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 26, 1997
-----------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
-------------------------- --------------------
COMMISSION FILE NUMBER 1-5517
SCIENTIFIC-ATLANTA, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
GEORGIA 58-0612397
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
ONE TECHNOLOGY PARKWAY, SOUTH
NORCROSS, GEORGIA 30092-2967
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
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 23, 1998, SCIENTIFIC-ATLANTA, INC. HAD OUTSTANDING 79,047,945
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 26, December 27, December 26, December 27,
1997 1996 1997 1996
------------- --------- ------------ ---------
SALES $294,524 $282,184 $589,025 $543,848
COSTS AND EXPENSES
Cost of sales 208,507 196,847 412,780 379,741
Sales and administrative 39,187 37,624 80,286 73,057
Research and development 26,651 29,108 53,401 57,141
Interest expense 154 120 269 254
Interest income (1,234) (1,112) (2,335) (1,651)
Other (income) expense, net 71 (626) (114) (815)
-------- -------- -------- --------
Total costs and expenses 273,336 261,961 544,287 507,727
EARNINGS FROM CONTINUING
OPERATIONS BEFORE INCOME TAXES 21,188 20,223 44,738 36,121
PROVISION (BENEFIT) FOR
INCOME TAXES
Current 6,045 9,480 13,016 (734)
Deferred 311 (3,009) 405 12,293
-------- -------- -------- --------
NET EARNINGS FROM CONTINUING
OPERATIONS 14,832 13,752 31,317 24,562
GAIN ON SALE OF DISCONTINUED
OPERATIONS, NET OF TAX -- -- -- 3,400
-------- -------- -------- --------
NET EARNINGS $ 14,832 $ 13,752 $ 31,317 $ 27,962
======== ======== ======== ========
EARNINGS PER COMMON SHARE
BASIC
CONTINUING OPERATIONS $ 0.19 $ 0.18 $ 0.40 $ 0.32
DISCONTINUED OPERATIONS -- -- -- 0.04
-------- -------- -------- --------
NET EARNINGS $ 0.19 $ 0.18 $ 0.40 $ 0.36
======== ======== ======== ========
DILUTED $ 0.19 $ 0.18 $ 0.40 $ 0.36
======== ======== ======== ========
WEIGHTED AVERAGE NUMBER
OF COMMON SHARES OUTSTANDING
BASIC 78,885 77,205 78,567 77,166
======== ======== ======== ========
DILUTED 80,149 78,387 80,038 78,249
======== ======== ======== ========
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 26, June 27,
1997 1997
--------- ---------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 89,154 $107,143
Receivables, less allowance for doubtful
accounts of $4,106,000 at December 26
and $4,202,000 at June 27 254,665 238,179
Inventories 202,284 209,570
Deferred income taxes 29,360 31,323
Other current assets 12,074 10,886
-------- --------
TOTAL CURRENT ASSETS 587,537 597,101
-------- --------
PROPERTY, PLANT AND EQUIPMENT, at cost
Land and improvements 19,854 19,854
Buildings and improvements 30,670 32,229
Machinery and equipment 215,775 206,760
-------- --------
266,299 258,843
Less-Accumulated depreciation and amortization 101,660 92,423
-------- --------
164,639 166,420
-------- --------
COST IN EXCESS OF NET ASSETS ACQUIRED 10,724 11,263
-------- --------
OTHER ASSETS 53,403 48,831
-------- --------
TOTAL ASSETS $816,303 $823,615
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of long-term debt $ 821 $ 842
Accounts payable 92,068 123,675
Accrued liabilities 90,489 111,737
Income taxes currently payable 7,171 13,507
-------- --------
TOTAL CURRENT LIABILITIES 190,549 249,761
-------- --------
LONG-TERM DEBT, less current maturities 1,493 1,810
-------- --------
OTHER LIABILITIES 44,812 39,394
-------- --------
STOCKHOLDERS' EQUITY
Preferred stock, authorized 50,000,000 shares;
no shares issued -- --
Common stock, $0.50 par value, authorized
350,000,000 shares; issued 79,086,325 shares at
December 26 and 77,995,475 shares at June 27 39,543 38,998
Additional paid-in capital 190,496 171,857
Retained earnings 352,565 323,608
Accumulated translation adjustments (456) (186)
-------- --------
582,148 534,277
-------- --------
Less - Treasury stock, at cost (164,521 shares at
December 26 and 113,000 shares at June 27) 2,699 1,627
-------- --------
579,449 532,650
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $816,303 $823,615
======== ========
SEE ACCOMPANYING NOTES
3
SCIENTIFIC-ATLANTA, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
Six Months Ended
--------------------------
December 26, December 27,
1997 1996
-------- --------
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES: $(14,508) $91,073
-------- -------
