HP Reports Fiscal 2015 Third Quarter Results

PALO ALTO, CA--(Marketwired - Aug 20, 2015) - HP (NYSE: HPQ)

  • Third quarter net revenue of $25.3 billion
  • Third quarter non-GAAP diluted net earnings per share of $0.88, versus the previously provided outlook of $0.83 to $0.87 per share
  • Third quarter GAAP diluted net earnings per share of $0.47, versus the previously provided outlook of $0.50 to $0.54 per share
  • Third quarter cash flow from operations of $1.7 billion
  • Returned $670 million to shareholders in the form of share repurchases and dividends in the third quarter

HP fiscal 2015 third quarter financial performance

             
    Q3 FY15   Q3 FY14   Y/Y
GAAP net revenue ($B)   $25.3   $27.6   (8%)
GAAP operating margin   4.8%   5.3%   (0.5 pts.)
GAAP net earnings ($B)   $0.9   $1.0   (13%)
GAAP diluted net earnings per share   $0.47   $0.52   (10%)
Non-GAAP operating margin   8.6%   8.5%   0.1 pts.
Non-GAAP net earnings ($B)   $1.6   $1.7   (6%)
Non-GAAP diluted net earnings per share   $0.88   $0.89   (1%)
Cash flow from operations ($B)   $1.7   $3.6   (54%)
             

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 third quarter ended July 31, 2015. 

Third quarter net revenue of $25.3 billion was down 8% from the prior-year period and down 2% on a constant currency basis.

Third quarter GAAP diluted net earnings per share (EPS) was $0.47, down from $0.52 in the prior-year period and below its previously provided outlook of $0.50 to $0.54. Third quarter non-GAAP diluted net EPS was $0.88, down from to $0.89 in the prior-year period and above its previously provided outlook of $0.83 to $0.87. Third quarter non-GAAP net earnings and non-GAAP diluted net EPS exclude after-tax costs of $750 million and $0.41 per diluted share, respectively, related to separation costs, the amortization of intangible assets, impairment of data center assets, defined benefit plan settlement charges, acquisition-related charges and restructuring charges.

Separation update
On July 1, Hewlett Packard Enterprise filed an initial Registration Statement on Form 10 with the Securities and Exchange Commission (SEC), an important step in the separation process. The filing provides detailed information on the business and historical financial results of Hewlett Packard Enterprise. On August 10, HP filed the first amendment to the Form 10, which included the pro forma cash and debt levels for Hewlett Packard Enterprise. 

With the Hewlett Packard Enterprise capital structure determined, credit ratings agencies published expected investment grade ratings for both Hewlett Packard Enterprise and HP Inc., which is in line with our objectives.

On August 12, HP introduced the expected members of the boards of directors for both Hewlett Packard Enterprise and HP Inc., effective upon the completion of the separation. Each board will include members of the current HP board, as well as several new directors chosen after a comprehensive review of personal and professional qualifications as they relate to the specific needs of the two new companies.

"HP delivered results in the third quarter that reflect very strong performance in our Enterprise Group and substantial progress in turning around Enterprise Services," said Meg Whitman, chairman, president and chief executive officer, HP. "I am very pleased that we have continued to deliver the results we said we would, while remaining on track to execute one of the largest and most complex separations ever undertaken."

Outlook
For the fiscal 2015 fourth quarter, HP estimates non-GAAP diluted net EPS to be in the range of $0.92 to $0.98 and GAAP diluted net EPS to be in the range of $0.12 to $0.18. Fiscal 2015 fourth quarter non-GAAP diluted net EPS estimates exclude after-tax costs of approximately $0.80 per share, related to separation costs, the amortization of intangible assets, restructuring charges, defined benefit plan settlement charges and acquisition-related charges.

For fiscal 2015, HP estimates non-GAAP diluted net EPS to be in the range of $3.59 to $3.65 and GAAP diluted net EPS to be in the range of $1.87 to $1.93. Fiscal 2015 non-GAAP diluted net EPS estimates exclude after-tax costs of approximately $1.72 per share, related to separation costs, the amortization of intangible assets, restructuring charges, defined benefit plan settlement charges, impairment of data center assets and acquisition-related charges.

