SOURCE: HP

HP

February 21, 2013 16:04 ET

HP Reports First Quarter 2013 Results

PALO ALTO, CA--(Marketwire - Feb 21, 2013) - HP (NYSE: HPQ)

  • First quarter non-GAAP diluted earnings per share of $0.82, down 11% from the prior year, above previously provided outlook of $0.68 to $0.71
  • First quarter GAAP diluted earnings per share of $0.63, down 14% from the prior year, above previously provided outlook of $0.34 to $0.37 per share
  • First quarter net revenue of $28.4 billion, down 6% year over year and down 4% when adjusted for the effects of currency
  • Cash flow from operations of $2.6 billion, up 115% from the prior year
  • Returned $511 million in cash to shareholders in the form of dividends and share repurchases
  • Improved company net debt position for the fourth consecutive quarter by over $1 billion

HP first quarter fiscal 2013 financial performance

                   
                   
    Q1 FY13     Q1 FY12     Y/Y  
GAAP net revenue ($B)   $ 28.4     $ 30.0     (6 %)
GAAP operating margin     6.2 %     6.8 %   (0.6 pts. )
GAAP net earnings ($B)   $ 1.2     $ 1.5     (16 %)
GAAP diluted EPS   $ 0.63     $ 0.73     (14 %)
Non-GAAP operating margin     7.9 %     8.6 %   (0.7 pts. )
Non-GAAP net earnings ($B)   $ 1.6     $ 1.8     (12 %)
Non-GAAP diluted EPS   $ 0.82     $ 0.92     (11 %)
                       
                       

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 first fiscal quarter ended Jan. 31, 2013. First quarter GAAP diluted earnings per share (EPS) was $0.63, down from $0.73 in the prior-year period and above its previously provided outlook of $0.34 to $0.37 per share. First quarter non-GAAP diluted EPS was $0.82, down from $0.92 in the prior-year period and above its previously provided outlook of $0.68 to $0.71 per share. First quarter non-GAAP earnings information excludes after-tax costs of $373 million, or $0.19 per diluted share, related to the amortization of purchased intangible assets, restructuring charges and acquisition-related charges. For the first quarter, net revenue of $28.4 billion was down 6% year over year and down 4% when adjusted for the effects of currency.

"We beat our non-GAAP diluted EPS outlook for the quarter by $0.11 per share, driven by improved execution, improvement in our channel and go-to-market efforts and the impact of the restructuring program we announced in May 2012," said Meg Whitman, HP president and chief executive officer. "While there's still a lot of work to do to generate the kind of growth we want to see, our turnaround is starting to gain traction as a result of the actions we took in 2012 to lay the foundation for HP's future."

Outlook
For the second quarter of fiscal 2013, HP estimates non-GAAP diluted EPS to be in the range of $0.80 to $0.82 and GAAP diluted EPS to be in the range of $0.38 to $0.40. Second quarter fiscal 2013 non-GAAP diluted EPS estimates exclude after-tax costs of approximately $0.42 per share, related primarily to the amortization of purchased intangible assets, restructuring charges and acquisition-related charges.

For the full year fiscal 2013, HP estimates a non-GAAP diluted EPS to be in the range of $3.40 to $3.60 and GAAP diluted EPS to be in the range of $2.30 to $2.50, in line with HP's previously communicated outlook. Full year fiscal 2013 non-GAAP diluted EPS estimates exclude after-tax costs of approximately $1.10 per share, related primarily to the amortization of purchased intangible assets, restructuring charges and acquisition-related charges.

"Our primary focus is to deliver on the full year outlook, and I feel good about the rest of the year," added Whitman. "We'll be bringing a number of new programs and disruptive innovations to market in the coming quarters, and we expect the benefits from our restructuring will accelerate through fiscal 2013."

Asset Management
HP generated $2.6 billion in cash flow from operations in the first quarter, up 115% from the prior-year period. Inventory ended the quarter at $6.4 billion, with days of inventory down 2 days year over year to 26 days. Accounts receivable of $14.2 billion was down 3 days year over year to 45 days. Accounts payable ended the quarter at $11.7 billion, flat from the prior-year period at 48 days. HP's dividend payment of $0.132 per share in the first quarter resulted in cash usage of $258 million. HP also utilized $253 million of cash during the quarter to repurchase approximately 19.2 million shares of common stock in the open market. HP exited the quarter with $13.1 billion in gross cash.

