- First quarter net revenue of $12.2 billion, down 12% from the prior-year period and down 5% in constant currency
- First quarter non-GAAP diluted net earnings per share from continuing operations of $0.36 - within the previously provided outlook of $0.33 to $0.38 per share
- First quarter GAAP diluted net earnings per share from continuing operations of $0.36 - above the previously provided outlook of $0.27 to $0.32 per share
- First quarter returned more than $1.0 billion to shareholders in the form of share repurchases and dividends
- First quarter net cash used in operating activities was ($108) million
HP Inc.'s fiscal 2016 first quarter financial performance
Q1 FY16 Q1 FY15 Y/Y
GAAP net revenue ($B) $12.2 $13.9 (12%)
GAAP operating margin from continuing operations 7.6% 8.1% (0.5 pts.)
GAAP net earnings from continuing operations ($B) $0.7 $0.8 (16%)
GAAP diluted net earnings per share from
continuing operations $0.36 $0.41 (12%)
Non-GAAP operating margin from continuing
operations 7.5% 7.9% (0.4 pts.)
Non-GAAP net earnings from continuing operations
($B) $0.6 $0.8 (16%)
Non-GAAP diluted net earnings per share from
continuing operations $0.36 $0.41 (12%)
Net Cash (used in) / provided by operating
activities ($M)(1) $(108) $744 N/M
Notes to table
(1) The consolidated condensed statement of cash flows for the three months
ended January 31, 2015 represents the combined cash flows of HP prior
to separation, as previously filed, and has not been adjusted to
reflect the effect of the separation of Hewlett Packard Enterprise
Company.
N/M Not meaningful
Information about HP Inc.'s use of non-GAAP financial information is provided under "Use of non-GAAP financial information" below.
HP Inc. (HP) announced first quarter net revenue of $12.2 billion, down 12% from the prior-year period and down 5% in constant currency.
First quarter GAAP diluted net earnings per share (EPS) from continuing operations was $0.36, down from $0.41 in the prior-year period and above the previously provided outlook of $0.27 to $0.32. First quarter non-GAAP diluted net EPS from continuing operations was $0.36, down from $0.41 in the prior-year period and within its previously provided outlook of $0.33 to $0.38. First quarter non-GAAP net earnings from continuing operations and non-GAAP diluted net EPS from continuing operations exclude after-tax costs of $5 million, rounding to $0.00 per diluted share, respectively, related to non-operating retirement-related credits, restructuring charges, and the amortization of intangible assets.
"We have a clear strategy that leverages our strengths, and we are focused on execution, taking cost out of the business and delivering innovations that will amaze our customers and partners," said Dion Weisler, HP's President and CEO. "Although we have some tough quarters ahead, I am confident in the future."
Asset management
HP's net cash used in operating activities in the first quarter was $108 million. Inventory ended the quarter at $4.1 billion, down 2 days quarter over quarter to 37 days. Accounts receivable ended the quarter at $4.1 billion, down 5 days quarter over quarter to 30 days. Accounts payable ended the quarter at $9.0 billion, down 11 days quarter over quarter to 82 days. HP's dividend payment of $0.124 per share in the first quarter resulted in cash usage of $0.2 billion. HP also utilized $0.8 billion of cash during the quarter to repurchase approximately 67.0 million shares of common stock in the open market. HP exited the quarter with $3.7 billion in gross cash.
Fiscal 2016 first quarter segment results
- Personal Systems net revenue was down 13% year over year (down 6% in constant currency) with a 3.1% operating margin. Commercial net revenue decreased 11% and Consumer net revenue decreased 16%. Total units were down 13% with Notebooks units down 8% and Desktops units down 13%.
- Printing net revenue was down 17% year over year (down 11% in constant currency) with a 17.0% operating margin. Total hardware units were down 20% with Commercial hardware units down 15% and Consumer hardware units down 23%. Supplies revenue was down 14% (down 8% in constant currency).