Asset management
HP generated $1.7 billion in cash flow from operations in the third quarter, down 54% from the prior-year period. Inventory ended the quarter at $6.7 billion, up 4 days year over year to 31 days. Accounts receivable ended the quarter at $12.8 billion, down 1 day year over year to 45 days. Accounts payable ended the quarter at $15.5 billion, up 7 days year over year to 72 days. HP's dividend payment of $0.176 per share in the third quarter resulted in cash usage of $318 million. HP also utilized $352 million of cash during the quarter to repurchase approximately 11.0 million shares of common stock in the open market. HP exited the quarter with $17.4 billion in gross cash, where gross cash includes cash and cash equivalents, short-term investments and certain long-term investments.

Fiscal 2015 third quarter segment results

  • Personal Systems revenue was down 13% year over year with a 3.0% operating margin. Commercial revenue decreased 9% and Consumer revenue decreased 22%. Total units were down 11% with Notebooks units down 3% and Desktops units down 20%.
  • Printing revenue was down 9% year over year with a 17.8% operating margin. Total hardware units were down 2% with Commercial hardware units down 6% and Consumer hardware units flat. Supplies revenue was down 6%.
  • Enterprise Group revenue was up 2% year over year with a 13.0% operating margin. Industry Standard Servers revenue was up 8%, Storage revenue was down 2%, Business Critical Systems revenue was down 21%, Networking revenue was up 22% and Technology Services revenue was down 9%.
  • Enterprise Services revenue was down 11% year over year with a 6.0% operating margin. Infrastructure Technology Outsourcing revenue was down 13%, and Application and Business Services revenue declined 7%.
  • Software revenue was down 6% year over year with a 20.6% operating margin. License revenue was down 11%, support revenue was down 3%, professional services revenue was down 8% and software-as-a-service (SaaS) revenue was down 4%.
  • HP Financial Services revenue was down 6% year over year with a 2% decrease in net portfolio assets and a 2% decrease in financing volume. The business delivered an operating margin of 10.8%.

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

HP's FY15 Q3 earnings conference call is accessible via an audio webcast at http://www.hp.com/investor/2015Q3Webcast.

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 (NYSE: HPQ) 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, including HP's Quarterly Report on Form 10-Q for the fiscal quarter ended April 30, 2015.

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 July 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  
    July 31,
2015
    April 30,
2015
    July 31,
2014
 
                         
Net revenue   $ 25,349     $ 25,453     $ 27,585  
                         
Costs and expenses:                        
  Cost of sales     19,317       19,345       20,974  
  Research and development     893       850       887  
  Selling, general and administrative     2,962       3,063       3,388  
  Amortization of intangible assets     242       221       227  
  Restructuring charges     25       255       649  
  Acquisition-related charges     47       19       2  
  Separation costs     401       269       -  
  Defined benefit plan settlement charges     114       -       -  
  Impairment of data center assets     136       -       -  
    Total costs and expenses     24,137       24,022       26,127  
                         
Earnings from operations     1,212       1,431       1,458  
                         
Interest and other, net     (108 )     (139 )     (145 )
                         
Earnings before taxes     1,104       1,292       1,313  
                         
Provision for taxes     (250 )     (281 )     (328 )
                         
Net earnings   $ 854     $ 1,011     $ 985  
                         
Net earnings per share:                        
  Basic   $ 0.47     $ 0.56     $ 0.53  
  Diluted   $ 0.47     $ 0.55     $ 0.52  
                         
Cash dividends declared per share   $ 0.35     $ -     $ 0.32  
                         
                         
Weighted-average shares used to compute net earnings per share:                        
  Basic     1,805       1,814       1,870  
  Diluted     1,828       1,836       1,899  
                           
                           
                           
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES  
CONSOLIDATED CONDENSED STATEMENTS OF EARNINGS  
(Unaudited)  
(In millions, except per share amounts)  
             
