____________________________________________________________
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, 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 June 30, 1996, was 269.3 million.
____________________________________________________________
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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,
1996 1995
--------- ------------
(in millions)
Current assets:
Cash and cash equivalents $ 1,927 $ 745
Accounts receivable, net 2,687 3,141
Inventories 1,535 2,156
Deferred income taxes 365 365
Prepaid expenses and other current assets 121 120
------- -------
Total current assets 6,635 6,527
Property, plant, and equipment,
less accumulated depreciation 1,163 1,110
Other assets 193 181
------- -------
$ 7,991 $ 7,818
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,141 $ 1,379
Income taxes payable 83 190
Other current liabilities 1,078 1,111
------- -------
Total current liabilities 2,302 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:
269.3 million shares at June 30, 1996
and 267.1 million shares at December 31, 1995) 922 890
Retained earnings 4,242 3,724
------- -------
Total stockholders' equity 5,164 4,614
------- -------
$ 7,991 $ 7,818
======= =======
See accompanying notes to consolidated financial data
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COMPAQ COMPUTER CORPORATION
CONSOLIDATED STATEMENT OF INCOME
(Unaudited)
Six months ended Quarter ended
June 30, June 30,
1996 1995 1996 1995
----------------------------------------
(in millions, except per share amounts)
Sales $ 8,206 $ 6,460 $ 4,001 $ 3,501
Cost of sales 6,400 4,910 3,080 2,675
----------------------------------------
1,806 1,550 921 826
----------------------------------------
Selling, general, and
administrative expense 871 719 440 391
Research and development costs 197 124 94 64
Other income and expense, net 22 66 5 30
----------------------------------------
1,090 909 539 485
----------------------------------------
Income before provision
for income taxes 716 641 382 341
Provision for income taxes 215 179 115 95
----------------------------------------
Net income $ 501 $ 462 $ 267 $ 246
========================================
Earnings per common and
common equivalent share:
Primary $ 1.81 $ 1.70 $ 0.97 $ 0.90
========================================
Assuming full dilution $ 1.81 $ 1.69 $ 0.96 $ 0.90
========================================
Shares used in computing
earnings per common and
common equivalent share:
Primary 276.4 271.6 276.7 272.2
========================================
Assuming full dilution 277.0 272.8 277.1 273.1
========================================
See accompanying notes to consolidated financial data
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Page 3
COMPAQ COMPUTER CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
Six months ended
June 30,
1996 1995
-------------------
(in millions)
Cash flows from operating activities:
Cash received from customers $ 8,615 $ 6,236
Cash paid to suppliers and employees (6,924) (5,367)
Interest and dividends received 24 20
Interest paid (42) (49)
Income taxes paid (322) (163)
-------------------
Net cash provided by operating activities 1,351 677
-------------------
Cash flows from investing activities:
Purchases of property, plant, and equipment, net (201) (177)
Acquisition of businesses (22)
Other, net (5) 13
-------------------
Net cash used in investing activities (228) (164)
-------------------
Cash flows from financing activities:
Proceeds from sale of equity securities 32 42
-------------------
Net cash provided by financing activities 32 42
-------------------
Effect of exchange rate changes on cash 27 (34)
-------------------
Net increase in cash and cash equivalents 1,182 521
Cash and cash equivalents at beginning of period 745 471
-------------------
Cash and cash equivalents at end of period $ 1,927 $ 992
===================
Reconciliation of net income to net cash provided by
operating activities:
Net income $ 501 $ 462
Depreciation and amortization 131 103
Provision for bad debts 14 9
Deferred income taxes 1
Currency exchange losses 6 33
Decrease (increase) in accounts receivable 409 (249)
Decrease (increase) in inventories 621 (30)
Increase in prepaid expenses and
other current assets (5) (65)
Increase (decrease) in accounts payable (236) 281
Increase (decrease) in income taxes payable (106) 17
Increase in other current liabilities 15 116
-------------------
Net cash provided by operating activities $ 1,351 $ 677
===================
See accompanying notes to consolidated financial data
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Page 4
COMPAQ COMPUTER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL DATA
Note 1 - Basis of presentation
The accompanying unaudited financial data as of June 30, 1996 and December
31, 1995 and for the six month periods ended June 30, 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 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,
1996 1995
--------- ------------
(in millions)
Raw materials and work-in-process 641 1,043
Finished goods 894 1,113
------- -------