"After returning more than half a billion dollars to shareholders through share repurchases and dividends in the quarter, we improved our operating company net debt position for the fourth successive quarter by more than $1 billion to $4.7 billion," said Whitman. "We'll continue to take this approach and focus on rebuilding our balance sheet."

First Quarter Fiscal 2013 Segment Results

  • Personal Systems revenue was down 8% year over year with a 2.7% operating margin. Commercial revenue decreased 4%, and Consumer revenue declined 13%. Total units were down 5% with Desktops units up 10% and Notebooks units down 14%.
  • Printing revenue declined 5% year over year with a strong operating margin of 16.1%. Total hardware units were down 11% year over year. Commercial hardware units were down 6% year over year, and Consumer hardware units were down 13% year over year.
  • Enterprise Group revenue declined 4% year over year with a 15.5% operating margin. Networking revenue was up 4%, Industry Standard Servers revenue was down 3%, Business Critical Systems revenue was down 24%, Storage revenue was down 13% and Technology Services revenue was down 1% year over year.
  • Enterprise Services revenue declined 7% year over year with a 1.3% operating margin. Application and Business Services revenue was down 9% year over year, and IT Outsourcing revenue declined 6% year over year.
  • Software revenue was down 2% year over year with a 17.0% operating margin. Support revenue was up 11% while license revenue was down 16% and services revenue was down 8% year over year.
  • HP Financial Services revenue grew 1% year over year as a 1% increase in net portfolio assets was offset by a 25% decrease in financing volume. The business delivered a 10.6% operating margin.

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 Q1 FY13 earnings conference call is accessible via an audio webcast at www.hp.com/investor/2013Q1webcast.

About HP
HP creates new possibilities for technology to have a meaningful impact on people, businesses, governments and society. The world's largest technology company, HP brings together a portfolio that spans printing, personal computing, software, services and IT infrastructure to solve customer problems. 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 GAAP basis, HP provides non-GAAP operating profit, non-GAAP operating margin, non-GAAP net earnings, non-GAAP diluted earnings per share, gross cash, free cash flow, net debt and operating company net debt. HP also provides forecasts of non-GAAP diluted 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 management uses these non-GAAP measures to evaluate its business, the substance behind HP management'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 management compensates for those limitations, and the substantive reasons why HP 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 operating profit, operating margin, net earnings, diluted earnings per share, cash and cash equivalents, cash flow from operations 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, earnings, earnings per share, tax provisions, cash flows, benefit obligations, 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 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 of 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; the impact of macroeconomic and geopolitical trends and events; the need to manage third-party suppliers and the distribution of HP's products and 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 restructuring plans, including estimates and assumptions related to the cost and the anticipated benefits of implementing those plans; the resolution of pending investigations, claims and; and other risks that are described in HP's Annual Report on Form 10-K for the fiscal year ended October 31, 2012 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 meaningful, these amounts could differ materially from actual reported amounts in HP's Form 10-Q for the fiscal quarter ended January 31, 2013. In particular, determining HP's actual tax balances and provisions as of January 31, 2013 requires extensive internal and external review of tax data (including consolidating and reviewing the tax provisions of numerous domestic and foreign entities), which is being completed in the ordinary course of preparing HP's Form 10-Q. 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,
2013
    October 31,
2012
    January 31,
2012
 
                         
Net revenue   $ 28,359     $ 29,959     $ 30,036  
                         
Costs and expenses:                        
  Cost of sales     22,029       22,711       23,313  
  Research and development     794       909       786  
  Selling, general and administrative     3,300       3,227       3,367  
  Amortization of purchased intangible assets     350       372       466  
  Impairment of goodwill and purchased intangible assets     -       8,847       -  
  Restructuring charges     130       378       40  
  Acquisition-related charges     4       3       22  
    Total costs and expenses     26,607       36,447       27,994  
                         
Earnings (loss) from operations     1,752       (6,488 )     2,042  
                         
Interest and other, net     (179 )     (188 )     (221 )
                         
