____________________________________________________________
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 March 31, 1996
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 March 29, 1996, was 268.2 million.
____________________________________________________________
<PAGE>
P A R T I. FINANCIAL INFORMATION
Item 1. Financial Statements
COMPAQ COMPUTER CORPORATION
CONSOLIDATED BALANCE SHEET
(Unaudited)
ASSETS
March 31, December 31,
1996 1995
--------- ------------
(in millions)
Current assets:
Cash and cash equivalents $ 1,036 $ 745
Accounts receivable, net 3,042 3,141
Inventories 1,934 2,156
Deferred income taxes 365 365
Prepaid expenses and other current assets 126 120
------- -------
Total current assets 6,503 6,527
Property, plant, and equipment,
less accumulated depreciation 1,144 1,110
Other assets 182 181
------- -------
$ 7,829 $ 7,818
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,177 $ 1,379
Income taxes payable 191 190
Other current liabilities 1,070 1,111
------- -------
Total current liabilities 2,438 2,680
------- -------
Long-term debt 300 300
------- -------
Deferred income taxes 225 224
------- -------
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:
268.2 million shares at March 31, 1996
and 267.1 million shares at December 31, 1995) 908 890
Retained earnings 3,958 3,724
------- -------
Total stockholders' equity 4,866 4,614
------- -------
$ 7,829 $ 7,818
======= =======
See accompanying notes to consolidated financial data
<PAGE>
COMPAQ COMPUTER CORPORATION
CONSOLIDATED STATEMENT OF INCOME
(Unaudited)
Quarter ended March 31,
1996 1995
------- -------
(in millions, except
per share amounts)
Sales $ 4,205 $ 2,959
Cost of sales 3,320 2,235
------- -------
885 724
------- -------
Selling, general, and administrative expense 431 328
Research and development costs 103 60
Other income and expense, net 17 36
------- -------
551 424
------- -------
Income before provision for income taxes 334 300
Provision for income taxes 100 84
------- -------
Net income $ 234 $ 216
======= =======
Earnings per common and common equivalent share:
Primary $ 0.85 $ 0.80
======= =======
Assuming full dilution $ 0.85 $ 0.80
======= =======
Shares used in computing earnings per common
and common equivalent share:
Primary 276.1 270.9
======= =======
Assuming full dilution 276.1 270.9
======= =======
See accompanying notes to consolidated financial data
<PAGE>
COMPAQ COMPUTER CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
Quarter ended March 31,
1996 1995
-------- --------
(in millions)
Cash flows from operating activities:
Cash received from customers $4,289 $2,872
Cash paid to suppliers and employees (3,770) (2,343)
Interest and dividends received 6 10
Interest paid (24) (25)
Income taxes paid (102) (132)
------ ------
Net cash provided by operating activities 399 382
------ ------
Cash flows from investing activities:
Purchases of property, plant, and equipment, net (112) (84)
Acquisition of businesses (22)
Other, net (6) (16)
------ ------
Net cash used in investing activities (140) (100)
------ ------
Cash flows from financing activities:
Proceeds from sale of equity securities 18 8
------ ------
Net cash provided by financing activities 18 8
------ ------
Effect of exchange rate changes on cash 14 (1)
------ ------
Net increase in cash and cash equivalents 291 289
Cash and cash equivalents at beginning of period 745 471
------ ------
Cash and cash equivalents at end of period $1,036 $ 760
====== ======
Reconciliation of net income to net cash provided by
operating activities:
Net income $ 234 $ 216
Depreciation and amortization 64 51
Provision for bad debts 7 (3)
Deferred income taxes 1
Currency exchange losses 5 24
Decrease (increase) in accounts receivable 81 (89)
Decrease (increase) in inventories 222 (105)
Increase in prepaid expenses and
other current assets (8) (16)
Increase (decrease) in accounts payable (201) 348
Increase (decrease) in income taxes payable 2 (22)
Decrease in other current liabilities (8) (22)
------ ------
Net cash provided by operating activities $ 399 $ 382
====== ======
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 March 31, 1996 and December
31, 1995 and for the three month periods ended March 31, 1996 and 1995 have
been prepared on substantially the same basis as the annual consolidated
financial statements. In the opinion of the Company, the data reflects 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:
March 31, December 31,
1996 1995
--------- ------------
(in millions)
Raw materials and work-in-process 842 1,043
Finished goods 1,092 1,113
------- -------
$ 1,934 $ 2,156
======= =======
Note 3 - Other income and expense
Other income and expense consisted of the following components:
Quarter ended March 31,
1996 1995
------- -------
(in millions)
Interest and dividend income $ (6) $ (10)
Interest expense associated with hedging 1 6
Other interest expense 15 14
Currency exchange losses, net 5 24
Other, net 2 2
----- -----
$ 17 $ 36
===== =====
<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 quarters ended March 31, 1996 and 1995
and December 31, 1995.
