# Hewlett Packard Enterprise Co (HPE) FY 2022 MD&A

Verbatim Item 7 Management's Discussion and Analysis from Hewlett Packard Enterprise Co's 10-K for fiscal year 2022.

SEC filing source: https://www.sec.gov/Archives/edgar/data/1645590/000164559022000071/hpe-20221031.htm
Accession: 0001645590-22-000071
Filing date: 2022-12-08
Report date: 2022-10-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary.
Confidence: high

Company profile: /company/HPE/
All MD&A years: /company/HPE/mda/
Previous year: /company/HPE/mda/fy2021/ (FY 2021)
Next year: /company/HPE/mda/fy2023/ (FY 2023)

ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.

For purposes of this Management's Discussion and Analysis of Financial Condition and Results of Operations ("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 the MD&A section to "former Parent" refer to HP Inc.

This section of this Form 10-K generally discusses fiscal 2022 and fiscal 2021 items and year-to-year comparisons between fiscal 2022 and fiscal 2021. Discussions of fiscal 2020 items and year-to-year comparisons between fiscal 2021 and fiscal 2020 that are not included in this Form 10-K can be found in "Part II, Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations" of the Company's Annual Report on Form 10-K for the fiscal year ended October 31, 2021, as filed with the SEC on December 10, 2021, which is available on the SEC's website at www.sec.gov.

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 Consolidated Financial Statements, 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 Consolidated Financial Statements. This discussion should be read in conjunction with our Consolidated Financial Statements and the related notes that appear elsewhere in this document.

This MD&A is organized as follows:

•Trends and Uncertainties. A discussion of material events and uncertainties known to management, such as the ongoing macroeconomic environment of supply chain constraints and inflationary pressures, our managed exit from Russia and Belarus, recent tax legislation, and other events.

•Executive Overview. A discussion of our business and a summary of our financial performance and other highlights, including non-GAAP financial measures, affecting the Company in order to provide context to the remainder of the MD&A.

•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. 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 and discussion of changes in our cash flows, financial condition, liquidity, and cash requirements and commitments.

•GAAP to Non-GAAP Reconciliation. Each non-GAAP financial measure has been reconciled to the most directly comparable GAAP financial measure therein. This section also includes a discussion of the usefulness of non-GAAP financial measures, and material limitations associated with the use of non-GAAP financial measures.

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Management's Discussion and Analysis of

Financial Condition and Results of Operations (Continued)

TRENDS AND UNCERTAINTIES

The overall demand environment continues to improve but remains impacted by industry-wide supply constraints, which contributed to a challenging supply chain environment, and inflationary pressures, both of which have been driving up material, logistics, and overall costs. The pandemic-related lockdowns in China we experienced in the first half of the fiscal period alleviated somewhat in the second half of the fiscal period. The challenging supply chain environment moderated our full-year revenue growth, elevated costs, and delayed certain unit shipments, resulting in part in a higher level of backlog and related inventory at the end of the current period as compared to the end of the prior-year period.

To address the challenging supply chain environment, we are taking proactive measures such as guiding certain customer demand to specific products, enhancing component engineering design, and multi-sourcing with indirect procurement. We expect the supply chain environment to continue to present challenges in the near term.

Additionally, we are experiencing a challenging foreign exchange environment, which has moderated our revenue and earnings growth. We expect the unfavorable foreign exchange effects and inflationary trend to continue in the longer term. We expect the substantial completion of our HPE Next and cost optimization and prioritization restructuring plans coupled with related cost reduction measures, and operational efficiencies, to moderate the impact of unfavorable foreign exchange effects and inflationary pressures in fiscal 2023.

Russia/Ukraine Conflict

The conflict between Russia and Ukraine and the related sanctions imposed by the U.S., European Union ("EU"), and other countries in response have negatively impacted our operations in both countries and increased economic and political uncertainty across the world. In response to the sanctions imposed, in February 2022, we suspended all new sales and shipments to Russia and Belarus and implemented compliance measures to address the continuously changing regulatory landscape. Based on a further assessment of business risks and needs, in June 2022, we determined that it is no longer tenable to maintain operations in Russia and Belarus and have been proceeding with an orderly, managed exit of our remaining business in these countries.

In fiscal 2021, our operations in Russia and Belarus accounted for approximately 2% of our total net revenue. During fiscal 2022, we recorded total pre-tax charges of $161 million primarily related to expected credit losses of financing and trade receivables, employee severance, and abandoned assets, $99 million of which was included in Financing cost, $12 million in Cost of services, and $50 million in Disaster charges in the Consolidated Statements of Earnings.

We will continue monitoring the social, political, regulatory, and economic environment in Russia and Ukraine, and will consider further actions as appropriate. More broadly, there could be additional adverse impacts to our net revenues, earnings, and cash flows should the situation continue or escalate geopolitical tensions and the impacts of recession, inflation, and supply chain pressures, both regionally and globally.

Recent U.S. Tax Legislation

On August 16, 2022, the U.S. government enacted the Inflation Reduction Act of 2022 (the “Inflation Reduction Act”) into law. The Inflation Reduction Act includes a new corporate alternative minimum tax (the “Corporate AMT”) of 15% on the adjusted financial statement income (“AFSI”) of corporations with average AFSI exceeding $1.0 billion over a three-year period. The Corporate AMT is effective for the Company beginning in fiscal 2024. We are evaluating the Corporate AMT and its potential impact on our future U.S. tax expense, cash taxes, and effective tax rate. Additionally, the Inflation Reduction Act imposes an excise tax of 1% tax on the fair market value of net stock repurchases made after December 31, 2022. The impact of this provision will be dependent on the extent of share repurchases made in future periods.

Other Trends and Uncertainties

We are in the process of addressing many challenges facing our business. One set of challenges include dynamic and accelerating market trends, such as the market shift of workloads to cloud-related information technology ("IT") infrastructure business models, emergence of software-defined architectures and converged infrastructure functionality, and growth in IT consumption models. Certain of our legacy hardware server and storage businesses face challenges as customers migrate to cloud-based offerings and reduce their purchases of hardware products. Therefore, the demand environment for traditional server and storage products is challenging, and lower traditional compute and storage unit volume is impacting support attach opportunities within the associated services organization.

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Management's Discussion and Analysis of

Financial Condition and Results of Operations (Continued)

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.

A third set of challenges relates to business model changes and our go-to-market execution. We provide our customers with a choice between traditional consumption models or software consumption-based, pay-per-use and as-a-service offerings across our entire portfolio of HPE products and services.

Additionally, the global pandemic has accelerated several trends relevant to the Company. First, the exponential increase of data at the edge driven by the proliferation of devices. Second, the need for a cloud experience everywhere to manage the growth of data at the edge. Third, data growth is creating new opportunities with the need to quickly extract value from the captured data. Enterprises have embraced multi-cloud strategies, as they recognize the need for different cloud environments for different types of data and workloads. Increasingly, customers want to digitally transform, while preserving capital and eliminating operating expense, by paying only for the IT they use.

In response to the aforementioned challenges, we are accelerating our development and innovation efforts in the areas of our strategic focus, including the Intelligent Edge and HPC & AI businesses, while at the same time, strengthening our core Compute and Storage businesses, by investing in key areas of growth and accelerating our as-a-service pivot to become the edge-to-cloud company for our customers and partners with our HPE GreenLake edge-to-cloud platform.

During the fiscal period, we announced significant advancements to our HPE GreenLake edge-to-cloud platform, our flagship hybrid offering that enables organizations to modernize all their applications and data, from edge to cloud and supports multi-cloud experiences everywhere – including clouds that live on-premises, at the edge, in a colocation facility, and in a public cloud. The platform advancements included a unified operating experience with one view of all services edge to cloud along with convergence with the Aruba Central cloud service, twelve new cloud services including network as-a-service, data services, high performance computing functions, compute operations management, and availability of the HPE GreenLake edge-to-cloud platform in the online marketplaces of several leading distributors. We also launched HPE GreenLake for Private Cloud Enterprise, which is a private cloud experience for traditional and cloud-native workloads. These updates strengthen the HPE GreenLake edge-to-cloud platform and help customers drive their data modernization needs.

The following Executive Overview, Results of Operations and Liquidity discussions and analysis compare fiscal 2022 to fiscal 2021, unless otherwise noted. The Capital Resources and, Cash Requirements and Commitments sections present information as of October 31, 2022, unless otherwise noted.

EXECUTIVE OVERVIEW

Net revenue of $28.5 billion represented an increase of 2.6% (increased 5.1% on a constant currency basis) as robust demand reflected by a high order backlog was moderated by a combination of unfavorable currency fluctuations, ongoing supply chain constraints, and lower revenue from Russia. The net revenue increase was led by effective pricing management in server products and strong demand for networking products. The gross profit margin of 33.4% (or $9.5 billion) represents a decrease of 0.3 percentage points and was primarily driven by a combination of supply chain constraints and related cost increases, higher costs in HPC & AI, and unfavorable currency fluctuations. Moderating the gross profit decrease was pricing discipline and strong cost management in server products. The operating profit margin of 2.7%, represents a decrease of 1.4 percentage points primarily due to goodwill impairment charges for the HPC & AI and Software businesses. The decrease in operating profit margin was primarily moderated by lower transformation costs. We generated $4.6 billion of cash flow from operations and $1.8 billion of free cash flows primarily due to improved working capital management.