    Nine months ended July 31  
    2015     2014  
                 
Net revenue   $ 77,641     $ 83,048  
                 
Costs and expenses:                
  Cost of sales     59,233       63,414  
  Research and development     2,568       2,571  
  Selling, general and administrative     9,096       9,989  
  Amortization of intangible assets     685       774  
  Restructuring charges     426       1,015  
  Acquisition-related charges     70       8  
  Separation costs     750       -  
  Defined benefit plan settlement charges     114       -  
  Impairment of data center assets     136       -  
    Total costs and expenses     73,078       77,771  
                 
Earnings from operations     4,563       5,277  
                 
Interest and other, net     (421 )     (482 )
                 
Earnings before taxes     4,142       4,795  
                 
Provision for taxes     (911 )     (1,112 )
                 
Net earnings   $ 3,231     $ 3,683  
                 
Net earnings per share:                
  Basic   $ 1.78     $ 1.95  
  Diluted   $ 1.75     $ 1.93  
                 
Cash dividends declared per share   $ 0.67     $ 0.61  
                 
                 
Weighted-average shares used to compute net earnings per share:                
  Basic     1,817       1,889  
  Diluted     1,842       1,913  
                   
                   
                   
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
July 31, 2015
    Diluted net earnings per share     Three months ended April 30, 2015     Diluted net earnings per share     Three months ended
July 31, 2014
    Diluted
net earnings per share
 
                                                 
GAAP net earnings   $ 854     $ 0.47     $ 1,011     $ 0.55     $ 985     $ 0.52  
                                                 
Non-GAAP adjustments:                                                
  Amortization of intangible assets     242       0.13       221       0.12       227       0.12  
  Restructuring charges     25       0.01       255       0.14       649       0.34  
  Acquisition-related charges     47       0.03       19       0.01       2       -  
  Separation costs     401       0.22       269       0.15       -       -  
  Defined benefit plan settlement charges     114       0.06       -       -       -       -  
  Impairment of data center assets     136       0.07       -       -       -       -  
  Adjustments for taxes     (215 )     (0.11 )     (179 )     (0.10 )     (165 )     (0.09 )
Non-GAAP net earnings   $ 1,604     $ 0.88     $ 1,596     $ 0.87     $ 1,698     $ 0.89  
                                                 
                                                 
GAAP earnings from operations   $ 1,212             $ 1,431             $ 1,458          
                                                 
Non-GAAP adjustments:                                                
  Amortization of intangible assets     242               221               227          
  Restructuring charges     25               255               649          
  Acquisition-related charges     47               19               2          
  Separation costs     401               269               -          
  Defined benefit plan settlement charges     114               -               -          
  Impairment of data center assets     136               -               -          
Non-GAAP earnings from operations   $ 2,177             $ 2,195             $ 2,336          
                                                 
GAAP operating margin     5 %             6 %             5 %        
Non-GAAP adjustments     4 %             3 %             3 %        
Non-GAAP operating margin     9 %             9 %             8 %        
                                                 
                                                 
                                                 
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)  
                         
    Nine months ended
July 31, 2015
    Diluted
net earnings per share
    Nine months ended
July 31, 2014
    Diluted
net earnings
per share
 
                                 
GAAP net earnings   $ 3,231     $ 1.75     $ 3,683     $ 1.93  
                                 
Non-GAAP adjustments:                                
  Amortization of intangible assets     685       0.37       774       0.40  
  Restructuring charges     426       0.23       1,015       0.53  
  Acquisition-related charges     70       0.04       8       -  
  Separation costs     750       0.41       -       -  
  Defined benefit plan settlement charges     114       0.06       -       -  
  Impairment of data center assets     136       0.07       -       -  
  Adjustments for taxes     (507 )     (0.27 )     (349 )     (0.18 )
Non-GAAP net earnings   $ 4,905     $ 2.66     $ 5,131     $ 2.68  
                                 
