===============================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1994
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to _____
Commission file number 0-9722
INTERGRAPH CORPORATION
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 63-0573222
- ------------------------------- -----------------------------------
(State or other jurisdiction of (I.R.S.Employer Identification No.)
incorporation or organization)
Intergraph Corporation
Huntsville, Alabama 35894-0001
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(205) 730-2000
------------------
(Telephone Number)
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
Common stock, par value $.10 per share: 44,644,003
shares outstanding as of September 30, 1994
==============================================================================
<PAGE>
INTERGRAPH CORPORATION
FORM 10-Q
September 30, 1994
INDEX
Page No.
--------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets at September 30, 1994
and December 31, 1993 2
Consolidated Statements of Income for the quarters ended
September 30, 1994 and 1993 3
Consolidated Statements of Income for the nine months ended
September 30, 1994 and 1993 4
Consolidated Statements of Cash Flows for the nine months
ended September 30, 1994 and 1993 5
Notes to Consolidated Financial Statements 6-7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 8-14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 6. Exhibits and Reports on Form 8-K 15
SIGNATURES 16
1
<PAGE>
PART I. FINANCIAL INFORMATION
INTERGRAPH CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
- -------------------------------------------------------------------------------
September 30, December 31,
1994 1993
- -------------------------------------------------------------------------------
(In thousands except share and per share amounts)
Assets
Cash and cash equivalents $ 53,049 $ 55,976
Short-term investments 2,099 19,772
Accounts receivable 313,079 314,256
Inventories 132,237 111,555
Refundable income taxes 8,743 42,380
Other current assets 52,144 41,118
- -------------------------------------------------------------------------------
Total current assets 561,351 585,057
Long-term investments 10,760 23,560
Other assets 27,173 22,281
Property, plant, and equipment, net 233,973 224,431
- -------------------------------------------------------------------------------
Total Assets $ 833,257 $ 855,329
===============================================================================
Liabilities and Shareholders' Equity
Trade accounts payable $ 45,581 $ 42,866
Accrued compensation 48,713 43,366
Other accrued expenses 67,993 75,608
Billings in excess of sales 63,752 62,087
Income taxes payable 3,402 3,309
Short-term debt and current maturities of
long-term debt 33,779 9,065
- -------------------------------------------------------------------------------
Total current liabilities 263,220 236,301
Deferred income taxes 11,497 12,777
Long-term debt 18,890 17,541
- -------------------------------------------------------------------------------
Total liabilities 293,607 266,619
- -------------------------------------------------------------------------------
Shareholders' equity:
Common stock, par value $.10 per share
- 100,000,000 shares authorized;
57,361,362 shares issued 5,736 5,736
Additional paid-in capital 244,207 246,642
Retained earnings 472,652 524,359
Cumulative translation adjustment 2,406 ( 7,606)
- -------------------------------------------------------------------------------
725,001 769,131
Less - cost of 12,717,359 treasury shares
at September 30, 1994 and 12,006,827
treasury shares at December 31, 1993 (185,351) (180,421)
- -------------------------------------------------------------------------------
Total shareholders' equity 539,650 588,710
- -------------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity $ 833,257 $ 855,329
===============================================================================
The accompanying notes are an integral part of these consolidated
financial statements.
2
<PAGE>
INTERGRAPH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
- -------------------------------------------------------------------------------
Quarter Ended September 30, 1994 1993
- -------------------------------------------------------------------------------
(In thousands except per share amounts)
Revenues
Systems $ 167,048 $ 156,514
Maintenance and services 95,177 94,047
- -------------------------------------------------------------------------------
Total revenues 262,225 250,561
- -------------------------------------------------------------------------------
Cost of revenues
Systems 104,241 87,006
Maintenance and services 53,971 59,617
- -------------------------------------------------------------------------------
Total cost of revenues 158,212 146,623
- -------------------------------------------------------------------------------
Gross profit 104,013 103,938
Product development 35,419 39,564
Sales and marketing 66,138 56,744
General and administrative 23,459 24,911
Restructuring charge --- 9,502
- -------------------------------------------------------------------------------
Loss from operations ( 21,003) ( 26,783)
Interest expense ( 599) ( 426)
Interest income 727 1,041
Other income (expense) - net 3,379 ( 2,527)
- -------------------------------------------------------------------------------
Loss before income taxes ( 17,496) ( 28,695)
Income tax benefit --- 8,856
- -------------------------------------------------------------------------------
Net loss $( 17,496) $( 19,839)
===============================================================================
Net loss per share $( .39) $( .43)
===============================================================================
Weighted average shares outstanding 44,559 45,769
===============================================================================
The accompanying notes are an integral part of these consolidated
financial statements.
