrowing may increase under certain business, market and economic conditions. For example, under the Tax Matters Agreement entered into in connection with the Separation, we will generally be prohibited, except in specific circumstances, from issuing equity securities beyond certain thresholds for a two year period following the Separation. Our liquidity is subject to various risks including the risks identified in the section entitled "Risk Factors" in Item 1A of Part II and market risks identified in the section entitled "Quantitative and Qualitative Disclosures about Market Risk" in Item 3 of Part I, each of which is incorporated herein by reference.
Our cash balances are held in numerous locations throughout the world, with a substantial amount held outside of the U.S. We utilize a variety of planning and financing strategies in an effort to ensure that our worldwide cash is available when and where it is needed. Our cash position is strong and we expect that our cash balances, anticipated cash flow generated from operations and access to capital markets will be sufficient to cover our expected near-term cash outlays.
Amounts held outside of the U.S. are generally utilized to support non-U.S. liquidity needs, although a portion of those amounts may, from time to time, be subject to short-term intercompany loans into the U.S. Most of the amounts held outside of the U.S. could be repatriated to the U.S. but, under current law, some would be subject to U.S. federal income taxes, less applicable foreign tax credits. Repatriation of some foreign earnings is restricted by local law. Except for foreign earnings that are considered indefinitely reinvested outside of the U.S., we have provided for the U.S. federal tax liability on these earnings for financial statement purposes. Repatriation could result in additional income tax payments in future years. Where local restrictions prevent an efficient intercompany transfer of funds, our intent is that cash balances would remain outside of the U.S. and we would meet liquidity needs through ongoing cash flows, external borrowings, or both. We do not expect restrictions or potential taxes incurred on repatriation of amounts held outside of the U.S. to have a material effect on our overall liquidity, financial condition or results of operations.
On October 13, 2015, our Board of Directors authorized a $3.0 billion share repurchase program. On May 24, 2016, the Board of Directors authorized an additional $3.0 billion under the share repurchase program. The number of shares that we repurchase under the share repurchase program may vary depending on numerous factors, including share price, liquidity and other market conditions, our ongoing capital allocation planning, levels of cash and debt balances, other demands for cash, such

60
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)


as acquisition activity, general economic or business conditions, and board and management discretion. Additionally, our share repurchase activity, if any, during any particular period may fluctuate. We may commence, accelerate, suspend, delay, or discontinue any share repurchase activity at any time, without notice. These programs do not have a specific expiration date.
In the first three months of fiscal 2017, we repurchased an aggregate of $0.6 billion as a result of our share repurchase program. For more information on our share repurchase program, refer to Note 15, "Stockholders' Equity", to the Condensed Consolidated Financial Statements in Item 1 of Part I, which is incorporated herein by reference.
During the first quarter of fiscal 2017, we completed the acquisition of SGI, which resulted in a cash payment of $346 million.
In February 2017, we completed the acquisition of SimpliVity, which resulted in a cash payment of $650 million. In March 2017, we entered into a definitive agreement to acquire Nimble Storage, Inc. (“Nimble”). We will pay $12.50 per share in cash, representing a net cash purchase price at closing of $1.0 billion.
On May 24, 2016, we announced the Everett Transaction, which is currently targeted to be completed at or near April 1, 2017. Immediately following the Everett Transaction, shareholders of Hewlett Packard Enterprise Company will own shares of both Hewlett Packard Enterprise Company and approximately 50.1% of the new combined company. The transaction also includes a cash dividend of $3.0 billion to Hewlett Packard Enterprise. Preceding the close of the transaction, we expect to incur one-time costs of approximately $900 million to separate Everett from Hewlett Packard Enterprise. The majority of these costs will be offset by lower costs associated with our Fiscal 2015 Restructuring Plan.
In connection with the Everett Transaction, there will be a transfer of pension liabilities for certain pension plans to Everett SpinCo, Inc. As of January 31, 2017, the transfer is targeted to be completed at or near April 1, 2017. The approximate net pension liability to be transferred is pursuant to the transaction agreements, wherein we are expected to fund the transferred net pension liability in excess of $570 million. We initially estimated the total funding amount to be in the range of $2.0 billion to $3.0 billion. We currently estimate the total funding amount to be approximately $1.9 billion, which equals the payment made in the first quarter of fiscal 2017. However, the exact amount of the funding will not be known until the transaction completion date.
On September 7, 2016, we announced the Seattle Transaction, which will create a pure-play enterprise software company. Upon the completion of the transaction, which is currently anticipated to close on September 1, 2017, shareholders of Hewlett Packard Enterprise Company will own shares of both Hewlett Packard Enterprise and approximately 50.1% of the new combined company. The transaction also includes a cash dividend of $2.5 billion to Hewlett Packard Enterprise. Preceding the close of the Seattle Transaction, we expect to incur one-time costs of approximately $700 million to separate Seattle from Hewlett Packard Enterprise.
Liquidity
 
