SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED DECEMBER 27, 1996
---------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
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COMMISSION FILE NUMBER 1-5517
SCIENTIFIC-ATLANTA, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
GEORGIA 58-0612397
(STATE OR OTHER (I.R.S. EMPLOYER
JURISDICTION OF IDENTIFICATION NUMBER)
INCORPORATION OR ORGANIZATION)
ONE TECHNOLOGY PARKWAY, SOUTH
NORCROSS, GEORGIA 30092-2967
(ADDRESS OF PRINCIPAL (ZIP CODE)
EXECUTIVE OFFICES)
770-903-5000
(REGISTRANT'S 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 [ ]
AS OF JANUARY 24, 1997, SCIENTIFIC-ATLANTA, INC. HAD OUTSTANDING 77,305,019
SHARES OF COMMON STOCK.
1
PART I - FINANCIAL INFORMATION
SCIENTIFIC-ATLANTA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF EARNINGS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
Three Months Ended Six Months Ended
----------------------------- ---------------------------
December 27, December 29, December 27, December 29,
1996 1995 1996 1995
------------ ------------ ------------ ------------
SALES $282,184 $261,100 $543,848 $503,293
COSTS AND EXPENSES
Cost of sales 196,847 193,383 379,741 374,499
Sales and administrative 37,624 33,663 73,057 66,389
Research and development 29,108 23,871 57,141 46,638
Interest expense 120 220 254 367
Interest (income) (1,112) (223) (1,651) (974)
Other (income) expense, net (626) 479 (815) 658
-------- -------- -------- --------
Total costs and expenses 261,961 251,393 507,727 487,577
EARNINGS FROM CONTINUING
OPERATIONS BEFORE INCOME TAXES 20,223 9,707 36,121 15,716
PROVISION (BENEFIT) FOR
INCOME TAXES
Current 9,480 4,331 (734) 4,881
Deferred (3,009) (1,225) 12,293 148
-------- -------- -------- --------
NET EARNINGS FROM CONTINUING
OPERATIONS 13,752 6,601 24,562 10,687
LOSS FROM DISCONTINUED
OPERATIONS, NET OF TAX -- -- -- (1,038)
GAIN (LOSS) ON SALE OF
DISCONTINUED OPERATIONS,
NET OF TAX -- -- 3,400 (12,172)
-------- -------- -------- --------
NET EARNINGS (LOSS) $ 13,752 $ 6,601 $ 27,962 $ (2,523)
======== ======== ======== ========
EARNINGS (LOSS) PER COMMON SHARE
AND COMMON EQUIVALENT SHARE
PRIMARY
CONTINUING OPERATIONS $ 0.18 $ 0.09 $ 0.32 $ 0.14
DISCONTINUED OPERATIONS -- -- 0.04 (0.17)
-------- -------- -------- --------
NET EARNINGS (LOSS) $ 0.18 $ 0.09 $ 0.36 $ (0.03)
======== ======== ======== ========
FULLY DILUTED $ 0.18 $ 0.09 $ 0.36 $ (0.03)
======== ======== ======== ========
WEIGHTED AVERAGE NUMBER
OF COMMON SHARES AND COMMON
EQUIVALENT SHARES OUTSTANDING
PRIMARY 77,907 76,379 77,788 76,699
======== ======== ======== ========
FULLY DILUTED 77,956 76,379 77,917 76,699
======== ======== ======== ========
DIVIDENDS PER SHARE PAID $ 0.015 $ 0.015 $ 0.03 $ 0.03
======== ======== ======== ========
SEE ACCOMPANYING NOTES
2
SCIENTIFIC-ATLANTA, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
(UNAUDITED)
In Thousands
--------------------------
December 27, June 28,
1996 1996
------------ --------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 96,021 $ 20,930
Receivables, less allowance for doubtful
accounts of $3,808,000 at December 27
and $3,826,000 at June 28 226,156 252,882
Inventories 178,580 215,767
Deferred income taxes 37,155 50,979
Other current assets 10,315 22,413
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TOTAL CURRENT ASSETS 548,227 562,971
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PROPERTY, PLANT AND EQUIPMENT, at cost
Land and improvements 20,592 18,173
Buildings and improvements 37,790 38,628
Machinery and equipment 188,120 162,073
-------- --------
246,502 218,874
Less-Accumulated depreciation and amortization 83,942 68,275
-------- --------
162,560 150,599
-------- --------
COST IN EXCESS OF NET ASSETS ACQUIRED 5,816 6,191
-------- --------
OTHER ASSETS 53,160 43,561
-------- --------
TOTAL ASSETS $769,763 $763,322
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Short-term debt and current maturities of long-term debt $ 250 $ 1,600
Accounts payable 97,629 106,542
Accrued liabilities 117,930 127,546
Income taxes currently payable 23,377 26,229
-------- --------
TOTAL CURRENT LIABILITIES 239,186 261,917
-------- --------
LONG-TERM DEBT, less current maturities 400 400
-------- --------
OTHER LIABILITIES 41,258 37,353
-------- --------
STOCKHOLDERS' EQUITY
Preferred stock, authorized 50,000,000 shares;
no shares issued -- --
Common stock, $0.50 par value, authorized
350,000,000 shares; issued 77,372,128 shares at
December 27 and 77,255,528 shares at June 28 38,686 38,628
Additional paid-in capital 162,405 163,143
Retained earnings 289,852 264,206
Accumulated translation adjustments 770 740
-------- --------
491,713 466,717
-------- --------
Less - Treasury stock, at cost (200,616 shares at
December 27 and 265,640 shares at June 28) 2,794 3,065
-------- --------
488,919 463,652
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $769,763 $763,322
======== ========
