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 October 1, 1995 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: 0-15086 SUN MICROSYSTEMS, INC. - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Delaware 94-2805249 --------------------------------- ------------------- (State or other jurisdiction (I.R.S.Employer of incorporation or organization) Identification No.) 2550 Garcia Avenue, Mountain View, CA 94043-1100 ------------------------------------------------------ (Address of principal executive offices with zip code) Registrant's telephone number, including area code: (415) 960-1300 ------------------------- N/A ---------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) 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 _____ APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS: Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15 (d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. YES _____ NO _____ APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practical date. Class Outstanding at October 1, 1995 - ---------------------------------- ------------------------------ Common stock -- $0.00067 par value 90,935,733
INDEX PAGE COVER PAGE ................................................................ 1 INDEX ..................................................................... 2 PART I - FINANCIAL INFORMATION Item 1 - Financial Statements Condensed Consolidated Balance Sheets ....................... 3 Condensed Consolidated Statements of Income ................. 4 Condensed Consolidated Statements of Cash Flows ............. 5 Notes to Condensed Consolidated Financial Statements ................. 6 Item 2 - Management's Discussion and Analysis of Results of Operations and Financial Condition ............... 7 PART II - OTHER INFORMATION Item 5 - Other Information ........................................... 11 Item 6 - Exhibits and Reports on Form 8-K ............................ 14 SIGNATURES ................................................................ 15 2
PART 1 - FINANCIAL INFORMATION ITEM 1 - FINANCIAL STATEMENTS SUN MICROSYSTEMS, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands) October 1, June 30, 1995 1995 ------------ ------------ (unaudited) ASSETS Current assets: Cash and cash equivalents ............ $ 385,615 $ 413,869 Short-term investments ............... 363,541 814,151 Accounts receivable, net ............. 927,586 1,041,804 Inventories .......................... 352,703 319,672 Other current assets ................. 387,837 344,868 ----------- ----------- Total current assets ............ 2,417,282 2,934,364 Property, plant and equipment, at cost ....... 1,087,024 1,045,876 Accumulated depreciation and amortization .... (645,475) (616,871) ----------- ----------- 441,549 429,005 Other assets, net ............................ 186,616 181,184 ----------- ----------- $ 3,045,447 $ 3,544,553 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Short-term borrowings ................ $ 28,077 $ 50,786 Accounts payable ..................... 329,340 303,995 Accrued liabilities .................. 607,195 688,325 Other current liabilities ............ 247,995 287,676 ----------- ----------- Total current liabilities ....... 1,212,607 1,330,782 Long-term debt and other obligations ......... 50,386 91,176 Stockholders' equity ......................... 1,782,454 2,122,595 ----------- ----------- $ 3,045,447 $ 3,544,553 =========== =========== See accompanying notes. 3
SUN MICROSYSTEMS, INC. CONDENSED CONSOLIDATED STATEMENTS OF INCOME (unaudited) (in thousands, except per share amounts) Three Months Ended ------------------ October 1, October 2, 1995 1994 ---------- ---------- Net revenues ..................................... $1,485,278 $1,273,439 Cost and expenses: Cost of sales ............................ 829,033 761,378 Research and development ................. 144,685 129,221 Selling, general and administrative ...... 398,616 329,022 ---------- ---------- Total costs and expenses ............ 1,372,334 1,219,621 ---------- ---------- Operating income ................................. 112,944 53,818 Interest income, net ............................. 11,609 2,692 ---------- ---------- Income before income taxes ....................... 124,553 56,510 Provision for income taxes ....................... 39,857 18,083 ---------- ---------- Net income ....................................... $ 84,696 $ 38,427 ========== ========== Net income per common and common-equivalent share .............. $ 0.85 $ 0.40 ========== ========== Common and common-equivalent shares used in the calculation of net income per share .................. 99,662 95,667 ---------- ---------- See accompanying notes. 4
