Securities and Exchange Commission
Washington, D.C. 20549
- -----------------------------------------------------------------------------
Form 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended October 1, 1995 Commission File
Number 0-12064
- ------------------------------------------------------------------------------
Stratus Computer, Inc.
(Exact name of registrant as specified in its Charter)
Massachusetts No. 04-2697554
(State of Incorporation) (I.R.S. Employer Identification No.)
55 Fairbanks Boulevard, Marlborough, Massachusetts 01752
(Address of principal executive office) (Zip)
(508) 460-2000
(Telephone number, including area code)
- ------------------------------------------------------------------------------
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____.
Number of Common Shares outstanding at the latest practicable date,
November 2, 1995: 25,459,231.
STRATUS COMPUTER, INC.
INDEX TO 10-Q
Part I Financial information
Consolidated statements of income - three months and nine months ended
October 1, 1995 and October 2, 1994
Consolidated balance sheets - October 1, 1995 and January 1, 1995
Consolidated statements of cash flows - nine months ended October 1, 1995
and October 2, 1994
Notes to consolidated financial statements
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Part II Other information
Legal Proceedings
Exhibits and reports on Form 8-K
Signatures
PART I - FINANCIAL INFORMATION
Item 1 - FINANCIAL STATEMENTS
STRATUS COMPUTER, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In thousands, except per share amounts)
Third Quarter Ended Nine Months Ended
----------------- ------------------
October 1, October 2, October 1, October 2,
1995 1994 1995 1994
-------- -------- -------- --------
Revenues:
Product sales $99,509 $105,607 $271,845 $309,277
Service 51,234 40,139 147,717 116,255
-------- -------- -------- --------
Total revenues 150,743 145,746 419,562 425,532
Costs and expenses:
Product cost of sales 49,949 43,529 132,983 131,477
Service expense 28,837 20,435 82,336 60,521
Research and development expense 21,928 20,584 62,721 62,909
Selling, general and administrative
expenses 40,503 40,124 120,909 117,284
Restructuring charge (see note 4) 24,500 - 24,500 -
-------- -------- -------- --------
Total costs and expenses 165,717 124,672 423,449 372,191
-------- -------- -------- --------
Operating income (loss) (14,974) 21,074 (3,887) 53,341
Other income 3,389 2,144 7,931 5,378
-------- -------- -------- --------
Income (loss) before provision
for (benefit from) income taxes (11,585) 23,218 4,044 58,719
Provision for (benefit from) income
taxes (2,317) 4,411 809 11,156
-------- -------- -------- --------
Net income (loss) ($9,268) $18,807 $3,235 $47,563
======== ======== ======== ========
Net income (loss) per common share ($.40) $.76 $.14 $1.93
======== ======== ======== ========
Weighted average number of shares of
common stock and common stock
equivalents 23,066 24,768 23,836 24,610
======== ======== ======== ========
See accompanying notes.
STRATUS COMPUTER, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
October 1, January 1,
ASSETS 1995 1995
------------------------------ --------- ---------
(Unaudited)
Current assets:
Cash and cash equivalents $156,042 $230,010
Accounts receivable, net 157,523 140,212
Inventories:
Finished products 31,851 24,802
Work-in-process 2,948 2,836
Parts and assemblies 14,908 15,599
--------- ---------
49,707 43,237
Other current assets 32,003 24,080
--------- ---------
Total current assets 395,275 437,539
Property, plant and equipment, at cost 323,414 300,162
Less: accumulated depreciation 209,123 183,360
--------- ---------
Net property, plant and
equipment 114,291 116,802
Other assets, net 67,608 59,069
--------- ---------
Total assets $577,174 $613,410
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
-----------------------------------
Current liabilities:
Accounts payable $23,400 $20,020
Accrued expenses 64,682 46,944
Income taxes payable 2,994 27,887
Short-term borrowings and obligations 4,904 5,783
Deferred revenue 16,691 12,474
--------- ---------
Total current liabilities 112,671 113,108
Long-term obligations 5,943 7,849
Deferred gain on sale-leaseback of land/building 1,878 2,301
Stockholders' equity:
Common stock, $.01 par value, 150,000,000
shares authorized, 25,417,204 and
25,017,414 shares issued and outstanding,
respectively 254 250
Junior common stock, $.01 par value,
500,000 shares authorized - -
Additional paid-in capital 200,597 191,971
Retained earnings 333,801 330,566
Cumulative translation adjustment (1,952) (1,233)
--------- ---------
532,700 521,554
Less: shares in treasury, at cost, 2,400,000
and 888,200 shares, respectively (76,018) (31,402)
--------- ---------
Total stockholders' equity 456,682 490,152
--------- ---------
Total liabilities and stockholders' equity $577,174 $613,410
========= =========
See accompanying notes.