SEE ACCOMPANYING NOTES
3
SCIENTIFIC-ATLANTA, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
Six Months Ended
------------------------------
December 27, December 29,
1996 1995
------------ ------------
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES: $ 91,073 $(22,661)
------- -------
INVESTING ACTIVITIES:
Purchases of property, plant, and equipment (29,626) (29,704)
Proceeds from sale of discontinued operations 18,369 --
Other 1,197 (1,973)
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Net cash used by investing activities (10,060) (31,677)
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FINANCING ACTIVITIES:
Net short-term borrowings (repayments) (1,350) 10,083
Principal payments on long-term debt -- (31)
Dividends paid (2,316) (2,299)
Issuance of common stock 717 1,487
Treasury shares acquired (2,973) (12,411)
------- -------
Net cash used by financing activities (5,922) (3,171)
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INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 75,091 (57,509)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 20,930 80,311
------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $96,021 $22,802
======= =======
SUPPLEMENTAL CASH FLOW DISCLOSURES
Interest paid $ 229 $ 306
======= =======
Income taxes paid, net $ 5,810 $ 3,580
======= =======
SEE ACCOMPANYING NOTES
4
NOTES:
(Amounts in thousands except share data).
A. The accompanying consolidated financial statements include the accounts
of the company and all subsidiaries after elimination of all material
intercompany accounts and transactions. Certain information and footnote
disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been
condensed or omitted pursuant to the rules and regulations of the
Securities and Exchange Commission. These condensed financial statements
should be read in conjunction with the consolidated financial statements
and related notes contained in the 1996 Form 10-K. The financial
information presented in the accompanying statements reflects all
adjustments which are, in the opinion of management, necessary for a fair
presentation of the periods indicated. All such adjustments are of a
normal recurring nature.
B. Earnings per share for the three and six months ended December 27, 1996
and December 29, 1995, were computed based on the weighted average number
of shares outstanding and equivalent shares derived from dilutive stock
options. See Exhibit 11.
C. Inventories consist of the following:
December 27, June 28,
1996 1996
------------ --------
Raw materials and work-in-process.. $107,616 $131,762
Finished goods................. 70,964 84,005
-------- --------
Total inventory................ $178,580 $215,767
======== ========
D. During the quarter ended September 29, 1995, the company decided to
discontinue its defense-related businesses in San Diego, California,
because these businesses were not aligned with the company's core
business strategies. A one-time charge of $12,172, net of a tax benefit
of $5,728, for the estimated loss on sale of discontinued operations was
recorded in the quarter ended September 29, 1995.
During the quarter ended September 27, 1996, the company completed
negotiations with a prime contractor, for whom the defense-related
businesses had performed work as a subcontractor, to settle issues
related to the pricing of unexercised options for additional products.
The company also completed the sale of its defense-related businesses to
Global Associates, Ltd. (Global) for cash of $13,142 and secured and
unsecured notes aggregating approximately $4,700. The net realizable
value of the assets of the defense-related businesses and the settlement
with the prime contractor were more favorable than the company had
anticipated when it decided to exit these businesses; accordingly, the
company recognized a pre-tax gain of $5,000 from these transactions in
the first quarter of fiscal 1997. At December 27, 1996, the company had
a reserve of approximately $7,700 for potential sales price adjustments,
indemnifications provided to Global, legal, severance and other
miscellaneous expenses related to the sale and the settlement with the
prime contractor.
5
Sales and earnings (loss) from discontinued operations were as follows:
Three Months Ended Six Months Ended
-------------------------- -----------------------------
December 27, December 29, December 27, December 29,
1996 1995 1996 1995
------------ ------------ ------------- ------------
Sales.............................. $ -- $7,425 $1,920 $12,445
Earnings (loss) from discontinued
operations, net of tax $ -- $ 259 $ (817) $ (779)
Tax expense (benefit).............. $ -- $ 122 $ (385) $ (366)
At June 28, 1996, the net assets of the discontinued operations included
inventory, accounts receivable, machinery and equipment, accounts
payable, and accrued expenses and were included in other current assets
in the Consolidated Statement of Financial Position.
