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HP Reports Fourth Quarter and Full Year 2011 Results

PALO ALTO, CA, Nov 21, 2011 (MARKETWIRE via COMTEX) -- HP (NYSE: HPQ)

  • Fiscal 2011 non-GAAP net revenue of $127.4 billion, non-GAAP diluted earnings per share of $4.88 and free cash flow of $9.1 billion grew 1%, 7% and 8%, respectively, over the prior year
  • Fiscal 2011 GAAP net revenue of $127.2 billion, GAAP diluted earnings per share of $3.32 and cash flow from operations of $12.6 billion
  • Fourth quarter non-GAAP net revenue of $32.3 billion, non-GAAP diluted earnings per share of $1.17 and free cash flow of $1.2 billion were down 3%, 12% and 43%, respectively, from the prior-year quarter
  • Fourth quarter GAAP net revenue of $32.1 billion, GAAP diluted earnings per share of $0.12 and cash flow from operations of $2.4 billion

HP today announced financial results for its fourth quarter and full fiscal year ended Oct. 31, 2011.

"HP has a great opportunity to build on our strong hardware, software, and services franchises with leading market positions, customer relationships, and intellectual property," said Meg Whitman, HP president and chief executive officer. "We need to get back to the business fundamentals in fiscal 2012, including making prudent investments in the business and driving more consistent execution."

"While FY11 proved to be a challenging year, we grew non-GAAP EPS 7% and generated $12.6 billion in cash flow from operations," said Cathie Lesjak, HP executive vice president and chief financial officer. "We're remaining cautious heading into FY12 but are focused on delivering our earnings outlook and driving shareholder value."

Earnings highlights

------------------ ------------------------------ --------------------------
                    Q4 FY11   Q4 FY10      Y/Y      FY11    FY10      Y/Y
------------------ ------------------------------ --------------------------
GAAP net revenue
 ($B)              $   32.1  $   33.3        (3%) $127.2  $126.0         1%
------------------ ------------------------------ --------------------------
GAAP operating
 margin                 2.5%      9.9% (7.4 pts)     7.6%    9.1% (1.5 pts)
------------------ ------------------------------ --------------------------
GAAP net earnings
 ($B)              $    0.2  $    2.5       (91%) $  7.1  $  8.8       (19%)
------------------ ------------------------------ --------------------------
GAAP diluted EPS   $   0.12  $   1.10       (89%) $ 3.32  $ 3.69       (10%)
------------------ ------------------------------ --------------------------
Non-GAAP net
 revenue ($)       $   32.3  $   33.3        (3%) $127.4  $126.0         1%
------------------ ------------------------------ --------------------------
Non-GAAP operating
 margin                 9.7%     12.0% (2.3 pts)    10.8%   11.4% (0.6 pts)
------------------ ------------------------------ --------------------------
Non-GAAP net
 earnings ($B)     $    2.4  $    3.1       (23%) $ 10.4  $ 10.9        (4%)
------------------ ------------------------------ --------------------------
Non-GAAP diluted
 EPS               $   1.17  $   1.33       (12%) $ 4.88  $ 4.58         7%
------------------ ------------------------------ --------------------------

Information about HP's use of non-GAAP financial information is provided under "Use of non-GAAP financial information" below. Unless otherwise specified, all revenue amounts below are calculated on a GAAP basis.

Full year fiscal 2011 GAAP net revenue for the full fiscal year 2011 was $127.2 billion, up 1% compared with the prior year or down 1% when adjusted for the effects of currency. GAAP operating profit was $9.7 billion, and GAAP diluted earnings per share (EPS) was $3.32, down 10% from the prior year.

Non-GAAP net revenue for the full fiscal year 2011 was $127.4 billion, up 1% compared with the prior year or down 1% when adjusted for the effects of currency. Non-GAAP operating profit was $13.8 billion, and non-GAAP diluted EPS was $4.88, up 7% from the prior year.

Fiscal 2011 non-GAAP net revenue includes an additional $0.2 billion of revenue resulting from the exclusion of contra revenue associated with sales incentive programs implemented in the fourth quarter in connection with the wind down of HP's webOS device business, net of fourth quarter webOS device revenue. Non-GAAP earnings and operating profit information excludes after-tax costs of $3.3 billion, or $1.56 per diluted share, related to the wind down of HP's webOS device business, impairment of goodwill and purchased intangible assets, amortization of purchased intangible assets, restructuring charges and acquisition-related charges.

Fourth fiscal quarter 2011 For the quarter, GAAP net revenue of $32.1 billion was down 3% from the prior-year period. Non-GAAP net revenue of $32.3 billion was down 3% from the prior-year period as reported and down 6% when adjusted for the effects of currency.

GAAP diluted EPS was $0.12, down 89% from the prior-year period. Non-GAAP diluted EPS was $1.17, down 12% from the prior-year period.

Fourth quarter non-GAAP net revenue includes an additional $0.2 billion of revenue resulting from the exclusion of contra revenue associated with sales incentive programs implemented in connection with the wind down of HP's webOS device business, net of webOS device revenue for the period. Fourth quarter non-GAAP earnings information excludes after-tax costs of $2.1 billion, or $1.05 per diluted share, related to the wind down of HP's webOS device business, impairment of goodwill and purchased intangible assets, amortization of purchased intangible assets, restructuring charges and acquisition-related charges.

Fourth fiscal quarter 2011 trends and regional performance In the Americas, fourth quarter GAAP net revenue was $14.5 billion, down 4% year over year and down 5% when adjusted for the effects of currency. Non-GAAP net revenue in the Americas was $14.6 billion, down 3% year over year and down 4% when adjusted for the effects of currency.

Europe, the Middle East and Africa GAAP revenue of $11.7 billion was down 6% year over year and down 10% when adjusted for the effects of currency. GAAP revenue in Asia Pacific was $6.0 billion, representing a 3% increase year over year, and down 4% when adjusted for the effects of currency.

