____________________________________________________________
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 September 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 September 30, 1995, was 265.8 million.
____________________________________________________________
<PAGE>
P A R T I. FINANCIAL INFORMATION
Item 1. Financial Statements
COMPAQ COMPUTER CORPORATION
CONSOLIDATED BALANCE SHEET
(Unaudited)
ASSETS
September 30, December 31,
1995 1994
--------------------
(in millions)
Current assets:
Cash and cash equivalents $ 1,120 $ 471
Accounts receivable, net 2,669 2,287
Inventories 2,344 2,005
Deferred income taxes 303 303
Prepaid expenses and other current assets 142 92
--------------------
Total current assets 6,578 5,158
Property, plant, and equipment,
less accumulated depreciation 1,058 944
Other assets 52 64
--------------------
$ 7,688 $ 6,166
====================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,573 $ 888
Income taxes payable 262 246
Other current liabilities 929 879
--------------------
Total current liabilities 2,764 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: 265.8 million shares at September 30,
1995 and 261.0 million shares at December 31, 1994) 803 739
Retained earnings 3,642 2,935
--------------------
Total stockholders' equity 4,445 3,674
--------------------
$ 7,688 $ 6,166
====================
See accompanying notes to consolidated financial data
<PAGE>
COMPAQ COMPUTER CORPORATION
CONSOLIDATED STATEMENT OF INCOME
(Unaudited)
Nine months ended Quarter ended
September 30, September 30,
1995 1994 1995 1994
----------------------------------------
(in millions, except per share amounts)
Sales $10,054 $7,615 $3,594 $2,838
Cost of sales 7,685 5,682 2,775 2,185
------- ------ ------ ------
$ 2,369 $1,933 $ 819 $ 653
------- ------ ------ ------
Research & Development costs 189 165 65 58
Selling, general, and
administrative expense 1,125 867 406 310
Other income & expense,net 74 58 8 14
------- ------ ------ ------
1,388 1,090 479 382
------- ------ ------ ------
Income before provision
for income taxes 981 843 340 271
Provision for income taxes 274 219 95 70
------- ------ ------ ------
Net income $ 707 $ 624 $ 245 $ 201
======= ====== ====== ======
Earnings per common and
common equivalent share:
Primary $ 2.59 $$ 2.33 $ 0.89 $ 0.75
======= ====== ====== ======
Assuming full
dilution $ 2.57 $$ 2.33 $ 0.89 $ 0.75
======= ====== ====== ======
Shares used in computing
earnings per common and
common equivalent share:
Primary 272.8 267.9 275.2 268.8
======= ====== ====== ======
Assuming full
dilution 274.5 268.1 275.2 268.8
======= ====== ====== ======
See accompanying notes to consolidated financial data
<PAGE>
COMPAQ COMPUTER CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
Nine months
ended September 30,
1995 1994
-------- --------
(in millions)
Cash flows from operating activities:
Cash received from customers $ 9,698 $ 6,970
Cash paid to suppliers and employees (8,459) (7,365)
Interest and dividends received 35 17
Interest paid (83) (54)
Income taxes paid (269) (187)
-------- --------
Net cash provided by (used in)
operating activities 922 (619)
-------- --------
Cash flows from investing activities:
Purchases of property, plant, and equipment, net 288 (260)
Purchases of short-term investments (69)
Maturities of short-term investments 66
Other, net 12 (46)
-------- --------
Net cash used in investing activities (276) (309)
-------- --------
Cash flows from financing activities:
Proceeds from sale of equity securities 64 68
Proceeds from short-term borrowings 346
Issuance of long-term debt 300
-------- --------
Net cash provided by financing activities 714 714
-------- --------
Effect of exchange rate changes on cash (61) (24)
-------- --------
Net increase (decrease) in cash
and cash equivalents (649) (238)
Cash and cash equivalents at beginning of period 471 627
-------- --------
Cash and cash equivalents at end of period $ 1,120 $ 389
======== ========
Reconciliation of net income to net cash
provided by (used in) operating activities:
Net income $ 707 $ 624
Depreciation and amortization 160 125
Provision for bad debts 23 28
Deferred income taxes 3
Currency exchange losses 28 25
Increase in accounts receivable (372) (656)
Increase in inventories (339) (1,177)
Increase in prepaid expenses and
