HP Inc. Reports Fiscal 2017 First Quarter Results
PALO ALTO, CA -- (Marketwired) -- 02/22/17 -- HP (NYSE: HPQ)
- First quarter GAAP diluted net earnings per share from continuing operations of $0.36, within the previously provided outlook of $0.33 to $0.36 per share
- First quarter non-GAAP diluted net earnings per share of $0.38, within the previously provided outlook of $0.35 to $0.38 per share
- First quarter net revenue of $12.7 billion, up 4% (up 5% in constant currency) from the prior-year period
- First quarter net cash provided by operating activities of $0.8 billion
- First quarter returned $613 million to shareholders in the form of share repurchases and dividends
HP Inc.'s fiscal 2017 first quarter financial performance
Q1 FY17 Q1 FY16 Y/Y
----------------------------------------------------------------------------
GAAP net revenue ($B) $ 12.7 $ 12.2 4%
GAAP operating margin from continuing
operations 6.7% 7.6% (0.9 pts)
GAAP net earnings from continuing
operations ($B) $ 0.6 $ 0.7 (6)%
GAAP diluted net earnings per share from
continuing operations $ 0.36 $ 0.36 -
Non-GAAP operating margin 7.1% 7.5% (0.4 pts)
Non-GAAP net earnings ($B) $ 0.6 $ 0.6 -
Non-GAAP diluted net earnings per share $ 0.38 $ 0.36 6%
Cash provided by operating activities ($B) $ 0.8 $ (0.1) NM
Notes to table Information about HP Inc.'s use of non-GAAP financial information is provided under "Use of non-GAAP financial information" below. NM - Not Meaningful
Net revenue and EPS results HP Inc. ("HP") announced first quarter net revenue of $12.7 billion, up 4% (up 5% in constant currency) from the prior-year period.
First quarter GAAP diluted net earnings per share ("EPS") from continuing operations was $0.36, flat from the prior-year period and within the previously provided outlook of $0.33 to $0.36. First quarter non-GAAP diluted net EPS was $0.38, up from $0.36 in the prior-year period and within the previously provided outlook of $0.35 to $0.38. First quarter non-GAAP net earnings and non-GAAP diluted net EPS exclude after-tax adjustments of $35 million, or $0.02 per share, related to restructuring and other charges, acquisition-related charges, non-operating retirement-related credits / (charges), and net tax indemnifications.
"In Q1, we delivered earnings at the high end of our outlook range with strong free cash flow, driven by relentless execution and innovation," said Dion Weisler, President and CEO, HP Inc. "We are confident in our ability to manage our business and deliver our FY17 financial commitments."
Asset management HP's cash provided by operating activities in the first quarter was $0.8 billion. Accounts receivable ended the quarter at $3.5 billion, down 5 days quarter over quarter to 25 days. Inventory ended the quarter at $4.6 billion, unchanged quarter over quarter at 39 days. Accounts payable ended the quarter at $11.0 billion, down 4 days quarter over quarter to 94 days. HP's dividend payment of $0.1327 per share in the first quarter resulted in cash usage of $0.2 billion. HP also utilized $0.4 billion of cash during the quarter to repurchase approximately 25.5 million shares of common stock in the open market. HP exited the quarter with $6.3 billion in gross cash, which includes cash and cash equivalents, short-term investments, and certain liquid long-term investments.
Fiscal 2017 first quarter segment results
- Personal Systems net revenue was up 10% year over year (up 11% in constant currency) with a 3.8% operating margin. Commercial net revenue increased 7% and Consumer net revenue increased 15%. Total units were up 8% with Notebooks units up 12% and Desktops units flat.
- Printing net revenue was down 3% year over year (down 2% in constant currency) with a 16.0% operating margin. Total hardware units were up 6% with Commercial hardware units up 2% and Consumer hardware units up 7%. Supplies net revenue was down 3% (down 2% in constant currency).