GAAP revenue from outside of the United States in the fourth quarter accounted for 65% of total HP revenue. BRIC countries (Brazil, Russia, India and China) generated revenue of $3.8 billion, up 9% over the year-ago period, for 12% of total HP revenue.

Revenue in HP's commercial businesses declined 2% year over year. Revenue in HP's consumer businesses, within PSG and IPG, was collectively down 9% year over year.

Fourth fiscal quarter 2011 business group results

  • Services revenue of $9.3 billion grew 2% year over year with a 12.8% operating margin. Technology Services and Application Services revenue grew 3% and 2%, respectively, while IT Outsourcing revenue grew 1% and Business Process Outsourcing revenue declined 2%.
  • Enterprise Servers, Storage and Networking (ESSN) revenue declined 4% year over year with a 13.0% operating margin. Networking revenue was up 5%, Industry Standard Servers revenue was down 4%, Business Critical Systems revenue was down 23%, and Storage revenue was up 4%.
  • HP Software revenue grew 28% year over year with a 27.7% operating margin. HP Software revenue was driven by revenue growth in licenses and services of 33% and 36%, respectively.
  • Personal Systems Group (PSG) revenue declined 2% year over year with a 5.7% operating margin. Commercial client revenue grew 5%, and Consumer client revenue declined 9%. Total units were up 2% with 5% growth in desktop units and 1% growth in notebook units.
  • Imaging and Printing Group (IPG) revenue declined 10% year over year with a 12.8% operating margin. Commercial revenue was up 4% year over year with commercial printer hardware units up 5%. Consumer printer hardware revenue was down 8% year over year with an 8% decline in units.
  • Financial Services revenue grew 18% year over year driven by double-digit growth in both lease volume and portfolio assets. The business delivered a 10.3% operating margin.

Asset management HP generated $2.4 billion in cash flow from operations in the fourth quarter. Inventory ended the quarter at $7.5 billion, with days of inventory up 4 days year over year to 27 days. Accounts receivable of $18.2 billion was up 1 day year over year to 51 days. Accounts payable ended the quarter at $14.8 billion, flat from the prior-year period at 52 days. HP's dividend payment of $0.12 per share in the fourth quarter resulted in cash usage of $239 million. HP also utilized $500 million of cash during the quarter to repurchase approximately 17 million shares of common stock in the open market. HP exited the quarter with $8.1 billion in gross cash.

Outlook For the first quarter of fiscal 2012, HP estimates non-GAAP diluted EPS in the range of $0.83 to $0.86, and GAAP diluted EPS in the range of $0.61 to $0.64.

First quarter fiscal 2012 non-GAAP diluted EPS estimates exclude after-tax costs of approximately $0.22 per share, related primarily to the amortization and impairment of purchased intangibles, restructuring charges and acquisition-related charges.

HP expects full year fiscal 2012 non-GAAP diluted EPS of at least $4.00 and GAAP diluted EPS of approximately $3.20.

Full year fiscal 2012 non-GAAP diluted EPS estimates exclude after-tax costs of approximately $0.80 per share, related primarily to the amortization and impairment of purchased intangibles, restructuring charges and acquisition-related charges.

In order to more effectively manage HP as one company and align its guidance policy with its long-term objective of delivering profitable growth, HP will only be providing a quarterly and annual earnings per share outlook. The company believes that earnings per share is a better indicator of successful execution across its various business levers. HP remains committed to high levels of disclosure and transparency, including general commentary on its expectations relating to future revenue and business segment performance, and will continue to provide detailed segment-level financial performance data for completed fiscal periods.

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 Q4 FY11 earnings conference call is accessible via an audio webcast at www.hp.com/investor/2011q4webcast.

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

Use of non-GAAP financial information To supplement HP's consolidated condensed financial statements presented on a GAAP basis, HP provides non-GAAP net revenue, non-GAAP operating profit, non-GAAP operating margin, non-GAAP net earnings, non-GAAP diluted earnings per share, gross cash and free cash flow. 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 revenue, operating profit, operating margin, net earnings, diluted earnings per share, cash and cash equivalents or cash flow from operations 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 and integration 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 the impact of macroeconomic and geopolitical trends and events; the competitive pressures faced by HP's businesses; 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 protection of HP's intellectual property assets, including intellectual property licensed from third parties; integration and other risks associated with business combination and investment transactions; the hiring and retention of key employees; assumptions related to pension and other post-retirement costs; expectations and assumptions relating to the execution and timing of restructuring and integration plans; the possibility that the expected benefits of business combination transactions may not materialize as expected; 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, 2010 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 July 31, 2011. 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-K for the fiscal year ended October 31, 2011. In particular, determining HP's actual tax balances and provisions as of October 31, 2011 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-K. HP assumes no obligation and does not intend to update these forward-looking statements.

