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 March 31, 1996 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, May 6, 1996: 25,792,810.
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 31, 1996
and April 2, 1995
Consolidated balance sheets -
March 31, 1996 and December 31,1995
Consolidated statements of cash flows -
three months ended March 31, 1996
and April 2, 1995
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 6
Exhibits and reports on Form 8-K
Signatures
PART I - FINANCIAL INFORMATON
Item 1 - FINANCIAL STATEMENTS
STRATUS COMPUTER, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In thousands, except per share amounts)
Three Months Ended
------------------
March 31, April 2,
1996 1995
-------- --------
Revenues:
Product sales $ 91,119 $ 81,500
Service 51,806 47,002
-------- --------
Total revenues 142,925 128,502
Costs and expenses:
Product cost of sales 48,057 37,533
Service expense 30,749 26,446
Research and development expense 20,080 20,620
Selling, general and administrative expenses 32,366 38,697
-------- --------
Total costs and expenses 131,252 123,296
-------- --------
Operating income 11,673 5,206
Other income 1,895 2,811
-------- --------
Income before provision for income taxes 13,568 8,017
Provision for income taxes 2,985 1,603
-------- --------
Net income $10,583 $ 6,414
======== ========
Net income per common share $.45 $.26
======== ========
Weighted average number of shares of
common stock and common stock
equivalents 23,623 24,341
======== ========
See accompanying notes.
STRATUS COMPUTER, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
March 31, December 31,
ASSETS 1996 1995
--------- ----------
(Unaudited)
Current assets:
Cash and cash equivalents $ 77,587 $ 91,592
Marketable securities 64,125 63,505
Accounts receivable, net 159,690 165,643
Inventories:
Finished products 37,180 35,640
Work-in-process 2,855 1,174
Parts and assemblies 30,698 24,457
--------- ---------
70,733 61,271
Prepaid Expenses 16,702 10,901
Other current assets 19,020 22,331
--------- ---------
Total current assets 407,857 415,243
Property, plant and equipment, at cost 329,715 323,529
Less: accumulated depreciation 210,108 207,148
--------- ---------
Net property, plant and
equipment 119,607 116,381
Other assets, net 78,418 76,185
--------- ---------
Total assets $605,882 $607,809
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current liabilities:
Accounts payable $28,191 $31,842
Accrued expenses:
Payroll 18,213 20,235
Other 32,033 38,129
Income taxes payable 9,050 8,617
Short-term borrowings and obligations 4,346 5,050
Deferred revenue 20,144 18,377
--------- ---------
Total current liabilities 111,977 122,250
Long-term obligations and deferrals 4,465 7,168
Stockholders' equity:
Common stock, $.01 par value, 150,000,000
shares authorized, 25,767,016 and
25,743,776 shares issued and outstanding,
respectively 258 257
Junior common stock, $.01 par value,
500,000 shares authorized - -
Additional paid-in capital 208,785 208,308
Retained earnings 358,487 347,904
Cumulative translation adjustment (2,072) (2,060)
--------- ---------
565,458 554,409
Less: shares in treasury, at cost,
2,400,000 shares (76,018) (76,018)
--------- ---------
Total stockholders' equity 489,440 478,391
--------- ---------
Total liabilities and stockholders' equity $605,882 $607,809
========= =========
See accompanying notes.
STRATUS COMPUTER, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
Three Months Ended
---------------------
March 31, April 2,
1996 1995
--------- ---------
Cash flows from operating activities:
Net income $10,583 $6,414
Adjustment to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 15,869 16,267
Add (deduct) changes in working capital:
Decrease in accounts receivable 5,997 8,081
Increase in inventory (9,463) (733)
Decrease in accounts payable and
accrued liabilities (10,950) (11,818)
Increase (decrease) in income taxes payable 129 (2,158)
Decrease in other working capital items (1,405) (58)
--------- ---------
Net cash provided by operating activities 10,760 15,995
Cash flows from investing activities:
Acquisition of property, plant and equipment (15,213) (9,213)
Acquisition of businesses 0 (2,967)
Purchase of Marketable Securities (9,365) (39,205)
Proceeds from sale and Maturity
of Marketable Securities 8,745 26,930
Acquisition of other long-term assets (6,748) (7,314)
--------- ---------
Net cash used in investing activities (22,581) (31,769)
Cash flows from financing activities:
Net proceeds and benefits from
employee stock plans 478 1,780
Purchase of treasury stock 0 (12,235)
Reduction of long-term debt and
capital lease obligations (2,650) (3,211)
--------- ---------
Net cash used in financing activities (2,172) (13,666)
Effect of exchange rate changes on cash (12) 1,077
--------- ---------
Net increase in cash and cash equivalents (14,005) (28,363)
Cash and cash equivalents at beginning of year 91,592 191,934
--------- ---------
Cash and cash equivalents at end of period $77,587 $163,571
========= =========
See accompanying notes.
STRATUS COMPUTER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1996 and April 2, 1995
(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 December 31, 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. Certain amounts
in the consolidated financial statements for the prior year have been
reclassified to conform to the current year presentation. Such
reclassifications had no effect on previously reported results of
operations. The balance sheet at December 31, 1995, has been derived
from the audited financial statements at that date.
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 three months of 1996 or 1995. The Company made interest
payments of $448 and $307 and tax payments of $2,565 and $1,450 in the
first three months of 1996 and 1995, respectively.
STRATUS COMPUTER, INC.
Item 2 - Management's Discussion and Analysis
of Financial Condition and Results of Operations.
Revenues
Total revenues of $142,925 for the first quarter of 1996
increased 11% from the corresponding period in 1995.