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Management's Discussion and Analysis of

Financial Condition and Results of Operations (Continued)

Financial Results

The following table summarizes our consolidated GAAP financial results:

[[GREPCENT_TABLE]]
[["","For the fiscal years ended October 31,"],["","2022","","2021","","","","Change"],["","In millions, except per share amounts"],["Net revenue","$","28,496","","","$","27,784","","","","","2.6%"],["Gross profit","$","9,506","","","$","9,376","","","","","1.4%"],["Gross profit margin","33.4","%","","33.7","%","","","","(0.3)pts"],["Earnings from operations","$","782","","","$","1,132","","","","","(30.9)%"],["Operating profit margin","2.7","%","","4.1","%","","","","(1.4)pts"],["Net earnings","$","868","","","$","3,427","","","","","(74.7)%"],["Diluted net earnings per share","$","0.66","","","$","2.58","","","","","$(1.92)"],["Cash flow from operations","$","4,593","","","$","5,871","","","","","(21.8)%"]]
[[/GREPCENT_TABLE]]

The following table summarizes our consolidated non-GAAP financial results:

[[GREPCENT_TABLE]]
[["","For the fiscal years ended October 31,"],["","2022","","2021","","","","Change"],["","In millions, except per share amounts"],["Net revenue adjusted for currency","$","29,213","","","$","27,784","","","","","5.1%"],["Non-GAAP gross profit","$","9,667","","","$","9,424","","","","","2.6%"],["Non-GAAP gross profit margin","33.9","%","","33.9","%","","","","\u2014pts"],["Non-GAAP earnings from operations","$","3,026","","","$","2,848","","","","","6.3%"],["Non-GAAP operating profit margin","10.6","%","","10.3","%","","","","0.3pts"],["Non-GAAP net earnings","$","2,664","","","$","2,602","","","","","2.4%"],["Non-GAAP diluted net earnings per share","$","2.02","","","$","1.96","","","","","$0.06"],["Free cash flow","$","1,794","","","$","1,551","","","","","$243"]]
[[/GREPCENT_TABLE]]

Each non-GAAP financial measure has been reconciled to the most directly comparable GAAP financial measure herein. Please refer to the section "GAAP to Non-GAAP Reconciliations" included in this MD&A for these reconciliations, usefulness of non-GAAP financial measures, and material limitations associated with the use of non-GAAP financial measures.

Annualized Revenue Run-rate ("ARR")

Our pivot to as-a-service continues its strong momentum with the addition of HPE GreenLake Cloud Services. Our mix of ARR is becoming more software-rich as we build our HPE GreenLake edge-to-cloud platform, which is improving our margin profile. On the innovation front, we announced a transformative new data storage services platform that brings our cloud operations model to wherever data lives by unifying data operations. The platform will be available through HPE GreenLake Central and includes a new data services cloud console and a suite of software subscription services that simplifies and automates global infrastructure at scale. We will continue to invest aggressively in HPE GreenLake Cloud Services to provide a true cloud experience and operating model, whether at the edge, on-premises or across multiple clouds.

ARR represents the annualized revenue of all net HPE GreenLake edge-to-cloud platform services revenue, related financial services revenue (which includes rental income from operating leases and interest income from finance leases), and software-as-a-service, software consumption revenue, and other as-a-service offerings, recognized during a quarter and multiplied by four. We use ARR as a performance metric. ARR should be viewed independently of net revenue and is not intended to be combined with it.

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Management's Discussion and Analysis of

Financial Condition and Results of Operations (Continued)

The following presents our ARR as of October 31, 2022 and 2021:

[[GREPCENT_TABLE]]
[["","For the fiscal years ended October 31,"],["","2022","","2021"],["","In millions"],["ARR","$","936","","","$","796"],["Year-over-year growth rate","17","%","","36","%"]]
[[/GREPCENT_TABLE]]

The 17% year over year increase in ARR represents growth from our HPE GreenLake edge-to-cloud platform and related financial services. The growth in the HPE GreenLake edge-to-cloud platform was due to an expanding customer installed base moderated by unfavorable currency fluctuations, supply chain constraints and related installation delays. At the segment level, the growth is led by Storage as-a-service including Zerto and Intelligent Edge as-a-service activity.

Returning capital to our shareholders remains an important part of our capital allocation framework, which also consists of strategic investments. We believe our existing balance of cash and cash equivalents, along with commercial paper and other short-term liquidity arrangements, are sufficient to satisfy our working capital needs, capital asset purchases, dividends, debt repayments, and other liquidity requirements associated with our existing operations. As of October 31, 2022, our cash, cash equivalents and restricted cash were $4.76 billion, compared to $4.33 billion as of October 31, 2021, representing an increase of $0.43 billion.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Our Consolidated Financial Statements are prepared in accordance with U.S. Generally Accepted Accounting Principles ("GAAP"), which requires us to make estimates, judgments, and assumptions that affect the reported amounts of assets, liabilities, net revenue and expenses, and the disclosure of contingent liabilities. A summary of significant accounting policies and a summary of recent accounting pronouncements applicable to our Consolidated Financial Statements are included in Note 1, "Overview and Summary of Significant Accounting Policies", to the Consolidated Financial Statements in Item 8 of Part II. An accounting policy is deemed to be critical if the nature of the estimate or assumption it incorporates is subject to material level of judgment related to matters that are highly uncertain and changes in those estimates and assumptions are reasonably likely to materially impact our Consolidated Financial Statements.

Estimates and judgments are based on historical experience, forecasted events, and various other assumptions that we believe to be reasonable under the circumstances. Estimates and judgments may vary under different assumptions or conditions. We evaluate our estimates and judgments on an ongoing basis.

We believe the accounting policies below are critical in the portrayal of our financial condition and results of operations and require management’s most difficult, subjective, or complex judgments.

Revenue Recognition

We enter into contracts with customers that may include combinations of products and services, resulting in arrangements containing multiple performance obligations for hardware and software products and/or various services.

The majority of our revenue is derived from sales of products and services and the associated support and maintenance, and such revenue is recognized when, or as, control of promised products or services is transferred to the customer at the transaction price. Transaction price is adjusted for variable consideration which may be offered in contracts with customers, partners, and distributors and may include rebates, volume-based discounts, cooperative marketing, price protection, and other incentive programs.

Significant judgment is applied in determining the transaction price as we may be required to estimate variable consideration at the time of revenue recognition. When determining the amount of revenue to recognize, we estimate the expected usage of these programs, applying the expected value or most likely estimate and update the estimate at each reporting period as actual utilization becomes available. Variable consideration is recognized only to the extent that it is probable that a significant reversal of revenue will not occur. We also consider the customers' right of return in determining the transaction price, where applicable.

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Management's Discussion and Analysis of

Financial Condition and Results of Operations (Continued)

To recognize revenue for the products and services for which control has been transferred, we allocate the transaction price for the contract among the performance obligations on a relative standalone selling price ("SSP") basis. We establish SSP for most of our products and services based on the observable price of the products or services when sold separately in similar circumstances to similar customers. When the SSP is not directly observable, we estimate SSP based on management judgment by considering available data, such as internal margin objectives, pricing strategies, market/competitive conditions, historical profitability data, as well as other observable inputs. We establish SSP ranges for our products and services and reassesses them periodically.

Taxes on Earnings

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

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

We record a valuation allowance to reduce deferred tax assets to the amount that we are more likely than not to realize. In determining the need for a valuation allowance, we consider future market growth, forecasted earnings, future sources of taxable income, the mix of earnings in the jurisdictions in which we operate, and prudent and feasible tax planning strategies. In order for us to realize our deferred tax assets, we must be able to generate sufficient taxable income in the jurisdictions in which the deferred tax assets are located.

Our effective tax rate includes the impact of certain undistributed foreign earnings and basis differences for which we have not provided for U.S. federal taxes because we plan to reinvest such earnings and basis differences indefinitely outside the U.S. We will remit non-indefinitely reinvested earnings of our non-U.S. subsidiaries for which deferred U.S. state income and foreign withholding taxes have been provided where excess cash has accumulated and when we determine that it is advantageous for business operations, tax, or cash management reasons.

We are subject to income taxes in the U.S. and approximately 90 other countries, and we are subject to routine corporate income tax audits in many of these jurisdictions. We believe that positions taken on our tax returns are fully supported, but tax authorities may challenge these positions, which may not be fully sustained on examination by the relevant tax authorities. Accordingly, our income tax provision includes amounts intended to satisfy assessments that may result from these challenges. Determining the income tax provision for these potential assessments and recording the related effects requires management judgments and estimates. The amounts ultimately paid on resolution of an audit could be materially different from the amounts previously included in our income tax provision and, therefore, could have a material impact on our (Provision) benefit for taxes, Net earnings (loss) and cash flows. Our accrual for uncertain tax positions is attributable primarily to uncertainties concerning the tax treatment of our international operations, including the allocation of income among different jurisdictions, intercompany transactions and related interest, and uncertain tax positions from acquired companies. For further discussion on taxes on earnings, refer to Note 6, "Taxes on Earnings", to the Consolidated Financial Statements in Item 8 of Part II.

Goodwill

We review goodwill for impairment at the reporting unit level annually on the first day of the fourth quarter, or whenever events or circumstances indicate the carrying amount of goodwill may not be recoverable. We are permitted to conduct a qualitative assessment to determine whether it is necessary to perform a quantitative goodwill impairment test.

As of October 31, 2022, our reporting units with goodwill are consistent with the reportable segments identified in Note 2, "Segment Information" to the Consolidated Financial Statements in Item 8 of Part II, with the exception of Corporate Investments and Other which contains three reporting units, Software, CMS and A & PS.

