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HP Reports Third Quarter 2010 Results
  • Third quarter net revenue of $30.7 billion, up 11.4%, or $3.1 billion, from a year earlier
  • Third quarter GAAP operating profit up 5% to $2.3 billion; GAAP diluted earnings per share of $0.75, up 9% from $0.69 a year earlier
  • Third quarter non-GAAP operating profit up 14% to $3.4 billion; non-GAAP diluted earnings per share of $1.08, up 17% from $0.92 a year earlier
  • Broad-based year-over-year revenue growth driven by ESS at 19%, PSG at 17% and IPG at 9%
  • Record services signings
  • Solid year-over-year revenue growth across all regions

PALO ALTO, Calif., Aug 19, 2010 (BUSINESS WIRE) -- HP (NYSE: HPQ) today announced financial results for its third fiscal quarter ended July 31, 2010, with net revenue of $30.7 billion, up 11.4% from a year earlier including a favorable currency benefit of approximately one percentage point.

In the third quarter, GAAP diluted earnings per share (EPS) was $0.75, up from $0.69 in the prior-year period. Non-GAAP diluted EPS was $1.08, up from $0.92 in the prior-year period, including a one-time negative impact of approximately $0.02 per share related to a legal settlement. Non-GAAP financial information excludes after-tax costs of approximately $0.33 per share and $0.23 per share in the third quarter of fiscal 2010 and 2009, respectively, related primarily to the amortization of purchased intangibles, restructuring charges and acquisition-related charges.

"The broad-based strength of HP's Q3 performance further demonstrates the power of our strategy and the discipline of our execution," said Cathie Lesjak, HP chief financial officer and interim chief executive officer. "We raised our full-year outlook and are continuing to build momentum in driving out costs, investing for profitable growth and capitalizing on HP's competitive advantages in the marketplace."

Q3 FY10 Q3 FY09 Y/Y
Net revenue ($B) $30.7 $27.6 11%
GAAP operating margin 7.6% 8.0% (0.4 pts)
GAAP net earnings ($B) $1.8 $1.7 6%
GAAP diluted EPS $0.75 $0.69 9%
Non-GAAP operating margin 11.2% 10.9% 0.3 pts
Non-GAAP net earnings ($B) $2.6 $2.2 15%
Non-GAAP diluted EPS $1.08 $0.92 17%

Information about HP's use of non-GAAP financial information is provided under "Use of non-GAAP financial information" below. Unless otherwise noted, all growth rates included in the narrative below reflect year-over-year comparisons.

Third quarter revenue was up 12% in the Americas to $14.2 billion. Revenue was up 9% in Europe, the Middle East and Africa and up 14% in Asia Pacific to $10.9 billion and $5.6 billion, respectively. When adjusted for the effects of currency, revenue was up 11% in the Americas, up 12% in Europe, the Middle East and Africa and up 8% in Asia Pacific. Revenue from outside of the United States in the third quarter accounted for 63% of total HP revenue, with revenue in the BRIC countries (Brazil, Russia, India and China) increasing 21% while accounting for 11% of total HP revenue.

Services

Services revenue increased 1% to $8.6 billion. Infrastructure Technology Outsourcing revenue and Business Process Outsourcing each increased 1%, while revenue in Technology Services declined roughly 1%. Application Services revenue was up 4% versus the prior-year period. Operating profit was $1.4 billion, or 15.9% of revenue, up from $1.3 billion, or 15.3% of revenue, in the prior-year period.

Enterprise Storage and Servers

Enterprise Storage and Servers (ESS) reported total revenue of $4.4 billion, up 19%. Industry Standard Server revenue increased 31%, while Storage revenue increased 10% and Business Critical Systems revenue declined 15%. ESS blade revenue was up 29%. Operating profit was $549 million, or 12.3% of revenue, up from $381 million, or 10.2% of revenue, in the prior-year period.

HP Software

HP Software revenue increased 2% to $863 million. Business Technology Optimization revenue increased 3%, and Other Software revenue decreased 1%. Operating profit was $183 million, or 21.2% of revenue, up from $153 million, or 18.1% of revenue, in the prior-year period.

Personal Systems Group

Personal Systems Group (PSG) posted a 12% increase in unit shipments and maintained the leading market share position in PCs worldwide. PSG revenue increased 17% to $9.9 billion. Notebook revenue for the quarter was up 10%, while Desktop revenue increased 27%. Commercial client revenue was up 25%, while Consumer client revenue increased 12%. Operating profit was $469 million, or 4.7% of revenue, up from $387 million, or 4.6% of revenue, in the prior-year period.