Outlook For the fiscal 2017 second quarter, HP estimates GAAP diluted net EPS from continuing operations to be in the range of $0.32 to $0.35 and non-GAAP diluted net EPS to be in the range of $0.37 to $0.40. Fiscal 2017 second quarter non-GAAP diluted net EPS estimates exclude $0.05 per diluted share, primarily related to restructuring and other charges, acquisition-related charges, non-operating retirement-related credits / (charges), and net tax indemnifications.
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 FY17 Q1 earnings conference call is accessible via an audio webcast www.hp.com/investor/2017Q1Webcast.
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. (NYSE: HPQ) is available at http://www.hp.com.
Use of non-GAAP financial information To supplement HP's consolidated condensed financial statements presented on a generally accepted accounting principles ("GAAP") basis, HP provides net revenue on a constant currency basis, as well as non-GAAP operating margin, non-GAAP net earnings, non-GAAP diluted net earnings per share and gross cash financial measures. HP also provides forecasts of non-GAAP diluted net earnings per share. A reconciliation of the adjustments to GAAP results for this quarter and prior periods is included in the tables below or elsewhere in the materials accompanying this news release. In addition, an explanation of the ways in which HP's management uses these non-GAAP measures to evaluate its business, the substance behind HP's decision to use these non-GAAP measures, the material limitations associated with the use of these non-GAAP measures, the manner in which HP's management compensates for those limitations, and the substantive reasons why HP's management believes that these non-GAAP measures provide useful information to investors is included under "Use of non-GAAP financial measures" after the tables below. This additional non-GAAP financial information is not meant to be considered in isolation or as a substitute for 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 statements that could be deemed 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, deferred tax assets, share repurchases, foreign currency exchange rates or other financial items; any projections of the amount, timing or impact of cost savings or restructuring and other charges; any statements of the plans, strategies and objectives of management for future operations, including the execution of the restructuring plans and any resulting cost savings, net 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, including with respect to the timing and expected benefits of acquisitions and other business combination and investment transactions; 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 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, clients 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 plans, including estimates and assumptions related to the cost (including any possible disruption of HP's business) and the anticipated benefits of the restructuring plans; the resolution of pending investigations, claims and disputes; and other risks that are described in HP's Annual Report on Form 10-K for the fiscal year ended October 31, 2016, and HP's other filings with the Securities and Exchange Commission.
As in prior periods, the financial information set forth in this release, including any 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, 2017 and HP's other filings with the Securities and Exchange Commission. 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 its 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 October January
31, 2017 31, 2016 31, 2016
--------- --------- ---------
Net revenue $ 12,684 $ 12,512 $ 12,246
Costs and expenses:
Cost of revenue 10,436 10,221 9,961
Research and development 296 318 292
Selling, general and administrative 1,017 1,075 1,037
Restructuring and other charges 63 49 20
Acquisition-related charges 16 7 --
Amortization of intangible assets -- -- 8