SUN MICROSYSTEMS, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) (in thousands) Three Months Ended ------------------ October 1, October 2, 1995 1994 ---------- ---------- Cash flow from operating activities: Net income ..................................... $ 84,696 $ 38,427 Adjustments to reconcile net income to operating cash flows: Depreciation, amortization and other non-cash items ....... 82,939 66,501 Decrease in accounts receivable ........ 114,218 13,627 Increase in inventories ................ (33,031) (44,518) Increase (decrease) in accounts payable 25,345 (92,908) Net decrease in other current and non-current assets ......... (39,544) (5,766) Net increase (decrease) in other current and non-current liabilities .... (135,106) 3,387 ---------- ---------- Net cash (used by) provided from operating activities 99,517 (21,250) ---------- ---------- Cash flow from investing activities: Acquisition of property, plant and equipment ... (75,900) (26,012) Acquisition of other assets .................... (25,754) (11,096) Acquisition of short-term investments .......... (695,886) (589,932) Maturities of short-term investments ........... 1,146,591 624,995 ---------- ---------- Net cash (used by) provided from investing activities 349,051 (2,045) ---------- ---------- Cash flow from financing activities: Issuance of common stock ....................... 25,982 9,344 Acquisition of treasury stock .................. (455,032) (9,303) Proceeds from employee stock purchase plans .... 14,794 12,187 Reduction of short-term borrowings, net ........ (22,709) (10,627) Reduction of long-term borrowings and other ................... (39,857) (40,143) ---------- ---------- Net cash used by financing activities .............. (476,822) (38,542) ---------- ---------- Net decrease in cash and cash equivalents .......... $ (28,254) $ (61,837) ========== ========== Supplemental disclosures of cash flow information: Cash paid during the period for: Interest ....................................... $ 5,388 $ 6,670 Income taxes ................................... $ 64,454 $ 21,137 See accompanying notes. 5
SUN MICROSYSTEMS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) BASIS OF PRESENTATION The consolidated financial statements include the accounts of Sun Microsystems, Inc. ("Sun" or "the Company") and its wholly-owned subsidiaries. Intercompany accounts and transactions have been eliminated. Certain amounts from prior years have been reclassified to conform to current year presentation. While the quarterly financial information furnished is unaudited, the financial statements included in this report reflect all adjustments (consisting only of normal recurring accruals) that the Company considers necessary for a fair presentation of the results of operations for the interim periods covered and of the financial condition of the Company at the date of the interim balance sheet. The results for interim periods are not necessarily indicative of the results for the entire year. The information included in this report should be read in conjunction with the Company's 1995 Annual Report to Stockholders. INVENTORIES (in thousands) October 1, 1995 June 30, 1995 --------------- ------------- Raw materials .................... $203,478 $170,337 Work in process .................. 43,704 32,356 Finished goods ................... 105,521 116,979 -------- -------- $352,703 $319,672 ======== ======== INCOME TAXES The Company accounts for income taxes under the liability method of Statement of Financial Accounting Standards No. 109. The provision for income taxes during the interim periods considers anticipated annual income before taxes, earnings of foreign subsidiaries permanently invested in foreign operations, and other differences. STOCK DIVIDEND On November 2, 1995 the Company announced a two-for-one stock dividend. Stockholders of record as of the close of business on November 20, 1995 will be issued one additional share of common stock for each share of common stock held. The amounts presented for October 1, 1995, June 30, 1995 and October 2, 1994 do not reflect the stock dividend. 6
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION The following table sets forth items from the Condensed Consolidated Statements of Income as percentages of net revenues: Three Months Ended ------------------ October 1, October 2, 1995 1994 ---------- ---------- Net revenues ................................. 100.0% 100.0% Cost of sales ................................ 55.8 59.8 ------ ------ Gross margin ......................... 44.2 40.2 Research and development ..................... 9.7 10.1 Selling, general and administrative .......... 26.8 25.9 ------ ------ Operating income ............................. 7.6 4.2 Interest income, net ......................... 0.8 0.2 ------ ------ Income before income taxes ................... 8.4 4.4 Provision for income taxes ................... 2.7 1.4 ------ ------ Net income ........................... 5.7% 3.0% ====== ====== RESULTS OF OPERATIONS Net revenues Net revenues were $1.49 billion for the first quarter of fiscal 1996, representing an increase of 16.6% over the comparable period of fiscal 1995. The growth in revenues resulted from strong demand for richly configured servers, including the SPARCserver 1000, and memory, storage options, and accessories shipped as part of system sales and separate orders. Server unit shipments increased over the comparable period in fiscal 1995, while desktop unit shipments remained relatively unchanged. Revenues from other Sun businesses, including service, aftermarketing, microprocessors, and software, in total increased significantly in absolute dollars as compared with the corresponding period of fiscal 1995. Domestic net revenues and international net revenues (including United States exports) increased by 16.6% and 16.7%, respectively, in the first quarter of fiscal 1996 compared with the corresponding period of fiscal 1995. Net revenues in Rest of World and Europe increased 19.5% and 14.1%, respectively, in the first quarter of fiscal 1996 over fiscal 1995's comparable period. These increases are due primarily to continued strengthening of the markets in central and northern Europe and the expanding client server markets in Asia. International net revenues represented 49.1% and 48.9% of total net revenues in the first quarter of fiscal 1996 and fiscal 1995, respectively. 7