STRATUS COMPUTER, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
Nine Months Ended
----------------------
October 1, October 2,
1995 1994
--------- ---------
Cash flows from operating activities:
Net income $3,235 $47,563
Adjustment to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 49,885 38,058
Restructuring charge (see note 4) 24,500 -
Add (deduct) changes in working capital:
(Increase) decrease in accounts receivable (15,260) 41,094
Increase in inventory (3,878) (5,770)
Decrease in accounts payable and accrued
liabilities (6,200) (2,809)
Decrease in income taxes payable (25,553) (5,092)
Decrease in other working capital items (4,221) (8,777)
--------- ---------
Net cash provided by operating activities 22,508 104,267
Cash flows from investing activities:
Acquisition of property, plant and equipment (36,230) (30,280)
Acquisition of businesses (7,641) -
Acquisition of other long-term assets (13,594) (9,932)
--------- ---------
Net cash used in investing activities (57,465) (40,212)
Cash flows from financing activities:
Net proceeds and benefits from employee
stock plans 8,630 12,271
Purchase of treasury stock (44,616) (21,064)
Reduction of long-term debt and capital
lease obligations (2,785) (2,687)
--------- ---------
Net cash used in financing activities (38,771) (11,480)
Effect of exchange rate changes on cash (240) 528
--------- ---------
Net increase (decrease) in cash and
cash equivalents (73,968) 53,103
Cash and cash equivalents at beginning of year 230,010 191,005
--------- ---------
Cash and cash equivalents at end of period $156,042 $244,108
========= =========
See accompanying notes.
STRATUS COMPUTER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
October 1, 1995 and October 2, 1994
(Unaudited)
(In thousands)
1. The accompanying consolidated financial statements include the accounts
of the Company and its subsidiaries, all of which are wholly-owned. The
information herein should be read in conjunction with the annual report on
Form 10-K for the year ended January 1, 1995. It is management's opinion
that the accompanying statements reflect all adjustments necessary for a fair
presentation of the results for this interim period and the comparable periods
presented.
2. Primary earnings per share is based on the weighted average number of
shares of common stock and the effect, when dilutive, of common stock
equivalents (stock options) outstanding. Fully diluted earnings per share
has not been separately presented as the amount does not differ significantly
from primary earnings per share.
3. There were no non-cash investing and financing activities for the first
nine months of 1995 or 1994. The Company made interest payments of $356 and
$820 and tax payments of $25,850 and $17,811 in the first nine months of 1995
and 1994, respectively.
4. During the third quarter of 1995, the Company, after it had completed
an evaluation of its economic model and cost structure, approved a plan to
restructure its operations. As a result, in the third quarter, the Company
recorded a $24.5 million restructuring charge for the reduction of its
worldwide workforce by approximately 575 employees, as well as the
consolidation of certain manufacturing and sales operations. Of the total
charges, $13.0 million was related to the workforce reduction and
$11.5 million was related to the consolidation of facilities and operations.
Approximately $4.5 million was paid in the third quarter.
Item 2 - Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Revenues
Total revenues of $150,743 for the third quarter of 1995 increased 3%
from the corresponding period in 1994. For the first nine months of 1995,
total revenues were $419,562, a decrease of 1% from the same 1994 period.
The Company's total product revenue declined 6% for the third quarter
and 12% for the first nine months of 1995 compared to the same prior year
periods, due mainly to the unfavorable impact of product transition issues
associated with the Company's introduction in the 1995 first fiscal quarter
of its new Continuum product line. During the third quarter of 1995, the
Company continued to increase shipments of its Continuum product line,
meeting revenue expectations for that product line. Such shipments,
however, were not sufficient to offset the decline in revenues associated
with the XA/R product line. In addition, the Company's product mix shifted
significantly toward the lower end of its product line.
The Company's direct product revenue decreased 7% for the third quarter
and 16% for the first nine months of 1995 from the same prior year periods.