Copyright 2011 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
                                   ----------------------------------------
                                    October 31,    July 31,     October 31,
                                       2011          2011          2010
                                   ------------  ------------  ------------
Net revenue                        $     32,122  $     31,189  $     33,278
Costs and Expenses:(a)
  Cost of sales                          25,332        23,929        24,995
  Research and development                  829           812           814
  Selling, general and
   administrative                         3,577         3,402         3,464
  Amortization of purchased
   intangible assets                        411           358           424
  Restructuring charges                     179           150           235
  Acquisition-related charges               114            18            51
  Impairment of goodwill and
   purchased intangible assets              885             -             -
                                   ------------  ------------  ------------
    Total costs and expenses             31,327        28,669        29,983
                                   ------------  ------------  ------------
Earnings from operations                    795         2,520         3,295
Interest and other, net                    (401)         (121)          (81)
                                   ------------  ------------  ------------
Earnings before taxes                       394         2,399         3,214
Provision for taxes                         155           473           676
                                   ------------  ------------  ------------
Net earnings                       $        239  $      1,926  $      2,538
                                   ============  ============  ============
Net earnings per share:
  Basic                            $       0.12  $       0.94  $       1.13
  Diluted                          $       0.12  $       0.93  $       1.10
Cash dividends declared per share  $          -  $       0.24  $          -
Weighted-average shares used to
 compute net earnings per share:
  Basic                                   1,989         2,054         2,249
  Diluted                                 2,005         2,080         2,297
(a) In connection with organizational realignments implemented in the first
    quarter of fiscal 2011, certain costs previously reported as Cost of
    Sales have been reclassified as Selling, General and Administrative
    expenses to better align those costs with the functional areas that
    benefit from those expenditures.
                  HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
               CONSOLIDATED CONDENSED STATEMENTS OF EARNINGS
                   (In millions except per share amounts)
                                                     Twelve months ended
                                                         October 31,
                                                 --------------------------
                                                     2011          2010
                                                 ------------  ------------
                                                  (Unaudited)
Net revenue                                      $    127,245  $    126,033
Costs and expenses:(a)
  Cost of sales                                        97,529        95,956
  Research and development                              3,254         2,959
  Selling, general and administrative                  13,466        12,718
  Amortization of purchased intangible assets           1,607         1,484
  Restructuring charges                                   645         1,144
  Acquisition-related charges                             182           293
  Impairment of goodwill and purchased
   intangible assets                                      885             -
                                                 ------------  ------------
    Total costs and expenses                          117,568       114,554
                                                 ------------  ------------
Earnings from operations                                9,677        11,479
Interest and other, net                                  (695)         (505)
                                                 ------------  ------------
Earnings before taxes                                   8,982        10,974
Provision for taxes                                     1,908         2,213
                                                 ------------  ------------
Net earnings                                     $      7,074  $      8,761
                                                 ============  ============
Net earnings per share:
  Basic                                          $       3.38  $       3.78
  Diluted                                        $       3.32  $       3.69
Cash dividends declared per share                $       0.40  $       0.32
Weighted-average shares used to compute net
 earnings per share:
  Basic                                                 2,094         2,319
  Diluted                                               2,128         2,372
(a) In connection with organizational realignments implemented in the first
    quarter of fiscal 2011, certain costs previously reported as Cost of
    Sales have been reclassified as Selling, General and Administrative
    expenses to better align those costs with the functional areas that
    benefit from those expenditures.
                  HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
  ADJUSTMENTS TO GAAP NET REVENUE, NET EARNINGS, EARNINGS FROM OPERATIONS,
                  OPERATING MARGIN AND EARNINGS PER SHARE
                                (Unaudited)
                   (In millions except per share amounts)
                  Three               Three               Three
                  months              months              months
                  ended               ended               ended
                 October   Diluted     July    Diluted   October   Diluted
                   31,     earnings    31,     earnings    31,     earnings
                   2011   per share    2011   per share    2010   per share
                 -------  ---------  -------  ---------  -------  ---------
GAAP net revenue $32,122             $31,189             $33,278
Non GAAP
 adjustment:
  WebOS device
   contra
   revenue,
   net(a)            142                   -                   -
                 -------             -------             -------
Non GAAP net
 revenue         $32,264             $31,189             $33,278
                 =======             =======             =======
GAAP net
 earnings        $   239  $    0.12  $ 1,926  $    0.93  $ 2,538  $    1.10
Non-GAAP
 adjustments:
  Amortization
   of purchased
   intangible
   assets            411       0.20      358       0.17      424       0.19
  Restructuring
   charges           179       0.09      150       0.07      235       0.10
  Acquisition-
   related
   charges in
   earnings from
   operations        114       0.06       18       0.01       51       0.02
  Impairment of
   goodwill and
   purchased
   intangible
   assets(b)         885       0.44        -          -        -          -
  Wind down of
   the WebOS
   device
   business(c)       755       0.38        -          -        -          -
  Acquisition-
   related
   charges in
   interest and
   other, net(d)     276       0.14        -          -        -          -
  Adjustments
   for taxes        (509)     (0.26)    (170)     (0.08)    (184)     (0.08)
                 -------  ---------  -------  ---------  -------  ---------
Non-GAAP net
 earnings        $ 2,350  $    1.17  $ 2,282  $    1.10  $ 3,064  $    1.33
                 =======  =========  =======  =========  =======  =========
GAAP earnings
 from operations $   795             $ 2,520             $ 3,295
Non-GAAP
 adjustments:
  Amortization
   of purchased
   intangible
   assets            411                 358                 424
  Restructuring
   charges           179                 150                 235
  Acquisition-
   related
   charges in
   earnings from
   operations        114                  18                  51
  Impairment of
   goodwill and
   purchased
   intangible
   assets(b)         885                   -                   -
  Wind down of
   the WebOS
   device
   business(c)       755                   -                   -
                 -------             -------             -------
Non-GAAP
 earnings from
 operations      $ 3,139             $ 3,046             $ 4,005
                 =======             =======             =======
GAAP operating
 margin                2%                  8%                 10%
Non-GAAP
 adjustments           8%                  2%                  2%
                 -------             -------             -------
Non-GAAP
 operating
 margin               10%                 10%                 12%
                 =======             =======             =======
(a) Includes contra revenue primarily associated with sales incentive
    programs to wind down the webOS device business, net of current quarter
    webOS device revenue.
(b) Includes impairment charges to goodwill and purchased intangible assets
    associated with the acquisition of Palm Inc. on July 1,2010 recorded as
    a result of the decision announced on August 18,2011 to wind down the
    webOS device business.
(c) Includes primarily expenses for supplier-related obligations and contra
    revenue associated with sales incentive programs related to winding down
    the webOS device business.
(d) Includes primarily the cost of the British pound options bought to limit
    foreign exchange rate risk in connection with the Autonomy acquisition.