Quarter ended
March 31, March 31, December 31,
1996 1995 1995
Sales 100.0% 100.0% 100.0%
Cost of sales 78.9 75.5 78.3
----- ----- -----
Gross margin 21.1 24.5 21.7
----- ----- -----
Selling, general,
and administrative expense 10.3 11.1 10.0
Research and
development costs 2.4 2.0 1.7
Purchased in-process technology(1) 5.1
Other income and expense, net .5 1.3 .5
----- ----- -----
13.2 14.4 17.3
----- ----- -----
Income before provision
for income taxes 7.9% 10.1% 4.4%
===== ===== =====
(1) Represents impact of a $241 million non-recurring, non-tax
deductible charge for purchased in-process technology in
connection with acquisitions that occurred during fourth quarter
1995.
Sales
Sales for the first quarter of 1996 increased 42% over the
comparable period of 1995 and declined 11% from the fourth quarter of
1995. Sales growth occurred in all regions with North American,
European, and other international sales increasing 56%, 27%, and 38%,
respectively, during first quarter 1996 over the comparable period of
1995. First quarter North American sales, including Canada,
represented 51% of total sales in the first quarter of 1996 as
compared with 47% in the comparable period of 1995 and 51% in the
fourth quarter of 1995. European sales represented 36% of total sales
in the first quarter of 1996 as compared with 40% in the comparable
period of 1995 and 37% in the fourth quarter of 1995. Other
international sales represented 13% of sales in first quarters 1996
and 1995 and 12% in fourth quarter 1995. The decline in the Company's
sales from the fourth quarter of 1995 was attributable to seasonality,
especially in its growing consumer business.
The Company's significant increase in consolidated sales in the
first quarter of 1996 in comparison to the same period of 1995 stemmed
primarily from an increase in the number of units and options sold.
Total computer unit sales increased more than 27% in the first quarter
of 1996 over the comparable period of 1995. Unit sales growth resulted
primarily from the Company's aggressively priced Compaq ProLinea and
Presario desktop products, the LTE Elite portable computers, and the
Compaq Prosignia tower system products.
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.
Early in the first quarter of 1996 the Company launched a new family
of home multimedia Presarios, which included a number of new
technologies such as the industry's first combination scanner
keyboard, rewritable PD-CD drive, 6X-speed CD-ROM drives, and the most
powerful Pentium processors. In February the Company introduced new
server products, including the ProLiant 4500/166, which provides the
industry's best price/performance characteristics for an enterprise
class server. In March the Company took a number of pricing actions
and established a number of marketing programs to position its desktop
and server products competitively. 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 declined to 21.1% in the
first quarter of 1996, compared to 24.5% in the comparable period of
1995, and 21.7% in the fourth quarter of 1995. The fall from the prior
periods primarily resulted from increased sales promotions to the
Company's resellers and end user customers, particularly in North
America, and unfavorable currency fluctuations. The Company maintains
a strategy designed to increase its market share and continues 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. Despite this pressure, the Company expects the
combination of changes in product mix, reductions in the cost of
materials, and higher margins on new products to raise gross margins
in the remainder of 1996. 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, and control of operating expenses.
