How profitable was Apple in fiscal 1995, and was the improvement sustainable?

Net income rose to $424 million from $310 million, and EPS rose to $3.45 from $2.61. Results were helped by a $23 million restructuring adjustment and a 37% effective tax rate. Fourth-quarter gross margin fell to 20.7%, and management said margins are likely to stay under pressure, so the full-year improvement may not persist.

Why did operating cash flow turn negative, and should investors be concerned?

Operating cash flow was negative $240 million, compared with positive $737 million in 1994. The main drivers were a $687 million inventory increase to support expected first-quarter 1996 product launches and a $350 million rise in receivables. Management attributed the shortfall to working-capital build rather than weak earnings, but it is a meaningful warning sign for cash generation, and the company has relied more on short-term borrowing.

What is the biggest strategic risk to Apple's business?

The filing highlights three risks: the ongoing transition from Motorola 68000 chips to PowerPC, which could hurt sales if it stalls; the expiration of the Microsoft Cross-Platform license on December 31, 1995, which could prevent Apple from supplying Windows-compatible systems; and the effect of Windows 95 on Apple's minority PC market share. Apple's ability to win software developers for Mac OS, and to license Mac OS without undermining its own hardware sales, is also uncertain.

Is Apple dependent on any particular suppliers or customers?

Yes, in certain areas. Several key components, including microprocessors from Motorola and IBM, displays, disk drives, and custom ASICs, come from single sources. Apple has no customer accounting for 10% or more of net sales. Its products are sold through third-party resellers and consumer channels, so reseller financial health matters.

How are Apple's international operations affecting results?

International sales made up 48% of 1995 net sales, up from 46% in 1994, and grew 25% year over year, led by Japan and the Pacific region. Apple benefits from a weaker U.S. dollar but is hurt when it strengthens. Hedging covers most exposures, but hedges generally extend only one year, and competitive price pressure in Japan is a concern for margins.

AAPL 10-K FY1995 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed December 19, 1995. Cited figures are marked; the original filing is the authoritative source.

Apple's fiscal 1995 10-K (year ended September 29, 1995) shows a company in transition.

Net sales rose 20% to $11.06 billion^a and net income rose 37% to $424 million, or $3.45 per share, driven by strong unit growth in Power Macintosh (over 70% of unit shipments by Q4 1995, versus 26% a year earlier) and a 12% increase in average revenue per Macintosh unit. Gross margin improved to 25.8% for the year, but management warned that margins fell to 20.7% in the fourth quarter on aggressive pricing and PowerPC production delays, and expects continued pressure from industrywide price competition, especially in Japan. The balance sheet shows rising pressure on liquidity.

Cash, cash equivalents and short-term investments fell to about $952 million^b, and net cash position (after short-term borrowings) declined to $491 million from $966 million. Operating cash flow was negative $240 million, driven by a $687 million inventory build ahead of new product launches and a $350 million increase in receivables. Short-term borrowings rose to $461 million.

Inventory of $1.78 billion^c now equals roughly 40% of annual cost of sales, which investors should watch closely. The filing also flags material strategic and operational risks. Apple is the primary maker of Macintosh-OS hardware with a minority share of the PC market, and it is licensing Mac OS to other vendors.

Its Cross-Platform Products depend on a Microsoft license that expires December 31, 1995, and Microsoft has conditioned renewal on a patent-related agreement Apple has not accepted. Microsoft's Windows 95 launched in August 1995.

Single-source components from Motorola and IBM, earthquake exposure at Cupertino, and a possibly weak holiday season add further risk. Results were supported by a $23 million^d restructuring reversal and a favorable 37% effective tax rate, so underlying margin trends deserve scrutiny.

02—Key points

Key Highlights

Net sales grew 20% to $11,062 million and net income grew 37% to $424 million, with EPS of $3.45 versus $2.61 in fiscal 1994.
Power Macintosh accounted for over 70% of Macintosh unit shipments by Q4 1995, up from 26% a year earlier, and Macintosh unit sales rose about 15%.
Gross margin improved to 25.8% for the full year, but fell to 20.7% in Q4 1995 due to aggressive pricing and PowerPC production delays, and management expects continued margin pressure.
Cash, cash equivalents and short-term investments fell to $952 million, and net cash declined to $491 million from $966 million, largely because operating cash flow was negative $240 million.
Inventories rose to $1,775 million (up about 63%), and short-term borrowings increased to $461 million, both signaling working-capital strain ahead of new product launches.
Microsoft's Old License Agreement for Cross-Platform Products expires December 31, 1995, with renewal contingent on terms Apple has not accepted, and Windows 95 launched in August 1995.
International sales were 48% of net sales in 1995, and backlog was about $618 million at December 1, 1995, versus $663 million a year earlier.

03—Questions

Frequently Asked Questions

How profitable was Apple in fiscal 1995, and was the improvement sustainable?
Net income rose to $424 million from $310 million, and EPS rose to $3.45 from $2.61. Results were helped by a $23 million restructuring adjustment and a 37% effective tax rate. Fourth-quarter gross margin fell to 20.7%, and management said margins are likely to stay under pressure, so the full-year improvement may not persist.
Why did operating cash flow turn negative, and should investors be concerned?
Operating cash flow was negative $240 million, compared with positive $737 million in 1994. The main drivers were a $687 million inventory increase to support expected first-quarter 1996 product launches and a $350 million rise in receivables. Management attributed the shortfall to working-capital build rather than weak earnings, but it is a meaningful warning sign for cash generation, and the company has relied more on short-term borrowing.
What is the biggest strategic risk to Apple's business?
The filing highlights three risks: the ongoing transition from Motorola 68000 chips to PowerPC, which could hurt sales if it stalls; the expiration of the Microsoft Cross-Platform license on December 31, 1995, which could prevent Apple from supplying Windows-compatible systems; and the effect of Windows 95 on Apple's minority PC market share. Apple's ability to win software developers for Mac OS, and to license Mac OS without undermining its own hardware sales, is also uncertain.
Is Apple dependent on any particular suppliers or customers?
Yes, in certain areas. Several key components, including microprocessors from Motorola and IBM, displays, disk drives, and custom ASICs, come from single sources. Apple has no customer accounting for 10% or more of net sales. Its products are sold through third-party resellers and consumer channels, so reseller financial health matters.
How are Apple's international operations affecting results?
International sales made up 48% of 1995 net sales, up from 46% in 1994, and grew 25% year over year, led by Japan and the Pacific region. Apple benefits from a weaker U.S. dollar but is hurt when it strengthens. Hedging covers most exposures, but hedges generally extend only one year, and competitive price pressure in Japan is a concern for margins.

04—Continue

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