Outlook
For the fiscal 2016 second quarter, HP estimates non-GAAP diluted net EPS from continuing operations to be in the range of $0.35 to $0.40 and GAAP diluted net EPS from continuing operations to be in the range of $0.33 to $0.38. Fiscal 2016 second quarter non-GAAP diluted net EPS from continuing operations estimates exclude $0.02 per diluted share, respectively related to non-operating retirement-related credits, restructuring charges, and the amortization of intangible assets.
For fiscal 2016, HP estimates non-GAAP diluted net EPS from continuing operations to be in the range of $1.59 to $1.69 and GAAP diluted net EPS from continuing operations to be in the range of $1.52 to $1.62. Fiscal 2016 non-GAAP diluted net EPS from continuing operations estimates exclude $0.07 per diluted share, respectively, related to non-operating retirement-related credits, restructuring charges, and the amortization of intangible assets.
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 FY16 Q1 earnings conference call is accessible via an audio webcast at www.hp.com/investor/2016Q1Webcast.
About HP Inc.
HP Inc. creates technology that makes life better for everyone, everywhere. Through our portfolio of printers, PCs, mobile devices, solutions, and services, we engineer experiences that amaze. More information about HP Inc. 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 net revenue on a constant currency basis, as well as non-GAAP operating margin from continuing operations, non-GAAP net earnings from continuing operations, non-GAAP diluted net earnings per share from continuing operations and gross cash financial measures. HP also provides forecasts of non-GAAP diluted net earnings per share from continuing operations. A reconciliation of the adjustments to GAAP results for this quarter and prior periods is included in the tables below or elsewhere in the materials accompanying this news release. In addition, an explanation of the ways in which HP's management uses these non-GAAP measures to evaluate its business, the substance behind HP's decision to use these non-GAAP measures, the material limitations associated with the use of these non-GAAP measures, the manner in which HP's management compensates for those limitations, and the substantive reasons why HP's management believes that these non-GAAP measures provide useful information to investors is included under "Use of non-GAAP financial measures" after the tables below. This additional non-GAAP financial information is not meant to be considered in isolation or as a substitute for net revenue, operating profit, operating margin, net earnings from continuing operations, diluted net earnings per share from continuing operations or cash and cash equivalents 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 forward-looking statements, including but not limited to any projections of net revenue, margins, expenses, effective tax rates, net earnings, net earnings per share, cash flows, benefit plan funding, share repurchases, currency exchange rates or other financial items; any projections of the amount, timing or impact of cost savings or restructuring charges; any statements of the plans, strategies and objectives of management for future operations, as well as the execution of the restructuring plan and any resulting cost savings or revenue or profitability improvements; any statements concerning the expected development, performance, market share or competitive performance relating to products or services; any statements regarding current or future macroeconomic trends or events and the impact of those trends and events on HP and its financial performance; any statements regarding pending investigations, claims or disputes; any statements of expectation or belief; and any statements or assumptions underlying any of the foregoing.
Risks, uncertainties and assumptions include the need to address the many challenges facing HP's businesses; the competitive pressures faced by HP's businesses; risks associated with executing HP's strategy; the impact of macroeconomic and geopolitical trends and events; the need to manage third-party suppliers and the distribution of HP's products and the delivery of HP's services effectively; the protection of HP's intellectual property assets, including intellectual property licensed from third parties; risks associated with HP's international operations; the development and transition of new products and services and the enhancement of existing products and services to meet customer needs and respond to emerging technological trends; the execution and performance of contracts by HP and its suppliers, customers and partners; the hiring and retention of key employees; integration and other risks associated with business combination and investment transactions; the results of the restructuring plan, including estimates and assumptions related to the cost (including any possible disruption of HP's business) and the anticipated benefits of the restructuring plan; 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, 2015, and HP's other filings with the Securities and Exchange Commission.