Compared with the first quarter of the prior fiscal year, the dollar has weakened against most major European currencies as well as against the Japanese yen. Management has estimated that the net impact of currency fluctuations on operating results, while slightly favorable, it was not significant in the first quarter of fiscal 1996. Gross margin Gross margin was 44.2% for the first quarter of fiscal 1996, compared with 40.2% for the corresponding period of fiscal 1995. The increase in gross margin reflects the effects of increased revenue generated from richly configured, higher margin servers, memory storage options and accessories, and increased revenues from Sun's service and support operations. The factors described above resulted in a favorable impact on gross margin. As part of the planned introduction of the UltraSPARC family of next-generation processors based on a 64-bit architecture (referred to hereafter as UltraSPARC) in the second quarter of fiscal 1996, the Company plans to reduce prices on certain products in its current line. Such repricing actions will result in downward pressure on gross margin. Sun's future operating results will be adversely affected if the Company is unable to mitigate this margin pressure by maintaining a favorable mix of system, software, service, and other revenues and by achieving component cost reductions and operating efficiencies. Research and development Research and development (R&D) expenses were $144.7 million in the first quarter of fiscal 1996, compared with $129.2 million for the same period of fiscal 1995. As a percentage of net revenues, R&D expenses decreased to 9.7 percent for the first quarter of fiscal 1996, from 10.1 percent for the corresponding period of fiscal 1995. The decrease as a percent of revenues is primarily due to the increase in revenues in the first quarter of fiscal 1996 over the comparable period of fiscal 1995. Slightly more than a third of the dollar increase for the first three months of fiscal 1996 over the comparable period of fiscal 1995 reflects increases in compensation as a result of increased staffing. The remaining increase in absolute dollars is due to Sun's development of UltraSPARC and the Company's continuing emphasis on technological advancement for both hardware and software products, as well as microprocessor technologies. To maintain its competitive position in the industry, the Company expects to continue to invest significant resources in new hardware, software and microprocessor product development, as well as in enhancements to existing products. Selling, general and administrative Selling, general and administrative (SG&A) expenses were $398.6 million in the first quarter of fiscal 1996, an increase of $69.6 million, or 21.2%, from the corresponding period of fiscal 1995. As a percentage of net revenues, SG&A expenses increased to 26.8% for the first quarter of fiscal 1996 from 25.8% for the comparable period of fiscal 1995. Approximately one third of the dollar increase reflects increases in marketing costs related to new product introductions and other promotional programs. The remaining increase reflects continued growth in field sales, service and support organizations as well costs incurred in connection with the Company's ongoing efforts to improve business processes and cycle times. The Company expects to continue to invest in efforts to achieve additional operating efficiencies through continual review and improvement of business processes. In addition, the Company expects to continue to hire personnel to drive its demand creation programs and service and support operations. Interest income, net Net interest income was $11.6 million for the first quarter of fiscal 1996, compared with $2.7 million for the first quarter of fiscal 1995. The increase is primarily the result of higher interest earned on increased average cash and investment balances as well as interest savings from scheduled debt repayments. 8
