Tellabs, Inc. Form 10-Q for Quarter Ended March 28, 2003

UNITED STATES
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 March 28, 2003

[ ]	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: 0-9692

TELLABS, INC.
(Exact name of registrant as specified in its charter)

Delaware

36-3831568

(State of Incorporation)

(I.R.S. Employer Identification No.)

One Tellabs Center, 1415 W. Diehl Road, Naperville, Illinois		60563
(Address of Principal Executive Offices)		(Zip Code)

Registrant's telephone number, including area code: (630) 378-8800

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___

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). YES X NO___

Common Shares, $.01 Par Value - 412,270,669 shares outstanding on March 28, 2003

TELLABS, INC.
INDEX

PART I.	FINANCIAL INFORMATION

Item 1.	Financial Statements:
	Condensed Consolidated Statements of Operations


	Condensed Consolidated Balance Sheets


	Condensed Consolidated Statements of Cash Flow


	Notes to Condensed Consolidated Financial Statements


Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations


Item 3.	Quantitative and Qualitative Disclosures about Market Risk


Item 4.	Disclosure Controls and Procedures


PART II.	OTHER INFORMATION


Item 1.	Legal Proceedings


Item 6.	Exhibits and Reports on Form 8-K


SIGNATURE



CERTIFICATIONS

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

TELLABS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
	Three
	Months Ended
(In millions, except per-share data)	3/28/03	3/29/02

Net Sales
Product	$186.7	$319.8
Services	35.8	51.7
	222.5	371.5
Cost of Sales
Product	98.7	163.1
Services	30.3	33.4
	129.0	196.5


Gross Profit	93.5	175.0


Operating expenses
Selling, general and administrative	64.7	77.2
Research and development	76.9	90.6
Purchased in-process research and development	-	5.4
Intangible asset amortization	2.4	1.7
	144.0	174.9


Operating Profit (Loss)	(50.5)	0.1


Other Income (Expense)
Interest income	8.7	7.5
Interest expense	-	(0.5)
Other	(1.6)	1.3
	7.1	8.3


Earnings (Loss) Before Income Taxes	(43.4)	8.4
Income taxes	(0.5)	3.1
Net Earnings (Loss)	$(42.9)	$5.3

Earnings (Loss) per Share
Basic	$(0.10)	$0.01
Diluted	$(0.10)	$0.01


Average number of common shares outstanding	412.3	410.5
Average number of common shares outstanding, assuming dilution	412.3	414.8

The accompanying notes are an integral part of these statements.

TELLABS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS


	3/28/03	12/27/02
(In millions, except share amounts)	(Unaudited)


Assets
Current Assets
Cash and cash equivalents	$ 257.4	$ 453.6
Investments in marketable securities	749.2	565.6
Accounts receivable, net	154.4	216.8
Inventories
Raw materials	85.3	92.4
Work in process	15.8	15.5
Finished goods	76.1	66.6
	177.2	174.5
Income taxes	98.1	91.9
Miscellaneous receivables and other current assets	44.3	31.2
Total Current Assets	1,480.6	1,533.6


Property, plant and equipment	739.4	770.2
Less: accumulated depreciation	332.3	349.3
	407.1	420.9
Goodwill	456.4	455.7
Intangible assets, net	69.8	70.1
Other Assets	142.9	142.5
Total Assets	$ 2,556.8	$ 2,622.8


Liabilities
Current Liabilities
Accounts payable	$ 60.1	$ 77.4
Accrued liabilities	85.8	94.5
Accrued restructuring and other charges	64.4	85.4
Total Current Liabilities	210.3	257.3


Accrued long-term restructuring charges	43.8	45.5
Other long-term liabilities	28.6	29.7


Stockholders' Equity
Preferred stock: authorized 5,000,000 shares of $.01 par value;
no shares issued and outstanding	-	-
Common stock: 1,000,000,000 shares of $.01 par value;
415,599,600 and 415,440,414 shares issued and outstanding	4.2	4.1
Additional paid-in capital	543.8	543.6
Treasury stock, at cost: 3,250,000 shares	(129.6)	(129.6)
Deferred compensation expense	(16.6)	(19.3)
Accumulated other comprehensive income (loss)
Cumulative translation adjustment	(32.2)	(57.4)
Unrealized net gains on available-for-sale securities	3.9	5.4
Total accumulated other comprehensive income (loss)	(28.3)	(52.0)
Retained earnings	1,900.6	1,943.5
Total Stockholders' Equity	2,274.1	2,290.3
Total Liabilities and Stockholders' Equity	$ 2,556.8	$ 2,622.8

The accompanying notes are an integral part of these statements.

TELLABS INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
(Unaudited)

		Three Months Ended
(In millions)		03/28/03		03/29/02
Operating Activities
Net Earnings/(Loss)		$(42.9)		$5.3
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization		31.4		35.8
Other		1.2		3.7
Net change in assets and liabilities, net of effects
from acquisitions:
Accounts receivable		62.9		96.6
Inventories		0.1		36.7
Long-term assets		(5.5)		(16.0)
Accounts payable		(18.1)		(11.4)
Accrued liabilities		4.9		(0.9)
Restructuring liabilities		(24.8)		(42.3)
Income taxes		(6.4)		6.3
Other, net		(14.0)		1.0
Net Cash Provided by/(Used for) Operating Activities	(11.2)		114.8

Investing Activities
Acquisition of property, plant and equipment, net		2.8		(9.5)
Proceeds from sales and maturities of investments		650.7		99.5
Payments for purchases of investments		(839.0)		(86.3)
Payments for acquisitions, net of cash acquired		(13.2)		(283.2)
Net Cash Used for Investing Activities	(198.7)			(279.5)

Financing Activities
Payments of notes payable and capital leases		-		(8.2)
Proceeds from issuance of common stock		0.1		1.1
Net Cash Provided by (Used for) Financing Activities	0.1			(7.1)
Effect of Exchange Rate Changes on Cash	13.7			(1.6)
Net Decrease in Cash and Cash Equivalents	(196.1)			(173.4)
Cash and Cash Equivalents at Beginning of Year	453.5			701.9
Cash and Cash Equivalents at End of Quarter	$257.4			$528.5

Other Information
Interest paid		-		$0.5
Income taxes paid		$9.7		$9.7

The accompanying notes are an integral part of this statement.

