11
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 March 29, 1998 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,
May 5, 1998: 27,941,461
STRATUS COMPUTER, INC.
INDEX TO 10-Q
Part I Financial information
Item 1 CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Consolidated statements of income -
three months ended March 29, 1998
and March 30, 1997
Consolidated balance sheets -
March 29, 1998 and December 28, 1997
Consolidated statements of cash flows -
three months ended March 29, 1998 and March 30, 1997
Notes to consolidated financial statements
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations
Part II Other information
Item 1 Legal proceedings
Item 5 Other information
Item 6 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)
First Quarter Ended
-------------------
March 29, March 30,
1998 1997
-------- --------
Revenues:
Product sales $113,258 $106,527
Service 50,798 49,138
-------- --------
Total revenues 164,056 155,665
Cost of sales:
Product cost of sales 58,819 56,309
Service expense 32,819 29,407
-------- --------
Gross profit 72,418 69,949
Operating expenses:
Research and development expense 22,310 20,516
Selling, general and administrative expenses 31,981 32,947
-------- --------
Total operating expenses 54,291 53,463
-------- --------
Operating income 18,127 16,486
Other income 4,011 2,460
-------- --------
Income before provision for income taxes 22,138 18,946
Provision for income taxes 4,870 4,168
-------- --------
Net income $ 17,268 $ 14,778
======== ========
Earnings per share:
Basic $0.72 $0.64
Diluted $0.69 $0.62
Shares used to compute earnings per share:
Basic 23,901 23,237
Diluted 25,010 24,009
See accompanying notes.
STRATUS COMPUTER, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
March 29, December 28,
1998 1997
ASSETS --------- ----------
(Unaudited)
Current assets:
Cash and cash equivalents $199,131 $178,611
Marketable securities 67,345 81,070
Accounts receivable, net 147,200 161,346
Inventories:
Finished products 28,616 32,872
Work-in-process 4,905 2,665
Parts and assemblies 42,086 41,098
-------- --------
Total inventories 75,607 76,635
Prepaid expenses 11,493 14,699
Other current assets 20,002 20,212
-------- --------
Total current assets 520,778 532,573
Property, plant, and equipment, at cost 411,643 404,294
Less: accumulated depreciation (264,148) (255,504)
-------- --------
Net property, plant, and equipment 147,495 148,790
Other assets, net 68,901 68,998
-------- --------
Total assets $737,174 $750,361
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 31,680 $ 34,860
Accrued expenses:
Compensation-related 16,354 24,395
Other 24,999 31,636
Income taxes payable 29,942 27,906
Short-term borrowings and obligations -- 1,487
Deferred revenue 23,562 28,414
-------- --------
Total current liabilities 126,537 148,698
Long-term obligations and deferrals 1,261 887
Stockholders' equity:
Common stock, $.01 par value, 150,000,000
shares authorized, 27,905,774 and
27,645,033 shares issued and outstanding,
in 1998 and 1997, respectively 279 276
Junior common stock, $.01 par value, 500,000 -- --
shares authorized
Additional paid-in capital 261,295 255,691
Retained earnings 482,806 465,538
Cumulative foreign currency translation adjustment (5,840) (5,877)
-------- --------
Subtotal 738,540 715,628
Less: shares in treasury, at cost, 4,003,100 and
3,700,000 shares in 1998 and 1997, respectively (129,164) (114,852)
-------- --------
Total stockholders equity 609,376 600,776
-------- --------
Total liabilities and stockholders' equity $737,174 $750,361
======== ========
See accompanying notes.
STRATUS COMPUTER, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
Three Months Ended
------------------
March 29, March 30,
1998 1997
-------- --------
Cash flows from operating activities:
Net income $ 17,268 $ 14,778
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 18,926 19,295
Add (deduct) changes in working capital:
Accounts receivable 14,146 26,290
Inventory 1,028 (12,746)
Accounts payable and accrued liabilities (21,463) (1,359)
Income taxes payable 2,036 3,497
Other working capital items 849 (4,569)
-------- --------
Net cash provided by operating activities 32,790 45,186
Cash flows from investing activities:
Acquisition of property, plant and equipment (9,580) (10,480)
Purchase of marketable securities (5,500) (2,780)
Proceeds from sale and maturity of
marketable securities 19,225 8,415
Acquisition of other assets (6,338) (6,609)
-------- --------
Net cash used in investing activities (2,193) (11,454)
Cash flows from financing activities:
Proceeds from employee stock plans 5,607 4,673
Acquisition of treasury stock (14,312) (22,537)
Reduction of debt (1,487) (1,479)
-------- --------
Net cash used in financing activities (10,192) (19,343)
Effect of exchange rate changes on cash 115 (432)
-------- --------
Net increase in cash and cash equivalents 20,520 13,957
Cash and cash equivalents at beginning of year 178,611 131,683
-------- --------
Cash and cash equivalents at end of period $199,131 $145,640
======== ========
See accompanying notes.