Income taxes The Company's effective income tax rate for the first quarter of both fiscal 1996 and 1995 was 32%. FUTURE OPERATING RESULTS The future operating results discussed below represent specific risks which could impact the Company's financial condition and results over the next few quarters. This information below should be read in conjunction with the Company's 1995 Annual Report to Stockholders. The introductions of Sun's enhanced systems based on the UltraSPARC processors are planned to begin in the second quarter of this fiscal year. Future operating results will depend to a considerable extent on the Company's ability to closely manage this planned product introduction. These new UltraSPARC products include advanced components manufactured internally and by third party suppliers. The manufacture and timely delivery of the Company's UltraSPARC products depends on the ability of certain suppliers to manufacture and deliver advanced components in sufficient quantity and quality to build theses products. Furthermore, in order to secure components for production and introduction of these new products, the Company frequently makes advanced payments to certain suppliers and often enters into noncancelable purchase commitments with vendors with respect to the purchase of components. Due to the variability of material requirement specifications during development and production, the Company must closely manage material purchase commitments and respective delivery schedules. The inability of the Company to secure enough components to build the new products in the quantities and configurations required or to produce, test and deliver sufficient products to meet demand in a timely manner, and any delays in production or variability of customer demand in light of the Company's noncancelable purchase commitments would adversely affect the Company's net revenues and operating results. The introduction of the UltraSPARC products requires that the Company must rapidly bring such products to volume manufacturing, a process that requires accurate forecasting of volumes, mix of products and configurations, among other things in order to achieve acceptable yields and costs. The Company must manage the transition from older, displaced products to minimize disruptions in customer ordering patterns, reduce levels of older product inventory, and ensure that adequate volumes of the new products can be delivered to meet customer demand. The ability of the Company to match supply and demand is further complicated by the Company's pricing actions taken with respect to its older products. As a result, the Company's operating results could be adversely affected if the Company is not able to correctly anticipate the level of demand and the mix of products. Generally, the computer systems sold by Sun, such as the UltraSPARC products, are the result of both hardware and software development, such that delays in the software development can delay the ability of the Company to ship new hardware products. In addition, adoption of a new release of an operating system may require effort on the part of the customer and porting by software vendors providing applications. As a result, the timing of conversion to a new release is inherently unpredictable. Moreover, delays by customers in adoption of a new release of an operating system can limit the acceptability of hardware products tied to that release. Such delays could adversely affect the future operating results of the Company. Sun's systems based on UltraSPARC processors operate using the Company's recently released version of its operating system, Solaris 2.5. In attempts to minimize the aforementioned risks, the Company has expended significant effort toward making Solaris 2.5 binary compatible with the applications currently running on Solaris 2.x, so customers should not need to port these applications to run on UltraSPARC-based systems. The Company's operating results would be adversely affected if Solaris 2.5 does not achieve market acceptance on a timely basis. The Company's customer order backlog at October 1, 1995 was approximately $287 million, a decrease of $36 million from the backlog level of approximately $323 million at June 30, 1995 due in part to customer anticipation of the introduction of UltraSPARC-based systems. Backlog includes only orders for which a delivery schedule within six months has been specified by the customer. Backlog levels vary with demand, product availability and the Company's delivery lead times and are subject to decreases as a result of customer order delays, changes or cancellations. As such, backlog levels are not necessarily a reliable indicator of future operating results. 9
LIQUIDITY AND CAPITAL RESOURCES Total assets at October 1, 1995 decreased by approximately $499 million from June 30, 1995, due principally to decreases in cash, cash equivalents and short-term investments ($479 million) and accounts receivable ($114 million) offset by increases in inventories ($33 million) and other current assets ($43 million). Cash and short-term investments decreased primarily due to the repurchase of 8.6 million shares of common stock for $455 million and due to scheduled debt repayments. The decrease in accounts receivable reflects the seasonal decrease in revenues. The increase in inventories reflects a build-up of supply to meet anticipated customer demand for new products to be introduced in the second fiscal quarter. Other current assets increased principally due to the timing of payments for income and other taxes. Total liabilities decreased approximately $159 million from