TELLABS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. Basis of Presentation

The accompanying unaudited condensed consolidated financial statements of Tellabs, Inc. ("Tellabs" or the "Company") have been prepared in accordance with generally accepted accounting principles for interim financial statements and the requirements of Form 10-Q and applicable rules of Regulation S-X and accordingly do not include all disclosures normally required by generally accepted accounting principles for complete financial statements. Accordingly, the financial statements and notes herein should be read in conjunction with the Company's Annual Report on Form 10-K for the year ended December 27, 2002.

In the opinion of management, the accompanying unaudited condensed consolidated financial statements include all adjustments (consisting of normal recurring accruals) that are necessary for a fair presentation. Operating results for interim periods are not necessarily indicative of operating results for the full year.

Certain amounts from prior periods have been reclassified to conform to the current period presentation. These reclassifications had no impact on net earnings or stockholders' equity as previously reported.

2. New Accounting Pronouncements

In November 2002, the FASB issued FASB Interpretation No. 45 ("FIN 45"), Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others. This Interpretation requires companies to recognize an initial liability for the fair value of an obligation assumed when issuing a guarantee. The provision for initial recognition and measurement of the liability will be applied on a prospective basis to guarantees issued or modified after December 31, 2002. The adoption of FIN 45 did not materially affect the Company's consolidated financial statements. For more information, please refer to Note 7, Product Warranties.

In January 2003, the FASB issued FIN 46, Consolidation of Variable Interest Entities. FIN 46 requires a variable interest entity to be consolidated by a company if that company is subject to a majority of the risk of loss from the variable interest entity's activities, is entitled to receive a majority of the entity's residual returns, or both. FIN 46 is effective for all new variable interest entities created or acquired after January 31, 2003 .. For variable interest entities created or acquired prior to February 1, 2003, the provisions of FIN 46 must be applied for the first interim or annual period beginning after June 15, 2003 .. The Company will adopt FIN 46 in the third quarter of 2003 and is currently evaluating the effect, if any, that the adoption of FIN 46 will have on its consolidated financial statements.

3. Restructuring and Other Charges

The Company underwent a series of restructuring activities during 2001and 2002. The major components of the restructuring efforts included the write-off of excess inventories and the accrual for excess inventory purchase commitments, workforce reductions, the closure and consolidation of excess facilities, and the write-off of related fixed assets. Total charges associated with these plans in 2001 and 2002 were $448.6 million and $287.1 million, respectively. For further discussion of the Company's 2001 and 2002 restructuring activities, refer to the Company's Annual Report on Form 10-K for the year ended December 27, 2002. The remaining balance of these restructuring reserves as of December 27, 2002, amounted to $130.9 million.

The following table displays the Company's restructuring activity during the first quarter of 2003 and the status of the reserves at March 28, 2003:

Description of reserve (in millions)	Balance 12/27/02	Non-Cash Activity	Cash Activity	Balance 3/28/03
Consolidation of excess leased facilities	$81.8	$0.3	$(10.7)	$71.4
Excess purchase commitments	30.0	0.8	(0.2)	30.6
Severance and related expenses	9.5	0.7	(6.4)	3.8
Other obligations	9.6	0.3	(7.5)	2.4
	$130.9	$2.1	$(24.8)	$108.2

Non-cash activity included foreign currency impact of $1.0 million and other minor adjustments.

Of the remaining $108.2 million reserves as of March 28, 2003, it is anticipated that approximately $64.4 million will be paid in the next 12 months. The long-term balance of $43.8 million will be paid over the remaining terms of the facility leases which expire at various times through 2011. Please refer to Footnote 8, Subsequent Event, for disclosure about recently announced restructuring actions.

4. Stock Options

Under the provisions of SFAS No. 123, Accounting for Stock-Based Compensation, and SFAS No. 148, Accounting for Stock-Based Compensation – Transition and Disclosure – an amendment of SFAS No. 123, the Company has elected to continue to apply Accounting Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued to Employees, and its related interpretations in accounting for its stock-based compensation plans. Accordingly, no compensation cost has been recognized for its fixed stock option plan grants. Had compensation cost for the Company's stock-based compensation plans been determined using the fair value at the grant dates for awards under those plans consistent with the method required by SFAS No. 123, the Company's net earnings and earnings per share would have been reduced to the pro forma amounts indicated in the following chart:

	Three Months Ended
(In millions, except per-share amounts)	3/28/03	3/29/02
Net earnings (loss), as reported	$(42.9)	$5.3

Plus: stock-based employee compensation expense included in reported net earnings, net of related tax effects	2.7	1.8

Deduct: total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects	(16.7)	(18.4)

Pro forma net loss	$(56.9)	$(11.3)

Earnings (loss) per common share:
As reported	$(0.10)	$0.01
Pro forma	$(0.14)	$(0.03)