3
<PAGE>
INTERGRAPH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
- -------------------------------------------------------------------------------
Nine Months Ended September 30, 1994 1993
- -------------------------------------------------------------------------------
(In thousands except per share amounts)
Revenues
Systems $ 467,286 $ 498,506
Maintenance and services 277,407 283,242
- -------------------------------------------------------------------------------
Total revenues 744,693 781,748
- -------------------------------------------------------------------------------
Cost of revenues
Systems 281,381 268,232
Maintenance and services 158,386 188,836
- -------------------------------------------------------------------------------
Total cost of revenues 439,767 457,068
- -------------------------------------------------------------------------------
Gross profit 304,926 324,680
Product development 103,606 122,686
Sales and marketing 188,879 176,836
General and administrative 68,547 79,658
Restructuring charge --- 14,092
- -------------------------------------------------------------------------------
Loss from operations ( 56,106) ( 68,592)
Interest expense ( 1,524) ( 1,574)
Interest income 2,489 3,325
Other income (expense) - net ( 537) ( 6,823)
- -------------------------------------------------------------------------------
Loss before income taxes and cumulative
effect of change in accounting for
income taxes ( 55,678) ( 73,664)
Income tax benefit 3,971 25,045
- -------------------------------------------------------------------------------
Loss before cumulative effect of change
in accounting for income taxes ( 51,707) ( 48,619)
Cumulative effect as of January 1, 1993 of change
in method of accounting for income taxes --- 2,500
- -------------------------------------------------------------------------------
Net loss $( 51,707) $( 46,119)
===============================================================================
Earnings (loss) per share:
Loss before cumulative effect of change in
accounting for income taxes $( 1.15) $( 1.04)
Cumulative effect of change in accounting for
income taxes --- .05
- -------------------------------------------------------------------------------
Net loss $( 1.15) $( .99)
===============================================================================
Weighted average shares outstanding 44,915 46,553
===============================================================================
The accompanying notes are an integral part of these consolidated
financial statements.
4
<PAGE>
INTERGRAPH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
- -------------------------------------------------------------------------------
Nine Months Ended September 30, 1994 1993
- -------------------------------------------------------------------------------
(In thousands)
Cash provided by (used for):
Operating Activities:
Net loss $( 51,707) $( 46,119)
Adjustments to reconcile net loss to net cash
provided by operations:
Cumulative effect of change in method of
accounting for income taxes --- ( 2,500)
Depreciation and amortization 53,859 64,976
Non-cash portion of restructuring charge --- 7,441
Gain on sale of long-term investment ( 5,815) ---
Write-off of long-term investments 3,361 3,273
Collection of income tax refunds 32,955 2,680
Net changes in current assets and liabilities ( 14,463) 30,742
Net exchange loss 1,104 2,804
- ------------------------------------------------------------------------------
Net cash provided by operating activities 19,294 63,297
- ------------------------------------------------------------------------------
Investing Activities:
Increase in short-term investments and long-term
debt securities, net --- 3,487
Purchases of available-for-sale securities ( 61,127) ---
Sales of available-for-sale securities 86,771 ---
Maturities of available-for-sale securities 5,000 ---
Purchase of property, plant, and equipment ( 55,496) ( 45,965)
Disposal of equipment 2,625 4,925
Purchase of ownership interests in other
businesses ( 770) ( 6,938)
Repayment of loan by affiliate --- 6,994
Other ( 15,815) ( 11,366)
- ------------------------------------------------------------------------------
Net cash used for investing activities ( 38,812) ( 48,863)
- ------------------------------------------------------------------------------
Financing Activities:
Proceeds of debt 35,698 860
Payment of debt ( 11,728) ( 613)
Proceeds of employee stock purchases 3,025 3,285
Proceeds of exercise of stock options --- 828
Acquisition of treasury stock ( 10,379) ( 27,044)
- ------------------------------------------------------------------------------
Net cash (used for) provided by financing
activities 16,616 ( 22,684)
- ------------------------------------------------------------------------------
Effect of exchange rate changes on cash ( 25) ( 2,798)
- ------------------------------------------------------------------------------
Net decrease in cash and cash equivalents ( 2,927) ( 11,048)
Cash and cash equivalents at beginning of period 55,976 67,194
- ------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 53,049 $ 56,146
==============================================================================
The accompanying notes are an integral part of these consolidated
financial statements.
5
<PAGE>
INTERGRAPH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: In the opinion of management, the accompanying unaudited
consolidated financial statements contain all adjustments (consisting
of normal recurring items) necessary for a fair presentation of
results for the interim periods presented.
Certain reclassifications have been made to the previously
reported consolidated statement of cash flows for the nine months
ended September 30, 1993 to provide comparability with the current
period presentation.
NOTE 2: In May 1993, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 115, "Accounting for
Certain Investments in Debt and Equity Securities". The Company
adopted the provisions of the new standard for investments held as of
and acquired after January 1, 1994. In accordance with the
requirements of the Statement, prior period financial statements have
not been restated to reflect the provisions of the new standard.
Neither the cumulative effect of the change in principle as of January
1, 1994 nor its application for the nine months ended September 30,
1994 is material to the Company's results of operations or financial
position.