Imaging and Printing Group

Imaging and Printing Group (IPG) revenue increased 9% to $6.2 billion. Supplies revenue was up 5%, while Commercial hardware revenue and Consumer hardware revenue increased 28% and 4%, respectively. Printer unit shipments increased 16%, with Commercial printer hardware units up 44% and Consumer printer hardware units up 9%. Operating profit was $1.0 billion, or 16.9% of revenue, versus $960 million, or 17.0% of revenue, in the prior-year period.

Corporate Investments

ProCurve revenue increased 42%, and HP Networking overall increased 198% year over year including the impact of the 3Com acquisition.

HP Financial Services

HP Financial Services (HPFS) revenue increased 14% to $764 million. Financing volume increased 3%, and net portfolio assets increased 13%. Operating margin was 9.4%, up from 7.9% in the prior-year period.

Asset management

HP generated $3.3 billion in cash flow from operations for the third quarter. Inventory ended the quarter at $7.2 billion, with days of inventory up to 28 from 25 in the prior-year period. Accounts receivable of $15.6 billion was down 2 days year over year. Accounts payable ended the quarter at $14.9 billion, up 2 days over the prior-year period. HP's dividend payment of $0.08 per share in the third quarter resulted in cash usage of $205 million. HP also utilized $2.6 billion of cash during the quarter to repurchase approximately 55 million shares of common stock in the open market. HP exited the quarter with $14.8 billion in gross cash.

Outlook

For the fourth quarter of fiscal 2010, HP estimates revenue of approximately $32.5 billion to $32.7 billion, GAAP diluted EPS in the range of $1.03 to $1.05, and non-GAAP diluted EPS in the range of $1.25 to $1.27. Fourth quarter fiscal 2010 non-GAAP diluted EPS estimates exclude after-tax costs of approximately $0.22 per share, related primarily to the amortization of purchased intangibles, restructuring charges and acquisition-related charges.

For the full year, HP expects revenue in the range of $125.3 billion to $125.5 billion. HP expects FY10 GAAP diluted EPS to be in the range of $3.62 to $3.64 and non-GAAP diluted EPS in the range of $4.49 to $4.51. FY10 non-GAAP diluted EPS estimates exclude after-tax costs of approximately $0.87 per share, related primarily to the amortization of purchased intangibles, restructuring charges and acquisition-related charges.

More information on HP's quarterly 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 Q3 FY10 earnings conference call is accessible via an audio webcast at www.hp.com/investor/2010q3webcast.

About HP

HP creates new possibilities for technology to have a meaningful impact on people, businesses, governments and society. The world's largest technology company, HP brings together a portfolio that spans printing, personal computing, software, services and IT infrastructure to solve customer problems. More information about HP is available at www.hp.com.

Use of non-GAAP financial information

To supplement HP's consolidated condensed financial statements presented on a GAAP basis, HP provides non-GAAP operating profit, non-GAAP operating margin, non-GAAP net earnings, non-GAAP diluted earnings per share and gross cash. HP also provides forecasts of non-GAAP diluted earnings per share. A reconciliation of the adjustments to GAAP results for this quarter and prior periods is included in the tables below. In addition, an explanation of the ways in which HP management uses these non-GAAP measures to evaluate its business, the substance behind HP management's decision to use these non-GAAP measures, the material limitations associated with the use of these non-GAAP measures, the manner in which HP management compensates for those limitations, and the substantive reasons why HP management believes that these non-GAAP measures provide useful information to investors is included under "Use of Non-GAAP Financial Measures" after the tables below. This additional non-GAAP financial information is not meant to be considered in isolation or as a substitute for operating profit, operating margin, net earnings, diluted earnings per share, 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 revenue, margins, expenses, earnings, tax provisions, cash flows, benefit obligations, share repurchases, currency exchange rates, the impact of acquisitions or other financial items; any statements of the plans, strategies and objectives of management for future operations, including the execution of cost reduction programs and restructuring plans; any statements concerning the expected development, performance or market share 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 macroeconomic and geopolitical trends and events; execution and performance of contracts by HP and its suppliers, customers and partners; the challenge of managing asset levels, including inventory; the difficulty of aligning expense levels with revenue changes; assumptions related to pension and other post-retirement costs; expectations and assumptions relating to the execution and timing of cost reduction programs and restructuring plans; the resolution of pending investigations, claims and disputes; and other risks that are described in HP's Annual Report on Form 10-K for the fiscal year ended October 31, 2009 and HP's other filings with the Securities and Exchange Commission, including HP's Quarterly Report on Form 10-Q for the fiscal quarter ended April 30, 2010. As in prior periods, the financial information set forth in this release, including tax-related items, reflects estimates based on information available at this time. While HP believes these estimates to be meaningful, these amounts could differ materially from actual reported amounts in HP's Form 10-Q for the fiscal quarter ended July 31, 2010. In particular, determining HP's actual tax balances and provisions as of July 31, 2010 requires extensive internal and external review of tax data (including consolidating and reviewing the tax provisions of numerous domestic and foreign entities), which is being completed in the ordinary course of preparing HP's Form 10-Q. HP assumes no obligation and does not intend to update these forward-looking statements.

