-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, JAf3tAGMv2JvYhuRG5aSwZF8+seSAPPuYAJpSbQpU5FEo3YbXcqLlnGU5sTrPRD2 MDjCugg/cX1ooytnIV5EwQ== 0000317771-98-000050.txt : 19980818 0000317771-98-000050.hdr.sgml : 19980818 ACCESSION NUMBER: 0000317771-98-000050 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980703 FILED AS OF DATE: 19980817 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: TELLABS INC CENTRAL INDEX KEY: 0000317771 STANDARD INDUSTRIAL CLASSIFICATION: TELEPHONE & TELEGRAPH APPARATUS [3661] IRS NUMBER: 363831568 STATE OF INCORPORATION: DE FISCAL YEAR END: 1227 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-09692 FILM NUMBER: 98692573 BUSINESS ADDRESS: STREET 1: 4951 INDIANA AVE CITY: LISLE STATE: IL ZIP: 60532 BUSINESS PHONE: 6303788800 MAIL ADDRESS: STREET 1: 4951 INDIANA AVE CITY: LISLE STATE: IL ZIP: 60532 10-Q 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended July 3, 1998 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 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.) 4951 Indiana Avenue, Lisle, Illinois 60532 -------------------------------------------- ----------- (Address of Principal Executive Offices) (Zip Code) Registrant's telephone number, including area code (630) 378-8800 -------------- Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered None N/A -------------------- --------- Securities registered pursuant to Section 12 (g) of the Act: Common shares, with $ .01 par value ------------------------------------ (Title of Class) 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[ ] On July 3, 1998, 182,529,304 common shares of Tellabs, Inc. were outstanding. -1- TELLABS, INC. INDEX Page PART I. FINANCIAL INFORMATION Item 1. Financial Statements: Condensed Consolidated Comparative Balance Sheets 3 Condensed Consolidated Comparative Statements of Earnings 4 Condensed Consolidated Comparative Statements of Cash Flow 5 Notes to Condensed Consolidated Comparative Financial Statements 7 Item 2. Management's Discussion and Analysis 8 PART II. OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders 12 Item 6. Exhibits and Reports on Form 8-K 12 SIGNATURE 13 -2- TELLABS, INC. CONDENSED CONSOLIDATED COMPARATIVE BALANCE SHEETS (Unaudited) July 3, Jan. 2, 1998 1998 Assets ------------ ----------- Current assets (In thousands) Cash and cash equivalents $267,489 $109,048 Investments in marketable securities 310,311 377,986 Accounts receivable, less allowance 293,628 284,084 Inventories Raw materials 32,202 28,335 Work in process 23,593 15,664 Finished goods 44,428 45,615 ------------ ----------- 100,223 89,614 Other current assets 4,538 2,202 ------------ ----------- Total Current Assets 976,189 862,934 Property, plant, and equipment 361,264 338,296 Less accumulated depreciation 138,057 128,967 ------------ ----------- 223,207 209,329 Goodwill 52,361 61,453 Intangible and other assets 44,222 49,663 ------------ ----------- $1,295,979 $1,183,379 Liabilities ============ =========== Current Liabilities Accounts payable $57,185 $50,422 Accrued liabilities 63,312 115,917 Income taxes 72,782 59,481 ------------ ----------- Total Current Liabilities 193,279 225,820 Long-term debt 2,850 2,850 Other long-term liabilities 17,544 14,870 Deferred income taxes 10,186 6,730 Stockholders' Equity Preferred stock, with $.01 par value- 5,000,000 shares authorized, no shares issued - - Common stock, with $.01 par value - 500,000,000 shares authorized 182,529,304 shares issued and outstanding at July 3, 1998 and 181,626,660 at January 2, 1998 1,825 1,816 Additional paid-in capital 153,421 130,378 Cumulative foreign currency translation adjustment (36,639) (27,901) Unrealized net holding gains on available-for-sale securities 33,401 95,990 Retained earnings 920,112 732,826 ------------ ----------- Total Stockholders' Equity 1,072,120 933,109 ------------ ----------- $1,295,979 $1,183,379 ============ =========== The accompanying notes are an integral part of these statements. -3- TELLABS, INC. CONDENSED CONSOLIDATED COMPARATIVE STATEMENTS OF EARNINGS (Unaudited) Three Months Ended Six Months Ended July 3, June 27, July 3, June 27, 1998 1997 1998 1997 ---------- ---------- ------------ ----------- (In thousands, except per-share data) Net sales $387,719 $292,701 $715,221 $539,824 Cost of sales 138,885 111,445 259,104 206,865 ---------- ---------- ------------ ----------- Gross Profit 248,834 181,256 456,117 332,959 Marketing, general & administrative expense 75,418 55,850 142,019 101,424 Research and development expense 47,919 37,532 91,225 70,768 Asset impairment 24,793 - 24,793 - Goodwill amortization 1,374 1,517 2,850 3,023 ---------- ---------- ------------ ----------- Total Operating Expense 149,504 94,899 260,887 175,215 Operating Profit 99,330 86,357 195,230 157,744 Interest income 4,710 3,032 8,749 5,415 Interest expense (76) (182) (161) (298) Other income, net 72,395 687 73,643 21,758 ---------- ---------- ------------ ----------- Earnings before income tax 176,359 89,894 277,461 184,619 Income tax 57,317 