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
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
For the quarter ended: Commission file number:
March 31, 1994 1-8028
CRAY RESEARCH, INC.
(Exact name of Registrant as specified in its charter)
Delaware 39-1161138
(State of Incorporation) (I.R.S Employer Identification No.)
655A Lone Oak Drive
Eagan, MN 55121
(Address of principal executive offices)
Telephone Number: (612) 683-7100
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 prededing 12 months (or for such shorter period
that the Registrant was required to file such reports), and (2) has been
subject to the filing requirements for at least the past 90 days. YES-X
NO
As of April 30, 1994 25,860,000 shares of the Registrant's Common Stock
were outstanding.
CRAY RESEARCH, INC. and SUBSIDIARIES
FORM 10-Q
March 31, 1994
I N D E X
Page
------
Part I - Financial Information:
Consolidated Statements of Operations-
Three months ended March 31, 1994 and 1993 1
Consolidated Balance Sheets -
March 31, 1994 and December 31, 1993 2
Consolidated Statements of Cash Flows -
Three months ended March 31, 1994 and 1993 3
Notes to Consolidated Financial Statements 4
Financial Review 6
Part II - Other Information 9
Signatures 10
Exhibit Index 11
CRAY RESEARCH, INC. and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended
March 31
----------------------
1994 1993
---------- ----------
(In thousands, except
per share data)
Revenue:
Sales $ 198,253 $ 148,708
Leased systems 5,066 5,066
Service fees 45,547 48,823
- - --------------------------------------------- --------- ---------
Total revenue 248,866 202,597
- - --------------------------------------------- --------- ---------
Cost of revenue:
Cost of sales 101,679 72,341
Cost of leased systems 2,619 3,442
Cost of services 36,448 35,063
- - -------------------------------------------- --------- ---------
Total cost of revenue 140,746 110,846
- - -------------------------------------------- --------- ---------
Gross profit 108,120 91,751
- - -------------------------------------------- --------- ---------
Operating expenses:
Development and engineering 36,950 34,383
Marketing 32,341 27,957
General and administrative 5,967 6,611
- - ------------------------------------------- --------- ---------
Total operating expenses 75,258 68,951
- - ------------------------------------------- --------- ---------
Operating income 32,862 22,800
Other expense, net (1,509) (722)
- - ------------------------------------------- --------- ---------
Earnings before income taxes 31,353 22,078
Income tax expense (9,400) (7,054)
- - ------------------------------------------- --------- ---------
Net earnings $ 21,953 $ 15,024
- - ------------------------------------------- ========= =========
Earnings per common
and common equivalent share $ 0.84 $ 0.58
- - ------------------------------------------- ========= =========
Average number of common and
common equivalent shares
outstanding 26,002 26,050
- - ------------------------------------------- ========= =========
<FN>
See accompanying notes to consolidated financial statements.
1
CRAY RESEARCH, INC. and SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
March 31 December 31
1994 1993
------------ ------------
(In thousands)
Assets
- - -------------------------------------------
Current assets:
Cash and equivalents $ 8,366 $ 78,373
Receivables 227,609 186,852
Inventories 332,621 315,100
Other current assets 50,943 46,988
- - ------------------------------------------- ---------- ----------
Total current assets 619,539 627,313
Long-term receivables 35,487 10,593
Leased systems and spares, net 98,905 99,859
Property, plant and equipment, net 219,970 225,649
Investments and other assets 191,431 206,354
- - ------------------------------------------- ---------- ----------
$1,165,332 $1,169,768
========== ==========
Liabilities and Stockholders' Equity
- - -------------------------------------------
Current liabilities:
Current installments of long-term debt $ 1,447 $ 2,216
Accounts payable 34,252 41,679
Accrued expenses 85,111 109,300
Income taxes payable 42,660 30,422
Deferred income and customer advances 84,686 88,346
- - ------------------------------------------- ---------- ----------
Total current liabilities 248,156 271,963
- - ------------------------------------------- ---------- ----------
Long-term debt, excluding
current installments 105,000 105,478
Other long-term obligations 13,266 12,986
Stockholders' equity:
Common stock 31,511 31,511
Additional paid-in capital 99,195 102,489
Retained earnings 888,817 866,864
Foreign currency translation adjustments (1,638) (3,024)
Treasury stock, at cost (218,975) (218,499)
- - ------------------------------------------- ---------- ----------
Total stockholders' equity 798,910 779,341
- - ------------------------------------------- ---------- ----------
1,165,332 1,169,768
========== ==========
<FN>
See accompanying notes to consolidated financial statements.
