SOURCE: HP

HP

May 22, 2014 15:54 ET

HP Reports Fiscal 2014 Second Quarter Results

PALO ALTO, CA--(Marketwired - May 22, 2014) -  HP (NYSE: HPQ)

  • Second quarter non-GAAP diluted net earnings per share of $0.88, up 1% from the prior-year period, versus the previously provided outlook of $0.85 to $0.89 per share
  • Second quarter GAAP diluted net earnings per share of $0.66, up 20% from the prior-year period, versus the previously provided outlook of $0.62 to $0.66 per share
  • Second quarter net revenue of $27.3 billion, down 1% from the prior-year period and flat on a constant currency basis
  • Second quarter cash flow from operations of $3.0 billion
  • Returned $1.1 billion to shareholders in the form of dividends and share repurchases in the second quarter
  • Improved operating company net cash by $1.0 billion, the ninth consecutive quarterly improvement of approximately $1 billion or more

HP fiscal 2014 second quarter financial performance

                   
    Q2 FY14     Q2 FY13     Y/Y  
GAAP net revenue ($B)   $ 27.3     $ 27.6     (1 %)
GAAP operating margin     6.7 %     5.8 %   0.9 pts.  
GAAP net earnings ($B)   $ 1.3     $ 1.1     18 %
GAAP diluted net earnings per share   $ 0.66     $ 0.55     20 %
Non-GAAP operating margin     8.6 %     8.6 %   0.0 pts.  
Non-GAAP net earnings ($B)   $ 1.7     $ 1.7     0 %
Non-GAAP diluted net earnings per share   $ 0.88     $ 0.87     1 %
Cash flow from operations ($B)   $ 3.0     $ 3.6     (16 %)
                       

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 2014 second quarter ended April 30, 2014. 

Second quarter GAAP diluted net earnings per share (EPS) was $0.66, up from $0.55 in the prior-year period and within its previously provided outlook of $0.62 to $0.66. Second quarter non-GAAP diluted net EPS was $0.88, up from $0.87 in the prior-year period and within its previously provided outlook of $0.85 to $0.89. Second quarter non-GAAP net earnings and non-GAAP diluted net EPS exclude after-tax costs of $418 million and $0.22 per diluted share, respectively, related to the amortization of intangible assets, restructuring charges and acquisition-related charges.

Second quarter net revenue of $27.3 billion was down 1% from the prior-year period and flat on a constant currency basis.

"With the first half of our fiscal year completed, I'm pleased to report that HP's turnaround remains on track," said Meg Whitman, president and chief executive officer, HP. "With each passing quarter, HP is improving its systems, structures and core go-to-market capabilities. We're gradually shaping HP into a more nimble, lower-cost, more customer- and partner-centric company that can successfully compete across a rapidly changing IT landscape."

In May 2012, HP adopted a multi-year restructuring plan designed to simplify business processes, accelerate innovation, lower costs and deliver better results. HP previously estimated that 34,000 positions would be eliminated in connection with the plan. As HP continues to reengineer the workforce to be more competitive and meet its objectives, the previously estimated number of eliminated positions will increase by between 11,000 to 16,000.

Outlook
For the fiscal 2014 third quarter, HP estimates non-GAAP diluted net EPS to be in the range of $0.86 to $0.90 and GAAP diluted net EPS to be in the range of $0.59 to $0.63. Fiscal 2014 third quarter non-GAAP diluted net EPS estimates exclude after-tax costs of approximately $0.27 per share, related primarily to the amortization of intangible assets and restructuring charges. 

For fiscal 2014, HP estimates non-GAAP diluted net EPS to be in the range of $3.63 to $3.75 and GAAP diluted net EPS to be in the range of $2.68 to $2.80. Fiscal 2014 non-GAAP diluted net EPS estimates exclude after-tax costs of approximately $0.95 per share, related primarily to the amortization of intangible assets and restructuring charges. 

Asset management
HP generated $3.0 billion in cash flow from operations in the second quarter, down 16% from the prior-year period. Inventory ended the quarter at $5.8 billion, down 1 day year over year to 25 days. Accounts receivable ended the quarter at $14.3 billion, down 1 day year over year at 47 days. Accounts payable ended the quarter at $13.5 billion, up 6 days year over year to 59 days. HP's dividend payment of $0.1452 per share in the second quarter resulted in cash usage of $298 million. HP also utilized $831 million of cash during the quarter to repurchase approximately 26.7 million shares of common stock in the open market. HP exited the quarter with $15.4 billion in gross cash.