Earnings (loss) per common share, assuming dilution:
As reported	$(0.10)	$0.01
Pro forma	$(0.14)	$(0.03)

The fair value of each option is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions for grants in 2003 and 2002:

	2003	2002
Expected volatility	72.2%	69.1%
Risk-free interest rate	2.9%	4.9%
Expected life	5.7 years	5.3 years
Expected dividend yield	0.0%	0.0%

The Black-Scholes option pricing model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. It requires the use of assumptions that are subjective, such as the expected volatility of the exercise price and the expected remaining life of the option. Since the Company's options have significantly different characteristics than traded options, and since the changes in the subjective input assumptions can result in materially different fair value estimates, in management's opinion, the existing option pricing models do not necessarily provide a reliable single measure of the fair value of the options and do not give a meaningful comparison of companies in a given industry.

5. Comprehensive Income (Loss)

Comprehensive income (loss) is an expression of the Company's net income (loss) adjusted for foreign currency translation adjustments and net unrealized gains or losses on available-for-sale securities. The comprehensive loss for the quarter ended March 28, 2003, was $19.2 million, while the comprehensive income for the quarter ended March 29, 2002, was $0.5 million.

(In millions)	Three Months Ended
(In millions)	3/28/03	3/29/02
Net earnings (loss)	$(42.9)	$5.3
Other comprehensive income (loss):
Net unrealized loss	(1.5)	(1.4)
Cumulative translation adjustments	25.2	(3.4)
Comprehensive income (loss)	$(19.2)	$0.5

6. Earnings (Loss) Per Share

The following table sets forth the computation of earnings per share:

	Three Months Ended
(In millions, except per-share amounts)	3/28/03	3/29/02
Numerator:
Net earnings (loss)	$(42.9)	$5.3


Denominator:
Denominator for basic earnings per share- weighted-average shares outstanding	412.3	410.5


Effect of dilutive securities:
Employee stock options and awards	-	4.3

Denominator for diluted earnings (loss) per share- adjusted weighted-average shares outstanding and assumed conversions	412.3	414.8
Earnings (loss) per share	$(0.10)	$ 0.01
Earnings (loss) per share, assuming dilution	$(0.10)	$ 0.01

7. Product Warranties

The Company offers warranties for all of its products. The specific terms and conditions of those warranties vary depending upon the product sold. The Company provides a basic limited warranty, including parts and labor, for all products for a period up to 5 years. Factors that enter into the Company's estimate of its warranty reserve include the number of units shipped, historical and anticipated rates of warranty claims, and cost per claim. The following table presents the changes in the Company's product warranty reserve:

(In millions)
Total product warranty reserve at December 27, 2002	$ 13.9
Accruals for product warranties issued	3.2
Settlements made during the period	(3.1)
Total product warranty reserve at March 28, 2003	$14.0

8. Subsequent Event

On April 16, 2003, the Company announced plans to reduce operating expenses. As an initial step, the Company will reduce its U.S and international work force by 665 employees and record a related charge in the second quarter. Potential additional charges may be incurred relating to excess and obsolete inventory, asset impairment charges, and lease terminations, among others. In total, the Company anticipates the second quarter charge could be in the range of $70 to $100 million with an estimated cash impact of $15 to $30 million. This action is the first step in a program intended to reduce operating expenses to $125 million by the fourth quarter of 2003 and to return Tellabs to profitability.

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Overview

Tellabs designs, manufactures, and markets communications equipment to telecommunications service providers worldwide. The Company's customers include incumbent local exchange carriers, independent telephone companies, interexchange carriers, other local exchange carriers, original equipment manufacturers, cellular and other wireless service companies, cable operators, alternate service providers, competitive local exchange carriers, Internet service providers and system integrators. The Company also provides installation and professional services that support its product offerings.

In March 2003, the Company announced a reorganization of its North American business to strengthen Tellabs' relationships with customers, speed the development of new products, and improve profitability. The Company named Edward Kennedy, formerly senior vice president of its Metro Networking Group, to the position of President, Tellabs North America Operations. In this position Kennedy has overall responsibility for all aspects of Tellabs' operations for North America including sales, marketing, engineering, strategic planning, products planning and manufacturing. The reorganization of Tellabs North America emulates the August 2002 reorganization of the Company's International operations under Anders Gustafsson, President of Tellabs International. With this structure, the Company now has two focused organizations capable of addressing the divergent technology and market requirements between customers in North America and the rest of the world.

Tellabs' optical networking systems are the primary strategic products the Company offers to service providers in North America. These systems manage network bandwidth to help service providers deliver voice, data and video services while reducing operating costs. Product offerings include the Tellabs® 5000 series of digital-cross connect systems, the Tellabs® 6400 and Tellabs® 6500 transport switches and the Tellabs® 7100 series of optical transport systems.

The Company's primary strategic offerings for service providers outside North America are the next-generation SDH (synchronous digital hierarchy) transport products and managed access systems. The Company's customers use these systems to deliver voice and data services for businesses and consumer wireless services. Products include the Tellabs® 6300 and the Tellabs 8000 series of managed access and transport systems and the Tellabs® 7200 optical transport system.

Included under the heading Other Products are the Tellabs® 2000 family cable telephony distribution systems, the Tellabs® 3000 family of broadband and narrowband echo cancellers and Tellabs voice-quality enhancement (VQE) solutions, and a small amount of other miscellaneous product revenue. Although these products are sold to customers around the world, organizationally they are managed as part of the North America business.