Earnings (loss) before taxes     1,573       (6,676 )     1,821  
                         
Provision for taxes     (341 )     (178 )     (353 )
                         
Net earnings (loss)   $ 1,232     $ (6,854 )   $ 1,468  
                         
Net earnings (loss) per share:                        
  Basic   $ 0.63     $ (3.49 )   $ 0.74  
  Diluted   $ 0.63     $ (3.49 )   $ 0.73  
                         
Cash dividends declared per share   $ 0.26     $ -     $ 0.24  
                         
Weighted-average shares used to compute net earnings (loss) per share:                        
  Basic     1,953       1,964       1,981  
  Diluted     1,956       1,964       1,998  
   
   
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES  
ADJUSTMENTS TO GAAP NET EARNINGS, EARNINGS FROM OPERATIONS,  
OPERATING MARGIN AND EARNINGS PER SHARE  
(Unaudited)  
(In millions except per share amounts)  
                                     
    Three months ended
January 31,
2013
    Diluted earnings per share     Three months ended
October 31,
2012
    Diluted earnings per share     Three months ended
January 31,
2012
    Diluted earnings per share  
                                                 
GAAP net earnings (loss)   $ 1,232     $ 0.63     $ (6,854 )   $ (3.49 )   $ 1,468     $ 0.73  
                                                 
Non-GAAP adjustments:                                                
  Amortization of purchased intangible assets     350       0.18       372       0.19       466       0.24  
  Impairment of goodwill and purchased intangible assets(a)     -       -       8,847       4.51       -       -  
  Restructuring charges     130       0.07       378       0.19       40       0.02  
  Acquisition-related charges in earnings from operations     4       -       3       -       22       0.01  
  Adjustments for taxes(b)     (111 )     (0.06 )     (465 )     (0.24 )     (164 )     (0.08 )
Non-GAAP net earnings   $ 1,605     $ 0.82     $ 2,281     $ 1.16     $ 1,832     $ 0.92  
                                                 
                                                 
GAAP earnings (loss) from operations   $ 1,752             $ (6,488 )           $ 2,042          
                                                 
Non-GAAP adjustments:                                                
  Amortization of purchased intangible assets     350               372               466          
  Impairment of goodwill and purchased intangible assets(a)     -               8,847               -          
  Restructuring charges     130               378               40          
  Acquisition-related charges in earnings from operations     4               3               22          
Non-GAAP earnings from operations   $ 2,236             $ 3,112             $ 2,570          
                                                 
GAAP operating margin     6 %             (22 %)             7 %        
Non-GAAP adjustments     2 %             32 %             2 %        
Non-GAAP operating margin     8 %             10 %             9 %        
                                                 
                                                 
(a) For the period ended October 31, 2012, represents a goodwill and intangible asset impairment charge of $8.8 billion associated with the Autonomy reporting unit within the Software segment.  
   
(b) For the period ended October 31, 2012, the adjustment for taxes is net of valuation allowances of $0.5 billion provided for certain deferred tax assets.  
 
 
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(In millions)
         
    January 31,
2013
  October 31,
2012
    (Unaudited)    
ASSETS            
             
Current assets:            
  Cash and cash equivalents   $ 12,589   $ 11,301
  Accounts receivable     14,236     16,407
  Financing receivables     3,316     3,252
  Inventory     6,374     6,317
  Other current assets     13,037     13,360
               
    Total current assets     49,552     50,637
             
Property, plant and equipment     11,686     11,954
             
Long-term financing receivables and other assets     10,249     10,593
             
Goodwill and purchased intangible assets     35,214     35,584
             
Total assets   $ 106,701   $ 108,768
             
             
LIABILITIES AND STOCKHOLDERS' EQUITY            
             
Current liabilities:            
  Notes payable and short-term borrowings   $ 6,475   $ 6,647
  Accounts payable     11,660     13,350
  Employee compensation and benefits     3,520     4,058
  Taxes on earnings     851     846
  Deferred revenue     7,603     7,494
  Other accrued liabilities     14,277     14,271
               
    Total current liabilities     44,386     46,666
             
Long-term debt     21,752     21,789
             
Other liabilities     17,273     17,480
             
Stockholders' equity:            
  HP stockholders' equity     22,895     22,436
  Non-controlling interests     395     397
               