Fiscal 2014 second quarter segment results

  • Personal Systems revenue was up 7% year over year with a 3.5% operating margin. Commercial revenue increased 12% and Consumer revenue declined 2%. Total units were up 10% with Desktops units up 6% and Notebooks units up 6%.
  • Printing revenue was down 4% year over year with a 19.5% operating margin. Total hardware units were up 1% with Commercial hardware units up 3% and Consumer hardware units flat. Supplies revenue was down 6%.
  • Enterprise Group revenue was down 2% year over year with a 14.4% operating margin. Industry Standard Servers revenue was up 1%, Storage revenue was down 6%, Business Critical Systems revenue was down 14%, Networking revenue was up 6% and Technology Services revenue was down 5%. 
  • Enterprise Services revenue was down 7% year over year with a 2.5% operating margin. Application and Business Services revenue was down 8%, and Infrastructure Technology Outsourcing revenue declined 7%. 
  • Software revenue was flat year over year with a 19.2% operating margin. License revenue was up 8%, support revenue was down 4%, professional services revenue was up 1% and software-as-a-service (SaaS) revenue was up 6%. 
  • HP Financial Services revenue was down 2% year over year with a 2% decrease in net portfolio assets and a 12% increase in financing volume. The business delivered an operating margin of 11.4%.

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 Q2 FY14 earnings conference call is accessible via an audio webcast at www.hp.com/investor/2014Q2webcast.

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

Use of non-GAAP financial information
To supplement HP's consolidated condensed financial statements presented on a generally accepted accounting principles (GAAP) basis, HP provides revenue on a constant currency basis, 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. 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 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'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, HP's effective tax rate, 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 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 disputes; and other risks that are described in HP's Annual Report on Form 10-K for the fiscal year ended October 31, 2013, 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 January 31, 2014. 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 actual reported amounts in HP's Quarterly Report on Form 10-Q for the fiscal quarter ended April 30, 2014. 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  
    April 30,
2014
    January 31,
2014
    April 30,
2013
 
                         
Net revenue   $ 27,309     $ 28,154     $ 27,582  
                         
Costs and expenses:                        
  Cost of sales     20,704       21,736       21,055  
  Research and development     873       811       815  
  Selling, general and administrative     3,391       3,210       3,342  
  Amortization of intangible assets     264       283       350  
  Restructuring charges     252       114       408  
  Acquisition-related charges     3       3       11  
    Total costs and expenses     25,487       26,157       25,981  
                         
Earnings from operations     1,822       1,997       1,601  
                         
Interest and other, net     (174 )     (163 )     (193 )
                         
Earnings before taxes     1,648       1,834       1,408  
                         
Provision for taxes     (375 )     (409 )     (331 )
                         
Net earnings   $ 1,273     $ 1,425     $ 1,077  
                         
Net earnings per share:                        
  Basic   $ 0.67     $ 0.75     $ 0.56  
  Diluted   $ 0.66     $ 0.74     $ 0.55  
                         
Cash dividends declared per share   $ -     $ 0.29     $ -  
                         
                         
Weighted-average shares used to compute net earnings per share:                        
  Basic     1,890       1,907       1,935  
  Diluted     1,916       1,935       1,947  
                           
                           
   
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES  
CONSOLIDATED CONDENSED STATEMENTS OF EARNINGS  
(Unaudited)  
(In millions except per share amounts)  
             
    Six months ended  
    April 30,  
    2014     2013  
                 
Net revenue   $ 55,463     $ 55,941  
                 
Costs and expenses:                
  Cost of sales     42,440       43,084  
  Research and development     1,684       1,609  
  Selling, general and administrative     6,601       6,642  
  Amortization of intangible assets     547       700  
  Restructuring charges     366       538  
  Acquisition-related charges     6       15  
    Total costs and expenses     51,644       52,588  
                 
Earnings from operations     3,819       3,353  
                 
Interest and other, net     (337 )     (372 )
                 
Earnings before taxes     3,482       2,981  
                 
Provision for taxes     (784 )     (672 )
                 