2
CRAY RESEARCH, INC. and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three months ended
March 31
--------------------
1994 1993
--------- ---------
(In thousands)
Cash flows provided by (used in) operations $ (59,254) $ 61,454
- - ----------------------------------------------------- --------- ---------
Cash flows provided by (used in) investing:
Transfers from (to) long-term investments 15,000 (25,000)
Expenditures for leased systems and spares (1,116) (6,162)
Expenditures for property, plant and equipment (20,470) (11,364)
Other, net 177 2,300
- - ----------------------------------------------------- --------- ---------
Total cash flows used in investing (6,409) (40,226)
- - ----------------------------------------------------- --------- ---------
Cash flows provided by (used in) financing:
Proceeds from borrowings 458 2,252
Proceeds from the sale of common stock to employees 3,929 627
Repayments of debt (1,747) (2,733)
Repurchases of common stock (7,732) -
- - ----------------------------------------------------- --------- ---------
Total cash flows provided by (used in) financing (5,092) 146
- - ----------------------------------------------------- --------- ---------
Effect of exchange rate changes 748 (1,136)
- - ----------------------------------------------------- --------- ---------
Increase (decrease) in cash and equivalents (70,007) 20,238
Cash and equivalents at beginning of period 78,373 54,953
- - ----------------------------------------------------- --------- ---------
Cash and equivalents at end of period $ 8,366 $ 75,191
- - ----------------------------------------------------- ========= =========
<FN>
See accompanying notes to consolidated financial statements.
3
CRAY RESEARCH, INC. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) In the opinion of management, the accompanying consolidated financial
statements reflect all adjustments considered necessary for a fair
presentation. These adjustments consist only of normal recurring
items. For further information, refer to the financial statement and
footnotes included or incorporated by reference in the Company's Annual
Report on form 10K for the year ended December 31, 1993.
(2) Operating results for the three months ended March 31, 1994 are not
necessarily indicative of the results that may be expected for the year
ending December 31, 1994.
(3) During the first quarter of 1994, the Company adopted Statement of
Financial Accounting Standards (SFAS) No. 115, Accounting for Investments
in Certain Debt and Equity Securities. The adoption of this standard
did not have a material impact on consolidated results of operations.
(4) On April 8, 1994, the Company repurchased on the open market a portion
of its Convertible Subordinated Debenture Bonds with a face value of $23.0
million for a purchase price of $20.4 million. The repurchase resulted
in a gain of $2.6 million which will be recognized in the second quarter
of 1994.
4
CRAY RESEARCH, INC and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(5) Selected consolidated financial statement details (in thousands):
March 31 December 31
1994 1993
------------ ------------
Inventories:
Components and subassemblies $ 101,043 $ 89,421
Systems in process 127,099 148,772
Finished goods 104,479 76,907
---------- ----------
$ 332,621 $ 315,100
========== ==========
Leased systems and spares:
Cost $ 297,479 $ 288,706
Accumulated depreciation and amortization (198,574) (188,847)
---------- ----------
$ 98,905 $ 99,859
========== ==========
Property, plant and equipment:
Cost $ 500,493 $ 498,011
Accumulated depreciation and amortization (280,523) (272,362)
---------- ----------
$ 219,970 $ 225,649
========== ==========
Three months ended
March 31
------------------
1994 1993
------- -------
Other income (expense), net:
Interest income $ 2,267 $ 2,097
Interest expense (2,204) (2,250)
Other, net (1,572) (569)
------- -------
$(1,509) $ (722)
======= =======
5
CRAY RESEARCH, INC. and SUBSIDIARIES
FINANCIAL REVIEW
REVENUE
- - ------- Three Months Ended
March 31
------------------
1994 1993
------ ------
High-end systems installed:
Parallel vector processing 16 11
Massively parallel processing 3 0
------ ------
19 11
------ ------
Low-end systems installed :
Parallel vector processing 26 8
Symmetric multiprocessing 8 1
------ ------
34 9
------ ------
Total system installations 53 20
====== ======
High-end systems lease-to-purchase conversions 3 -
====== ======
Percent of total revenue
- - ------------------------ Change from
1994 1993 prior year
- - ------ ------ -----------
Revenue:
79.7% 73.4% Sales 33.3%
2.0 2.5 Leased systems -
18.3 24.1 Service fees (6.7)
- - ------ ------ ------------------ ------
100.0% 100.0% Total revenue 22.8%
====== ====== ================== ======
Revenue increased 22.8% in the first quarter of 1994 from the same period in
1993, reflecting a $49.5 million increase in sales revenue, flat lease
revenues, and a $3.3 million decline in service fees. At March 31, 1994,
533 systems were installed, compared to 473 a year earlier.