NOTE 3: In the first quarter of 1994, the Company wrote down minority
share investments in two companies, resulting in a pretax charge of
$3.4 million ($.07 per share). During the first nine months of 1994,
the Company in two installments sold its stock investment in another
company, resulting in a pretax gain of $3.3 million ($.07 per share)
in the third quarter of 1994 and a pretax gain of $5.8 million ($.12
per share) for the first nine months of 1994. These items are
included in "Other income (expense) - net" in the consolidated income
statement.
In the first quarter of 1993, the Company wrote off a minority
share investment in another company, resulting in a pretax charge of
$3.3 million ($.04 per share). The charge is included in "Other
income (expense) - net" in the consolidated income statement.
NOTE 4: Inventories are stated at the lower of average cost or market
and are summarized as follows:
- ------------------------------------------------------------------------------
September 30, December 31,
1994 1993
- ------------------------------------------------------------------------------
(In thousands)
Raw materials $ 42,589 $ 31,023
Work-in-process 37,571 33,118
Finished goods 15,336 14,295
Service spares 36,741 33,119
- ------------------------------------------------------------------------------
Totals $ 132,237 111,555
==============================================================================
NOTE 5: Property, plant, and equipment - net includes allowances for
depreciation and amortization of $279,571,000 and $249,445,000
at September 30, 1994 and December 31, 1993, respectively.
6
<PAGE>
INTERGRAPH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6: Supplemental cash flow information is summarized as follows:
Changes in current assets and liabilities, net of the effects of
business acquisitions and restructuring charges, in reconciling net
loss to net cash provided by operations are as follows:
-----------------------------------------------------------------------
Cash Provided By (Used For) Operations
for the Nine Months Ended September 30,
1994 1993
-----------------------------------------------------------------------
(In thousands)
(Increase) decrease in:
Accounts receivable $ 11,658 $ 45,456
Inventories (11,538) 18,078
Other current assets ( 7,831) (14,686)
Increase (decrease) in:
Trade accounts payable ( 88) 1,510
Accrued compensation and other
accrued expenses ( 5,906) ( 1,370)
Billings in excess of sales ( 583) (11,356)
Income taxes payable ( 175) ( 6,890)
-----------------------------------------------------------------------
Net change in current assets
and liabilities $(14,463) $ 30,742
-----------------------------------------------------------------------
Cash payments for income taxes totaled $2,291,000 and $2,168,000 for
the nine months ended September 30, 1994 and 1993, respectively. Cash
payments for interest during those periods totaled $1,613,000 and
$1,498,000, respectively.
There were no significant non-cash investing and financing
transactions in the first nine months of 1994. Non-cash transactions
in the first nine months of 1993 consisted of the acquisition of a
business in part through obligations totaling approximately $2.5
million.
NOTE 7: The Company's effective tax benefit rate for the third quarter
of 1994 was zero and for the first nine months of 1994 was 7.1%,
versus 30.9% for third quarter 1993, 34% for the first nine months of
1993, and 31.3% for the full year 1993. During the second quarter of
1994 the Company reduced its estimated annual effective tax benefit rate
as a result of exhaustion of all available U.S. tax loss carryback
refund opportunities and as a result of a reduction in the Company's
deferred tax assets due to a change in the Company's expectations for
realization of these future benefits. Any further losses in 1994 will
carry no tax benefit.
7
<PAGE>
INTERGRAPH CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SUMMARY
- -------
EARNINGS. The Company incurred a net loss of $.39 per share in the
third quarter of 1994 versus a loss of $.43 per share in the third
quarter of 1993. For the first nine months of 1994, the Company
incurred a net loss per share of $1.15 versus $.99 in 1993. Losses in
the third quarter and first nine months of 1994 are the result of a
major product transition (to a new operating system and new hardware
products) that has resulted in weak systems revenue, and of a decline
in gross margin on systems sales and the loss of tax benefits of the
Company's pretax loss.
Third quarter 1994 earnings were increased $.07 per share as a result
of a gain on the sale of the Company's investment in an affiliated
company. Third quarter 1993 earnings were reduced $.14 per share by a
restructuring charge primarily for employee severance costs,
facilities charges and write-off of assets. Excluding these
nonrecurring items in third quarter 1994 and 1993, loss per share
increased by $.17 as the result of declining systems gross margin and
loss of tax benefits of the Company's pretax loss.
Earnings for the first nine months of 1993 were reduced by a net $.19
per share by nonrecurring items including a restructuring charge of
$.20 per share, the write-off of an equity investment of $.04 per
share, and the required adoption of a change in the method of
accounting for income taxes, which improved earnings by $.05 per share
(shown as the cumulative effect of a change in accounting principle in
the year to date 1993 consolidated income statement). Excluding the
1993 nonrecurring charges, year to date 1994 losses are up $.35 per
share from the 1993 level due to a $37 million decline in revenues, a
6.4 point decline in systems gross margin, and the loss of tax
benefits.