Net earnings   $ 2,698     $ 2,309  
                 
Net earnings per share:                
  Basic   $ 1.42     $ 1.19  
  Diluted   $ 1.40     $ 1.18  
                 
Cash dividends declared per share   $ 0.29     $ 0.26  
                 
                 
Weighted-average shares used to compute net earnings per share:                
  Basic     1,898       1,944  
  Diluted     1,922       1,952  
                   
                   
   
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
April 30, 2014
    Diluted net earnings per share     Three months ended
January 31, 2014
    Diluted net earnings per share     Three months ended
April 30, 2013
    Diluted
net earnings per share
 
                                                 
GAAP net earnings   $ 1,273     $ 0.66     $ 1,425     $ 0.74     $ 1,077     $ 0.55  
                                                 
Non-GAAP adjustments:                                                
  Amortization of intangible assets     264       0.14       283       0.15       350       0.17  
  Restructuring charges     252       0.13       114       0.06       408       0.21  
  Acquisition-related charges     3       -       3       -       11       0.01  
  Adjustments for taxes     (101 )     (0.05 )     (83 )     (0.05 )     (148 )     (0.07 )
Non-GAAP net earnings   $ 1,691     $ 0.88     $ 1,742     $ 0.90     $ 1,698     $ 0.87  
                                                 
                                                 
GAAP earnings from operations   $ 1,822             $ 1,997             $ 1,601          
                                                 
Non-GAAP adjustments:                                                
  Amortization of intangible assets     264               283               350          
  Restructuring charges     252               114               408          
  Acquisition-related charges     3               3               11          
Non-GAAP earnings from operations   $ 2,341             $ 2,397             $ 2,370          
                                                 
GAAP operating margin     7 %             7 %             6 %        
Non-GAAP adjustments     2 %             2 %             3 %        
Non-GAAP operating margin     9 %             9 %             9 %        
                                                 
                                                 
   
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)  
                         
    Six months ended
April 30, 2014
    Diluted
net earnings per share
    Six months ended
April 30, 2013
    Diluted
net earnings
per share
 
                                 
GAAP net earnings   $ 2,698     $ 1.40     $ 2,309     $ 1.18  
                                 
Non-GAAP adjustments:                                
  Amortization of intangible assets     547       0.28       700       0.35  
  Restructuring charges     366       0.19       538       0.28  
  Acquisition-related charges     6       -       15       0.01  
  Adjustments for taxes     (184 )     (0.08 )     (259 )     (0.13 )
Non-GAAP net earnings   $ 3,433     $ 1.79     $ 3,303     $ 1.69  
                                 
                                 
GAAP earnings from operations   $ 3,819             $ 3,353          
                                 
Non-GAAP adjustments:                                
  Amortization of intangible assets     547               700          
  Restructuring charges     366               538          
  Acquisition-related charges     6               15          
Non-GAAP earnings from operations   $ 4,738             $ 4,606          
                                 
GAAP operating margin     7 %             6 %        
Non-GAAP adjustments     2 %             2 %        
Non-GAAP operating margin     9 %             8 %        
                                 
                                 
 
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(In millions)
         
    As of
    April 30,
2014
  October 31,
2013
    (Unaudited)    
ASSETS            
             
Current assets:            
  Cash and cash equivalents   $ 15,096   $ 12,163
  Accounts receivable     14,288     15,876
  Financing receivables     3,112     3,144
  Inventory     5,840     6,046
  Other current assets     11,547     13,135
             
    Total current assets     49,883     50,364
             
Property, plant and equipment     11,350     11,463
             
Long-term financing receivables and other assets     9,043     9,556
             
Goodwill and intangible assets     33,696     34,293
             
Total assets   $ 103,972   $ 105,676
             
             
LIABILITIES AND STOCKHOLDERS' EQUITY            
             
Current liabilities:            
  Notes payable and short-term borrowings   $ 5,396   $ 5,979
  Accounts payable     13,521     14,019
  Employee compensation and benefits     3,662     4,436
  Taxes on earnings     1,263     1,203
  Deferred revenue     6,416     6,477
  Other accrued liabilities     13,022     13,407
             