Three months ended
January 31
 
2017
 
2016
 
In millions
Net cash used in operating activities
$
(1,464
)
 
$
(75
)
Net cash used in investing activities
(1,157
)
 
(692
)
Net cash used in financing activities
(508
)
 
(570
)
Net decrease in cash and cash equivalents
$
(3,129
)
 
$
(1,337
)
Operating Activities
For the three months ended January 31, 2017, net cash used in operating activities increased by $1.4 billion as compared to the prior-year period. The increase was due primarily to a payment of $1.9 billion for pension funding in connection with the Everett Transaction, partially offset by favorable working capital improvements.
As of January 31, 2017, the cash conversion cycle increased by six days as compared to October 31, 2016. As of January 31, 2016, the cash conversion cycle increased by eight days as compared to October 31, 2015. As a result, cash generated from working capital management improved in the current period as compared to the corresponding period in fiscal 2016.

61
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)


Our working capital metrics and cash conversion impacts were as follows:
 
As of
 
As of
 
 
 
January 31,
2017
 
October 31,
2016
 
Change
 
January 31,
2016
 
October 31,
2015
 
Change
 
Y/Y
Change
Days of sales outstanding in accounts receivable ("DSO")
51

 
50

 
1

 
56

 
57

 
(1
)
 
(5
)
Days of supply in inventory ("DOS")
22

 
18

 
4

 
23

 
21

 
2

 
(1
)
Days of purchases outstanding in accounts payable ("DPO")
(61
)
 
(62
)
 
1

 
(48
)
 
(55
)
 
7

 
(13
)
Cash conversion cycle
12

 
6

 
6

 
31

 
23

 
8

 
(19
)
Three months ended January 31, 2017 compared with three months ended January 31, 2016
DSO measures the average number of days our receivables are outstanding. DSO is calculated by dividing ending accounts receivable, net of allowance for doubtful accounts, by a 90-day average of net revenue. Compared to the corresponding period in fiscal 2016, the decrease in DSO was due primarily to increased early payments and improved collections, partially offset by unfavorable currency fluctuations.
DOS measures the average number of days from procurement to sale of our product. DOS is calculated by dividing ending inventory by a 90-day average of cost of goods sold. Compared to the corresponding period in fiscal 2016, the decrease in DOS was due primarily to lower buffer inventory to support expected service levels.
DPO measures the average number of days our accounts payable balances are outstanding. DPO is calculated by dividing ending accounts payable by a 90-day average of cost of goods sold. Compared to the corresponding period in fiscal 2016, the increase in DPO was primarily the result of improved vendor payables management and an extension of payment terms with our product suppliers.
The cash conversion cycle is the sum of DSO and DOS less DPO. Items which may cause the cash conversion cycle in a particular period to differ include, but are not limited to, changes in business mix, changes in payment terms (including extended payment terms from suppliers), the extent of receivables factoring, seasonal trends and the timing of revenue recognition and inventory purchases within the period.
Investing Activities
For the three months ended January 31, 2017, net cash used in investing activities increased by $0.5 billion as compared to the corresponding period in fiscal 2016. The increase was due primarily to higher payments in the current period in connection with business acquisitions, lower cash proceeds from business divestitures and higher cash utilization for purchases of property, plant and equipment, net of proceeds from sales.
Financing Activities
Compared to the corresponding period in fiscal 2016, net cash used in financing activities decreased by $0.1 billion for the three months ended January 31, 2017, due primarily to lower cash utilization for repurchases of common stock in the current period partially offset by a final cash allocation from former Parent received in the prior period.
Capital Resources
Debt Levels
We maintain debt levels that we establish through consideration of a number of factors, including cash flow expectations, cash requirements for operations, investment plans (including acquisitions), separation activities, share repurchase activities, and our cost of capital and targeted capital structure.
Outstanding borrowings decreased to $15.8 billion as of January 31, 2017, as compared to $16.1 billion at October 31, 2016, bearing weighted-average interest rates of 3.6% and 3.5%, respectively. During the first three months of fiscal 2017, we issued $1.1 billion and repaid $1.1 billion of commercial paper.
There are two tranches of Senior Notes scheduled to mature in October 2017 with an aggregate face value of $2.6 billion. We expect to refinance these notes to the extent they are not retired during fiscal 2017 in connection with the Everett

62
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)