    Total stockholders' equity     23,290     22,833
             
Total liabilities and stockholders' equity   $ 106,701   $ 108,768
   
   
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES  
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS  
(Unaudited)  
(In millions)  
   
    Three months ended  
    January 31,
2013
    January 31,
2012
 
                 
Cash flows from operating activities:                
  Net earnings   $ 1,232     $ 1,468  
  Adjustments to reconcile net earnings to net cash provided by operating activities:                
    Depreciation and amortization     1,163       1,303  
    Stock-based compensation expense     184       175  
    Provision for bad debt and inventory     124       52  
    Restructuring charges     130       40  
    Deferred taxes on earnings     500       (110 )
    Excess tax benefit from stock-based compensation     -       (11 )
    Other, net     167       44  
                     
    Changes in operating assets and liabilities:                
      Accounts and financing receivables     2,246       2,311  
      Inventory     (149 )     180  
      Accounts payable     (1,690 )     (2,376 )
      Taxes on earnings     (423 )     (12 )
      Restructuring     (237 )     (174 )
      Other assets and liabilities     (685 )     (1,697 )
        Net cash provided by operating activities     2,562       1,193  
                 
Cash flows from investing activities:                
    Investment in property, plant and equipment     (633 )     (883 )
    Proceeds from sale of property, plant and equipment     127       96  
    Purchases of available-for-sale securities and other investments     (299 )     -  
    Maturities and sales of available-for-sale securities and other investments     161       96  
    Payments made in connection with business acquisitions, net of cash acquired     -       (141 )
    Proceeds from business divestiture, net     -       81  
        Net cash used in investing activities     (644 )     (751 )
                 
Cash flows from financing activities:                
    Repayment of commercial paper and notes payable, net     (105 )     (2,607 )
    Issuance of debt     45       3,035  
    Payment of debt     (114 )     (100 )
    Issuance of common stock under employee stock plans     55       313  
    Repurchase of common stock     (253 )     (780 )
    Excess tax benefit from stock-based compensation     -       11  
    Cash dividends paid     (258 )     (244 )
      Net cash used in financing activities     (630 )     (372 )
                 
Increase in cash and cash equivalents     1,288       70  
Cash and cash equivalents at beginning of period     11,301       8,043  
Cash and cash equivalents at end of period   $ 12,589     $ 8,113  
   
   
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES  
SEGMENT INFORMATION  
(Unaudited)  
(In millions)  
                   
    Three months ended  
    January 31, 2013     October 31, 2012     January 31, 2012  
                         
Net revenue:(a)                        
                         
  Personal Systems   $ 8,204     $ 8,727     $ 8,892  
  Printing     5,926       6,080       6,258  
    Total Printing and Personal Systems Group(b)     14,130       14,807       15,150  
  Enterprise Group     6,984       7,459       7,282  
  Enterprise Services     5,919       6,352       6,371  
  Software     926       1,171       946  
  HP Financial Services     957       966       950  
  Corporate Investments     4       10       30  
      Total segments     28,920       30,765       30,729  
  Elimination of intersegment net revenue and other     (561 )     (806 )     (693 )
                           
      Total HP consolidated net revenue   $ 28,359     $ 29,959     $ 30,036  
                         
Earnings before taxes:(a)                        
                         
  Personal Systems   $ 223     $ 309     $ 459  
  Printing     953       1,067       761  
    Total Printing and Personal Systems Group(b)     1,176       1,376       1,220  
  Enterprise Group     1,084       1,229       1,329  
  Enterprise Services     76       423       145  
  Software     157       318       162  
  HP Financial Services     101       104       91  
  Corporate Investments     (65 )     (78 )     (50 )
      Total segment earnings from operations     2,529       3,372       2,897  
                         
  Corporate and unallocated costs and eliminations     (109 )     (120 )     (153 )
  Unallocated costs related to stock-based compensation expense     (184 )     (140 )     (174 )
  Amortization of purchased intangible assets     (350 )     (372 )     (466 )
  Impairment of goodwill and purchased intangible assets     -       (8,847 )     -  
  Restructuring charges     (130 )     (378 )     (40 )
  Acquisition-related charges     (4 )     (3 )     (22 )
  Interest and other, net     (179 )     (188 )     (221 )
                           
