Securities and Exchange Commission
Washington, D.C. 20549
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Form 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended July 2, 1995 Commission File
Number 0-12064
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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)
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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,
August 7, 1995: 25,356,368.
STRATUS COMPUTER, INC.
INDEX TO 10-Q
Part I Financial information
Consolidated statements of income - three months and six months ended July 2,
1995 and July 3, 1994
Consolidated balance sheets - July 2, 1995 and January 1, 1995
Consolidated statements of cash flows - six months ended July 2, 1995 and
July 3, 1994
Notes to consolidated financial statements
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Part II Other information
Legal Proceedings
Submission of Matters to a Vote of Security Holders
Exhibits and reports on Form 8-K
Signatures
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION
Item 1 - FINANCIAL STATEMENTS
STRATUS COMPUTER, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In thousands, except per share amounts)
Quarter Ended Six Months Ended
July 2, July 3, July 2, July 3,
1995 1994 1995 1994
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues:
Product sales $90,836 $105,149 $172,336 $203,670
Service 49,481 39,230 96,483 76,116
-------- -------- -------- --------
Total revenues 140,317 144,379 268,819 279,786
Costs and expenses:
Product cost of sales 45,501 43,908 83,034 87,948
Service expense 27,053 20,525 53,499 40,086
Research and development expense 20,173 21,569 40,793 42,325
Selling, general and administrative
expenses 41,709 38,921 80,406 77,160
-------- -------- -------- --------
Total costs and expenses 134,436 124,923 257,732 247,519
Operating income 5,881 19,456 11,087 32,267
Other income 1,731 1,984 4,542 3,234
-------- -------- -------- --------
Income before provision for income
taxes 7,612 21,440 15,629 35,501
Provision for income taxes 1,523 4,073 3,126 6,745
-------- -------- -------- --------
Net income $6,089 $17,367 $12,503 $28,756
======== ======== ======== ========
Net income per common share $.26 $.71 $.52 $1.17
======== ======== ======== ========
Weighted average number of shares of
common stock and common stock
equivalents 23,832 24,540 24,089 24,540
======== ======== ======== ========
See accompanying notes.
</TABLE>
STRATUS COMPUTER, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
July 2, January 1,
ASSETS 1995 1995
----------------------------------- -------- --------
(Unaudited)
Current assets:
Cash and cash equivalents $168,486 $230,010
Accounts receivable, net 139,401 140,212
Inventories:
Finished products 28,794 24,802
Work-in-process 2,062 2,836
Parts and assemblies 12,496 15,599
-------- --------
43,352 43,237
Other current assets 26,922 24,080
-------- --------
Total current assets 378,161 437,539
Property, plant and equipment, at cost 319,941 300,162
Less: accumulated depreciation 203,288 183,360
-------- --------
Net property, plant and
equipment 116,653 116,802
Other assets, net 66,605 59,069
-------- --------
Total assets $561,419 $613,410
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable $18,770 $20,020
Accrued expenses 40,436 46,944
Income taxes payable 7,272 27,887
Short-term borrowings and obligations 2,972 5,783
Deferred revenue 11,373 12,474
-------- --------
Total current liabilities 80,823 113,108
Long-term obligations 5,972 7,849
Deferred gain on sale-leaseback of
land/building 2,019 2,301
Stockholders' equity:
Common stock, $.01 par value, 150,000,000
shares authorized, 25,306,911 and
25,017,414 shares issued and outstanding,
respectively 253 250
Junior common stock, $.01 par value,
500,000 shares authorized - -
Additional paid-in capital 198,544 191,971
Retained earnings 343,069 330,566
Cumulative translation adjustment 987 (1,233)
-------- --------
542,853 521,554
Less: shares in treasury, at cost, 2,191,200
and 888,200 shares, respectively (70,248) (31,402)
-------- --------
Total stockholders' equity 472,605 490,152
-------- --------
Total liabilities and
stockholders' equity $561,419 $613,410
======== ========
See accompanying notes.