                  HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
  ADJUSTMENTS TO GAAP NET REVENUE, NET EARNINGS, EARNINGS FROM OPERATIONS,
                  OPERATING MARGIN AND EARNINGS PER SHARE
                                (Unaudited)
                   (In millions except per share amounts)
                            Twelve                    Twelve
                            months                    months
                            ended       Diluted       ended       Diluted
                         October 31,    earnings   October 31,    earnings
                             2011      per share       2010      per share
                         -----------  -----------  -----------  -----------
GAAP net revenue         $   127,245               $   126,033
Non GAAP adjustment:
  WebOS device contra
   revenue, net(a)               142                         -
                         -----------               -----------
Non GAAP net revenue     $   127,387               $   126,033
                         ===========               ===========
GAAP net earnings        $     7,074  $      3.32  $     8,761  $      3.69
Non-GAAP adjustments:
  Amortization of
   purchased intangible
   assets                      1,607         0.75        1,484         0.63
  Restructuring charges          645         0.30        1,144         0.48
  Acquisition-related
   charges in earnings
   from operations               182         0.09          293         0.12
  Impairment of goodwill
   and purchased
   intangible assets(b)          885         0.42            -            -
  Wind down of the WebOS
   device business(c)            755         0.35            -            -
  Acquisition-related
   charges in interest
   and other, net(d)             276         0.13            -            -
  Adjustments for taxes       (1,045)       (0.48)        (816)       (0.34)
                         -----------  -----------  -----------  -----------
Non-GAAP net earnings    $    10,379  $      4.88  $    10,866  $      4.58
                         ===========  ===========  ===========  ===========
GAAP earnings from
 operations              $     9,677               $    11,479
Non-GAAP adjustments:
  Amortization of
   purchased intangible
   assets                      1,607                     1,484
  Restructuring charges          645                     1,144
  Acquisition-related
   charges in earnings
   from operations               182                       293
  Impairment of goodwill
   and purchased
   intangible assets(b)          885                         -
  Wind down of the WebOS
   device business(c)            755                         -
                         -----------               -----------
Non-GAAP earnings from
 operations              $    13,751               $    14,400
                         ===========               ===========
GAAP operating margin              8%                        9%
Non-GAAP adjustments               3%                        2%
                         -----------               -----------
Non-GAAP operating
 margin                           11%                       11%
                         ===========               ===========
(a) Includes contra revenue primarily associated with sales incentive
    programs to wind down the webOS device business, net of current quarter
    webOS device revenue.
(b) Includes impairment charges to goodwill and purchased intangible assets
    associated with the acquisition of Palm Inc. on July 1,2010 recorded as
    a result of the decision announced on August 18,2011 to wind down the
    webOS device business.
(c) Includes primarily expenses for supplier-related obligations and contra
    revenue associated with sales incentive programs related to winding down
    the webOS device business.
(d) Includes primarily the cost of the British pound options bought to limit
    foreign exchange rate risk in connection with the Autonomy acquisition.
                  HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
                    CONSOLIDATED CONDENSED BALANCE SHEETS
                                (In millions)
                                                  October 31,   October 31,
                                                      2011          2010
                                                 ------------- -------------
                                                  (unaudited)
ASSETS
Current assets:
  Cash and cash equivalents                      $       8,043 $      10,929
  Accounts receivable                                   18,224        18,481
  Financing receivables                                  3,162         2,986
  Inventory                                              7,490         6,466
  Other current assets                                  14,102        15,322
                                                 ------------- -------------
    Total current assets                                51,021        54,184
                                                 ------------- -------------
Property, plant and equipment                           12,292        11,763
Long-term financing receivables and other assets        10,755        12,225
Goodwill and purchased intangible assets                55,449        46,331
                                                 ------------- -------------
Total assets                                     $     129,517 $     124,503
                                                 ============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Notes payable and short-term borrowings        $       8,083 $       7,046
  Accounts payable                                      14,750        14,365
  Employee compensation and benefits                     3,999         4,256
  Taxes on earnings                                      1,048           802
  Deferred revenue                                       7,449         6,727
  Other accrued liabilities                             15,113        16,207
                                                 ------------- -------------
    Total current liabilities                           50,442        49,403
                                                 ------------- -------------
Long-term debt                                          22,551        15,258
Other liabilities                                       17,520        19,061
Stockholders' equity:
  HP stockholders' equity                               38,625        40,449
  Non-controlling interests                                379           332
                                                 ------------- -------------
    Total stockholders' equity                          39,004        40,781
                                                 ------------- -------------
Total liabilities and stockholders' equity       $     129,517 $     124,503
                                                 ============= =============
                  HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
              CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
                                (Unaudited)
                               (In millions)
                                                Three months  Twelve months
                                                   ended          ended
                                                October 31,    October 31,
                                                    2011           2011
                                               -------------  -------------
Cash flows from operating activities:
  Net earnings                                 $         239  $       7,074
  Adjustments to reconcile net earnings to net
   cash provided by operating activities:
    Depreciation and amortization                      1,262          4,984
    Impairment of goodwill and purchased
     intangible assets                                   885            885
    Stock-based compensation expense                     210            685
    Provision for bad debt and inventory                  90            298
    Restructuring charges                                179            645
    Deferred taxes on earnings                          (638)           166
    Excess tax benefit from stock-based
     compensation                                         (3)          (163)
    Other, net                                           156            (46)
    Changes in assets and liabilities:
      Accounts and financing receivables                  (7)          (227)
      Inventory                                         (113)        (1,252)
      Accounts payable                                   153            275
      Taxes on earnings                                  359            610
      Restructuring                                     (252)        (1,002)
      Other assets and liabilities                      (120)          (293)
                                               -------------  -------------
        Net cash provided by operating
         activities                                    2,400         12,639
                                               -------------  -------------
Cash flows from investing activities:
    Investment in property, plant and
     equipment                                        (1,385)        (4,539)
    Proceeds from sale of property, plant and
     equipment                                           217            999
    Purchases of available-for-sale securities
     and other investments                               (96)           (96)
    Maturities and sales of available-for-sale
     securities and other investments                      9             68
    Payments made in connection with business
     acquisitions, net of cash acquired              (10,211)       (10,480)
    Proceeds from business divestiture, net                -             89
