____________________________________________________________
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 1995
Commission File Number 1-9026
COMPAQ COMPUTER CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 76-0011617
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
20555 SH 249, Houston, Texas 77070
(713) 370-0670
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes [ x ] No [ ]
The number of shares of the registrant's Common Stock, $.01 par value,
outstanding as of June 30, 1995, was 264.2 million.
____________________________________________________________
<PAGE>
Page 1
P A R T I. FINANCIAL INFORMATION
Item 1. Financial Statements
COMPAQ COMPUTER CORPORATION
CONSOLIDATED BALANCE SHEET
(Unaudited)
ASSETS
June 30, December 31,
1995 1994
--------------------
(in millions)
Current assets:
Cash and cash equivalents $ 992 $ 471
Accounts receivable, net 2,589 2,287
Inventories 2,036 2,005
Deferred income taxes 303 303
Prepaid expenses and other current assets 158 92
--------------------
Total current assets 6,078 5,158
Property, plant, and equipment,
less accumulated depreciation 1,003 944
Other assets 52 64
--------------------
$ 7,133 $ 6,166
====================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,174 $ 888
Income taxes payable 268 246
Other current liabilities 1,034 879
--------------------
Total current liabilities 2,476 2,013
--------------------
Long-term debt 300 300
--------------------
Deferred income taxes 179 179
--------------------
Stockholders' equity:-
Preferred stock, $.01 par value
(authorized: 10 million shares; issued: none)
Common stock and capital in excess of $.01 par value
(authorized: 1 billion shares; issued and
outstanding: 264.2 million shares at June 30, 1995
and 261.0 million shares at December 31, 1994) 781 739
Retained earnings 3,397 2,935
--------------------
Total stockholders' equity 4,178 3,674
--------------------
$ 7,133 $ 6,166
====================
See accompanying notes to consolidated financial data
<PAGE>
Page 2
COMPAQ COMPUTER CORPORATION
CONSOLIDATED STATEMENT OF INCOME
(Unaudited)
Six months ended Quarter ended
June 30, June 30,
1995 1994 1995 1994
----------------------------------------
(in millions, except per share amounts)
Sales $ 6,460 $ 4,777 $ 3,501 $ 2,499
Cost of sales 4,910 3,497 2,675 1,836
----------------------------------------
1,550 1,280 826 663
----------------------------------------
Research and development costs 124 107 64 54
Selling, general, and
administrative expense 719 557 391 303
Other income and expense, net 66 44 30 22
----------------------------------------
909 708 485 379
----------------------------------------
Income before provision
for income taxes 641 572 341 284
Provision for income taxes 179 149 95 74
----------------------------------------
Net income $ 462 $ 423 $ 246 $ 210
========================================
Earnings per common and
common equivalent share:
Primary $ 1.70 $ 1.58 $ 0.90 $ 0.78
========================================
Assuming full dilution $ 1.69 $ 1.58 $ 0.90 $ 0.78
========================================
Shares used in computing
earnings per common and
common equivalent share:
Primary 271.6 267.4 272.2 268.6
========================================
Assuming full dilution 272.8 267.8 273.1 268.6
========================================
See accompanying notes to consolidated financial data
<PAGE>
Page 3
COMPAQ COMPUTER CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
Six months ended
June 30,
1995 1994
-------------------
(in millions)
Cash flows from operating activities:
Cash received from customers $ 6,236 $ 4,371
Cash paid to suppliers and employees (5,367) (4,549)
Interest and dividends received 20 13
Interest paid (49) (28)
Income taxes paid (163) (46)
-------------------
Net cash provided by (used in) operating activities 677 (239)
-------------------
Cash flows from investing activities:
Purchases of property, plant, and equipment, net (177) (149)
Purchases of short-term investments (69)
Maturities of short-term investments 12
Other, net 13 (40)
-------------------
Net cash used in investing activities (164) (246)
-------------------
Cash flows from financing activities:
Proceeds from sale of equity securities 42 60
Issuance of long-term debt 300
-------------------
Net cash provided by financing activities 42 360
-------------------