June 30, 1995, due principally to decreases in accrued liabilities ($81 million), and long-term debt and other obligations ($41 million). Accrued liabilities decreased due to payments of performance based compensation, commissions, and income taxes. Long-term debt and other obligations decreased as a result of scheduled debt repayments. At October 1, 1995, the Company's primary sources of liquidity consisted of cash, cash equivalents and short-term investments of $749 million and a revolving credit facility with banks aggregating $150 million, which was available subject to compliance with certain covenants. The Company believes that the liquidity provided by existing cash and short-term investment balances and the borrowing arrangements described above will be sufficient to meet the Company's capital requirements through fiscal 1996. However, the Company believes the level of financial resources is a significant competitive factor in its industry and may choose at any time to raise additional capital through debt or equity financings to strengthen its financial position, facilitate growth and provide the Company with additional flexibility to take advantage of business opportunities that may arise. 10
PART II - OTHER INFORMATION ITEM 5 - OTHER INFORMATION SCHEDULE OF SALES BY EXECUTIVE OFFICERS DURING THE QUARTER The following is a summary of all sales of the Company's Common Stock by the Company's executive officers and directors who are subject to Section 16 of the Securities Exchange Act of 1934, as amended, during the fiscal quarter ended October 1, 1995: OFFICER DATE PRICE NUMBER OF SHARES SOLD ================================================================= Kenneth Alvares 8/14/95 $50.4375 1,000 8/15/95 $52.625 1,000 8/16/95 $55.50 1,000 8/16/95 $57.00 1,000 8/22/95 $56.4375 1,000 8/22/95 $54.8125 2,000 8/23/95 $60.1875 1,750 Patrick Deagman 8/14/95 $50.74 2,000 8/14/95 $50.74 900 8/14/95 $50.74 6,000 8/14/95 $50.74 800 8/14/95 $50.74 3,000 Larry Hambly 8/14/95 $50.00 5,000 8/14/95 $51.00 4,000 8/15/95 $53.00 8,000 8/16/95 $54.25 4,000 8/16/95 $57.0625 2,500 8/18/95 $56.375 5,000 8/18/95 $56.625 5,000 8/23/95 $60.625 12,000 8/31/95 $57.00 12,000 *William Hearst 8/16/95 $56.00 1,250 8/16/95 $56.00 2,500 8/16/95 $56.00 3,750 8/16/95 $56.00 5,000 11
OFFICER DATE PRICE NUMBER OF SHARES SOLD ================================================================= Masood Jabbar 8/15/95 $52.88 5,000 *Jon Kannegaard 8/14/95 $51.25 1,500 8/14/95 $51.25 1,600 8/14/95 $51.25 1,600 Michael Lehman 8/11/95 $48.00 4,000 8/17/95 $56.75 2,000 8/17/95 $56.75 1,500 *William Marr 8/8/95 $45.4375 363 8/8/95 $45.4375 3,000 8/8/95 $45.4375 2,400 8/14/95 $50.00 8,871 8/14/95 $48.50 10,000 8/14/95 $49.00 10,000 8/14/95 $49.88 10,000 Michael Morris 8/17/95 $56.815 3,200 8/17/95 $56.815 6,000 Frank Pinto 8/14/95 $50.19 1,500 8/23/95 $59.94 2,000 George Reyes 8/10/95 $48.00 2,000 Janpieter Scheerder 8/17/95 $56.565 1,000 8/17/95 $56.565 3,600 Eric Schmidt 8/14/95 $50.125 5,000 8/17/95 $56.50 7,500 8/18/95 $56.75 5,000 8/23/95 $60.75 7,500 8/25/95 $58.125 5,000 8/30/95 $55.125 5,000 John Shoemaker 8/21/95 $56.875 3,200 8/21/95 $56.875 363 12
OFFICER DATE PRICE NUMBER OF SHARES SOLD ================================================================= Dorothy Terrell 8/10/95 $49.9375 1,000 8/11/95 $48.00 1,000 8/14/95 $50.4375 2,000 8/15/95 $52.3125 1,000 8/16/95 $55.50 1,000 8/16/95 $57.00 1,000 8/22/95 $54.8125 1,750 8/22/95 $56.4375 2,000 8/23/95 $60.625 1,400 8/23/95 $58.9375 1,000 8/31/95 $57.9375 3,000 Kevin Walsh 8/31/95 $57.625 2,400 8/31/95 $57.625 1,600 Edward Zander 8/16/95 $56.0625 6,478 8/23/95 $60.75 10,000 * A former Section 16 Officer or Director of Sun Microsystems, Inc. 13
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K a) EXHIBITS 4.6 (1) Third Amendment dated as of November 2, 1994 to the First Amended and Restated Common Shares Rights Agreement dated December 14, 1990. 4.7 (2) Fourth Amendment dated as of November 1, 1995 to the First Amended and Restated Common Shares Rights Agreement dated December 14, 1990. 11.0 Statement re: Computation of Earnings Per Share 27.0 Financial data schedule for the period ended October 1, 1995 ------- (1) Incorporated by reference to Exhibit 4 filed as an exhibit to Registrant's Form 8A/A Amendment No. 4 to Registration Statement on Form 8-A filed on November 17, 1994. (2) Incorporated by reference to Exhibit 5 filed as an exhibit to Registrant's Form 8A/A Amendment No. 5 to Registration Statement on Form 8-A filed on November 7, 1995. b) REPORTS ON FORM 8-K No reports on Form 8-K were filed during the quarter ended October 1, 1995. 14
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 thereunto duly authorized. SUN MICROSYSTEMS, INC. BY /s/ Michael E. Lehman ------------------------------------------ Michael E. Lehman Vice President and Chief Financial Officer /s/ George Reyes ------------------------------------------ George Reyes Vice President and Corporate Controller, Chief Accounting Officer Dated: November 14, 1995 15
EXHIBITS TO REPORT ------------------ ON FORM 10-Q ------------ FOR THE QUARTERLY PERIOD ENDED OCTOBER 1, 1995 ----------------------------------------------