                                 
GAAP earnings from operations   $ 4,563             $ 5,277          
                                 
Non-GAAP adjustments:                                
  Amortization of intangible assets     685               774          
  Restructuring charges     426               1,015          
  Acquisition-related charges     70               8          
  Separation costs     750               -          
  Defined benefit plan settlement charges     114               -          
  Impairment of data center assets     136               -          
Non-GAAP earnings from operations   $ 6,744             $ 7,074          
                                 
GAAP operating margin     6 %             6 %        
Non-GAAP adjustments     3 %             3 %        
Non-GAAP operating margin     9 %             9 %        
                                 
                                 
                                 
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(In millions)
 
    As of
         
    July 31, 2015   October 31, 2014
    (Unaudited)    
ASSETS            
             
Current assets:            
  Cash and cash equivalents   $ 17,171   $ 15,133
  Accounts receivable     12,753     13,832
  Financing receivables     2,804     2,946
  Inventory     6,700     6,415
  Other current assets     12,570     11,819
               
    Total current assets     51,998     50,145
             
Property, plant and equipment     11,028     11,340
             
Long-term financing receivables and other assets     8,733     8,454
             
Goodwill and intangible assets     35,274     33,267
             
Total assets   $ 107,033   $ 103,206
             
             
LIABILITIES AND STOCKHOLDERS' EQUITY            
             
Current liabilities:            
  Notes payable and short-term borrowings   $ 11,034   $ 3,486
  Accounts payable     15,549     15,903
  Employee compensation and benefits     3,348     4,209
  Taxes on earnings     629     1,017
  Deferred revenue     6,277     6,143
  Other accrued liabilities     12,196     12,977
             
    Total current liabilities     49,033     43,735
             
Long-term debt     14,468     16,039
             
Other liabilities     16,089     16,305
             
Stockholders' equity:            
  HP stockholders' equity     27,035     26,731
  Non-controlling interests     408     396
             
    Total stockholders' equity     27,443     27,127
             
Total liabilities and stockholders' equity   $ 107,033   $ 103,206
             
             
             
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES  
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS  
(Unaudited)  
(In millions)  
             
    Three months ended
July 31, 2015
    Nine months ended
July 31, 2015
 
Cash flows from operating activities:                
  Net earnings   $ 854     $ 3,231  
  Adjustments to reconcile net earnings to net cash provided by operating activities:                
    Depreciation and amortization     1,023       3,054  
    Stock-based compensation expense     160       476  
    Provision for doubtful accounts and inventory     101       265  
    Restructuring charges     25       426  
    Deferred taxes on earnings     898       898  
    Excess tax benefit from stock-based compensation     (6 )     (124 )
    Other, net     378       675  
                     
    Changes in operating assets and liabilities (net of acquisitions):                
      Accounts receivable     (295 )     1,199  
      Financing receivables     (53 )     192  
      Inventory     (520 )     (467 )
      Accounts payable     534       (358 )
      Taxes on earnings     (1,160 )     (1,075 )
      Restructuring     (303 )     (1,006 )
      Other assets and liabilities     37       (3,505 )
        Net cash provided by operating activities     1,673       3,881  
                 
Cash flows from investing activities:                
    Investment in property, plant and equipment     (916 )     (2,642 )
    Proceeds from sale of property, plant and equipment     99       310  
    Purchases of available-for-sale securities and other investments     (72 )     (180 )
    Maturities and sales of available-for-sale securities and other investments     123       246  
    Payments made in connection with business acquisitions, net of cash acquired     (2,478 )     (2,617 )
    Proceeds from business divestitures, net     156       156  
        Net cash used in investing activities     (3,088 )     (4,727 )
                 
Cash flows from financing activities:                
    Short-term borrowings with original maturities less than 90 days, net     775       2,633  
    Issuance of debt     4,406       5,993  
    Payment of debt     (747 )     (2,642 )
    Settlement of cash flow hedge     (32 )     (32 )
    Issuance of common stock under employee stock plans     80       303  
    Repurchase of common stock     (352 )     (2,582 )
    Excess tax benefit from stock-based compensation     6       124  
    Cash dividends paid     (318 )     (913 )
        Net cash provided by financing activities     3,818       2,884  
                 