Effect of exchange rate changes on cash (34) 14
-------------------
Net increase (decrease) in cash and cash equivalents 521 (111)
Cash and cash equivalents at beginning of period 471 627
-------------------
Cash and cash equivalents at end of period $ 992 $ 516
===================
Reconciliation of net income to net cash provided by
(used in) operating activities:
Net income $ 462 $ 423
Depreciation and amortization 103 78
Provision for bad debts 9 29
Deferred income taxes 3
Currency exchange losses 33 23
Increase in accounts receivable (249) (410)
Increase in inventories (30) (1,118)
Increase in prepaid expenses and
other current assets (65) (19)
Increase in accounts payable 281 494
Increase in income taxes payable 17 100
Increase in other current liabilities 116 158
-------------------
Net cash provided by (used in) operating activities $ 677 $ (239)
===================
See accompanying notes to consolidated financial data
<PAGE>
Page 4
COMPAQ COMPUTER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL DATA
Note 1 - Basis of presentation
The accompanying unaudited financial data as of June 30, 1995 and December
31, 1994 and for the six month periods ended June 30, 1995 and 1994 have
been prepared on substantially the same basis as the annual consolidated
financial statements. In the opinion of the Company, the data reflect all
adjustments, consisting only of normal recurring adjustments, necessary for
a fair presentation of the results for those periods and the financial
condition at those dates.
Note 2 - Inventories
Inventories consisted of the following components:
June 30, December 31,
1995 1994
------------------------
(in millions)
Raw materials $ 646 $ 1,013
Work-in-process 300 266
Finished goods 1,090 726
------------------------
$ 2,036 $ 2,005
========================
Note 3 - Other income and expense
Other income and expense consisted of the following components:
Six months ended Quarter ended
June 30, June 30,
1995 1994 1995 1994
-------------------------------
(in millions)
Interest and dividend income $ (20) $ (13) $ (10) $ (7)
Interest expense associated
with hedging 11 7 5 3
Other interest expense 37 27 23 14
Currency exchange losses, net 33 23 9 14
Other, net 5 3 (2)
--------------------------------
$ 66 $ 44 $ 30 $ 22
================================
<PAGE>
Page 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
The following discussion should be read in conjunction with
the consolidated interim financial statements.
Results of Operations
The following table presents, as a percentage of sales,
certain selected financial data for the six months and
quarters ended June 30, 1995 and 1994.
Six months ended Quarter ended
June 30, June 30,
1995 1994 1995 1994
---------------------------------
Sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 76.0 73.2 76.4 73.4
---------------------------------
Gross margin 24.0 26.8 23.6 26.6
---------------------------------
Research and development costs 1.9 2.2 1.8 2.2
Selling, general, and administrative expense 11.1 11.7 11.2 12.1
Other income and expense, net 1.1 .9 .9 .9
---------------------------------
14.1 14.8 13.9 15.2
---------------------------------
Income before provision for income taxes 9.9% 12.0% 9.7% 11.4%
=================================
Sales
Sales increased 40% and 35% in the second quarter and
first half of 1995, respectively, over the comparable
periods of 1994, and 18% over the first quarter of 1995.
European sales represented 37% and 38% of total sales in the
second quarter and first half of 1995, respectively, as
compared with 32% and 34% in the corresponding periods of
1994. Other international sales, excluding Canada,
represented 16% and 15% of the total sales in the second
quarter and first half of 1995 as compared with 16% and 13%
in the comparable periods of 1994.
The Company's significant increase in consolidated
sales in the second quarter stemmed primarily from an
increase in the number of units sold. Total computer unit
sales increased approximately 16% in the second quarter of
1995 over the comparable period of 1994. Unit sales growth
resulted primarily from the Company's aggressively priced
Compaq ProLinea and Presario desktop products, the Compaq
Contura and LTE Elite portable computers, and the Compaq
Proliant tower system products. During the first half of
1995, the Company carried out a major product transition.