                                               -------------  -------------
        Net cash used in investing activities        (11,466)       (13,959)
                                               -------------  -------------
Cash flows from financing activities:
    Issuance (repayment) of commercial paper
     and notes payable, net                              262         (1,270)
    Issuance of debt                                   4,644         11,942
    Payment of debt                                      (65)        (2,336)
    Issuance of common stock under employee
     stock plans                                          51            896
    Repurchase of common stock                          (500)       (10,117)
    Excess tax benefit from stock-based
     compensation                                          3            163
    Dividends                                           (239)          (844)
                                               -------------  -------------
        Net cash provided by (used in)
         financing activities                          4,156         (1,566)
                                               -------------  -------------
Decrease in cash and cash equivalents                 (4,910)        (2,886)
Cash and cash equivalents at beginning of
 period                                               12,953         10,929
                                               -------------  -------------
Cash and cash equivalents at end of period     $       8,043  $       8,043
                                               =============  =============
                  HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
                            SEGMENT INFORMATION
                                (Unaudited)
                               (In millions)
                                              Three months ended
                                   ----------------------------------------
                                    October 31,    July 31,     October 31,
                                       2011          2011          2010
                                   ------------  ------------  ------------
Net revenue:(a)
  Services                         $      9,281  $      9,089  $      9,125
  Enterprise Servers, Storage and
   Networking                             5,655         5,396         5,888
  HP Software                               976           780           763
  Personal Systems Group                 10,118         9,592        10,283
  Imaging and Printing Group              6,321         6,087         6,995
  HP Financial Services                     952           932           809
  Corporate Investments                     (94)          266           135
                                   ------------  ------------  ------------
    Total Segments                       33,209        32,142        33,998
  Eliminations of intersegment net
   revenue and other                     (1,087)         (953)         (720)
                                   ------------  ------------  ------------
    Total HP Consolidated Net
     Revenue                       $     32,122  $     31,189  $     33,278
                                   ============  ============  ============
Earnings from operations:(a)
  Services                         $      1,188  $      1,225  $      1,500
  Enterprise Servers, Storage and
   Networking                               733           699           888
  HP Software                               270           151           261
  Personal Systems Group                    578           567           568
  Imaging and Printing Group                808           892         1,220
  HP Financial Services                      98            88            73
  Corporate Investments                    (903)         (332)         (157)
                                   ------------  ------------  ------------
    Total Segments                        2,772         3,290         4,353
  Corporate and unallocated costs
   and eliminations                        (196)         (114)         (239)
  Unallocated costs related to
   stock-based compensation
   expense                                 (192)         (130)         (109)
  Amortization of purchased
   intangible assets                       (411)         (358)         (424)
  Restructuring charges                    (179)         (150)         (235)
  Acquisition-related charges              (114)          (18)          (51)
  Impairment of goodwill and
   purchased intangible assets             (885)            -             -
  Interest and other, net                  (401)         (121)          (81)
                                   ------------  ------------  ------------
Total HP Consolidated Earnings
 Before Taxes                      $        394  $      2,399  $      3,214
                                   ============  ============  ============
(a) Certain fiscal 2011 organizational reclassifications have been reflected
    retroactively to provide improved visibility and comparability. For each
    of the quarters in fiscal year 2010, the reclassifications resulted in
    the transfer of revenue and operating profit among the Enterprise
    Servers, Storage and Networking, Services, HP Software and Corporate
    Investments financial reporting segments. Reclassifications between
    segments included the transfer of the networking business from Corporate
    Investments to Enterprise Servers, Storage and Networking, the transfer
    of the communications and media solutions business from HP Software to
    Services, and the transfer of the business intelligence business from HP
    Software to Corporate Investments. There was no impact on the previously
    reported financial results for the Personal Systems Group, HP Financial
    Services and Imaging and Printing Group segments.
                  HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
                            SEGMENT INFORMATION
                                (Unaudited)
                               (In millions)
                                                      Twelve months ended
                                                          October 31,
                                                   ------------------------
                                                       2011         2010
                                                   -----------  -----------
Net revenue:(a)
  Services                                         $    35,954  $    35,529
  Enterprise Servers, Storage and Networking            22,241       20,356
  HP Software                                            3,217        2,729
  Personal Systems Group                                39,574       40,741
  Imaging and Printing Group                            25,783       25,764
  HP Financial Services                                  3,596        3,047
  Corporate Investments                                    322          346
                                                   -----------  -----------
    Total Segments                                     130,687      128,512
  Eliminations of intersegment net revenue and
   other                                                (3,442)      (2,479)
                                                   -----------  -----------
    Total HP Consolidated Net Revenue              $   127,245  $   126,033
                                                   ===========  ===========
Earnings from operations:(a)
  Services                                         $     5,149  $     5,661
  Enterprise Servers, Storage and Networking             3,026        2,825
  HP Software                                              698          782
  Personal Systems Group                                 2,350        2,032
  Imaging and Printing Group                             3,973        4,412
  HP Financial Services                                    348          281
  Corporate Investments                                 (1,616)        (366)
                                                   -----------  -----------
    Total Segments                                      13,928       15,627
  Corporate and unallocated costs and eliminations        (314)        (614)
  Unallocated costs related to stock-based
   compensation expense                                   (618)        (613)
  Amortization of purchased intangible assets           (1,607)      (1,484)
  Restructuring charges                                   (645)      (1,144)
  Acquisition-related charges                             (182)        (293)
  Impairment of goodwill and purchased intangible
   assets                                                 (885)           -
  Interest and other, net                                 (695)        (505)
                                                   -----------  -----------
Total HP Consolidated Earnings Before Taxes        $     8,982  $    10,974
                                                   ===========  ===========
(a) Certain fiscal 2011 organizational reclassifications have been reflected
    retroactively to provide improved visibility and comparability. For each
    of the quarters in fiscal year 2010, the reclassifications resulted in
    the transfer of revenue and operating profit among the Enterprise
    Servers, Storage and Networking, Services, HP Software and Corporate
    Investments financial reporting segments. Reclassifications between
    segments included the transfer of the networking business from Corporate
    Investments to Enterprise Servers, Storage and Networking, the transfer
    of the communications and media solutions business from HP Software to
    Services, and the transfer of the business intelligence business from HP
    Software to Corporate Investments. There was no impact on the previously
    reported financial results for the Personal Systems Group, HP Financial