Operating Expenses
The Company's selling, general, and administrative expense
increased in amount while declining as a percentage of sales in the
first quarter of 1996 as compared with the same period of 1995. 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 entry into new markets and the
expansion of distribution channels. The Company anticipates that in
the remainder of 1996 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.
The Company strives to manage total operating expenses in line
with sales growth and gross margin levels. Research and development
costs increased to 2.4% in the first quarter of 1996 compared to 2.0%
in the corresponding period of 1995. The Company is committed to
continuing a significant research and development program and research
and development costs in absolute dollars are likely to remain at
current levels or increase slightly for the remainder of the year.
Other Items
Other income and expense in the first quarter of 1996 was an
expense of $17 million. Net interest expense was the same level in
absolute dollars as the corresponding period of 1995. Net interest
expense as a percentage of sales was lower in the first quarter of
1996 when compared to the corresponding period of 1995 due to higher
sales.
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 $5 million in the
first quarter of 1996, compared to a net loss of $24 million in the
first quarter of 1995.
Provision for Income Taxes
The Company estimates the effective tax rate for 1996 will be
30%, a decline from 34% in 1995. The Company's tax rate in 1995
increased from 26% in 1994 due to a non-tax deductible charge
associated with the Company's acquisitions and a decline in the ratio
of earnings derived from the Company's Singaporean manufacturing
subsidiary to total earnings. The Company anticipates that the
proportion of its Singaporean earnings will continue to decline in
1996, bringing the rate to 30%. The Company's tax rate is heavily
dependent upon the mix of earnings of its Singaporean manufacturing
subsidiary due to this subsidiary's earnings not being subject to
taxes in Singapore until August 2001 (with potential extension to
August 2004 if certain cumulative investment levels and other
conditions are met) and the Company's decision to invest a portion of
the undistributed earnings of this subsidiary indefinitely in
operations outside the United States. 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. As a result, the Company does not provide tax on
these earnings, which lowers its effective tax rate. Should the
Company choose to discontinue its permanent reinvestment policy, the
Company's effective tax rate will increase at that time.
Liquidity and Capital Resources
The Company's working capital increased to $4.1 billion at March
31, 1996, compared to $3.8 billion at December 31, 1995.
The Company's cash and cash equivalents increased to $1.0 billion
at March 31, 1996, from $745 million at December 31, 1995, primarily
because of positive cash flow from operating activities. Accounts
receivable decreased to $3.0 billion at March 31, 1996, from $3.1
billion at December 31, 1995 as a result of a decline in sales.
Inventory levels declined to $1.9 billion from $2.2 billion during the
same period as a result of tighter inventory management. The Company
anticipates that inventory levels will rise in absolute terms in the
second quarter in connection with major product transitions. These
high levels of inventory could adversely affect the Company in the
event of a drop in demand for PC products.
Cash used in the first quarter of 1996 for the purchase of
property, plant and equipment totaled $112 million. The Company
estimates that capital expenditures for land, buildings, and equipment
during the remainder of 1996 will be approximately $290 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 $250 million
syndicated credit facility, which will expire in October 1996, and a
$1 billion syndicated credit facility, which will expire in October
2000, both of which were unused at March 31, 1996. The Company has
established a commercial paper program, which is supported by the
syndicated credit facility, $5 million of which was outstanding at
March 31, 1996. In the U.S. and various international locations the
Company has uncommitted bank lines of credit, of which $14 million was
outstanding at March 31, 1996. 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. In developing strategies to achieve
continued increases in sales and operating profits, the Company
anticipates the continued expansion of the computer market and
spending on information technology. In this environment the Company
seeks profitable PC market share growth while expanding its product
offerings. The Company's operating results could be adversely affected
should the Company be unable to anticipate customer demand 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, to differentiate its
products from those of its competitors, or to compete successfully in
the markets for its new products. In accordance with the provisions of
the Private Securities Litigation Reform Act of 1995, the cautionary
statements set forth below identify important factors that could cause
actual results to differ materially from the projected results
contained in the forward-looking statements in this report.