Defined benefit plan settlement charges -- 179 --
--------- --------- ---------
Total costs and expenses 11,828 11,849 11,318
--------- --------- ---------
Earnings from continuing operations 856 663 928
Interest and other, net (81) 347 (94)
--------- --------- ---------
Earnings from continuing operations before
taxes 775 1,010 834
Provision for taxes (164) (497) (184)
--------- --------- ---------
Net earnings from continuing operations 611 513 650
Net loss from discontinued operations, net
of taxes -- (21) (58)
--------- --------- ---------
Net earnings $ 611 $ 492 $ 592
========= ========= =========
Net earnings (loss) per share:
Basic
Continuing operations $ 0.36 $ 0.30 $ 0.37
Discontinued operations -- (0.01) (0.04)
--------- --------- ---------
Total basic net earnings per share $ 0.36 $ 0.29 $ 0.33
========= ========= =========
Diluted
Continuing operations $ 0.36 $ 0.30 $ 0.36
Discontinued operations -- (0.02) (0.03)
--------- --------- ---------
Total diluted net earnings per share $ 0.36 $ 0.28 $ 0.33
========= ========= =========
Cash dividends declared per share $ 0.27 $ -- $ 0.25
Weighted-average shares used to compute net
earnings (loss) per share:
Basic 1,704 1,712 1,776
Diluted 1,721 1,729 1,785
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, share 31, share 31, share
2017 2016 2016
------- ------- ------- ------- ------- -------
GAAP net earnings
from continuing
operations $ 611 $ 0.36 $ 513 $ 0.30 $ 650 $ 0.36
Non-GAAP adjustments:
Restructuring and
other charges 63 0.04 49 0.03 20 0.01
Acquisition-related
charges 16 0.01 7 -- -- --
Amortization of
intangible assets -- -- -- -- 8 0.01
Non-operating
retirement-related
credits (32) (0.02) (28) (0.02) (40) (0.02)
Defined benefit
plan settlement
charges -- -- 179 0.10 -- --
Adjustments for
taxes (3) -- 329 0.20 7 --
Tax indemnification
credits (9) (0.01) (435) (0.25) -- --
------- ------- ------- ------- ------- -------
Non-GAAP net earnings $ 646 $ 0.38 $ 614 $ 0.36 $ 645 $ 0.36
======= ======= ======= ======= ======= =======
GAAP earnings from
continuing
operations $ 856 $ 663 $ 928
Non-GAAP adjustments:
Restructuring and
other charges 63 49 20
Acquisition-related
charges 16 7 --
Amortization of
intangible assets -- -- 8
Non-operating
retirement-related
credits (32) (28) (40)
Defined benefit
plan settlement
charges -- 179 --
------- ------- -------
Non-GAAP earnings $ 903 $ 870 $ 916
======= ======= =======
GAAP operating margin
from continuing
operations 7% 5% 8%
Non-GAAP adjustments -- 2% (1)%
------- ------- -------
Non-GAAP operating
margin 7% 7% 7%
======= ======= =======
HP INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(Unaudited)
(In millions)
As of
--------------------
January October
31, 2017 31, 2016
--------- ---------
ASSETS
Current assets:
Cash and cash equivalents $ 6,331 $ 6,288
Accounts receivable 3,478 4,114
Inventory 4,555 4,484
Other current assets 3,411 3,582
--------- ---------
Total current assets 17,775 18,468
--------- ---------
Property, plant and equipment 1,730 1,736
Goodwill 5,622 5,622
Other non-current assets(a) 3,065 3,161
--------- ---------
Total assets $ 28,192 $ 28,987
========= =========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Notes payable and short-term borrowings $ 100 $ 78
Accounts payable 10,951 11,103
Employee compensation and benefits 526 759
Taxes on earnings 267 231
Deferred revenue 952 919
Other accrued liabilities 5,791 5,718
--------- ---------
Total current liabilities 18,587 18,808
--------- ---------
Long-term debt(a) 6,688 6,735
Other non-current liabilities 7,244 7,333
Stockholders' deficit (4,327) (3,889)
Total liabilities and stockholders' deficit $ 28,192 $ 28,987
========= =========
(a) Pursuant to Accounting Standard Update 2015-03 "Simplifying the
Presentation of Debt Issuance Costs" in Q1 FY17, debt issuance costs
has been reclassified from other non-current assets to long-term debt.
The change has been adopted including prior comparative periods.
