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 29, 2013
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: 0-09692
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) |
Registrants telephone number, including area code: (630) 798-8800
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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES x NO ¨
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):
Large Accelerated Filer x | Accelerated Filer ¨ | |||||
Non-Accelerated Filer ¨ (Do not check if a smaller reporting company) |
Smaller reporting company ¨ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES ¨ NO x
Common Shares, $0.01 Par Value 355,581,451 shares outstanding on April 26, 2013.
INDEX
PAGE | ||||
PART I. | FINANCIAL INFORMATION | |||
Item 1. | Financial Statements | |||
Consolidated Statements of Operations | 3 | |||
Consolidated Statements of Comprehensive Loss | 4 | |||
Consolidated Balance Sheets | 5 | |||
Consolidated Statements of Cash Flows | 6 | |||
Notes to Consolidated Financial Statements | 7 | |||
Item 2. | Managements Discussion and Analysis of Results of Operations and Financial Condition | 21 | ||
Item 3. | Quantitative and Qualitative Disclosures about Market Risk | 29 | ||
Item 4. | Controls and Procedures | 30 | ||
PART II. | OTHER INFORMATION | |||
Item 1. | Legal Proceedings | 30 | ||
Item 1A. | Risk Factors | 30 | ||
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 30 | ||
Item 6. | Exhibits | 31 | ||
SIGNATURE | 32 |
2
TELLABS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
First Quarter | ||||||||
3/29/13 | 3/30/12 | |||||||
In millions, except per-share data | ||||||||
Revenue |
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Products |
$ | 165.0 | $ | 209.7 | ||||
Services |
44.4 | 48.2 | ||||||
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Total revenue |
209.4 | 257.9 | ||||||
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Cost of Revenue |
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Products |
106.9 | 128.7 | ||||||
Services |
30.2 | 33.5 | ||||||
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Total cost of revenue |
137.1 | 162.2 | ||||||
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Gross Profit |
72.3 | 95.7 | ||||||
Gross profit as a percentage of revenue |
34.5 | % | 37.1 | % | ||||
Gross profit as a percentage of revenue - products |
35.2 | % | 38.6 | % | ||||
Gross profit as a percentage of revenue - services |
32.0 | % | 30.5 | % | ||||
Operating Expenses |
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Research and development |
52.7 | 66.9 | ||||||
Sales and marketing |
27.0 | 36.4 | ||||||
General and administrative |
17.6 | 21.1 | ||||||
Intangible asset amortization |
1.1 | 2.2 | ||||||
Restructuring and other charges |
34.7 | 106.0 | ||||||
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Total operating expenses |
133.1 | 232.6 | ||||||
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Operating Loss |
(60.8 | ) | (136.9 | ) | ||||
Operating loss as a percentage of revenue |
-29.0 | % | -53.1 | % | ||||
Other Income |
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Interest income, net |
0.7 | 1.8 | ||||||
Other income (expense), net |
1.2 | (1.0 | ) | |||||
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Total other income |
1.9 | 0.8 | ||||||
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Loss Before Income Tax |
(58.9 | ) | (136.1 | ) | ||||
Income tax benefit (expense) |
3.0 | (3.7 | ) | |||||
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Net Loss |
$ | (55.9 | ) | $ | (139.8 | ) | ||
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Weighted Average Shares Outstanding |
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Basic |
359.4 | 365.7 | ||||||
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Diluted |
359.4 | 365.7 | ||||||
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Net Loss Per Share |
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Basic |
$ | (0.16 | ) | $ | (0.38 | ) | ||
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Diluted |
$ | (0.16 | ) | $ | (0.38 | ) | ||
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Cash Dividends Per Share |
$ | | $ | 0.02 | ||||
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The accompanying notes are an integral part of these statements.
3
TELLABS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(Unaudited)
First Quarter | ||||||||
3/29/13 | 3/30/12 | |||||||
In millions | ||||||||
Net Loss |
$ | (55.9 | ) | $ | (139.8 | ) | ||
Reclassification adjustment for net (gain) loss included in net loss, net of tax of $0.6 and $(0.1) |
(2.0 | ) | 0.2 | |||||
Unrealized net (loss) gain on available-for-sale securities, net of tax of $(0.1) and $0.1 |
(0.3 | ) | 0.9 | |||||
Unrealized net loss on net investment hedges |
| (4.1 | ) | |||||
Foreign currency translation adjustment |
(8.1 | ) | 15.7 | |||||
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Comprehensive Loss |
$ | (66.3 | ) | $ | (127.1 | ) | ||
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The accompanying notes are an integral part of these statements.
4
TELLABS, INC.