E. The company purchased 225,000 shares of its common stock at an aggregate
cost of $2,973 during the six months ended December 27, 1996, and
1,010,000 shares at an aggregate cost of $12,411 during the six months
ended December 29, 1995, under a stock buyback program for the purchase
of up to 5,000,000 shares of its common stock. The company re-issues
these shares under the company's stock option plan, 401(k) plan, employee
stock purchase plan and other stock-based employee compensation plans.
6
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FINANCIAL CONDITION
- -------------------
Scientific-Atlanta had stockholders' equity of $488.9 million and cash on
hand was $96.0 million at December 27, 1996. Cash increased $75.1 million
during the six months ended December 27, 1996 as cash generated from earnings,
accounts receivable collections, reductions in inventory levels and the sale of
discontinued operations exceeded expenditures for equipment, expansion of
manufacturing capacity and reductions in payables. The current ratio was 2.3:1
at December 27, 1996, compared to 2.1:1 at June 28, 1996. At December 27, 1996,
total debt was $0.6 million or less than one percent of total capital invested.
Short-term debt at June 28, 1996 consisted primarily of borrowings by the
company's international operations to support their working capital
requirements. There was no short-term debt at December 27, 1996. The company
believes that funds generated from operations, existing cash balances and its
available senior credit facility will be sufficient to support growth and
planned expansion of manufacturing capacity.
RESULTS OF OPERATIONS
- ---------------------
Sales for the quarter and six months ended December 27, 1996, were $282.2
million and $543.8 million, respectively, up 8 percent over the prior year.
Higher sales volume of transmission products was the primary factor in the year-
to-year sales increases. Sales volume of Sega game adapters declined as
compared to the prior year. Increased sales of satellite systems, primarily
PowerVu/TM/ digital video systems and VSAT (Very Small Aperture Terminal) data
networks, also contributed to the year-to-year increases. International sales
for the quarter increased by 13 percent over the prior year and accounted for 42
percent of total sales. International sales for the six months ended December
27, 1996, accounted for 38 percent of total sales, as compared to 37 percent of
total sales in the prior year.
Gross margins of 30.2 percent and 30.1 percent, for the three and six
months ended December 27, 1996, improved 4.3 and 4.6 percentage points,
respectively, over the prior year, reflecting the impact of internal programs to
improve quality and reduce cost, the ramp-up of the Juarez, Mexico manufacturing
facility, favorable exchange rates on Japanese yen compared to the prior year
and favorable product mix. The company expects gross margins during the second
half of fiscal 1997 to continue at approximately the same level as the first
half of fiscal 1997.
Certain material purchases are denominated in Japanese yen and,
accordingly, the purchase price in U.S. dollars is subject to change based on
exchange rate fluctuations. The company has forward exchange contracts to
purchase yen to hedge a portion of its exposure on purchase commitments for a
period of approximately twelve months.
Research and development costs increased $5.2 million and $10.5 million, or
22 percent, for the three and six months ended December 27, 1996, respectively,
over the comparable periods of the prior year reflecting the company's continued
investment in research and development programs to support new product
initiatives. The company plans to launch three major digital system categories
during fiscal 1997: high speed data including cable modems, cable telephony and
digital video including broadcast and interactive set-tops. The company expects
to continue significant research and development investments and anticipates
start-up costs as these new products are rolled out.
Selling and administrative expense increased $4.0 million, or 12 percent,
and $6.7 million, or 10 percent, for the three and six months ended December 27,
1996, respectively, over the comparable periods of the prior year. Increased
selling expenses reflect costs associated with higher sales volumes, ongoing
investments to support expansion into international markets and to support the
introduction of new products and a build-up in the infrastructure to handle the
growth the company is experiencing. Administrative expenses increased as higher
consulting fees, administrative expenses of ATx Telecom Systems, Inc. acquired
in June 1996 and other miscellaneous items more than offset cost reductions from
internal processes and systems improvements.
7
Other (income) expense for the three and six months ended December 27, 1996
and December 29, 1995, included the results of foreign currency transactions and
partnership activities and net gains from rental income and other miscellaneous
items. There were no significant items in other (income) expense.
The company's effective income tax rate was 32 percent, unchanged from the
prior year.
Net earnings from continuing operations were $13.8 million for the quarter
ended December 27, 1996, up $7.2 million or 108 percent over the prior year.
Net earnings from continuing operations were $24.6 million for the six months
ended December 27, 1996, up $13.9 million or 130 percent over the prior year.
