Impact of tax reform on HP in 1Q18
During 1Q18, HP (HPQ) earned non-GAAP earnings of $0.48 billion, which increased from the year-ago quarter by $0.10 per share. The 1Q18 earnings included one-time income tax gains of $0.04 per share associated with the tax provision due to the revision in the US federal tax reform legislation.
Adjusting for the tax reform benefit, HP’s earnings increased 16% year-over-year (or YoY) to $0.44 in the first quarter. Tax-adjusted earnings of $0.44 came in above the previously guided range of $0.40 to $0.43 per share.
US tax reforms
The recently approved US Tax Cuts and Job Act changed the corporate tax structure. According to the new tax reform announced in December 2017, the corporate tax has been reduced to 21% from 35%. The US government has also imposed a one-time repatriation tax of 15.5% on cash held abroad and an 8% tax on non-cash assets.
The reduction in tax rates has supported many large companies that have kept their cash overseas to avoid paying high taxes in the US. These companies can now bring back their cash holdings from abroad and invest in the US. The change in the tax structure is expected to help boost the US economy, raise wages, and increase jobs.
HP has also booked a gross repatriation charge of $3.2 billion in fiscal 1Q18 that will be paid over an eight-year schedule. HP expects the actual cash payments to be lower, as the firm will reduce the overall liability by over 50%.
Peer NetApp (NTAP) incurred a one-time charge of $856 million, which was included in the third quarter of fiscal 2018. On the other hand, Hewlett Packard Enterprise (HPE) plans to offer tax-reform-based incentives to its employees.
The tax rate in fiscal 2018
HP expects the tax rate in fiscal 1Q18 to be around 16%, much lower than the previously guided range of 21% to 22%, owing to changes in the tax structure. The company expects to see a net benefit of approximately $0.10 from tax provisions in fiscal 2018.