As in prior periods, the financial information set forth in this release, including tax-related items, reflects estimates based on information available at this time. While HP believes these estimates to be reasonable, these amounts could differ materially from reported amounts in HP's Quarterly Report on Form 10-Q for the fiscal quarter ended January 31, 2016. HP assumes no obligation and does not intend to update these forward-looking statements. HP's Investor Relations website at www.hp.com/investor/home contains a significant amount of information about HP, including financial and other information for investors. HP encourages investors to visit our website from time to time, as information is updated and new information is posted.
HP INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF EARNINGS
(Unaudited)
(In millions, except per share amounts)
Three months ended
----------------------------------------
January 31, October 31, January 31,
2016 2015 2015
------------ ------------ ------------
Net revenue $ 12,246 $ 12,266 $ 13,858
Costs and expenses:
Cost of products and services 9,961 9,900 11,173
Research and development 292 282 304
Selling, general and
administrative 1,037 1,212 1,222
Amortization of intangible
assets 8 26 27
Restructuring charges 20 41 14
Defined benefit plan settlement
charges - 7 -
------------ ------------ ------------
Total costs and expenses 11,318 11,468 12,740
------------ ------------ ------------
Earnings from continuing
operations before interest and
taxes 928 798 1,118
Interest and other, net (94) (99) (121)
------------ ------------ ------------
Earnings from continuing
operations before taxes 834 699 997
(Provision) benefit for taxes (184) 816 (227)
------------ ------------ ------------
Earnings from continuing
operations 650 1,515 770
(Loss) earnings from discontinued
operations, net of taxes (58) (192) 596
------------ ------------ ------------
Net earnings $ 592 $ 1,323 $ 1,366
============ ============ ============
Net earnings (loss) per share:
Basic
Continuing operations $ 0.37 $ 0.84 $ 0.42
Discontinued operations (0.04) (0.11) 0.33
------------ ------------ ------------
Total basic net earnings per
share $ 0.33 $ 0.73 $ 0.75
============ ============ ============
Diluted
Continuing operations $ 0.36 $ 0.83 $ 0.41
Discontinued operations (0.03) (0.10) 0.32
------------ ------------ ------------
Total diluted net earnings per
share $ 0.33 $ 0.73 $ 0.73
============ ============ ============
Cash dividends declared per share $ 0.25 $ - $ 0.32
Weighted-average shares used to
compute net earnings per share:
Basic 1,776 1,802 1,833
Diluted 1,785 1,821 1,861
HP INC. 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 Diluted Three Diluted Three Diluted
months net months net months net
ended earnings ended earnings ended earnings
January per October per January per
31, 2016 share 31, 2015 share 31, 2015 share
-------- -------- -------- -------- -------- --------
GAAP net earnings
from continuing
operations $ 650 $ 0.36 $ 1,515 $ 0.83 $ 770 $ 0.41
Non-GAAP
adjustments:
Amortization of
intangible assets 8 0.01 26 0.01 27 0.01
Restructuring
charges 20 0.01 41 0.02 14 0.01
Non-operating
retirement-
related credits (40) (0.02) (58) (0.03) (58) (0.03)
Defined benefit
plan settlement
charges - - 7 - - -
Adjustments for
taxes 7 - 9 0.01 12 0.01
Valuation
allowances, net
and separation
taxes and
adjustments - - (992) (0.54) - -
-------- -------- -------- -------- -------- --------
Non-GAAP net
earnings from
continuing
operations $ 645 $ 0.36 $ 548 $ 0.30 $ 765 $ 0.41
======== ======== ======== ======== ======== ========
GAAP earnings from
continuing
operations before
interest and taxes $ 928 $ 798 $ 1,118
Non-GAAP
adjustments:
Amortization of
intangible assets 8 26 27
Restructuring
charges 20 41 14
Non-operating
retirement-
related credits (40) (58) (58)
Defined benefit
plan settlement
charges - 7 -
-------- -------- --------
Non-GAAP earnings
from continuing
operations before
interest and taxes $ 916 $ 814 $ 1,101
======== ======== ========
GAAP operating
margin from
continuing
operations 8% 7% 8%
Non-GAAP adjustments (1%) 0% 0%
-------- -------- --------
Non-GAAP operating
margin from
continuing
