HP Reports Fiscal 2015 First Quarter Results

PALO ALTO, CA--(Marketwired - Feb 24, 2015) - HP (NYSE: HPQ) 

  • First quarter net revenue of $26.8 billion, down 5% from the prior-year period and down 2% on a constant currency basis
  • First quarter non-GAAP diluted net earnings per share of $0.92, up 2% from the prior-year period and within the previously provided outlook of $0.89 to $0.93 per share
  • First quarter GAAP diluted net earnings per share of $0.73, down 1% from the prior-year period and within the previously provided outlook of $0.72 to $0.76 per share
  • First quarter cash flow from operations of $744 million, down 75% from the prior-year period
  • Returned $1.9 billion to shareholders in the form of share repurchases and dividends in the first quarter

HP fiscal 2015 first quarter financial performance

    Q1 FY15   Q1 FY14   Y/Y  
GAAP net revenue ($B)   $26.8   $28.2   (5%)  
GAAP operating margin   7.1%   7.1%   0 pts.  
GAAP net earnings ($B)   $1.4   $1.4   (4%)  
GAAP diluted net earnings per share   $0.73   $0.74   (1%)  
Non-GAAP operating margin   8.8%   8.5%   0.3 pts.  
Non-GAAP net earnings ($B)   $1.71   $1.74   (2%)  
Non-GAAP diluted net earnings per share   $0.92   $0.90   2%  
Cash flow from operations ($B)   $0.7   $3.0   (75%)  

Information about HP's use of non-GAAP financial information is provided under "Use of non-GAAP financial information" below.

HP today announced financial results for its fiscal 2015 first quarter ended January 31, 2015. 

First quarter net revenue of $26.8 billion was down 5% from the prior-year period and down 2% on a constant currency basis.

First quarter GAAP diluted net earnings per share (EPS) was $0.73, down from $0.74 in the prior-year period and within its previously provided outlook of $0.72 to $0.76. First quarter non-GAAP diluted net EPS was $0.92, up from $0.90 in the prior-year period and within its previously provided outlook of $0.89 to $0.93. First quarter non-GAAP net earnings and non-GAAP diluted net EPS exclude after-tax costs of $339 million and $0.19 per diluted share, respectively, related to the amortization of intangible assets, restructuring charges, separation costs, and acquisition-related charges.

"With the first quarter of fiscal 2015 now behind us, the HP turnaround remains on track," said Meg Whitman, chairman, president and chief executive officer, HP.  "We grew operating profit margins across all of our major business segments, increased investment in innovation, and executed well across key areas of our portfolio and in our separation activities.  Our progress continues as we head into Q2."

Outlook
The US dollar has strengthened considerably since HP last provided an FY15 outlook in November, 2014.  As is the case with many US based companies, this currency challenge is having a significant impact on HP's financial outlook.

For the fiscal 2015 second quarter, HP estimates non-GAAP diluted net EPS to be in the range of $0.84 to $0.88, reflecting an estimated currency impact of $0.09.  HP expects GAAP diluted net EPS to be in the range of $0.57 to $0.61, reflecting an estimated currency impact of $0.09. Fiscal 2015 second quarter non-GAAP diluted net EPS estimates exclude after-tax costs of approximately $0.27 per share, related to separation costs, the amortization of intangible assets, restructuring charges and acquisition-related charges.

For fiscal 2015, HP estimates non-GAAP diluted net EPS to be in the range of $3.53 to $3.73, reflecting an estimated currency impact of $0.30.  Absent the impact of currency, the range is in line with HP's prior forecast.  HP expects GAAP diluted net EPS to be in the range of $2.03 to $2.23, reflecting an estimated currency impact of $0.30. Fiscal 2015 non-GAAP diluted net EPS estimates exclude after-tax costs of approximately $1.50 per share, related to separation costs, the amortization of intangible assets, restructuring charges and acquisition-related charges.

"While we were able to manage the impact of currency in the quarter and deliver earnings as expected, we believe the impact on FY15 will be significantly greater than we anticipated in November," Whitman added.  "We'll work hard to offset these impacts through re-pricing and productivity, but fully mitigating currency movements of this size would require reducing investments and mortgaging our future.  We won't do that."