$ 1,535 $ 2,156
======= =======
Note 3 - Other income and expense
Other income and expense consisted of the following components:
Six months ended Quarter ended
June 30, June 30,
1996 1995 1996 1995
-------------------------------
(in millions)
Interest and dividend income $ (24) $ (20) $ (18) $ (10)
Interest expense associated
with hedging 11 (1) 5
Other interest expense 37 37 22 23
Currency exchange losses, net 6 33 1 9
Other, net 3 5 1 3
--------------------------------
$ 22 $ 66 $ 5 $ 30
================================
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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,
1996 1995 1996 1995
---------------------------------
Sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 78.0 76.0 77.0 76.4
---------------------------------
Gross margin 22.0 24.0 23.0 23.6
---------------------------------
Selling, general, and administrative expense 10.6 11.1 11.0 11.2
Research and development costs 2.4 1.9 2.4 1.8
Other income and expense, net .3 1.1 .1 .9
---------------------------------
13.3 14.1 13.5 13.9
---------------------------------
Income before provision for income taxes 8.7% 9.9% 9.5% 9.7%
=================================
Sales
Sales increased 14% and 27% in the second quarter and
first half of 1996, respectively, over the comparable
periods of 1995, and declined 5% from the first quarter of
1996. European sales represented 33% and 34% of total sales
in the second quarter and first half of 1996, respectively,
as compared with 37% and 38% in the corresponding periods of
1995. Other international sales, excluding Canada,
represented 16% and 15% of the total sales in the second
quarter and first half of 1996 as compared with 16% and 15%
in the comparable periods of 1995.
The Company's increase in consolidated sales in the
second 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
10% in the second quarter of 1996 over the comparable period
of 1995, driven primarily by sales of the Company's
commercial desktop and server 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. In the second quarter
the Company launched Compaq ProLiant 5000 Pentium Pro
servers that deliver midrange systems performance and
capabilities at about half the price, as well as new models
of its LTE 5000 notebook computer family and the new Compaq
Armada notebook computer families, including the Armada 4100
family that features a flexible slimline design and the
latest Pentium processors for notebook computers. In July
1996, the Company announced Compaq Presario PCs designed for
specific consumer needs, including the Compaq Presario 3000
series that is easy to move and includes double-bright flat
panel display, a four-disc CD changer, and a cordless radio
frequency mouse, the Compaq Presario 1000 series of
multimedia notebooks, that include built-in CD-ROMs, modem,
and stereo speakers, the Compaq Presario 4000 series for
home and family users seeking a multi-purpose computer, the
Compaq Presario 6000 series for the home office worker who
needs corporate office capabilities, and the Compaq Presario
8000 series for high-tech audiophiles who want additional
features for games, creativity, and surfing the internet.
The Company also announced a redesigned family of Deskpro
commercial desktop PCs, including the Deskpro 2000 value PC,
the Deskpro 4000 network-ready PC, and the Deskpro 6000 high
performance network-ready PCs.
Gross Margin
Gross margin as a percentage of sales rose to 23% in
the second quarter of 1996 from 21.1% in the first quarter,
while it fell from 23.6% in the second quarter of 1995. The
increase from the first quarter of 1996 primarily resulted
from improvements in logistics, asset management, and major
new product cycles, while the decline from the comparable
period of 1995 primarily resulted from 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, 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 maintain its current gross margin
levels 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 strives to manage total operating expenses
in line with sales growth and gross margin levels. The
Company's selling, general, and administrative expense
increased in amount while declining as a percentage of sales
in the second 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.
Research and development costs increased to 2.4% in the
second quarter of 1996 compared to 1.8% 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 second quarter of 1996
was an expense of $5 million. Interest income and interest
expense in the second quarter was a net expense of $3
million compared to $18 million in the corresponding period
of 1995. The lower net interest expense is attributable to
higher interest income due to higher cash balances, lower
hedging interest expense, and lower interest expense
associated with lower international borrowing.
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 $1 million in the second
quarter of 1996, compared to a net loss of $9 million in the
second 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 $4.3 billion
at June 30, 1996, compared to $3.8 billion at December 31,
1995.