HP INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
(In millions)
Three months ended
January 31
--------------------
2017 2016
--------- ---------
In millions
Cash flows from operating activities:(a)
Net earnings $ 611 $ 592
Adjustments to reconcile net earnings to net cash
provided by (used in) operating activities:
Depreciation and amortization 84 79
Stock-based compensation expense 75 61
Provision for doubtful accounts (2) 11
Provision for inventory (2) 34
Restructuring and other charges 63 20
Deferred taxes on earnings 67 526
Other, net 23 (15)
Changes in operating assets and liabilities, net
of acquisitions:
Accounts receivable 614 704
Inventory (69) 202
Accounts payable (116) (1,104)
Taxes on earnings (75) (534)
Restructuring and other (51) (31)
Other assets and liabilities (455) (647)
--------- ---------
Net cash provided by (used in) operating
activities 767 (102)
--------- ---------
Cash flows from investing activities:
Investment in property, plant and equipment (101) (120)
Proceeds from sale of property, plant and equipment 69 --
Purchases of available-for-sale securities and other
investments (56) --
Maturities and sales of available-for-sale
securities and other investments 2 9
--------- ---------
Net cash used in investing activities (86) (111)
--------- ---------
Cash flows from financing activities:
Short-term borrowings with original maturities less
than 90 days, net 35 26
Proceeds from debt, net of issuance costs 5 4
Payment of debt (27) (2,155)
Settlement of cash flow hedges (4) (11)
Net transfer of cash and cash equivalents to Hewlett
Packard Enterprise Company -- (10,375)
Net payments related to stock-based award activities (34) (3)
Repurchase of common stock (386) (797)
Cash dividends paid (227) (221)
--------- ---------
Net cash used in financing activities (638) (13,532)
--------- ---------
Increase (decrease) in cash and cash equivalents 43 (13,745)
Cash and cash equivalents at beginning of period 6,288 17,433
--------- ---------
Cash and cash equivalents at end of period $ 6,331 $ 3,688
========= =========
(a) Pursuant to Accounting Standard Update 2016-09 "Improvements to
Employee Share-Based Payment Accounting" in Q1 FY17, excess income tax
benefit from stock-based compensation expense is no longer separated
from operating income tax cash flows and reported as financing
activity. In addition, income taxes paid on shares withheld is now
required to be presented as financing activity as opposed to operating
activity. The change has been adopted including prior comparative
periods.
HP INC. AND SUBSIDIARIES
SEGMENT INFORMATION
(Unaudited)
(In millions)
Three months ended
-------------------------------
January October January
31, 2017 31, 2016 31, 2016
--------- --------- ---------
Net revenue:(a)
Personal Systems $ 8,224 $ 8,018 $ 7,467
Printing 4,483 4,558 4,642
Corporate Investments 2 1 3
--------- --------- ---------
Total segments 12,709 12,577 12,112
Intersegment net revenue eliminations and
other (25) (65) 134
--------- --------- ---------
Total net revenue $ 12,684 $ 12,512 $ 12,246
========= ========= =========
Earnings from continuing operations before
taxes:(a)
Personal Systems $ 313 $ 346 $ 229
Printing 716 637 787
Corporate Investments (23) (32) (23)
--------- --------- ---------
Total segment earnings from operations 1,006 951 993
Corporate costs and eliminations (28) (39) (16)
Stock-based compensation expense (75) (42) (61)
Restructuring and other charges (63) (49) (20)
Acquisition-related charges (16) (7) --
Amortization of intangible assets -- -- (8)
Non-operating retirement-related credits 32 28 40
Defined benefit plan settlement charges -- (179) --
Interest and other, net (81) 347 (94)
--------- --------- ---------
Total earnings from continuing
operations before taxes $ 775 $ 1,010 $ 834
========= ========= =========
(a) Effective at the beginning of its first quarter of fiscal year 2017, HP
implemented an organizational change to align its business unit
financial reporting more closely with its current business structure.
The organizational change resulted in transfer of a portion of LaserJet
printers from commercial to consumer within the Printing segment. HP
reflected this change to its business unit information in prior
reporting periods on an as-if basis which resulted in reclassification
of revenues between the commercial and consumer business units of
Printing. The reporting change had no impact to previously reported
segment net revenue, consolidated net revenue, earnings from continuing
operations, net earnings or net earnings per share.