When performing the goodwill impairment test, we compare the fair value of each reporting unit to its carrying amount. An impairment exists if the fair value of the reporting unit is less than its carrying amount. Estimating the fair value of a reporting unit is judgmental in nature and involves the use of significant estimates and assumptions. We estimate the fair value of our reporting units using a weighting of fair values derived mostly from the income approach and, to a lesser extent, the market approach, with the exception of the Software reporting unit which uses a weighting derived mostly from the market approach. Under the income approach, the fair value of a reporting unit is based on discounted cash flow analysis of management's short-term and long-term forecast of operating performance. This analysis includes significant assumptions

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Management's Discussion and Analysis of

Financial Condition and Results of Operations (Continued)

regarding revenue growth rates, expected operating margins, and timing of expected future cash flows based on market conditions and customer acceptances. The discount rate used is based on the weighted-average cost of capital of comparable public companies adjusted for the relevant risk associated with business specific characteristics and the uncertainty related to the reporting unit's ability to execute on the projected cash flows. Under the market approach, the fair value is based on market multiples of revenue and earnings derived from comparable publicly traded companies with operating and investment characteristics similar to the reporting unit. We weight the fair value derived from the market approach commensurate with the level of comparability of these publicly traded companies to the reporting unit. When market comparables are not meaningful or not available, we estimate the fair value of a reporting unit using the income approach. In addition, we make certain judgments and assumptions in allocating shared assets and liabilities to individual reporting units to determine the carrying amount of each reporting unit.

Our fiscal 2022 annual goodwill impairment analysis resulted in impairment charges for goodwill related to the HPC & AI and Software reporting units. There was no impairment of goodwill for our other reporting units.

The decline in the fair value of the HPC & AI reporting unit below its carrying value resulted from changes in expected future cash flows as compared to our fiscal 2021 long-term plan due to the continuation of supply chain constraints, and other operational challenges as well as an increase in cost of capital. Prior to the quantitative goodwill impairment test, we tested the recoverability of long-lived assets and other assets of the HPC & AI reporting unit and concluded that such assets were not impaired. As a result, we recorded a goodwill impairment charge of $815 million in the fourth quarter of fiscal 2022.

The HPC & AI reporting unit has remaining goodwill allocated of $2.9 billion as of October 31, 2022 and an excess of fair value over carrying value of net assets of 0% as of the annual test date. The HPC & AI business is facing challenges reflected in the results for the year ended October 31, 2022. The challenges are primarily related to supply chain constraints and other operational challenges impacting our ability to achieve certain customer acceptance milestones required for revenue recognition and resulting cost increases associated with fulfilling contracts over longer than originally anticipated timelines. We currently believe these challenges will be successfully addressed when supply chain constraints ease. If the global macroeconomic or geopolitical conditions worsen, projected revenue growth rates or operating margins decline, weighted average cost of capital increases, or if we have significant or sustained decline in our stock price, it is possible our estimates about the HPC & AI reporting unit's ability to successfully address the current challenges may change, which could result in the carrying value of the HPC & AI reporting unit exceeding its estimated fair value and potential impairment charges.

The decline in the fair value of the Software reporting unit resulted primarily from a decline in market multiples. Prior to the quantitative goodwill impairment test, we tested the recoverability of long-lived assets and other assets of the Software reporting unit and concluded that such assets were not impaired. As a result, we recorded a goodwill impairment charge of $90 million in the fourth quarter of fiscal 2022.

The Software reporting unit has remaining goodwill allocated of $123 million as of October 31, 2022 and an excess of fair value over carrying value of net assets of 0% as of the annual test date. As noted above, the Software reporting unit relies significantly on the market approach, which is impacted by market volatility. If global macroeconomic or geopolitical conditions worsen and cause a further decline in equity market or if revenue expectations are not met, this could result in the carrying value of the Software reporting unit exceeding its estimated fair value and potential impairment charges.

The excess of fair value over carrying amount for our reporting units, excluding HPC & AI and Software, ranged from approximately 22% to 142% of the respective carrying amounts. In order to evaluate the sensitivity of the estimated fair value of our other reporting units in the goodwill impairment test, we applied a hypothetical 10% decrease to the fair value of each reporting unit. Based on the results of this hypothetical 10% decrease, all of the other reporting units had an excess of fair value over carrying amount.

Contingencies

We are subject to the possibility of losses from various contingencies. Significant judgment is necessary to estimate the probability and amount of a loss, if any, from such contingencies. An accrual is made when it is probable that a liability has been incurred or an asset has been impaired and the amount of loss can be reasonably estimated. We review these matters at least quarterly and adjust these liabilities to reflect the impact of negotiations, settlements, rulings, advice of legal counsel, and other updated information and events, pertaining to a particular case.

Based on our experience, we believe that any damage amounts claimed in the specific litigation and contingency matters further discussed in Note 17, "Litigation and Contingencies", to the Consolidated Financial Statements in Item 8 of Part II, are

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Management's Discussion and Analysis of

Financial Condition and Results of Operations (Continued)

not a meaningful indicator of our potential liability. Litigation is inherently unpredictable. However, we believe we have valid defenses with respect to legal matters pending against us. Nevertheless, cash flows or results of operations could be materially affected in any particular period by the resolution of one or more of these contingencies. We believe we have recorded adequate provisions for any such matters and, as of October 31, 2022, it was not reasonably possible that a material loss had been incurred in connection with such matters in excess of the amounts recognized in our financial statements.

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 does not adjust for any repricing or demand impacts from changes in foreign currency exchange rates. This change in revenue on a constant currency basis is calculated as the quotient of (a) current year revenue converted to U.S. dollars using the prior-year period's foreign currency exchange rates divided by (b) the prior-year period revenue. This information is provided so that revenue can be viewed without the effect of fluctuations in foreign currency exchange rates, which is consistent with how management evaluates our revenue results and trends. This constant currency disclosure is provided in addition to, and not as a substitute for, the year-over-year percentage change in revenue on a GAAP basis. Other companies may calculate and define similarly labeled items differently, which may limit the usefulness of this measure for comparative purposes.

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

[[GREPCENT_TABLE]]
[["","For the fiscal years ended October 31,"],["","2022","","2021","","2020"],["","Dollars","","% of Revenue","","Dollars","","% of Revenue","","Dollars","","% of Revenue"],["","Dollars in millions"],["Net revenue","$","28,496","","","100.0","%","","$","27,784","","","100.0","%","","$","26,982","","","100.0","%"],["Cost of sales","18,990","","","66.6","%","","18,408","","","66.3","%","","18,513","","","68.6","%"],["Gross profit","9,506","","","33.4","%","","9,376","","","33.7","%","","8,469","","","31.4","%"],["Research and development","2,045","","","7.2","%","","1,979","","","7.1","%","","1,874","","","6.9","%"],["Selling, general and administrative","4,941","","","17.3","%","","4,929","","","17.7","%","","4,624","","","17.2","%"],["Amortization of intangible assets","293","","","1.0","%","","354","","","1.3","%","","379","","","1.4","%"],["Impairment of goodwill","905","","","3.2","%","","\u2014","","","\u2014","%","","865","","","3.2","%"],["Transformation costs","473","","","1.7","%","","930","","","3.3","%","","950","","","3.5","%"],["Disaster charges","48","","","0.2","%","","16","","","0.1","%","","26","","","0.1","%"],["Acquisition, disposition and other related charges","19","","","0.1","%","","36","","","0.1","%","","80","","","0.3","%"],["Earnings (loss) from operations","782","","","2.7","%","","1,132","","","4.1","%","","(329)","","","(1.2)","%"],["Interest and other, net","(188)","","","(0.7)","%","","(211)","","","(0.8)","%","","(215)","","","(0.8)","%"],["Tax indemnification and related adjustments","(67)","","","(0.2)","%","","65","","","0.2","%","","(101)","","","(0.4)","%"],["Non-service net periodic benefit credit","134","","","0.5","%","","70","","","0.3","%","","136","","","0.5","%"],["Litigation judgment","\u2014","","","\u2014","%","","2,351","","","8.5","%","","\u2014","","","\u2014","%"],["Earnings from equity interests","215","","","0.8","%","","180","","","0.6","%","","67","","","0.3","%"],["Earnings (loss) before taxes","876","","","3.1","%","","3,587","","","12.9","%","","(442)","","","(1.6)","%"],["(Provision) benefit for taxes","(8)","","","(0.1)","%","","(160)","","","(0.6)","%","","120","","","0.4","%"],["Net earnings (loss)","$","868","","","3.0","%","","$","3,427","","","12.3","%","","$","(322)","","","(1.2)","%"]]
[[/GREPCENT_TABLE]]

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HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES

Management's Discussion and Analysis of

Financial Condition and Results of Operations (Continued)

Fiscal 2022 compared with fiscal 2021

Net revenue

In fiscal 2022, total net revenue of $28.5 billion, increased by $0.7 billion, or 2.6% (increased 5.1% on a constant currency basis). U.S. net revenue increased by $0.6 billion or 6.5% to $9.4 billion, while net revenue from outside of the U.S. increased by $0.1 billion or 0.7% to $19.1 billion.

From a segment perspective, net revenue increased across many of our segments due to the improved demand environment led by revenue growth of 11%, 4%, and 0.3% in Intelligent Edge, Compute, and HPC & AI, respectively, and decreased 7%, 2%, 1% in Corporate Investments and Other, Financial Services, and Storage, respectively.