For the quarter, domestic direct and international direct revenues declined
6% and 8%, respectively. For the first nine months, domestic direct and
international direct revenues declined 21% and 10%, respectively. The
domestic decline for the quarter was due mainly to lower sales in the
telecommunications industry. For the first nine months, the domestic decline
was due to the end of a major customer rollout in the second quarter of 1994,
as well as lower than anticipated capital spending in other telecommunication
channels. In the quarter, direct product revenue in Europe declined 44% from
the prior year's third quarter primarily due to declines in the United Kingdom
and France. Asia/Pacific sales during the quarter increased 43% from 1994,
due mainly to higher revenues in the Far East and Japan. For the first nine
months of 1995, direct product revenue in Europe declined 28% from the same
1994 period. Lower sales in the United Kingdom, France, Italy and Sweden
were somewhat offset by increased sales in Belgium, Holland and Germany.
Asia/Pacific sales during the first nine months of 1995 increased 17% from
1994 as higher revenues in Japan and the Far East were somewhat offset by
lower sales in Australia.
Product revenue from indirect channels declined 3% in the 1995 third
quarter and increased 4% in the first nine months compared to the same prior
year periods. For the quarter, sales to NEC increased 20% compared to the
same 1994 period, and were 11% of total product revenue. Product revenue
from international distributors declined 10% from the prior year's third
quarter, and were also 11% of total product revenue. Sales to Olivetti
declined 30% compared to the same 1994 period, and were 3% of total product
revenue. For the first nine months of 1995, sales to NEC increased 71%
compared to the same 1994 period, and were 11% of total product revenue.
Product revenue from international distributors decreased 17% from the same
prior year period while sales to Olivetti declined 26%.
Total service revenue increased 28% and 27% in the third quarter and
first nine months of 1995 over the corresponding periods in the previous year.
This growth was due to the increased professional service, maintenance and
education products provided to the expanding customer base. The Company's
TCAM subsidiary, acquired in the fourth quarter of 1994, contributed 9
percentage points of the growth in total service revenue in both the 1995
third quarter and first nine months.
Cost of Sales
The gross margin on product revenue of 50% and 51% for the third quarter
and first nine months of 1995 declined nine and six percentage points,
respectively, from the gross margin on product revenue achieved in the
corresponding 1994 periods. This was the result of increased competitive
pressures and a shift in product mix to the lower end of the Company's
product line, which carries lower margins, during the 1995 periods versus
1994.
The gross margin on service revenue was 44% for the third quarter and
first nine months of 1995. This compares to the 49% and 48% service margins
realized in the third quarter and first nine months of 1994, respectively.
This decrease in the service margin percentage was primarily due to a higher
proportion of professional services revenue, which yield lower margins.
Other Operating Expenses
Total operating expenses for the third quarter of 1995, excluding the
restructuring charge, increased 3% from the corresponding 1994 period. As a
percentage of total revenues, operating expenses decreased by 1 percentage
point in the third quarter of 1995 to 41% compared to 1994's third quarter.
For the first nine months of 1995, total operating expenses grew 2% over the
corresponding 1994 period, increasing as a percentage of total revenues from
42% to 44%.
During the third quarter of 1995, the Company announced a $24.5 million
restructuring charge for the reduction of its worldwide workforce by
approximately 575 employees, as well as the consolidation of certain
manufacturing and sales operations. (See note 4 in the Notes to Consolidated
Financial Statements).
Research and development expense in the third quarter and first nine
months of 1995 increased 7% and remained unchanged, respectively, compared to
the same 1994 periods. As a percentage of total revenues, R&D expense
increased one percentage point, to 15%, for the third quarter of 1995 compared
to the 1994 third quarter. For the nine month period, R&D expense remained
at 15% of total revenues. Throughout the remainder of 1995 and into 1996, the
Company will continue to enhance its Continuum product line by integrating the
latest PA-RISC microprocessor technology, and expanding its lower price point
products. In addition, the Company continues to invest in the development of
a new product line consisting of scalable, open PC servers, specifically
designed for distributed, high-availability enterprise computing. In October
1995, these development efforts resulted in the Company's announcement of its
RADIO product, which combines fault tolerant software from the Company's
Isis Distributed Systems, Inc. subsidiary with industry-standard hardware,
operating system, and networking components. Also, the Company will continue
the transition to open systems technology by increasing the functionality of
FTX, its UNIX"System V Release 4 operating system, and integrating open
architecture standards into its hardware platforms.