    Services and Imaging and Printing Group segments.
                 HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
                    SEGMENT / BUSINESS UNIT INFORMATION
                                (Unaudited)
                               (In millions)
                                                              Growth rate
                                    Three months ended            (%)
                               ----------------------------  -------------
                                October             October
                                 31,     July 31,    31,
                                 2011      2011      2010     Q/Q     Y/Y
                               --------  --------  --------  -----   -----
Net revenue:(a)
  Services
    Infrastructure Technology
     Outsourcing               $  3,886  $  3,884  $  3,851      0%      1%
    Technology Services           2,810     2,754     2,733      2%      3%
    Application Services          1,798     1,698     1,763      6%      2%
    Business Process
     Outsourcing                    683       658       695      4%     (2%)
    Other                           104        95        83      9%     25%
                               --------  --------  --------
      Total Services              9,281     9,089     9,125      2%      2%
                               --------  --------  --------
  Enterprise Servers, Storage
   and Networking
    Industry Standard Servers     3,384     3,302     3,530      2%     (4%)
    Storage                       1,088       976     1,044     11%      4%
    Business Critical Systems       535       459       695     17%    (23%)
    HP Networking(b)                648       659       619     (2%)     5%
                               --------  --------  --------
      Total Enterprise
       Servers, Storage and
       Networking                 5,655     5,396     5,888      5%     (4%)
                               --------  --------  --------
  HP Software(c)                    976       780       763     25%     28%
                               --------  --------  --------
  Personal Systems Group(d)
    Notebooks                     5,390     5,082     5,623      6%     (4%)
    Desktops                      3,946     3,777     3,928      4%      0%
    Workstations                    593       547       529      8%     12%
    Other                           189       186       203      2%     (7%)
                               --------  --------  --------
      Total Personal Systems
       Group                     10,118     9,592    10,283      5%     (2%)
                               --------  --------  --------
  Imaging and Printing Group
    Supplies                      4,041     4,143     4,707     (2%)   (14%)
    Commercial Hardware           1,596     1,292     1,541     24%      4%
    Consumer Hardware               684       652       747      5%     (8%)
                               --------  --------  --------
      Total Imaging and
       Printing Group             6,321     6,087     6,995      4%    (10%)
                               --------  --------  --------
  HP Financial Services             952       932       809      2%     18%
                               --------  --------  --------
  Corporate Investments             (94)      266       135   (135%)  (170%)
                               --------  --------  --------
    Total Segments               33,209    32,142    33,998      3%     (2%)
                               --------  --------  --------
Eliminations of intersegment
 net revenue and other           (1,087)     (953)     (720)    14%     51%
                               --------  --------  --------
    Total HP Consolidated Net
     Revenue                   $ 32,122  $ 31,189  $ 33,278      3%     (3%)
                               ========  ========  ========
(a) Certain fiscal 2011 organizational reclassifications have been reflected
    retroactively to provide improved visibility and comparability. For each
    of the quarters in fiscal year 2010, the reclassifications resulted in
    the transfer of revenue among the Enterprise Servers, Storage and
    Networking, Services, HP Software and Corporate Investments financial
    reporting segments. Reclassifications between segments included the
    transfer of the networking business from Corporate Investments to
    Enterprise Servers, Storage and Networking, the transfer of the
    communications and media solutions business from HP Software to
    Services, and the transfer of the business intelligence business from HP
    Software to Corporate Investments. In addition, revenue was transferred
    among the business units within the Services and Personal Systems Group
    segments. There was no impact on the previously reported financial
    results for the HP Financial Services and Imaging and Printing Group
    segments or for the business units within the Imaging and Printing Group
    segment.
(b) The networking business was added to the Enterprise Servers, Storage and
    Networking segment in fiscal 2011.
(c) The Business Technology Optimization and Other Software business units
    were consolidated into a single business unit within the HP Software
    segment in fiscal 2011.
(d) The Handhelds business unit, which includes devices that run on Windows
    Mobile software, was reclassified into the Other business unit within
    the Personal Systems Group in fiscal 2011.
                  HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
                    SEGMENT / BUSINESS UNIT INFORMATION
                                (Unaudited)
                               (In millions)
                                                      Twelve months ended
                                                          October 31,
                                                   ------------------------
                                                       2011         2010
                                                   -----------  -----------
Net revenue:(a)
  Services
    Infrastructure Technology Outsourcing          $    15,189  $    14,942
    Technology Services                                 10,879       10,627
    Application Services                                 6,852        6,792
    Business Process Outsourcing                         2,672        2,872
    Other                                                  362          296
                                                   -----------  -----------
      Total Services                                    35,954       35,529
                                                   -----------  -----------
  Enterprise Servers, Storage and Networking
    Industry Standard Servers                           13,521       12,574
    Storage                                              4,056        3,785
    Business Critical Systems                            2,095        2,292
    HP Networking(b)                                     2,569        1,705
                                                   -----------  -----------
      Total Enterprise Servers, Storage and
       Networking                                       22,241       20,356
                                                   -----------  -----------
  HP Software(c)                                         3,217        2,729
                                                   -----------  -----------
  Personal Systems Group(d)
    Notebooks                                           21,319       22,602
    Desktops                                            15,260       15,519
    Workstations                                         2,216        1,786
    Other                                                  779          834
                                                   -----------  -----------
      Total Personal Systems Group                      39,574       40,741
                                                   -----------  -----------
  Imaging and Printing Group
    Supplies                                            17,154       17,249
    Commercial Hardware                                  5,790        5,569
    Consumer Hardware                                    2,839        2,946
                                                   -----------  -----------
      Total Imaging and Printing Group                  25,783       25,764
                                                   -----------  -----------
  HP Financial Services                                  3,596        3,047
                                                   -----------  -----------
  Corporate Investments                                    322          346
                                                   -----------  -----------
    Total Segments                                     130,687      128,512
                                                   -----------  -----------
  Eliminations of intersegment net revenue and
   other                                                (3,442)      (2,479)
                                                   -----------  -----------
    Total HP Consolidated Net Revenue              $   127,245  $   126,033
                                                   ===========  ===========
(a) Certain fiscal 2011 organizational reclassifications have been reflected
    retroactively to provide improved visibility and comparability. For each
    of the quarters in fiscal year 2010, the reclassifications resulted in
    the transfer of revenue among the Enterprise Servers, Storage and
    Networking, Services, HP Software and Corporate Investments financial
    reporting segments. Reclassifications between segments included the
    transfer of the networking business from Corporate Investments to
    Enterprise Servers, Storage and Networking, the transfer of the