Transaction. For more information on our borrowings, see Note 13, "Borrowings", to the Condensed Consolidated Financial Statements in Item 1 of Part I, which is incorporated herein by reference.
In connection with our separation capitalization plan, on October 9, 2015, we completed our offering of $14.6 billion of aggregate principal amount of Senior Notes. As intended, net proceeds of $14.5 billion from the Senior Notes offering were distributed to HP Inc. to redeem or repurchase certain of our outstanding notes and to facilitate the separation of Hewlett Packard Enterprise from HP Inc. On November 23, 2016, we launched an offer to exchange new registered notes for all of the outstanding $14.6 billion of unregistered Senior Notes. The terms of the new registered Notes in the exchange offer are substantially identical to the terms of the previously unregistered Senior Notes, except that the new Notes are registered under the Securities Act, and certain transfer restrictions, registration rights and additional interest provisions relating to the outstanding Senior Notes do not apply to the new Notes. On December 30, 2016, the exchange offer for the registered Notes was completed.
Our weighted-average interest rate reflects the average effective rate on our borrowings prevailing during the period and reflects the impact of interest rate swaps. For more information on our interest rate swaps, see Note 12, "Financial Instruments", to the Condensed Consolidated Financial Statements in Item 1 of Part I, which is incorporated herein by reference.
Revolving Credit Facility
On November 1, 2015, the Company entered into a revolving credit facility (the "Credit Agreement"), together with the lenders named therein, JPMorgan Chase Bank, N.A. ("JPMorgan"), as co-administrative agent and administrative processing agent, and Citibank, N.A., as co-administrative agent, providing for a senior, unsecured revolving credit facility with aggregate lending commitments of $4.0 billion. Loans under the revolving credit facility may be used for general corporate purposes. Commitments under the Credit Agreement are available for a period of five years, which may be extended, subject to the satisfaction of certain conditions, by up to two one-year periods. Commitment fees, interest rates and other terms of borrowing under the credit facility vary based on Hewlett Packard Enterprise's external credit rating.
Available Borrowing Resources
As of January 31, 2017, we had the following additional liquidity resources available if needed:
 
As of
January 31, 2017
 
In millions
Commercial paper programs
$
4,164

Uncommitted lines of credit
$
1,740

As contemplated by the Everett Transaction, during the first quarter of fiscal 2017, Everett SpinCo, Inc., our wholly owned subsidiary, entered into a term loan facility in the principal amount of $2.0 billion. Everett SpinCo, Inc. also intends to issue Senior Notes in the principal amount of $1.05 billion. Funds to be borrowed under these arrangements will be used by Everett SpinCo, Inc. to fund a $3.0 billion dividend to Hewlett Packard Enterprise. Borrowings under these arrangements will either be transferred in connection with the Everett Transaction or repaid in the event that the merger does not occur.
For more information on our available borrowings resources, see Note 13, "Borrowings", to the Condensed Consolidated Financial Statements in Item 1 of Part I, which is incorporated herein by reference.
CONTRACTUAL AND OTHER OBLIGATIONS
Contractual Obligations
Our purchase obligations increased from $1.8 billion to $2.3 billion during the first quarter of fiscal 2017. 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.

63
HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)


Our other contractual obligations have not changed materially since October 31, 2016. For other contractual obligations see "Contractual and Other Obligations" in Item 7 of Part II of our Annual Report on Form 10-K for the fiscal year ended October 31, 2016, which is incorporated herein by reference.
Retirement and Post-Retirement Benefit Plan Funding
For the remainder of fiscal 2017, we anticipate making additional contributions of approximately $290 million to our non-U.S. pension plans and approximately $2 million to our U.S. non-qualified plan participants and expect to pay approximately $2 million to cover benefit claims under the Company's post-retirement benefit plans. These amounts do not include additional pension funding we may be obligated to make related to the Everett Transaction. We initially estimated the total funding amount to be in the range of $2.0 billion to $3.0 billion. We currently estimate the total funding amount to be approximately $1.9 billion, which equals the payment made in the first quarter of fiscal 2017. However, the exact amount of the funding will not be known until the transaction completion date. Our policy is to fund our pension plans so that we meet at least the minimum contribution requirements, as established by local government, funding and taxing authorities. For more information on our retirement and post-retirement benefit plans, see Note 4, "Retirement and Post-Retirement Benefit Plans", to the Condensed Consolidated Financial Statements in Item 1 of Part I, which is incorporated herein by reference.
Restructuring Plans
As of January 31, 2017, we expect to make future cash payments of approximately $1.6 billion in connection with our approved restructuring plans, which includes $0.8 billion expected to be paid through the remainder of fiscal 2017 and $0.8 billion expected to be paid through fiscal 2021. For more information on our restructuring activities, see Note 3, "Restructuring", to the Condensed Consolidated Financial Statements in Item 1 of Part I, which is incorporated herein by reference.
Uncertain Tax Positions
As of January 31, 2017, we had approximately $4.7 billion of recorded liabilities and related interest and penalties pertaining to uncertain tax positions. These liabilities and related interest and penalties include $6 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 6, "Taxes on Earnings", to the Condensed Consolidated Financial Statements in Item 1 of Part I, which is incorporated herein by reference.
Cross-indemnification with HP Inc.
In connection with the Separation, the Company entered into a Separation and Distribution Agreement with HP Inc. effective November 1, 2015 where the Company agreed to indemnify HP Inc., each of its subsidiaries and each of their respective directors, officers and employees from and against all liabilities relating to, arising out of or resulting from, among other matters, the liabilities allocated to the Company as part of the Separation. HP Inc. similarly agreed to indemnify the Company, each of its subsidiaries and each of their respective directors, officers and employees from and against all claims and liabilities relating to, arising out of or resulting from, among other matters, the liabilities allocated to HP Inc. as part of the Separation. Additionally, in connection with the Separation, the Company entered into a Tax Matters Agreement (the "Tax Matters Agreement") with HP Inc. effective November 1, 2015 that governs the rights and obligations of the Company and HP Inc. for certain pre-Separation tax liabilities. The Tax Matters Agreement provides that the Company and HP Inc. will share certain pre-Separation income tax liabilities that arise from adjustments made by tax authorities to the Company and HP Inc.'s U.S. and certain non-U.S. income tax returns. For more information on our General Cross-indemnification and Tax Matters Agreement and Other Income Tax Matters with HP Inc., see Note 18, "Guarantees, Indemnifications and Warranties", to the Condensed Consolidated Financial Statements in Item 1 of Part I, which is incorporated herein by reference.
Off-Balance Sheet Arrangements
As part of our ongoing business, we have not participated in transactions that generate material relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.