Asset management
HP generated $744 million in cash flow from operations in the first quarter, down 75% from the prior-year period. Inventory ended the quarter at $6.6 billion, up 4 days year over year to 29 days. Accounts receivable ended the quarter at $12.3 billion, down 2 days year over year to 41 days. Accounts payable ended the quarter at $14.9 billion, up 13 days year over year to 65 days. HP's dividend payment of $0.16 per share in the first quarter resulted in cash usage of $304 million. HP also utilized $1.6 billion of cash during the quarter to repurchase approximately 41.1 million shares of common stock in the open market. HP exited the quarter with $13.3 billion in gross cash.

Fiscal 2015 first quarter segment results

  • Personal Systems revenue was flat year over year with a 3.7% operating margin. Commercial revenue decreased 1% and Consumer revenue increased 2%. Total units were up 9% with Notebooks units up 21% and Desktops units down 7%.
  • Printing revenue was down 5% year over year with a 19.2% operating margin. Total hardware units were down 4% with Commercial hardware units flat and Consumer hardware units down 6%. Supplies revenue was down 5%.
  • Enterprise Group revenue was flat year over year with a 15.6% operating margin. Industry Standard Servers revenue was up 7%, Storage revenue was flat, Business Critical Systems revenue was down 9%, Networking revenue was down 11% and Technology Services revenue was down 5%.  
  • Enterprise Services revenue was down 11% year over year with a 3.0% operating margin.  Application and Business Services revenue was down 11%, and Infrastructure Technology Outsourcing revenue declined 11%. 
  • Software revenue was down 5% year over year with an 18.0% operating margin. License revenue was down 16%, support revenue was flat, professional services revenue was down 7% and software-as-a-service (SaaS) revenue was flat. 
  • HP Financial Services revenue was down 8% year over year with a 1% decrease in net portfolio assets and a 14% increase in financing volume. The business delivered an operating margin of 11.2%.

More information on HP's earnings, including additional financial analysis and an earnings overview presentation, is available on HP's Investor Relations website at www.hp.com/investor/home.

HP's FY15 Q1 earnings conference call is accessible via an audio webcast at www.hp.com/investor/2015Q1Webcast.

About HP
HP creates new possibilities for technology to have a meaningful impact on people, businesses, governments and society. With the broadest technology portfolio spanning printing, personal systems, software, services and IT infrastructure, HP delivers solutions for customers' most complex challenges in every region of the world. More information about HP is available at http://www.hp.com.

Use of non-GAAP financial information
To supplement HP's consolidated condensed financial statements presented on a generally accepted accounting principles (GAAP) basis, HP provides revenue on a constant currency basis, as well as non-GAAP operating profit, non-GAAP operating margin, non-GAAP net earnings, non-GAAP diluted net earnings per share, gross cash, free cash flow, net capital expenditures, net debt, net cash, operating company net debt and operating company net cash financial measures. HP also provides forecasts of non-GAAP diluted net earnings per share. A reconciliation of the adjustments to GAAP results for this quarter and prior periods is included in the tables below or elsewhere in the materials accompanying this news release. In addition, an explanation of the ways in which HP's management uses these non-GAAP measures to evaluate its business, the substance behind HP's  decision to use these non-GAAP measures, the material limitations associated with the use of these non-GAAP measures, the manner in which HP's management compensates for those limitations, and the substantive reasons why HP's management believes that these non-GAAP measures provide useful information to investors is included under "Use of non-GAAP financial measures" after the tables below. This additional non-GAAP financial information is not meant to be considered in isolation or as a substitute for revenue, operating profit, operating margin, net earnings, diluted net earnings per share, cash and cash equivalents, cash flow from operations, capital expenditures, or total company debt prepared in accordance with GAAP.

Forward-looking statements
This news release contains forward-looking statements that involve risks, uncertainties and assumptions. If the risks or uncertainties ever materialize or the assumptions prove incorrect, the results of HP may differ materially from those expressed or implied by such forward-looking statements and assumptions.

All statements other than statements of historical fact are statements that could be deemed forward-looking statements, including but not limited to any projections of revenue, margins, expenses, effective tax rates, net earnings, net earnings per share, cash flows, benefit plan funding, share repurchases, currency exchange rates or other financial items; any projections of the amount, timing or impact of cost savings or restructuring charges; any statements of the plans, strategies and objectives of management for future operations, including the previously announced separation transaction and the future performances of the post-separation companies if the separation is completed, as well as the execution of restructuring plans and any resulting cost savings or revenue or profitability improvements; any statements concerning the expected development, performance, market share or competitive performance relating to products or services; any statements regarding current or future macroeconomic trends or events and the impact of those trends and events on HP and its financial performance; any statements regarding pending investigations, claims or disputes; any statements of expectation or belief; and any statements or assumptions underlying any of the foregoing.