HP INC. AND SUBSIDIARIES
SEGMENT/BUSINESS UNIT INFORMATION
(Unaudited)
(In millions)
Three months ended Change (%)
------------------------------- -----------
January October January
31, 2017 31, 2016 31, 2016 Q/Q Y/Y
--------- --------- --------- ---- ----
Net revenue:(a)
Personal Systems
Notebooks $ 4,890 $ 4,636 $ 4,205 5% 16%
Desktops 2,534 2,572 2,527 (1)% --
Workstations 491 489 444 -- 11%
Other 309 321 291 (4)% 6%
--------- --------- ---------
Total Personal Systems 8,224 8,018 7,467 3% 10%
--------- --------- ---------
Printing
Supplies 3,007 2,835 3,101 6% (3)%
Commercial Hardware 886 1,107 964 (20)% (8)%
Consumer Hardware 590 616 577 (4)% 2%
--------- --------- ---------
Total Printing 4,483 4,558 4,642 (2)% (3)%
--------- --------- ---------
Corporate Investments 2 1 3 100% (33)%
--------- --------- ---------
Total segments 12,709 12,577 12,112 1% 5%
--------- --------- ---------
Intersegment net revenue
eliminations and other(b) (25) (65) 134 NM NM
--------- --------- ---------
Total net revenue $ 12,684 $ 12,512 $ 12,246 1% 4%
========= ========= =========
(a) Effective at the beginning of its first quarter of fiscal year 2017, HP
implemented an organizational change to align its business unit
financial reporting more closely with its current business structure.
The organizational change resulted in transfer of a portion of LaserJet
printers from commercial to consumer within the Printing segment. HP
reflected this change to its business unit information in prior
reporting periods on an as-if basis which resulted in reclassification
of revenues between the commercial and consumer business units of
Printing. The reporting change had no impact to previously reported
segment net revenue, consolidated net revenue, earnings from continuing
operations, net earnings or net earnings per share.
(b) "NM"- Not Meaningful.
HP INC. AND SUBSIDIARIES
SEGMENT OPERATING MARGIN SUMMARY DATA
(Unaudited)
Change in Operating
Three months ended Margin (pts)
---------------------------- -------------------
January October January
31, 2017 31, 2016 31, 2016 Q/Q Y/Y
-------- -------- -------- ---------- --------
Segment operating
margin:(a)
Personal Systems 3.8% 4.3% 3.1% (0.5) pts 0.7 pts
Printing (1.0)
16.0% 14.0% 17.0% 2.0 pts pts
Corporate Investments(b) NM NM NM NM NM
Total segments (0.3)
7.9% 7.6% 8.2% 0.3 pts pts
(a) Effective at the beginning of its first quarter of fiscal year 2017, HP
implemented an organizational change to align its business unit
financial reporting more closely with its current business structure.
The organizational change resulted in transfer of a portion of LaserJet
printers from commercial to consumer within the Printing segment. HP
reflected this change to its business unit information in prior
reporting periods on an as-if basis which resulted in reclassification
of revenues between the commercial and consumer business units of
Printing. The reporting change had no impact to previously reported
segment net revenue, consolidated net revenue, earnings from continuing
operations, net earnings or net earnings per share.
(b) "NM"- Not Meaningful.
HP INC. AND SUBSIDIARIES
CALCULATION OF DILUTED NET EARNINGS PER SHARE
(Unaudited)
(In millions, except per share amounts)
Three months ended
--------------------------
January October January
31, 2017 31, 2016 31, 2016
-------- -------- --------
Numerator:
GAAP net earnings from continuing operations $ 611 $ 513 $ 650
======== ======== ========
Non-GAAP net earnings $ 646 $ 614 $ 645
======== ======== ========
Denominator:
Weighted-average shares used to compute basic
net earnings per share 1,704 1,712 1,776
Dilutive effect of employee stock plans(a) 17 17 9
-------- -------- --------
Weighted-average shares used to compute diluted
net earnings per share 1,721 1,729 1,785
======== ======== ========
GAAP diluted net earnings per share from
continuing operations $ 0.36 $ 0.30 $ 0.36
======== ======== ========
Non-GAAP diluted net earnings per share $ 0.38 $ 0.36 $ 0.36
======== ======== ========
(a) Includes any dilutive effect of restricted stock units, 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, 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.