The Company also generates revenue globally from professional services such as product and system installation, network deployment, traffic management and others. Revenue trends from professional services have generally followed the revenue trend for product sales.

Beginning in the first half of 2001, telecommunications service providers, particularly in the United States, began to significantly reduce their capital spending. This began a period of significant change in the market conditions within the telecommunications industry.

Throughout this period the Company has responded by undertaking actions to realign its business in line with the changes taking place in the industry and its expectations for the future. Those actions have included: reducing headcount from a peak of 9,200 in the first quarter of 2001 to 4,700 at the end of the first quarter of 2003; closing four out of six manufacturing facilities; and reducing overall operating expenses by 40.7% compared with first quarter 2001 levels. Over the coming year, the Company will continue to identify and implement actions to cut fixed costs through facility consolidation, increase returns from manufacturing operations and implement further cost reductions across the business including work force reductions as needed. These efforts may result in additional restructuring charges (refer to Footnote 8, Subsequent Event).

Results of Operations

Quarter Ended March 28, 2003, as Compared with Quarter Ended March 29, 2002

Current market conditions can be characterized by a combination of decreased end-user demand, excess capacity in both network bandwidth and the number of service providers, burdensome debt obligations for some providers, extended macroeconomic and geopolitical concerns, and certain regulatory uncertainties. This trend continued throughout 2002 and into 2003. All of these market conditions have impacted the Company's revenue performance in the periods of this report.

Total revenue for the quarter ended March 28, 2003, was $222.5 million compared with $371.5 million in the first quarter of 2002. Declines occurred across all product families and in both the international and North American businesses. In addition to the expected impact of lower customer spending levels on first quarter revenue, the Company also experienced a larger than expected slowdown in spending by its largest customer for the Tellabs 2000 products.

The overall decline in revenue was the primary driver of our net loss of $42.9 million, or $(0.10) per share, for the first quarter of 2003 compared to a net profit of $5.3 million, or $0.01 per share, for the first quarter of 2002.

Revenue within North America for the first quarter of 2003 amounted to $141.4 million or 63.6% of total revenue, compared with $259.1 million or 69.7% in the first quarter of 2002. International revenue for the first quarter of 2003 amounted to $81.1 million or 36.4% of total revenue, compared with $112.4 million or 30.3% in the first quarter of 2002.

Optical Networking Products

Revenues from optical networking products were $104.5 million in the first quarter of 2003, compared with $180.5 million in the first quarter of 2002.

The Company's new optical networking products (the Tellabs 6400, the Tellabs 6500, and the Tellabs 7100 systems) accounted for $14.7 million of revenue in the first quarter of 2002 compared with $13.9 million in the first quarter of 2002.

Next-Gen SDH and Managed Access Systems

Next-gen SDH transport products and managed access systems, the primary products the Company offers to its international customers, accounted for $62.4 million in sales during the first quarter of 2003, compared with $80.5 million in the first quarter of 2002. The decline was the result of lower revenue from the Tellabs 7200 optical transport system and the Tellabs 8000 managed access systems.

Our new international products (Tellabs 6340, Tellabs 6350, and Tellabs 7200 systems) accounted for $14.2 million of revenue in the first quarter of 2003 compared with $21.6 million in the first quarter of 2002.

Other Products

Revenue from Other Products was $19.9 million for the first quarter of 2003 compared with $58.8 million for the same period last year. The decline in revenue is primarily the result of lower sales of our Tellabs 2000 cable telephony product as mentioned previously.

Professional Services

Professional services revenue for the quarter ended March 28, 2003, was $35.7 million, compared with $51.7 million in the first quarter of 2002. The decline in service revenue is directly attributable to the lower level of overall product revenue.

Gross Profit

For the quarter ended March 28, 2003, total gross profit was $93.5 million or 42.0% of sales, compared with $175.0 million or 47.1% of sales for the first quarter of 2002 reflecting lower absorption of fixed manufacturing expenditures due to lower volume, unfavorable product mix shifts, and lower gross margins on professional services revenue.

We are continuing to examine all avenues for achieving further product cost efficiencies to maintain and improve margins. As a result the Company is targeting gross margins in the mid 40-percent range by the fourth quarter of 2003, with variability up or down based on product and service revenue mix, the level of fixed cost absorption, and other factors.

Operating Expenses

Operating expenses for the three months ended March 28, 2003, declined to $144.0 million from $174.9 million for the first quarter of 2002. The improvement in operating expenses reflects the results of the restructuring actions mentioned previously as well as the Company's continuing commitment to bring operating expenses in line with lower revenue while continuing to invest for future growth. As a result of previously announced plans and continuing commitment to reduce costs, the Company plans quarterly operating expenses to be in the $140 million range for the second quarter and in the $125 million range by the end of 2003.

Effective Tax Rate

The effective tax rate for the quarter ended March 28, 2003, was a benefit of 1.2% compared with an expense of 36.9% in the first quarter of 2002. The tax rate for the first quarter of 2003 reflects the absence of a tax benefit for operating losses incurred primarily in the United States and a small tax benefit from our International operations.

SFAS No. 109, Accounting for Income Taxes, requires that a valuation allowance be established when it is more likely than not that all or a portion of a deferred tax asset will not be realized. This valuation allowance will offset assets associated with future tax deductions as well as carryforward items. Although the Company does expect to realize these benefits, it expects to continue to record a full valuation allowance on future U.S. and certain non-U.S. tax benefits until an appropriate level of profitability is attained.

Financial Condition, Liquidity and Capital Resources

The Company's principal source of liquidity remained its cash and equivalents and short-term investments, which decreased, in total, $12.6 million during the first three months of 2003 to $1,006.6 million. The decrease during the quarter was mainly the result of cash payments related to prior years' restructuring liabilities.