TRANSITION PROGRESS. The Company has substantially completed its port
to Microsoft Corporation's Windows NT operating system for two of its
three dominant software applications (architecture, engineering, and
construction and mapping/geographic information systems). Porting of
most of the remaining software applications is expected to be complete
by the end of the year. With respect to hardware transition, Intel-
based workstations accounted for approximately 80% of the hardware
units sold during the third quarter, indicating the near completion of
hardware transition. The Company believes the Windows NT operating
system is gaining increasing acceptance in the U.S. and Asian
markets, with the European market somewhat slower in its acceptance.
ORDERS. Third quarter systems orders were up 9% from the same prior
year period and up 17% from the second quarter 1994 level. This is
the first time orders have increased year to year since the transition
began. The Company believes the order increase is evidence of the
forward movement of the transition; however, the order increase is
slower and later than the Company planned.
On July 13, 1994, the U.S. Navy awarded the Company a multi-year,
indefinite delivery, indefinite quantity contract (the Naval Air
Systems Command and Space and Naval Warfare Command or "NAVAIR and
SPAWAR" contract) to provide computer aided design, manufacturing and
engineering (CAD/CAM/CAE) systems and services for electronics and
mechanical applications. The twelve year contract has an estimated
value of $398 million. The award of this contract has been formally
protested by one of the losing bidders. The Company is supporting the
efforts of the Navy in defending against the protest, and expects the
Navy to prevail in that defense. The Company expects settlement of
the dispute during the fourth quarter. There will be no order and
shipment activity until the dispute is settled.
8
<PAGE>
OUTLOOK. The Company anticipates continued improvement in order and
revenue levels during the fourth quarter as it continues progress in its
software applications porting effort and makes fully available its new
hardware offerings, although another loss will likely be incurred. The
Company expects to be profitable for 1995.
PRODUCT TRANSITION AND RESTRUCTURING
- ------------------------------------
PRODUCT TRANSITION. Over the past several years the industry in which
the Company competes has been characterized by a rapid move to higher
performance, lower priced product offerings, by intense price and
performance competition (best exhibited by gross margins that have
declined steadily in the industry and for the Company), by
significantly shorter product cycles, and by development and support
of software standards that result in less specific hardware dependency
by customers. As a consequence, the operating results of the Company
and others in the industry have and will continue to depend on the
ability to rapidly and continuously develop and deliver new hardware
and software products that are competitively priced, offer enhanced
performance, and meet customers' requirements for standardization and
interoperability. As described below, during late 1992 and 1993 the
Company made several strategic decisions to better position itself to
compete in this environment.
OPERATING SYSTEMS. In November, 1992 the Company announced its
decision to port its technical software applications to Microsoft
Corporation's new Windows NT operating system, and to make Windows NT
available on Intergraph workstations. Microsoft's standard Windows
system has been widely accepted in the personal computing (PC) market,
and Windows NT is Microsoft's operating system for high-end computing.
The effect of this decision is to expand the availability of the
Company's workstations and software applications to Windows-based
computing environments not previously addressed by the Company,
including the availability of Intergraph software applications that
will operate across a variety of hardware architectures, including
those of other hardware vendors that use the Windows NT operating
system. Prior to this decision, the Company's software applications
operated principally on Intergraph hardware platforms. At the same
time, the Company is continuing to develop and maintain products in
the UNIX operating system environment, the foundation for its software
applications prior to Windows NT, thereby offering existing and
potential customers a choice of operating systems as well as a path to
the NT system if and when the customer chooses. Limited shipments of
Windows NT-based software began in the fourth quarter of 1993. Both
the Company's offering of new products and customers' evaluation of
the change to a new operating system are occurring more slowly than
anticipated.
While the Company believes that Windows NT will become the dominant
operating system in the markets it serves, competing operating systems
are available in the market. In addition, several competitors of the
Company also offer UNIX or are adopting the Windows NT operating
system for product offerings.
HARDWARE ARCHITECTURE. In addition to the Windows NT operating
system, the Company believes that Intel Corporation's hardware
architecture will play an increasingly important role in the computing
markets it serves, and is offering a hardware platform (in addition to
its own) based on Intel microprocessors. Previously, the Company's
principal hardware platform offering had been based on its own
microprocessor. The Company has ceased design of its own
microprocessor, although limited production of that microprocessor
will continue through 1994. The Company began shipping new Intel-
based workstations in third quarter 1993.
9
<PAGE>
In May, 1994 the Company announced a new series of Intel-based
personal workstations, the TD-2, TD-3, TD-4 and TD-5. Personal
workstations combine PC and workstation functionality into a single
computer system. These systems are designed and engineered for high-
end and technical applications and are powered by single or dual Intel
Pentium microprocessors. All products in the series are available for
shipping.
