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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED NOVEMBER 2, 1997
COMMISSION FILE NUMBER: 0-17017
DELL COMPUTER CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 74-2487834
(State of incorporation) (I.R.S. Employer
ID No.)
ONE DELL WAY (512) 338-4400
ROUND ROCK, TEXAS 78682 (Telephone number)
(Address of 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 TWELVE MONTHS AND (2) HAS BEEN SUBJECT TO SUCH FILING
REQUIREMENTS FOR THE PAST 90 DAYS. YES [X] No [ ]
AS OF THE CLOSE OF BUSINESS ON DECEMBER 1, 1997, 326,435,775 SHARES OF THE
REGISTRANT'S COMMON STOCK, PAR VALUE $.01 PER SHARE, WERE OUTSTANDING.
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PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
DELL COMPUTER CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL POSITION
(IN MILLIONS AND UNAUDITED)
ASSETS
NOVEMBER 2, FEBRUARY 2,
1997 1997
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Current assets:
Cash...................................................... $ 222 $ 115
Marketable securities..................................... 1,393 1,237
Accounts receivable, net.................................. 1,350 903
Inventories............................................... 301 251
Other..................................................... 341 241
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Total current assets.............................. 3,607 2,747
Property, plant and equipment, net.......................... 301 235
Other....................................................... 13 11
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$3,921 $2,993
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $1,488 $1,040
Accrued and other......................................... 891 618
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Total current liabilities......................... 2,379 1,658
Deferred revenue............................................ 235 219
Other....................................................... 49 31
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Total liabilities................................. 2,663 1,908
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Put options................................................. 51 279
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Stockholders' equity:
Preferred stock and capital in excess of $.01 par value;
shares authorized: 5; shares issued and outstanding:
none................................................... -- --
Common stock and capital in excess of $.01 par value;
shares issued and outstanding: 326 and 346,
respectively........................................... 627 195
Retained earnings......................................... 621 647
Other..................................................... (41) (36)
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Total stockholders' equity........................ 1,207 806
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$3,921 $2,993
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The accompanying notes are an integral part of these condensed consolidated
financial statements.
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DELL COMPUTER CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF INCOME
(IN MILLIONS, EXCEPT PER SHARE DATA, AND UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
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NOVEMBER 2, OCTOBER 27, NOVEMBER 2, OCTOBER 27,
1997 1996 1997 1996
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Net sales......................................... $3,188 $2,019 $8,590 $5,347
Cost of sales..................................... 2,471 1,569 6,691 4,205
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Gross margin.................................... 717 450 1,899 1,142
------ ------ ------ ------
Operating expenses:
Selling, general and administrative............. 312 215 832 592
Research, development and engineering........... 59 33 148 86
------ ------ ------ ------
Total operating expenses..................... 371 248 980 678
------ ------ ------ ------
Operating income............................. 346 202 919 464
Financing and other............................... 13 8 36 19
------ ------ ------ ------
Income before income taxes and extraordinary
loss......................................... 359 210 955 483
Provision for income taxes........................ 111 61 296 140
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Income before extraordinary loss................ 248 149 659 343
Extraordinary loss, net of taxes.................. -- (4) -- (13)
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Net income...................................... $ 248 $ 145 $ 659 $ 330
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Earnings per common share:
Income before extraordinary loss................ $ 0.69 $ 0.39 $ 1.81 $ 0.88
Extraordinary loss, net of taxes................ -- (.01) -- (.03)
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Earnings per common share....................... $ 0.69 $ 0.38 $ 1.81 $ 0.85
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Weighted average shares outstanding............... 360 382 364 388
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The accompanying notes are an integral part of these condensed consolidated
financial statements.
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DELL COMPUTER CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(IN MILLIONS AND UNAUDITED)
NINE MONTHS ENDED
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NOVEMBER 2, OCTOBER 27,
1997 1996
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Cash flows from operating activities:
Net income................................................ $ 659 $ 330
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization.......................... 48 34
Other.................................................. 17 18
Changes in:
Operating working capital................................. 245 549
Non-current assets and liabilities........................ 33 94
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Net cash provided by operating activities......... 1,002 1,025
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Cash flows from investing activities:
Marketable securities:
Purchases.............................................. (8,649) (6,564)
Maturities and sales................................... 8,492 6,060
Capital expenditures...................................... (121) (82)
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Net cash used in investing activities............. (278) (586)
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Cash flows from financing activities:
Purchase of common stock.................................. (710) (336)
Repurchase of 11% Senior Notes............................ -- (95)
Issuance of common stock under employee plans............. 58 37
Cash received from sale of equity options................. 38 --
Cash paid on purchase of equity options................... -- (7)
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Net cash used in financing activities............. (614) (401)
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Effect of exchange rate changes on cash..................... (3) (6)
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Net increase in cash........................................ 107 32
Cash at beginning of period................................. 115 55
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Cash at end of period....................................... $ 222 $ 87
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The accompanying notes are an integral part of these condensed consolidated
financial statements.