Approximately one-half of the $1,006.6 million was generated by offshore operations and remains invested offshore. The Company currently considers these funds to be permanently re-invested. In the event the funds are needed for investment purposes in the United States some additional foreign withholding taxes and U.S. federal income taxes might be payable. The amount of the taxes will depend on foreign withholding tax rates and the Company's tax position in the United States at the time the funds are repatriated. We believe that any such taxes would not have a significant impact on the Company's liquidity.

During the first quarter of 2003, the Company's cash and equivalents balance decreased $196.2 million while its short-term investment balance increased $183.6 million. These changes primarily reflect management's decision to modify the investment portfolio mix for funds held offshore by reducing its position in highly liquid cash equivalents in favor of higher yielding short-term investments.

Management believes that the current level of working capital, particularly cash and short-term investments, is sufficient to meet the Company's normal operating requirements and strategic growth needs, both now and in the foreseeable future. Management believes sufficient resources exist to support the Company's operations, including funding the remaining short-term obligations under the restructuring programs, either through currently available cash, cash generated from future operations, short-term or long-term financing or equity offerings.

The current assets portion of the Company's balance sheet for the quarter ended March 28, 2003, included an anticipated federal income tax refund relating to the federal income tax effect of the Company's 2002 tax loss carryback. After the close of the quarter, the Company received a $157.0 million federal income tax refund arising from the filing of its 2002 federal income tax return. The cash impact of the refund will be reflected in the Company's financial statements for the second quarter of 2003.

Critical Accounting Policies

There were no changes in critical accounting policies during the quarter. Additionally, the initial adoption of new accounting policies during the quarter ended March 28, 2003, did not have a material impact on the Company's consolidated financial statements.

Outlook

The Company believes that it is unlikely that the telecommunications equipment industry will emerge from the downturn during 2003. Therefore, the Company will continue to pursue a course aimed at improving near-term financial performance while channeling investment into the most promising future growth opportunities. The Company will continue to explore ways to maximize profitability by enhancing returns from our supply chain, including expanded use of third-party manufacturers where appropriate; continuing to identify and implement plans to cut fixed costs, including additional consolidations of facilities where possible; maintaining spending controls across the business; and reducing headcount as necessary. The restructuring action that the Company announced on April 16, 2003 (see Footnote 8, Subsequent Event) was the first step along this path that we believe can allow the Company to achieve a breakeven profile at somewhere in the vicinity of $275 million in revenue.

The Company also believes that it is important to focus its development efforts on having the right products when the industry recovers. Therefore, the Company intends to reduce spending on existing products and re-allocate more of its spending to new products and areas that it believes represent the primary avenues to growth. These investments in new products may include acquisitions or the formation of strategic partnerships in addition to internal development efforts. The Company believes that it has the financial flexibility to make any such investments using either cash (available or borrowed) or company stock while maintaining adequate liquidity to run its business.

Forward-Looking Statements

This Management's Discussion and Analysis and other sections of this Form 10-Q contain forward-looking statements made pursuant to the safe harbor provisions of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These statements reflect management's expectations, estimates and assumptions, based on the information available at the time the document was prepared. These forward-looking statements include, but are not limited to, statements regarding future events, plans, goals, objectives and expectations. The words "anticipate," "believe," "estimate," "target," "expect," "plan," "intend," "likely," "unlikely," "will," "should" and similar expressions are intended to identify forward-looking statements. Forward-looking statements are not guarantees of future performance and involve risks, uncertainties and other factors that may cause our actual performance or achievements to be materially different from any future results, performance or achievements expressed or implied by those statements. Important factors that could cause our actual results to differ materially from those in forward-looking statements include, but are not limited to: economic changes impacting the telecommunications industry; financial condition of telecommunication service providers and equipment vendors, including any impact of bankruptcies; the impact of customer and vendor consolidation; new product acceptance; product demand and industry capacity; competitive products and pricing; competitive pressures from new entrants to the telecommunications industry; manufacturing efficiencies; research and new product development; protection and access to intellectual property, patents and technology; ability to attract and retain highly qualified personnel; availability of components and critical manufacturing equipment; facility construction and start-ups; the regulatory and trade environment; availability and terms of future acquisitions; uncertainties relating to synergies, charges, and expenses associated with business combinations and other transactions; and other risks and future factors that may be detailed from time to time in the Company's filings with the SEC. For a further description of such risks and future factors, see Exhibit 99.3. The Company's actual future results could differ materially from those predicted in such forward-looking statements. In light of the foregoing risks, uncertainties and other factors, investors should not place undue reliance on the forward-looking statements in determining whether to buy, sell or hold any of the Company's securities. The Company undertakes no obligation to publicly update or revise any forward-looking statements to reflect changed assumptions, the occurrence of anticipated or unanticipated events or changes to future results over time.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

There were no material changes to the disclosures on this matter made in the Company's Annual Report on Form 10-K for the year ended December 27, 2002.

Item 4. Disclosure Controls and Procedures

Within the 90-day period prior to the filing of this report, an evaluation was carried out under the supervision and with the participation of the Company's management, including the Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO"), of the effectiveness of disclosure controls and procedures. Based on that evaluation, the CEO and CFO have concluded that the Company's disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms. Subsequent to the date of their evaluation, there were no significant changes in the Company's internal controls or in other factors that could significantly affect the disclosure controls.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

There were no material changes to the disclosures on this matter made in the Company's Annual Report on Form 10-K for the year ended December 27, 2002.