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

[[GREPCENT_TABLE]]
[["","For the fiscal years ended October 31,"],["","2022","","2021"],["","Percentage Points"],["Compute","1.6","","","\u2014"],["HPC & AI","0.1","","","0.3"],["Storage","(0.1)","","","0.3"],["Intelligent Edge","1.3","","","1.6"],["Financial Services","(0.2)","","","0.2"],["Corporate Investments and Other","(0.4)","","","0.2"],["Total segment","2.3","","","2.6"],["Elimination of intersegment net revenue","0.3","","","0.4"],["Total HPE","2.6","","","3.0"]]
[[/GREPCENT_TABLE]]

Gross Profit

For the twelve months ended October 31, 2022, the total gross profit margin of 33.4%, represents a decrease of 0.3 percentage points compared to the prior-year period. The decrease was primarily driven by a combination of supply chain constraints and related cost increases, higher costs in HPC & AI, and unfavorable currency fluctuations, with costs from expected credit losses related to exiting our Russia and Belarus businesses adding to the overall decline. Moderating the gross profit decrease was pricing discipline and strong cost management in server products.

Operating expenses

Research and development ("R&D")

R&D expense increased by $66 million, or 3% due primarily to higher overall employee compensation expense, which contributed 1.8 percentage points to the change, and a combination of higher facilities expense, training and travel expenses, and software expenditures, which in total contributed 1.3 percentage points to the change.

Selling, general and administrative ("SG&A")

SG&A expense increased by $12 million, or 0.2% due primarily to higher travel expense as the economy reopens and COVID-19 restrictions ease, higher software expenditures, and the release of bad debt reserves in the prior-year period, which contributed 1.2 percentage points, 0.5 percentage points and 0.3 percentage points to the change, respectively. The increase was partially offset by a combination of lower employee cost driven by lower variable compensation expense and cost savings from our transformation programs which in total contributed 1.9 percentage points to the change. Additionally, the overall increase in SG&A expense was moderated across various expense categories by favorable currency fluctuations.

Amortization of intangible assets

Amortization expense decreased by $61 million, or 17% due to certain intangible assets associated with prior acquisitions reaching the end of their amortization periods moderated by an increase in amortization expense in the current period resulting

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Management's Discussion and Analysis of

Financial Condition and Results of Operations (Continued)

from recent acquisitions. Additionally, the decrease in the current fiscal period was due to certain write-offs taken in the prior fiscal period.

Impairment of goodwill

Impairment of goodwill for fiscal 2022 represents a partial goodwill impairment charge of $905 million recorded in the fourth quarter of fiscal 2022, as it was determined that the fair value of the HPC & AI and Software reporting units was below the carrying value of their net assets. Refer to Note 11, "Goodwill and Intangible Assets" to the Consolidated Financial Statements in Item 8 of Part II for more information.

Transformation programs and costs

Our transformation programs consist of the cost optimization and prioritization plan (launched in 2020) and the HPE Next initiative (launched in 2017).

Transformation costs decreased by $457 million, or 49% due primarily to lower restructuring charges recorded in the current fiscal period as restructuring actions related to employee severance, infrastructure, and other under the cost optimization and prioritization plan are approaching completion primarily in fiscal 2023. For a further discussion, refer to Note 3, “Transformation Programs" to the Consolidated Financial Statements in Item 8 of Part II.

Interest and other, net

Interest and other, net expense decreased by $23 million due primarily to early debt redemption costs incurred in the prior-year period, while in the current-year period a combination of higher gains from the sale of certain assets, lower interest expense from lower average borrowings, and increased interest income from higher interest rates contributed to the net expense decline. This decline was moderated by the current period containing lower gains from equity investments and unfavorable currency fluctuations.

Tax indemnification and related adjustments

We record changes in certain pre-separation tax liabilities for which we shared joint and several liability with HP Inc. and for which we were indemnified under the Termination and Mutual Release Agreement within Tax indemnification and related adjustments. We also record changes to certain pre-separation and pre-divestiture tax liabilities and tax receivables for which we remain liable on behalf of the separated or divested business, but which may not be subject to indemnification.

We recorded Tax indemnification and related adjustments expense of $67 million and income of $65 million in fiscal 2022 and 2021, respectively.

Tax indemnification and related adjustments in fiscal 2022 resulted from changes in certain pre-separation tax liabilities, for which we partially shared joint and several liability with HP Inc. and for which we were indemnified under the Termination and Mutual Release Agreement, and changes to certain pre-divestiture tax liabilities and tax receivables.

Tax indemnification and related adjustments in fiscal 2021 primarily included the impacts of a Brazilian Supreme Court decision received regarding the base on which two social contribution taxes in Brazil ("PIS" and "COFINS") are imposed. As a result of this decision, the Company is entitled to recover credits and associated interest related to the overpayment of these transaction taxes imposed between 2005 and 2019 to be used to offset future Brazilian tax liabilities. As such, we have recorded benefits of $17 million and $80 million, both net of taxes, for the recovery of PIS and COFINS, respectively, during fiscal 2021, of which $25 million was included in Net revenue, $10 million related to interest income was included in Interest and other, net, and $80 million related to pre-separation liabilities was included in Tax indemnification and related adjustments. The corresponding income taxes of $18 million as a result of this recovery were included in (Provision) benefit for taxes in the Consolidated Statement of Earnings.

Non-service net periodic benefit credit

Non-service net periodic benefit credit represents the components of net periodic pension benefit costs, other than service cost, for the Hewlett Packard Enterprise defined benefit pension and post-retirement benefit plans such as interest cost, expected return on plan assets, and the amortization of prior plan amendments and actuarial gains or losses. The credit also includes the impact of any plan settlements, curtailments, or special termination benefits.

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Management's Discussion and Analysis of

Financial Condition and Results of Operations (Continued)

Non-service net periodic benefit credit increased by $64 million due primarily to lower amortized actuarial losses, partially offset by higher interest cost due to higher discount rates and lower expected returns on assets in the current period.

Litigation judgment

Litigation judgment represents the $2.35 billion settlement we received in October 2021 in relation to the Itanium litigation judgment. The gain was recognized as other income and presented as a Litigation judgment in the Consolidated Statements of Earnings in the prior-year period. For further discussion, refer to Note 17, “Litigation and Contingencies" to the Consolidated Financial Statements in Item 8 of Part II.

Earnings from equity interests

Earnings from equity interests primarily represents our 49% interest in H3C Technologies and the amortization of our interest in a basis difference. Earnings from equity interests increased by $35 million due primarily to lower amortization expense from basis difference and higher net income earned by H3C in the current period, partially offset by gains from certain venture investments in the prior-year period.

(Provision) benefit for taxes

For fiscal 2022 and 2021, we recorded income tax expense of $8 million and $160 million, respectively, which reflect effective tax rates of 0.9% and 4.5%, respectively. Our effective tax rate generally differs from the U.S. federal statutory rate of 21% due to favorable tax rates associated with certain earnings from our operations in lower tax jurisdictions throughout the world but may also be materially impacted by discrete tax adjustments during the fiscal year. Our tax rate for fiscal 2022 also included the effects of the non-deductible goodwill impairment. The jurisdictions with favorable tax rates that had the most significant impact on our effective tax rate in the periods presented include Puerto Rico and Singapore.

In fiscal 2022, we recorded $454 million of net income tax benefits related to items discrete to the year. These amounts primarily included:

•$150 million of income tax benefits related to releases of foreign valuation allowances,

•$99 million of income tax benefits related to transformation costs and acquisition, disposition and other related charges,

•$43 million of income tax benefits related to the settlement of U.S. tax audit matters,

•$42 million of income tax benefits related to the release of U.S. passive foreign tax credit valuation allowance,

•$30 million of income tax benefits related to the change in pre-separation tax liabilities, primarily those for which the Company shared joint and several liability with HP Inc. and for which the Company was indemnified by HP Inc.

•$27 million of income tax benefits related to the utilization of capital losses which had a full valuation allowance,

•$12 million of income tax benefits as a result of the fiscal 2021 U.S. tax return filing primarily from the decrease in Global Intangible Low Taxed Income, and

•$11 million of net income tax benefits related to settlements and ongoing discussions in foreign tax audit matters.

In fiscal 2021, we recorded $294 million of net income tax benefits related to items discrete to the year. These amounts primarily included:

•$180 million of income tax benefits related to transformation costs and acquisition, disposition and other related charges,

•$157 million of income tax benefits related to releases of foreign valuation allowances,

•$39 million of income tax benefits related to tax rate changes on deferred taxes,

•$32 million of income tax benefits related to the change in pre-separation tax liabilities, primarily those for which we shared joint and several liability with HP Inc. and for which we were indemnified by HP Inc.

•These benefits were partially offset by $337 million of net income tax charges associated with income from the Itanium litigation judgment, against which $244 million of income tax attributes previously subject to a valuation allowance were utilized, resulting in a net tax expense of $93 million.

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Management's Discussion and Analysis of

Financial Condition and Results of Operations (Continued)

Segment Information

Hewlett Packard Enterprise's organizational structure is based on a number of factors that the Chief Operating Decision Maker ("CODM"), who is the Chief Executive Officer ("CEO"), uses to evaluate, view and run our business operations, which include, but are not limited to, customer base and homogeneity of products and technology. The segments are based on this organizational structure and information reviewed by Hewlett Packard Enterprise's management to evaluate segment results.

A description of the products and services for each segment, along with other pertinent information related to Segments can be found in Note 2, "Segment Information", to the Consolidated Financial Statements in Item 8 of Part II.