The Company's cash and cash equivalents increased to
$1.9 billion at June 30, 1996, from $745 million at December
31, 1995, primarily because of positive cash flow from
operating activities and better management of costs,
inventory, and accounts receivable. Accounts receivable
decreased to $2.7 billion at June 30, 1996, from $3.1
billion at December 31, 1995, primarily as a result of a
decline in sales from the fourth quarter of 1995. Accounts
payable decreased to $1.1 billion at June 30, 1996, from
$1.4 billion at December 31, 1995, primarily as a result of
lower volumes. Inventory levels decreased to $1.5 billion
at June 30, 1996, from $2.2 billion at December 31, 1995, as
a result of better overall management of inventories.
Cash used in the second quarter of 1996 for the
purchase of property, plant and equipment totaled $89
million. The Company estimates that capital expenditures for
land, buildings, and equipment during the remainder of 1996
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 $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 June 30, 1996. The Company has established a commercial
paper program, which is supported by the syndicated credit
facility, which was unused at June 30, 1996. In the U.S. and
various international locations the Company has uncommitted
bank lines of credit, of which $10 million was outstanding
at June 30, 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.
Third Quarter Outlook. For the third quarter 1996, the
Company is targeting sales above second quarter levels. This
level of sales is dependent on continued strong customer
demand and the availability of new products. 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 third quarter earnings that exceed the same period
of 1995 and second quarter 1996. 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,
aggressively reduce costs, maintain tight control over
operating expenses, and continue to pursue gross-margin
enhancing opportunities. Despite quarterly fluctuations, the
Company remains focused on achieving gross margin levels at
or above current levels. 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
continue to increase in 1996. In the second quarter of 1996,
the Company achieved inventory turns of 7.1 in comparison to
6.5 in the first quarter of 1996 as a result of 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. This summer the Company has announced
and will be announcing additional major new products in each
of its products groups. In each product transition cycle
the Company confronts the risk of delays in new product
production that would impact sales of its newer PCs while it
manages the inventory of its older products and facilitates
the sale of older Compaq inventory held by resellers. 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. From time to time the
Company and its resellers may hold substantial amounts of
inventory of selected older products. To facilitate smooth
product transitions, the Company carries out pricing actions
and marketing programs to raise dealer sales. The success
of the Company's product transition strategy depends upon a
variety of competitive and market factors. 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. 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
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. 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 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 and
support 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 half 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
At the annual meeting of stockholders of the Company on
April 25, 1996, the shareholders voted on the election of
directors. The votes in this election were set forth in
Item 4 of the Company's Quarterly Report on Form-Q for the
quarter ended March 31, 1996, which is incorporated herein
by reference.
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 5, 1996 Compaq Computer Corporation
/s/ EARL MASON
------------------------------
Earl Mason, 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)
1996
----
Shares:
Weighted average number of
shares outstanding 268.2 268.7 268.2 268.7
Incremental shares attributed
to outstanding options 8.2 8.0 8.8 8.4
-------- -------- -------- --------
276.4 276.7 277.0 277.1
======== ======== ======== ========
Earnings:
Net income $ 501 $ 267 $ 501 $ 267
======== ======== ======== ========
Earnings per common and common
equivalent share $ 1.81 $ 0.97 $ 1.81 $ 0.96
======== ======== ======== ========
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
======== ======== ======== ========
<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, 1996 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-31-1996
<PERIOD-END> JUN-30-1996
<CASH> 1,927
<SECURITIES> 0
<RECEIVABLES> 2,687
<ALLOWANCES> 0
<INVENTORY> 1,535
<CURRENT-ASSETS> 6,635
<PP&E> 1,163
<DEPRECIATION> 0
<TOTAL-ASSETS> 7,991
<CURRENT-LIABILITIES> 2,302
<BONDS> 300
<COMMON> 922
0
0
<OTHER-SE> 4,242
<TOTAL-LIABILITY-AND-EQUITY> 7,991
<SALES> 8,206
<TOTAL-REVENUES> 8,206
<CGS> 6,400
<TOTAL-COSTS> 6,400
<OTHER-EXPENSES> 197<F1>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 37
<INCOME-PRETAX> 716
<INCOME-TAX> 215
<INCOME-CONTINUING> 501
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 501
<EPS-PRIMARY> 1.81
<EPS-DILUTED> 1.81
<FN>
<F1> Includes research and development costs.
</FN>
</TABLE>