RESTRUCTURING. As described above, during late 1992 and 1993, the
Company made several strategic decisions to better position itself to
compete in the current industry and economic environment. These
decisions led to actions that resulted in an $89.8 million pretax
restructuring charge in 1993. The restructuring charge was comprised
of $10.5 million for direct workforce reductions, $17.1 million for
elimination of operations, primarily the Company's European
manufacturing and distribution facility, $56.1 million for revaluation
of assets resulting from new product strategy, primarily spares
inventory, goodwill, and investments in other companies, and $6.1
million for restructure of the Company's electronics business unit.
The Company estimates that the restructuring actions taken in 1993
have reduced year to date 1994 expenses by approximately $45 million,
primarily in the areas of selling, product support, and product
development expenses.
There have been no changes to the Company's 1993 restructuring plan
during the first nine months of 1994 that would materially affect the
amount of the 1993 restructuring charge. The phased closure over the
course of 1994 of the Company's European manufacturing and
distribution facility (IEM) was completed during the third quarter.
The Company determined in fourth quarter 1994 that it will utilize a
portion of this facility as a distribution center for Europe and will
lease any excess space. The original plan called for sale or lease of
the facility. Included in the September 30, 1994 balance sheet is
approximately $11 million representing the net book value (which
approximates market value) of the IEM facility and approximately $5.5
million in related mortgage debt. Cash outlays in the first nine
months of 1994 related to the 1993 restructuring were approximately
$10 million, primarily for severance pay and associated personnel
costs, all of which was funded by cash generated from operations and
credit line borrowing. Total 1994 cash expenditures related to the
restructuring are expected to be $13-$15 million, primarily for
severance pay and related personnel costs, all of which will be funded
from operations and existing credit line borrowings. The Company
continues to believe that the long-term effects of the 1993
restructuring on liquidity and sources and uses of capital will be
minimal. See "LIQUIDITY AND CAPITAL RESOURCES" below for comments
regarding the Company's cash position.
REVENUES/ORDERS
- ---------------
REVENUES. Total revenues for third quarter and year to date 1994 were $262.2
million and $744.7 million, respectively, up 5% and down 5%, respectively,
from the same prior year periods.
Third quarter systems revenues were $167 million, up 7% from the prior
year period due to an 18% increase in U.S. systems revenues (both U.S.
commercial and Federal government revenues were improved), partially
offset by a 6% decline in international revenues (European revenues
were down 5%). Third quarter systems revenues were up 12% from the
second quarter 1994 level due to improved U.S. systems revenues. Year
to date 1994 systems revenues were $467.3 million, down 6% from the
same prior year period due to a 14% decline in international systems
revenues (European systems revenues were down 17%), partially offset
by a 2% increase in U.S. systems revenues. Product transition and
declining per unit sales prices are the primary causes for the decline
in systems revenue.
10
<PAGE>
International revenues represented 49% of year to date 1994 total
revenues, versus 51% for the full year 1993. European revenues
represented 34% of year to date 1994 total revenues, approximately
equal to the full year 1993 percentage.
Among the Company's software applications, AEC (architecture,
engineering and construction), mapping/GIS (geographic information
systems), and MDEM (mechanical design, engineering, and manufacturing)
continue to dominate the product mix.
Maintenance revenues grow as the Company's installed base of systems
grows. Maintenance revenue for the third quarter was relatively flat
with the third quarter 1993 and year to date declined 2% from the same
prior year period, due to the systems revenue decline, the shift
within the industry to lower priced workstations and software, and
longer product warranty periods. The trend in the industry toward
lower priced workstations with longer warranty periods could continue to
reduce maintenance revenue, if not offset by higher volumes of product sales.
ORDERS. Systems orders for the third quarter totaled $175.3 million, up 9%
from the prior year period. Systems orders for the first nine months of 1994
totaled $455.7 million, flat with the prior year period. U.S. systems
orders for the third quarter and year to date 1994 were up 3% and 6%,
respectively, from the comparable prior year periods. Federal
government orders were down 18% and up 10%, respectively. Government
purchasing activity remains unpredictable. U.S. commercial orders
were up 29% and 4%, respectively. International systems orders for
the third quarter and year to date 1994 were up 20% and down 6%,
respectively, from the comparable prior year periods. European orders
for the third quarter and year to date 1994 were up 11% and down 9%,
respectively. Order levels have improved sequentially in both the
second and third quarters of 1994. Third quarter orders were up 17%
from the second quarter, while second quarter orders increased 16%
over the first quarter level due primarily to improved U.S. order
levels in both the commercial and Federal sectors.
Based on current order levels and trends, the Company believes its new
hardware offerings and the new Windows NT operating system are gaining
acceptance in the U.S. and Asia Pacific regions, with acceptance in
the European region somewhat slower. However, all geographic regions'
order levels have been adversely affected year to date by the product
transition.
GROSS MARGIN
- ------------
Gross margins for the third quarter and the first nine months of 1994
were 39.7% and 40.9%, respectively, versus 41.5% for the first nine
months of 1993 and 40.8% for the full year 1993.