During the second quarter it announced twelve new Presario
products, including Pentium-based models, added new Intel
120-megahertz Pentium models to its Deskpro XL family, and
introduced the ProLiant 4500, its most powerful server
product.
The personal computer industry is highly competitive
and marked by frequent product introductions, continual
improvement in product price/performance characteristics,
and a large number of competitors. Approximately 70% of the
Company's CPU sales in the second quarter of 1995 were
derived from products introduced in 1995. These new
products have been designed to allow the Company to achieve
low product costs while offering high performance computers
and the quality and reliability for which the Company's
products have been known, thereby increasing the Company's
ability to compete on price and value. Although the
Company's growth in sales dollars exceeded unit sales growth
for second quarter 1995 when compared to second quarter
1994, the difference is largely attributable to favorable
currency fluctuations, a higher component of options sales,
and a favorable mix of systems products, partially offset by
an unfavorable mix of consumer products and increased sales
promotions. Competition will continue to have a significant
impact on prices of the Company's products, and additional
pricing actions are likely to occur as the Company attempts
to maintain its competitive position in terms of price and
performance characteristics and customer support services.
<PAGE>
Page 6
Gross Margin
Gross margin as a percentage of sales fell to 23.6% and
24.0% in the second quarter and first half of 1995,
respectively, compared to 26.6% and 26.8% in the second
quarter and first half of 1994, while it declined from 24.5%
in the first quarter of 1995. The decline in margins
primarily resulted from unfavorable product mix, in
particular a higher contribution of consumer products that
generally carry lower margins, costs associated with product
transitions, and a generally more aggressive pricing
environment, partially offset by favorable currency
fluctuations and a favorable mix of systems products. The
Company believes that an aggressive pricing environment will
continue throughout 1995, placing pressure on the Company's
gross margins. The Company maintains a strategy designed to
increase its market share and to expand its presence in the
price sensitive consumer market segment. This strategy,
along with the expectation of a continued aggressive pricing
environment and anticipated pricing actions with respect to
certain older products, will continue to put pressure on the
Company's gross margins. The Company attempts to mitigate
the effect of pricing actions through implementation of
effective design to cost goals, the aggressive pursuit of
reduced component costs, manufacturing efficiencies, control
of operating expenses, and growth of its higher margin
businesses such as its systems and options products.
Operating Expenses
The Company strives to manage total operating expenses
in line with sales growth and gross margin levels. Research
and development costs increased 19% and 16% in absolute
dollars in the second quarter and first half of 1995,
respectively, as compared with the corresponding periods of
1994, while declining slightly as a percentage of sales.
The Company is committed to continuing a significant
research and development program and research and
development costs are likely to increase in absolute dollars
in the remaining quarters of 1995.
Selling, general, and administrative expense increased
in amount while declining as a percentage of sales in the
second quarter and first half of 1995 as compared with the
same periods of 1994. The increase in expenses resulted
from domestic and international selling expense associated
with higher unit volumes as well as expense incurred in
connection with the introduction of new products, increased
advertising, the entry into new markets, and the expansion
of distribution channels. The Company anticipates that in
the remainder of 1995, selling, general, and administrative
expense will increase in absolute dollars as it supports
significant new product introductions, steps up its
advertising and promotion programs, expands into new
markets, and increases its investment in the area of service
and support, especially in support of its systems business.
Other Items
Other income and expense in the second quarter of 1995
was an expense of $30 million. In the second quarter of
1995 compared to the corresponding period of 1994, the
Company experienced a higher net interest expense in
absolute dollars as a result of short-term borrowing in
Brazil to finance and hedge the Company's manufacturing and
sales operations in that country.
The translation gains and losses relating to the
financial statements of the Company's international
subsidiaries, net of offsetting gains and losses associated
with hedging activities related to the net monetary assets
of these subsidiaries, are included in other income and
expense and were a net loss of $9 million in the second
quarter of 1995, compared to a net loss of $14 million in
the second quarter of 1994.