The Company's total product revenue increased 12% from the
first quarter of 1995. Hardware product revenue grew 17%, primarily
the result of stronger sales of the Company's Continuum (r) family of
fault-tolerant computer systems introduced a year ago. The Company's
Mexico subsidiary COMTEA, acquired in the third quarter of 1995,
contributed 6 percentage points of the growth. These increases were
somewhat mitigated by a 46% decline in software license revenue from
the Company's S2 Systems, Inc. subsidiary.
Domestic direct product revenues declined 9% in the first
quarter of 1996 compared to the first quarter of 1995. This was due
mainly to weak sales into the retail, telecommunications and
banking/brokerage industries. International direct product revenues
increased 21% from 1995's first quarter due primarily to the strong
performance of COMTEA and a 19% increase in the Asia/Pacific region.
Within Asia/Pacific, higher sales in Australia and Hong Kong were
partially offset by lower sales in Japan. In Europe, revenue declined
9% reflecting lower sales in Germany and Holland somewhat offset by
increased sales in Sweden.
Product revenue from indirect channels increased 40% in the
1996 first quarter compared to the same 1995 period. Sales to NEC
increased 120% for the first quarter of 1996, increasing from 10% to
20% of total product revenue. Product revenue from other international
distributors declined 20% from the first quarter of 1995.
Total service revenue increased 10% in the first quarter of
1996 over the corresponding period in the previous year. This growth
was due to the increased professional service, maintenance and
education products provided to the expanding customer base.
Professional services revenue increased 46% from the first quarter of
1995, primarily driven by several large system integration contracts.
Maintenance and education revenues increased 3% from the first quarter
of 1995.
Cost of Sales
The gross margin on product revenue of 47% for the first
quarter of 1996 declined seven percentage points from the gross margin
on product revenue achieved in the corresponding 1995 period. This was
the result of increased competitive pressure, an aggressively priced
Continuum product line that delivers substantial price/performance
improvement and a significant migration to the low end of the
Company's product line. Management believes that the downward pressure
on product margins will continue, but at a much slower pace.
The gross margin on service revenue was 41% and 44% for the
first three months of 1996 and 1995, respectively. The decrease from
the first quarter of 1995 as compared to the first quarter of 1996 was
due to a shift in the mix of service revenues, with a higher
percentage generated from professional services versus maintenance
contracts. In addition, extended service warranties provided with the
Continuum product offerings slowed revenue growth and added pressure
on the service gross margin.
Other Operating Expenses
Total operating expenses for the first quarter of 1996
decreased 12% from the corresponding 1995 period reflecting benefits
derived from the Company's restructuring actions initiated in the
third quarter of 1995. As a percentage of total revenues, operating
expenses decreased to 37% in the first quarter of 1996 compared to 46%
for the first quarter of 1995.
Research and development expense in the first quarter of 1996
decreased 3% from the same period in 1995. As a percentage of total
revenues, research and development expense decreased two percentage
points, to 14%, for the first quarter of 1996 compared to the 1995
first quarter. Throughout the remainder of 1996, the Company will
continue its long-standing commitment to provide leading edge hardware
and software products to the on-line computing marketplace
particularly in support of critical applications. Research and
development efforts directed towards the Company's Continuum and RADIO
(tm) product lines will be ongoing through the remainder of 1996. The
Company will continue to enhance its Continuum product line, leveraged
by the successful incorporation of Hewlett-Packard's industry leading
PA-RISC microprocessor technology, and expanding its lower price point
products. RADIO combines fault tolerant software from the Company's
Isis Distributed Systems division with industry-standard hardware,
operating system, and networking components. The Company will continue
to invest in these technologies to bring competitive products to
market, and to realize the benefits of purchased research and
development.
For the first quarter of 1996, selling, general and
administrative expenses decreased 16% from the same period in 1995
primarily due to the 1995 restructuring activities. Total selling,
general and administrative expenses were 23% of net revenues for the
1996 first quarter as compared with 30% for the same 1995 period. The
Company's strategy in 1996 is to continue to focus the sales
organization on strategic markets within vertical industries, expand
indirect sales channels, and improve selling efficiencies. In
addition, the Company will continue to focus on effective cost
management.
Other Income
Other income for the first quarter of 1996 decreased $916
compared to the same 1995 period. Interest income decreased due to an
$80 million reduction in the Company's cash balance since January 1,
1995, relating primarily to stock repurchase programs, the acquisition
of businesses and the restructuring actions. 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 22% from 20% primarily due
to the expiration of the R&D tax credit and a change in the mix of
taxable income in the Company's international subsidiaries.
Liquidity and Capital Resources
At March 31, 1996, the Company had cash and cash equivalents of
$141,712, a decrease of $13,385 from the balance at the beginning of
the year. This was primarily due to the purchase of a significant
amount of inventory in preparation for the shipment of new products in
the second quarter of 1996, reductions of accounts payable and accrued
liabilities, and the acquisition of long term assets.
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 1996.
At March 31, 1996, the Company had $3,828 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 $1,948 at March 31, 1996.
The ratio of current assets to current liabilities for the
Company as of March 31, 1996 was 3.6 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
capital resources are sufficient to meet its financial requirements
for the foreseeable future.
The Company plans to invest approximately $60 million in
capital improvements and software technologies in 1996.
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 of 1995, 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 $6.5 million related to the restructuring was paid and
charged against the reserve in the first quarter of 1996.
Approximately $3.0 million remains to be paid during the balance of
1996.
UNIX is a registered trademark of UNIX System Laboratories, Inc.
Stratus and Continuum are registered trademarks, and RADIO, Isis and
Isis Distributed Systems are trademarks 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 first
quarter ended March 31, 1996.
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, 1996 Robert E. Donahue
Vice President, Finance and
Administration, Chief Financial Officer
and Treasurer, hereunto
duly authorized