      Total HP consolidated earnings (loss) before taxes   $ 1,573     $ (6,676 )   $ 1,821  
                         
(a) HP has implemented certain organizational realignments. As a result of these realignments, HP has re-evaluated its segment financial reporting structure and, effective in the first quarter of fiscal 2013, created two new financial reporting segments, the Enterprise Group segment and the Enterprise Services segment, and eliminated two other financial reporting segments, the Enterprise Servers, Storage and Networking ("ESSN") segment and the Services segment. The Enterprise Group segment consists of the business units within the former ESSN segment and most of the services offerings of the Technology Services ("TS") business unit, which was previously a part of the former Services segment. The Enterprise Services segment consists of the Applications and Business Services ("ABS") and Infrastructure Technology Outsourcing ("ITO") business units from the former Services segment, along with the end-user workplace support services business that was previously a part of the TS business unit. Taking into account these changes, HP has the following seven financial reporting segments: Personal Systems, Printing, the Enterprise Group, Enterprise Services, Software, HP Financial Services and Corporate Investments.  
   
Also as a result of these realignments, the financial results of the Personal Systems commercial products support business, which were previously reported as part of the TS business unit, will now be reported as part of the Other business unit within the Personal Systems segment, and the financial results of the portion of the business intelligence services business that had continued to be reported as part of the Corporate Investments segment following the implementation of prior realignment actions will now be reported as part of the ABS business unit. In addition, the end-user workplace support services business, which, as noted above, was previously a part of the TS business unit and will now become a part of the Enterprise Services segment, will be reported as part of the ITO business unit within that segment.  
   
To provide improved visibility and comparability, HP has reflected these changes to its reporting structure in prior financial reporting periods on an as-if basis, which has resulted in the transfer of revenue and operating profit among the Personal Systems, the Enterprise Group, Enterprise Services and Corporate Investments segments. These changes had no impact on the previously reported financial results for the Printing, Software or HP Financial Services segments. In addition, none of these changes impacted HP's previously reported consolidated net revenue, earnings from operations, net earnings or net earnings per share.  
   
(b) The Personal Systems segment and the Printing segment are structured beneath a broader Printing and Personal Systems Group ("PPS"). While PPS is not a financial reporting segment, HP provides financial data aggregating the segments within it in order to provide a supplementary view of its business.  
   
   
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES  
SEGMENT / BUSINESS UNIT INFORMATION  
(Unaudited)  
(In millions)  
                   
    Three months ended     Growth rate (%)  
    January 31,
2013
    October 31,
2012
    January 31,
2012
    Q/Q     Y/Y  
Net revenue:(a)                                    
                                     
  Printing and Personal Systems Group(b)                                    
    Personal Systems                                    
      Notebooks   $ 4,128     $ 4,572     $ 4,942     (10 %)   (16 %)
      Desktops     3,321       3,369       3,206     (1 %)   4 %
      Workstations     535       550       535     (3 %)   0 %
      Other     220       236       209     (7 %)   5 %
        Total Personal Systems     8,204       8,727       8,892     (6 %)   (8 %)
                                       
    Printing                                    
      Supplies     3,893       4,007       4,079     (3 %)   (5 %)
      Commercial Hardware     1,354       1,482       1,489     (9 %)   (9 %)
      Consumer Hardware     679       591       690     15 %   (2 %)
        Total Printing     5,926       6,080       6,258     (3 %)   (5 %)
          Total Printing and Personal Systems Group     14,130       14,807       15,150     (5 %)   (7 %)
                                       
    Enterprise Group                                    
      Industry Standard Servers     2,994       3,137       3,072     (5 %)   (3 %)
      Technology Services     2,243       2,340       2,264     (4 %)   (1 %)
      Storage     833       946       955     (12 %)   (13 %)
      Networking     608       635       586     (4 %)   4 %
      Business Critical Systems     306       401       405     (24 %)   (24 %)
        Total Enterprise Group     6,984       7,459       7,282     (6 %)   (4 %)
                                         