operations 7% 7% 8%
======== ======== ========
HP INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(Unaudited)
(In millions)
As of
---------------------------
January 31, October 31,
2016 2015
------------ -------------
ASSETS
Current assets:
Cash and cash equivalents $ 3,688 $ 7,584
Accounts receivable 4,114 4,825
Inventory 4,052 4,288
Other current assets 3,301 4,498
Current assets of discontinued operations - 30,592
------------ -------------
Total current assets 15,155 51,787
------------ -------------
Property, plant and equipment 1,529 1,492
Other non-current assets 3,873 1,508
Goodwill and intangible assets 5,756 5,764
Non-current assets of discontinued operations - 46,331
------------ -------------
Total assets $ 26,313 $ 106,882
============ =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable and short-term borrowings $ 49 $ 2,194
Accounts payable 9,041 10,194
Employee compensation and benefits 553 747
Taxes on earnings 182 243
Deferred revenue 863 1,051
Other accrued liabilities 6,073 6,241
Current liabilities of discontinued operations - 21,521
------------ -------------
Total current liabilities 16,761 42,191
------------ -------------
Long-term debt 6,683 6,677
Other non-current liabilities 8,644 7,414
Non-current liabilities of discontinued
operations - 22,449
Stockholders' (deficit) equity:
HP stockholders' (deficit) equity (5,775) 27,768
Non-controlling interests - 383
------------ -------------
Total stockholders' (deficit) equity (5,775) 28,151
------------ -------------
Total liabilities and stockholder's equity $ 26,313 $ 106,882
============ =============
HP INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
(In millions)
Three months ended
January 31,
--------------------------
2016 2015(a)
------------ ------------
Cash flows from operating activities:
Net earnings $ 592 $ 1,366
Adjustments to reconcile net earnings to net
cash (used in) provided by operating
activities:
Depreciation and amortization 79 1,028
Stock-based compensation expense 61 187
Provision for doubtful accounts and
inventory 45 62
Restructuring charges 20 146
Deferred taxes on earnings 526 (173)
Excess tax benefit from stock-based
compensation (1) (109)
Other, net (18) 138
Changes in operating assets and liabilities
(net of acquisitions):
Accounts receivable 704 1,540
Financing receivable - 222
Inventory 202 (224)
Accounts payable (1,104) (852)
Taxes on earnings (534) 293
Restructuring (31) (483)
Other assets and liabilities (649) (2,397)
------------ ------------
Net cash (used in) provided by operating
activities (108) 744
------------ ------------
Cash flows from investing activities:
Investment in property, plant and equipment (120) (947)
Proceeds from sale of property, plant and
equipment - 130
Purchases of available-for-sale securities
and other investments - (50)
Maturities and sales of available-for-sale
securities and other investments 9 30
Payments made in connection with business
acquisitions - (1)
------------ ------------
Net cash used in investing activities (111) (838)
------------ ------------
Cash flows from financing activities:
Short-term borrowings with original
maturities less than 90 days, net 26 77
Proceeds from debt, net of issuance costs 4 299
Payment of debt (2,155) (911)
Settlement of cash flow hedge (11) -
Net transfer of cash and cash equivalents to
Hewlett Packard Enterprise Company (10,375) -
Issuance of common stock under employee
stock plans 2 181
Repurchase of common stock (797) (1,571)
Excess tax benefit from stock-based
compensation 1 109
Cash dividends paid (221) (304)
------------ ------------
Net cash used in financing activities (13,526) (2,120)
------------ ------------
Decrease in cash and cash equivalents (13,745) (2,214)
Cash and cash equivalents at beginning of period 17,433 15,133
------------ ------------
Cash and cash equivalents at end of period $ 3,688 $ 12,919
============ ============
(a) The consolidated condensed statement of cash flows for the three months
ended January 31, 2015 represents the combined cash flows of HP prior to
separation, as previously filed, and has not been adjusted to reflect the
effect of the separation of Hewlett Packard Enterprise Company.