STRATUS COMPUTER, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
Six Months Ended
--------------------
July 2, July 3,
1995 1994
-------- --------
Cash flows from operating activities:
Net income $12,503 $28,756
Adjustment to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 32,819 24,498
Add (deduct) changes in working capital:
(Increase) decrease in accounts receivable (4,055) 11,730
Decrease in inventory 554 270
Decrease in accounts payable and accrued
liabilities (4,949) (14,190)
Decrease in income taxes payable (21,368) (7,497)
Increase (decrease) in other working capital
items (3,180) 1,293
-------- --------
Net cash provided by operating activities 12,324 44,860
Cash flows from investing activities:
Acquisition of property, plant and equipment (23,437) (17,971)
Acquisition of businesses (2,967) 0
Acquisition of other long-term assets (12,270) (9,360)
-------- --------
Net cash used in investing activities (38,674) (27,331)
Cash flows from financing activities:
Net proceeds and benefits from employee
stock plans 6,576 6,288
Purchase of treasury stock (38,846) (4,541)
Reduction of long-term debt and capital
lease obligations (4,688) (2,636)
-------- --------
Net cash provided by (used in) financing
activities (36,958) (889)
Effect of exchange rate changes on cash 1,784 521
-------- --------
Net increase in cash and cash equivalents (61,524) 17,161
Cash and cash equivalents at beginning of year 230,010 191,005
-------- --------
Cash and cash equivalents at end of period $168,486 $208,166
======== ========
See accompanying notes.
STRATUS COMPUTER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 2, 1995 and July 3, 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 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 six
months of 1995 or 1994. The Company made interest payments of $327 and $557
and tax payments of $23,329 and $15,425 in the first six months of 1995 and
1994, respectively.
STRATUS COMPUTER, INC.
Item 2 - Management's Discussion and Analysis
of Financial Condition and Results of Operations.
Revenues
Total revenues of $140,317 for the second quarter of 1995 declined 3%
from the corresponding period in 1994. For the first six months of 1995, total
revenues were $268,819, a decrease of 4% from the same 1994 period.
The Company's total product revenue declined 14% for the second quarter
and 15% for the first six 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 second 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, yet the actual aggregate number of systems
shipped during the second quarter and first six months of 1995 increased
slightly over the corresponding periods of 1994.
The Company's direct product revenue decreased 23% for the second
quarter and 21% for the first six months of 1995 from the same prior year
periods. For the quarter, domestic direct and international direct revenues
declined 33% and 1%, respectively. For the first six months, domestic direct
and international direct revenues declined 26% and 12%, respectively. The
domestic decline was due mainly to lower sales to the telecommunications
industry in both time periods primarily due to the end of a major customer
rollout in the second quarter of 1994, and lower than anticipated capital
spending in other telecommunication channels. In the quarter, direct product
revenue in Europe declined 8% from the prior year's second quarter as lower
sales in France and Italy were somewhat offset by increased sales in Germany.
Asia/Pacific sales during the quarter increased 9% from 1994. Higher revenues
in Japan were somewhat offset by lower sales in the Far East and Australia. For
the first six months of 1995, direct product revenue in Europe declined 19% from
the same 1994 period. Lower sales in the United Kingdom, France, Italy and
Sweden were somewhat offset by increased sales in Holland and Germany.
Asia/Pacific sales during the first six months of 1995 declined 2% from 1994 as
lower revenues in the Far East and Australia were mostly offset by increased
sales in Japan.
Product revenue from indirect channels increased 33% and 9% in the 1995
second quarter and the first six months compared to the same prior year periods.
For the quarter, sales to NEC increased 160% compared to the same 1994 period,
and were 12% of total product revenue. Product revenue from international
distributors increased 28% from the prior year's second quarter. Sales to
Olivetti declined 37% compared to the same 1994 period, and were 5% of total
product revenue. For the first six months of 1995, sales to NEC increased 129%
compared to the same 1994 period, and were 11% of total product revenue.
Product revenue from international distributors decreased 21% from the same
prior year period while sales to Olivetti declined 25%.
Total service revenue increased 26% and 27% in the second quarter and
first six 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 and 10
percentage points of the growth in total service revenue in the 1995 second
quarter and first six months, respectively.
Cost of Sales
The gross margin on product revenue of 50% and 52% for the second
quarter and first six months of 1995 declined eight and five percentage points,
respectively, from the gross margin on product revenue achieved in the
corresponding 1994 periods. This was the result of 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, as well as higher discount levels on the Company's
older product line.
The gross margin on service revenue was 45% for the second quarter and
first six months of 1995. This compares to the 48% and 47% service margins
realized in the second quarter and first six months of 1994, respectively. This
decrease in the service margin percentage was primarily due to the higher
proportion of professional services revenue, which earns a lower margin, in the
1995 periods versus the corresponding 1994 periods.