other current assets (51) (62)
Increase in accounts payable 684 193
Increase in income taxes payable 11 29
Increase in other current liabilities 71 249
-------- --------
Net cash provided by (used in) operating activities $ 922 $ (619)
======== ========
See accompanying notes to consolidated financial data
<PAGE>
COMPAQ COMPUTER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL DATA
Note 1 - Basis of presentation
The accompanying unaudited financial data as of September 30, 1995 and
December 31, 1994 and for the three month and nine month periods ended
September 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:
September 30, December 31,
1995 1994
------- -------
(in millions)
Raw materials $ 929 $ 1,013
Work-in-process 305 266
Finished goods 1,110 726
------- -------
$ 2,344 $ 2,005
======= =======
Note 3 - Other income and expense
Other income and expense consisted of the following components:
Nine months Three months
ended ended
September 30, September 30,
1995 1994 1995 1994
----- ----- ----- -----
(in millions)
Interest and dividend income $(35) $(17) $(15) $ (4)
Interest expense associated with hedging 14 8 3 1
Other interest expense 58 45 21 18
Currency exchange (gains) losses, net 28 25 (5) 2
Other, net 9 (3) 4 (3)
----- ----- ----- -----
$ 74 $ 58 $ 8 $ 14
===== ===== ===== =====
<PAGE>
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 nine months and quarters
ended September 30, 1995 and 1994.
Periods ended September 30,
Nine months Quarter
1995 1994 1995 1994
------------------------------
Sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 76.4 74.6 77.2 77.0
------------------------------
Gross margin 23.6 25.4 22.8 23.0
------------------------------
Research and development costs 1.9 2.2 1.8 2.0
Selling, general, and
administrative expense 11.2 11.4 11.3 10.9
Other income and expense, net .7 .7 .2 .6
------------------------------
13.8 14.3 13.3 13.5
------------------------------
Income from consolidated companies
before provision for income taxes 9.8% 11.1% 9.5% 9.5%
==============================
Sales
Sales increased 27% and 32% in the third quarter and
first nine months of 1995, respectively, over the comparable
periods of 1994, and 3% over the second quarter of 1995.
North American sales represented 52% and 49% of total sales
in the third quarter and first nine months of 1995,
respectively, as compared with 50% and 52% in the
corresponding periods of 1994. European sales represented
32% and 36% of total sales in the third quarter and first
nine months of 1995, respectively, as compared with 33% and
34% in the corresponding periods of 1994. Other
international sales, excluding Canada, represented 16% and
15% total sales in the third quarter and first nine months
of 1995 as compared with 17% and 14% in the comparable
periods of 1994.
The Company's significant increase in consolidated
sales in the third quarter stemmed primarily from an
increase in the number of units sold. Total computer unit
sales increased approximately 14% in the third quarter of
1995 over the comparable period of 1994. Unit sales growth
resulted primarily from the Company's aggressively priced
Compaq ProLinea(R) and Presario(R) desktop products, the
Compaq Contura(R) portable computers, and the Compaq
Proliant(R) tower system products. Although the Company's
growth in sales dollars exceeded unit sales growth for third
quarter 1995 when compared to third 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.
During the first nine months of 1995, the Company
carried out major product transitions in each of its product
areas. During the third quarter it announced the Presario
9500, 7100, and 5500 series featuring audio and video
technology, nine new commercial desktop computers based on
the 133 Mhz Pentium microprocessors, and the Company's first
Pentium-based notebook computer, the LTE 5000. In October
the Company announced the new Compaq Proliant 4500 servers,
its most powerful server product. These 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. Approximately 90% of the Company's CPU
sales in the third quarter of 1995 were derived from
products introduced in 1995 and more than 60% of CPU sales
used Pentium microprocessors.
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. 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.