Risks, uncertainties and assumptions include the need to address the many challenges facing HP's businesses; the competitive pressures faced by HP's businesses; risks associated with executing HP's strategy, including the planned separation transaction; the impact of macroeconomic and geopolitical trends and events; the need to manage third-party suppliers and the distribution of HP's products and the delivery of HP's services effectively; the protection of HP's intellectual property assets, including intellectual property licensed from third parties; risks associated with HP's international operations; the development and transition of new products and services and the enhancement of existing products and services to meet customer needs and respond to emerging technological trends; the execution and performance of contracts by HP and its suppliers, customers and partners; the hiring and retention of key employees; integration and other risks associated with business combination and investment transactions; the execution, timing and results of the separation transaction or restructuring plans, including estimates and assumptions related to the cost (including any possible disruption of HP's business) and the anticipated benefits of implementing the separation transaction and restructuring plans; the resolution of pending investigations, claims and disputes; and other risks that are described in HP's Annual Report on Form 10-K for the fiscal year ended October 31, 2014, and HP's other filings with the Securities and Exchange Commission.

As in prior periods, the financial information set forth in this release, including tax-related items, reflects estimates based on information available at this time. While HP believes these estimates to be reasonable, these amounts could differ materially from reported amounts in HP's Quarterly Report on Form 10-Q for the fiscal quarter ended January 31, 2015. HP assumes no obligation and does not intend to update these forward-looking statements.

   
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES  
CONSOLIDATED CONDENSED STATEMENTS OF EARNINGS  
(Unaudited)  
(In millions, except per share amounts)  
                   
                   
    Three months ended  
    January 31,
2015
    October 31,
2014
    January 31,
2014
 
                         
Net revenue   $ 26,839     $ 28,406     $ 28,154  
                         
Costs and expenses:                        
  Cost of sales     20,571       21,425       21,736  
  Research and development     825       876       811  
  Selling, general and administrative     3,071       3,364       3,210  
  Amortization of intangible assets     222       226       283  
  Restructuring charges     146       604       114  
  Acquisition-related charges     4       3       3  
  Separation costs     80       -       -  
    Total costs and expenses     24,919       26,498       26,157  
                         
Earnings from operations     1,920       1,908       1,997  
                         
Interest and other, net     (174 )     (146 )     (163 )
                         
Earnings before taxes     1,746       1,762       1,834  
                         
Provision for taxes     (380 )     (432 )     (409 )
                         
Net earnings   $ 1,366     $ 1,330     $ 1,425  
                         
Net earnings per share:                        
  Basic   $ 0.75     $ 0.71     $ 0.75  
  Diluted   $ 0.73     $ 0.70     $ 0.74  
                         
Cash dividends declared per share   $ 0.32     $ -     $ 0.29  
                         
                         
Weighted-average shares used to compute net earnings per share:                        
  Basic     1,833       1,862       1,907  
  Diluted     1,861       1,896       1,935  
                           
                           
                           
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES  
ADJUSTMENTS TO GAAP NET EARNINGS, EARNINGS FROM OPERATIONS,  
OPERATING MARGIN AND DILUTED NET EARNINGS PER SHARE  
(Unaudited)  
(In millions, except per share amounts)  
                         
                         
  Three months ended
January 31, 2015
  Diluted net earnings per share   Three months ended
October 31, 2014
  Diluted net earnings per share   Three months ended
January 31, 2014
  Diluted
net earnings per share
 
                                     
GAAP net earnings $ 1,366   $ 0.73   $ 1,330   $ 0.70   $ 1,425   $ 0.74  
                                     
Non-GAAP adjustments:                                    
  Amortization of intangible assets   222     0.12     226     0.12     283     0.15  
  Restructuring charges   146     0.08     604     0.32     114     0.06  
  Acquisition-related charges   4     -     3     -     3     -  
  Separation costs   80     0.04     -     -     -     -  
  Adjustments for taxes   (113 )   (0.05 )   (149 )   (0.08 )   (83 )   (0.05 )
Non-GAAP net earnings $ 1,705   $ 0.92   $ 2,014   $ 1.06   $ 1,742   $ 0.90  
                                     