Provision for Income Taxes
The Company estimates the effective tax rate for 1995
will be 28%, an increase from 26% in 1994. The increase
from 1994 is primarily attributable to a decline in the
ratio of earnings derived from the Company's Singaporean
manufacturing subsidiary to total earnings. The Company's
tax rate is heavily dependent upon the mix of earnings of
its Singaporean manufacturing subsidiary due to a tax
holiday granted by the Singaporean authorities
<PAGE>
Page 7
on manufacturing income generated by this subsidiary. This
holiday is effective through August 2001 with the potential
for extension through August 2004 if certain cumulative
investment levels and other conditions are met. The Company
does not provide tax on these earnings, based on its
decision to invest a majority of the undistributed
earnings of this subsidiary indefinitely in operations
outside the United States, which lowers its effective tax rate.
These earnings would become subject to U.S. tax if they were
actually or deemed to be remitted to the Company as dividends
or if the Company should sell its stock in this subsidiary.
Liquidity and Capital Resources
At June 30, 1995, the Company had working capital of
approximately $3.6 billion compared to $3.1 billion at
December 31, 1994.
The Company's cash and cash equivalents increased to
$992 million at June 30, 1995, from $471 million at December
31, 1994, primarily because of positive cash flow from
operating activities. Accounts receivable increased to $2.6
billion at June 30, 1995, from $2.3 billion at December 31,
1994, as a result of higher sales levels and an increase in
days sales outstanding of receivables. Receivable days of
67 at June 30, 1995, are higher than comparable periods in
1994 due to the Company's expanding presence in emerging
markets, particularly in China and Latin America. In the
event that days sales outstanding significantly lengthen,
the Company's cash could be adversely affected. Inventory
levels of $2.0 billion were relatively flat with December
31, 1994, and down from $2.1 billion at March 31, 1995.
Cash used in the first half of 1995 for the purchase of
property, plant, and equipment totaled $177 million,
including $93 million in the second quarter. The Company
estimates that capital expenditures for land, buildings, and
equipment during the remainder of 1995 will be approximately
$200 million. The Company has commitments for only a small
portion of such amounts and the actual level of spending
will depend on a variety of factors, including general
economic conditions and the Company's business.
The Company currently expects to fund expenditures for
capital requirements as well as liquidity needs created by
changes in working capital from a combination of available
cash balances, internally generated funds, and financing
arrangements. The Company from time to time may borrow
funds for actual or anticipated funding needs or because it
is economically beneficial to borrow funds for the Company's
needs instead of repatriating funds in the form of dividends
from its foreign subsidiaries. The Company has a $300
million syndicated credit facility, which expires in July
1997 and remains unused as of June 30, 1995. The Company
has established a commercial paper program, which is
supported by the syndicated credit facility. This program,
which provides the Company with additional sources of
working capital, remains unused as of June 30, 1995. In the
U.S. and various international locations the Company has
uncommitted bank lines of credit, of which $70 million was
outstanding at the end of the quarter. The Company had a
$200 million syndicated credit facility that expired in July
1995, which the Company is in the process of renewing. The
Company believes that these sources of credit provide
sufficient financial flexibility to meet future funding
requirements. The Company continually evaluates the need to
establish other sources of working capital and will pursue
those it considers appropriate based upon Company needs and
market conditions.
Factors that May Affect Future Results
The Company participates in a highly volatile industry
that is characterized by fierce industry-wide competition
for market share resulting in aggressive pricing practices,
continually changing customer demand patterns, growing
competition from well capitalized high technology and
consumer electronics companies, and rapid technological
development carried out in the midst of legal battles over
intellectual property rights. The Company's operating
results could be adversely affected should the Company be
unable to anticipate customer requirements accurately, to
maintain short design cycles while meeting evolving industry
performance standards, to manage its product transitions,
inventory levels, and manufacturing processes efficiently,
to distribute its products quickly in response to customer
demand, or to differentiate its products from those of its
competitors.