Gross Margin
Gross margin as a percentage of sales fell to 22.8% and
23.6% in the third quarter and first nine months of 1995,
respectively, compared to 23.0% and 25.4% in the third
quarter and first nine months of 1994, and 23.6% in the
second quarter of 1995. The decline in margins from second
quarter 1995 to third quarter 1995 primarily resulted from
unfavorable product mix, in particular a higher contribution
of consumer products that generally carry lower margins,
unfavorable currency fluctuations, costs associated with
product transitions, and a generally more aggressive pricing
environment, partially offset by a favorable mix of systems
products. The Company believes that an aggressive pricing
environment will continue for the remainder of 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 an aggressive pricing environment and continued pricing
actions with respect to the Company's existing 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 12% and 15% in absolute
dollars in the third quarter and first nine months 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 remainder of 1995.
Selling, general, and administrative expense increased
as a percentage of sales in the third quarter of 1995 as
compared with the same period of 1994 while remaining
relatively stable as a percentage of sales compared to the
second quarter of 1995. The increase in expense 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, 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 in support of anticipated
higher volume sales, increased advertising and promotion
programs, expansion into new markets, and increased
investment in the area of service and support, especially
with respect to its systems business.
Other Items
Other income and expense in the third quarter of 1995
was an expense of $8 million. In the third quarter of 1995,
compared to the corresponding period of 1994, the Company
experienced a lower net interest expense in absolute dollars
as a result of an increase in interest earned on investable
cash due to higher cash levels and currency gains offset by
higher interest expense associated with the Company's local
borrowing to finance its Brazilian operations.
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 gain of $5 million in the third
quarter of 1995, compared to a net loss of $2 million in the
third 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 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 September 30, 1995, the Company had working capital
of approximately $3.8 billion compared to $3.1 billion at
December 31, 1994.
The Company's cash and cash equivalents increased to
$1.1 billion at September 30, 1995, from $471 million at
December 31, 1994, primarily because of positive cash flow
from operating activities. Accounts receivable increased to
$2.7 billion at September 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 September 30, 1995, are equal to
receivable days at June 30, 1995, and higher than receivable
days of 63 at December 31, 1994. Receivable days remain
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 $2.3 billion at
September 30, 1995, were higher than the $2.0 billion level
of December 31, 1994, in support of higher sales levels and
product transitions. Inventory turns of 5.1 were lower than
turns of 5.2 at June 30, 1995, and higher than turns of 4.6
at December 31, 1994.
Cash used in the first nine months of 1995 for the
purchase of property, plant, and equipment totaled $288
million, including $111 million in the third quarter. The
Company estimates that capital expenditures for land,
buildings, and equipment during the remainder of 1995 will
be approximately $119 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 continues to evaluate acquisition, joint
venture, and alliance opportunities in a number of
strategic areas. After the close of the third quarter the
Company announced that it had entered into agreements to
acquire NetWorth, Inc., a leading developer, manufacturer
and supplier of Fast Ethernet hubs, switches and related
products, and Thomas-Conrad Corporation, a privately-held
maker of network interface cards and hubs. With the
support and recommendation of the Board of Directors and
management team of Networth, the Company will commence a
tender offer to acquire all the outstanding shares of
NetWorth, Inc. for $42.00 per share in cash for an
approximate purchase price of $372 million. The Company
anticipates distributing tender offer materials around
November 9, 1995. The proposed acquisitions will support
the Company's ability to offer more tightly integrated
enterprise-class computing systems to commercial customers
by providing servers, client machines, network interface
cards, routers, hubs, and network management. Completion of
each of the Thomas-Conrad and NetWorth transaction s is
subject to a number of conditions including clearance under
the Hart-Scott-Rodino Antitrust Improvements Act.
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 had a $300
million syndicated credit facility, which remained unused at
September 30, 1995. This credit facility was replaced by a
$250 million syndicated credit facility that the Company
opened in October 1995, which will expire in October 1996,
and a $1 billion syndicated credit facility that it opened
in October 1995, which will expire in October 2000. The
Company has established a commercial paper program, which is
supported by the syndicated credit facility. In the U.S.
and various international locations the Company has
uncommitted bank lines of credit, of which $63 million was
outstanding at the end of the third quarter. 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.