64

Item 3.    Quantitative and Qualitative Disclosures About Market Risk.
For quantitative and qualitative disclosures about market risk affecting HPE, see "Quantitative and Qualitative Disclosures About Market Risk" in Item 7A of Part II of our Annual Report on Form 10-K for the fiscal year ended October 31, 2016, which is incorporated herein by reference. Our exposure to market risk has not changed materially since October 31, 2016.
Item 4.    Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act as of the end of the period covered by this report (the "Evaluation Date"). Based on this evaluation, our principal executive officer and principal financial officer concluded as of the Evaluation Date that our disclosure controls and procedures were effective such that the information relating to the Company, including our consolidated subsidiaries, required to be disclosed in our SEC reports (i) is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and (ii) is accumulated and communicated to the Company's management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control Over Financial Reporting
Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of any changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during our most recently completed fiscal quarter. Based on that evaluation, our principal executive officer and principal financial officer concluded that there has not been any change in our internal control over financial reporting during that quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

65

PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
Information with respect to this item may be found in Note 17, "Litigation and Contingencies" to the Condensed and Consolidated Financial Statements in Item 1 of Part I, which is incorporated herein by reference.
Item 1A. Risk Factors.
Our operations and financial results are subject to various risks and uncertainties, including those described in Part I, Item 1A, "Risk Factors" in our Annual Report on Form 10-K for the fiscal period ended October 31, 2016, which could adversely affect our business, financial condition, results of operations, cash flows, and the trading price of our common stock, including as certain of such risks have been modified as follows:
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 61% of our net revenue in fiscal 2016. 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, including uncertainties and instability in economic and market conditions caused by the United Kingdom’s vote to exit the European Union;
•
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, or federal or state tax reforms, including, but not limited to the possible implementation in the U.S. of “border adjustment” taxes or tariffs on good imported from certain countries into the US;
•
local labor conditions and regulations, including local labor issues faced by specific suppliers and original equipment manufacturers ("OEMs"), or changes to immigration and labor law policies which may adversely impact our access to technical and professional talent;
•
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.
The stock distribution in either or both of the Business Separations could result in significant tax liability, and CSC or Micro Focus (as applicable) may in certain cases be obligated to indemnify us for any such tax liability imposed on us.
Each of the Business Separations is conditioned on the receipt of an opinion from outside counsel regarding the qualification of (i) the relevant distribution and related transactions as a “reorganization” within the meaning of Sections 368(a), 361 and 355 of the Internal Revenue Code of 1986 (the “Code”); and (ii) the relevant merger as a “reorganization” within the meaning of Section 368(a) of the Code.