Segment Results

The following provides an overview of our key financial metrics by segment for fiscal 2022, as compared to fiscal 2021:

[[GREPCENT_TABLE]]
[["","HPE Consolidated","","Compute","","HPC & AI","","Storage","","Intelligent Edge","","Financial Services","","CorporateInvestments and Other"],["","Dollars in millions, except for per share amounts"],["Net revenue(1)","$","28,496","","","$","12,742","","","$","3,192","","","$","4,711","","","$","3,674","","","$","3,339","","","$","1,255"],["Year-over-year change %","2.6","%","","3.7","%","","0.3","%","","(1.0)","%","","11.3","%","","(1.8)","%","","(7.4)","%"],["Earnings (loss) from operations(2)","$","782","","","$","1,780","","","$","11","","","$","682","","","$","549","","","$","399","","","$","(92)"],["Earnings (loss) from operations as a % of net revenue","2.7","%","","14.0","%","","0.3","%","","14.5","%","","14.9","%","","11.9","%","","(7.3)","%"],["Year-over-year change percentage points","(1.4)","pts","","3.2","pts","","(7.0)","pts","","(1.8)","pts","","(0.5)","pts","","0.4","pts","","(0.3)","pts"]]
[[/GREPCENT_TABLE]]

(1)HPE consolidated net revenue excludes inter-segment net revenue.

(2)Segment earnings from operations exclude certain unallocated corporate costs and eliminations, stock-based compensation expense, amortization of initial direct costs, amortization of intangible assets, impairment of goodwill, transformation costs, disaster charges and acquisition, disposition and other related charges.

Compute

[[GREPCENT_TABLE]]
[["","For the fiscal years ended October 31,"],["","2022","","2021","","2020","","2022 vs 2021 % Change","","2021 vs 2020 % Change"],["","Dollars in millions"],["Net revenue","$","12,742","","","$","12,284","","","$","12,274","","","3.7","%","","0.1","%"],["Earnings from operations","$","1,780","","","$","1,323","","","$","1,002","","","34.5","%","","32.0","%"],["Earnings from operations as a % of net revenue","14.0","%","","10.8","%","","8.2","%"]]
[[/GREPCENT_TABLE]]

Fiscal 2022 compared with fiscal 2021

Compute net revenue increased by $458 million, or 3.7% (increased 6.0% on a constant currency basis) primarily due to higher average unit prices resulting from a combination of increased sales of server configurations with more complex component architectures in our next generation products and disciplined pricing actions. The net revenue increase was moderated by unfavorable currency fluctuations and lower unit shipments resulting from supply constraints due to the challenging supply chain environment. As a result, we ended the period with a high level of order backlog.

Compute experienced product revenue growth in the rack and synergy server categories moderated by a revenue decline due to certain products approaching their end-of-life. Services net revenue declined primarily due to lower revenue from Russia and the impact of delayed hardware shipments on services contracts.

Compute earnings from operations as a percentage of net revenue increased 3.2 percentage points due to decreases in costs of products and services as a percentage of net revenue and operating expenses as a percentage of net revenue. The decrease in costs of products and services as a percentage of net revenue was primarily due to pricing discipline and strong cost management partially offset by unfavorable currency fluctuations and the impact of supply chain constraints and related costs.

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Management's Discussion and Analysis of

Financial Condition and Results of Operations (Continued)

The decrease in operating expenses as a percentage of net revenue was primarily due to cost reduction measures and lower variable compensation expense.

HPC & AI

[[GREPCENT_TABLE]]
[["","For the fiscal years ended October 31,"],["","2022","","2021","","2020","","2022 vs 2021 % Change","","2021 vs 2020 % Change"],["","Dollars in millions"],["Net revenue","$","3,192","","","$","3,184","","","$","3,102","","","0.3","%","","2.6","%"],["Earnings from operations","$","11","","","$","231","","","$","282","","","(95.2)","%","","(18.1)","%"],["Earnings from operations as a % of net revenue","0.3","%","","7.3","%","","9.1","%"]]
[[/GREPCENT_TABLE]]

Fiscal 2022 compared with fiscal 2021

HPC & AI net revenue increased by $8 million or 0.3% (increased 1.9% on a constant currency basis) as a result of growth in HPC led by Converged Edge Systems (formerly known as Edge Compute) and in Data Solutions. The increase was moderated by a decline in net revenue from HPE Cray products as a result of supply chain constraints and other operational challenges impacting the achievement of certain customer acceptance milestones required for revenue recognition. The increase in net revenue was also moderated by lower services revenue due primarily to an unfavorable portfolio mix of service offerings and unfavorable currency fluctuations.

HPC & AI earnings from operations as a percentage of net revenue decreased 7.0 percentage points primarily due to increases in cost of products and services as a percentage of net revenue and operating expenses as a percentage of net revenue. The increase in cost of products and services as a percentage of net revenue was due primarily to higher operational costs, supply chain constraints and related cost increases, and lower revenue from higher-margin services. The increase in operating expenses as a percentage of net revenue was primarily due to higher investments in research and development which focus on high-performance computing and AI solutions, including integrating such solutions into our HPE GreenLake edge-to-cloud platform, partially offset by lower variable compensation expense.

Storage

[[GREPCENT_TABLE]]
[["","For the fiscal years ended October 31,"],["","2022","","2021","","2020","","2022 vs 2021 % Change","","2021 vs 2020 % Change"],["","Dollars in millions"],["Net revenue","$","4,711","","","$","4,760","","","$","4,682","","","(1.0)","%","","1.7","%"],["Earnings from operations","$","682","","","$","775","","","$","810","","","(12.0)","%","","(4.3)","%"],["Earnings from operations as a % of net revenue","14.5","%","","16.3","%","","17.3","%"]]
[[/GREPCENT_TABLE]]

Fiscal 2022 compared with fiscal 2021

Storage net revenue decreased by $49 million, or 1.0% (increased 0.5% on a constant currency basis) due primarily to unfavorable currency fluctuations and supply chain constraints. Net revenue declined in Storage products moderated by an increase in Storage services. The decline in Storage products was led by declines in HPE 3PAR, as we transition to its next generation of product platforms, such as HPE Alletra and HPE Primera products, and lower traditional storage revenue. The increase in Storage services was led by Zerto Services and higher subscription services as we continue our transition to more services-intensive, and software-rich offerings, partially offset by lower support services revenue.

Storage earnings from operations as a percentage of net revenue decreased 1.8 percentage points as cost of products and services as a percentage of net revenue remained unchanged and operating expenses as a percentage of net revenue increased. Cost of products and services as a percentage of net revenue remained unchanged as the impact of increased sales of higher- margin Zerto products was moderated by supply chain constraints and related costs, which unfavorably impacted the mix of certain higher-margin products, and unfavorable currency fluctuations. The increase in operating expenses as a percentage of net revenue was due primarily to higher investments in research and development and SG&A, focused on as-a-service offerings, partially offset by lower variable compensation expense.

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HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES

Management's Discussion and Analysis of

Financial Condition and Results of Operations (Continued)

Intelligent Edge

[[GREPCENT_TABLE]]
[["","For the fiscal years ended October 31,"],["","2022","","2021","","2020","","2022 vs 2021 % Change","","2021 vs 2020 % Change"],["","Dollars in millions"],["Net revenue","$","3,674","","","$","3,302","","","$","2,872","","","11.3","%","","15.0","%"],["Earnings from operations","$","549","","","$","509","","","$","346","","","7.9","%","","47.1","%"],["Earnings from operations as a % of net revenue","14.9","%","","15.4","%","","12.0","%"]]
[[/GREPCENT_TABLE]]

Fiscal 2022 compared with fiscal 2021

Intelligent Edge net revenue increased by $372 million, or 11.3% (increased 14.0% on a constant currency basis) primarily due to a robust demand environment, reflected in a high backlog, which continues to be impacted by supply constraints resulting from a challenging supply chain environment. Net revenue increased in both Intelligent Edge products and services but was moderated by unfavorable currency fluctuations. The increase in product revenue was primarily driven by the wireless local area network ("WLAN") business, partially offset by declines in the Switching business due to material constraints. Growth in services revenue was led by higher attached support services and our as-a-service offerings.

Intelligent Edge earnings from operations as a percentage of net revenue decreased 0.5 percentage points primarily due to an increase in cost of products and services as a percentage of net revenue partially offset by a decrease in operating expenses as a percentage of net revenue. The increase in cost of product and services as a percentage of net revenue was primarily due to supply chain constraints and related costs and unfavorable currency fluctuations. Operating expenses as a percentage of net revenue decreased primarily due to lower variable compensation expense and an increase in the scale of net revenue.

Financial Services

[[GREPCENT_TABLE]]
[["","For the fiscal years ended October 31,"],["","2022","","2021","","2020","","2022 vs 2021 % Change","","2021 vs 2020 % Change"],["","Dollars in millions"],["Net revenue","$","3,339","","","$","3,401","","","$","3,352","","","(1.8)","%","","1.5","%"],["Earnings from operations","$","399","","","$","390","","","$","284","","","2.3","%","","37.3","%"],["Earnings from operations as a % of net revenue","11.9","%","","11.5","%","","8.5","%"]]
[[/GREPCENT_TABLE]]

Fiscal 2022 compared with fiscal 2021

FS net revenue decreased by $62 million, or 1.8% (increased 1.7% on a constant currency basis) due primarily to unfavorable currency fluctuations, partially offset by higher asset management revenue from pre-owned equipment sales, lease buyouts, and remarketing equipment sales.

FS earnings from operations as a percentage of net revenue increased 0.4 percentage points due primarily to lower cost of services as a percentage of net revenue and operating expenses as a percentage of net revenue. The decrease to cost of services as a percentage of net revenue resulted primarily from a combination of lower depreciation expense and bad debt. The decrease in operating expenses as a percentage of net revenue was due primarily to lower employee cost driven by lower variable compensation expense.

The provision for expected credit losses due to the Company's exit from its Russia and Belarus businesses for the year ended October 31, 2022, was excluded from segment operating results.