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DELL COMPUTER CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of Dell
Computer Corporation (the "Company") should be read in conjunction with the
consolidated financial statements and notes thereto filed with the Securities
and Exchange Commission in the Company's Annual Report on Form 10-K for the
fiscal year ended February 2, 1997. In the opinion of management, the
accompanying condensed consolidated financial statements reflect all adjustments
of a normal recurring nature considered necessary to present fairly the
financial position of the Company and its consolidated subsidiaries at November
2, 1997 and February 2, 1997 and the results of their operations for the
three-month and nine-month periods ended November 2, 1997 and October 27, 1996.
NOTE 2 -- COMMON STOCK
On July 18, 1997, the Company's stockholders approved an increase in the number
of authorized shares of common stock to one billion. On July 25, 1997, the
Company effected a two-for-one common stock split by paying a 100% stock
dividend to stockholders of record as of July 18, 1997. All share and per share
information included in the accompanying condensed consolidated financial
statements and related notes have been restated to reflect the stock split.
NOTE 3 -- COMMITMENTS AND CONTINGENCIES
The Company is subject to various legal proceedings and claims arising in the
ordinary course of business. The Company's management does not expect that the
outcome in any of these legal proceedings, individually or collectively, will
have a material adverse effect on the Company's financial condition or results
of operations.
NOTE 4 -- RECENT PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings Per Share." This statement is
effective for financial statements issued for periods ending after December 15,
1997 and will require restatement of all prior period comparative amounts. Under
this statement, primary and fully diluted earnings per share calculations will
be replaced by basic and diluted earnings per share calculations. Diluted
earnings per share does not differ materially from earnings per common share as
currently reported. Basic earnings per share for the three month periods ended
November 2, 1997 and October 27, 1996 were $0.76 and $0.41, respectively. For
the nine month periods then ended, basic earnings per share were $1.99 and
$0.92, respectively.
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DELL COMPUTER CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 5 -- SUPPLEMENTAL FINANCIAL INFORMATION (IN MILLIONS)
Supplemental Condensed Consolidated Statement of Financial Position Information:
NOVEMBER 2, FEBRUARY 2,
1997 1997
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Inventories:
Production materials...................................... $244 $223
Work-in-process and finished goods........................ 57 28
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$301 $251
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Supplemental Condensed Consolidated Statement of Cash Flows Information:
NINE MONTHS ENDED
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NOVEMBER 2, OCTOBER 27,
1997 1996
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Changes in operating working capital accounts:
Accounts receivable, net.................................. $(486) $(197)
Inventories............................................... (56) 213
Accounts payable.......................................... 470 448
Accrued and other liabilities............................. 424 74
Other..................................................... (107) 11
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$ 245 $ 549
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
All percentage amounts and ratios were calculated using the underlying data in
thousands. Operating results for the three-month and nine-month periods ended
November 2, 1997 are not necessarily indicative of the results that may be
expected for the full fiscal year.
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated the percentage of
consolidated net sales represented by certain items in the Company's condensed
consolidated statement of income.
PERCENTAGE OF CONSOLIDATED NET SALES
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THREE MONTHS ENDED NINE MONTHS ENDED
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NOVEMBER 2, OCTOBER 27, NOVEMBER 2, OCTOBER 27,
1997 1996 1997 1996
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Net sales:
Americas........................... 72.0% 69.9% 70.1% 67.7%
Europe............................. 22.0 23.9 22.9 25.9
Asia Pacific and Japan............. 6.0 6.2 7.0 6.4
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Consolidated net sales..... 100.0 100.0 100.0 100.0
Cost of sales........................ 77.5 77.7 77.9 78.6
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Gross margin............... 22.5 22.3 22.1 21.4
Operating expenses:
Selling, general and
administrative.................. 9.8 10.7 9.7 11.1
Research, development and
engineering..................... 1.8 1.6 1.7 1.6
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Total operating expenses... 11.6 12.3 11.4 12.7
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Operating income........... 10.9 10.0 10.7 8.7
Financing and other.................. 0.4 0.4 0.4 0.3
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Income before income taxes and
extraordinary loss.............. 11.3 10.4 11.1 9.0
Provision for income taxes........... 3.5 3.0 3.4 2.6
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Income before extraordinary loss... 7.8 7.4 7.7 6.4
Extraordinary loss, net of taxes..... -- (0.2) -- (0.2)
----- ----- ----- -----
Net income................. 7.8% 7.2% 7.7% 6.2%
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Net Sales
Consolidated net sales increased 58% and 61% in the third quarter and first nine
months, respectively, of fiscal 1998 over the comparable periods of fiscal 1997,
and increased 13% over the second quarter of fiscal 1998.