INVESTING ACTIVITIES:
Purchases of property, plant, and equipment (19,270) (29,626)
Proceeds from sale of discontinued operations -- 18,369
Proceeds from the sale of a business unit 8,059 --
Other 25 1,197
-------- --------
Net cash used by investing activities (11,186) (10,060)
-------- --------
FINANCING ACTIVITIES:
Net repayments of short-term borrowings -- (1,350)
Principal payments on long-term debt (338) --
Dividends paid (2,360) (2,316)
Issuance of common stock 10,403 717
Treasury shares acquired -- (2,973)
-------- --------
Net cash provided (used) by financing activities 7,705 (5,922)
-------- --------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (17,989) 75,091
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 107,143 20,930
-------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 89,154 $96,021
======== =======
SUPPLEMENTAL CASH FLOW DISCLOSURES
Interest paid $ 242 $ 229
======== =======
Income taxes paid, net $ 15,662 $ 5,810
======== =======
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 1997 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. Basic earnings per common share were computed by dividing net earnings by
the weighted average number of shares of common stock outstanding during
the period. Diluted earnings per common share were computed by dividing
net earnings by the sum of the weighted average shares of common stock
outstanding during the period and incremental shares from the assumed
exercise of dilutive options. See Exhibit 11.
C. Inventories consist of the following:
December 26, June 27,
1997 1997
-------- --------
Raw materials and work-in-process $127,471 $136,699
Finished goods 74,813 72,871
-------- --------
Total inventory $202,284 $209,570
======== ========
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 and recorded a one-time charge of $12,172, net of a
tax benefit of $5,728, for the estimated loss on sale of discontinued
operations. 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. Sales and losses, net of tax, from
discontinued operations were $1,920 and $817, respectively, for the
quarter ended September 27, 1996. At December 26, 1997, the company had
a reserve of approximately $7,200 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.
Global is currently in default under its promissory notes to the company
and under promissory notes to Global's senior lenders and, in January
1998, filed a voluntary petition for a Chapter 11 reorganization in the
United States Bankruptcy Court. Whether Global will successfully
reorganize in this bankruptcy proceeding is not known at this time. If a
satisfactory resolution of the situation is not reached, the company
believes it has adequate reserves to cover any potential losses related
to Global's default on the promissory note and related to any contracts
of the defense-related businesses from which contracts the company has
not been released.
E. During the quarter ended March 28, 1997, the company decided to dispose
of two business units, microwave and mobile, because these businesses
were not aligned with the company's core business strategies and recorded
a pre-tax charge of $5,526. During the quarter ended December 26, 1997,
the company sold the majority of the net assets of the microwave business
unit for $8,059 of cash. No gain or loss was recognized on the
transaction. At December 26, 1997, the company had a reserve of
approximately $5,200 to adjust the carrying amount of the net assets of
the mobile business unit and to provide for estimated indemnifications to
the purchaser of the microwave business unit, potential losses on
contracts of the microwave business which were retained by the company,
severance, closing costs and other miscellaneous expenses related to the
sale of the microwave business unit.
5
NOTES: (continued)
(Amounts in thousands except share data).
F. During the six months ended December 27, 1996, the company purchased
225,000 shares of its common stock pursuant to a stock buyback program at
an aggregate cost of $2,973. During the six months ended December 26,
1997, the company obtained an additional 70,496 shares of its common
stock, primarily from the cancellation of unvested, restricted stock
grants. The company re-issues these shares under the company's stock
option plans, 401(k) plan, employee stock purchase plan and other stock-
based employee compensation arrangements.