Increase in cash and cash equivalents     2,403       2,038  
Cash and cash equivalents at beginning of period     14,768       15,133  
Cash and cash equivalents at end of period   $ 17,171     $ 17,171  
                 
                 
                 
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES  
SEGMENT INFORMATION  
(Unaudited)  
(In millions)  
                   
    Three months ended  
    July 31,
2015
    April 30,
2015
    July 31,
2014
 
Net revenue:(a)                        
                         
  Personal Systems   $ 7,491     $ 7,740     $ 8,649  
  Printing     5,108       5,453       5,590  
    Total Printing and Personal Systems Group     12,599       13,193       14,239  
  Enterprise Group     7,007       6,561       6,872  
  Enterprise Services     4,976       4,817       5,590  
  Software     900       892       959  
  HP Financial Services     806       805       855  
  Corporate Investments     4       2       3  
      Total segments     26,292       26,270       28,518  
  Elimination of intersegment net revenue and other     (943 )     (817 )     (933 )
                         
      Total HP consolidated net revenue   $ 25,349     $ 25,453     $ 27,585  
                         
Earnings before taxes:(a)                        
                         
  Personal Systems   $ 222     $ 235     $ 346  
  Printing     910       996       1,026  
    Total Printing and Personal Systems Group     1,132       1,231       1,372  
  Enterprise Group     912       950       963  
  Enterprise Services     297       194       231  
  Software     185       160       203  
  HP Financial Services     87       85       79  
  Corporate Investments     (148 )     (144 )     (115 )
      Total segment earnings from operations     2,465       2,476       2,733  
                           
  Corporate and unallocated costs and eliminations     (129 )     (152 )     (265 )
  Stock-based compensation expense     (159 )     (129 )     (132 )
  Amortization of intangible assets     (242 )     (221 )     (227 )
  Restructuring charges     (25 )     (255 )     (649 )
  Acquisition-related charges(b)     (47 )     (19 )     (2 )
  Separation costs     (401 )     (269 )     -  
  Defined benefit plan settlement charges     (114 )     -       -  
  Impairment of data center assets     (136 )     -       -  
  Interest and other, net     (108 )     (139 )     (145 )
                           
      Total HP consolidated earnings before taxes   $ 1,104     $ 1,292     $ 1,313  
                               
(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) Acquisition-related charges in the current period include non-cash inventory fair value adjustment charges, as well as professional service and legal fees associated with the acquisition of Aruba Networks, Inc.
 
   
   
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES  
SEGMENT INFORMATION  
(Unaudited)  
(In millions)  
             
    Nine months ended July 31  
    2015     2014  
Net revenue:(a)                
                 
  Personal Systems   $ 23,775     $ 25,355  
  Printing     16,104       17,239  
    Total Printing and Personal Systems Group     39,879       42,594  
  Enterprise Group     20,549       20,475  
  Enterprise Services     14,786       16,887  
  Software     2,663       2,846  
  HP Financial Services     2,414       2,592  
  Corporate Investments     22       297  
      Total segments     80,313       85,691  
  Elimination of intersegment net revenue and other     (2,672 )     (2,643 )
                 
      Total HP consolidated net revenue   $ 77,641     $ 83,048  
                 
Earnings before taxes:(a)                
                 
  Personal Systems   $ 770     $ 915  
  Printing     2,973       3,145  
    Total Printing and Personal Systems Group     3,743       4,060  
  Enterprise Group     2,952       2,923  
  Enterprise Services     639       439  
  Software     502       534  
  HP Financial Services     262       279  
  Corporate Investments     (416 )     (92 )
      Total segment earnings from operations     7,682       8,143  
                   
  Corporate and unallocated costs and eliminations     (463 )     (637 )
  Stock-based compensation expense     (475 )     (432 )
  Amortization of intangible assets     (685 )     (774 )
  Restructuring charges     (426 )     (1,015 )
  Acquisition-related charges(b)     (70 )     (8 )
  Separation costs     (750 )     -  
  Defined benefit plan settlement charges     (114 )     -  
  Impairment of data center assets     (136 )     -  
  Interest and other, net     (421 )     (482 )
                   
      Total HP consolidated earnings before taxes   $ 4,142     $ 4,795  
                       
(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) Acquisition-related charges in the current period include non-cash inventory fair value adjustment charges, as well as professional service and legal fees associated with the acquisition of Aruba Networks, Inc.
 