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 currency exchange rate from the prior-year period. Non-GAAP operating margin is defined to exclude the effects of any amounts relating to restructuring and other charges, acquisition-related charges, the amortization of intangible assets, non-operating retirement-related credits/(charges), defined benefit plan settlement charges, and net tax indemnification amounts. Non-GAAP net earnings and non-GAAP diluted net earnings per share 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 and non-GAAP diluted net earnings per share are adjusted by the amount of additional taxes or tax benefits associated with each non-GAAP item and other tax benefits or charges as a consequence of the separation of Hewlett Packard Enterprise Company from HP Inc. (the "Separation"). 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:
- Restructuring and other charges are (i) costs associated with a formal restructuring plan and are primarily related to employee termination costs and benefits, costs of real estate consolidation and other non-labor charges; and (ii) other charges, which include non-recurring costs that are distinct from ongoing operational costs. HP excludes these restructuring and other charges (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 cost related to its acquisitions, which it would not have otherwise incurred as part of its operations. The charges are direct expenses such as third-party professional and legal fees, and integration-related costs. These charges related to acquisitions are inconsistent in amount and frequency and are significantly impacted by the timing and nature of HP's acquisitions. HP believes that eliminating such expenses for purposes of calculating these non-GAAP measures facilitates a more meaningful evaluation of HP's current operating performance and comparisons to HP's past operating performance.
- HP incurs charges relating to the amortization of intangible assets. Those charges are included in HP's GAAP earnings from continuing operations, operating margin from continuing operations, 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.
- Non-operating retirement-related credits/(charges) includes certain market-related factors such as interest cost, expected return on plan assets, amortized actuarial gains or losses, and impacts from other market-related factors associated with our defined benefit pension and post-retirement benefit plans. The market-driven retirement-related adjustments are primarily due to the changes in pension plan assets and liabilities which are tied to financial market performance and HP considers these adjustments to be outside the operational performance of the business. Non-operating retirement-related credits/(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 adjustments 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.
- As part of the Separation, HP evaluates all tax uncertain positions to determine the indemnification amounts under the Tax Matters Agreement with Hewlett Packard Enterprise Company and records the adjustments as net tax indemnifications amounts for the quarter. HP excludes these adjustments 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.
- HP incurred defined benefit plan settlement charges relating to the U.S. HP pension plan. The charges are associated with the net settlement and remeasurement resulting from voluntary lump sum payments offered to certain terminated vested participants. HP excludes these charges for the purpose of calculating these non-GAAP measures to facilitate a more meaningful evaluation of HP's current operating performance and comparisons to HP's operating performance in other periods.
- As part of the 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 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 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 change in value is not included in non-GAAP operating margin, non-GAAP net earnings and non-GAAP diluted net earnings per share, and therefore does not reflect the full economic effect of the change in value of those intangible assets.
- Items such as restructuring and other charges, acquisition-related charges, non-operating retirement-related credits/(charges), defined benefit plan settlement charges, net tax indemnifications and net valuation allowance, and separation taxes and adjustments that are excluded from non-GAAP operating margin, non-GAAP net earnings and non-GAAP diluted net earnings per share can have a material impact on the equivalent GAAP earnings measure and cash flows.
- HP may not be able to immediately liquidate the short-term and long-term investments included in gross cash, which may limit the usefulness of gross cash as a liquidity measure.
- Other companies may calculate 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 those reconciliations carefully.
Usefulness of non-GAAP financial measures to investors HP believes that providing net revenue on a constant currency basis, non-GAAP operating margin, non-GAAP net earnings, non-GAAP diluted net earnings per share 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 financial condition and to evaluate the efficacy of the methodology and information used by HP's management to evaluate and measure such performance and financial condition. 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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Source: HP Inc.