                                     
GAAP earnings from operations $ 1,920         $ 1,908         $ 1,997        
                                     
Non-GAAP adjustments:                                    
  Amortization of intangible assets   222           226           283        
  Restructuring charges   146           604           114        
  Acquisition-related charges   4           3           3        
  Separation costs   80           -           -        
Non-GAAP earnings from operations $ 2,372         $ 2,741         $ 2,397        
                                     
GAAP operating margin   7 %         7 %         7 %      
Non-GAAP adjustments   2 %         3 %         2 %      
Non-GAAP operating margin   9 %         10 %         9 %      
                                     
                                     
                                     
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(In millions)
 
         
    As of
    January 31, 2015   October 31, 2014
    (Unaudited)    
ASSETS            
             
Current assets:            
  Cash and cash equivalents   $ 12,919   $ 15,133
  Accounts receivable     12,295     13,832
  Financing receivables     2,907     2,946
  Inventory     6,575     6,415
  Other current assets     13,502     11,819
             
    Total current assets     48,198     50,145
             
Property, plant and equipment     11,030     11,340
             
Long-term financing receivables and other assets     8,619     8,454
             
Goodwill and intangible assets     33,014     33,267
             
Total assets   $ 100,861   $ 103,206
             
             
LIABILITIES AND STOCKHOLDERS' EQUITY            
             
Current liabilities:            
  Notes payable and short-term borrowings   $ 3,509   $ 3,486
  Accounts payable     14,873     15,903
  Employee compensation and benefits     2,900     4,209
  Taxes on earnings     1,565     1,017
  Deferred revenue     6,241     6,143
  Other accrued liabilities     13,441     12,977
             
    Total current liabilities     42,529     43,735
             
Long-term debt     15,552     16,039
             
Other liabilities     15,876     16,305
             
Stockholders' equity:            
  HP stockholders' equity     26,507     26,731
  Non-controlling interests     397     396
             
    Total stockholders' equity     26,904     27,127
             
Total liabilities and stockholders' equity   $ 100,861   $ 103,206
             
             
             
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES  
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS  
(Unaudited)  
(In millions)  
             
   
    Three months ended January 31,  
    2015     2014  
Cash flows from operating activities:                
  Net earnings   $ 1,366     $ 1,425  
  Adjustments to reconcile net earnings to net cash provided by operating activities:                
    Depreciation and amortization     1,028       1,117  
    Stock-based compensation expense     187       170  
    Provision for doubtful accounts and inventory     62       57  
    Restructuring charges     146       114  
    Deferred taxes on earnings     (173 )     9  
    Excess tax benefit from stock-based compensation     (109 )     (27 )
    Other, net     138       (33 )
                     
    Changes in operating assets and liabilities (net of acquisitions):                
      Accounts receivable     1,540       2,391  
      Financing receivables     222       296  
      Inventory     (224 )     (19 )
      Accounts payable     (852 )     (1,165 )
      Taxes on earnings     293       170  
      Restructuring     (483 )     (381 )
      Other assets and liabilities     (2,397 )     (1,134 )
        Net cash provided by operating activities     744       2,990  
                 
Cash flows from investing activities:                
    Investment in property, plant and equipment     (947 )     (997 )
    Proceeds from sale of property, plant and equipment     130       450  
    Purchases of available-for-sale securities and other investments     (50 )     (135 )
    Maturities and sales of available-for-sale securities and other investments     30       465  
    Payments made in connection with business acquisitions     (1 )     -  
        Net cash used in investing activities     (838 )     (217 )
                 
Cash flows from financing activities:                
    Short-term borrowings with original maturities less than 90 days, net     77       2  
    Issuance of debt     299       2,005  
    Payment of debt     (911 )     (45 )
    Issuance of common stock under employee stock plans     181       83  
    Repurchase of common stock     (1,571 )     (565 )
    Excess tax benefit from stock-based compensation     109       27  
    Cash dividends paid     (304 )     (278 )
        Net cash (used in) provided by financing activities     (2,120 )     1,229  
                 
(Decrease) increase in cash and cash equivalents     (2,214 )     4,002  
Cash and cash equivalents at beginning of period     15,133       12,163  
Cash and cash equivalents at end of period   $ 12,919     $ 16,165  
                 
