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 30, 1997 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 6, 1997: 26,595,802
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 30, 1997 and March 31, 1996
Consolidated balance sheets -
March 30, 1997 and December 29, 1996
Consolidated statements of cash flows -
three months ended March 30, 1997 and March 31, 1996
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)
First Quarter Ended
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March 30, March 31,
1997 1996
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Revenues:
Product sales $106,527 $ 91,119
Service 49,138 51,806
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Total revenues 155,665 142,925
Costs and expenses:
Product cost of sales 56,309 48,057
Service expense 29,407 30,749
Research and development expense 20,516 20,080
Selling, general and administrative expenses 32,947 32,366
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Total costs and expenses 139,179 131,252
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Operating income 16,486 11,673
Other income 2,460 1,895
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Income before provision for income taxes 18,946 13,568
Provision for income taxes 4,168 2,985
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Net income $14,778 $ 10,583
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Net income per common share $.62 $.45
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Weighted average number of shares of
common stock and common stock equivalents 24,009 23,623
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See accompanying notes.
STRATUS COMPUTER, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
March 30, December 29,
ASSETS 1997 1996
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(Unaudited)
Current assets:
Cash and cash equivalents $145,640 $131,683
Marketable securities 37,552 43,187
Accounts receivable, net 148,771 175,061
Inventories:
Finished products 39,709 35,921
Work-in-process 2,393 1,542
Parts and assemblies 33,927 25,820
Total Inventories --------- ---------
76,029 63,283
Prepaid Expenses 18,513 14,540
Other current assets 13,775 13,773
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Total current assets 440,280 441,527
Property, plant and equipment, at cost 359,041 355,097
Less: accumulated depreciation 237,080 232,341
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Net property, plant and
equipment 121,961 122,756
Other assets, net 72,805 74,638
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Total assets $635,046 $638,921
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LIABILITIES AND STOCKHOLDERS' EQUITY
-----------------------------------
Current liabilities:
Accounts payable $34,330 $30,357
Accrued expenses:
Payroll 17,247 17,422
Other 29,131 34,204
Income taxes payable 17,061 13,564
Short-term borrowings and obligations 2,342 2,667
Deferred revenue 17,505 17,589
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Total current liabilities 117,616 115,803
Long-term obligations and deferrals 1,970 3,634
Stockholders' equity:
Common stock, $.01 par value, 150,000,000
shares authorized, 26,461,085 and
26,252,242 shares issued and outstanding,
respectively 265 263
Junior common stock, $.01 par value,
500,000 shares authorized - -
Additional paid-in capital 223,896 219,237
Retained earnings 406,202 391,424
Cumulative translation adjustment (3,764) (2,826)
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626,611 608,098
Less: shares in treasury, at cost, 3,600,000
and 2,934,300 shares, respectively (111,151) (88,614)
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Total stockholders' equity 515,460 519,484
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Total liabilities and stockholders' equity $635,046 $638,921
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See accompanying notes.
STRATUS COMPUTER, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
Three Months Ended
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March 30, March 31,
1997 1996
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Cash flows from operating activities:
Net income $14,778 $10,583
Adjustment to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 19,295 15,869
Add (deduct) changes in working capital:
Decrease in accounts receivable 26,290 5,997
Increase in inventory (12,746) (9,463)
Decrease in accounts payable and accrued
liabilities (1,359) (10,950)
Increase (decrease) in income taxes payable 3,497 129
Decrease in other working capital items (4,569) (1,405)
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Net cash provided by operating activities 45,186 10,760
Cash flows from investing activities:
Acquisition of property, plant and equipment (10,480) (15,213)
Acquisition of businesses 0 0
Purchase of Marketable Securities (2,780) (9,365)
Proceeds from sale and Maurity of Marketable
Securities 8,415 8,745
Acquisition of other long-term assets (6,609) (6,748)
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Net cash used in investing activities (11,454) (22,581)
Cash flows from financing activities:
Net proceeds and benefits from employee
stock plans 4,673 478
Purchase of treasury stock (22,537) 0
Reduction of long-term debt and capital
lease obligations (1,479) (2,650)
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Net cash used in financing activities (19,343) (2,172)
Effect of exchange rate changes on cash (432) (12)
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Net increase (decrease) in cash and cash
equivalents 13,957 (14,005)
Cash and cash equivalents at beginning of year 131,683 91,592
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Cash and cash equivalents at end of period $145,640 $77,587
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See accompanying notes.