The sales revenue increase for the quarter resulted from improved revenue
from sales of upgrades and peripherals and the higher volume of
installations and lease-to-purchase conversions (three lease-to-purchase
conversions during first quarter of 1994 compared to zero during first
quarter of 1993). Product mix shifted to smaller systems, with more
2-processor and 4-processor systems being installed at the high-end,
and a substantial increase in low-end systems volume. This mix change,
together with continued market pricing pressures, is expected to result in
significantly lower average selling prices in 1994 compared to 1993.
To meet its 1994 revenue goals, the Company must achieve a significant
increase in the number of systems accepted, many of which will be new
customer installations.
6
CRAY RESEARCH, INC. and SUBSIDIARIES
FINANCIAL REVIEW
(continued)
Service fees declined 6.7% in the quarter. As new products replace old,
average service revenue per installation is declining. Smaller systems
result in lower monthly service fees. In addition, the new systems are
more reliable, enabling the Company to offer, and more customers to accept,
lower priced service options with less coverage.
The order backlog at March 31, 1994 was $271 million, compared to $381
million a year earlier and $409 million at December 31, 1993. The
Company believes backlog information provides only a limited indication of
its expected future revenue. The backlog at the end of the first quarter
was affected by a number of factors: historically, the first quarter has
a relatively low order rate; higher than normal installations during the
first quarter depleted backlog; a few large orders expected during the
quarter were not completed before quarter-end; procurement cycles for
high-end systems are lengthening, especially for government customers; and
the time period between order and acceptance for low-end systems is shorter,
resulting in lower backlogs for that part of the business.
GROSS PROFIT
- - ------------
Percent of related revenue
- - -------------------------- Change from
1994 1993 prior year
- - -------- -------- ---------
Gross profit percent:
48.7% 51.4% Sales (2.7)%
48.3 32.1 Leased systems 16.2
20.0 28.2 Service fees (8.2)
- - -------- -------- ---------------------------- ----------
43.4% 45.3% Total gross profit percent (1.9)%
======== ======== ============================ ==========
The total gross profit percent declined from 45.3% in the first quarter of
1993 to 43.4% in 1994, reflecting decreased margins on sales and service
fees. Leased systems margins improved, but had little impact on overall
margins because of the small lease base.
Sales and service margins reflect the pressures referred to in the Revenue
discussion above: product mix shift to smaller systems which achieve lower
margins; continued market pricing pressures; and lower priced service
options which will not be accompanied by proportionately lower costs until
the installed base becomes large enough to provide additional economies of
scale.
The Company does not expect the full year 1994 total gross profit percent
to exceed the level achieved in the first quarter.
7
CRAY RESEARCH, INC. and SUBSIDIARIES
FINANCIAL REVIEW
(continued)
EXPENSES
- - --------
Percent of total revenue
- - ------------------------ Change from
1994 1993 prior year
- - -------- ------- --------
Operating expenses:
14.8% 17.0% Development and engineering 7.5%
13.0 13.8 Marketing 15.7
2.4 3.2 General and administrative (9.7)
- - -------- -------- ---------------------------- ---------
30.2% 34.0% Total operating expenses 9.1%
======== ======== ============================ =========
Total operating expenses for the first quarter increased 9.1% from 1993
to 1994. Investments are being made in the development of follow-on products
to CRAY C90 and CRAY EL systems, in applications development, and in
increased marketing and selling efforts for low-end products. The decline
in general and administrative expenses reflects the timing of charitable
contributions.
The Company continues to employ the expense control management begun with
the restructuring at the end of 1992. Even with the significant investments
described above, the Company plans to limit full-year 1994 operating expense
growth to about 6%.
The effective tax rate for the quarter was 30.0%, compared to 32.0% for
the first quarter of 1993. The 1993 rate did not include the benefit of the
Federal Research and Development tax credit, which was reinstated in the
third quarter of last year.