The increase in consolidated net sales was primarily attributable to increased
units sold. Unit volumes increased 54% and 59% in the third quarter and first
nine months, respectively, of fiscal 1998 compared to the same periods of fiscal
1997. Unit volumes increased 17% in the third quarter of fiscal 1998 compared to
the second quarter of fiscal 1998. While desktop products continue to remain the
primary driver of unit volumes (comprising 85% of total units shipped during the
third quarter of fiscal 1998), the growth rate in enterprise systems (which
includes both servers and workstations) continues to exceed the growth rate of
desktop products. During the third quarter and first nine months of fiscal 1998,
enterprise system units increased 313% and 306%, respectively, over the
comparable periods of the prior fiscal year. On a sequential basis, enterprise
units increased 61% in the third quarter of fiscal 1998. Notebook products also
experienced unit growth increasing 38% and 60% in the third quarter and first
nine months of fiscal 1998, respectively, compared to the same periods of fiscal
1997 and 8% on a sequential basis.
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In addition to increased unit volumes, consolidated net sales for the third
quarter and first nine months of fiscal 1998 were affected positively by
increased average revenue per unit of 2% and 1%, respectively, over the same
periods of the prior fiscal year. However, average revenue per unit declined by
3% in the third quarter compared to the second quarter of fiscal 1998.
Net sales increased in all geographic regions in the third quarter and first
nine months of fiscal 1998 as compared with the same periods of fiscal 1997. The
increase in net sales was led by the Americas, where net sales increased 63% and
66% in the third quarter and first nine months of fiscal 1998, respectively,
from the comparable periods in fiscal 1997. Europe also experienced growth,
where net sales increased 45% and 42% in the third quarter and first nine months
of fiscal 1998, respectively, over the same periods of fiscal 1997.
Additionally, net sales in the Asia-Pacific and Japan region increased 52% and
76% in the third quarter and first nine months of fiscal 1998, respectively,
over the same periods of the prior fiscal year.
The sequential increase in net sales of 13% from the second quarter to the third
quarter of fiscal 1998, was attributable primarily to the growth in the Americas
region of 16% while Europe also experienced sequential growth of 13%. However,
net sales in the Asia-Pacific and Japan region sequentially declined 9%.
Gross Margin
The Company's gross margin as a percentage of consolidated net sales increased
slightly in the third quarter of fiscal 1998 compared to both the third quarter
of fiscal 1997 and the second quarter of fiscal 1998. The increase from 21.4% in
the first nine months of fiscal 1997 to 22.1% in the first nine months of fiscal
1998 was driven by the first quarter of each respective period. During the first
quarter of fiscal 1998, compared to the first quarter of fiscal 1997, gross
margin was positively affected by component cost declines, partially offset by
price reductions, and a shift in product mix to server and higher-end desktop
products.
Operating Expenses
Selling, general and administrative expenses decreased as a percentage of
consolidated net sales to 9.8% and 9.7% for the third quarter and first nine
months of fiscal 1998, respectively, from 10.7% and 11.1% in the comparable
periods of the prior fiscal year due to scaling benefits associated with sales
growth. Selling, general and administrative expenses remained relatively flat as
a percentage of consolidated net sales at 9.8% in the third quarter from 9.9% in
the second quarter of fiscal 1998. The current level of selling, general and
administrative spending is principally due to increased worldwide staffing and
related infrastructure-type investments to support the Company's growth.
Research, development and engineering expenses have increased in absolute dollar
amounts due to increased staffing levels and product development costs in order
to meet the demand of product transition cycles. Although total operating
expenses may continue to increase in absolute dollar terms, the Company's goal
is to manage operating expenses, over time, relative to net sales and gross
margin.
Income Taxes
The Company's effective tax rate was 31.0% for the third quarter and first nine
months of fiscal 1998 compared with 29.0% for the third quarter and first nine
months of fiscal 1997. The increase in the Company's effective tax rate resulted
from changes in the geographical distribution of income and losses.