   
   
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES  
SEGMENT/BUSINESS UNIT INFORMATION  
(Unaudited)  
(In millions)  
                   
    Three months ended     Change (%)  
    July 31,
2015
    April 30,
2015
    July 31,
2014
    Q/Q     Y/Y  
Net revenue:(a)                                    
                                     
  Printing and Personal Systems Group                                    
    Personal Systems                                    
      Notebooks   $ 3,993     $ 4,170     $ 4,359     (4 %)   (8 %)
      Desktops     2,700       2,762       3,395     (2 %)   (20 %)
      Workstations     507       513       579     (1 %)   (12 %)
      Other     291       295       316     (1 %)   (8 %)
        Total Personal Systems     7,491       7,740       8,649     (3 %)   (13 %)
                                       
    Printing                                    
      Supplies     3,455       3,684       3,660     (6 %)   (6 %)
      Commercial Hardware     1,250       1,304       1,401     (4 %)   (11 %)
      Consumer Hardware     403       465       529     (13 %)   (24 %)
        Total Printing     5,108       5,453       5,590     (6 %)   (9 %)
          Total Printing and Personal Systems Group     12,599       13,193       14,239     (5 %)   (12 %)
                                       
    Enterprise Group                                    
      Industry Standard Servers     3,335       3,138       3,097     6 %   8 %
      Technology Services     1,881       1,932       2,074     (3 %)   (9 %)
      Storage     784       740       796     6 %   (2 %)
      Networking     823       556       672     48 %   22 %
      Business Critical Systems     184       195       233     (6 %)   (21 %)
        Total Enterprise Group     7,007       6,561       6,872     7 %   2 %
                                       
    Enterprise Services                                    
      Infrastructure Technology Outsourcing     3,036       2,871       3,494     6 %   (13 %)
      Application and Business Services     1,940       1,946       2,096     0 %   (7 %)
        Total Enterprise Services     4,976       4,817       5,590     3 %   (11 %)
                                       
    Software     900       892       959     1 %   (6 %)
                                       
    HP Financial Services     806       805       855     0 %   (6 %)
                                       
    Corporate Investments     4       2       3     100 %   33 %
        Total segments     26,292       26,270       28,518     0 %   (8 %)
                                       
    Elimination of intersegment net revenue and other     (943 )     (817 )     (933 )   15 %   1 %
                                       
      Total HP consolidated net revenue   $ 25,349     $ 25,453     $ 27,585     0 %   (8 %)
                                     
(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.
   
   
   
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES  
SEGMENT/BUSINESS UNIT INFORMATION  
(Unaudited)  
(In millions)  
   
    Nine months ended July 31  
    2015     2014  
Net revenue:(a)                
                 
  Printing and Personal Systems Group                
    Personal Systems                
      Notebooks   $ 12,887     $ 12,671  
      Desktops     8,411       10,012  
      Workstations     1,546       1,660  
      Other     931       1,012  
        Total Personal Systems     23,775       25,355  
                   
    Printing                
      Supplies     10,740       11,321  
      Commercial Hardware     3,870       4,150  
      Consumer Hardware     1,494       1,768  
        Total Printing     16,104       17,239  
          Total Printing and Personal Systems Group     39,879       42,594  
                     
    Enterprise Group                
      Industry Standard Servers     9,860       9,104  
      Technology Services     5,800       6,282  
      Storage     2,361       2,438  
      Networking     1,941       1,960  
      Business Critical Systems     587       691  
        Total Enterprise Group     20,549       20,475  
                     
    Enterprise Services                
      Infrastructure Technology Outsourcing     9,039       10,592  
      Application and Business Services     5,747       6,295  
        Total Enterprise Services     14,786       16,887  
                     
    Software     2,663       2,846  
                     
    HP Financial Services     2,414       2,592  
                     
    Corporate Investments     22       297  
        Total segments     80,313       85,691  
                     
    Elimination of intersegment net revenue and other     (2,672 )     (2,643 )
                     
      Total HP consolidated net revenue   $ 77,641     $ 83,048  
                       
(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.
   