    Total current liabilities     43,280     45,521
             
Long-term debt     17,190     16,608
             
Other liabilities     14,920     15,891
             
Stockholders' equity:            
  HP stockholders' equity     28,185     27,269
  Non-controlling interests     397     387
             
    Total stockholders' equity     28,582     27,656
             
Total liabilities and stockholders' equity   $ 103,972   $ 105,676
             
             
   
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES  
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS  
(Unaudited)  
(In millions)  
   
    Three months ended     Six months ended  
    April 30, 2014     April 30, 2014  
Cash flows from operating activities:                
  Net earnings   $ 1,273     $ 2,698  
  Adjustments to reconcile net earnings to net cash provided by operating activities:                
    Depreciation and amortization     1,087       2,204  
    Stock-based compensation expense     130       300  
    Provision for doubtful accounts and inventory     55       112  
    Restructuring charges     252       366  
    Deferred taxes on earnings     (99 )     (90 )
    Excess tax benefit from stock-based compensation     (6 )     (33 )
    Other, net     47       14  
                 
    Changes in operating assets and liabilities (net of acquisitions):                
      Accounts receivable     (801 )     1,590  
      Financing receivables     (42 )     254  
      Inventory     126       107  
      Accounts payable     765       (400 )
      Taxes on earnings     (17 )     153  
      Restructuring     (300 )     (681 )
      Other assets and liabilities     525       (609 )
        Net cash provided by operating activities     2,995       5,985  
                 
Cash flows from investing activities:                
    Investment in property, plant and equipment     (840 )     (1,837 )
    Proceeds from sale of property, plant and equipment     120       570  
    Purchases of available-for-sale securities and other investments     (316 )     (451 )
    Proceeds from sale of available-for-sale securities and other investments     79       544  
    Payments made in connection with business acquisitions     (20 )     (20 )
      Net cash used in investing activities     (977 )     (1,194 )
                 
Cash flows from financing activities:                
    Issuance of commercial paper and notes payable, net     58       60  
    Issuance of debt     -       2,005  
    Payment of debt     (2,070 )     (2,115 )
    Issuance of common stock under employee stock plans     48       131  
    Repurchase of common stock     (831 )     (1,396 )
    Excess tax benefit from stock-based compensation     6       33  
    Cash dividends paid     (298 )     (576 )
      Net cash used in financing activities     (3,087 )     (1,858 )
                 
(Decrease) increase in cash and cash equivalents     (1,069 )     2,933  
Cash and cash equivalents at beginning of period     16,165       12,163  
Cash and cash equivalents at end of period   $ 15,096     $ 15,096  
                 
                 
   
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES  
SEGMENT INFORMATION  
(Unaudited)  
(In millions)  
                   
    Three months ended  
    April 30,
2014
    January 31,
2014
    April 30,
2013
 
Net revenue:(a)                        
                         
  Personal Systems   $ 8,176     $ 8,530     $ 7,610  
  Printing     5,834       5,815       6,094  
    Total Printing and Personal Systems Group     14,010       14,345       13,704  
  Enterprise Group     6,657       6,993       6,794  
  Enterprise Services     5,702       5,595       6,133  
  Software     971       916       967  
  HP Financial Services     867       870       881  
  Corporate Investments     6       288       10  
    Total segments     28,213       29,007       28,489  
  Elimination of intersegment net revenue and other     (904 )     (853 )     (907 )
                         
    Total HP consolidated net revenue   $ 27,309     $ 28,154     $ 27,582  
                         
Earnings before taxes:(a)                        
                         
  Personal Systems   $ 290     $ 279     $ 244  
  Printing     1,140       979       970  
    Total Printing and Personal Systems Group     1,430       1,258       1,214  
  Enterprise Group     961       1,006       1,074  
  Enterprise Services     144       57       156  
  Software     186       145       180  
  HP Financial Services     99       101       97  
  Corporate Investments     (98 )     121       (75 )
    Total segment earnings from operations     2,722       2,688       2,646  
                         
  Corporate and unallocated costs and eliminations     (251 )     (121 )     (169 )
  Stock-based compensation expense     (130 )     (170 )     (107 )
  Amortization of intangible assets     (264 )     (283 )     (350 )
  Restructuring charges     (252 )     (114 )     (408 )
  Acquisition-related charges     (3 )     (3 )     (11 )
  Interest and other, net     (174 )     (163 )     (193 )
                         