Competitive Environment. The Company expects the PC market in 1996 to
expand in line with third party research organizations' forecasts of
unit growth in the range of 17% to 20%. The Company is putting in
place programs and products focused on meeting market demand and
gaining market share profitably. Competition for PC market share
remains fierce and a number of the Company's competitors have
announced plans to increase their PC market shares. Several of the
Company's suppliers also manufacture and market PCs or motherboards,
which contain the microprocessor and other internal operating
components of the PC. In addition, a number of consumer electronics
companies are entering the PC market as it expands into the consumer
sector and consumer models expand multimedia features. Each of these
companies may be willing to accept lower profit margins to win market
share. In addition, when the Company lowers prices on existing
products or announces new products at lower price points, the Company
must increase the volume of unit sales to achieve sales targets.
Second Quarter Outlook. For the second quarter 1996, the Company is
targeting sales at approximately first quarter levels.. This level of
sales is dependent on continued strong customer demand and the
availability of new products late in the quarter. The Company also
expects the combination of changes in product mix, reductions in the
cost of materials, higher margins on new products, and ongoing expense
controls to enable it to achieve second quarter earnings that meet or
exceed the same period of 1995. The Company's ability to achieve
targeted sales and earnings levels depends upon a number of
competitive and market factors and is subject to the risks set forth
in this report.
Gross Margin Pressures and Operating Expenses. In order to maintain or
increase its market share, the Company must continue to price its
products competitively, to design products at lower price points with
attractive price/performance characteristics, and, from time to time,
to 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 lower prices and sales incentives on its sales,
gross margins, and profitability, the Company must increase unit
shipments, especially of its high-end systems products and options,
aggressively reduce costs, and maintain tight control over operating
expenses. Despite quarterly fluctuations, the Company remains focused
on its long-standing gross margin target of 23 percent although it
does not expect to reach this level in 1996. The Company's ability to
achieve higher gross margin levels and lower operating expenses as a
percentage of sales in the remaining quarters of the year depends upon
a variety of competitive and market factors and is subject to the
other risks set forth in this report.
Inventory. The Company anticipates that its inventory turns, which
increased to 5.5 in 1995 from 5.2 in 1994, will fluctuate in 1996. In
the first quarter of 1996, the Company achieved inventory turns of
6.5. The Company anticipates that inventory turns will be down
sequentially in the second quarter of the year as a result of major
product introductions but expects inventory turns to improve in the
second half of 1996 as product introductions are completed and in
connection with improved product cycle management and other
efficiencies accompanying the reengineering of certain internal
processes. 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, difficulties in managing product transitions, or component
pricing movements that affect the value of raw material inventory,
there could be an adverse impact on inventory, cash, and related
profitability.
Product Transitions. The Company faces significant product transitions
in the summer of 1996, particularly in its commercial desktop and
systems divisions. In each product transition cycle the Company
confronts the risk of delays in new product production while managing
the inventory of its older products and facilitating the sale of older
Compaq inventory held by resellers as it increases sales of newer PCs.
The Company provides currently for estimated product returns and price
protection that may occur under programs the Company has with its
customers and under floor planning arrangements with third-party
finance companies. The Company and resellers in the U.S. currently
hold substantial amounts of inventory of certain of the Company's
products. The Company expects anticipated selected pricing actions and
aggressive marketing programs in the second quarter of 1996 to raise
dealer sales of these products, which will facilitate product
transitions. The success of this strategy depends upon a variety of
competitive and market factors and is subject to the other risks set
forth in this report. Should the Company be unable to sell its
inventory of older products at anticipated prices or if dealers hold
higher than expected amounts of inventory subject to price protection
at the time of planned price reductions, there could be a resulting
adverse impact on sales, gross margins, and profitability.
Reengineering Implementation. The Company continues to expand its
manufacturing capacity as well as reengineer its internal processes to
support continued growth. During 1996 the Company continues 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. As the
Company has grown it has outstripped the ability of certain of its
systems to support continued expansion. In connection with its
reengineering efforts the Company is moving many of its systems from a
legacy environment of proprietary systems to client-server
architectures. 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.