<PAGE>
Page 8
In recent quarters the Company has made significant
investments in inventory to support higher sales. The
Company expects the PC market to continue to expand
significantly in the remainder of 1995 and is putting in
place programs and products focused on expanding its market
share. In the remainder of 1995 the Company anticipates
that its inventory turns will improve as it implements
various reengineering programs and completes a major product
transition; however, in the event of a drop in worldwide
demand for PC products, lower than anticipated demand for
one or more of the Company's products, or a delay in
reengineering implementation, there could be an adverse
impact on inventory, cash, and related profitability.
In order to maintain or increase its market share, the
Company must continue to price its products competitively
and from time to time may use various incentive programs to
increase sales. Some of these strategies lower the average
sales price per unit and may cause declines in gross margin
and profitability. Other sales incentives increase
operating expenses and may lower profitability. To
compensate for the impact of reduced prices and sales
incentives on its sales, gross margins, and profitability,
the Company must increase unit shipments, especially of its
high end system products and options, aggressively reduce
costs, and maintain tight control over operating expenses.
In the third quarter of 1995 the Company confronts the
challenge of managing the inventory of its older products as
it increases sales of its newer PCs. If the Company is not
able to sell its inventory of older products at anticipated
prices, there could be an adverse impact on sales, gross
margins, and profitability.
The Company continues to expand manufacturing and
distribution capacity as well as reengineer its internal
processes to support continued growth. During 1995 the
Company is focusing on making its business processes more
efficient in order to increase customer satisfaction,
improve productivity, and lower costs. In connection with
these efforts the Company will move many of its systems from
a legacy environment of proprietary systems to client-server
architectures. As the Company has grown it has outstripped
the ability of certain of its systems to support continued
expansion. Should the Company's transition to new systems
not occur in a smooth and orderly manner, the Company could
experience disruptions in the operations of its business,
which could have an adverse financial impact.
Competition for PC market share remains fierce. A
number of the Company's suppliers also manufacture and
market PCs or motherboards, which contain the microprocessor
and other internal operating components of the PC. Several
of the Company's competitors have recently announced plans
to increase their PC market shares. In addition, a number
of large consumer electronics companies are likely to enter
the PC market as it expands into the consumer sector. Each
of these companies may be willing to accept lower profit
margins to win market share.
Because of the pace of technological advances in the
personal computer industry, the Company must introduce on a
timely basis new products that offer customers competitive
technologies while managing the production and marketing
cycles of its existing products. The forecast of demand for
newly introduced products is complicated by the availability
of different product models, which may include various types
of built-in peripherals and software, and the configuration
requirements in certain markets, such as language. As a
result, while overall demand may be in line with the
Company's projections and manufacturing implementation,
local market variations can lead to differences between
expected and actual demand and resulting delays in shipment,
which can affect the Company's financial results.
In managing production levels, product transitions, and
developments in microprocessor and other component
technology, the Company must develop and implement effective
strategies that anticipate availability and pricing by
suppliers as well as forecast customer demand for its
products. The Company attempts to select suppliers that can
provide sufficient and timely supplies of high quality
material. There can be no assurance, however, that the
Company will acquire sufficient supplies of components,
including microprocessors, to deliver its products in volume
in response to shifts in customer demand. In addition,
certain of the Company's future products will be
manufactured by third party original equipment
manufacturers, which could fail to respond in a timely
manner to the Company's purchase orders or could fail to
meet the Company's quality standards. The Company attempts
to maintain tight control over production by third party
original equipment manufacturers to ensure that these
products will comply with its standards and schedule.
<PAGE>
Page 9
The Company continually evaluates its key component and
software content strategies to position its products in the
market. Although the Company designs many of its own
product components, across the Company's full product range
significant elements of strategy are dependent on
technological developments by third parties. Participants
in the PC industry traditionally rely on the creation and
implementation of technology standards to win the broadest
market acceptance for their products. Competitors of
companies whose products have become standard in the
industry may claim that such products violate the law in
some manner. In 1995 certain competitors of Microsoft
Corporation have argued that one or more features of
Microsoft Windows95 violate antitrust laws and these claims
have been investigated by the U.S. Department of Justice.