    communications and media solutions business from HP Software to
    Services, and the transfer of the business intelligence business from HP
    Software to Corporate Investments. In addition, revenue was transferred
    among the business units within the Services and Personal Systems Group
    segments. There was no impact on the previously reported financial
    results for the HP Financial Services and Imaging and Printing Group
    segments or for the business units within the Imaging and Printing Group
    segment.
(b) The networking business was added to the Enterprise Servers, Storage and
    Networking segment in fiscal 2011.
(c) The Business Technology Optimization and Other Software business units
    were consolidated into a single business unit within the HP Software
    segment in fiscal 2011.
(d) The Handhelds business unit, which includes devices that run on Windows
    Mobile software, was reclassified into the Other business unit within
    the Personal Systems Group in fiscal 2011.
                  HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
               SEGMENT NON-GAAP OPERATING MARGIN SUMMARY DATA
                                (Unaudited)
                               (In millions)
                                      Three months     Change in Operating
                                          ended           Margin (pts)
                                      ------------   ----------------------
                                      October 31,
                                          2011           Y/Y         Q/Q
                                      ------------   ----------  ----------
Non-GAAP Operating Margin:(a)
  Services                                    12.8%    (3.6 pts)   (0.7 pts)
  Enterprise Servers, Storage and
   Networking                                 13.0%    (2.1 pts)    0.0 pts
  HP Software                                 27.7%    (6.5 pts)    8.3 pts
  Personal Systems Group                       5.7%     0.2 pts    (0.2 pts)
  Imaging and Printing Group                  12.8%    (4.6 pts)   (1.9 pts)
  HP Financial Services                       10.3%     1.3 pts     0.9 pts
  Corporate Investments                     (308.3%) (192.0 pts) (183.5 pts)
    Total Segments                            10.6%    (2.2 pts)    0.4 pts
    Total HP Consolidated Non-GAAP
     Operating Margin                          9.7%    (2.3 pts)   (0.1 pts)
(a) Certain fiscal 2011 organizational reclassifications have been reflected
    retroactively to provide improved visibility and comparability. For each
    of the quarters in fiscal year 2010, the reclassifications resulted in
    the transfer of revenue and operating profit among the Enterprise
    Servers, Storage and Networking, Services, HP Software and Corporate
    Investments financial reporting segments.  Reclassifications between
    segments included the transfer of the networking business from Corporate
    Investments to Enterprise Servers, Storage and Networking, the transfer
    of the communications and media solutions business from HP Software to
    Services, and the transfer of the business intelligence business from HP
    Software to Corporate Investments.  There was no impact on the
    previously reported financial results for the Personal Systems Group, HP
    Financial Services and Imaging and Printing Group segments.
                  HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
                    CALCULATION OF NET EARNINGS PER SHARE
                                 (Unaudited)
                   (In millions except per share amounts)
                                                 Three months ended
                                       -------------------------------------
                                       October 31,    July 31,   October 31,
                                           2011         2011         2010
                                       -----------  -----------  -----------
Numerator:
  GAAP net earnings                    $       239  $     1,926  $     2,538
                                       ===========  ===========  ===========
  Non-GAAP net earnings                $     2,350  $     2,282  $     3,064
                                       ===========  ===========  ===========
Denominator:
  Weighted-average shares used to
   compute basic EPS                         1,989        2,054        2,249
  Dilutive effect of employee stock
   plans                                        16           26           48
                                       -----------  -----------  -----------
  Weighted-average shares used to
   compute diluted EPS                       2,005        2,080        2,297
                                       ===========  ===========  ===========
GAAP net earnings per share:
  Basic(a)                             $      0.12  $      0.94  $      1.13
  Diluted(c)                           $      0.12  $      0.93  $      1.10
Non-GAAP net earnings per share:
  Basic(b)                             $      1.18  $      1.11  $      1.36
  Diluted(c)                           $      1.17  $      1.10  $      1.33
(a) GAAP basic earnings per share were calculated based on GAAP net earnings
    and the weighted-average number of shares outstanding during the
    reporting period.
(b) Non-GAAP basic earnings per share were calculated based on non-GAAP net
    earnings and the weighted-average number of shares outstanding during
    the reporting period.
(c) Diluted net 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)
                                                        Twelve months ended
                                                            October 31,
                                                      ----------------------
                                                         2011        2010
                                                      ----------  ----------
Numerator:
  GAAP net earnings                                   $    7,074  $    8,761
                                                      ==========  ==========
  Non-GAAP net earnings                               $   10,379  $   10,866
                                                      ==========  ==========
Denominator:
  Weighted-average shares used to compute basic EPS        2,094       2,319
  Dilutive effect of employee stock plans                     34          53
                                                      ----------  ----------
  Weighted-average shares used to compute diluted EPS      2,128       2,372
                                                      ==========  ==========
GAAP net earnings per share:
  Basic(a)                                            $     3.38  $     3.78
  Diluted(c)                                          $     3.32  $     3.69
Non-GAAP net earnings per share:
  Basic(b)                                            $     4.96  $     4.69
  Diluted(c)                                          $     4.88  $     4.58
(a) GAAP basic earnings per share were calculated based on GAAP net earnings
    and the weighted-average number of shares outstanding during the
    reporting period.
(b) Non-GAAP basic earnings per share were calculated based on non-GAAP net
    earnings and the weighted-average number of shares outstanding during
    the reporting period.
(c) Diluted net 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 net revenue, non-GAAP operating profit, non-GAAP operating margin, non-GAAP net earnings, non-GAAP diluted earnings per share, gross cash and free cash flow. 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 net revenue is net revenue. The GAAP measure most directly comparable to non-GAAP operating profit is earnings from operations. The GAAP measure most directly comparable to non-GAAP operating margin is operating margin. The GAAP measure most directly comparable to non-GAAP net earnings is net earnings. The GAAP measure most directly comparable to non-GAAP diluted earnings per share is diluted net earnings per share. The GAAP measure most directly comparable to gross cash is cash and cash equivalents. The GAAP measure most directly comparable to free cash flow is cash flow from operations. 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 net revenue reflects the elimination of contra revenue associated with sales incentive programs implemented in the fourth fiscal quarter of 2011 in connection with the wind down of HP's webOS device business, net of webOS device revenue for the period. Non-GAAP operating profit and non-GAAP operating margin are defined to exclude the effects of any restructuring charges, charges relating to the impairment of goodwill and purchased intangible assets, charges relating to the amortization of purchased intangible assets, and acquisition-related charges recorded during the relevant period. Non-GAAP net earnings and non-GAAP diluted earnings per share consist of net earnings or diluted net earnings per share excluding those same charges. In addition, non-GAAP net earnings and non-GAAP diluted earnings per share are adjusted by the amount of additional taxes or tax benefit associated with each non-GAAP item. HP's management uses these non-GAAP financial measures for purposes of evaluating HP's historical and prospective financial performance, as well as HP's performance relative to its competitors. HP's management also uses these non-GAAP measures to further its own understanding of HP's segment operating performance. HP believes that excluding those items mentioned above from these non-GAAP financial measures allows HP management to better understand HP's consolidated financial performance in relationship to the operating results of HP's segments, as management does not believe that the excluded items are reflective of ongoing operating results. More specifically, HP's management excludes each of those items mentioned above for the following reasons:

  • In the fourth quarter of fiscal 2011, HP announced that it would wind down its WebOS device business. Non-GAAP net revenue reflects the elimination of contra revenue associated with sales incentive programs implemented connection with the wind down of that business, net of WebOS device revenue for the period. Because the winding down of HP businesses is inconsistent in amount and frequency, HP believes that eliminating these amounts for purposes of calculating non-GAAP net revenue facilitates a more meaningful evaluation of HP's current operating performance and comparisons to HP's past and future operating performance.
  • Goodwill is the excess of the purchase price of acquired companies over the estimated fair value of the tangible and intangible assets acquired and liabilities assumed. Purchased intangible assets consist primarily of customer contracts, customer lists, distribution agreements, technology patents, and products, trademarks and trade names purchased in connection with acquisitions. In the fourth quarter of fiscal 2011, HP recorded impairment charges to goodwill and certain intangible assets associated with the acquisition of Palm Inc. The charges relate to HP's decision to wind-down the WebOS device business. Impairment charges are inconsistent in amount and frequency. HP excludes these charges for purposes of calculating these non-GAAP measures to facilitate a more meaningful evaluation of HP's current operating performance and comparisons to HP's past and future operating performance.
  • HP incurs charges relating to the amortization of purchased intangibles. HP also incurs charges relating to the amortization of amounts assigned to intangible assets to be used in research and development projects. All of those charges are included in HP's GAAP presentation of earnings from operations, operating margin, net earnings and net earnings per share. Such charges are inconsistent in amount and frequency and are significantly impacted by the timing and magnitude of HP's acquisitions. Consequently, HP excludes these charges for purposes of calculating these non-GAAP measures to facilitate a more meaningful evaluation of HP's current operating performance and comparisons to HP's past and future operating performance.
  • Restructuring charges consist of costs associated with a formal restructuring plan and are primarily related to (i) employee termination costs and benefits, and (ii) costs to vacate duplicative facilities. HP excludes these restructuring costs (and any reversals of charges recorded in prior periods) for purposes of calculating these non-GAAP measures because it believes that these historical costs do not reflect expected future operating expenses and do not contribute to a meaningful evaluation of HP's current operating performance or comparisons to HP's past and future operating performance.
  • HP incurs costs related to its acquisitions, most of which are treated as non-capitalized expenses. Because non-capitalized, acquisition-related expenses are inconsistent in amount and frequency and are significantly impacted by the timing and nature of HP's acquisitions, HP believes that eliminating the non-capitalized expenses for purposes of calculating these non-GAAP measures facilitates a more meaningful evaluation of HP's current operating performance and comparisons to HP's past and future operating performance.

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

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 net revenue, non-GAAP operating profit, non-GAAP operating margin, non-GAAP net earnings, non-GAAP diluted earnings per share, gross cash and free cash flow 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 net revenue, non-GAAP operating profit, non-GAAP operating margin, non-GAAP net earnings, non-GAAP diluted earnings per share, gross cash and free cash flow 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 net revenue, non-GAAP operating profit, non-GAAP operating margin, non-GAAP net earnings, non-GAAP diluted earnings per share, gross cash and free cash flow 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