31,133 90,175 62,771 ---------- ---------- ------------ ----------- Net Earnings $119,042 $58,761 $187,286 $121,848 ========== ========== ============ =========== Earnings per share - Basic $0.65 $0.33 $1.03 $0.68 ========== ========== ============ =========== - Diluted $0.63 $0.32 $1.00 $0.66 ========== ========== ============ =========== Average number of shares of common stock outstanding - Basic 182,390 180,749 182,132 180,437 - Diluted 187,482 186,055 187,214 185,883 The accompanying notes are an integral part of these statements. -4- TELLABS, INC. CONDENSED CONSOLIDATED COMPARATIVE STATEMENTS OF CASH FLOW (Unaudited - In thousands) For The Six Months Ended July 3, June 27, 1998 1997 Cash Flows from Operating Activities: --------- --------- Net earnings $187,286 $121,848 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization 25,645 21,435 Provision for doubtful receivables 2,950 1,545 Deferred income taxes 3,670 (1,293) Gain on sale of stock held as an investment (74,126) (20,873) Asset impairment charge 24,793 --- Net changes in assets and liabilities, net of effects from acquisitions: Accounts receivable (15,018) (10,194) Inventories (13,066) (9,466) Other current assets (2,398) (169) Long-term assets (13,907) (10,265) Accounts payable 7,201 8,302 Accrued liabilities (9,850) (12,896) Income taxes 13,916 2,461 Long-term liabilities 2,736 1,913 ------------ ----------- Net Cash Provided by Operating Activities 139,832 92,348 Cash Flows from Investing Activities: Acquisition of property, plant and equipment, net (37,291) (36,885) Payments for purchases of marketable securities (227,384) (124,882) Proceeds from sales of marketable securities 262,631 56,914 Payments for acquisitions, net of cash acquired --- (7,821) ------------ ----------- Net Cash Used by Investing Activities (2,044) (112,674) Cash Flows from Financing Activities: Common stock sold through stock-option plans * 22,428 19,848 ------------ ----------- Net Cash Provided by Financing Activities 22,428 19,848 Effect of exchange rate changes on cash (1,775) (3,811) ------------ ----------- Net increase (decrease) in cash and cash equivalents 158,441 (4,289) Beginning of period cash and cash equivalents 109,048 90,446 ------------ ----------- End of period cash and cash equivalents $267,489 $86,157 ============ =========== -5- TELLABS, INC. CONDENSED CONSOLIDATED COMPARATIVE STATEMENTS OF CASH FLOW (continued) (Unaudited - In thousands) For The Six Months Ended July 3, June 27, 1998 1997 Supplemental Disclosures: --------- --------- Interest paid $151 $123 Income taxes paid $54,598 $46,130 Supplemental Schedule of Non-Cash Investing and Financing Activities: During 1997, in acquiring all of the outstanding shares of Trelcom Oy and certain wavelength-division multiplexing and optical networking technology and related assets from IBM, the Company paid direct costs totaling $8,434,000. In conjunction with the acquisitions, the purchase prices are currently allocated as follows: (In thousands) ---------- Fair value of assets acquired $1,777 Cost in excess of fair value 8,098 Liabilities assumed (1,441) ---------- Cash paid for acquisitions $8,434 ========== * "Common stock sold through stock option plans" contains non-cash deferred tax benefits of $16,127,000 and $14,143,000 during the first six months of 1998 and 1997, respectively. The accompanying notes are an integral part of these statements. -6- TELLABS, INC. NOTES TO CONDENSED CONSOLIDATED COMPARATIVE FINANCIAL STATEMENTS 1. Financial Information: The unaudited financial information reflects all adjustments (consisting only of normal recurring accruals) which are, in the opinion of management, necessary for a fair presentation of the statements contained herein. Certain reclassifications have been made in the 1997 financial statements to conform to the 1998 presentation. In accordance with Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income", total comprehensive income for the three months ended July 3, 1998 and June 27, 1997 was $33,330,000 and $95,204,000, respectively. Total comprehensive income for the six months ended July 3, 1998 and June 27, 1997 was $115,959,000 and $172,187,000, respectively. 2. Basis of Presentation: These financial statements are presented in accordance with the requirements of Form 10-Q and consequently may not include all disclosures normally required by generally accepted accounting principles or those normally reflected in the Company's Annual Report on Form 10-K. Accordingly, the financial statements and notes herein should be read in conjunction with the financial statements and related notes in the Company's Form 10-K for the year ended January 2, 1998. 