Alliance and Acquisition Strategy. Because of the rapid pace of
technological advances in information technology, the Company must
introduce on a timely basis new products offering competitive features
that appeal to a wide variety of customers. The Company's product
development efforts are centered on aggressively developing new areas
in which the Company can differentiate its products and add value,
focusing on innovative platform features, the integration of hardware
and software, and new related products and services, such as storage
devices, toys and software titles. Because the Company's business now
intersects with a number of areas in which other companies have
significantly greater technological, marketing, and service expertise,
the Company has focused on forming alliances with third parties that
have complementary products and skills as well as acquisitions that
target incremental business opportunities. The Company believes that
its alliance and acquisition strategies enable it to provide best-in-
class solutions integrated in its platforms while expanding its
offerings of complementary products. Each of these approaches,
however, carries significant risks. In its acquisition activities the
Company confronts significant challenges in retaining key employees
and reconciling diverse corporate cultures, synchronizing product
roadmaps and business processes, and integrating logistics, marketing,
product development, and manufacturing operations to achieve greater
efficiencies. If the Company is unable to complete the transition
phase with respect to its 1995 acquisitions of Thomas-Conrad
Corporation and NetWorth, Inc. as anticipated, the expansion of its
market in the internetworking arena could be delayed. In developing
business plans based on an alliance model, the Company must rely on
the performance of third parties, many of whom may compete with the
Company in other parts of their businesses. In addition, particularly
in attempting to expand its systems business into enterprise computing
through an alliance model, the Company competes against businesses
that are vertically integrated and offer customers the convenience of
dealing with only one vendor for their enterprise-wide systems.
Customers' willingness to adopt the Company's more cost-effective
solution will depend upon the reputation for reliability that it and
its business allies earn in this area.
Technology Standards. 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.
Supplier Issues. 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. Order lead times and cancellation
requirements vary by supplier and component. Should the Company
underestimate the component supplies needed to meet demand, the
Company could be unable to meet customer demand. Should the Company
overestimate the component supplies needed to meet customer demand,
the Company's cash and profitability could be adversely affected. Many
of the components used in the Company's products, particularly
microprocessors and memory, experience steep price declines over their
product lives. If the Company is unable to manage its purchases and
utilization of such components efficiently to maintain low inventory
levels immediately prior to major price declines, the Company could be
unable to take immediate advantage of such declines to lower its
product costs, which could adversely affect the Company's sales and
gross margins. In planning product transitions the Company evaluates
the speed at which customers are likely to switch to newer products.
The contrast between the prices of old and new products, which is
related to component costs, is a critical variable in predicting
customer decisions to move to the next generation of products.
Technology transitions may occur more quickly or more slowly than
anticipated based on pricing decisions by industry component
suppliers, particularly microprocessor prices set by Intel
Corporation. Because of the lead times associated with the Company's
volume production, should the Company be unable to predict the rate of
a product transition accurately, the Company's inventory levels, cash
and profitability could be negatively affected. 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.
Intellectual Property Infringement. 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.
Product Distribution. During the first quarter of 1996 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, value-added
resellers, mass merchandise stores, consumer electronic outlets,
computer superstores, and mail order, 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, particularly with respect to the
levels of service and support desired by customers to support systems
products in enterprise-wide computing solutions. 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 1996, 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 financial instability
among resellers in these regions. The Company continues to evaluate
its business operations in these regions and attempts to take measures
to limit its risks in these areas.
Credit Risks. 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.
Forecasting Issues. Because of the pace of technological advances in
the 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, such as language localization, in certain markets. 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.
Currency and Hedging Risks. 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. For certain
of its markets, particularly Latin America, the Company has determined
that ongoing hedging of its non-U.S. dollar net monetary assets is not
cost effective and instead attempts to minimize currency exposure risk
through working capital management. There can be no assurance that
such an approach will be successful, especially in the event of a
significant and sudden decline in the value of local currencies. From
time to time the Company 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 and Japan.
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.