For the third quarter and first nine months of 1995, selling, general
and administrative expenses were 27% and 29% of total revenues, respectively.
For the third quarter and first nine months of 1995, TCAM contributed $2,142
and $6,984, respectively to SG&A expenses. These incremental expenses were
mitigated by savings of $1,763 and $3,359 for the third quarter and first
nine months of 1995, due to the continued focus on strong cost controls
throughout the Company. The Company's strategy in 1995 and into 1996, is to
focus on strategic application opportunities within and across targeted
vertical markets, expand distribution and increase efficiency through indirect
channels, and continue to focus on effective cost management.
Other Income
Other income for the third quarter and first nine months of 1995
increased $1,245 and $2,553, respectively, compared to the same 1994 periods.
Interest income increased in the third quarter and first nine months of
1995 compared to the corresponding 1994 periods, while interest expense
declined due to the lower amount of outstanding debt in connection with the
acquisition of Isis Distributed Systems, Inc. in 1993.
The effective tax rate increased to 20% in 1995's third quarter and
first nine months from 19% in 1994's corresponding periods due to reduced
U.S. tax credits and a less favorable mix of foreign tax rates.
Liquidity and Capital Resources
At October 1, 1995, the Company had cash and cash equivalents of
$156,042 which reflects a $73,968 decrease from the balance at the beginning
of the year. The purchase of treasury stock as well as tax payments were
primary factors in the declining cash balance.
The Company has a Multicurrency Revolving Credit Agreement providing up
to $50 million of borrowings through March 1997. There have been no
borrowings against this Agreement, and the Company anticipates no borrowings
during the remainder of 1995.
During the first nine months of 1995, the Company has invested
approximately $7.6 million to purchase businesses, primarily FEMCON
Associates Inc., and Comercializacion Tea, S.A. DE C.V.
At October 1, 1995, the Company had $6,938 in outstanding debt related
to the Isis acquisition.
Certain subsidiaries have entered into credit arrangements with local
banks, principally Overdraft Agreements, for the purpose of short-term
liquidity management. Borrowings under these Agreements were $2,159 at
October 1, 1995.
The ratio of current assets to current liabilities for the Company as of
October 1, 1995 was 3.5 to 1. Based upon its current cash position, and
expected cash flow from operating activities supplemented by ongoing stock
issuance from the Employee Stock Purchase Plan and stock option plans,
management believes that the Company's capital resources are sufficient to
meet its financial requirements for the foreseeable future.
The Company plans to invest approximately $65 million in capital
improvements and software technologies in 1995.
UNIX is a registered trademark of UNIX System Laboratories, Inc.
Stratus is a registered trademark of Stratus Computer, Inc.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
There are no material legal proceedings, either outstanding or
pending, with respect to the Company.
Item 6. Exhibits and reports on Form 8-K
No reports on Form 8-K have been filed during the third quarter
ended October 1, 1995.
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 duly authorized.
STRATUS COMPUTER, INC.
(Registrant)
Date November 15, 1995 ROBERT E. DONAHUE
- ----------------------- ---------------------------
Vice President, Finance and
Chief Financial Officer
hereunto duly authorized
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000723610
<NAME> STRATUS COMPUTER, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-02-1995
<PERIOD-END> OCT-01-1995
<CASH> 156042
<SECURITIES> 0
<RECEIVABLES> 157113
<ALLOWANCES> 9664
<INVENTORY> 48707
<CURRENT-ASSETS> 395275
<PP&E> 323414
<DEPRECIATION> 209122
<TOTAL-ASSETS> 577175
<CURRENT-LIABILITIES> 112671
<BONDS> 5943
<COMMON> 254
0
0
<OTHER-SE> 456429
<TOTAL-LIABILITY-AND-EQUITY> 577175
<SALES> 271845
<TOTAL-REVENUES> 419562
<CGS> 132983
<TOTAL-COSTS> 423449
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (7931)
<INCOME-PRETAX> 4044
<INCOME-TAX> 809
<INCOME-CONTINUING> 3235
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3235
<EPS-PRIMARY> .14
<EPS-DILUTED> .14
</TABLE>