HP INC. AND SUBSIDIARIES
SEGMENT INFORMATION
(Unaudited)
(In millions)
Three months ended
----------------------------------------
January 31, October 31, January 31,
2016 2015 2015
------------ ------------ ------------
Net revenue:(a)
Personal Systems $ 7,467 $ 7,694 $ 8,562
Printing 4,642 4,965 5,596
Corporate Investments 3 4 12
------------ ------------ ------------
Total segments 12,112 12,663 14,170
Intersegment net revenue
eliminations and other 134 (397) (312)
------------ ------------ ------------
Total net revenue $ 12,246 $ 12,266 $ 13,858
============ ============ ============
Earnings from continuing
operations before taxes:(a)
Personal Systems $ 229 $ 281 $ 303
Printing 787 837 1,050
Corporate Investments (23) (11) (5)
------------ ------------ ------------
Total segment earnings from
operations 993 1,107 1,348
Corporate and unallocated costs
and eliminations (16) (223) (196)
Stock-based compensation expense (61) (70) (51)
Amortization of intangible
assets (8) (26) (27)
Restructuring charges (20) (41) (14)
Non-operating retirement-related
credits 40 58 58
Defined benefit plan settlement
charges - (7) -
Interest and other, net (94) (99) (121)
------------ ------------ ------------
Total earnings from continuing
operations before taxes $ 834 $ 699 $ 997
============ ============ ============
(a) Effective at the beginning of its first quarter of fiscal 2016, HP
implemented an organizational change to align its segment financial
reporting more closely with its current business structure. In addition,
HP implemented a reporting change to provide better transparency to its
segment operating results. This reporting change resulted in the
exclusion of certain market-related factors such as interest cost,
expected return on plan assets, amortized actuarial gains/losses, and
impacts from other market-related factors related to its defined benefit
pension and post-retirement benefit plans from its segment operating
results ("Non-operating retirement-related credits"). This change also
resulted in the exclusion of certain plan curtailments, settlements and
special termination benefits related to its defined benefit pension and
post-retirement benefit plans from HP's segment operating results.
Segment operating results will continue to include service costs and
amortization of prior service costs associated with HP's defined benefit
pension and post-retirement benefit plans. The organizational and
reporting changes had an immaterial impact to previously reported
segment net revenue and earnings from operations. These changes also had
no impact on HP's previously reported consolidated net revenue, earnings
from operations, net earnings or net earnings per share.
HP INC. AND SUBSIDIARIES
SEGMENT/BUSINESS UNIT INFORMATION
(Unaudited)
(In millions)
Three months ended Change (%)
------------------------------------- ------------
January 31, October 31, January 31,
2016 2015 2015 Q/Q Y/Y
------------ ----------- ----------- ----- -----
Net revenue:(a)
Personal Systems
Notebooks $ 4,205 $ 4,384 $ 4,724 (4%) (11%)
Desktops 2,527 2,530 2,949 0% (14%)
Workstations 444 472 526 (6%) (16%)
Other 291 308 363 (6%) (20%)
------------ ----------- -----------
Total Personal
Systems 7,467 7,694 8,562 (3%) (13%)
------------ ----------- -----------
Printing
Supplies 3,101 3,239 3,601 (4%) (14%)
Commercial Hardware 1,219 1,366 1,394 (11%) (13%)
Consumer Hardware 322 360 601 (11%) (46%)
------------ ----------- -----------
Total Printing 4,642 4,965 5,596 (7%) (17%)
------------ ----------- -----------
Corporate Investments 3 4 12 (25%) (75%)
------------ ----------- -----------
Total segments 12,112 12,663 14,170 (4%) (15%)
------------ ----------- -----------
Elimination of
intersegment net
revenue and other(b) 134 (397) (312) NM NM
------------ ----------- -----------
Total net revenue $ 12,246 $ 12,266 $ 13,858 (0%) (12%)
============ =========== ===========
(a) Effective at the beginning of its first quarter of fiscal 2016, HP
implemented an organizational change to align its segment financial
reporting more closely with its current business structure. This
organizational change had an immaterial impact to previously reported
segment net revenue and operating profit, and HP has reflected this
change to its segment information retrospectively to the earliest period
presented. This change had no impact on HP's previously reported
consolidated net revenue, earnings from operations, net earnings or net
EPS.