While the Department of Justice has announced that it will
take no action against Microsoft prior to the introduction
of Windows95, the investigation continues. If as a result
of further legal proceedings a court were to enjoin the
distribution of Windows95 in its current form, the personal
computer industry could experience delays in shipping
products containing such software.
The Company must successfully manage and participate in
the development of standards while continuing to
differentiate its products in a manner valued by customers.
A number of industry participants are expanding their
efforts to win a competitive advantage by securing
intellectual property rights to components and software
adopted as standards in PC products. To minimize the impact
on the Company of intellectual property claims by third
parties, the Company pursues an active patent portfolio
development plan. While industry participants generally
accept, and may encourage, the use of their intellectual
property by third parties under license, when intellectual
property owned by competitors or suppliers becomes accepted
as an industry standard, the Company must purchase
components utilizing such technology from the owners of such
technology or their licensees or must otherwise acquire
rights to use such technology, which could result in
increased Company costs. In addition, delays in access to
technology developed by competitors and suppliers could slow
down the Company's design and manufacture of components and
subsystems that distinguish its products.
Because of rapid technological changes in the computer
industry, extensive patent and copyright coverage, and the
rapid establishment of new copyright and patent rights,
certain components of the Company's products designed by the
Company or purchased from third parties may unknowingly
infringe intellectual property rights of others. The
Company believes, based in part on industry practices, that
if any infringements do exist, the Company will be able to
modify its products to avoid infringement, obtain components
that do not infringe, or obtain licenses or rights to such
intellectual property on terms not having a material adverse
effect on the Company. There can be no assurance, however,
that the Company will be able to ensure that component
supplies and the cost of components are not adversely
affected by legal proceedings in which an adverse
determination is made with respect to intellectual property
rights.
During the second quarter of 1995, the Company
continued to broaden its product distribution. Offering its
products in an increasing number of geographic locations and
through a variety of distribution channels, including
dealers, distributors, mail order, mass merchandise stores,
consumer electronic outlets, and computer superstores,
requires the Company to increase its geographic presence and
to provide increased levels of sales and support interface
with customers. There can be no assurance, however, that
the requisite service and support to ensure the success of
the Company's operations in new locations or through new
channels can be achieved in a cost effective manner. While
the Company anticipates that its geographic expansion will
continue and the number of outlets for its products will
continue to increase in the remainder of 1995, a reduction
in the pace of this growth could affect sales and
profitability. Geographic expansion, particularly the
expansion of manufacturing operations in developing
countries, such as Brazil and China, and the expansion of
sales into economically and politically volatile areas such
as Latin America, Eastern Europe, Hong Kong, and China also
subjects the Company to a number of economic and other
risks, such as currency devaluation, expropriation, and
related financial instability among resellers in these
regions. The Company continues to evaluate its business
operations in these regions and attempts to take appropriate
measures to limit its risks in these areas.
The Company's primary means of distribution remains
third-party resellers. The Company continuously monitors
and manages the credit it extends to resellers and attempts
to limit credit risks by broadening its distribution
channels, utilizing certain risk transfer instruments, and
obtaining security interests in property owned by its
debtors. The Company's business could be adversely affected
in the event that the financial condition of
<PAGE>
Page 10
third-party computer resellers worsens. Upon the financial failure
of a major reseller, the Company could experience disruptions in
its distribution as well as the loss of the unsecured
portion of any outstanding accounts receivable. The Company
generally has experienced longer accounts receivable cycles
in its emerging markets, in particular Latin America and
China, when compared to its U.S. and European markets. In
the event that accounts receivable cycles in these
developing markets lengthen further or one or more of the
Company's larger resellers in these regions fail, the
Company could be adversely affected.
The value of the U.S. dollar continues to affect the
Company's financial results. The functional currency for
the Company's international subsidiaries is the U.S. dollar.