STRATUS COMPUTER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 30, 1997 and March 31, 1996
(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 29, 1996. 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 29, 1996, 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. 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.
4. There were no non-cash investing and financing activities for the
first three months of 1997 or 1996. The Company made interest payments of
$122 and $448 and tax payments of $1,638 and $2,565 in the first three
months of 1997 and 1996, respectively.
5. During the first quarter of 1997, the Company completed its current
stock repurchase program. This program to purchase 1,200,000 shares of
Stratus common stock on the open market was authorized by the Company's
board of directors on October 22, 1996.
6. In February 1997, the Financial Accounting Standards Board issued
Statement No. 128. Earnings per Share which is required to be adopted on
December 28, 1997. At that time, the Company will be required to change
the method currently used to compute earnings per share and to restate all
prior periods. Under the new requirements for calculating primary
earnings per share, the dilutive effect of stock options will be excluded.
The impact is expected to result in an increase in primary earnings per
share for the first quarter ended March 30, 1997 and March 31, 1996 of
$.02 and $.01 per share, respectively. The impact of Statement 128 on the
calculation of fully diluted earnings per share for these quarters is not
material.
STRATUS COMPUTER, INC.
Item 2 - Management's Discussion and Analysis of Financial Condition and
Results of Operations. (In thousands)
Revenues
Total revenues of $155,665 for the first quarter of 1997 increased 9%
from the corresponding period in 1996.
The Company's total product revenue increased 17% from the first
quarter of 1996. Hardware product revenue grew 15%, with strong year over
year growth in the telecommunications and financial services markets of 58%
and 38%, respectively. Application software license revenue increased 31%
in the Company's wholly owned software subsidiary, S2(tm), driven primarily by
strong sales in the financial services and healthcare markets.
Domestic direct product revenues in the first quarter of 1997 were the
same as the first quarter of 1996. International direct product revenues
decreased 8% from 1996's first quarter due primarily to weak sales in Europe
and Mexico. Product revenue from indirect channels increased 67% in the
first quarter of 1997 compared to the same 1996 period. Sales to NEC
increased 81%, and grew from 20% to 31% of total product revenue. Product
revenue from other international distributors increased 36% from the first
quarter of 1996, driven by strong sales to Olivetti and distributors in
Latin America. Sales to Olivetti were primarily in the gaming and
telecommunications markets.
Total service revenue decreased 5% in the first quarter of 1997 from
the corresponding period in the previous year primarily as a result of lower
professional services from both the hardware and application software
businesses. These decreases were the result of the completion of several
large systems integration contracts and the related lower utilization rates.
Cost of Sales
Total gross margin of 45% for the first quarter of 1997 was the same as
the gross margin in the first quarter of 1996.
Product gross margins of 47% for the first quarter of 1997 were
unchanged from the corresponding 1996 period. Gross margins in the hardware
business decreased slightly, offset by improved margins in the application
software business. The hardware margin decline was primarily related to a
shift in channel mix with increased indirect sales somewhat offset by
manufacturing efficiencies gained as a result of increased volume. The
application software increase relates to the increased volume of license
sales.
The gross margin on service revenue declined slightly in the first
quarter of 1997 compared to the first quarter of 1996. This decrease was
primarily due to the decline in professional services revenue noted above.
Other Operating Expenses
Total operating expenses for the first quarter of 1997 increased 2%
from the corresponding 1996 period. As a percentage of total revenues,
operating expenses decreased to 34% in the first quarter of 1997 compared to
37% in the first quarter of 1996, reflecting the Company's strong focus on
effective cost management combined with the increase in revenues described
above.