G. Income taxes paid of $15,662 in the six months ended December 26, 1997
included approximately $5,800 of payments in connection with the filing
of amended federal income tax returns. Payments to foreign tax
authorities were approximately $2,900 higher in the six months ended
December 26, 1997 as compared to the prior year due to the timing of tax
payments by foreign subsidiaries.
H. During the quarter ended December 26, 1997, the company adopted Statement
of Financial Accounting Standards No. 128 "Earnings Per Share" which
superseded Opinion 15. Earnings per share computed under the provisions
of Statement 128 were the same as those computed under Opinion 15 for the
three months ended December 26, 1997 and December 27, 1996, respectively,
and were the same for the six months ended December 27, 1996.
6
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FINANCIAL CONDITION
- -------------------
Scientific-Atlanta had stockholders' equity of $579.4 million and cash on
hand of $89.2 million at December 26, 1997. Cash decreased $18.0 million during
the six months ended December 26, 1997 as expenditures for equipment, reductions
in payables, and increases in accounts receivable exceeded cash generated from
earnings, the issuance of common stock and the sale of the net assets of the
microwave business. The current ratio was 3.1:1 at December 26, 1997, compared
to 2.4:1 at June 27, 1997. At December 26, 1997, total debt was $2.3 million or
less than one percent of total capital invested. The company entered into a $38
million off-balance sheet operating lease commitment with an option to purchase
in July 1997 related to the construction of facilities to replace those
currently under lease by the company. The company believes that funds generated
from operations, existing cash balances and its available senior credit facility
will be sufficient to support the company's growth.
RESULTS OF OPERATIONS
- ---------------------
Sales for the quarter ended December 26,1997 were $294.5 million, up 4
percent over the prior year. Sales of Subscriber Network Systems products
increased 13 percent over the prior year primarily on higher sales volume of
analog settops. Sales of Terrestrial Network Systems products increased 9
percent over the prior year primarily due to sales generated by Arcodan A/S
which was acquired in February 1997.
Sales for the six months ended December 26, 1997 were $589.0 million, up 8
percent over the prior year. Sales of Subscriber Network Systems and
Terrestrial Network Systems products increased 14 percent and 9 percent,
respectively. These increases were also the result of higher sales volume of
analog settops and sales generated by Arcodan in fiscal 1998. Delivery of
ground terminals for a satellite-based global system for the Iridium(TM) project
during fiscal 1998 contributed to a 5 percent increase in sales of Satellite
Network Systems. Sales in each sector were negatively impacted by the
deterioration in the economic condition of the Asia/Pacific region during
fiscal 1998 and the company believes that future sales in this region will be
negatively impacted until the economic conditions improve.
The company previously announced that it planned to have production
quantities of the new Prisma(TM) Digital Transport product available in the
third quarter of fiscal 1998, but the availability of such production quantities
is expected to be delayed until the fourth quarter of fiscal 1998.
Orders booked during the three and six months ended December 26, 1997 were
$312.6 million and $575.2 million, respectively, a decline of 9 percent from the
comparable periods of the prior year. Lower orders in fiscal 1998 reflected a
decline in business in the Pacific Rim resulting from currency issues in the
region, which made the company's products more expensive, and a slowdown of a
cable system roll-out in Australia and a softening of the market in the United
Kingdom. These declines were offset partially by strong growth in orders booked
in North America and Latin America.
Gross margins of 29.2 percent and 29.9 percent, for the three and six
months ended December 26, 1997, declined 1.0 and 0.3 percentage points,
respectively, from the prior year. Lower volume of sales in the Asia/Pacific
region, which generally have higher margins than some other geographic regions,
and margin decreases in Terrestrial Network Systems, resulting from market
pressures, more than offset the impact of favorable exchange rates on the
Japanese yen compared to the prior year and favorable product mix.
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 were $26.7 million and $53.4 million for the
three and six months ended December 26, 1997, respectively, or 9 percent of
sales, reflecting the company's continued investment in research and development
programs to support new product initiatives. Research and development costs
during fiscal 1998 were lower than the prior year due primarily to decreased
research and development efforts related to cable telephony products which was
offset partially by increased investments in analog and digital settop
programs. In addition, the company capitalized software development costs of
$0.4 million and $1.0 million and non-recurring engineering costs of $3.2
million and $6.2 million during the three and six months ended December 26,
1997, respectively.