                 
                 
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES  
SEGMENT INFORMATION  
(Unaudited)  
(In millions)  
   
                   
    Three months ended  
    January 31,
2015
    October 31,
2014
    January 31,
2014
 
Net revenue:(a)                        
                         
  Personal Systems   $ 8,544     $ 8,948     $ 8,530  
  Printing     5,543       5,740       5,815  
    Total Printing and Personal Systems Group     14,087       14,688       14,345  
  Enterprise Group     6,981       7,248       6,970  
  Enterprise Services     4,993       5,511       5,595  
  Software     871       1,087       916  
  HP Financial Services     803       906       870  
  Corporate Investments     16       5       288  
      Total segments     27,751       29,445       28,984  
  Elimination of intersegment net revenue and other     (912 )     (1,039 )     (830 )
                           
      Total HP consolidated net revenue   $ 26,839     $ 28,406     $ 28,154  
                         
Earnings before taxes:(a)                        
                         
  Personal Systems   $ 313     $ 355     $ 279  
  Printing     1,067       1,040       979  
    Total Printing and Personal Systems Group     1,380       1,395       1,258  
  Enterprise Group     1,090       1,072       1,003  
  Enterprise Services     148       377       60  
  Software     157       338       145  
  HP Financial Services     90       110       101  
  Corporate Investments     (124 )     (107 )     121  
      Total segment earnings from operations     2,741       3,185       2,688  
                           
  Corporate and unallocated costs and eliminations     (182 )     (316 )     (121 )
  Stock-based compensation expense     (187 )     (128 )     (170 )
  Amortization of intangible assets     (222 )     (226 )     (283 )
  Restructuring charges     (146 )     (604 )     (114 )
  Acquisition-related charges     (4 )     (3 )     (3 )
  Separation costs     (80 )     -       -  
  Interest and other, net     (174 )     (146 )     (163 )
                           
      Total HP consolidated earnings before taxes   $ 1,746     $ 1,762     $ 1,834  
                         
(a)   Effective at the beginning of its first quarter of fiscal 2015, HP implemented an organizational change to align its segment financial reporting more closely with its current business structure. This organizational change resulted in the transfer of third party multi-vendor support arrangements from the Technology Services business unit within the Enterprise Group segment to the Infrastructure Technology Outsourcing business unit within the Enterprise Services segment. HP reflected this change to its segment information in prior reporting periods on an as-if basis, which resulted in the removal of intersegment revenue from the Technology Services business unit within the Enterprise Group segment and the related corporate intersegment revenue eliminations, and the transfer of operating profit from the Technology Services business unit within the Enterprise Group segment to the Infrastructure Technology Outsourcing business unit within the Enterprise Services segment. This change had no impact on HP's previously reported consolidated net revenue, earnings from operations, net earnings or net earnings per share.
     
     
     
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES  
SEGMENT/BUSINESS UNIT INFORMATION  
(Unaudited)  
(In millions)  
                   
                   
    Three months ended     Change (%)  
    January 31,
2015
    October 31,
2014
    January 31,
2014
    Q/Q     Y/Y  
Net revenue:(a)                                    
                                     
  Printing and Personal Systems Group                                    
    Personal Systems                                    
      Notebooks   $ 4,724     $ 4,869     $ 4,335     (3 %)   9 %
      Desktops     2,949       3,185       3,274     (7 %)   (10 %)
      Workstations     526       558       533     (6 %)   (1 %)
      Other     345       336       388     3 %   (11 %)
        Total Personal Systems     8,544       8,948       8,530     (5 %)   0 %
                                         
    Printing                                    
      Supplies     3,601       3,596       3,795     0 %   (5 %)
      Commercial Hardware     1,316       1,567       1,347     (16 %)   (2 %)
      Consumer Hardware     626       577       673     8 %   (7 %)
        Total Printing     5,543       5,740       5,815     (3 %)   (5 %)
          Total Printing and Personal Systems Group     14,087       14,688       14,345     (4 %)   (2 %)
                                         
    Enterprise Group                                    
      Industry Standard Servers     3,387       3,370       3,178     1 %   7 %
      Technology Services     1,987       2,093       2,100     (5 %)   (5 %)
      Storage     837       878       834     (5 %)   0 %
      Networking     562       669       630     (16 %)   (11 %)
      Business Critical Systems     208       238       228     (13 %)   (9 %)
        Total Enterprise Group     6,981       7,248       6,970     (4 %)   0 %
                                         