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 in the
remainder of 1995 and is putting in place programs and
products focused on meeting market demand. The Company
anticipates that its inventory turns will improve throughout
1995 as a result of the completion of major product
transitions; 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, 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 each product transition cycle 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 the remainder
of 1995 and 1996 the Company will continue to focus on
making its business processes more efficient in order to
increase customer satisfaction, improve productivity, and
lower costs. In the event of a delay in reengineering
implementation, there could be an adverse impact on
inventory, cash, and related profitability. 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 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. Forecasting 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 products are 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 comply with its standards and schedule.
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 generally rely on the creation and
implementation of technology standards to win the broadest
market acceptance for their products. The Company must
successfully manage and participate in the development of
standards while continuing to differentiate its products in
a manner valued by customers. 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
obtain a license, purchase components utilizing such
technology from the owners of such technology or their
licensees or 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 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 of the Company or one of its suppliers. To minimize
the impact of intellectual property claims by third parties,
the Company pursues an active patent portfolio development
plan.
During the third 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 China, Hong Kong, Latin America, and Eastern Europe,
subject 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 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 China and Latin
America, 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 or yen-denominated purchase commitments during a
period when the dollar strengthens, the Company could incur
expense that would not be balanced by the impact of exchange
rate movements on its sales and purchase commitments. 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 fourth quarter 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.
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 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
(b) Report on Form 8-K dated October 17, 1995, containing
the Company's news released dated October 17, 1995,
with respect to its interim financial results for the
periods ended September 30, 1995, including an
unaudited consolidated balance sheet as of September
30, 1995, and an unaudited consolidated statement of
income for the periods ended September 30, 1995.
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.
November 8, 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
FOR THE PERIODS ENDED SEPTEMBER 30
Primary earnings Fully diluted earnings
per share per share
Nine Three Nine Three
months months months months
-------- -------- -------- --------
(in millions, except per share amounts)
1995
----
Shares:
Weighted average number of
shares outstanding 263.2 265.3 263.2 265.3
Incremental shares attributed
to outstanding options 9.6 9.9 11.3 9.9
-------- -------- -------- --------
272.8 275.2 274.5 275.2
======== ======== ======== ========
Earnings:
Net income $ 707 $ 245 $ 707 $ 245
======== ======== ======== ========
Earnings per common and common
equivalent share $ 2.59 $ 0.89 $ 2.57 $ 0.89
======== ======== ======== ========
1994
----
Shares:
Weighted average number of
shares outstanding 256.8 258.0 256.8 258.0
Incremental shares attributed
to outstanding options 11.1 10.8 11.3 10.8
-------- -------- -------- --------
267.9 268.8 268.1 268.8
======== ======== ======== ========
Earnings:
Net income $ 624 $ 201 $ 624 $ 201
======== ======== ======== ========
Earnings per common and common
equivalent share $ 2.33 $ 0.75 $ 2.33 $ 0.75
======== ======== ======== ========
<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 SEPTEMBER 30, 1995 AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> SEP-30-1995
<CASH> 1,120
<SECURITIES> 0
<RECEIVABLES> 2,669
<ALLOWANCES> 0
<INVENTORY> 2,344
<CURRENT-ASSETS> 6,578
<PP&E> 1,058
<DEPRECIATION> 0
<TOTAL-ASSETS> 7,688
<CURRENT-LIABILITIES> 2,764
<BONDS> 300
<COMMON> 803
0
0
<OTHER-SE> 3,642
<TOTAL-LIABILITY-AND-EQUITY> 7,688
<SALES> 10,054
<TOTAL-REVENUES> 10,054
<CGS> 7,685
<TOTAL-COSTS> 7,685
<OTHER-EXPENSES> 189<F1>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 72
<INCOME-PRETAX> 981
<INCOME-TAX> 274
<INCOME-CONTINUING> 707
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<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 707
<EPS-PRIMARY> 2.59
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<FN>
<F1> Includes research and development costs.
</FN>
</TABLE>