Systems margin for third quarter was 37.6%, down 6.8 points from the
comparable prior year period. Systems margin for the first nine
months of 1994 was 39.8%, down 6.4 points from the same prior year
period and down 5 points from the full year 1993 level. The decline
in systems margin is the result of competitive price discounting in all
regions, lower margins on new hardware products, a 17% decline in European
sales volume, and a decline in the mix of international systems sales to
total Company systems sales. In addition, third quarter systems margin was
negatively impacted by a third quarter price reduction on the
Company's low end personal workstations as part of a marketing
strategy to strengthen the Company's indirect sales channel. Third
quarter systems margin was also negatively impacted by a loss on the
sale of excess inventory.
In general, factors that contribute to lower systems margin include
price competition, a stronger dollar in international markets, the
effects of technological changes on the value of existing inventories,
and a higher mix of federal government systems sales to total systems
sales. Systems margins are improved by higher software content in the
product, a weaker dollar in international markets, a higher mix of
international systems sales to total systems sales, and reductions in
prices of component parts, which
11
<PAGE>
generally tend to decline over time in the industry. The Company is unable
to predict the effects that many of these factors may have on its systems
margin, but expects continuing margin pressure, due primarily to industry
price competition.
Maintenance and services margin for third quarter was 43.3%, an
increase of 6.7 points from the third quarter 1993 level. For the
first nine months of 1994 maintenance and services margin was 42.9%,
up approximately 9.6 points from the same prior year period and the
full year 1993 level. The increase in maintenance and services margin
results primarily from a decline in the provision for inventory
obsolescence . As part of the restructuring actions taken during
1993, the Company revalued its oldest generation spares inventory
items in recognition of the diminished value of these parts as the
Company transitions to Intel based workstations and new operating
systems that provide greater ease of use. In addition, headcount
reductions from the 1993 restructuring have favorably affected
maintenance and services margin, as have increased presales activities
of maintenance personnel, which are charged to sales and marketing
expense.
OPERATING EXPENSES
- ------------------
Operating expenses for the third quarter and first nine months of 1994
increased 3% and decreased 5%, respectively, from the comparable prior
year periods (excluding restructuring charges). Total employee
headcount has declined 5% from the comparable prior year level.
Product development expense for third quarter and year to date 1994
declined 11% and 16%, respectively, from the comparable prior year
periods due in large part to the 1993 restructuring action that
eliminated the Company's microprocessor design division, and, to a
lesser extent, due to an increase in the costs of development
activities capitalized by the Company. The Company's continuing
efforts to complete its transition to Windows NT have partially offset
the savings generated by its 1993 restructuring in the development
area and may continue to do so for the next two quarters. Third
quarter and year to date 1994 sales and marketing expense increased
17% and 7%, respectively, from the comparable prior year periods.
Savings generated by the restructuring have been offset by an increase
in presales support (see "Gross Margin" above) and
advertising costs resulting from demonstration and promotion of the
Company's new product offerings. General and administrative expense
for the third quarter and year to date 1994 declined 6% and 14%,
respectively, from the comparable prior year periods. The Company
continues to closely monitor all costs.
NON-OPERATING INCOME AND EXPENSES
- ---------------------------------
Interest income was $.7 million for the third quarter and $2.5 million
for the first nine months of 1994 versus $1.0 million and $3.3
million, respectively, for the same prior year periods. The average
cash balance was lower during the first nine months of 1994 than in 1993.
See "Liquidity and Capital Resources" below.
"Other income (expense) - net" in the consolidated statements of
income consists primarily of aggregate exchange gains/losses, equity
in the earnings of 20%- to 50%-owned companies, other miscellaneous
items of non-operating income and expense, and non-recurring charges
other than restructuring. The third quarter 1994 amount includes a
gain of $3.3 million from the sale of the Company's remaining
investment in an affiliated company. The year to date 1994 amount
includes a charge of $3.4 million for write-down of the Company's
investments in two affiliates and a gain of $5.8 million from the sale
of the Company's investment in an affiliated company. The year to
date 1993 amount includes a $3.3 million write-off of the Company's
investment in an affiliated company.
12
<PAGE>
IMPACT OF CURRENCY FLUCTUATIONS AND CURRENCY RISK MANAGEMENT
- ------------------------------------------------------------
Fluctuations in the value of the U.S. dollar in international markets
can have a significant impact on results of operations at the level of
international business currently conducted by the Company. In the
first nine months of 1994, approximately 49% of the Company's
revenues were derived from customers outside the United States (51%
for the full year 1993), primarily through subsidiary operations.
Most subsidiaries sell to customers and incur and pay operating
expenses in local currency. These local currency revenues and
expenses are translated to dollars for U.S. reporting purposes. A
stronger U.S. dollar will decrease the level of reported U.S. dollar
orders and revenues, decrease the dollar gross margin, and decrease
reported dollar operating expenses of the international subsidiaries.