Item 6. Exhibits and Reports on Form 8-K

(A) Exhibits

99.1 – Certification Pursuant to Section 1350 of Chapter 63 of Title 18 of the United States Code

99.2 – Certification Pursuant to Section 1350 of Chapter 63 of Title 18 of the United States Code

99.3 – Forward-Looking Statements and Risks and Future Factors Impacting Tellabs

(B) Reports on Form 8-K:

The Registrant filed a press release on January 23, 2003, announcing its earnings for the quarter ended December 27, 2002.

The Registrant filed a press release on February 4, 2003, announcing the resignation of Tellabs' executive vice president and chief financial officer, Joan Ryan, effective February 7, 2003.

The Registrant filed a press release on March 10, 2003, announcing the reorganization of its North America business and naming Edward Kennedy president of Tellabs Operations, Inc.

The Registrant filed a press release on March 25, 2003, naming Timothy J. Wiggins as executive vice president and chief financial officer effective March 31, 2003.

The Registrant filed a press release on April 16, 2003, announcing earnings for the quarter-ended March 28, 2003, and restructuring actions.

SIGNATURE

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.

TELLABS, INC.
(Registrant)

/s James A. Dite
James A. Dite
Vice President and Controller
(Principal Accounting Officer)

May 9, 2003
(Date)

EX-99.1 3 ceo.htm CERTIFICATION OF PERIODIC FINANCIAL REPORTS Exhibit 99.1

Exhibit 99.1

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Tellabs, Inc. (the "Company") on Form 10-Q for the quarter ending March 28, 2003, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Michael J. Birck, the Chief Executive Officer of the Company, certify, pursuant to and for purposes of 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s Michael J. Birck
Michael J. Birck
Chief Executive Officer
Date: May 9, 2003 EX-99.2 4 cfo.htm CERTIFICATION OF PERIODIC FINANCIAL REPORTS Exhibit 99.2

Exhibit 99.2

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Tellabs, Inc. (the "Company") on Form 10-Q for the quarter ending March 28, 2003, as filed with the Securities and Exchange Commission on the date hereof (the "Report), I, Timothy J. Wiggins, the Chief Financial Officer of the Company, certify, pursuant to and for purposes of 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s Timothy J. Wiggins
Timothy J. Wiggins
Chief Financial Officer
Date: May 9, 2003

EX-99.3 5 riskfactors.htm FORWARD LOOKING STATEMENTS AND RISKS Exhibit 99.3

Exhibit 99.3

Forward-Looking Statements and Risks and Future Factors Impacting Tellabs

Press releases and the reports and other documents we file with the Securities and Exchange Commission may contain or incorporate by reference forward-looking statements made pursuant to the safe harbor provisions of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These statements reflect management's expectations, estimates and assumptions, based on information available at the time the document, or any document incorporated therein by reference, was prepared. These forward-looking statements include, but are not limited to, statements regarding future events, plans, goals, objectives and expectations. The words "anticipate," "believe," "estimate," "target," "expect," "plan," "intend," "likely," "will," "should" and similar expressions are intended to identify forward-looking statements. Forward-looking statements are not guarantees of future performance and involve risks, uncertainties and other factors which may cause our actual performance or achievements to be materially different from any future results, performance or achievements expressed or implied by those statements. Important factors that could cause our actual operating results and financial condition to differ materially from those in forward-looking statements include, but are not limited to, those indicated below. We undertake no obligation to publicly update or revise any forward-looking statements to reflect changed assumptions, the occurrence of anticipated or unanticipated events or changes to future results over time. You are cautioned not to rely on forward-looking statements.

Our business may be adversely affected by general economic and market conditions.

Our business is subject to the effects of general economic conditions in the United States and globally, and, in particular, market conditions in the communications and networking industries. In recent quarters, our operating results have been adversely affected as a result of recent unfavorable economic conditions and reduced capital spending throughout our customer base, particularly in the United States. If the economic conditions in the United States and globally do not improve, or if we experience a worsening in the United States or a global economic slowdown, we may continue to experience adverse impacts on our business, operating results and financial condition.

The market for communications equipment products and services is rapidly changing.

In the past, our principal product offerings have been products designed to connect and transmit information on traditional telephony networks. With the growth of multimedia applications and the development of enhanced Internet, data, video and voice services, our recent product offerings and research and development efforts have been and are focused on emerging technologies and network equipment, software and integration service offerings for communications equipment applications. The market for communications network equipment, software and integration services is rapidly changing. Our future growth will be dependent in part on our ability to develop successfully and introduce commercially new products for this market. Our future will also depend on the growth of the communications equipment market. The growth in the market for communications equipment products and services is dependent on a number of factors. These factors include:

· the amount of capital expenditures by telecommunications service providers;

· regulatory and legal developments;

· changes to capital expenditure rates by network providers due to consolidation among our customers;

· the addition of new customers to the market; and

· end-user demand for integrated Internet, data, video, voice and other network services.

We cannot predict whether the market for communications equipment products and services will develop rapidly. The recent slowdown in the general economy, changes in the service provider market, and the constraints on capital availability have had a material adverse effect on the markets where we sell our products and services. Also, we cannot predict with certainty technological trends or new products in this market. In addition, we cannot predict whether our products and services will meet with market acceptance or be profitable. We may not be able to compete successfully, and competitive pressures may adversely affect our business, operating results and financial condition.

Demand for our products may decrease if we are unable to anticipate and adapt to rapidly changing technology.