    Total HP consolidated earnings before taxes   $ 1,648     $ 1,834     $ 1,408  
                             
(a) Effective at the beginning of its first quarter of fiscal 2014, HP implemented certain organizational changes to align its segment financial reporting more closely with its current business structure. These organizational changes include (i) transferring the HP Exstream business from the Commercial Hardware business unit within the Printing segment to the Software segment; (ii) transferring the Personal Systems trade and warranty support business from the Technology Services business unit within the Enterprise Group segment to the Other business unit within the Personal Systems segment; (iii) transferring the spare and replacement parts business supporting the Personal Systems and Printing segments from the Technology Services business unit within the Enterprise Group segment to the Other business unit within the Personal Systems segment and the Commercial Hardware business unit within the Printing segment, respectively; and (iv) transferring certain cloud-related incubation activities previously reported in Corporate and unallocated costs and eliminations and in the Enterprise Group segment to the Corporate Investments segment. In addition, HP transferred certain intrasegment eliminations from the Enterprise Services segment and the Enterprise Group segment to corporate intersegment revenue eliminations.
   
  HP reflected these changes to its segment information in prior reporting periods on an as-if basis, which resulted in the transfer of revenue among the Personal Systems, Printing, the Enterprise Group, Enterprise Services and Software segments. These changes also resulted in the transfer of operating profit among the Personal Systems, Printing, the Enterprise Group, Software and Corporate Investments segments. These changes 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 INFORMATION  
(Unaudited)  
(In millions)  
             
    Six months ended  
    April 30,  
    2014     2013  
Net revenue:(a)                
                 
  Personal Systems   $ 16,706     $ 15,842  
  Printing     11,649       12,040  
    Total Printing and Personal Systems Group     28,355       27,882  
  Enterprise Group     13,650       13,742  
  Enterprise Services     11,297       12,171  
  Software     1,887       1,918  
  HP Financial Services     1,737       1,838  
  Corporate Investments     294       14  
    Total segments     57,220       57,565  
  Elimination of intersegment net revenue and other     (1,757 )     (1,624 )
                 
    Total HP consolidated net revenue   $ 55,463     $ 55,941  
                 
Earnings before taxes:(a)                
                 
  Personal Systems   $ 569     $ 477  
  Printing     2,119       1,937  
    Total Printing and Personal Systems Group     2,688       2,414  
  Enterprise Group     1,967       2,144  
  Enterprise Services     201       232  
  Software     331       335  
  HP Financial Services     200       198  
  Corporate Investments     23       (148 )
    Total segment earnings from operations     5,410       5,175  
                 
  Corporate and unallocated costs and eliminations     (372 )     (278 )
  Stock-based compensation expense     (300 )     (291 )
  Amortization of intangible assets     (547 )     (700 )
  Restructuring charges     (366 )     (538 )
  Acquisition-related charges     (6 )     (15 )
  Interest and other, net     (337 )     (372 )
                 
    Total HP consolidated earnings before taxes   $ 3,482     $ 2,981  
                     
(a) Effective at the beginning of its first quarter of fiscal 2014, HP implemented certain organizational changes to align its segment financial reporting more closely with its current business structure. These organizational changes include (i) transferring the HP Exstream business from the Commercial Hardware business unit within the Printing segment to the Software segment; (ii) transferring the Personal Systems trade and warranty support business from the Technology Services business unit within the Enterprise Group segment to the Other business unit within the Personal Systems segment; (iii) transferring the spare and replacement parts business supporting the Personal Systems and Printing segments from the Technology Services business unit within the Enterprise Group segment to the Other business unit within the Personal Systems segment and the Commercial Hardware business unit within the Printing segment, respectively; and (iv) transferring certain cloud-related incubation activities previously reported in Corporate and unallocated costs and eliminations and in the Enterprise Group segment to the Corporate Investments segment. In addition, HP transferred certain intrasegment eliminations from the Enterprise Services segment and the Enterprise Group segment to corporate intersegment revenue eliminations.
   
  HP reflected these changes to its segment information in prior reporting periods on an as-if basis, which resulted in the transfer of revenue among the Personal Systems, Printing, the Enterprise Group, Enterprise Services and Software segments. These changes also resulted in the transfer of operating profit among the Personal Systems, Printing, the Enterprise Group, Software and Corporate Investments segments. These changes had no impact on HP's previously reported consolidated net revenue, earnings from operations, net earnings or net earnings per share.
   