66

Each opinion of outside counsel will be based upon and rely on, among other things, certain facts and assumptions, as well as certain representations, statements and undertakings of us, Everett SpinCo and CSC, or us, Seattle SpinCo and Micro Focus, as applicable. If any of these representations, statements or undertakings are, or become, inaccurate or incomplete, or if any party breaches any of its covenants in the relevant separation documents, the relevant opinion of counsel may be invalid and the conclusions reached therein could be jeopardized. Notwithstanding the opinions of counsel, the Internal Revenue Service (the “IRS”) could determine that either or both of the distributions should be treated as a taxable transaction if it determines that any of the facts, assumptions, representations, statements or undertakings upon which the relevant opinion of counsel was based are false or have been violated, or if it disagrees with the conclusions in the opinion of counsel. An opinion of counsel is not binding on the IRS and there can be no assurance that the IRS will not assert a contrary position.
If the distribution of Everett SpinCo or Seattle SpinCo, as applicable, together with certain related transactions, failed to qualify 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, in general, we would recognize taxable gain as if we had sold the stock of Everett SpinCo or Seattle SpinCo, as applicable, in a taxable sale for its fair market value, and our stockholders who receive Everett SpinCo shares or Seattle SpinCo shares in the relevant distribution would be subject to tax as if they had received a taxable distribution equal to the fair market value of such shares.
We obtained a private letter ruling from the IRS regarding certain matters impacting the U.S. federal income tax treatment of the ES Separation for the company and certain related transactions as transactions that are generally tax-free for U.S. federal income tax purposes. The conclusions of the IRS private letter ruling were based, among other things, on various factual assumptions we have authorized and representations we have made to the IRS. If any of these assumptions or representations are, or become, inaccurate or incomplete, reliance on the IRS private letter ruling may be affected. Notwithstanding the foregoing, we incurred certain tax costs in connection with the ES Separation, including non-U.S. tax expenses resulting from the ES Separation in multiple non-U.S. jurisdictions that do not legally provide for tax-free ES Separation, which may be material. If the ES Separation or certain internal transactions undertaken in anticipation of the ES Separation are determined to be taxable for U.S. federal income tax purposes, we, our stockholders that are subject to U.S. federal income tax and/or CSC could incur significant U.S. federal income tax liabilities.
Under the tax matters agreement entered into by us with Everett SpinCo and CSC, and to be entered into by us with Seattle SpinCo and Micro Focus, Everett SpinCo and Seattle SpinCo generally would be required to indemnify us for any taxes resulting from the relevant separation (and any related costs and other damages) to the extent such amounts resulted from (i) certain actions taken by, or acquisitions of capital stock of, Everett SpinCo or Seattle SpinCo, as applicable (excluding actions required by the documents governing the relevant Separation), or (ii) any breach of certain representations and covenants made by Everett SpinCo or Seattle SpinCo, as applicable. Any such indemnity obligations could be material.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Recent Sales of Unregistered Securities
There were no unregistered sales of equity securities during the period covered by this report.
Issuer Purchases of Equity Securities
Period
Total Number
of Shares
Purchased
 
Average
Price Paid
per Share
 
Total Number of
Shares Purchased as
Part of Publicly
Announced Plans
or Programs
 
Approximate Dollar Value of
Shares that May Yet Be
Purchased under the Plans
or Programs
 
In thousands, except per share amounts
Month #1 (November 2016)
8,678

 
$
22.98

 
8,678

 
$
3,137,262

Month #2 (December 2016)
9,788

 
$
23.90

 
9,788

 
$
2,903,285

Month #3 (January 2017)
9,031

 
$
22.97

 
9,031

 
$
2,695,810

Total
27,497

 
$
23.31

 
27,497

 
 

For the three months ended January 31, 2017, the Company repurchased and settled 27 million shares of the Company's common stock, which were retired and recorded as a $641 million reduction to stockholders' equity.
On October 13, 2015, the Hewlett Packard Enterprise Board of Directors announced the authorization of a $3.0 billion share repurchase program. On May 24, 2016, the Board of Directors announced the authorization of an additional $3.0 billion

67

under the Company's share repurchase program. Hewlett Packard Enterprise may choose to repurchase shares when sufficient liquidity exists and the shares are trading at a discount relative to estimated intrinsic value. These programs, which do not have a specific expiration date, authorize repurchases in the open market or in private transactions. Share repurchases settled in the first quarter of fiscal 2017 consisted of open market purchase and private transactions. The Company had unsettled open market repurchases of 1.5 million shares, which were recorded as a $34 million reduction to stockholders' equity. As of January 31, 2017, the Company had remaining authorization of $2,662 million for future share repurchases.
Item 5. Other Information.
None.
Item 6. Exhibits.
The Exhibit Index beginning on page 70 of this report sets forth a list of exhibits.

68

SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
HEWLETT PACKARD ENTERPRISE COMPANY
 
 
/s/ TIMOTHY C. STONESIFER
 
 
Timothy C. Stonesifer
 Executive Vice President and Chief Financial Officer
(Principal Financial Officer and Authorized
Signatory)
Date: March 9, 2017

69

HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES
EXHIBIT INDEX
 
 
 
 
Incorporated by Reference
Exhibit
Number
 
Exhibit Description
 
Form
 
File No.
 