Financing Volume

[[GREPCENT_TABLE]]
[["","For the fiscal years ended October 31,"],["","2022","","2021","","2020"],["","Dollars in millions"],["Financing volume","$","6,252","","","$","6,168","","","$","6,005"]]
[[/GREPCENT_TABLE]]

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HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES

Management's Discussion and Analysis of

Financial Condition and Results of Operations (Continued)

Financing volume, which represents the amount of financing provided to customers for equipment and related software and services, including intercompany activity, increased by 1.4% in fiscal 2022 as compared to the prior-year period. The increase was primarily driven by higher financing associated with third-party product sales and related service offerings, partially offset by unfavorable currency fluctuations and lower financing of HPE product sales and related service offerings.

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 Consolidated Financial Statements.

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

[[GREPCENT_TABLE]]
[["","As of October 31,"],["","2022","","2021"],["","Dollars in millions"],["Financing receivables, gross","$","8,359","","","$","9,198"],["Net equipment under operating leases","4,103","","","4,001"],["Capitalized profit on intercompany equipment transactions(1)","241","","","275"],["Intercompany leases(1)","97","","","96"],["Gross portfolio assets","12,800","","","13,570"],["Allowance for doubtful accounts(2)","222","","","228"],["Operating lease equipment reserve","44","","","39"],["Total reserves","266","","","267"],["Net portfolio assets","$","12,534","","","$","13,303"],["Reserve coverage","2.1","%","","2.0","%"],["Debt-to-equity ratio(3)","7.0x","","7.0x"]]
[[/GREPCENT_TABLE]]

(1)Intercompany activity is eliminated in consolidation.

(2)Allowance for credit losses for financing receivables includes both the short- and long-term portions.

(3)Debt benefiting FS consists of intercompany equity that is treated as debt for segment reporting purposes, intercompany debt, and borrowing- and funding-related activity associated with FS and its subsidiaries. Debt benefiting FS totaled $11.5 billion and $11.9 billion at October 31, 2022 and 2021, 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 October 31, 2022 and 2021, was $1.6 billion and $1.7 billion, respectively.

As of October 31, 2022 and 2021, FS net cash and cash equivalents were $923 million and $898 million, respectively.

Net portfolio assets as of October 31, 2022 decreased 5.8% from October 31, 2021. The decrease generally resulted from unfavorable currency fluctuations, partially offset by new financing volume exceeding portfolio runoff during the period.

FS bad debt expense includes charges to general reserves, specific reserves and write-offs for sales-type, direct-financing and operating leases. FS recorded net bad debt expense of $82 million, $95 million and $93 million in fiscal 2022, 2021 and 2020, respectively.

As of October 31, 2022, FS experienced a decrease in billed finance receivables compared to October 31, 2021, which included a limited impact to collections from customers as a result of the pandemic, and customers from Russia. We are currently unable to fully predict the extent to which the pandemic and our exit from Russia and Belarus businesses may adversely impact future collections of our receivables.

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Management's Discussion and Analysis of

Financial Condition and Results of Operations (Continued)

Corporate Investments and Other

[[GREPCENT_TABLE]]
[["","For the fiscal years ended October 31,"],["","2022","","2021","","2020","","2022 vs 2021 % Change","","2021 vs 2020 % Change"],["","Dollars in millions"],["Net revenue","$","1,255","","","$","1,356","","","$","1,298","","","(7.4)","%","","4.5","%"],["Loss from operations","$","(92)","","","$","(95)","","","$","(206)","","","3.2","%","","53.9","%"],["Loss from operations as a % of net revenue","(7.3)","%","","(7.0)","%","","(15.9)","%"]]
[[/GREPCENT_TABLE]]

Fiscal 2022 compared with fiscal 2021

Corporate Investments and Other net revenue decreased by $101 million, or 7.4% (decreased 0.4% on a constant currency basis) due to unfavorable currency fluctuations.

Corporate Investments and Other loss from operations as a percentage of net revenue increased 0.3 percentage points due primarily to lower cost of services as a percentage of net revenue and an increase in operating expenses as a percentage of net revenue. The decrease in cost of services as a percentage of net revenue was due primarily to improved service delivery efficiencies in A & PS and lower variable compensation expense largely offset by a lower mix of higher margin license revenue in Software. The increase in operating expenses as a percentage of net revenue was due primarily to the scale of the net revenue decline partially offset by lower variable compensation expense.

LIQUIDITY AND CAPITAL RESOURCES

Current Overview

We use cash generated by operations as our primary source of liquidity. We believe that internally generated cash flows will be generally sufficient to support our operating businesses, capital expenditures, product development initiatives, acquisitions and disposal activities including legal settlements, restructuring activities, transformation costs, indemnifications, maturing debt, interest payments, and income tax payments, in addition to any future investments, share repurchases, and stockholder dividend payments. We expect to supplement this short-term liquidity, if necessary, by accessing the capital markets, issuing commercial paper, and borrowing under credit facilities made available by various domestic and foreign financial institutions. However, our access to capital markets may be constrained and our cost of borrowing may increase under certain business, market and economic conditions. We anticipate that the funds made available and cash generated from operations along with our access to capital markets will be sufficient to meet our liquidity requirements for at least the next twelve months and for the foreseeable future thereafter. We continue to monitor the severity and duration of the COVID-19 pandemic and its impact on the U.S. and other global economies, the capital markets, consumer behavior, our businesses, results of operations, financial condition and cash flows. Our liquidity is subject to various risks including the risks identified in the section entitled "Risk Factors" in Item 1A and market risks identified in the section entitled "Quantitative and Qualitative Disclosures about Market Risk" in Item 7A.

Our cash balances are held in numerous locations throughout the world, with a substantial amount held outside the U.S as of October 31, 2022. 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.

Amounts held outside of the U.S. are generally utilized to support our non-U.S. liquidity needs. Repatriations of amounts held outside the U.S. generally will not be taxable from a U.S. federal tax perspective, but may be subject to state income or foreign withholding tax. Where local restrictions prevent an efficient intercompany transfer of funds, our intent is to keep cash balances outside of the U.S. and to meet liquidity needs through ongoing cash flows, external borrowings, or both. We do not expect restrictions or potential taxes incurred on the repatriation of amounts held outside of the U.S. to have a material effect on our overall liquidity, financial condition or results of operations.

In connection with the share repurchase program previously authorized by our Board of Directors, during fiscal 2022, we repurchased and settled an aggregate amount of $0.5 billion. As of October 31, 2022, we had a remaining authorization of $1.4 billion for future share repurchases. For more information on our share repurchase program, refer to Note 15, "Stockholders' Equity", to the Consolidated Financial Statements in Item 8 of Part II.

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Management's Discussion and Analysis of

Financial Condition and Results of Operations (Continued)

On April 22, 2022, we entered into an amendment with Unisplendour Corporation (“UNIS”) and H3C Technologies Co. Limited (“H3C”) to the Shareholder Agreement previously entered into between the parties as of May 1, 2016. The amendment extended the Shareholder Agreement to October 31, 2022, the latest date upon which we could put to UNIS all or part of the H3C shares held by us, at a price of 15.0 times the last twelve months net income of H3C.

On October 28, 2022, we entered into a subsequent amendment to the aforementioned Shareholder Agreement to further extend to December 31, 2022, the latest date upon which we may put to UNIS all or part of the H3C shares held by us, at a price of 15.0 times the last twelve months (measured from April 30, 2022) net income of H3C.

Liquidity

Our cash, cash equivalents, restricted cash, total debt and available borrowing resources were as follows:

[[GREPCENT_TABLE]]
[["","As of October 31,"],["","2022","","2021","","2020"],["","In millions"],["Cash, cash equivalents, and restricted cash","$","4,763","","","$","4,332","","","$","4,621"],["Total debt","$","12,465","","","$","13,448","","","$","15,941"],["Available borrowing resources","$","6,161","","","$","6,017","","","$","6,297"],["Commercial paper programs(1)","$","5,208","","","$","5,045","","","$","5,073"],["Uncommitted lines of credit","$","953","","","$","972","","","$","1,224"]]
[[/GREPCENT_TABLE]]

(1) The maximum aggregate borrowing amount of the commercial paper programs and revolving credit facility is $5.75 billion.

The tables below represent the way in which management reviews cash flows:

[[GREPCENT_TABLE]]
[["","For the fiscal years ended October 31,"],["","2022","","2021","","2020"],["","In millions"],["Net cash provided by operating activities","$","4,593","","","$","5,871","","","$","2,240"],["Net cash used in investing activities","(2,087)","","","(2,796)","","","(2,578)"],["Net cash (used in) provided by financing activities","(1,796)","","","(3,364)","","","883"],["Effect of exchange rate changes on cash, cash equivalents, and restricted cash","(279)","","","\u2014","","","\u2014"],["Net increase (decrease) in cash, cash equivalents, and restricted cash","$","431","","","$","(289)","","","$","545"]]
[[/GREPCENT_TABLE]]

Operating Activities

Net cash provided by operating activities decreased by $1.3 billion for fiscal 2022, as compared to fiscal 2021. The decrease was primarily due to $2.2 billion of after-tax cash resulting from a litigation judgment in the prior-year period, lower variable compensation accruals, and favorable hedging positions moderated by improved working capital and a decrease in financing receivables, as compared to the prior-year period.