© 2010 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.

HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF EARNINGS

(Unaudited)
(In millions except per share amounts)
Three months ended

July 31,
2010

April 30,
2010

July 31,
2009

Net revenue $ 30,729 $ 30,849 $ 27,585
Costs and expenses(a):
Cost of sales 23,402 23,601 21,031
Research and development 742 722 667
Selling, general and administrative 3,154 3,064 2,874
Amortization of purchased intangible assets 383 347 379
Restructuring charges 598 180 362
Acquisition-related charges 127 77 59
Total costs and expenses 28,406 27,991 25,372
Earnings from operations 2,323 2,858 2,213
Interest and other, net (134 ) (91 ) (177 )
Earnings before taxes 2,189 2,767 2,036
Provision for taxes(b) 416 567 365
Net earnings $ 1,773 $ 2,200 $ 1,671
Net earnings per share:
Basic $ 0.76 $ 0.94 $ 0.70
Diluted $ 0.75 $ 0.91 $ 0.69
Cash dividends declared per share $ 0.16 $ - $ 0.16
Weighted-average shares used to compute net earnings per share:
Basic 2,322 2,345 2,382
Diluted 2,376 2,406 2,436
(a) Stock-based compensation expense was as follows:
Cost of sales $ 43 $ 48 $ 41
Research and development 11 16 12
Selling, general and administrative 111 136 94
Acquisition-related charges 1 - 3
Total costs and expenses $ 166 $ 200 $ 150
(b) Tax benefit from stock-based compensation $ (54 ) $ (64 ) $ (51 )

HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF EARNINGS

(Unaudited)
(In millions except per share amounts)
Nine months ended

July 31,
2010

July 31,
2009

Net revenue $ 92,755 $ 83,775
Costs and expenses(a):
Cost of sales 71,065 64,049
Research and development 2,145 2,115
Selling, general and administrative 9,150 8,647
Amortization of purchased intangible assets 1,060 1,171
In-process research and development charges - 6
Restructuring charges 909 602
Acquisition-related charges 242 182
Total costs and expenses 84,571 76,772
Earnings from operations 8,184 7,003
Interest and other, net (424 ) (589 )
Earnings before taxes 7,760 6,414
Provision for taxes(b) 1,537 1,166
Net earnings $ 6,223 $ 5,248
Net earnings per share:
Basic $ 2.66 $ 2.19
Diluted $ 2.60 $ 2.15
Cash dividends declared per share $ 0.32 $ 0.32
Weighted-average shares used to compute net earnings per share:
Basic 2,342 2,395
Diluted 2,398 2,442
(a) Stock-based compensation expense was as follows:
Cost of sales $ 138 $ 141
Research and development 41 47
Selling, general and administrative 366 288
Acquisition-related charges 2 25
Total costs and expenses $ 547 $ 501
(b) Tax benefit from stock-based compensation $ (176 ) $ (158 )

HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

ADJUSTMENTS TO GAAP NET EARNINGS, EARNINGS FROM OPERATIONS,

OPERATING MARGIN AND EARNINGS PER SHARE

(Unaudited)
(In millions except per share amounts)

Three months ended
July 31,
2010

Diluted earnings
per share

Three months ended
April 30,
2010

Diluted earnings
per share

Three months ended
July 31,
2009

Diluted earnings
per share

GAAP net earnings $ 1,773 $ 0.75 $ 2,200 $ 0.91 $ 1,671 $ 0.69
Non-GAAP adjustments:

Amortization of purchased intangible assets

383 0.16 347 0.14 379 0.16
Restructuring charges 598 0.25 180 0.08 362 0.15
Acquisition-related charges 127 0.05 77 0.03 59 0.02
Adjustments for taxes (306 ) (0.13 ) (171 ) (0.07 ) (232 ) (0.10 )
Non-GAAP net earnings $ 2,575 $ 1.08 $ 2,633 $ 1.09 $ 2,239 $ 0.92
GAAP earnings from operations $ 2,323 $ 2,858 $ 2,213
Non-GAAP adjustments:

Amortization of purchased intangible assets

383 347 379
Restructuring charges 598 180 362
Acquisition-related charges 127 77 59