Higher sales volume and improved gross margins were offset partially by
increased research and development expenses and selling and administrative
expenses. Net earnings from continuing operations were $6.6 million and $10.7
million for the three and six months ended December 29, 1995, respectively. Net
earnings in the quarter and for the first half of fiscal 1996 were negatively
impacted by the exchange rate for the yen, higher spending for research and
development and investment in sales and marketing to support the company's
international growth.
The company periodically evaluates the contribution of its business units
and products to the company's overall strategic direction. During the quarter
ended September 29, 1995, the company decided to discontinue its defense-related
businesses in San Diego, California because these businesses were not aligned
with the company's core business strategy of being a provider of satellite and
terrestrial based networks and applications. In October 1995, the company
announced its intent to sell its defense-related businesses and recorded a one-
time, after-tax charge of $13.2 million in the quarter ended September 29, 1995.
During the quarter ended September 27, 1996, the company completed
negotiations with a prime contractor, for whom the defense-related businesses
had performed work as a subcontractor, to settle issues related to the pricing
of unexercised options for additional products. The company also completed the
sale of its defense-related businesses to Global Associates, Ltd. for cash of
$13.1 million and secured and unsecured notes aggregating approximately $4.7
million. The net realizable value of the assets of the defense-related
businesses and the settlement with the prime contractor were more favorable than
the company had anticipated when it decided to exit these businesses;
accordingly the company recognized a pre-tax gain of $5.0 million from these
transactions in the quarter ended September 27, 1996.
Net earnings for the three months ended December 27, 1996 were $13.8
million, up $7.2 million over the prior year. Net earnings for the six months
ended December 27, 1996 were $28.0 million, including an after-tax gain of $3.4
million related to the sale of discontinued operations, compared to a net loss
in the prior year of $2.5 million, which included an after-tax charge of $13.2
million related to discontinued operations.
Any of the above statements that are not statements about historical facts
are forward-looking statements. Such forward-looking statements are based upon
current expectations but involve risks and uncertainties. Investors are
referred to the Cautionary Statements contained in Exhibit 99 to this Form 10-Q
for a description of the various risks and uncertainties that could cause the
company's actual results and experience to differ materially from the
anticipated results or other expectations expressed in the company's forward-
looking statements. Such Exhibit 99 is hereby incorporated by reference into
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
PowerVu is a trademark of Scientific-Atlanta, Inc.
8
PART II - OTHER INFORMATION
Item 4 Submission of Matters to a Vote of Security Holders
- ------ ---------------------------------------------------
The following information is furnished with respect to matters submitted
to a vote of security holders through the solicitation of proxies:
(a) The matters described below were submitted to a vote of security
holders at the Annual Meeting of Shareholders held on
November 13, 1996.
(b) Election of directors:
Votes For Withhold Authority
------------ ------------------
Marion H. Antonini 64,478,877 396,535
William E. Kassling 64,484,798 390,614
Mylle Bell Mangum 64,495,256 380,156
Wilbur B. King, Alonzo L. McDonald, James F. McDonald, David J.
McLaughlin, James V. Napier and Sidney Topol continue as directors.
(c) (i) Selection of Arthur Andersen LLP as independent auditors
Votes For Votes Against Abstain
---------- ------------- -------
64,038,116 672,978 164,318
Item 6 Exhibits and Reports on Form 8-K
- ------ --------------------------------
(a) Exhibits.
Exhibit No. Description
----------- -----------
10.1 Long-Term Incentive Plan of Scientific-Atlanta,
Inc., as amended and restated by the Board on
November 13, 1996
10.2 Stock Plan for Non-Employee Directors, as amended
and restated by the Board on November 13, 1996
10.3 Scientific-Atlanta, Inc. 1992 Employee Stock Option
Plan, as amended and restated by the Board on
November 13, 1996
10.4 Amendment Number Two to the Non-Employee
Directors Stock Option Plan
10.5 Deferred Compensation Plan for Non-Employee
Directors of Scientific-Atlanta, Inc., as amended
and restated by the Board on November 13, 1996
10.6 Non-Qualified Stock Option Agreement between
Scientific-Atlanta, Inc. and James F. McDonald,
incorporated by reference to the registrant's Form
S-8 Registration Statement, filed on December 27,
1996, and amended by Post-Effective Amendment
No. 1, filed on January 7, 1997
11 Computation of Earnings Per Share
27 Financial Data Schedule
99 Cautionary Statements
(b) No reports on Form 8-K were filed during the quarter ended
December 27, 1996.
Date: February 7, 1997 /s/ Harvey A. Wagner
---------------- --------------------
Harvey A. Wagner
Senior Vice President, Finance
Chief Financial Officer and Treasurer
(Principal Financial Officer and duly
authorized signatory of the Registrant)
9