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LIQUIDITY AND CAPITAL RESOURCES
The following table presents selected financial statistics and information:
NOVEMBER 2, FEBRUARY 2,
1997 1997
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( DOLLARS IN MILLIONS)
Cash and marketable securities.............................. $1,615 $1,352
Working capital............................................. $1,228 $1,089
ASSET MANAGEMENT STATISTICS:
Days of sales in accounts receivable........................ 38 37
Days of supply in inventory................................. 11 13
Days in accounts payable.................................... 54 54
Cash flows generated from operating activities for the first nine months of
fiscal 1998 were $1 billion and represented the Company's primary source of cash
during the quarter. Operating cash flows benefited from the Company's strong net
income performance and continued focus on asset management.
During the first nine months of fiscal 1998, the Company repurchased 28 million
shares of common stock for $710 million. The Company is currently authorized to
repurchase up to 57 million additional shares of its common stock and
anticipates that such repurchases will constitute a significant use of future
cash resources. At November 2, 1997, the Company held equity instrument
arrangements that entitle the Company to purchase 27 million additional shares
of common stock for an average cost of $74 per share at various times through
the third quarter of fiscal 1999. The Company's potential repurchase obligations
under put options has decreased from $279 million at February 2, 1997 to $51
million at November 2, 1997, because a significant number of the options that
did not contain net share settlement terms have expired or have been exercised.
During the second quarter of fiscal 1998, the Company entered into a $250
million five-year revolving credit facility. This facility replaced a $100
million 364-day revolving credit facility that expired on June 9, 1997 and a
$150 million three-year revolving credit facility that was scheduled to expire
on June 9, 1999. At November 2, 1997, this new facility was unused.
During the first half of fiscal 1998, the Company entered into a $225 million
master lease facility, which provides for the ability to lease certain real
property, buildings and equipment to be constructed or acquired.
Management believes that the Company will have sufficient resources available to
meet its cash requirements for the foreseeable future, including working capital
requirements, planned capital expenditures and stock repurchases.
FACTORS AFFECTING THE COMPANY'S BUSINESS AND PROSPECTS
Statements in this Report that relate to future results or events are based on
the Company's current expectations. There are many factors that affect the
Company's business and the results of its operations and may cause the actual
results of operations in future periods to differ materially from those
currently expected or desired. These factors include general economic and
business conditions; the level of demand for personal computers; the level and
intensity of competition in the personal computer industry and the pricing
pressures that may result; foreign currency fluctuations; the ability of the
Company to timely and effectively manage periodic product transitions and
component availability; the ability of the Company to develop new products based
on new or evolving technology and the market's acceptance of those products; the
ability of the Company to manage its inventory levels to minimize excess
inventory, declining inventory values and obsolescence; the product, customer
and geographic sales mix of any particular period; and the Company's ability to
continue to improve its infrastructure (including personnel and systems) to keep
pace with the growth in its overall business activities. For a discussion of
these and other factors affecting the Company's business and prospects, see
"Item 1 -- Business -- Factors Affecting the Company's Business and Prospects"
in the Company's Annual Report on Form 10-K for the fiscal year ended February
2, 1997.
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The Company has a formal program to ensure its products and information systems
and those of its third party providers will be year 2000 compliant. The ultimate
cost of this program has not been and is not expected to be material to the
Company's financial position or results of operations. Although management
believes the Company has an adequate program in place to address the year 2000
issue, there can be no assurance that the program will ultimately be successful.
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is subject to various legal proceedings and claims arising in the
ordinary course of business. The Company's management does not expect that the
results in any of these legal proceedings will have a material adverse effect on
the Company's financial condition or results of operations.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
The following exhibits are filed as part of this Report:
EXHIBIT NO. DESCRIPTION OF EXHIBIT
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10 -- Fourth Amendment to Dell Computer Corporation Incentive
Plan, dated as of September 12, 1997
11 -- Statement Re Computation of Per Share Earnings
27 -- Financial Data Schedule
(b) Reports on Form 8-K.
None.
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SIGNATURE
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.
DELL COMPUTER CORPORATION
December 5, 1997 /s/ JAMES M. SCHNEIDER
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James M. Schneider
Vice President, Finance
(On behalf of the registrant and as
chief accounting officer)
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INDEX TO EXHIBITS
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
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10 -- Fourth Amendment to Dell Computer Corporation Incentive
Plan, dated as of September 12, 1997
11 -- Statement Re Computation of Per Share Earnings
27 -- Financial Data Schedule