For the first nine months of 1994, the U.S. dollar strengthened on
average from levels of the comparable prior year period, which
decreased the level of reported dollar revenues, orders, and gross
margin, but also decreased the level of reported dollar operating
expenses in comparison to the prior year period. These effects for
the first nine months of 1994 were not material to the Company's
results of operations. Currency effects on the Company's results of
operations could become significant if the percentage of revenues and
expenses attributed to the Company's international operations
increases and/or if the dollar fluctuates significantly against
international currencies.
With respect to balance sheet exposure to currency fluctuations, the
strategy of the Company is to protect against financial statement
volatility arising from changes in exchange rates on amounts
denominated for balance sheet purposes in a currency other than the
functional currency of the local company entity. The Company
therefore enters into forward contracts and options ("derivative
instruments") primarily related to intercompany receivables and
payables, including formalized intercompany debt, which are
denominated in a currency other than the local entity functional
currency. Periodic changes in the value of these derivative
instruments are used to offset exchange rate-related changes in the
financial statement value of the foreign currency denominated
receivables and payables. Derivative instruments are only purchased
in amounts sufficient to offset possible significant currency rate-
related changes in the recorded values of receivables and payables,
which represent a known calculable exposure for the Company from
period to period. Since this risk is calculable and derivatives are
purchased only in offsetting amounts, neither the derivatives
themselves or the exposed foreign currency denominated receivables and
payables can have a significant effect on the Company's financial
position or results of operations. The Company's positions in these
derivatives are continuously monitored to ensure protection against
the known balance sheet exposure described above. By policy the
Company is prohibited from market speculation via such instruments and
therefore does not take currency positions exceeding its known
financial statement exposures.
INCOME TAXES
- ------------
The Company's effective tax benefit rate for third quarter 1994 was
zero and for the first nine months of 1994 was 7.1 %, versus 30.9% for
the third quarter 1993, 34% for the first nine months of 1993 and
31.3% for the full year 1993. Any further losses in 1994 will carry
no tax benefit.
During the second quarter of 1994 the Company reduced its estimated
annual effective tax benefit rate as a result of exhaustion of all
available U.S. tax loss carryback refund opportunities and a reduction
in the Company's deferred tax assets due to a change in the Company's
expectations for realization of these future benefits. This reduction
in the estimated annual effective tax benefit rate has increased year
to date net losses by $13.5 million or $.30 per share versus the 1993
full year benefit rate.
13
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
At September 30, 1994, cash and short-term investments totaled $55.1
million, a decrease of $20.6 million from the December 31, 1993 level.
The short-term debt of the Company has increased by $24.7 million
since December 31, 1993.
In the first nine months of 1994, the Company generated $19.3 million
from operations ($63.3 million during the first nine months of 1993),
including $33 million in receipt of tax refunds, primarily refunds of
prior years' federal income tax payments as the result of carryback of
the 1993 U.S. tax return loss. In addition, the Company has borrowed
a net $24 million during the first nine months of 1994 (the majority of
which was borrowed during the third quarter) to build inventory for an
anticipated volume increase and to fund a slight third quarter
increase in accounts receivable (see discussion below regarding the
Company's accounts receivable collection period). Significant uses of
Company funds in the first nine months of 1994 included $55.5 million
in capital expenditures, primarily for Intergraph products used in
hardware and software development, $11.7 million for repayment of
short-term debt, $11.5 million in inventory build-ups, and $10.4
million to purchase the Company's stock in the open market.
Significant uses in the first nine months of 1993 included $46.0
million in capital expenditures, $27 million to purchase the Company's
stock in the open market, and $6.9 million for a business acquisition.
The Company anticipates capital expenditures for the full year 1994 in
the $65-$75 million range, primarily for computer equipment
manufactured by the Company for use in hardware and software
development.
Historically the Company's collection period for accounts receivable
has been slightly in excess of 100 days. The long collection period
experienced by the Company unfavorably affects its liquidity. The
Company believes the length of the collection period is due in large
part to sales of a significant portion of its products to the U.S.
government and customers outside the United States, primarily in
Europe. Traditionally there is a longer collection period associated
with these receivables. The Company has not made changes to either
its credit or payment terms that would adversely impact its collection
period, and has added collections personnel in the U.S. government and
international areas in an attempt to improve its collection period.
The Company has a $50 million revolving credit agreement with a bank
enabling the Company to borrow funds on a revolving basis until May
31, 1995. At September 30, 1994, outstanding borrowings under this
agreement totaled $12 million. The loan commitment is conditional on
the maintenance of minimum levels of tangible net worth at various
dates through May, 1995. Under certain circumstances, borrowings
under the agreement may create a security interest in certain of the
accounts receivable of the Company. The Company at September 30 also
had outstanding borrowings of $20.6 million under uncommitted lines of
credit and other short-term borrowing facilities.
During the second quarter, the State Industrial Development Authority
of Alabama authorized the issuance of up to $30 million of industrial
revenue bonds to finance the cost of a possible expansion project to increase
hardware production capacity. The Company has postponed the expansion,
and thus the bonds have not been issued.
The Company believes that existing cash balances together with cash
available from its revolving credit agreement and cash expected to be
generated from operations will be adequate to meet cash requirements
for the foreseeable future.