    Enterprise Services                                    
      Infrastructure Technology Outsourcing     3,132       3,446       3,501     (9 %)   (11 %)
      Application and Business Services     1,861       2,065       2,094     (10 %)   (11 %)
        Total Enterprise Services     4,993       5,511       5,595     (9 %)   (11 %)
                                         
    Software     871       1,087       916     (20 %)   (5 %)
                                         
    HP Financial Services     803       906       870     (11 %)   (8 %)
                                         
    Corporate Investments (b)     16       5       288     NM     (94 %)
        Total segments     27,751       29,445       28,984     (6 %)   (4 %)
                                         
    Elimination of intersegment net revenue and other     (912 )     (1,039 )     (830 )   (12 %)   10 %
                                         
      Total HP consolidated net revenue   $ 26,839     $ 28,406     $ 28,154     (6 %)   (5 %)
                                     
(a)   Effective at the beginning of its first quarter of fiscal 2015, HP implemented an organizational change to align its segment financial reporting more closely with its current business structure. This organizational change resulted in the transfer of third party multi-vendor support arrangements from the Technology Services business unit within the Enterprise Group segment to the Infrastructure Technology Outsourcing business unit within the Enterprise Services segment. HP reflected this change to its segment information in prior reporting periods on an as-if basis, which resulted in the removal of intersegment revenue from the Technology Services business unit within the Enterprise Group segment and the related corporate intersegment revenue eliminations. This change had no impact on HP's previously reported consolidated net revenue, earnings from operations, net earnings or net earnings per share.
     
(b)   "NM" represents not meaningful.
     
     
     
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES  
SEGMENT OPERATING MARGIN SUMMARY DATA  
(Unaudited)  
   
                   
    Three months ended     Change in Operating Margin (pts)  
    January 31,
2015
    Q/Q     Y/Y  
                   
Segment operating margin:(a)                  
  Personal Systems   3.7 %   (0.3 pts )   0.4 pts  
  Printing   19.2 %   1.1 pts     2.4 pts  
    Total Printing & Personal Systems   9.8 %   0.3 pts     1.0 pts  
                     
  Enterprise Group   15.6 %   0.8 pts     1.2 pts  
  Enterprise Services   3.0 %   (3.8 pts )   1.9 pts  
  Software   18.0 %   (13.1 pts )   2.2 pts  
  HP Financial Services   11.2 %   (0.9 pts )   (0.4 pts )
  Corporate Investments(b)   NM     NM     NM  
    Total segments   9.9 %   (0.9 pts )   0.6 pts  
                   
                   
(a)   Effective at the beginning of its first quarter of fiscal 2015, HP implemented an organizational change to align its segment financial reporting more closely with its current business structure. This organizational change resulted in the transfer of third party multi-vendor support arrangements from the Technology Services business unit within the Enterprise Group segment to the Infrastructure Technology Outsourcing business unit within the Enterprise Services segment. HP reflected this change to its segment information in prior reporting periods on an as-if basis, which resulted in the removal of intersegment revenue from the Technology Services business unit within the Enterprise Group segment and the related corporate intersegment revenue eliminations, and the transfer of operating profit from the Technology Services business unit within the Enterprise Group segment to the Infrastructure Technology Outsourcing business unit within the Enterprise Services segment. This change had no impact on HP's previously reported consolidated net revenue, earnings from operations, net earnings or net earnings per share.
     
(b)   "NM" represents not meaningful.
     
     
     
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
CALCULATION OF DILUTED NET EARNINGS PER SHARE
(Unaudited)
(In millions, except per share amounts)
             
             
    Three months ended
    January 31,
2015
  October 31,
2014
  January 31,
2014
                   
Numerator:                  
  GAAP net earnings   $ 1,366   $ 1,330   $ 1,425
  Non-GAAP net earnings   $ 1,705   $ 2,014   $ 1,742
                   
Denominator:                  
  Weighted-average shares outstanding during the reporting period     1,833     1,862     1,907
  Dilutive effect of employee stock plans(a)     28     34     28
    Weighted-average shares used to compute diluted net earnings per share     1,861     1,896     1,935
                   
GAAP diluted net earnings per share   $ 0.73   $ 0.70   $ 0.74
Non-GAAP diluted net earnings per share   $ 0.92   $ 1.06   $ 0.90
                   
                   
                   
(a)   Includes any dilutive effect of restricted stock units, restricted stock, stock options and performance-based restricted stock units.
     