7
Selling and administrative expense increased $1.6 million, or 4 percent,
and $7.2 million, or 10 percent, for the three and six months ended December 26,
1997, 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 selling expenses of Arcodan A/S which was
acquired in February 1997. Administrative expenses declined in fiscal 1998 due
primarily to lower professional and consulting fees and cost reduction programs
the company has implemented.
Other (income) expense for the three and six months ended December 26, 1997
and December 27, 1996, 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 in fiscal 1998 was 30 percent, two
percentage points lower than the rate in the prior year. The lower effective
income tax rate in fiscal 1998, as compared to fiscal 1997, is due to benefits
from the company's foreign sales corporation (FSC) and a decrease in foreign
earnings taxed at higher rates.
Net earnings from continuing operations were $14.8 million for the quarter
ended December 26, 1997, up $1.1 million or 8 percent, over the prior year. Net
earnings from continuing operations were $31.3 million for the six months ended
December 26, 1997, up $6.8 million, or 28 percent, over the prior year. Higher
sales volume and lower research and development expenses in fiscal 1998 were
offset partially by increased selling and administrative expenses and lower
gross margins.
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.
Global is currently in default under its promissory notes to the company
and under promissory notes to Global's senior lenders and, in January 1998,
filed a voluntary petition for a Chapter 11 reorganization in the United States
Bankruptcy Court. Whether Global will successfully reorganize in this bankruptcy
proceeding is not known at this time. If a satisfactory resolution of the
situation is not reached, the company believes it has adequate reserves to cover
any potential losses related to Global's default on the promissory note and
related to any contracts of the defense-related businesses from which contracts
the company has not been released.
During the quarter end March 28, 1997, the company decided to dispose of
two business units, microwave and mobile, because these business were not
aligned with the company's core business strategies and recorded a pretax charge
of $5.5 million. During the quarter ended December 26, 1997, the company sold
the majority of the net assets of the microwave business unit for $8.1 million
of cash. No gain or loss was recognized on the transaction.
Net earnings for the three months ended December 26, 1997 were $14.8
million, up $1.1 million over the prior year. Net earnings for the six months
ended December 26, 1997 were $31.3 million, up $3.4 million over the prior year
which included an after-tax gain of $3.4 million related to the sale of
discontinued operations.
8
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.
ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
- ------ -----------------------------------------------------------
This information is not yet required, per the Instructions to Item 305 of
Regulation S-K.
PRISMA is a registered trademark of Scientific-Atlanta, Inc.
IRIDIUM is a registered trademark and service mark of Iridium LLC.
9
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 12,
1997.
(b) Election of directors:
Votes For Withhold Authority
------------- -------------------
David J. McLaughlin 58,860,026 8,441,689
James V. Napier 58,873,802 8,427,913
Sam Nunn 58,200,636 9,101,079
Marion H. Antonini, William E. Kassling, Wilbur B. King, Mylle Bell
Mangum, Alonzo L. McDonald, and James F. McDonald continue as
directors. Sidney Topol retired from the Board of Directors effective
November 12, 1997.
(c)(i) Approval of the Amended Stock Plan for Non-Employee Directors
Votes For Votes Against Abstain
------------- ---------------- -----------
63,923,175 1,808,106 1,570,434
(ii) Approval of a grant of an option for shares of the Corporation's
Common Stock to an executive officer
Votes For Votes Against Abstain
------------- ---------------- -----------
56,256,407 10,457,890 587,418
(iii) Ratification of the selection of Arthur Andersen LLP as independent
auditors
Votes For Votes Against Abstain
------------- ---------------- -----------
66,883,545 197,078 221,092
Item 6 Exhibits and Reports on Form 8-K
- ------ --------------------------------
(a) Exhibits.
Exhibit No. Description
----------- -----------
3(b) By-laws of the company, as amended.
10.1 Stock Plan for Non-Employee Directors of Scientific-
Atlanta, Inc., as amended and restated
10.2 Deferred Compensation Plan for Non-Employee Directors
of Scientific-Atlanta, Inc., as amended and restated
10.3 Retirement Plan for Non-Employee Directors, as
amended and restated
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 26, 1997.
Date: February 6, 1998 /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)
10