 
   
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES  
SEGMENT / BUSINESS UNIT INFORMATION  
(Unaudited)  
(In millions)  
                   
    Three months ended     Growth rate (%)  
    April 30,
2014
    January 31,
2014
    April 30,
2013
    Q/Q     Y/Y  
Net revenue:(a)                                    
                                     
  Printing and Personal Systems Group                                    
    Personal Systems                                    
      Notebooks   $ 3,977     $ 4,335     $ 3,718     (8 %)   7 %
      Desktops     3,343       3,274       3,103     2 %   8 %
      Workstations     548       533       521     3 %   5 %
      Other     308       388       268     (21 %)   15 %
        Total Personal Systems     8,176       8,530       7,610     (4 %)   7 %
                                     
    Printing                                    
      Supplies     3,866       3,795       4,122     2 %   (6 %)
      Commercial Hardware     1,402       1,347       1,411     4 %   (1 %)
      Consumer Hardware     566       673       561     (16 %)   1 %
        Total Printing     5,834       5,815       6,094     0 %   (4 %)
          Total Printing and Personal Systems Group     14,010       14,345       13,704     (2 %)   2 %
                                     
    Enterprise Group                                    
    Industry Standard Servers     2,829       3,178       2,806     (11 %)   1 %
    Technology Services     2,132       2,123       2,247     0 %   (5 %)
    Storage     808       834       857     (3 %)   (6 %)
    Networking     658       630       618     4 %   6 %
    Business Critical Systems     230       228       266     1 %   (14 %)
        Total Enterprise Group     6,657       6,993       6,794     (5 %)   (2 %)
                                     
    Enterprise Services                                    
      Infrastructure Technology Outsourcing     3,597       3,501       3,855     3 %   (7 %)
      Application and Business Services     2,105       2,094       2,278     1 %   (8 %)
        Total Enterprise Services     5,702       5,595       6,133     2 %   (7 %)
                                     
    Software     971       916       967     6 %   0 %
                                     
    HP Financial Services     867       870       881     0 %   (2 %)
                                     
    Corporate Investments     6       288       10     (98 %)   (40 %)
        Total segments     28,213       29,007       28,489     (3 %)   (1 %)
                                     
    Elimination of intersegment net revenue and other     (904 )     (853 )     (907 )   6 %   0 %
                                     
    Total HP consolidated net revenue   $ 27,309     $ 28,154     $ 27,582     (3 %)   (1 %)
   
(a) Effective at the beginning of its first quarter of fiscal 2014, HP implemented certain organizational changes to align its segment financial reporting more closely with its current business structure. These organizational changes include (i) transferring the HP Exstream business from the Commercial Hardware business unit within the Printing segment to the Software segment; (ii) transferring the Personal Systems trade and warranty support business from the Technology Services business unit within the Enterprise Group segment to the Other business unit within the Personal Systems segment; (iii) transferring the spare and replacement parts business supporting the Personal Systems and Printing segments from the Technology Services business unit within the Enterprise Group segment to the Other business unit within the Personal Systems segment and the Commercial Hardware business unit within the Printing segment, respectively; and (iv) transferring certain cloud-related incubation activities previously reported in Corporate and unallocated costs and eliminations and in the Enterprise Group segment to the Corporate Investments segment. In addition, HP transferred certain intrasegment eliminations from the Enterprise Services segment and the Enterprise Group segment to corporate intersegment revenue eliminations.
   
  HP reflected these changes to its segment information in prior reporting periods on an as-if basis, which resulted in the transfer of revenue among the Personal Systems, Printing, the Enterprise Group, Enterprise Services and Software segments. These changes 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)  
       
    Six months ended  
    April 30,  
    2014     2013  
Net revenue:(a)                
                 
  Printing and Personal Systems Group                
    Personal Systems                
      Notebooks   $ 8,312     $ 7,846  
      Desktops     6,617       6,424  
      Workstations     1,081       1,056  
      Other     696       516  
        Total Personal Systems     16,706       15,842  
                 