Non-GAAP earnings from operations

$ 3,431 $ 3,462 $ 3,013
GAAP operating margin 8 % 9 % 8 %
Non-GAAP adjustments 3 % 2 % 3 %
Non-GAAP operating margin 11 % 11 % 11 %

HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

ADJUSTMENTS TO GAAP NET EARNINGS, EARNINGS FROM OPERATIONS,

OPERATING MARGIN AND EARNINGS PER SHARE

(Unaudited)
(In millions except per share amounts)

Nine months ended
July 31,
2010

Diluted earnings
per share

Nine months ended
July 31,
2009

Diluted earnings
per share

GAAP net earnings $ 6,223 $ 2.60 $ 5,248 $ 2.15
Non-GAAP adjustments:

Amortization of purchased intangible assets

1,060 0.44 1,171 0.48

In-process research and development charges

- - 6 -
Restructuring charges 909 0.38 602 0.25
Acquisition-related charges 242 0.10 182 0.07
Adjustments for taxes (632 ) (0.27 ) (580 ) (0.24 )
Non-GAAP net earnings $ 7,802 $ 3.25 $ 6,629 $ 2.71
GAAP earnings from operations $ 8,184 $ 7,003
Non-GAAP adjustments:

Amortization of purchased intangible assets

1,060 1,171

In-process research and development charges

- 6
Restructuring charges 909 602
Acquisition-related charges 242 182

Non-GAAP earnings from operations

$ 10,395 $ 8,964
GAAP operating margin 9 % 8 %
Non-GAAP adjustments 2 % 3 %
Non-GAAP operating margin 11 % 11 %

HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

CONSOLIDATED CONDENSED BALANCE SHEETS

(In millions)

July 31,
2010

October 31,
2009

(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 14,718 $ 13,279
Short-term investments 5 55
Accounts receivable 15,621 16,537
Financing receivables 2,799 2,675
Inventory 7,206 6,128
Other current assets 14,016 13,865
Total current assets 54,365 52,539
Property, plant and equipment 11,477 11,262
Long-term financing receivables and other assets 11,681 11,289
Goodwill and purchased intangible assets 42,494 39,709
Total assets $ 120,017 $ 114,799
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable and short-term borrowings $ 7,842 $ 1,850
Accounts payable 14,885 14,809
Employee compensation and benefits 3,703 4,071
Taxes on earnings 947 910
Deferred revenue 6,583 6,182
Other accrued liabilities 15,328 15,181
Total current liabilities 49,288 43,003
Long-term debt 12,204 13,980
Other liabilities 15,690 17,052 (a)
Stockholders' equity
HP Stockholders' equity 42,535 40,517
Noncontrolling interests 300 247 (a)
Total stockholders' equity 42,835 40,764
Total liabilities and stockholders' equity $ 120,017 $ 114,799
(a) Reflects the adoption of the accounting standard related to the presentation of noncontrolling interests in consolidated financial statements.

HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

(Unaudited)
(In millions)

Three months ended
July 31,
2010

Nine months ended
July 31,
2010

Cash flows from operating activities:
Net earnings $ 1,773 $ 6,223

Adjustments to reconcile net earnings to net cash provided by operating activities:

Depreciation and amortization 1,210 3,556
Stock-based compensation expense 166 547
Provision for bad debt and inventory 56 249
Restructuring charges 598 909
Deferred taxes on earnings 95 (191 )
Excess tax benefit from stock-based compensation (20 ) (283 )
Other, net 44 193
Changes in assets and liabilities:
Accounts and financing receivables (864 ) 845
Inventory (791 ) (981 )
Accounts payable 1,420 (128 )
Taxes on earnings (85 ) 641
Restructuring (270 ) (1,053 )
Other assets and liabilities (59 ) (1,756 )
Net cash provided by operating activities 3,273 8,771
Cash flows from investing activities:
Investment in property, plant and equipment (1,130 ) (2,901 )
Proceeds from sale of property, plant and equipment 85 353
Purchases of available-for-sale securities and other investments (22 ) (50 )

Maturities and sales of available-for-sale securities and other investments

94 197
Payments made in connection with business acquisition, net (1,505 ) (4,017 )
Proceeds from business divestiture, net 125 125
Net cash used in investing activities (2,353 ) (6,293 )
Cash flows from financing activities:
Issuance of commercial paper and notes payable, net 3,138 4,993
Issuance of debt 71 121
Payment of debt (1,030 ) (1,274 )
Issuance of common stock under employee stock plans 241 2,507
Repurchase of common stock (2,568 ) (7,079 )
Excess tax benefit from stock-based compensation 20 283
Dividends (205 ) (590 )
Net cash used in financing activities (333 ) (1,039 )
Increase in cash and cash equivalents 587 1,439
Cash and cash equivalents at beginning of period 14,131 13,279
Cash and cash equivalents at end of period $ 14,718 $ 14,718

HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

SEGMENT INFORMATION

(Unaudited)
(In millions)
Three months ended

July 31,
2010

April 30,
2010

July 31,
2009(a)

Net revenue:
Services $ 8,609 $ 8,712 $ 8,520
Enterprise Storage and Servers 4,449 4,542 3,735
HP Software 863 871 847
HP Enterprise Business 13,921 14,125 13,102
Personal Systems Group 9,918 9,956 8,441
Imaging and Printing Group 6,167 6,396 5,660
HP Financial Services 764 755 670
Corporate Investments 607 315 193
Total Segments 31,377 31,547 28,066

Eliminations of intersegment net revenue and other

(648 ) (698 ) (481 )
Total HP Consolidated $ 30,729 $ 30,849 $ 27,585
Earnings from operations:
Services $ 1,366 $ 1,382 $ 1,302
Enterprise Storage and Servers 549 571 381
HP Software 183 162 153
HP Enterprise Business 2,098 2,115 1,836
Personal Systems Group 469 465 387
Imaging and Printing Group 1,040 1,098 960
HP Financial Services 72 69 53
Corporate Investments 83 12 (10 )
Total Segments 3,762 3,759 3,226

Corporate and unallocated costs and eliminations

(175 ) (112 ) (81 )

Unallocated costs related to stock-based compensation expense

(156 ) (185 ) (132 )

Amortization of purchased intangible assets

(383 ) (347 ) (379 )
Restructuring charges (598 ) (180 ) (362 )
Acquisition-related charges (127 ) (77 ) (59 )
Interest and other, net (134 ) (91 ) (177 )
Total HP Consolidated Earnings Before Taxes $ 2,189 $ 2,767 $ 2,036
(a) As a result of HP's adoption in fiscal 2009 of the revenue recognition standards related to multiple-deliverable revenue arrangements and revenue arrangements that included software, certain previously reported segment and business unit results have been restated. The adoption primarily impacted the Services, Enterprise Storage and Servers and Personal Systems Group financial reporting segments.

HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

SEGMENT INFORMATION

(Unaudited)
(In millions)
Nine months ended
July 31,
2010
July 31,
2009(a)
Net revenue:
Services $ 25,972 $ 25,767
Enterprise Storage and Servers 13,382 11,141
HP Software 2,612 2,605
HP Enterprise Business 41,966 39,513
Personal Systems Group 30,458 25,443
Imaging and Printing Group 18,769 17,557
HP Financial Services 2,238 1,947
Corporate Investments 1,158 577
Total Segments 94,589 85,037

Eliminations of intersegment net revenue and other

(1,834 ) (1,262 )
Total HP Consolidated $ 92,755 $ 83,775
Earnings from operations:
Services $ 4,112 $ 3,600
Enterprise Storage and Servers 1,672 1,037
HP Software 512 450
HP Enterprise Business 6,296 5,087
Personal Systems Group 1,464 1,201
Imaging and Printing Group 3,192 3,139
HP Financial Services 208 140
Corporate Investments 114 (48 )
Total Segments 11,274 9,519

Corporate and unallocated costs and eliminations

(375 ) (119 )

Unallocated costs related to stock-based compensation expense

(504 ) (436 )

Amortization of purchased intangible assets

(1,060 ) (1,171 )

In-process research and development charges

- (6 )
Restructuring charges (909 ) (602 )
Acquisition-related charges (242 ) (182 )
Interest and other, net (424 ) (589 )
Total HP Consolidated Earnings Before Taxes $ 7,760 $ 6,414
(a) As a result of HP's adoption in fiscal 2009 of the revenue recognition standards related to multiple-deliverable revenue arrangements and revenue arrangements that included software, certain previously reported segment and business unit results have been restated. The adoption primarily impacted the Services, Enterprise Storage and Servers and Personal Systems Group financial reporting segments.

HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

SEGMENT / BUSINESS UNIT INFORMATION

(Unaudited)
(In millions)
Three months ended
July 31,
2010
April 30,
2010

July 31,
2009(a)(b)
Net revenue:
Infrastructure Technology Outsourcing $ 3,937 $ 3,998 $ 3,906
Technology Services 2,366 2,420 2,389
Application Services 1,501 1,512 1,442
Business Process Outsourcing 727 716 719
Other 78 66 64
Services 8,609 8,712 8,520
Industry Standard Servers 3,042 3,056 2,316
Storage 904 948 824
Business Critical Systems 503 538 595
Enterprise Storage and Servers 4,449 4,542 3,735
Business Technology Optimization 581 584 563
Other Software 282 287 284
HP Software 863 871 847
HP Enterprise Business 13,921 14,125 13,102
Notebooks 5,298 5,513 4,803
Desktops 3,930 3,788 3,098
Workstations 459 423 299
Handhelds 18 24 32
Other 213 208 209
Personal Systems Group 9,918 9,956 8,441
Supplies 4,130 4,331 3,949
Commercial Hardware 1,389 1,348 1,085
Consumer Hardware 648 717 626
Imaging and Printing Group 6,167 6,396 5,660
HP Financial Services 764 755 670
Corporate Investments 607 315 193
Total Segments 31,377 31,547 28,066
Eliminations of intersegment net revenue and other (648 ) (698 ) (481 )
Total HP Consolidated $ 30,729 $ 30,849 $ 27,585
(a) Certain fiscal 2010 organizational reclassifications have been reflected retroactively to provide improved visibility and comparability. For each of the quarters in fiscal year 2009, the reclassifications resulted in the transfer of revenue among the business units within the Services segment only. There was no impact to the previously reported segment financial results.
(b) As a result of HP's adoption in fiscal 2009 of the revenue recognition standards related to multiple-deliverable revenue arrangements and revenue arrangements that included software, certain previously reported segment and business unit results have been restated. The adoption primarily impacted the Services, Enterprise Storage and Servers and Personal Systems Group financial reporting segments.

HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

SEGMENT / BUSINESS UNIT INFORMATION

(Unaudited)
(In millions)
Nine months ended
July 31,
2010
July 31,
2009(a)(b)
Net revenue:
Infrastructure Technology Outsourcing $ 11,868 $ 11,511
Technology Services 7,192 7,260
Application Services 4,522 4,615
Business Process Outsourcing 2,177 2,192
Other 213 189
Services 25,972 25,767
Industry Standard Servers 9,044 6,627
Storage 2,741 2,555
Business Critical Systems 1,597 1,959
Enterprise Storage and Servers 13,382 11,141
Business Technology Optimization 1,756 1,725
Other Software 856 880
HP Software 2,612 2,605
HP Enterprise Business 41,966 39,513
Notebooks 16,936 14,416
Desktops 11,558 9,383
Workstations 1,257 919
Handhelds 67 136
Other 640 589
Personal Systems Group 30,458 25,443
Supplies 12,542 12,102
Commercial Hardware 4,028 3,517
Consumer Hardware 2,199 1,938
Imaging and Printing Group 18,769 17,557
HP Financial Services 2,238 1,947
Corporate Investments 1,158 577
Total Segments 94,589 85,037
Eliminations of intersegment net revenue and other (1,834 ) (1,262 )
Total HP Consolidated $ 92,755 $ 83,775
(a) Certain fiscal 2010 organizational reclassifications have been reflected retroactively to provide improved visibility and comparability. For each of the quarters in fiscal year 2009, the reclassifications resulted in the transfer of revenue among the business units within the Services segment only. There was no impact to the previously reported segment financial results.
(b) As a result of HP's adoption in fiscal 2009 of the revenue recognition standards related to multiple-deliverable revenue arrangements and revenue arrangements that included software, certain previously reported segment and business unit results have been restated. The adoption primarily impacted the Services, Enterprise Storage and Servers and Personal Systems Group financial reporting segments.

HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

CALCULATION OF NET EARNINGS PER SHARE

(Unaudited)
(In millions except per share amounts)
Three months ended
July 31,
2010
April 30,
2010
July 31,
2009
Numerator:
Net earnings $ 1,773 $ 2,200 $ 1,671
Denominator:

Weighted-average shares used to compute basic EPS

2,322 2,345 2,382

Dilutive effect of employee stock plans

54 61 54

Weighted-average shares used to compute diluted EPS

2,376 2,406 2,436
Net earnings per share:
Basic(a) $ 0.76 $ 0.94 $ 0.70
Diluted(b) $ 0.75 $ 0.91 $ 0.69
(a) Basic earnings per share was calculated based on net earnings and the weighted-average number of shares outstanding during the reporting period.
(b) Diluted earnings per share included any dilutive effect of outstanding stock options, performance-based restricted units, restricted stock units and restricted stock.

HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

CALCULATION OF NET EARNINGS PER SHARE

(Unaudited)
(In millions except per share amounts)
Nine months ended
July 31,
2010
July 31,
2009
Numerator:
Net earnings $ 6,223 $ 5,248
Denominator:

Weighted-average shares used to compute basic EPS

2,342 2,395
Dilutive effect of employee stock plans 56 47

Weighted-average shares used to compute diluted EPS

2,398 2,442
Net earnings per share:
Basic(a) $ 2.66 $ 2.19
Diluted(b) $ 2.60 $ 2.15
(a) Basic earnings per share was calculated based on net earnings and the weighted-average number of shares outstanding during the reporting period.
(b) Diluted earnings per share included any dilutive effect of outstanding stock options, performance-based restricted units, restricted stock units and restricted stock.

HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

CALCULATION OF NON-GAAP NET EARNINGS PER SHARE

(Unaudited)
(In millions except per share amounts)
Three months ended
July 31,
2010
April 30,
2010
July 31,
2009
Numerator:
Non-GAAP net earnings $ 2,575 $ 2,633 $ 2,239
Denominator:

Weighted-average shares used to compute basic EPS

2,322 2,345 2,382
Dilutive effect of employee stock plans 54 61 54

Weighted-average shares used to compute diluted EPS

2,376 2,406 2,436
Non-GAAP net earnings per share:
Basic(a) $ 1.11 $ 1.12 $ 0.94
Diluted(b) $ 1.08 $ 1.09 $ 0.92
(a) Basic non-GAAP earnings per share was calculated based on non-GAAP net earnings and the weighted-average number of shares outstanding during the reporting period.
(b) Diluted non-GAAP earnings per share included any dilutive effect of outstanding stock options, performance-based restricted units, restricted stock units and restricted stock.

HEWLETT-PACKARD COMPANY AND SUBSIDIARIES

CALCULATION OF NON-GAAP NET EARNINGS PER SHARE

(Unaudited)
(In millions except per share amounts)
Nine months ended
July 31,
2010
July 31,
2009
Numerator:
Non-GAAP net earnings $ 7,802 $ 6,629
Denominator:

Weighted-average shares used to compute basic EPS

2,342 2,395

Dilutive effect of employee stock plans

56 47

Weighted-average shares used to compute diluted EPS

2,398 2,442
Non-GAAP net earnings per share:
Basic(a) $ 3.33 $ 2.77
Diluted(b) $ 3.25 $ 2.71
(a) Basic non-GAAP earnings per share was calculated based on non-GAAP net earnings and the weighted-average number of shares outstanding during the reporting period.
(b) Diluted non-GAAP earnings per share included any dilutive effect of outstanding stock options, performance-based restricted units, restricted stock units and restricted stock.

Use of Non-GAAP Financial Measures

To supplement HP's consolidated condensed financial statements presented on a GAAP basis, HP provides non-GAAP operating profit, non-GAAP operating margin, non-GAAP net earnings, non-GAAP diluted earnings per share and gross cash. HP also provides forecasts of non-GAAP diluted earnings per share. These non-GAAP financial measures are not in accordance with, or an alternative for, generally accepted accounting principles in the United States. The GAAP measure most directly comparable to non-GAAP operating profit is earnings from operations. The GAAP measure most directly comparable to non-GAAP operating margin is operating margin. The GAAP measure most directly comparable to non-GAAP net earnings is net earnings. The GAAP measure most directly comparable to non-GAAP diluted earnings per share is diluted net earnings per share. The GAAP measure most directly comparable to gross cash is cash and cash equivalents. Reconciliations of each of these non-GAAP financial measures to GAAP information are included in the tables above.

Use and Economic Substance of Non-GAAP Financial Measures Used by HP

Non-GAAP operating profit and non-GAAP operating margin are defined to exclude the effects of any restructuring charges, charges relating to the amortization of purchased intangible assets, acquisition-related charges and in-process research and development charges recorded during the relevant period. Non-GAAP net earnings and non-GAAP diluted earnings per share consist of net earnings or diluted net earnings per share excluding those same charges. In addition, non-GAAP net earnings and non-GAAP diluted earnings per share are adjusted by the amount of additional taxes or tax benefit associated with each non-GAAP item. HP's management uses these non-GAAP financial measures for purposes of evaluating HP's historical and prospective financial performance, as well as HP's performance relative to its competitors. HP's management also uses these non-GAAP measures to further its own understanding of HP's segment operating performance. HP believes that excluding those items mentioned above from these non-GAAP financial measures allows HP management to better understand HP's consolidated financial performance in relationship to the operating results of HP's segments, as management does not believe that the excluded items are reflective of ongoing operating results. More specifically, HP's management excludes each of those items mentioned above for the following reasons:

  • Restructuring charges consist of costs associated with a formal restructuring plan and are primarily related to (i) employee termination costs and benefits, and (ii) costs to vacate duplicative facilities. HP excludes these restructuring costs (and any reversals of charges recorded in prior periods) for purposes of calculating these non-GAAP measures because it believes that these historical costs do not reflect expected future operating expenses and do not contribute to a meaningful evaluation of HP's current operating performance or comparisons to HP's past operating performance.
  • Purchased intangible assets consist primarily of customer contracts, customer lists, distribution agreements, technology patents, and products, trademarks and trade names purchased in connection with acquisitions. HP incurs charges relating to the amortization of these intangibles, and those charges are included in HP's GAAP presentation of earnings from operations, operating margin, net earnings and net earnings per share. Amortization charges for HP's purchased intangible assets are inconsistent in amount and frequency and are significantly impacted by the timing and magnitude of HP's acquisitions. Consequently, HP excludes these charges for purposes of calculating these non-GAAP measures to facilitate a more meaningful evaluation of HP's current operating performance and comparisons to HP's past operating performance.
  • In-process research and development costs relate to amounts assigned to tangible and intangible assets to be used in research and development projects. Once these projects are completed, the costs are generally amortized over the estimated useful life of the item. Amortization charges for in-process research and development in connection with HP's acquisitions are reflected in HP's GAAP presentation of earnings from operations, operating margin, net earnings and net earnings per share. In-process research and development amortization expenses are not indicative of HP's ongoing operating costs and are generally unpredictable. Accordingly, HP believes that eliminating these amortization expenses for purposes of calculating these non-GAAP measures contributes to a meaningful evaluation of HP's current operating performance and comparisons to HP's past operating performance.
  • HP incurs costs related to its acquisitions, most of which are treated as non-capitalized expenses. Because non-capitalized, acquisition-related expenses are inconsistent in amount and frequency and are significantly impacted by the timing and nature of HP's acquisitions, HP believes that eliminating the non-capitalized expenses for purposes of calculating these non-GAAP measures facilitates a more meaningful evaluation of HP's current operating performance and comparisons to HP's past operating performance.

Gross cash is a non-GAAP measure that is defined as cash and cash equivalents plus short-term investments and certain long-term investments that may be liquidated within 90 days pursuant to the terms of existing put options or similar rights. HP's management uses gross cash for the purpose of determining the amount of cash available for investment in HP's businesses, funding strategic acquisitions, repurchasing stock and other purposes. HP's management also uses gross cash for the purposes of evaluating HP's historical and prospective liquidity, as well as to further its own understanding of HP's segment operating results. Because gross cash includes liquid assets that are not included in GAAP cash and cash equivalents, HP believes that gross cash provides a more accurate and complete assessment of HP's liquidity and segment operating results.

Material Limitations Associated with Use of Non-GAAP Financial Measures

These non-GAAP financial measures may have limitations as analytical tools, and these measures should not be considered in isolation or as a substitute for analysis of HP's results as reported under GAAP. Some of the limitations in relying on these non-GAAP financial measures are:

  • Items such as amortization of purchased intangible assets, though not directly affecting HP's cash position, represent the loss in value of intangible assets over time. The expense associated with this loss in value is not included in non-GAAP operating profit, non-GAAP operating margin, non-GAAP net earnings and non-GAAP diluted earnings per share and therefore does not reflect the full economic effect of the loss in value of those intangible assets.
  • Items such as restructuring charges that are excluded from non-GAAP operating profit, non-GAAP operating margin, non-GAAP net earnings and non-GAAP diluted earnings per share can have a material impact on cash flows and earnings per share.
  • HP may not be able to liquidate immediately the long-term investments included in gross cash, which may limit the usefulness of gross cash as a liquidity measure.
  • Other companies may calculate non-GAAP operating profit, non-GAAP operating margin, non-GAAP net earnings, non-GAAP diluted earnings per share and gross 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 operating profit, non-GAAP operating margin, non-GAAP net earnings, non-GAAP diluted earnings per share and gross cash by relying primarily on its GAAP results and using non-GAAP financial measures only supplementally. HP also provides robust and detailed reconciliations of each non-GAAP financial measure to its most directly comparable GAAP measure within this press release and in other written materials that include these non-GAAP financial measures, and HP encourages investors to review carefully those reconciliations.

Usefulness of Non-GAAP Financial Measures to Investors

HP believes that providing non-GAAP operating profit, non-GAAP operating margin, non-GAAP net earnings, non-GAAP diluted earnings per share 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 management to evaluate and measure such performance. Disclosure of these non-GAAP financial measures also facilitates comparisons of HP's operating performance with the performance of other companies in HP's industry that supplement their GAAP results with non-GAAP financial measures that are calculated in a similar manner.

SOURCE: HP

HP
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