   
   
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES  
SEGMENT OPERATING MARGIN SUMMARY DATA  
(Unaudited)  
                 
  Three months ended     Change in Operating Margin (pts)  
  July 31,
2015
    Q/Q     Y/Y  
                 
Segment operating margin:(a)                
  Personal Systems 3.0 %   0.0 pts     (1.0 pts )
  Printing 17.8 %   (0.5 pts )   (0.6 pts )
    Total Printing & Personal Systems Group 9.0 %   (0.3 pts )   (0.6 pts )
                   
  Enterprise Group 13.0 %   (1.5 pts )   (1.0 pts )
  Enterprise Services 6.0 %   2.0 pts     1.9 pts  
  Software 20.6 %   2.7 pts     (0.6 pts )
  HP Financial Services 10.8 %   0.2 pts     1.6 pts  
  Corporate Investments(b) NM     NM     NM  
    Total segments 9.4 %   0.0 pts     (0.2 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
    July 31,
2015
  April 30,
2015
  July 31,
2014
                   
Numerator:                  
  GAAP net earnings   $ 854   $ 1,011   $ 985
  Non-GAAP net earnings   $ 1,604   $ 1,596   $ 1,698
                   
Denominator:                  
  Weighted-average shares outstanding during the reporting period     1,805     1,814     1,870
  Dilutive effect of employee stock plans(a)     23     22     29
      Weighted-average shares used to compute diluted net earnings per share     1,828     1,836     1,899
                   
GAAP diluted net earnings per share   $ 0.47   $ 0.55   $ 0.52
Non-GAAP diluted net earnings per share   $ 0.88   $ 0.87   $ 0.89
                   
(a) Includes any dilutive effect of restricted stock units, restricted stock, stock options and performance-based restricted stock units.
   
   
   
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
CALCULATION OF DILUTED NET EARNINGS PER SHARE
(Unaudited)
(In millions, except per share amounts)
         
         
    Nine months ended July 31
    2015   2014
             
Numerator:            
  GAAP net earnings   $ 3,231   $ 3,683
  Non-GAAP net earnings   $ 4,905   $ 5,131
             
Denominator:            
  Weighted-average shares outstanding during the reporting period     1,817     1,889
  Dilutive effect of employee stock plans(a)     25     24
      Weighted-average shares used to compute diluted net earnings per share     1,842     1,913
             
GAAP diluted net earnings per share   $ 1.75   $ 1.93
Non-GAAP diluted net earnings per share   $ 2.66   $ 2.68
             
(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 earnings from operations 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, acquisition-related charges, impairment of data center assets and defined benefit plan settlement 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 primarily related to third-party consulting, contractor fees and other incremental costs 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 cost related to its acquisitions, most of which are treated as non-cash or non-capitalized expenses. The charges are direct expenses such as professional fees and retention costs, as well as non-cash adjustments to the fair value of certain acquired assets such as inventory. Because non-cash or non-capitalized 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 such 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 past operating performance.

  • HP incurs impairment charges related to its exit from certain data centers. Such charges are inconsistent in amount and frequency. HP believes that eliminating these amounts for purposes of calculating non-GAAP operating profit facilitates a more meaningful evaluation of HP's current operating performance and comparisons to HP's operating performance in other periods.

  • HP incurs defined benefit settlement charges relating to the U.S. HP pension plan. The charges are associated with the net settlement and remeasurement resulting from voluntary lump sum payments offered to certain terminated vested participants. HP excludes these charges for the purpose 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.

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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