When the U.S. dollar strengthens against other currencies,
sales made in those currencies translate into lower sales in
U.S. dollars; and when the U.S. dollar weakens, sales made
in local currencies translate into higher sales in U.S.
dollars. Correspondingly, costs and expenses incurred in
non-U.S. dollar currencies increase when the U.S. dollar
weakens and decline when the U.S. dollar strengthens.
Accordingly, changes in exchange rates may positively or
negatively affect the Company's sales (as expressed in U.S.
dollars), gross margins, and operating expenses, and the
Company's results of operations can be significantly
affected in the short term by fluctuations in foreign
currency exchange rates. The Company engages in hedging
programs aimed at limiting in part the impact of currency
fluctuations. Through these programs the Company hedges its
non-U.S. dollar net monetary assets and its Japanese yen
denominated purchase commitments primarily through the use
of forward exchange and option contracts. From time to time
the Company also purchases foreign currency option contracts
as well as short-term forward exchange contracts to protect
against currency exchange risks associated with the
anticipated sales of its international marketing
subsidiaries, principally in Europe. These instruments
provide only limited protection against currency exchange
risks. The Company varies the percentage of anticipated
sales that it attempts to protect against currency exchange
risks based upon its judgment of currency markets and the
costs of these instruments, and in some markets,
particularly in developing areas, the Company's ability to
utilize such instruments is limited. If the Company
overestimates the hedging amount needed to protect
anticipated sales during a period in which the dollar
weakens, the Company could incur a significant expense that
would not be balanced by the impact of favorable exchange
rates on sales. All currency contracts that are entered
into by the Company are components of its hedging programs
and are entered into for the sole purpose of hedging an
existing or anticipated currency exposure, not for
speculation. Although the Company maintains these programs
to reduce the impact of changes in currency exchange rates,
when the U.S. dollar sustains a strengthening position
against currencies in which the Company sells its products
or a weakening exchange rate against currencies in which the
Company incurs costs, particularly the Japanese yen, the
Company's sales or its costs are adversely affected.
The Company's tax rate is heavily dependent upon the
proportion of earnings that are derived from its Singaporean
manufacturing subsidiary and its ability to reinvest those
earnings permanently outside the U.S. If the earnings of
this subsidiary as a percentage of the Company's total
earnings were to decline, or should the Company's ability to
reinvest these earnings be reduced, the Company's tax rate
would likely increase beyond the estimated 28%. In
addition, should the Company's intercompany transfer pricing
with respect to its Singaporean manufacturing subsidiary
require significant adjustment due to audits or regulatory
changes, the Company's overall tax rate could increase.
General economic conditions have an impact on the
Company's business and financial results. From time to time
the markets in which the Company sells its products
experience weak economic conditions that may negatively
affect sales of the Company's products. Although the
Company does not consider its business to be highly
seasonal, it has experienced seasonally higher sales and
earnings in the fourth quarter of the year. The continued
expansion of its retail business is likely to result in the
increased seasonality of the Company's business,
particularly in the second half of the year, and its
financial results being more dependent on retail business
fluctuations.
Certain of the Company's facilities, including its
European distribution center in Gorinchem, The Netherlands,
and critical suppliers are located in areas that are at risk
for natural disasters such as floods, tornadoes, hurricanes,
and earthquakes. The Company's operating results and
financial condition could be adversely affected should its
ability to manufacture or distribute its products be
impaired by such an event.
<PAGE>
Page 11
Because of the foregoing factors, as well as other
variables affecting the Company's operating results, past
financial performance should not be considered a reliable
indicator of future performance, and investors should not
use historical trends to anticipate results or trends in
future periods. In addition, the Company's participation in
a highly dynamic industry often results in significant
volatility of the Company's common stock price.