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

[[GREPCENT_TABLE]]
[["","As of October 31,"],["","2022","","2021","","2020"],["Days of sales outstanding in accounts receivable (\"DSO\")","47","","","49","","","42"],["Days of supply in inventory (\"DOS\")","88","","","82","","","48"],["Days of purchases outstanding in accounts payable (\"DPO\")","(149)","","","(128)","","","(97)"],["Cash conversion cycle","(14)","","","3","","","(7)"]]
[[/GREPCENT_TABLE]]

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 to customers or from suppliers), early or late invoice payments from customers or to suppliers, the

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HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES

Management's Discussion and Analysis of

Financial Condition and Results of Operations (Continued)

extent of receivables factoring, seasonal trends, the timing of sales and inventory purchases within the period, the impact of commodity costs and acquisition activity.

DSO measures the average number of days our receivables are outstanding. DSO is calculated by dividing ending accounts receivable, net of allowance for doubtful accounts, by a 90-day average of net revenue. For the three-month period ending October 31, 2022, as compared to the corresponding prior-year period, DSO decreased by 2 days due primarily to favorable billings linearity, higher early collections and receivables factoring, partially offset by extended payment terms.

DOS measures the average number of days from procurement to sale of our product. DOS is calculated by dividing ending inventory by a 90-day average of cost of goods sold. For the three-month period ending October 31, 2022, as compared to the corresponding prior-year period, DOS increased by 6 days due primarily to higher levels of inventory resulting from a combination of supply chain constraints, positioning of inventory to fulfill planned future shipments, and strategic purchases of certain key components.

DPO measures the average number of days our accounts payable balances are outstanding. DPO is calculated by dividing ending accounts payable by a 90-day average of cost of goods sold. For the three-month period ending October 31, 2022, as compared to the corresponding prior-year period, DPO increased by 21 days due primarily to proactive measures we have taken to secure key materials for future shipments and a larger proportion of vendors with longer payment terms.

Investing Activities

Net cash used in investing activities decreased by $0.7 billion in fiscal 2022, as compared to fiscal 2021. The change was primarily due to a combinaton of lower payments in connection with business acquisitions of $0.5 billion, lower cash utilized in net financial collateral activities of $0.3 billion and higher proceeds from the sale of investments, net of purchases of $0.3 billion, partially offset by higher cash utilized for investment in property, plant and equipment, net of sales proceeds of $0.4 billion, as compared to the prior-year period.

Financing Activities

Net cash used in financing activities decreased by $1.6 billion in fiscal 2022, as compared to fiscal 2021. The decrease was due primarily to lower net debt repayments of $1.9 billion and higher cash utilized for share repurchases of $0.3 billion, as compared to the prior-year period.

Free Cash Flow

[[GREPCENT_TABLE]]
[["","For the fiscal years ended October 31,"],["","2022","","2021","","2020"],["","In millions"],["Net cash provided by operating activities","$","4,593","","","$","5,871","","","$","2,240"],["Litigation judgment, net of taxes paid","\u2014","","","(2,172)","","","\u2014"],["Net cash provided by operating activities, excluding litigation judgment, net of taxes paid","4,593","","","3,699","","","2,240"],["Investment in property, plant and equipment","(3,122)","","","(2,502)","","","(2,383)"],["Proceeds from sale of property, plant and equipment","602","","","354","","","703"],["Effect of exchange rate changes on cash, cash equivalents, and restricted cash","(279)","","","\u2014","","","\u2014"],["Free Cash Flow","$","1,794","","","$","1,551","","","$","560"]]
[[/GREPCENT_TABLE]]

Free cash flow represents cash flow from operations, excluding the impact of $2.2 billion in proceeds received in the fourth quarter of fiscal 2021 from a one-time Itanium litigation judgment, less net capital expenditures (investments in property, plant and equipment (“PP&E”) less proceeds from the sale of PP&E), and adjusted for the effect of exchange rate fluctuations on cash, cash equivalents, and restricted cash. Free cash flow increased by $0.2 billion in fiscal 2022, as compared to fiscal 2021, due to higher cash generated from operating activities (excluding a one-time litigation judgment) led by improved net working capital management, moderated by increased cash used for investments in property, plant and equipment, net of sales proceeds.

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HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES

Management's Discussion and Analysis of

Financial Condition and Results of Operations (Continued)

Our improved free cash flow and cash position help to ensure we have ample liquidity to run operations, continuing to invest in our business to drive growth and return capital to shareholders.

For more information on the impact from operating assets and liabilities to cash flows, see Note 7, "Balance Sheet Details", to the Consolidated Financial Statements in Item 8 of Part II.

Capital Resources

Debt Levels

[[GREPCENT_TABLE]]
[["","As of October 31,"],["","2022","","2021","","2020"],["","In millions"],["Short-term debt","$","4,612","","","$","3,552","","","$","3,755"],["Long-term debt","$","7,853","","","$","9,896","","","$","12,186"],["Weighted-average interest rate","4.0","%","","2.9","%","","3.2","%"]]
[[/GREPCENT_TABLE]]

We maintain debt levels that we establish through consideration of a number of factors, including cash flow expectations, cash requirements for operations, investment plans (including acquisitions), share repurchase activities, our cost of capital, and targeted capital structure. We maintain a revolving credit facility and two commercial paper programs, "the Parent Programs", and a wholly-owned subsidiary maintains a third program. In December 2021, we terminated our prior senior unsecured revolving credit facility and entered into a new senior unsecured revolving credit facility with an aggregate commitment of $4.75 billion for a period of five years. There have been no changes to our commercial paper programs since October 31, 2021.

In December 2020, we filed a shelf registration statement with the Securities and Exchange Commission that allows us to sell, at any time and from time to time, in one or more offerings, debt securities, preferred stock, common stock, warrants, depository shares, purchase contracts, guarantees or units consisting of any of these securities.

As of October 31, 2022 and 2021, no borrowings were outstanding under our revolving credit facility.

As of October 31, 2022 and 2021, no borrowings were outstanding under the Parent Programs, and $542 million and $705 million, respectively, were outstanding under our subsidiary’s program. During fiscal 2022, we issued $3.2 billion and repaid $3.2 billion of commercial paper.

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 13, "Financial Instruments", to the Consolidated Financial Statements in Item 8 of Part II.

For more information on our available borrowing resources and the impact of operating assets and liabilities to cash flows, see Note 14, "Borrowings", and Note 7, "Balance Sheet Details", respectively, to the Consolidated Financial Statements in Item 8 of Part II.

Cash Requirements and Commitments

Long-term debt and interest payments on debt

As of October 31, 2022, future principal payment obligations on our long-term debt including asset-backed debt securities totaled $11.9 billion, of which $3.9 billion is due within one year. As of October 31, 2022, our finance lease obligations, including interest, was $55 million, of which $7 million is to be due within one year. For more information on our debt, see Note 14, "Borrowings", to the Consolidated Financial Statements in Item 8 of Part II.

As of October 31, 2022, future interest payments relating to our long-term debt is estimated to be approximately $3.6 billion, of which $0.5 billion is expected to be due within one year. We use interest rate swaps to mitigate the exposure of our fixed rate debt to changes in fair value resulting from changes in interest rates, or hedge the variability of cash flows in the interest payments associated with our variable-rate debt. The impact of our outstanding interest rate swaps as of October 31, 2022 was factored into the calculation of the future interest payments on long-term debt.

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Management's Discussion and Analysis of

Financial Condition and Results of Operations (Continued)

Operating lease obligations

We enter into various leases as a lessee for assets including office buildings, data centers, vehicles, and aviation. As of October 31, 2022, operating lease obligations, net of sublease rental income totaled $1.1 billion, of which $171 million is due within one year. These amounts included uncommenced operating leases as of October 31, 2022, and did not reflect imputed interest adjustments. For more information on our leases, see Note 8, "Accounting for Leases as a Lessee", to the Consolidated Financial Statements in Item 8 of Part II.

Unconditional purchase obligations

Our unconditional purchase obligations are related principally to inventory purchases, software maintenance and support services and other items. Unconditional purchase obligations exclude agreements that are cancellable without penalty. As of October 31, 2022, unconditional purchase obligations totaled $1.6 billion, of which $449 million is due within one year. For more information on our unconditional purchase obligations, see Note 19, "Commitments", to the Consolidated Financial Statements in Item 8 of Part II.

Retirement Benefit Plan Funding

In fiscal 2023, we anticipate making contributions of $170 million to our non-U.S. pension plans. Our policy is to fund pension plans to meet at least the minimum contribution requirements, as established by various authorities including local government and taxing authorities. Expected contributions and payments to our pension and post-retirement benefit plans are not considered as contractual obligations because they do not represent contractual cash outflows, as they are dependent on numerous factors which may result in a wide range of outcomes. For more information on our retirement and post-retirement benefit plans, see Note 4, "Retirement and Post-Retirement Benefit Plans", to the Consolidated Financial Statements in Item 8 of Part II.

Restructuring Plans

As of October 31, 2022, we expect future cash payments of approximately $460 million in connection with our approved restructuring plans, which includes $330 million expected to be paid in fiscal 2023 and $130 million expected to be paid thereafter. Payments for restructuring activities are not considered as contractual obligations, because they do not represent contractual cash outflows and there is uncertainty as to the timing of these payments. For more information on our restructuring activities, see Note 3, "Transformation Programs", to the Consolidated Financial Statements in Item 8 of Part II.

Uncertain Tax Positions

As of October 31, 2022, we had approximately $297 million of recorded liabilities and related interest and penalties pertaining to uncertain tax positions. These liabilities and related interest and penalties include $29 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 Consolidated Financial Statements in Item 8 of Part II.

Off-Balance Sheet Arrangements

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

We have third-party revolving short-term financing arrangements intended to facilitate the working capital requirements of certain customers. For more information on our third-party revolving short-term financing arrangements, see Note 7, "Balance Sheet Details", to the Consolidated Financial Statements in Item 8 of Part II.