The communications equipment industry is characterized by rapid technological change. In our industry, we also face evolving industry standards, changing market conditions and frequent new product and service introductions and enhancements. The introduction of products using new technologies or the adoption of new industry standards can make existing products or products under development obsolete or unmarketable. In order to grow and remain competitive, we will need to adapt to these rapidly changing technologies, to enhance our existing solutions and to introduce new solutions to address our customers' changing demands.

In addition, new product development often requires long-term forecasting of market trends, development and implementation of new technologies and processes, and a substantial capital commitment. We have invested, and we will continue to invest, substantial resources for the development of new products. We may experience difficulties that could delay or prevent the successful design, development, introduction or marketing of new solutions. In addition, these new solutions and enhancements must meet the requirements of our current and prospective customers and must achieve significant market acceptance. If we fail to anticipate or respond on a cost-effective and timely basis to technological developments, changes in industry standards or customer requirements, or if we have any significant delays in product development or introduction, our business, operating results and financial condition could be adversely affected.

Our industry is highly competitive.

Competition in the communications equipment industry is intense. We believe that competition may increase substantially with the increased use of broadband networks. We believe our success in competing with other manufacturers of communications equipment products and services will depend primarily on our engineering, manufacturing and marketing skills, the price, quality and reliability of our products, our delivery and service capabilities and our control of operating expenses and management of assets. Pricing pressures could increase from current and future competitors and customers. Many of our foreign and domestic competitors (both current and new) have more engineering, manufacturing, marketing, financial and personnel resources available to them. Competition may also be affected by consolidation among communications equipment providers as well as entrants into the telecommunications market. As a result, other providers may be able to respond more quickly to new or emerging technologies and changes in customer requirements. We cannot predict whether we will be able to compete successfully with current and future competitors using our existing and new products and services. In addition, we believe that technological change, the increasing addition of Internet, data, video, voice and other services to networks, the possibility of regulatory changes and industry consolidation of new entrants will continue to cause rapid evolution in the competitive environment. The full scope and nature of these changes are difficult to predict at this time. Increased competition could lead to price cuts, reduced gross margins and loss of market share, which may adversely affect our business, operating results and financial condition.

Our operating results fluctuate significantly.

Our operating results vary significantly from quarter to quarter. These fluctuations are the result of a number of factors, including:

· the volume and timing of orders from and shipments to our customers;

· the timing of and our ability to obtain new customer contracts;

· the timing of and our ability to recognize revenue for product and service sales;

· the timing of new product and service announcements;

· the availability of products and services;

· the overall level of capital expenditures by our customers;

· the market acceptance of new and enhanced versions of our products and services or variations in the mix of products and services we sell;

· the utilization of our production capacity and employees; and

· the availability and cost of key components.

Our recent operating results may not be a good predictor of our results in future periods. The recent economic downturn has caused a significant change in our short-term growth strategy and, therefore, may not be an accurate indicator of future operating results. Our expense levels are based in part on expectations of future revenues. If revenue levels in a particular period are lower than expected, our operating results will be adversely affected. In addition, our operating results may be subject to seasonal factors. With the introduction of new products and the timing of acceptance of those products by our customers, the revenues associated with the sale of such products may be deferred longer than our other legacy products.

We may not realize expected benefits from any restructuring initiatives.

We recently announced an initiative to focus our business on core operations performance by restructuring and streamlining operations. In light of our rapidly changing market, we cannot predict whether we will realize expected synergies and improved operating performance as a result of any restructuring and streamlining of operations or whether we will need to engage in any further restructuring activities in the future. We also cannot predict whether any restructuring and streamlining of operations will adversely affect our ability to retain key employees, which, in turn, would adversely affect our operating results. Further, in the events the market fluctuates up or down, we may not have the appropriate level of resources and personnel to appropriately react to the change.

Conditions in international markets could affect our operations.

Due to our international sales and our international manufacturing and software development operations, we are subject to the risks of conducting business internationally. These risks include:

· local economic and market conditions;

· political and economic instability;

· unexpected changes in our impositions of legislative or regulatory requirements;

· fluctuations in the exchange rate of the U.S. dollar;

· tariffs and other barriers and restrictions;

· longer payment cycles;

· difficulties in enforcing intellectual property and contract rights;

· greater difficulty in accounts receivable collection;

· potentially adverse taxes; and

· the burdens of complying with a variety of foreign laws and telecommunications standards.

We also are subject to general geopolitical risks, such as political and economic instability and changes in diplomatic and trade relationships. We maintain business operations and have sales in many international markets. Economic conditions in many of these markets represent significant risks to us. We cannot predict whether our sales and business operations in these markets will be adversely affected by these conditions. Instability in foreign markets, particularly in Asia, Latin America and the Middle East, could have a negative impact on our business, financial condition and operation results. In addition to the effect of international economic instability on foreign sales, domestic sales to U.S. customers having significant foreign operations could be adversely impacted by these economic conditions, which may adversely affect our business, financial condition and operating results in the future.

Our intellectual property rights may not be adequate to protect our business.

Our future success depends in part upon our proprietary technology. Although we attempt to protect our proprietary technology through patents, copyrights and trade secrets, we cannot predict whether such protection will indeed prevent others from using our technology, or whether our competitors can develop competitive technology independently without violating our proprietary rights.

We may receive third-party infringement claims related to our business.