14
<PAGE>
INTERGRAPH CORPORATION AND SUBSIDIARIES
PART II. OTHER INFORMATION
Item 1: Legal Proceedings
Refer to information appearing under "Item 1: Legal
Proceedings" on page 12 of the Intergraph Corporation
Form 10-Q Quarterly Report for the quarterly period ended
March 31, 1994.
Item 6: Exhibits and Reports on Form 8-K
(a) Exhibit 11, Computations of loss per share, pages 17
to 18.
(b) There were no reports on Form 8-K filed during the
quarter ended September 30, 1994.
15
<PAGE>
INTERGRAPH CORPORATION AND SUBSIDIARIES
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.
INTERGRAPH CORPORATION
----------------------
(Registrant)
By: Larry J. Laster By: John W. Wilhoite
-------------------------- ------------------------------
Larry J. Laster John W. Wilhoite
Executive Vice President, Vice President and Controller
Chief Financial Officer and (Principal Accounting Officer)
Director
Date: October 25, 1994 Date: October 25, 1994
16
Exhibit 11
- ----------
INTERGRAPH CORPORATION AND SUBSIDIARIES
COMPUTATIONS OF LOSS PER SHARE
- -----------------------------------------------------------------------------
Quarter Ended September 30, 1994 1993
- -----------------------------------------------------------------------------
(In thousands except per share amounts)
NET LOSS $(17,496) $(19,839)
========= =========
PRIMARY
Weighted average common shares outstanding 44,559 45,738
Net common shares issuable on exercise of
certain stock options (1) --- 31
--------- ---------
Average common and equivalent common
shares outstanding 44,559 45,769
========= =========
Per share amount $( .39) $( .43)
========= =========
FULLY DILUTED (2)
Weighted average common shares outstanding 44,559 45,738
Net common shares issuable on exercise
of certain stock options (1) --- 42
--------- ---------
Average common and equivalent common
shares outstanding 44,559 45,780
========= =========
Per share amount $( .39) $( .43)
========= =========
(1) Net common shares issuable on exercise of certain stock options is
calculated based on the treasury stock method using the average market
price for the primary calculation and the ending market price, if higher
than the average, for the fully diluted calculation.
(2) This calculation is submitted in accordance with Securities Exchange Act
of 1934 Release No. 9083 although not required by footnote 2 to
paragraph 14 of APB Opinion No. 15 because it results in dilution of
less than 3%.
17
<PAGE>
Exhibit 11
- ----------
INTERGRAPH CORPORATION AND SUBSIDIARIES
COMPUTATIONS OF LOSS PER SHARE
- ------------------------------------------------------------------------------
Nine Months Ended September 30, 1994 1993
- ------------------------------------------------------------------------------
(In thousands except per share amounts)
NET LOSS $(51,707) $(46,119)
========= =========
PRIMARY
Weighted average common shares outstanding 44,915 46,488
Net common shares issuable on exercise of
certain stock options (1) --- 65
--------- ---------
Average common and equivalent common
shares outstanding 44,915 46,553
========= =========
Per share amount $( 1.15) $( .99)
========= =========
FULLY DILUTED (2)
Weighted average common shares outstanding 44,915 46,488
Net common shares issuable on exercise of
certain stock options (1) --- 67
--------- ---------
Average common and equivalent common
shares outstanding 44,915 46,555
========= =========
Per share amount $( 1.15) $( .99)
========= =========
(1) Net common shares issuable on exercise of certain stock
options is calculated based on the treasury stock method using
the average market price for the primary calculation and the
ending market price, if higher than the average, for the fully
diluted calculation.
(2) This calculation is submitted in accordance with
Securities Exchange Act of 1934 Release No. 9083 although not
required by footnote 2 to paragraph 14 of APB Opinion No. 15
because it results in dilution of less than 3%.
18
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Company's Quarterly Report on Form 10-Q for the quarter ended September 30,
1994, and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-END> SEP-30-1994
<CASH> 53,049
<SECURITIES> 2,099
<RECEIVABLES> 313,079
<ALLOWANCES> 0
<INVENTORY> 132,237
<CURRENT-ASSETS> 561,351
<PP&E> 513,544
<DEPRECIATION> 279,571
<TOTAL-ASSETS> 833,257
<CURRENT-LIABILITIES> 263,220
<BONDS> 18,890
<COMMON> 5,736
0
0
<OTHER-SE> 533,914
<TOTAL-LIABILITY-AND-EQUITY> 833,257
<SALES> 467,286
<TOTAL-REVENUES> 744,693
<CGS> 281,381
<TOTAL-COSTS> 439,767
<OTHER-EXPENSES> 361,032
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,524
<INCOME-PRETAX> (55,678)
<INCOME-TAX> (3,971)
<INCOME-CONTINUING> (51,707)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (51,707)
<EPS-PRIMARY> (1.15)
<EPS-DILUTED> (1.15)
</TABLE>