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HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES

Management's Discussion and Analysis of

Financial Condition and Results of Operations (Continued)

GAAP TO NON-GAAP RECONCILIATIONS

The following tables provide a reconciliation of each non-GAAP financial measure to the most directly comparable GAAP financial measure for the periods presented:

Reconciliation of GAAP gross profit and gross profit margin to non-GAAP gross profit and gross profit margin.

[[GREPCENT_TABLE]]
[["","For the fiscal years ended October 31,"],["","2022","","2021"],["","Dollars","","% of Revenue","","Dollars","","% of Revenue"],["","In millions"],["GAAP Net revenue","$","28,496","","","100.0","%","","$","27,784","","","100.0","%"],["GAAP Cost of sales","18,990","","","66.6","%","","18,408","","","66.3","%"],["GAAP gross profit","$","9,506","","","33.4","%","","$","9,376","","","33.7","%"],["Non-GAAP adjustments"],["Amortization of initial direct costs","4","","","\u2014","%","","8","","","\u2014","%"],["Stock-based compensation expense","46","","","0.1","%","","40","","","0.2","%"],["Disaster charges(1)","111","","","0.4","%","","\u2014","","","\u2014","%"],["Non-GAAP gross profit","$","9,667","","","33.9","%","","$","9,424","","","33.9","%"]]
[[/GREPCENT_TABLE]]

Reconciliation of GAAP earnings from operations and operating profit margin to non-GAAP earnings from operations and operating profit margin.

[[GREPCENT_TABLE]]
[["","For the fiscal years ended October 31,"],["","2022","","2021"],["","Dollars","","% of Revenue","","Dollars","","% of Revenue"],["","In millions"],["GAAP earnings from operations","$","782","","","2.7","%","","$","1,132","","","4.1","%"],["Non-GAAP adjustments:"],["Amortization of initial direct costs","4","","","\u2014","%","","8","","","\u2014","%"],["Amortization of intangible assets","293","","","1.0","%","","354","","","1.3","%"],["Impairment of goodwill","905","","","3.2","%","","\u2014","","","\u2014","%"],["Transformation costs","473","","","1.6","%","","930","","","3.4","%"],["Disaster charges(1)","159","","","0.6","%","","16","","","0.1","%"],["Stock-based compensation expense","391","","","1.4","%","","372","","","1.3","%"],["Acquisition, disposition and other related charges","19","","","0.1","%","","36","","","0.1","%"],["Non-GAAP earnings from operations","$","3,026","","","10.6","%","","$","2,848","","","10.3","%"]]
[[/GREPCENT_TABLE]]

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HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES

Management's Discussion and Analysis of

Financial Condition and Results of Operations (Continued)

Reconciliation of GAAP net earnings and diluted net earnings per share to non-GAAP net earnings and diluted net earnings per share.

[[GREPCENT_TABLE]]
[["","For the fiscal years ended October 31,"],["","2022","","2021"],["","Dollars","","Diluted net earnings per share","","Dollars","","Diluted net earnings per share"],["","Dollars in millions"],["GAAP net earnings","$","868","","","$","0.66","","","$","3,427","","","$","2.58"],["Non-GAAP adjustments:"],["Amortization of initial direct costs","4","","","\u2014","","","8","","","0.01"],["Amortization of intangible assets","293","","","0.22","","","354","","","0.27"],["Impairment of goodwill","905","","","0.69","","","\u2014","","","\u2014"],["Transformation costs","473","","","0.36","","","930","","","0.70"],["Disaster charges(1)","159","","","0.12","","","16","","","0.01"],["Stock-based compensation expense","391","","","0.30","","","372","","","0.28"],["Acquisition, disposition and other related charges","19","","","0.01","","","36","","","0.03"],["Tax indemnification and related adjustments","67","","","0.05","","","(65)","","","(0.05)"],["Non-service net periodic benefit credit","(134)","","","(0.10)","","","(70)","","","(0.05)"],["Litigation judgment","\u2014","","","\u2014","","","(2,351)","","","(1.78)"],["Early debt redemption costs","\u2014","","","\u2014","","","100","","","0.08"],["Earnings from equity interests(2)","45","","","0.03","","","109","","","0.08"],["Adjustments for taxes","(426)","","","(0.32)","","","(264)","","","(0.20)"],["Non-GAAP net earnings","$","2,664","","","$","2.02","","","$","2,602","","","$","1.96"]]
[[/GREPCENT_TABLE]]

(1) During fiscal year ended 2022, the Company recorded total pre-tax charges of $161 million, primarily related to the Company's exit from its Russia and Belarus businesses. Additionally, in fiscal 2022, Disaster charges included a recovery of $2 million related to COVID-19. Refer to Note 1, "Overview and Summary of Significant Accounting Policies" to the Consolidated Financial Statements in Item 8 of Part II, for further information.

(2) Represents the amortization of basis difference adjustments related to the H3C divestiture.

Reconciliation of net cash provided by operating activities to free cash flow.

[[GREPCENT_TABLE]]
[["","For the fiscal years ended October 31,"],["","2022","","2021"],["","In millions"],["Net cash provided by operating activities","$","4,593","","","$","5,871"],["Litigation judgment, net of taxes paid","\u2014","","","(2,172)"],["Net cash provided by operating activities, excluding litigation judgment, net of taxes paid","4,593","","","3,699"],["Investment in property, plant and equipment","(3,122)","","","(2,502)"],["Proceeds from sale of property, plant and equipment","602","","","354"],["Effect of exchange rate changes on cash, cash equivalents, and restricted cash","(279)","","","\u2014"],["Free cash flow","$","1,794","","","$","1,551"]]
[[/GREPCENT_TABLE]]

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HEWLETT PACKARD ENTERPRISE COMPANY AND SUBSIDIARIES

Management's Discussion and Analysis of

Financial Condition and Results of Operations (Continued)

Non-GAAP financial measures

The non-GAAP financial measures presented are net revenue on a constant currency basis, non-GAAP gross profit, non-GAAP gross profit margin, non-GAAP earnings from operations, non-GAAP operating profit margin (non-GAAP earnings from operations as a percentage of net revenue), non-GAAP net earnings, non-GAAP diluted net earnings per share, and free cash flow. These non-GAAP financial measures are used by management for purposes of evaluating our historical and prospective financial performance, as well as evaluating our performance relative to our competitors. These non-GAAP financial measures are not computed in accordance with, or as an alternative to, generally accepted accounting principles in the United States. The GAAP measure most directly comparable to net revenue on a constant currency basis is net revenue. The GAAP measure most directly comparable to non-GAAP gross profit is gross profit. The GAAP measure most directly comparable to non-GAAP gross profit margin is gross profit margin. The GAAP measure most directly comparable to non-GAAP earnings from operations is earnings from operations. The GAAP measure most directly comparable to non-GAAP operating profit margin (non-GAAP earnings from operations as a percentage of net revenue) is operating profit margin (earnings from operations as a percentage of net revenue). The GAAP measure most directly comparable to non-GAAP net earnings is net earnings. The GAAP measure most directly comparable to non-GAAP diluted net earnings per share is diluted net earnings per share. The GAAP measure most directly comparable to free cash flow is cash flow from operations.

Net revenue on a constant currency basis assumes no change in the foreign exchange rate from the prior-year period. Non-GAAP gross profit and non-GAAP gross profit margin is defined to exclude charges related to the amortization of initial direct costs, stock-based compensation expense and disaster charges. Non-GAAP earnings from operations and non-GAAP operating profit margin (non-GAAP earnings from operations as a percentage of net revenue) consist of earnings from operations excluding any charges related to the amortization of initial direct costs, amortization of intangible assets, impairment of goodwill, transformation costs, disaster charges, stock-based compensation expense and acquisition, disposition and other related charges. Non-GAAP net earnings and non-GAAP diluted net earnings per share consist of net earnings or diluted net earnings per share excluding those same charges, as well as items such as tax indemnification and related adjustments, non-service net periodic benefit credit, litigation judgment, early debt redemption costs, earnings from equity interests, certain income tax valuation allowances and separation taxes, the impact of tax reform, structural rate adjustment and excess tax benefit from stock-based compensation. In addition, non-GAAP net earnings and non-GAAP diluted net earnings per share are adjusted by the amount of additional taxes or tax benefits associated with each non-GAAP item. We believe that excluding the items mentioned above from these non-GAAP financial measures allows management to better understand our consolidated financial performance in relation to the operating results of our segments. Management believes excluding these items facilitates a more meaningful evaluation of our current operating performance in comparison to our peers.

These non-GAAP financial measures have limitations as analytical tools, and these measures should not be considered in isolation or as a substitute for analysis of our results as reported under GAAP. Some of the limitations in relying on these non-GAAP financial measures are that they can have a material impact on the equivalent GAAP earnings measures and cash flows, they may be calculated differently by other companies and may not reflect the full economic effect of the loss in value of certain assets.

We compensate for these limitations on the use of non-GAAP financial measures by relying primarily on our GAAP results and using non-GAAP financial measures only as a supplement. We also provide a reconciliation of each non-GAAP financial measure to its most directly comparable GAAP measure. We believe that providing net revenue on a constant currency basis, non-GAAP gross profit, non-GAAP gross profit margin, non-GAAP earnings from operations, non-GAAP operating profit margin, non-GAAP net earnings, non-GAAP diluted net earnings per share and free cash flow, in addition to the related GAAP measures provides greater transparency to the information used in our financial and operational decision making and allows the reader of our Consolidated Financial Statements to see our financial results “through the eyes” of management.

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