Financial Condition
- - --------------------
The Company used $85.0 million of cash during the first quarter of 1994.
With a $15.0 million transfer from long-term investments into cash, cash and
equivalents declined $70.0 million during the period. Total cash and
investments declined from $235.4 million at December 31, 1993 to $150.0
million at March 31, 1994.
Operations used $59.3 million of cash during the first quarter, compared
to $61.5 million of cash provided by operations during the first quarter
of 1993. A few large sales at the end of the quarter resulted in a large
increase in receivables in 1994, whereas receivables declined during the
first three months of 1993. The increase during the first quarter of 1994
includes an increase in long-term receivables related to one CRAY C90
transaction which will be financed in the second quarter of 1994. Overall,
changes in receivables account for a $103.0 million decline in cash from
operations.
For the year, the Company expects cash from operations to be sufficient
to fund all investing and financing activities except repurchases of common
stock. The Company repurchased 249,400 shares for $7.7 million during the
quarter, and had authorization remaining to repurchase up to 1.5 million
additional shares.
Capital expenditures totalling $20.5 million comprised the only other major
use of cash during the quarter. The Company expects 1994 capital
expenditures to exceed the 1993 level; significant investments in
manufacturing facilities and equipment are planned to bring new products
to market.
In addition to cash and investment balances, the Company has available an
unused, unsecured $75 million line of credit. The Company believes its
liquidity and financial flexibility remain adequate to meet its requirements.
8
CRAY RESEARCH, INC. and SUBSIDIARIES
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
- - ------------------------------------------------------------
No matters were submitted to a vote of security holders during the quarter
ended March 31, 1994.
Item 6. Exhibits and Reports on Form 8-K
- - -----------------------------------------
(a) Exhibits
(11) Computation of Earnings Per Share.
(b)No reports on Form 8-K were filed during the quarter ended March 31, 1994.
9
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
CRAY RESEARCH, INC.
Date May 6, 1994 by /s/ MICHAEL J. LINDSETH
------------------------ ---------------------------------
MICHAEL J. LINDSETH
Chief Financial Officer
(Principal Financial Officer)
Date May 6, 1994 by /s/ CHARLES T. ROEHRICK
------------------------ ---------------------------------
CHARLES T. ROEHRICK
Corporate Controller
(Principal Accounting Officer)
10
EXHIBIT INDEX
EXHIBITS FILED AS ITEM 6 TO THE QUARTERLY REPORT OF CRAY RESEARCH, INC.
AND SUBSIDIARIES ON FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 1994.
(11) Computation of Earnings Per Share.
11
Exhibit 11
----------
CRAY RESEARCH, INC. and SUBSIDIARIES
Computation of Earnings per Share
Three Months Ended
March 31
---------------------
1994 1993
---------- ----------
PRIMARY EARNINGS PER SHARE (In thousands, except per
share data)
- - ------------------------------------------
(Computation for Consolidated Statements
of Operations)
Net earnings $21,953 $15,024
Net earnings effect of interest on 6 1/8%
Convertible Debentures - (1) - (1)
- - ------------------------------------------ ------- -------
Net earnings applicable to common and
common equivalent shares $21,953 $15,024
- - ------------------------------------------ ------- -------
Weighted average number of shares outstanding
during the period 25,991 26,049
Common stock equivalents-stock options 11 1
Common stock equivalents-
convertible debentures - (1) - (1)
- - ------------------------------------------ ------- -------
Total weighted average number of common
and common equivalent shares outstanding 26,002 26,050
- - ------------------------------------------ ------- -------
Earnings per common and common
equivalent share $ .84 $ 0.58
- - ------------------------------------------ ======= =======
FULLY DILUTED EARNINGS PER SHARE
- - ------------------------------------------
Net earnings per primary computation above $21,953 $15,024
- - ------------------------------------------ ------- -------
Weighted average number of common and
common equivalent shares outstanding,
as adjusted per primary computation above 26,002 26,050
Additional dilutive effect of outstanding
stock options - 8
- - ------------------------------------------ ------- -------
Total weighted average number of common
and common equivalent shares outstanding 26,002 26,058
- - ------------------------------------------ ------- -------
Earnings per common and common
equivalent share, assuming
full dilution $ .84 $ 0.58
- - ------------------------------------------ ======= =======
<FN>
(1) The effect of the convertible debentures on earnings per share is
anti-dilutive as of March 31, 1994 and 1993 and is excluded from the
calculation.