    Enterprise Services                                    
      Infrastructure Technology Outsourcing     3,736       3,924       3,980     (5 %)   (6 %)
      Application and Business Services     2,183       2,428       2,391     (10 %)   (9 %)
        Total Enterprise Services     5,919       6,352       6,371     (7 %)   (7 %)
                                         
    Software     926       1,171       946     (21 %)   (2 %)
                                         
    HP Financial Services     957       966       950     (1 %)   1 %
                                         
    Corporate Investments     4       10       30     (60 %)   (87 %)
      Total segments     28,920       30,765       30,729     (6 %)   (6 %)
                                         
    Elimination of intersegment net revenue and other     (561 )     (806 )     (693 )   (30 %)   (19 %)
                                         
      Total HP consolidated net revenue   $ 28,359     $ 29,959     $ 30,036     (5 %)   (6 %)
                                     
(a) HP has implemented certain organizational realignments. As a result of these realignments, HP has re-evaluated its segment financial reporting structure and, effective in the first quarter of fiscal 2013, created two new financial reporting segments, the Enterprise Group segment and the Enterprise Services segment, and eliminated two other financial reporting segments, the Enterprise Servers, Storage and Networking ("ESSN") segment and the Services segment. The Enterprise Group segment consists of the business units within the former ESSN segment and most of the services offerings of the Technology Services ("TS") business unit, which was previously a part of the former Services segment. The Enterprise Services segment consists of the Applications and Business Services ("ABS") and Infrastructure Technology Outsourcing ("ITO") business units from the former Services segment, along with the end-user workplace support services business that was previously a part of the TS business unit. Taking into account these changes, HP has the following seven financial reporting segments: Personal Systems, Printing, the Enterprise Group, Enterprise Services, Software, HP Financial Services and Corporate Investments.  
         
Also as a result of these realignments, the financial results of the Personal Systems commercial products support business, which were previously reported as part of the TS business unit, will now be reported as part of the Other business unit within the Personal Systems segment, and the financial results of the portion of the business intelligence services business that had continued to be reported as part of the Corporate Investments segment following the implementation of prior realignment actions will now be reported as part of the ABS business unit. In addition, the end-user workplace support services business, which, as noted above, was previously a part of the TS business unit and will now become a part of the Enterprise Services segment, will be reported as part of the ITO business unit within that segment.  
         
To provide improved visibility and comparability, HP has reflected these changes to its reporting structure in prior financial reporting periods on an as-if basis, which has resulted in the transfer of revenue and operating profit among the Personal Systems, the Enterprise Group, Enterprise Services and Corporate Investments segments. These changes had no impact on the previously reported financial results for the Printing, Software or HP Financial Services segments. In addition, none of these changes impacted HP's previously reported consolidated net revenue, earnings from operations, net earnings or net earnings per share.  
         
(b) The Personal Systems segment and the Printing segment are structured beneath a broader Printing and Personal Systems Group ("PPS"). While PPS is not a financial reporting segment, HP provides financial data aggregating the segments within it in order to provide a supplementary view of its business.  
   
   
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES  
SEGMENT NON-GAAP OPERATING MARGIN SUMMARY DATA  
(Unaudited)  
                   
    Three months ended     Change in Operating Margin (pts)  
    January 31,
2013
    Q/Q     Y/Y  
                   
Non-GAAP operating margin:(a)                  
  Personal Systems   2.7 %   (0.8 pts )   (2.5 pts )
  Printing   16.1 %   (1.4 pts )   3.9 pts  
    Printing and Personal Systems Group(b)   8.3 %   (1.0 pts )   0.2 pts  
                     
  Enterprise Group   15.5 %   (1.0 pts )   (2.8 pts )
  Enterprise Services   1.3 %   (5.4 pts )   (1.0 pts )
  Software   17.0 %   (10.2 pts )   (0.1 pts )
  HP Financial Services   10.6 %   (0.2 pts )   1.0 pts  
  Corporate Investments   NM     NM     NM  
      Total segments   8.7 %   (2.3 pts )   (0.7 pts )
                     
      Total HP consolidated non-GAAP operating margin   7.9 %   (2.5 pts )   (0.7 pts )
                   