Exhibit(s)
 
Filing Date
2.1

 
Separation and Distribution Agreement, dated as of October 31, 2015, by and among Hewlett-Packard Company, Hewlett Packard Enterprise Company and the Other Parties Thereto
 
8-K
 
001-37483
 
2.1
 
November 5, 2015
2.2

 
Transition Services Agreement, dated as of November 1, 2015, by and between Hewlett-Packard Company and Hewlett Packard Enterprise Company
 
8-K
 
001-37483
 
2.2
 
November 5, 2015
2.3

 
Tax Matters Agreement, dated as of October 31, 2015, by and between Hewlett-Packard Company and Hewlett Packard Enterprise Company
 
8-K
 
001-37483
 
2.3
 
November 5, 2015
2.4

 
Employee Matters Agreement, dated as of October 31, 2015, by and between Hewlett-Packard Company and Hewlett Packard Enterprise Company
 
8-K
 
001-37483
 
2.4
 
November 5, 2015
2.5

 
Real Estate Matters Agreement, dated as of October 31, 2015, by and between Hewlett-Packard Company and Hewlett Packard Enterprise Company
 
8-K
 
001-37483
 
2.5
 
November 5, 2015
2.6

 
Master Commercial Agreement, dated as of November 1, 2015, by and between Hewlett-Packard Company and Hewlett Packard Enterprise Company
 
8-K
 
001-37483
 
2.6
 
November 5, 2015
2.7

 
Information Technology Service Agreement, dated as of November 1, 2015, by and between Hewlett-Packard Company and HP Enterprise Services, LLC
 
8-K
 
001-37483
 
2.7
 
November 5, 2015
2.8

 
Agreement and Plan of Merger, dated as of May 24, 2016, among Hewlett Packard Enterprise Company, Computer Sciences Corporation, Everett SpinCo, Inc. and Everett Merger Sub, Inc.
 
8-K
 
001-37483
 
2.1
 
May 26, 2016
2.9

 
Separation and Distribution Agreement, dated as of May 24, 2016, between Hewlett Packard Enterprise Company and Everett SpinCo, Inc.
 
8-K
 
001-37483
 
2.2
 
May 26, 2016
2.10

 
Agreement and Plan of Merger, dated as of September 7, 2016, by and among Hewlett Packard Enterprise Company, Micro Focus International plc, Seattle SpinCo, Inc., Seattle Holdings, Inc. and Seattle MergerSub, Inc.
 
8-K
 
001-37483
 
2.1
 
September 7, 2016
2.11

 
Separation and Distribution Agreement, dated as of September 7, 2016, by and between Hewlett Packard Enterprise Company and Seattle SpinCo, Inc.
 
8-K
 
001-37483
 
2.2
 
September 7, 2016
2.12

 
Employee Matters Agreement, dated as of September 7, 2016, by and among Hewlett Packard Enterprise Company, Seattle SpinCo, Inc. and Micro Focus International plc
 
8-K
 
001-37483
 
2.3
 
September 7, 2016
2.13

 
Agreement and Plan of Merger, dated as of March 6, 2017, by and among Hewlett Packard Enterprise Company, Nimble Storage, Inc. and Nebraska Merger Sub, Inc.
 
8-K
 
001-37483
 
99.1
 
March 7, 2017
2.14

 
Tender and Support Agreement, dated as of March 6, 2017, by and among Hewlett Packard Enterprise Company, Nebraska Merger Sub, Inc. and each of the persons set forth on Schedule A thereto
 
8-K
 
001-37483
 
99.1
 
March 7, 2017
3.1

 
Registrant's Amended and Restated Certificate of Incorporation
 
8-K
 
001-37483
 
3.1
 
November 5, 2015
3.2

 
Registrant's Amended and Restated Bylaws effective October 31, 2015
 
8-K
 
001-37483
 
3.2
 
November 5, 2015

70

 
 
 
 
Incorporated by Reference
Exhibit
Number
 
Exhibit Description
 
Form
 
File No.
 