(b) "NM" represents not meaningful.
HP INC. AND SUBSIDIARIES
SEGMENT OPERATING MARGIN SUMMARY DATA
(Unaudited)
Three months Change in Operating
ended Margin (pts)
-------------- ---------------------
January 31,
2016 Q/Q Y/Y
-------------- ---------- ----------
Segment operating margin:(a)
Personal Systems 3.1% (0.6 pts) (0.4 pts)
Printing 17.0% 0.1 pts (1.8 pts)
Corporate Investments(b) NM NM NM
Total segments 8.2% (0.5 pts) (1.3 pts)
(a) Effective at the beginning of its first quarter of fiscal 2016, HP
implemented an organizational change to align its segment financial
reporting more closely with its current business structure. In addition,
HP implemented a reporting change to provide better transparency to its
segment operating results. This reporting change resulted in the
exclusion of certain market-related factors such as interest cost,
expected return on plan assets, amortized actuarial gains/losses, and
impacts from other market-related factors related to its defined benefit
pension and post-retirement benefit plans from its segment operating
results ("Non-operating retirement-related credits"). This change also
resulted in the exclusion of certain plan curtailments, settlements and
special termination benefits related to its defined benefit pension and
post-retirement benefit plans from HP's segment operating results.
Segment operating results will continue to include service costs and
amortization of prior service costs associated with HP's defined benefit
pension and post-retirement benefit plans. The organizational and
reporting changes had an immaterial impact to previously reported
segment net revenue and earnings from operations. These changes also 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.
HP INC. AND SUBSIDIARIES
CALCULATION OF DILUTED NET EARNINGS PER SHARE
(Unaudited)
(In millions, except per share amounts)
Three months ended
-----------------------------------------
January 31, October 31, January 31,
2016 2015 2015
------------- ------------- -------------
Numerator:
GAAP net earnings from
continuing operations $ 650 $ 1,515 $ 770
============= ============= =============
Non-GAAP net earnings from
continuing operations $ 645 $ 548 $ 765
============= ============= =============
Denominator:
Weighted-average shares
outstanding during the
reporting period 1,776 1,802 1,833
Dilutive effect of employee
stock plans(a) 9 19 28
------------- ------------- -------------
Weighted-average shares used
to compute diluted net
earnings per share 1,785 1,821 1,861
============= ------------- =============
GAAP diluted net earnings per
share from continuing operations $ 0.36 $ 0.83 $ 0.41
============= ============= =============
Non-GAAP diluted net earnings per
share from continuing operations $ 0.36 $ 0.30 $ 0.41
============= ============= =============
(a) Includes any dilutive effect of restricted stock units, restricted
stock, stock options and performance-based awards.
Use of non-GAAP financial measures
To supplement HP's consolidated condensed financial statements presented on a generally accepted accounting principles ("GAAP") basis, HP provides net revenue on a constant currency basis, non-GAAP operating margin from continuing operations, non-GAAP net earnings, non-GAAP diluted net earnings per share and gross cash. HP also provides forecasts of non-GAAP diluted net earnings per share from continuing operations.
