01—Abstract
Summary
Summary of the 10-K filed December 19, 1996. Cited figures are marked; the original filing is the authoritative source.
Apple's fiscal 1996 10-K (year ended September 27, 1996) reports a sharp deterioration in the business.
Net sales fell 11% to $9.833 billiona from $11.062 billion, and the company posted a net loss of $816 million, or $6.59 per share, versus net income of $424 million in 1995. Gross margin collapsed to 9.8% from 25.8%, driven mainly by a $616 million inventory write-down in the second quarter, roughly $145 million in quality-related charges, and heavier pricing actions against competitors. Management attributes the decline to weaker demand, quality problems with PowerBook and entry-level products, and the loss of share in the PC market, which it says fell to 5.4% worldwide and 7.3% in the U.S. in the fourth quarter.
Management has also said net sales will stay below prior-year levels through at least Q1 1997 and that the company will not return to sustained profitability until at least Q2 1997. The company is undertaking a restructuring under a new strategic direction. The plan includes terminating roughly 1,500 employees, selling the Fountain, Colorado plant to SCI Systems and shifting production to outsourcing arrangements, and selling the Napa data center to MCI Systemhouse.
The restructuring charge was $179 millionb net after a $28 million favorable adjustment, and the company has dividend payments suspended since Q2 1996. Balance sheet strength has weakened: shareholders' equity fell to $2.06 billion from $2.90 billion, long-term debt rose to $949 million after a $661 million convertible note issuance, and the company's credit ratings were downgraded to B1 and B+ during 1996. Cash and short-term investments of $1.75 billion provide near-term liquidity, but management acknowledges that its cost of funds has increased and that access to bank financing is not assured.
For investors, the central questions are whether the restructuring and new product strategy can restore profitability and market share, and whether the company can execute its outsourcing transition without losing product quality or control. The filing indicates that management expects cash generation from asset sales to decline in 1997, and it discloses material litigation and tax exposure, including an IRS dispute covering 1989 to 1991. Results in 1996 were heavily affected by one-time charges, so the underlying earnings power is difficult to assess from this report alone.
02—Key points
Key Highlights
- Net sales declined 11% to $9.83 billion in fiscal 1996 from $11.06 billion, with Macintosh unit sales down 11% and peripheral unit sales down 20%.
- Net loss of $816 million ($6.59 per share) compared with net income of $424 million ($3.45 per share) in fiscal 1995.
- Gross margin fell to 9.8% from 25.8%, largely due to a $616 million inventory write-down and about $145 million in quality-related charges.
- Worldwide PC market share dropped to 5.4% in Q4 1996 from 8.7% a year earlier, and U.S. share fell to 7.3% from 13.2%.
- Restructuring underway: about 1,500 job cuts, sale of the Fountain, Colorado plant to SCI and the Napa data center to MCI, and a shift toward outsourced manufacturing.
- Dividends were suspended from Q2 1996. Shareholders' equity fell to $2.06 billion, and credit ratings were downgraded to B1 and B+.
- Management expects sales to remain below prior-year levels through at least Q1 1997 and a return to sustained profitability no earlier than Q2 1997.
03—Questions
Frequently Asked Questions
Why did Apple post such a large loss in fiscal 1996?
The loss was driven by a combination of falling demand, intense price competition, and one-time charges. The largest was a $616 million inventory write-down in Q2 1996, tied to weak demand for entry-level products and canceled component orders. Apple also took about $145 million in charges to fix quality problems in PowerBook, Performa, and peripheral products, and it incurred higher warranty costs and restructuring charges of $179 million.
Is Apple's restructuring likely to restore profitability?
The filing does not guarantee it. Management says it expects to return to sustained profitability no earlier than Q2 1997, and it acknowledges risks that cost cuts will not be fast enough and could impair innovation. The shift to outsourced manufacturing and third-party collaboration may also reduce the company's direct control over quality, production schedules, and R&D.
How is Apple's financial position after the losses?
Liquidity is adequate in the near term, with $1.75 billion in cash and short-term investments. However, shareholders' equity fell to $2.06 billion from $2.90 billion, long-term debt rose to $949 million after a $661 million convertible note issuance, and credit ratings were downgraded. The company also says its cost of funds has risen and that continued bank financing cannot be assured.
What is happening to Apple's market share and product strategy?
Apple's worldwide PC share fell to 5.4% in Q4 1996 from 8.7%, and U.S. share fell to 7.3% from 13.2%. In response, the company is narrowing its product portfolio to focus on education, home, and business segments, and it is reducing new product introductions. It is also licensing Mac OS to other vendors and developing cross-platform products that run Windows and DOS applications.
Does Apple have significant legal or tax risks?
Yes, several. The IRS has proposed federal tax deficiencies for 1984 to 1991, and Apple has petitioned the U.S. Tax Court on the 1989 to 1991 years. The company faces several shareholder class actions, numerous repetitive stress injury suits (one resolved in its favor), and monitor-size false advertising class actions. Management believes adequate provisions have been made and that the outcomes will not have a material adverse effect on financial condition, though results in a given period could be affected.
04—Continue