STRATUS COMPUTER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 29, 1998 and March 30, 1997
(Unaudited)
(In thousands, except share amounts)
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 December 28, 1997. 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. The balance sheet at December 28, 1997 has
been derived from the audited financial statements at that date.
2. The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from these estimates.
3. In 1997 the Company adopted Financial Accounting Standards Board
Statement No. 128, "Earnings per Share". In accordance with this Statement,
the Company changed the method previously used to compute earnings per share
and restated all prior periods presented. Basic earnings per share is
calculated based on the weighted average number of common shares outstanding.
Diluted earnings per share includes the effect of dilutive stock options of
993,000 shares and 771,000 shares in the first quarter of 1998 and 1997,
respectively. The anti-dilutive impact of employee stock options was not
material in each of the two periods.
4. For the quarter ended March 29, 1998, the Company recognized revenue
of approximately $7.8 million under certain long term contracts. Revenue
under these contracts has been recognized using the percentage of completion
method. Progress on these contracts is measured based upon cost incurred to
date as compared to the estimated total cost of the contract.
5. There were no non-cash investing and financing activities for the
first three months of 1998 or 1997. The Company made interest payments of
$102 and $122 and tax payments of $1,533 and $1,638 in the first three
months of 1998 and 1997, respectively.
6. As part of the common stock repurchase program, the Company repurchased
303,100 shares for $14.3 million and 665,700 shares for $22.5 million during the
first quarter of 1998 and 1997, respectively.
7. During the first quarter of 1998 and 1997, revenues from NEC represented
23% and 21%, respectively, of total revenues.
8. As of January 1, 1998, the Company adopted Financial Accounting Standards
Board Statement No. 130, Reporting Comprehensive Income. Statement 130
establishes rules for the reporting and display of comprehensive income and its
components; however, the adoption of this Statement had no impact on the
Company's net income or stockholders' equity. Statement 130 requires unrealized
gains or losses on the Company's available-for-sale securities and foreign
currency translation adjustments, which prior to adoption were reported
separately in stockholders' equity to be included in other comprehensive income.
During the first quarter of 1998 and 1997, total comprehensive income
amounted to $17,296 and $14,045, respectively. The difference between total
comprehensive income and net income as reported on the consolidated
statements of income is attributable to cumulative foreign currency
translation adjustment.
STRATUS COMPUTER, INC.
Item 2 - Management's Discussion and Analysis of Financial Condition and
Results of Operations. (In thousands)
Revenues
Revenues of $164,056 for the first quarter of 1998 increased 5% from
the corresponding period in 1997. Product revenue increased 6% and service
revenue increased 3% for the first quarter of 1998 compared to the
corresponding 1997 period.
In the hardware business, product revenue grew 7% in the first quarter
of 1998 compared to the same 1997 period, primarily attributable to year
over year growth of 25% in the financial services market. Product sales in
the telecommunication market were flat in the first quarter of 1998 compared
to the first quarter of 1997. As a percentage of product revenue, sales in
the telecommunications and financial services markets were 50% and 34%,
respectively, for the first quarter of 1998, compared with 53% and 29%,
respectively, for the first quarter of 1997. Hardware service revenue
increased 3% from the first quarter of 1997 to the first quarter of 1998,
with increases in both maintenance and professional services revenues.
Revenues from the Company's software business in the first quarter of 1998
were flat with first quarter 1997 revenues.
International product sales from all channels increased 13% for the
first quarter of 1998 from the same prior year period. For the same
periods, domestic product sales declined 8%. Direct sales in Europe
increased 130%, with strong growth in all countries. Japan direct sales
grew 49%, however, this increase was offset by declines in other Asia
Pacific direct business.
Product revenue from indirect channels increased 1% for the first
quarter of 1998 compared to the same prior year period. Sales to NEC
increased 16% for the first quarter of 1998 compared to the same 1997
period, representing 23% and 21% of total revenues, respectively. Product
revenue from other international distributors decreased 42% in the first
quarter of 1998 compared to the same 1997 period primarily due to economic
problems in the Far East. As a percentage of total revenues, sales to other
international distributors was 5% and 9% for the first quarter of 1998 and
1997, respectively.