3. Earnings Per Share Reconciliation The following table sets forth the computation of basic and diluted earnings per share: (In thousands, except per-share data) Three Months Ended Six Months Ended 07/03/98 06/27/97 07/03/98 06/27/97 Numerator: ---------- ---------- ------------ ----------- Net Income $119,042 $58,761 $187,286 $121,848 Denominator: Denominator for basic earnings per share - weighted-average shares 182,390 180,749 182,132 180,437 Effect of Dilutive Securities: employee stock options and awards 5,092 5,306 5,082 5,446 ---------- ---------- ------------ ----------- Denominator for diluted earnings per share - adjusted weighted-average shares and assumed conversions 187,482 186,055 187,214 185,883 ========== ========== ============ =========== Basic earnings per share $0.65 $0.33 $1.03 $0.68 ========== ========== ============ =========== Diluted earnings per share $0.63 $0.32 $1.00 $0.66 ========== ========== ============ =========== -7- MANAGEMENT'S DISCUSSION AND ANALYSIS LIQUIDITY AND CAPITAL RESOURCES At the end of the first half of 1998, the Company's cash and cash equivalents amounted to $267,489,000, an increase of $158,441,000 from the balance at the end of 1997. The increase was primarily due to the Company's record earnings, along with the receipt of $75,644,000 from the proceeds of a sale of stock and the settlement of related hedge contracts. The Company's marketable securities portfolio decreased to $310,311,000, from the 1997 year-end balance of $377,986,000. The decrease of $67,675,000 was due to the aforementioned partial sale of an investment held in the available-for-sale portfolio and the decrease in the market value of the remainder of the investment, offset by additions to the Company's marketable securities portfolio. Accounts receivable, net of allowance, increased $9,544,000 during the first half of 1998 as a result of record second-quarter sales. Inventory balances showed an increase of $10,609,000 during the first six months of 1998 to support expected higher demand for the remainder of the year. During the second quarter of 1998, the Company determined that the value of assets acquired as part of the 1996 acquisition of the Company's Wireless Systems Division was impaired, resulting in the write-off of goodwill and other assets. The impairment write-off, along with regular amortization, caused the decrease in the goodwill balance of $9,092,000, when compared to the 1997 year-end balance. Other long-term assets decreased $5,441,000 from the year-end balance reflecting the aforementioned impairment of intangible assets, offset by additional capitalization of the Company's costs to develop a globally-integrated information system. Accrued liabilities experienced a decrease of $52,605,000 from the balance at January 3, 1997 primarily due to deferred taxes related to the mark-to-market adjustment of the marketable securities, as well as first quarter payments for normal year-end obligations. The Company made a net investment of approximately $37,000,000 in property, plant and equipment during the first two quarters of 1998. These expenditures were driven by the Company's on-going expansion of its manufacturing and research and development capacity world-wide. The expansion of the facilities in Finland was completed during the first half of 1998, while the new facility in Ireland is expected to be completed during the second half of the year. The Company currently expects gross capital additions for 1998 to approximate $70,000,000, the majority of which is planned for the facilities in Ireland and Finland and the purchase of equipment and other tangible assets to be installed in the newly-expanded facilities. Net working capital at July 3, 1998 was $782,910,000, compared with net working capital of $637,114,000 at January 2, 1998. The Company's current ratio at the end of the second quarter was 5.1 to 1. The increase in net working capital was primarily due to the cash generated by operating activities. Management believes that the existing level of working capital will be adequate for the Company's liquidity needs related to normal operations, both currently and in the foreseeable future. Sufficient resources exist to support the Company's growth either through currently available cash, through cash generated from future operations, or through additional short-term or long-term financing. -8- RESULTS OF OPERATIONS Sales for the second quarter of 1998 were a record $387,719,000, up 33 percent from sales in the second quarter of 1997 of $292,701,000. Sales of the Company's SONET-based TITAN (a registered trademark of Tellabs Operations, Inc.) 5500 digital cross-connect systems (the TITAN 5500 system) drove the majority of the sales growth during the second quarter of 1998 with an increase of 51 percent over the second quarter 1997 sales level. The increase in TITAN 5500 system sales was primarily driven by increased demand among existing customers. Earnings for the second quarter of 1998 were a record $119,042,000, up from the 1997 second quarter earnings of $58,761,000. Second quarter 1998 earnings included a pre-tax gain on the sale of stock of $73,374,000 ($49,528,000 net of tax), offset by a pre-tax charge taken for impaired assets at the Company's Wireless Systems Division of $24,793,000 ($16,736,000 net of tax). Diluted earnings per share were 63 cents in