Tax Rate. 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
significantly from anticipated levels, or should the Company's ability
to reinvest these earnings be reduced, the Company's tax rate would
increase above the estimated 30%. 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.
Seasonality. 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.
Facilities. 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. While
the Company attempts to minimize the potential for loss through
preventative planning and insurance risk transfer products, such
natural disasters could negatively affect the Company's sales,
profitability, and cash flow.
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's 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
There were no matters submitted to a vote of security holders
during the first quarter of 1996. At the annual meeting of
stockholders of the Company on April 25, 1996, the shareholders voted
on a proposal to elect Benjamin M. Rosen, Eckhard Pfeiffer, Lawrence
T. Babbio, Jr., Robert Ted Enloe, III, George H. Heilmeier, George
E.R. Kinnear II, Peter N. Larson, Kenneth L. Lay, Kenneth Roman, and
Lucille S. Salhany as directors of the Company. The following table
sets forth the votes in this election:
Matter For Against or Abstentions Broker
Withheld Non-Votes
Election
of Directors
Benjamin M. Rosen 229,864,051 1,642,502
Eckhard Pfeiffer 229,829,109 1,677,444
Lawrence T. Babbio, Jr. 228,126,719 3,379,834
Robert Ted Enloe, III 229,886,020 1,620,533
George H. Heilmeier 229,912,935 1,593,618
George E.R. Kinnear II 229,870,944 1,635,609
Peter N. Larson 229,936,458 1,570,095
Kenneth L. Lay 229,917,391 1,589,162
Kenneth Roman 229,893,758 1,612,795
Lucille S. Salhany 229,894,066 1,612,487
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit Description
No.
11 Statement regarding computation of per share earnings
27 EDGAR Financial Data Schedule
(b) Report on Form 8-K dated March 1,1996, containing the Company's
news released dated March 1, 1996, with respect to its financial
outlook for the period ended March 31, 1996.
Report on Form 8-K dated April 24, 1996, containing the Company's
news release dated April 24, 1996, with respect to its financial
results for the period ended March 31, 1996.
All other items specified by Part II of this report are inapplicable
and accordingly have been omitted.
<PAGE>
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.
May 9, 1996 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
Quarter ended
March 31,
In millions, except per share amounts 1996 1995
- ----------------------------------------------------------------------
Primary earnings per share:
Shares used in computing earnings per share:
Weighted average number of shares outstanding 267.7 261.4
Incremental shares attributed
to outstanding options 8.4 9.5
----- -----
276.1 270.9
===== =====
Earnings:
Net income $ 234 $ 216
===== =====
Earnings per common and common equivalent share $0.85 $0.80
===== =====
Earnings per share - assuming full dilution:-
Shares used in computing earnings per share:
Weighted average number of shares outstanding 267.7 261.4
Incremental shares attributed to
outstanding options 8.4 9.5
----- -----
276.1 270.9
===== =====
Earnings:
Net income $ 234 $ 216
===== =====
Earnings per common and common equivalent share $0.85 $0.80
===== =====
<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 MARCH 31, 1996 AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> MAR-31-1996
<CASH> 1,036
<SECURITIES> 0
<RECEIVABLES> 3,042
<ALLOWANCES> 0
<INVENTORY> 1,934
<CURRENT-ASSETS> 6,503
<PP&E> 1,144
<DEPRECIATION> 0
<TOTAL-ASSETS> 7,829
<CURRENT-LIABILITIES> 2,438
<BONDS> 300
<COMMON> 908
0
0
<OTHER-SE> 3,958
<TOTAL-LIABILITY-AND-EQUITY> 7,829
<SALES> 4,205
<TOTAL-REVENUES> 4,205
<CGS> 3,320
<TOTAL-COSTS> 3,320
<OTHER-EXPENSES> 103<F1>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 16
<INCOME-PRETAX> 334
<INCOME-TAX> 100
<INCOME-CONTINUING> 234
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 234
<EPS-PRIMARY> 0.85
<EPS-DILUTED> 0.85
<FN>
<F1> Includes research and development costs.
</FN>
</TABLE>