Exhibit(s)
 
Filing Date
4.1

 
Senior Indenture, dated as of October 9, 2015, between Hewlett Packard Enterprise Company and The Bank of New York Mellon Trust Company, N.A., as Trustee
 
8-K
 
001-37483
 
4.1
 
October 13, 2015
4.2

 
First Supplemental Indenture, dated as of October 9, 2015, between Hewlett Packard Enterprise Company and The Bank of New York Mellon Trust Company, N.A., as Trustee, relating to Hewlett Packard Enterprise Company's 2.450% notes due 2017
 
8-K
 
001-37483
 
4.2
 
October 13, 2015
4.3

 
Second Supplemental Indenture, dated as of October 9, 2015, between Hewlett Packard Enterprise Company and The Bank of New York Mellon Trust Company, N.A., as Trustee, relating to Hewlett Packard Enterprise Company's 2.850% notes due 2018
 
8-K
 
001-37483
 
4.3
 
October 13, 2015
4.4

 
Third Supplemental Indenture, dated as of October 9, 2015, between Hewlett Packard Enterprise Company and The Bank of New York Mellon Trust Company, N.A., as Trustee, relating to Hewlett Packard Enterprise Company's 3.600% notes due 2020
 
8-K
 
001-37483
 
4.4
 
October 13, 2015
4.5

 
Fourth Supplemental Indenture, dated as of October 9, 2015, between Hewlett Packard Enterprise Company and The Bank of New York Mellon Trust Company, N.A., as Trustee, relating to Hewlett Packard Enterprise Company's 4.400% notes due 2022
 
8-K
 
001-37483
 
4.5
 
October 13, 2015
4.6

 
Fifth Supplemental Indenture, dated as of October 9, 2015, between Hewlett Packard Enterprise Company and The Bank of New York Mellon Trust Company, N.A., as Trustee, relating to Hewlett Packard Enterprise Company's 4.900% notes due 2025
 
8-K
 
001-37483
 
4.6
 
October 13, 2015
4.7

 
Sixth Supplemental Indenture, dated as of October 9, 2015, between Hewlett Packard Enterprise Company and The Bank of New York Mellon Trust Company, N.A., as Trustee, relating to Hewlett Packard Enterprise Company's 6.200% notes due 2035
 
8-K
 
001-37483
 
4.7
 
October 13, 2015
4.8

 
Seventh Supplemental Indenture, dated as of October 9, 2015, between Hewlett Packard Enterprise Company and The Bank of New York Mellon Trust Company, N.A., as Trustee, relating to Hewlett Packard Enterprise Company's 6.350% notes due 2045
 
8-K
 
001-37483
 
4.8
 
October 13, 2015
4.9

 
Eighth Supplemental Indenture, dated as of October 9, 2015, between Hewlett Packard Enterprise Company and The Bank of New York Mellon Trust Company, N.A., as Trustee, relating to Hewlett Packard Enterprise Company's floating rate notes due 2017
 
8-K
 
001-37483
 
4.9
 
October 13, 2015
4.10

 
Ninth Supplemental Indenture, dated as of October 9, 2015, between Hewlett Packard Enterprise Company and The Bank of New York Mellon Trust Company, N.A., as Trustee, relating to Hewlett Packard Enterprise Company's floating rate notes due 2018
 
8-K
 
001-37483
 
4.10
 
October 13, 2015
4.11

 
Guarantee Agreement, dated as of October 9, 2015, between Hewlett-Packard Company, Hewlett Packard Enterprise Company and The Bank of New York Mellon Trust Company, N.A., as Trustee, in favor of the holders of the Notes
 
8-K
 
001-37483
 
4.11
 
October 13, 2015
4.12

 
Registration Rights Agreement, dated as of October 9, 2015, among Hewlett Packard Enterprise Company, Hewlett-Packard Company, and the representatives of the initial purchasers of the Notes
 
8-K
 
001-37483
 
4.12
 
October 13, 2015

71

 
 
 
 
Incorporated by Reference
Exhibit
Number
 
Exhibit Description
 
Form
 
File No.
 
Exhibit(s)
 
Filing Date
4.13

 
Eighth Supplemental Indenture, dated as of November 1, 2015, among Hewlett Packard Enterprise Company, HP Enterprise Services, LLC and the Bank of New York Mellon Trust Company, N.A., as Trustee, relating to HP Enterprise Services LLC's 7.45% Senior Notes due October 2029
 
10-K
 
001-04423
 
4.13
 
December 17, 2015
4.14

 
Hewlett Packard Enterprise 401(k) Plan
 
S-8
 
333-207680
 
4.3
 
October 30, 2015
4.15

 
Term Loan Agreement, dated as of December 16, 2016, by and among Everett SpinCo, Inc., the lenders and arrangers party thereto and The Bank of Tokyo-Mitsubishi UFJ, Ltd., as administrative agent
 
8-K
 
001-37483

 
10.1
 
December 22, 2017

10.1

 
Amended and Restated Hewlett Packard Enterprise Company 2015 Stock Incentive Plan*
 
8-K
 
001-37483
 
10.1
 
January 30, 2017
10.2

 
Hewlett Packard Enterprise Company 2015 Employee Stock Purchase Plan
 
10
 
001-37483
 
10.2
 
September 28, 2015
10.3

 
Hewlett Packard Enterprise Company Severance and Long-Term Incentive Change in Control Plan for Executive Officers*
 