As the competition in the communications equipment industry increases and the functionality of the products in this industry converges, companies in the communications equipment industry increasingly may become the target of infringement claims. We have received and may continue to receive notices from third parties, including some of our competitors, claiming that we are infringing third-party patents or other proprietary rights. Such third parties may choose to litigate their claims and we cannot predict whether we will prevail in such litigation over third-party claims. We also cannot predict whether we will be able to secure, on commercially reasonable terms, any licenses that we may seek to secure. Third-party claims, whether with or without merit, can result in costly litigation, divert our management's time, attention and resources, delay or halt our product shipments, require us to pay damages, require us to enter into royalty-bearing licensing arrangements or otherwise impose obligations or restrictions upon us which could adversely affect our business, financial condition and operating results.

We may be unable to identify or complete strategic dispositions, acquisitions and investments.

Our decision to dispose or otherwise exit businesses may result in the recording of accrued liabilities for special one-time charges, such as workforce reduction costs, closure of excess facilities, and excess inventory write-offs. Furthermore, estimates with respect to the useful life and ultimate recoverability of our carrying basis of assets, including goodwill and purchased intangible assets, could change as a result of such dispositions. Our long-term growth strategy includes the continued acquisition of, or investment by us in, complementary businesses, products, services or technologies. We cannot assure that we will be able to identify suitable acquisitions or investment candidates. Even if we identify suitable candidates, we cannot assure that we will be able to make acquisitions or investments on commercially acceptable terms, if at all. If we acquire a company, we may have difficulty assimilating its businesses, products, services, technologies and personnel into our operations. These difficulties could disrupt our ongoing business, distract our management and workforce, increase our expenses and adversely affect our operating results. In addition, we may incur debt or be required to issue equity securities to pay for future acquisitions or investments. The issuance of any equity securities could be dilutive to our stockholders. We may also need to make further investments to support the acquired company and may have difficulty identifying and acquiring the appropriate resources.

We may encounter difficulties obtaining raw materials and supplies needed to make our products and retaining personnel to install and service our products.

Our ability to produce our products is dependent upon the availability of certain raw materials and supplies. The availability of these raw materials and supplies is subject to market forces beyond our control. From time to time there may not be sufficient quantities of raw materials and supplies in the marketplace to meet the customer demand for our products. In addition, the costs to obtain these raw materials and supplies are subject to price fluctuations because of market demand. Many companies utilitize the same raw materials and supplies in the production of their products as we use in our products. Companies with more resources than our own may have a competitive advantage in obtaining raw materials and supplies due to greater buying power. Servicing our products also requires certain raw materials, supplies and personnel. The availability of these resources is similarly subject to market forces and availability beyond our control. The ability to attract and retain personnel in the geographic areas that our customers need our services may also be restricted by market and competitive pressures. Reduced supply and higher prices of raw materials, supplies and personnel may adversely affect our business, operating results and financial condition.

The regulatory environment in which we operate is changing.

The communications equipment industry is subject to regulation in the United States and other countries. Our business is dependent upon the continued growth of the telecommunications industry in the United States and internationally. Federal and state regulatory agencies regulate most of our domestic customers. In early 1996, the U.S. Telecommunications Act of 1996 was enacted. The Telecommunications Act lifted certain restrictions on the ability of companies, including the Regional Bell Operating Companies and other customers of ours, to compete with one another. The Telecommunications Act also made other significant changes in the regulation of the telecommunications industry. Although these changes have increased our opportunities to provide solutions for our customers' Internet, data, video and voice needs, recent consolidation and failures in the telecommunications industry have limited the number of customers available and increased the amount of excess equipment available. Additionally, competition in our markets could intensify as a result of future changes or new regulations in the United States or internationally, which could adversely affect our business, operating results and financial condition.

Our stock price is volatile.

Based on the trading history of our common stock and the nature of the market for publicly traded securities of companies in our industry, we believe that some factors have caused and are likely to continue to cause the market price of our common stock to fluctuate substantially. These factors include:

· announcements of new products and services by us or our competitors;

· quarterly fluctuations in our financial results or the financial results of our competitors or our customers;

· customer contract awards to us or our competitors;

· increased competition with our competitors or among our customers;

· introduction of new competitors and technology;

· consolidation of our customers or our competitors;

· disputes concerning intellectual property rights;

· developments in telecommunications regulations;

· general conditions in the communications equipment industry; and

· general economic conditions.

In addition, communications equipment company stocks have experienced significant price and volume fluctuations that are often unrelated to the operating performance of such companies. This market volatility may adversely affect the market price of our common stock.

We are dependent upon key personnel.

Like all high-technology companies, our success is dependent on the efforts and abilities of our senior management and other qualified employees. Our ability to attract, retain and motivate skilled employees and other senior management personnel is critical to our continued growth. The competition for qualified employees, and particularly engineers, programmers and systems analysts, has been and likely will continue to be intense. In addition, because we may acquire one or more businesses in the future, our success will depend, in part, upon our ability to retain and integrate our own operations personnel with personnel from acquired entities who are necessary to the continued success or the successful integration of the acquired businesses. Moreover, due to our recent initiative to focus our business on core operations and improve our operating performance by restructuring and streamlining operations, we cannot assure of our ability to attract and retain key personnel.

CERTIFICATIONS

I, Timothy J. Wiggins, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Tellabs, Inc.;

2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and

c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions):

a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and

6. The registrant's other certifying officers and I have indicated in this quarterly report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: May 9, 2003

                                                                                                                                /s Timothy J. Wiggins
                                                                                                                                Timothy J. Wiggins
                                                                                                                                Chief Financial Officer

I, Michael J. Birck, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Tellabs, Inc.;

b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and

c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and

Date: May 9, 2003

                                                                                                                                /s Michael J. Birck
                                                                                                                                Michael J. Birck
                                                                                                                                Chief Executive Officer