Gross Profit
Total gross margin of 44% for the first quarter of 1998 decreased one
percentage point from the total gross margin percentage realized in the
first quarter of 1997.
Product gross margin of 48% for the first quarter of 1998 increased one
percentage point from the gross margin on product revenue achieved in the
corresponding 1997 period. This increase was primarily related to an
increase in average system configuration sizes, favorable product mix, and
manufacturing efficiencies gained as a result of increased volume.
The gross margin on service revenue was 35% for the first quarter of
1998 compared to 40% for the first quarter of 1997 as revenue grew by $1.7
million while expenses grew by $3.4 million. The gross margin decrease was
primarily due to the investments made in the core service business to
support new product introductions and deferral of revenue recognition on
certain professional services projects.
Other Operating Expenses
Total operating expenses for the first quarter of 1998 increased 2%
from the corresponding 1997 period, primarily due to increased research and
development and marketing expenses. As a percentage of total revenues,
operating expenses decreased to 33% in the first quarter of 1998 from 34% in
the corresponding 1997 period.
Research and development expense increased 9% for the first quarter of
1998 compared to the same period in 1997. As a percentage of total
revenues, research and development expense increased one percentage point to
14% for the first quarter of 1998 compared to the corresponding 1997 period.
Throughout the remainder of 1998, the Company will continue its long-
standing commitment to provide leading-edge hardware and software products
to the telecommunications and enterprise server marketplaces, particularly
in support of mission critical applications. The Company will continue to
enhance its Continuumr product line, leveraged by the successful
incorporation of the Hewlett-PackardT industry leading PA-RISC
microprocessor, and the HP-UXT, FTXT, and VOS operating system
technologies. Resources have also been deployed to focus on development of
the Company's next generation of Continuum products. These products will be
based on the Intelr IA-64 microprocessor, code-named Merced, which is being
jointly developed by Intel and Hewlett-Packard, and which is planned to
support both the HP-UX operating system and the Microsoftr Windows NTr
Server computing environments.
Management believes that ongoing expenditures in research and
development, and focusing on core competencies further leveraged by
effective partnerships are vital to future growth. The Company expects to
continue to invest in these technologies in the normal course of its
business cycle to bring competitive products to market.
Selling, general and administrative expenses declined 3% in the first
quarter of 1998 compared to the same 1997 period. In the first quarter of
1998, selling, general and administrative expenses were 19% of net revenues,
down from 21% in 1997's first quarter. The Company's strategy is to
continue to focus the sales organization on targeted vertical industries and
application opportunities within the telecommunications and enterprise
server markets, expand indirect sales channels and improve selling
efficiencies. The Company is in the process of expanding its marketing
function in order to increase the Company's identity in the marketplace and
to improve its understanding of product requirements in strategic market
segments such as telecommunications.
Other Income
Other income increased $1,551 in the first quarter of 1998 compared to
the prior year period. This was primarily due to an increase in interest
income earned on higher levels of invested cash, and a decrease in interest
expense resulting from lower levels of long-term debt.
The effective tax rate of 22% in the first quarter of 1998 remained
unchanged compared to the corresponding 1997 period.
Liquidity and Capital Resources
At March 29, 1998, the Company had cash and cash equivalents of
$199,131, an increase of $20,520 from the balance at the beginning of the
year. This was primarily due to profitable operations, collection of
accounts receivable, reinvestment of proceeds from matured marketable
securities into short-term investments, and proceeds from employee stock
plans, partially offset by the stock repurchase program, capital
expenditures, and a reduction of accounts payable and accrued expenses.
At March 29, 1998, the Company had no outstanding long-term debt, as
the final payments related to the acquisition of Isis Distributed SystemsT,
Inc. were transacted during the quarter.
Certain subsidiaries have entered into credit arrangements with local
banks, principally Overdraft Agreements, for the purpose of short-term
liquidity management. There were no outstanding borrowings under these
agreements at March 29, 1998.
The ratio of current assets to current liabilities for the Company as
of March 29, 1998 was 4.1 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 $75 million in capital
improvements and software technologies in 1998.
Outlook
Future operating results of the Company will be dependent, in part,
upon its ability to continue to execute its strategy for growth in its two
principal business areas: 1) the telecommunications and financial services
markets with focus on the core product line of Continuum fault-tolerant
computer systems, and 2) the application software markets addressed by the
Company's S2T and TCAMT subsidiaries. The Company will align its product
strategies to meet the industry-specific requirements of targeted growth
markets.