                   
(a) HP has implemented certain organizational realignments. As a result of these realignments, HP has re-evaluated its segment financial reporting structure and, effective in the first quarter of fiscal 2013, created two new financial reporting segments, the Enterprise Group segment and the Enterprise Services segment, and eliminated two other financial reporting segments, the Enterprise Servers, Storage and Networking ("ESSN") segment and the Services segment. The Enterprise Group segment consists of the business units within the former ESSN segment and most of the services offerings of the Technology Services ("TS") business unit, which was previously a part of the former Services segment. The Enterprise Services segment consists of the Applications and Business Services ("ABS") and Infrastructure Technology Outsourcing ("ITO") business units from the former Services segment, along with the end-user workplace support services business that was previously a part of the TS business unit. Taking into account these changes, HP has the following seven financial reporting segments: Personal Systems, Printing, the Enterprise Group, Enterprise Services, Software, HP Financial Services and Corporate Investments.  
   
Also as a result of these realignments, the financial results of the Personal Systems commercial products support business, which were previously reported as part of the TS business unit, will now be reported as part of the Other business unit within the Personal Systems segment, and the financial results of the portion of the business intelligence services business that had continued to be reported as part of the Corporate Investments segment following the implementation of prior realignment actions will now be reported as part of the ABS business unit. In addition, the end-user workplace support services business, which, as noted above, was previously a part of the TS business unit and will now become a part of the Enterprise Services segment, will be reported as part of the ITO business unit within that segment.  
   
To provide improved visibility and comparability, HP has reflected these changes to its reporting structure in prior financial reporting periods on an as-if basis, which has resulted in the transfer of revenue and operating profit among the Personal Systems, the Enterprise Group, Enterprise Services and Corporate Investments segments. These changes had no impact on the previously reported financial results for the Printing, Software or HP Financial Services segments. In addition, none of these changes impacted HP's previously reported consolidated net revenue, earnings from operations, net earnings or net earnings per share.  
   
(b) The Personal Systems segment and the Printing segment are structured beneath a broader Printing and Personal Systems Group ("PPS"). While PPS is not a financial reporting segment, HP provides financial data aggregating the segments within it in order to provide a supplementary view of its business.  
 
 
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
CALCULATION OF NET EARNINGS PER SHARE
(Unaudited)
(In millions except per share amounts)
               
    Three months ended
    January 31,
2013
  October 31,
2012
    January 31,
2012
                     
Numerator:                    
  GAAP net earnings (loss)   $ 1,232   $ (6,854 )   $ 1,468
  Non-GAAP net earnings   $ 1,605   $ 2,281     $ 1,832
                     
Denominator:                    
  Weighted-average shares used to compute basic net earnings (loss) per share and diluted net (loss) per share     1,953     1,964       1,981
  Dilutive effect of employee stock plans     3     3       17
    Weighted-average shares used to compute diluted net earnings per share     1,956     1,967       1,998
                     
GAAP net earnings (loss) per share:                    
  Basic   $ 0.63   $ (3.49 )   $ 0.74
  Diluted(a)   $ 0.63   $ (3.49 )   $ 0.73
                     
Non-GAAP net earnings per share:                    
  Basic   $ 0.82   $ 1.16     $ 0.92
  Diluted(b)   $ 0.82   $ 1.16     $ 0.92
 
(a) GAAP diluted net earnings per share reflects any dilutive effect of outstanding stock options, performance-based restricted units, restricted stock units and restricted stock, but that effect is excluded when calculating GAAP diluted net (loss) per share because it would be anti-dilutive.
 
(b) Non-GAAP diluted net earnings per share reflects any dilutive effect of outstanding stock options, performance-based restricted units, restricted stock units and restricted stock.