Research and development expense in the first quarter of 1997 increased
2% from the same period in 1996. As a percentage of total revenues,
research and development expense decreased one percentage point to 13%, for
the first quarter of 1997 compared to the 1996 first quarter. Throughout
the remainder of 1997, 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. Research and development efforts
directed towards the Company's Continuum(r) and RADIO Cluster(tm) product
lines will be ongoing. The Company will continue to enhance its Continuum
product line, leveraged by the successful incorporation of the
Hewlett-Packard(tm) industry leading PA-RISC microprocessor and HP-UX(tm)
operating system technologies. RADIO Cluster combines availability software
from the Company's Isis Distributed(tm) Systems division with
industry-standard hardware and networking components, and the Microsoft(r)
Windows NT(r) operating system. 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 1997, selling, general and administrative
expenses increased 2% from the same period in 1996. Total selling, general
and administrative expenses were 21% of net revenues for the 1997 first
quarter as compared with 23% for the same 1996 period. The Company's
strategy is to continue to focus the sales organization on strategic
opportunities within targeted vertical industries, expand indirect sales
channels, and improve selling efficiencies. In addition, the Company will
continue to focus on effective cost management.
Other Income and Expense
Other income for the first quarter of 1997 increased $565 compared to
the same 1996 period primarily due to an increase in interest income on
higher levels of invested cash.
The effective tax rate in the first quarter of 1997 of 22% decreased
from 23% for the full year 1996. The reduction was due to a change in mix
of taxable income in the Company's international subsidiaries. The tax rate
for the first quarter of 1997 was the same as the first quarter of 1996.
Liquidity and Capital Resources
At March 30, 1997, the Company had cash and cash equivalents of
$145,640, an increase of $13,957 from the balance at the beginning of the
year. This was primarily due to collection of accounts receivable and
proceeds from employee stock plans, partially offset by purchase of
inventory in preparation for product shipments in the second quarter of
1997, and one-time purchases for large multi-year rollouts of the prior
generation of products.
On January 3, 1997, the Company canceled its $50 million Multicurrency
Revolving Credit Agreement because management believes it is no longer
needed. There were never any borrowings against this Agreement.
At March 30, 1997, the Company had $1,524 in outstanding debt related
to the Isis(tm) 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 $804 at March
30, 1997.
The ratio of current assets to current liabilities for the Company as
of March 30, 1997 was 3.7 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 1997.
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 three
principal business areas: the core product line of Continuum fault-tolerant
computer systems, the new RADIO Cluster products for distributed computing
and application software products provided by the Company's S2 and TCAM(tm)
subsidiaries. The Company will align its product strategies to meet the
industry-specific requirements of targeted growth markets, specifically the
telecommunications, financial services, and enterprise server 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 invest in
improvements in the functionality, serviceability and ease-of-use of its
distributed computing products. The development and delivery of
telecommunications middleware, 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
Forward looking statements made within this report speak only as of the
date made. The Company cautions readers to recognize that actual results
could differ materially from those suggested, as a result of the following
factors:
The Company's future operating results are dependent upon the timing
and market acceptance of new and enhanced product introductions, including
but not limited to the Continuum family of computers and the RADIO Cluster
products which began shipment in 1996. 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 in
this process.
The Company historically ships a large percentage of its revenues
towards the end of each quarter, making revenue forecasting unpredictable.
In addition, product volumes and product and service mixes 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.
Essentially all of the Company's product manufacturing and many
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 the need for 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, 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.
In addition to its direct channels, the Company continues to expand its
indirect distribution channels through resellers and distributors. One
customer, NEC, represented 22% of total Company sales during the first
quarter of 1997. The financial condition of, and ongoing business
relationship with, such resellers and distributors is important to the
Company's financial success. Fluctuations in channel mix may be significant
and can have a significant impact on gross margins as a percentage of
revenue and therefore on earnings per share.
As the technology marketplace continues to emerge 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 trends may cause
the Company to change its operations and as such, may adversely impact the
Company's financial results.
Stratus, the Stratus logo, and Continuum are registered trademarks, and
RADIO Cluster, Isis and Isis Distributed 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 the
Hewlett-Packard Company. Microsoft and Windows NT are registered trademarks
of Microsoft Corporation. Other registered trademarks and trademarks are
the property of their respective owners.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The Company is subject to legal proceedings and claims, including claims of
patent infringement and other matters, which arose in connection with the
acquisition of businesses. Management believes that the outcome of those
matters will not have a material adverse effect on the Company's financial
condition or results of operations.
Item 6. Exhibits and reports on Form 8-K
No reports on Form 8-K have been filed during the first quarter ended March
30, 1997.
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, 1997 ROBERT E. DONAHUE
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Robert E. Donahue
Vice President, Finance and
Administration, Chief Financial
Officer and Treasurer, hereunto
duly authorized