The Company will continue to invest in its core business by developing
and introducing products which will expand the breadth of the Continuum
product family. In addition, the Company plans to continue to support
customer needs for its distributed computing products. The development and
delivery of telecommunications infrastructure software, application software
and professional services will be targeted towards those market segments
where computer availability is a critical need.
Factors That May Affect Future Results
Except for the historical information contained herein, the matters
discussed in this Quarterly Report are forward-looking statements. The
Company cautions readers to recognize that actual future results could
differ materially from historical performance as a result of the following
and other factors:
Future operating results are dependent upon the timing and market
acceptance of new and enhanced product introductions by the Company or its
competitors, several of which are larger than the Company, including
competitors offering high-availability solutions;
The transition of customers from existing to new products in a rapidly
changing technological environment, as well as unexpected delays and/or
cancellations in customer purchases of existing products in anticipation of
new products, are inherent risks;
Revenues and earnings may be impacted by the Company's ability to
strengthen its position in open systems by increasing sales of its Continuum
systems running the HP-UX operating system.
The Company historically books and ships a large percentage of its
revenues towards the end of each quarter, making revenue forecasting
difficult. In addition, product volumes and product mix comprising the
forecast are dependent upon customers' changing demands and needs. As the
Company increases its product and service offerings, the process of planning
and forecasting revenue becomes increasingly difficult. Each of these
factors may subject the Company to fluctuations in revenues and earnings.
Substantially all of the Company's product manufacturing and many of
its suppliers are located outside the United States. In conjunction with the
forecast process discussed above, the Company must adjust operations to
satisfy production requirements as demand changes. Production capacity is
dependent upon the ability of the Company's suppliers to provide components
on time and at reasonable prices. Supply constraints, dependence on single-
source vendors, foreign currency exchange rate fluctuations, foreign country
political and economic changes, as well as changes in export and trade
regulations could adversely impact the Company's operations.
A significant amount of the Company's business is derived from
international markets, including the Far East. In the first quarter of 1998,
business levels in Asia were adversely affected by the economic problems in
the region. There is no assurance that future financial results will not be
adversely impacted by economic events in of the Far East or elsewhere.
In addition to its direct channels, the Company continues to expand its
indirect distribution channels through resellers and distributors. One
customer, NEC, represented 23% and 21% of total revenues in the first
quarter of 1998 and 1997, respectively. The financial condition of, and
ongoing business relationship with, such resellers and distributors are
important to the Company's financial success. Fluctuations in channel mix
may be significant and can have a significant impact on gross margins and
therefore on earnings per share.
As the technology marketplace continues to evolve in anticipation of
meeting customers' changing needs, the industry continues to experience
competitive pressures on price and gross margins. Downward pressures on
price and gross margins and unexpected revenue and margin shifts may cause
the Company to change its operations and as such, may adversely impact the
Company's financial results.
Competition for employees with the skills required by the Company is
intense in the geographic areas in which the Company's primary operations
are located. The Company believes that its future success will depend on its
continued ability to attract and retain qualified employees, especially in
the high-technology engineering areas.
Stratus, the Stratus logo and Continuum are registered trademarks and FTX
and Isis Distributed Systems are trademarks of Stratus Computer,
Inc. S2 is a trademark of S2 Systems, Inc. TCAM is a trademark of TCAM
Systems, Inc. Hewlett-Packard and HP-UX are trademarks of Hewlett-Packard
Company. Microsoft and Windows NT Server are registered trademark of
Microsoft Corporation. Intel is a registered trademark of Intel Corporation
in the United States and other countries. All other trademarks and
registered trademarks are the property of their respective holders.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The Company is subject to legal proceedings and claims which arise in the
ordinary course of its business. Management does not believe these actions will
have a material adverse affect on the financial position or results of
operations of the Company.
Item 5. Other Information
On January 26, 1998, Gerald Campenella was appointed as Treasurer. Mr.
Campenella has been a director and manager at the Company since 1987, including
his most recent role as Assistant Treasurer.
On April 20, 1998, Gary Okimoto was appointed as Vice President of Process
Improvement and Corporate Quality Officer. Mr. Okimoto joined the Company in
1985 as Director of End-User Software, then served as Vice President of Software
Engineering and Vice President of International Customer Service and Support.
Most recently, he has been based in Hong Kong as Vice President of Asia Pacific
Sales and General Manager of Stratus' business operations in China.
Item 6. Exhibits and reports on Form 8-K
No reports on Form 8-K have been filed during the first quarter ended March
29, 1998.
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: May 13, 1998
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MAURICE L. CASTONGUAY
---------------------
Maurice L. Castonguay
Vice President, Finance and Administration
and Chief Financial Officer,
hereunto duly authorized
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