the second quarter of 1998 (or, 46 cents per share, excluding the after-tax gain on the stock sale and the asset impairment charge), compared with 32 cents per diluted share for the second quarter of 1997. The gross profit margin percentage for the second quarter of 1998 increased to 64.2 percent from 61.9 percent in the second quarter of 1997. This increase primarily reflects greater efficiencies realized by the Company's manufacturing operations during the quarter. Operating expenses for the second quarter of 1998 increased by 31.4 percent over the second quarter of 1997, excluding the asset impairment charge taken in the second quarter of 1998. This increase in expenses is primarily the result of expenses incurred for the installation of TITAN products. The Company's commitment to product research and development, as well as expansion of service and support capabilities, both domestically and internationally, also contributed to the increase. Other income of $72,395,000 for the second quarter, was up considerably from income of $687,000 in the second quarter of 1997. During the second quarter of 1998, the Company realized a gain on the sale of stock and the settlement of related hedge contracts of $73,374,000. During the second quarter of 1998, the Company experienced foreign exchange losses of $1,097,000, compared to the foreign exchange gains of $531,000 in the same quarter of 1997. The strength of the U.S. dollar against the Finnish markka and the Irish punt during 1997, and subsequent weakening of the U.S. dollar against these same currencies during 1998 caused the swing in net foreign exchange income. Interest income increased to $4,710,000 in the second quarter of 1998, up 55.3 percent from $3,032,000 in the second quarter of 1997. This increase was due to significantly higher cash balances. The effective tax rate was approximately 32.5 percent for the second quarter of 1998, compared to 34.6 percent for the second quarter of 1997. The decrease in the effective tax rate for 1998 in comparison to the rate for 1997 is primarily due to the tax benefits associated with contributions to the Tellabs Foundation, a non-profit organization established by the Company, as well as deductions from the asset impairment charge at the Company's Wireless Systems Division. Overall, the Company's 1998 and 1997 effective tax rates reflect the benefits of lower foreign tax rates as compared to the U.S. Federal statutory rate. -9- Sales for the first six months of 1998 of $715,221,000 were an increase of 32.5 percent over the then record sales of $539,824,000 during the first six months of 1997. Growth in domestic sales during the first half of 1998 of 41 percent, when compared to the same period during 1997, was primarily due to a 46 percent increase in TITAN 5500 system sales. International sales for the first half of 1998 grew a modest 16 percent from the same period in 1998. This increase was driven by a 23 percent increase in MartisDXX system sales despite the softer demand experienced from the Asian economic crisis. Net earnings for the first six months of 1998 were $187,286,000, which included a pre-tax gain on the sale of stock and the settlement of related hedge contracts of $73,374,000 and a pre-tax charge for impaired assets of $24,793,000, compared to net earnings of $121,848,000 in 1997, which included a pre-tax gain of $20,803,000 ($13,855,000 net of tax) for the sale of stock held as an investment. Diluted earnings per share were $1.00 for the first six months of 1998 ($0.83 excluding the stock sale and asset impairment charge) compared to $0.66 in 1997 ($0.59 excluding the effect of the stock sale). The gross profit margin for the first six months of 1998 improved to 63.8 percent, surpassing the previous record of 61.7 percent for the first six months of 1997. This improvement reflects a sales mix that shifted toward higher-margin products as well as continued improvement in manufacturing efficiencies. Operating expenses for the first six months of 1998 increased 34.7 percent over the same period in 1997, excluding the asset impairment charge taken in the second quarter of 1998. Expenses incurred for the installation of TITAN products were the largest component of the increase. Also contributing to the year-over-year increase was the Company's commitment to product research and development, as well as expansion of service and support capabilities, both domestically and internationally. Operating expenses, as a percentage of sales, increased only slightly from 32.5 percent in 1997 to 33.0 percent in 1998. Other income was $73,643,000 for the first half of 1998 compared to $21,758,000 during the first half of 1997. The first half of both 1998 and 1997 saw gains related to the sale of stock held as an investment. The gain in 1997 was $20,803,000, while the gain on the stock sale, along with the settlement of related hedge contracts was $73,374,000 in 1998. Other income in the first half of 1998 included foreign exchange losses of $190,000 compared to gains