P A R T II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company has been named as a defendant in a number
of repetitive stress injury lawsuits, primarily in New York
state courts or federal district courts for the New York
City area. In each of these lawsuits the plaintiff alleges
that he or she suffers from symptoms generally known as
repetitive stress injury, which allegedly were caused by the
design of the keyboard supplied with the computer the
plaintiff used. The suits naming the Company are similar to
those filed against other major suppliers of personal
computers. Ultimate resolution of the litigation against
the Company may depend on progress in resolving this type of
litigation overall. The Company is unable to determine at
this time the outcome of these suits or the likelihood of
the Company being named in additional suits by plaintiffs
alleging similar injuries. The Company has denied these
claims and intends to defend vigorously the suits. The
Company believes that the claims will not have a material
adverse effect on the Company's financial results of
operations or its financial position.
Item 4. Submission of Matters to a Vote of Security Holders
Information in regard to the election of directors at
the annual meeting of stockholders of the Company on April
26, 1995, is set forth in Item 4 of the Company's Quarterly
Report on Form 10-Q for the period ended March 31, 1995.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit No. Description
11 Statement regarding computation of per share earnings
27 EDGAR financial data schedule
All other items specified by Part II of this report are
inapplicable and accordingly have been omitted.
SIGNATURES
Pursuant to the requirements of the Securities Exchange
Act of 1934, the registrant has duly caused this report to
be signed on its behalf by the undersigned thereunto duly
authorized.
August 11, 1995 Compaq Computer Corporation
/s/ DARYL J. WHITE
------------------------------
Daryl J. White, Senior Vice President,
Finance, and Chief Financial Officer
(as authorized officer and as principal
financial officer)
Exhibit 11
COMPAQ COMPUTER CORPORATION
STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
Primary earnings Fully diluted earnings
per share per share
Six months Three months Six months Three months
ended ended ended ended
June 30 June 30 June 30 June 30
-------- -------- -------- --------
(in millions, except per share amounts)
1995
----
Shares:
Weighted average number of
shares outstanding 262.1 262.8 262.1 262.8
Incremental shares attributed
to outstanding options 9.5 9.4 10.7 10.3
-------- -------- -------- --------
271.6 272.2 272.8 273.1
======== ======== ======== ========
Earnings:
Net income $ 462 $ 246 $ 462 $ 246
======== ======== ======== ========
Earnings per common and common
equivalent share $ 1.70 $ 0.90 $ 1.69 $ 0.90
======== ======== ======== ========
1994
----
Shares:
Weighted average number of
shares outstanding 256.1 257.2 256.1 257.2
Incremental shares attributed
to outstanding options 11.3 11.4 11.7 11.4
-------- -------- -------- --------
267.4 268.6 267.8 268.6
======== ======== ======== ========
Earnings:
Net income $ 423 $ 210 $ 423 $ 210
======== ======== ======== ========
Earnings per common and common
equivalent share $ 1.58 $ 0.78 $ 1.58 $ 0.78
======== ======== ======== ========
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
COMPAQ COMPUTER CORPORATION'S CONSOLIDATED BALANCE SHEET AND CONSOLIDATED
STATEMENT OF INCOME FOR THE PERIOD ENDED JUNE 30, 1995 AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> JUN-30-1995
<CASH> 992
<SECURITIES> 0
<RECEIVABLES> 2,589
<ALLOWANCES> 0
<INVENTORY> 2,036
<CURRENT-ASSETS> 6,078
<PP&E> 1,003
<DEPRECIATION> 0
<TOTAL-ASSETS> 7,133
<CURRENT-LIABILITIES> 2,476
<BONDS> 300
<COMMON> 781
0
0
<OTHER-SE> 3,397
<TOTAL-LIABILITY-AND-EQUITY> 7,133
<SALES> 6,460
<TOTAL-REVENUES> 6,460
<CGS> 4,910
<TOTAL-COSTS> 4,910
<OTHER-EXPENSES> 124<F1>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 48
<INCOME-PRETAX> 641
<INCOME-TAX> 179
<INCOME-CONTINUING> 462
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 462
<EPS-PRIMARY> 1.70
<EPS-DILUTED> 1.69
<FN>
<F1> Includes research and development costs.
</FN>
</TABLE>