These non-GAAP financial measures are not computed in accordance with, or as an alternative to, generally accepted accounting principles in the United States. 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
Net revenue on a constant currency basis assumes no change in the foreign exchange rate from the prior-year period. Non-GAAP operating margin from continuing operations is defined to exclude the effects of any charges relating to amortization of intangible assets, restructuring charges, defined benefit plan settlement charges and non-operating retirement-related credits. Non-GAAP net earnings from continuing operations and non-GAAP diluted net earnings per share from continuing operations consist of net earnings from continuing operations or diluted net earnings per share from continuing operations excluding those same charges. In addition, non-GAAP net earnings from continuing operations and non-GAAP diluted net earnings per share from continuing operations are adjusted by the amount of additional taxes or tax benefits associated with each non-GAAP item and other tax benefits or charges as a consequence of the separation transaction. HP's management uses these non-GAAP financial measures for purposes of evaluating HP's historical and prospective financial performance, as well as HP's performance relative to its competitors. HP's management also uses these non-GAAP measures to further its own understanding of HP's segment operating performance. HP believes that excluding the items mentioned above from these non-GAAP financial measures allows HP's management to better understand HP's consolidated financial performance in relation to the operating results of HP's segments, as HP's management does not believe that the excluded items are reflective of ongoing operating results. More specifically, HP's management excludes each of those items mentioned above for the following reasons:
- HP incurs charges relating to the amortization of intangible assets. Those charges are included in HP's GAAP earnings from operations, operating margin, net earnings from continuing operations and diluted net earnings per share from continuing operations. 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.
- Non-operating retirement-related credits includes certain market-related factors such as interest cost, expected return on plan assets, amortized actuarial gains/losses, and impacts from other market-related factors associated with our defined benefit pension and post-retirement benefit plans. The market-driven retirement-related costs are primarily due to the changes in pension plan assets and liabilities which are tied to financial market performance and the company considers these costs to be outside the operational performance of the business. Non-operating retirement-related charges also include certain plan curtailments, settlements and special termination benefits related to HP's defined benefit pension and post-retirement benefit plans. HP believes that eliminating such costs for purposes of calculating non-GAAP measures facilitates a more meaningful evaluation of HP's current operating performance and provides better transparency into the segment operating results.
- HP incurred defined benefit plan settlement charges relating to U.S. HP pension plan. The charges are associated with the net settlement and remeasurement resulting from voluntary lump sum payments offered to certain terminated vested participants. HP excludes these charges for the purpose of calculating these non-GAAP measures to facilitate a more meaningful evaluation of HP's current operating performance and comparisons to HP's operating performance in other periods.
- As part of separation, HP recorded several separation related items including: the reversal of a previously recorded valuation allowance, the write-off of specific deferred taxes providing no continued benefit to HP and the entry of certain separation related deferred tax expense. HP believes that eliminating these amounts for purposes of calculating non-GAAP net earnings facilitates a more meaningful comparison of HP's net earnings to other periods, as HP's management does not believe that the excluded items are reflective of ongoing operating results.
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. HP's management uses gross cash for the purpose of determining the amount of cash available for investment in HP's businesses, repurchasing stock and other purposes. HP's management also uses gross cash 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 helpful assessment of HP's liquidity.
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 margin from continuing operations, non-GAAP net earnings from continuing operations or non-GAAP diluted net earnings per share from continuing operations, and therefore does not reflect the full economic effect of the loss in value of those intangible assets.
- Items such as restructuring charges, defined benefit plan settlement charges and non-operating retirement-related credits that are excluded from non-GAAP operating margin from continuing operations, non-GAAP net earnings from continuing operations and non-GAAP diluted net earnings per share from continuing operations can have a material impact on the equivalent GAAP earnings measure and cash flows.
- HP may not be able to immediately liquidate the short-term and long-term investments included in gross cash, which may limit the usefulness of gross cash as a liquidity measure.
- Other companies may calculate the non-GAAP financial measures differently than HP, 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 net revenue on a constant currency basis, non-GAAP operating margin from continuing operations, non-GAAP net earnings from continuing operations, non-GAAP diluted net earnings per share from continuing operations and gross 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.
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