  Printing                
    Supplies     7,661       8,015  
    Commercial Hardware     2,749       2,785  
    Consumer Hardware     1,239       1,240  
      Total Printing     11,649       12,040  
        Total Printing and Personal Systems Group     28,355       27,882  
                 
  Enterprise Group                
    Industry Standard Servers     6,007       5,800  
    Technology Services     4,255       4,454  
    Storage     1,642       1,690  
    Networking     1,288       1,226  
    Business Critical Systems     458       572  
      Total Enterprise Group     13,650       13,742  
                 
  Enterprise Services                
    Infrastructure Technology Outsourcing     7,098       7,710  
    Application and Business Services     4,199       4,461  
      Total Enterprise Services     11,297       12,171  
                 
  Software     1,887       1,918  
                 
  HP Financial Services     1,737       1,838  
                 
  Corporate Investments     294       14  
      Total segments     57,220       57,565  
                 
  Elimination of intersegment net revenue and other     (1,757 )     (1,624 )
                 
  Total HP consolidated net revenue   $ 55,463     $ 55,941  
   
(a) Effective at the beginning of its first quarter of fiscal 2014, HP implemented certain organizational changes to align its segment financial reporting more closely with its current business structure. These organizational changes include (i) transferring the HP Exstream business from the Commercial Hardware business unit within the Printing segment to the Software segment; (ii) transferring the Personal Systems trade and warranty support business from the Technology Services business unit within the Enterprise Group segment to the Other business unit within the Personal Systems segment; (iii) transferring the spare and replacement parts business supporting the Personal Systems and Printing segments from the Technology Services business unit within the Enterprise Group segment to the Other usiness unit within the Personal Systems segment and the Commercial Hardware business unit within the Printing segment, respectively; and (iv) transferring certain cloud-related incubation activities previously reported in Corporate and unallocated costs and eliminations and in the Enterprise Group segment to the Corporate Investments segment. In addition, HP transferred certain intrasegment eliminations from the Enterprise Services segment and the Enterprise Group segment to corporate intersegment revenue eliminations.
   
  HP reflected these changes to its segment information in prior reporting periods on an as-if basis, which resulted in the transfer of revenue among the Personal Systems, Printing, the Enterprise Group, Enterprise Services and Software segments. These changes 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)  
    April 30, 2014     Q/Q     Y/Y  
                   
Segment operating margin:(a)                  
  Personal Systems   3.5 %   0.2 pts     0.3 pts  
  Printing   19.5 %   2.7 pts     3.6 pts  
    Printing and Personal Systems Group   10.2 %   1.4 pts     1.3 pts  
                     
  Enterprise Group   14.4 %   -     (1.4 pts )
  Enterprise Services   2.5 %   1.5 pts     -  
  Software   19.2 %   3.4 pts     0.6 pts  
  HP Financial Services   11.4 %   (0.2 pts )   0.4 pts  
  Corporate Investments (b)   NM     NM     NM  
    Total segments   9.6 %   0.3 pts     0.3 pts  
                   
(a) Effective at the beginning of its first quarter of fiscal 2014, HP implemented certain organizational changes to align its segment financial reporting more closely with its current business structure. These organizational changes include (i) transferring the HP Exstream business from the Commercial Hardware business unit within the Printing segment to the Software segment; (ii) transferring the Personal Systems trade and warranty support business from the Technology Services business unit within the Enterprise Group segment to the Other business unit within the Personal Systems segment; (iii) transferring the spare and replacement parts business supporting the Personal Systems and Printing segments from the Technology Services business unit within the Enterprise Group segment to the Other business unit within the Personal Systems segment and the Commercial Hardware business unit within the Printing segment, respectively; and (iv) transferring certain cloud-related incubation activities previously reported in Corporate and unallocated costs and eliminations and in the Enterprise Group segment to the Corporate Investments segment. In addition, HP transferred certain intrasegment eliminations from the Enterprise Services segment and the Enterprise Group segment to corporate intersegment revenue eliminations.
   