Other Operating Expenses
Total operating expenses for the second quarter of 1995 increased 2%
over the corresponding 1994 period. As a percentage of net revenues, operating
expenses increased by 2 percentage points in the second quarter of 1995 to 44%
compared to 1994's second quarter. For the first six months of 1995, total
operating expenses grew 1% over the corresponding 1994 period, increasing as a
percentage of net revenues from 43% to 45%.
Research and development expense in the second quarter and first six
months of 1995 decreased 6% and 4%, respectively, from the same 1994 periods, as
the Company continued to manage costs. As a percentage of total revenues, R&D
expense declined one percentage point, to 14%, for the second quarter of 1995
compared to the 1994 second quarter. For the six month period, R&D expense
remained at 15% of total revenues. Stratus has a commitment to provide both
hardware and software solutions to the critical online computing marketplace.
Throughout 1995, 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 is developing a new
highly reliable hardware product line, based on its unique Isis software, that
will provide guaranteed message delivery in a distributed computing environment.
Also, the Company will continue the transition to open systems technology by
increasing the functionality of FTX, its UNIXrSystem V Release 4 operating
system, and integrating open architecture standards into its hardware platforms.
For the second quarter and first six months of 1995, selling, general
and administrative expenses increased 7% and 4%, respectively, over the same
1994 periods. The total amount of the increase for the quarter was attributable
to the Company's TCAM acquisition. For the first six months of 1995, the TCAM
acquisition contributed $5,748 to the increase in SG&A expenses. This increase
was mitigated by savings of $2,502 due to the continued focus on strong cost
controls throughout the Company. Total SG&A expenses were 30% of net revenues,
up three and two percentage points, for the 1995 second quarter and first six
months, respectively, as compared with the same 1994 periods. The Company's
strategy in 1995 is to continue to focus the sales organization on strategic
markets within vertical industries, as well as continue to improve selling
efficiencies and focus on effective cost management.
As a result of the 1995 second quarter and first six month financial
performance, the Company is currently evaluating its economic model and
conducting a thorough evaluation of its cost structure, and expects that any
plan resulting from this effort will be announced in the latter part of the
third quarter of 1995.
Other Income
Other income for the second quarter and first six months of 1995
decreased $253 and increased $1,308, respectively, compared to the same 1994
periods. Interest income declined in the second quarter and increased in the
first six months, compared to the corresponding 1994 periods. 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 second quarter and
first six months from 19% in 1994's respective periods due to reduced U.S. tax
credits and a less favorable mix of foreign tax rates.
Liquidity and Capital Resources
At July 2, 1995, the Company had cash and cash equivalents of $168,486
which reflects a $61,524 decrease from the balance at the beginning of the
year. The continued purchase of treasury stock, expenditures for capital and
other long-term assets and tax payments were primary factors in the declining
cash balance. These factors were partially offset by profitable operations and
capital generated through employee stock plans.
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.
At July 2, 1995, the Company had $6,718 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 $292 at July 2, 1995.
The ratio of current assets to current liabilities for the Company as
of July 2, 1995 was 4.7 to 1. Based upon its current cash position, and
expected cash flow from operating activities supplemented by continued 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 $75 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 4. Submission of Matters to a Vote of Security Holders
On April, 18, 1995, the Annual Meeting of Stockholders was held and, in
addition to the ratification of the selection of Ernst & Young LLP as
Independent Public Accountants, Messrs. Paul J. Ferri and Gardner C. Hendrie
were elected as Directors of the Company to serve for a three year term. A
proposal was approved to amend the 1983 Stock Option Plan and the Non Qualified
Common Stock Option Plan. A proposal to amend the Employee Stock Purchase Plan
was also approved.
Item 6. Exhibits and reports on Form 8-K
No reports on Form 8-K have been filed during the second quarter ended
July 2, 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 August 11, 1995 ROBERT E. DONAHUE
---------------------------- --------------------------
Vice President, Finance and
Chief Financial Officer
hereunto duly authorized
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<NAME> STRATUS COMPUTER, INC.
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-02-1995
<PERIOD-END> JUL-02-1995
<CASH> 168486
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<RECEIVABLES> 139157
<ALLOWANCES> 7576
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<COMMON> 253
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<OTHER-SE> 472555
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