10
 
001-37483
 
10.4
 
September 28, 2015
10.4

 
Hewlett Packard Enterprise Executive Deferred Compensation Plan*
 
S-8
 
333-207679
 
4.3
 
October 30, 2015
10.5

 
Hewlett Packard Enterprise Grandfathered Executive Deferred Compensation Plan*
 
S-8
 
333-207679
 
4.4
 
October 30, 2015
10.6

 
Form of Non-Qualified Stock Option Grant Agreement*
 
8-K
 
001-37483
 
10.4
 
November 5, 2015
10.7

 
Form of Restricted Stock Unit Grant Agreement*
 
8-K
 
001-37483
 
10.5
 
November 5, 2015
10.8

 
Form of Performance-Adjusted Restricted Stock Unit Grant Agreement*
 
8-K
 
001-37483
 
10.6
 
November 5, 2015
10.9

 
Form of Restricted Stock Unit Launch Grant Agreement*
 
8-K
 
001-37483
 
10.7
 
November 5, 2015
10.10

 
Form of Performance-Contingent Non-Qualified Stock Option Launch Grant Agreement*
 
8-K
 
001-37483
 
10.8
 
November 5, 2015
10.11

 
Form of Non-Employee Director Stock Options Grant Agreement*
 
8-K
 
001-37483
 
10.9
 
November 5, 2015
10.12

 
Form of Non-Employee Director Restricted Stock Unit Grant Agreement*
 
8-K
 
001-37483
 
10.10
 
November 5, 2015
10.13

 
Credit Agreement, dated as of November 1, 2015, by and among Hewlett Packard Enterprise Company, JPMorgan Chase Bank, N.A., Citibank, N.A., and the other parties thereto
 
8-K
 
001-37483
 
10.1
 
November 5, 2015
10.14

 
Form of Restricted Stock Units Grant Agreement, as amended and restated effective January 1, 2016*
 
10-Q
 
001-37483
 
10.14
 
March 10, 2016
10.15

 
Form of Performance-Adjusted Restricted Stock Unit Agreement, as amended and restated effective January 1, 2016*
 
10-Q
 
001-37483
 
10.15
 
March 10, 2016
10.16

 
Description of Amendment to Equity Awards (incorporated by reference to Item 5.02 of the 8-K filed on May 26, 2016)*
 
8-K
 
001-37483
 
10.1
 
May 26, 2016
10.17

 
Niara, Inc. 2013 Equity Incentive Plan*
 
S-8
 
333-207679
 
4.3
 
March 6, 2017
11

 
None
 
 
 
 
 
 
 
 
12

 
Statement of Computation of Ratio of Earnings to Fixed Charges‡
 
 
 
 
 
 
 
 
15

 
None
 
 
 
 
 
 
 
 
18-19

 
None
 
 
 
 
 
 
 
 
22-24

 
None
 
 
 
 
 
 
 
 

72

 
 
 
 
Incorporated by Reference
Exhibit
Number
 
Exhibit Description
 
Form
 
File No.
 
Exhibit(s)
 
Filing Date
31.1

 
Certification of Chief Executive Officer pursuant to Rule 13a- 14(a) and Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended‡
 
 
 
 
 
 
 
 
31.2

 
Certification of Chief Financial Officer pursuant to Rule 13a- 14(a) and Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended‡
 
 
 
 
 
 
 
 
32

 
Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002†
 
 
 
 
 
 
 
 
101.INS

 
XBRL Instance Document‡
 
 
 
 
 
 
 
 
101.SCH

 
XBRL Taxonomy Extension Schema Document‡
 
 
 
 
 
 
 
 
101.CAL

 
XBRL Taxonomy Extension Calculation Linkbase Document‡
 
 
 
 
 
 
 
 
101.DEF

 
XBRL Taxonomy Extension Definition Linkbase Document‡
 
 
 
 
 
 
 
 
101.LAB

 
XBRL Taxonomy Extension Label Linkbase Document‡
 
 
 
 
 
 
 
 
101.PRE

 
XBRL Taxonomy Extension Presentation Linkbase Document‡
 
 
 
 
 
 
 
 
______________________________________________________________________________
*
Indicates management contract or compensation plan, contract or arrangement
‡
Filed herewith
†
Furnished herewith
The registrant agrees to furnish to the Commission supplementally upon request a copy of (1) any instrument with respect to long-term debt not filed herewith as to which the total amount of securities authorized thereunder does not exceed 10% of the total assets of the registrant and its subsidiaries on a consolidated basis and (ii) schedules or exhibits omitted pursuant to Item 601(b)(2) of Regulation S-K of any material plan of acquisition, disposition or reorganization set forth above.

73