of $875,000 during the first six months of 1997. The gains in 1997 were a result of a stronger U.S. dollar versus the Finnish markka and Irish punt in 1997 compared to a weaker U.S. dollar against those currencies in 1998. The effective tax rate was approximately 32.5 percent for the first six months of 1998 compared to 34.0 percent for the same period in 1997. The decrease in the effective tax rate for 1998 is primarily due to the tax benefits associated with contributions to the Tellabs Foundation, as well as deductions from the asset impairment charge at the Company's Wireless Systems Division. Overall, the Company's 1998 and 1997 effective tax rates also reflect the benefits of lower foreign tax rates as compared to the U.S. Federal statutory rate. -10- SUBSEQUENT EVENTS On August 3, 1998, the Company completed its merger with Coherent Communications Systems Corporation (Coherent). Under the terms of the merger agreement, Coherent stockholders received 0.72 shares of the Company's common stock for each share of Coherent common stock they held. The transaction will be accounted for as a pooling-of-interests. Coherent will operate as a wholly-owned subsidiary of the Company and Coherent's common stock will no longer be quoted on the Nasdaq National Market. Except for historical information, the matters discussed or incorporated by reference in this Quarterly Report on Form 10-Q are forward-looking statements that involve risks and uncertainties including, but not limited to, economic conditions, product demand and industry capacity, competitive products and pricing, manufacturing efficiencies, research and new product development, protection of and access to intellectual property, patents and technology, ability to attract and retain highly qualified personnel, availability of components and critical manufacturing equipment, ability of vendors and third parties to respond to Year 2000 issues, facility construction and start-ups, the regulatory and trade environment, the availability and terms of future acquisitions and the uncertainties relating to the synergies, charges, and expenses associated with the proposed mergers described in the Company's filings, as well as other risks that may be detailed from time to time in the Company's filings with the Securities and Exchange Commission. The Company's actual future results could differ materially from those discussed here. The Company undertakes no obligation to revise or update these forward-looking statements. -11- PART II. OTHER INFORMATION ITEM 4. Submission of Matters to a Vote of Security Holders The Company's Annual Meeting of Stockholders was held on April 15, 1998. At this meeting, Michael J. Birck and Frederick A. Krehbiel were re-elected as directors. These directors were elected for a term of office expiring at the Company's Annual Meeting of Stockholders in 2001. In addition, the following directors are continuing in office for the terms indicated: Brian J. Jackman, Stephanie Pace Marshall, and William F. Souders for terms expiring at the Company's Annual Meeting of Stockholders in 1999, and John D. Foulkes, Peter A. Guglielmi, and Jan H. Suwinski for terms expiring at the Company's Annual Meeting of Stockholders in 2000. Set forth below is a separate tabulation of the votes cast for and votes withheld with respect to each nominee for director elected at this meeting: Votes For Votes Withheld Michael J. Birck 155,324,079 2,039,173 Frederick A. Krehbiel 155,317,109 2,046,143 In addition, stockholders approved the 1998 Stock Option Plan by the following vote: For 152,343,269 Opposed 4,582,465 Withheld 437,518 ITEM 6. Exhibits and Reports on Form 8-K (A) Exhibits: Exhibit 27 - Financial Data Schedule. (B) Reports on Form 8-K The Registrant filed a report on Form 8-K on June 4, 1998, to announce that the Company had entered into an Agreement and Plan of Merger with CIENA Corporation ("CIENA"), whereby CIENA would become a wholly-owned subsidiary of the Company. The Registrant filed a report on Form 8-K on July 24, 1998, with respect to the issuance of a second quarter letter to stockholders and a press release announcing that the merger of the Company and Coherent Communications Systems Corporation is expected to be completed in early August. -12- TELLABS, INC. 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\ J. Peter Johnson ------------------- J. Peter Johnson Vice President/Controller & Chief Accounting Officer August 15, 1998 - ---------------- (Date) -13- EX-27 2
5 This schedule contains summary financial information extracted from the July 3, 1998, Income Statement and Balance Sheet and is qualified in its entirety by reference to such 10-Q. 6-MOS JAN-01-1999 JUL-03-1998 267489000 310311000 299956000 6328000 100223000 976189000 361264000 138057000 1295979000 193279000 2850000 0 0 1825000 1070295000 1295979000 715221000 715221000 259104000 259104000 260887000 2950000 (8588000) 277461000 90175000 187286000 0 0 0 187286000 1.03 1.00
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