  HP reflected these changes to its segment information in prior reporting periods on an as-if basis, which resulted in the transfer of revenue among the Personal Systems, Printing, the Enterprise Group, Enterprise Services and Software segments. These changes also resulted in the transfer of operating profit among the Personal Systems, Printing, the Enterprise Group, Software and Corporate Investments segments. These changes 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
    April 30,
2014
  January 31,
2014
  April 30,
2013
                   
Numerator:                  
  GAAP net earnings   $ 1,273   $ 1,425   $ 1,077
  Non-GAAP net earnings   $ 1,691   $ 1,742   $ 1,698
                   
Denominator:                  
  Weighted-average number of shares outstanding during the reporting period     1,890     1,907     1,935
  Dilutive effect of employee stock plans(a)     26     28     12
    Weighted-average number of shares used to compute diluted net earnings per share     1,916     1,935     1,947
                   
GAAP diluted net earnings per share   $ 0.66   $ 0.74   $ 0.55
Non-GAAP diluted net earnings per share   $ 0.88   $ 0.90   $ 0.87
                   
(a) Includes any dilutive effect of outstanding stock options, performance-based restricted stock units, restricted stock units and restricted stock.
   
   
 
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
CALCULATION OF DILUTED NET EARNINGS PER SHARE
(Unaudited)
(In millions except per share amounts)
         
    Six months ended
    April 30,
    2014   2013
             
Numerator:            
  GAAP net earnings   $ 2,698   $ 2,309
  Non-GAAP net earnings   $ 3,433   $ 3,303
             
Denominator:            
  Weighted-average number of shares outstanding during the reporting period     1,898     1,944
  Dilutive effect of employee stock plans(a)     24     8
    Weighted-average number of shares used to compute diluted net earnings per share     1,922     1,952
             
GAAP diluted net earnings per share   $ 1.40   $ 1.18
Non-GAAP diluted net earnings per share   $ 1.79   $ 1.69
             
(a) Includes any dilutive effect of outstanding stock options, performance-based restricted stock 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 revenue on a constant currency basis, non-GAAP operating profit, non-GAAP operating margin, non-GAAP net earnings, non-GAAP diluted net earnings per share, gross cash, free cash flow, net capital expenditures, net debt, net cash, operating company net debt and operating company net cash. HP also provides forecasts of non-GAAP diluted net earnings per share. These non-GAAP financial measures are not computed in accordance with, or as an alternative to, generally accepted accounting principles in the United States. The GAAP measure most directly comparable to revenue on a constant currency basis is revenue. The GAAP measure most directly comparable to non-GAAP operating profit is earnings from operations. The GAAP measure most directly comparable to non-GAAP operating margin is operating margin. The GAAP measure most directly comparable to non-GAAP net earnings is net earnings. The GAAP measure most directly comparable to non-GAAP diluted net earnings per share is diluted net earnings per share. The GAAP measure most directly comparable to gross cash is cash and cash equivalents. The GAAP measure most directly comparable to free cash flow is cash flow from operations. The GAAP measure most directly comparable to net capital expenditures is capital expenditures. The GAAP measure most directly comparable to net debt and operating company net debt is total company debt. The GAAP measure most directly comparable to 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 restructuring charges, charges relating to the impairment of goodwill and intangible assets, charges relating to the amortization of intangible assets, acquisition-related charges and charges related to the wind-down of HP businesses recorded during the relevant period. 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 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 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, including acquired research and development projects. Those charges are included in HP's GAAP presentation of 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.
  • HP incurs costs related to its acquisitions. As acquisition-related expenses are inconsistent in amount and frequency and are significantly impacted by the timing and nature of HP's acquisitions, HP believes that eliminating these expenses for purposes of calculating these non-GAAP measures facilitates a more meaningful evaluation of HP's current operating performance and comparisons to HP's operating performance in other periods.

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

Total company net debt consists of total debt (including the effects of hedging) less gross cash, which includes cash and cash equivalents, short-term investments, and certain liquid long-term investments. Total company net cash consists of gross cash less total debt. HP Financial Services (HPFS) net debt consists of HPFS debt, which includes primarily intercompany equity that is treated as debt for segment reporting purposes, intercompany debt, and borrowing and funding related activity associated with HPFS and its subsidiaries, less HPFS cash. Total company net debt and total company net cash provide useful information to HP's management about the state of HP's consolidated condensed balance sheet. Operating company net debt is a non-GAAP measure that is defined as total company net debt less HPFS net debt. Operating company net cash is a non-GAAP measure that is defined as total company net cash less HPFS cash less HPFS 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 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 liquidate immediately 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.

© 2014 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.