Use of non-GAAP financial measures
To supplement HP's consolidated condensed financial statements presented on a GAAP basis, HP provides revenue on a constant currency basis, non-GAAP operating profit, non-GAAP operating margin, non-GAAP net earnings, non-GAAP diluted net earnings per share, gross cash, free cash flow, net capital expenditures, net debt, net cash, operating company net debt and operating company net cash. HP also provides forecasts of non-GAAP diluted net earnings per share.

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 revenue on a constant currency basis is revenue. The GAAP measure most directly comparable to non-GAAP operating profit is earnings from operations. The GAAP measure most directly comparable to non-GAAP operating margin is operating margin. 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 gross cash is cash and cash equivalents. The GAAP measure most directly comparable to free cash flow is cash flow from operations. The GAAP measure most directly comparable to net capital expenditures is capital expenditures. The GAAP measure most directly comparable to net debt and operating company net debt is total company debt. The GAAP measure most directly comparable to each of net cash and operating company net cash is cash and cash equivalents. Reconciliations of each of these non-GAAP financial measures to GAAP information are included in the tables above or elsewhere in the materials accompanying this news release.

Use and economic substance of non-GAAP financial measures used by HP
Revenue on a constant currency basis assumes no change in the foreign exchange rate from the prior-year period. Non-GAAP operating profit and non-GAAP operating margin are defined to exclude the effects of any charges relating to the amortization of intangible assets, restructuring charges, charges relating to the separation transaction and acquisition-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. 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. HP's management uses these non-GAAP financial measures for purposes of evaluating HP's historical and prospective financial performance, as well as HP's performance relative to its competitors. HP's management also uses these non-GAAP measures to further its own understanding of HP's segment operating performance. HP believes that excluding the items mentioned above from these non-GAAP financial measures allows HP's management to better understand HP's consolidated financial performance in relation to the operating results of HP's segments, as HP's management does not believe that the excluded items are reflective of ongoing operating results. More specifically, HP's management excludes each of those items mentioned above for the following reasons:

  • HP incurs charges relating to the amortization of intangible assets. Those charges are included in HP's GAAP earnings from operations, operating margin, net earnings and diluted net earnings per share. Such charges are significantly impacted by the timing and magnitude of HP's acquisitions and any related impairment charges. Consequently, HP excludes these charges for purposes of calculating these non-GAAP measures to facilitate a more meaningful evaluation of HP's current operating performance and comparisons to HP's operating performance in other periods.
  • Restructuring charges are costs associated with a formal restructuring plan and are primarily related to (i) employee termination costs and benefits and (ii) costs to vacate duplicative facilities. HP excludes these restructuring costs (and any reversals of charges recorded in prior periods) for purposes of calculating these non-GAAP measures because it believes that these historical costs do not reflect expected future operating expenses and do not contribute to a meaningful evaluation of HP's current operating performance or comparisons to HP's operating performance in other periods.
  • Separation costs are expenses associated with HP's plan to separate into two independent publicly-traded companies. The charges are related primarily to third-party consulting fees and other expenses incurred to complete the separation. HP excludes these separation costs for purposes of calculating these non-GAAP measures to facilitate a more meaningful evaluation of HP's current operating performance and comparisons to HP's operating performance in other periods.
  • HP incurs costs related to its acquisitions. As acquisition-related expenses are inconsistent in amount and frequency and are significantly impacted by the timing and nature of HP's acquisitions, HP believes that eliminating these expenses for purposes of calculating these non-GAAP measures facilitates a more meaningful evaluation of HP's current operating performance and comparisons to HP's operating performance in other periods.