Use of Non-GAAP Financial Measures
To supplement HP's consolidated condensed financial statements presented on a GAAP basis, HP provides non-GAAP operating profit, non-GAAP operating margin, non-GAAP net earnings, non-GAAP diluted earnings per share, gross cash, free cash flow, net debt and operating company net debt. HP also provides forecasts of non-GAAP diluted earnings per share. These non-GAAP financial measures are not in accordance with, or an alternative for, generally accepted accounting principles in the United States. 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 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 debt and operating company net debt is total company debt. 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
Non-GAAP operating profit and non-GAAP operating margin are defined to exclude the effects of any restructuring charges, charges relating to the impairment of goodwill and purchased intangible assets, charges relating to the amortization of purchased intangible assets, and acquisition-related charges recorded during the relevant period. Non-GAAP net earnings and non-GAAP diluted 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 earnings per share are adjusted by the amount of additional taxes or tax benefit 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 those items mentioned above from these non-GAAP financial measures allows HP management to better understand HP's consolidated financial performance in relationship to the operating results of HP's segments, as 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:

  • In the third quarter of fiscal 2012, HP decided to wind down certain retail publishing business activities. Non-GAAP operating profit reported in the third quarter of fiscal 2012 reflects the elimination of certain contract-related charges, including inventory write-downs, in connection with the wind down of that business. Because the winding down of HP businesses is 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 past and future operating performance.

  • Goodwill is the excess of the purchase price of acquired companies over the estimated fair value of the tangible and intangible assets acquired and liabilities assumed. Purchased intangible assets consist primarily of customer contracts, customer lists, distribution agreements, technology patents, and products, trademarks and trade names purchased in connection with acquisitions. In the fourth quarter of fiscal 2012, HP recorded a non-cash charge for the impairment of goodwill and intangible assets associated with the acquisition of Autonomy Corporation plc. In the third quarter of fiscal 2012, HP recorded an impairment charge for the goodwill associated with its Services segment following an impairment review. In addition, in that same quarter, HP recorded an impairment charge related to the intangible asset associated with the "Compaq" trade name acquired in 2002 in conjunction with a change in branding strategy. 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 past and future operating performance.

  • HP incurs charges relating to the amortization of purchased intangibles. HP also incurs charges relating to the amortization of amounts assigned to intangible assets to be used in research and development projects. All of those charges are included in HP's GAAP presentation of earnings from operations, operating margin, net earnings and net earnings per share. Such charges are inconsistent in amount and frequency and are significantly impacted by the timing and magnitude of HP's acquisitions. 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 past and future operating performance.

  • Restructuring charges consist of 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 past and future operating performance.

  • HP incurs costs related to its acquisitions, most of which are treated as non-capitalized expenses. Because 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 the non-capitalized 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 and future operating performance.

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. 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 strategic acquisitions, repurchasing stock and other purposes. HP's management also uses gross cash and free cash flow for the purposes of evaluating HP's historical and prospective liquidity, as well as to further its own understanding of HP's segment operating results. 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 and segment operating results. Because free cash flow includes the effect of 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.

Operating company net debt is a non-GAAP measure that is defined as total company net debt less HP Financial Services ("HPFS") net debt. Total company net debt consists of total debt (including the effect of hedging) less gross cash, which includes cash and cash equivalents, short-term investments, and certain liquid long-term investments. HPFS net debt consists of HPFS debt, which includes primarily intercompany equity that is treated as debt for segment reporting purposes, intercompany debt and debt issued directly by HPFS, less HPFS cash. Total company net debt provides useful information to management about the state of HP's consolidated balance sheet. Operating company net debt provides additional useful information to management about the state of HP's consolidated 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 may 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 purchased 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 and non-GAAP diluted 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 that are excluded from non-GAAP operating profit, non-GAAP operating margin, non-GAAP net earnings and non-GAAP diluted earnings per share can have a material impact on cash flows and earnings per share.

  • HP may not be able to liquidate immediately the long-term investments included in gross cash, which may limit the usefulness of gross cash as a liquidity measure.

  • Other companies may calculate non-GAAP operating profit, non-GAAP operating margin, non-GAAP net earnings, non-GAAP diluted earnings per share, gross cash, free cash flow, net debt and operating company net debt 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 operating profit, non-GAAP operating margin, non-GAAP net earnings, non-GAAP diluted earnings per share, gross cash, free cash flow, net debt and operating company net debt 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 press 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 non-GAAP operating profit, non-GAAP operating margin, non-GAAP net earnings, non-GAAP diluted earnings per share, gross cash, free cash flow, net debt and operating company net debt 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 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 are calculated in a similar manner.

© 2013 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.