Gross cash is a non-GAAP measure that is defined as cash and cash equivalents plus short-term investments and certain long-term investments that may be liquidated within 90 days pursuant to the terms of existing put options or similar rights. Free cash flow is defined as cash flow from operations less net capital expenditures. Net capital expenditures is defined as investments in property, plant and equipment less proceeds from the sale of property, plant and equipment. HP's management uses gross cash and free cash flow for the purpose of determining the amount of cash available for investment in HP's businesses, funding acquisitions, repurchasing stock and other purposes. HP's management also uses gross cash and free cash flow to evaluate HP's historical and prospective liquidity. Because gross cash includes liquid assets that are not included in GAAP cash and cash equivalents, HP believes that gross cash provides a more accurate and complete assessment of HP's liquidity. Because net capital expenditures includes proceeds from the sale of property, plant and equipment, HP believes that net capital expenditures provides a more accurate and complete assessment of HP's liquidity. Because free cash flow includes the effect of net capital expenditures that are not reflected in GAAP cash flow from operations, HP believes that free cash flow provides a more accurate and complete assessment of HP's liquidity and capital resources.

Total company net debt consists of total debt (including the effects of hedging) less gross cash, which includes cash and cash equivalents, short-term investments, and certain liquid long-term investments. Total company net cash consists of gross cash less total debt. HP Financial Services (HPFS) net debt consists of HPFS debt, which includes primarily intercompany equity that is treated as debt for segment reporting purposes, intercompany debt, and borrowing and funding related activity associated with HPFS and its subsidiaries, less HPFS cash. Total company net debt and total company net cash provide useful information to HP's management about the state of HP's consolidated condensed balance sheet. Operating company net debt is a non-GAAP measure that is defined as total company net debt less HPFS net debt. Operating company net cash is a non-GAAP measure that is defined as total company net cash less HPFS net debt. Operating company net debt and operating company net cash provide additional useful information to HP's management about the state of HP's consolidated condensed balance sheet by providing more transparency into the financial components of the operating company separate from HP's financing business, which has different capital structure requirements and requires much greater leverage to run effectively.

Material limitations associated with use of non-GAAP financial measures
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 HP's results as reported under GAAP. Some of the limitations in relying on these non-GAAP financial measures are:  

  • Items such as amortization of intangible assets, though not directly affecting HP's cash position, represent the loss in value of intangible assets over time. The expense associated with this loss in value is not included in non-GAAP operating profit, non-GAAP operating margin, non-GAAP net earnings or non-GAAP diluted net earnings per share, and therefore does not reflect the full economic effect of the loss in value of those intangible assets.
  • Items such as restructuring charges and separation costs that are excluded from non-GAAP operating profit, non-GAAP operating margin, non-GAAP net earnings and non-GAAP diluted net earnings per share can have a material impact on the equivalent GAAP earnings measure and cash flows.
  • HP may not be able to immediately liquidate the short-term and long-term investments included in gross cash, which may limit the usefulness of gross cash as a liquidity measure.
  • Other companies may calculate revenue on a constant currency basis, non-GAAP operating profit, non-GAAP operating margin, non-GAAP net earnings, non-GAAP diluted net earnings per share, gross cash, free cash flow, net capital expenditures, net debt, net cash, operating company net debt and operating company net cash differently than HP does, limiting the usefulness of those measures for comparative purposes.

Compensation for limitations associated with use of non-GAAP financial measures
HP compensates for the limitations on its use of non-GAAP financial measures by relying primarily on its GAAP results and using non-GAAP financial measures only supplementally. HP also provides robust and detailed reconciliations of each non-GAAP financial measure to its most directly comparable GAAP measure within this news release and in other written materials that include these non-GAAP financial measures, and HP encourages investors to review carefully those reconciliations.

Usefulness of non-GAAP financial measures to investors
HP believes that providing revenue on a constant currency basis, non-GAAP operating profit, non-GAAP operating margin, non-GAAP net earnings, non-GAAP diluted net earnings per share, gross cash, free cash flow, net capital expenditures, net debt, net cash, operating company net debt and operating company net cash to investors in addition to the related GAAP measures provides investors with greater transparency to the information used by HP's management in its financial and operational decision making and allows investors to see HP's results "through the eyes" of management. HP further believes that providing this information better enables HP's investors to understand HP's operating performance and to evaluate the efficacy of the methodology and information used by HP's management to evaluate and measure such performance. Disclosure of these non-GAAP financial measures also facilitates comparisons of HP's operating performance with the performance of other companies in HP's industry that supplement their GAAP results with non-GAAP financial measures that may be calculated in a similar manner.

© 2015 Hewlett-Packard Development Company, L.P. The information contained herein is subject to change without notice. HP shall not be liable for technical or editorial errors or omissions contained herein.

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