3/29/13 | 12/28/12 | |||||||
In millions, except share data | Unaudited | |||||||
Assets |
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Current Assets |
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Cash and cash equivalents |
$ | 370.3 | $ | 223.7 | ||||
Investments in marketable securities |
201.3 | 380.7 | ||||||
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Total cash, cash equivalents and marketable securities |
571.6 | 604.4 | ||||||
Other marketable securities |
209.6 | 195.1 | ||||||
Accounts receivable, net of allowances of $1.3 and $1.3 |
199.6 | 246.8 | ||||||
Inventories |
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Raw materials |
36.0 | 30.2 | ||||||
Finished goods |
76.6 | 70.8 | ||||||
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Total inventories |
112.6 | 101.0 | ||||||
Income taxes |
14.9 | 7.3 | ||||||
Miscellaneous receivables and other current assets |
21.9 | 35.1 | ||||||
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Total Current Assets |
1,130.2 | 1,189.7 | ||||||
Property, Plant and Equipment |
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Land |
19.9 | 20.1 | ||||||
Buildings and improvements |
188.8 | 193.5 | ||||||
Equipment |
387.2 | 406.4 | ||||||
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Total property, plant and equipment |
595.9 | 620.0 | ||||||
Accumulated depreciation |
(385.7 | ) | (389.6 | ) | ||||
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Property, plant and equipment, net |
210.2 | 230.4 | ||||||
Goodwill |
122.0 | 122.1 | ||||||
Intangible Assets, Net of Amortization |
3.3 | 4.4 | ||||||
Other Assets |
79.5 | 91.5 | ||||||
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Total Assets |
$ | 1,545.2 | $ | 1,638.1 | ||||
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Liabilities and Stockholders Equity |
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Current Liabilities |
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Accounts payable |
$ | 60.7 | $ | 57.4 | ||||
Accrued compensation |
34.1 | 37.7 | ||||||
Restructuring and other charges |
30.6 | 19.1 | ||||||
Income taxes |
45.7 | 61.5 | ||||||
Loan related to other marketable securities |
209.6 | 195.1 | ||||||
Deferred revenue |
26.7 | 20.3 | ||||||
Other accrued liabilities |
60.1 | 78.5 | ||||||
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Total Current Liabilities |
467.5 | 469.6 | ||||||
Long-Term Restructuring Liabilities |
4.6 | 2.8 | ||||||
Income Taxes |
22.1 | 21.9 | ||||||
Other Long-Term Liabilities |
39.8 | 42.5 | ||||||
Stockholders Equity |
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Preferred stock: authorized 5,000,000 shares of $0.01 par value; no shares issued and outstanding |
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Common stock: authorized 1,000,000,000 shares of $0.01 par value; 510,921,560 and 508,846,484 shares issued |
5.1 | 5.1 | ||||||
Additional paid-in capital |
1,595.4 | 1,592.2 | ||||||
Treasury stock, at cost: 153,395,726 and 141,284,352 shares |
(1,258.0 | ) | (1,231.0 | ) | ||||
Retained earnings |
580.1 | 636.0 | ||||||
Accumulated other comprehensive income |
88.6 | 99.0 | ||||||
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Total Stockholders Equity |
1,011.2 | 1,101.3 | ||||||
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Total Liabilities and Stockholders Equity |
$ | 1,545.2 | $ | 1,638.1 | ||||
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The accompanying notes are an integral part of these statements.
5
TELLABS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
First Quarter | ||||||||
3/29/13 | 3/30/12 | |||||||
In millions | ||||||||
Operating Activities |
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Net loss |
$ | (55.9 | ) | $ | (139.8 | ) | ||
Adjustments to reconcile net loss to net cash used for operating activities: |
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Depreciation and amortization |
10.7 | 14.4 | ||||||
Loss on disposal of property, plant and equipment |
0.1 | 0.8 | ||||||
Equity-based compensation |
3.1 | 5.5 | ||||||
Deferred income taxes |
(0.6 | ) | 0.6 | |||||
Restructuring and other charges |
34.7 | 106.0 | ||||||
Net gain on investments in marketable securities |
(1.2 | ) | | |||||
Net changes in assets and liabilities: |
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Accounts receivable |
36.9 | 21.4 | ||||||
Inventories |
(12.7 | ) | 12.5 | |||||
Miscellaneous receivables and other current assets |
4.7 | 2.8 | ||||||
Other assets |
(3.4 | ) | (2.3 | ) | ||||
Accounts payable |
3.7 | (43.7 | ) | |||||
Restructuring and other charges |
(10.2 | ) | (13.9 | ) | ||||
Deferred revenue |
6.5 | 8.1 | ||||||
Other accrued liabilities |
(20.1 | ) | (7.5 | ) | ||||
Income taxes |
0.6 | (2.2 | ) | |||||
Other long-term liabilities |
(2.3 | ) | (0.2 | ) | ||||
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Net Cash Used for Operating Activities |
(5.4 | ) | (37.5 | ) | ||||
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Investing Activities |
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Capital expenditures |
(3.1 | ) | (5.0 | ) | ||||
Payments for purchases of investments |
(95.5 | ) | (110.7 | ) | ||||
Proceeds from sales and maturities of investments |
277.7 | 139.0 | ||||||
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Net Cash Provided by Investing Activities |
179.1 | 23.3 | ||||||
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Financing Activities |
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Repurchase of common stock |
(27.0 | ) | (1.8 | ) | ||||
Dividends paid |
| (7.3 | ) | |||||
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Net Cash Used for Financing Activities |
(27.0 | ) | (9.1 | ) | ||||
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Effect of Exchange Rate Changes on Cash |
(0.1 | ) | 3.4 | |||||
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Net Increase (Decrease) in Cash and Cash Equivalents |
146.6 | (19.9 | ) | |||||
Cash and Cash Equivalents - Beginning of Year |
223.7 | 132.7 | ||||||
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Cash and Cash Equivalents - End of Period |
$ | 370.3 | $ | 112.8 | ||||
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The accompanying notes are an integral part of these statements.
6
TELLABS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
IN MILLIONS, EXCEPT SHARE AND PER-SHARE DATA
1. Basis of Presentation
We prepared the accompanying unaudited consolidated financial statements in accordance with U.S. generally accepted accounting principles (U.S. GAAP) for interim financial statements, the requirements of Form 10-Q and applicable rules of the U.S. Securities and Exchange Commissions Regulation S-X. Therefore, they do not include all disclosures normally required by U.S. generally accepted accounting principles for complete financial statements. Accordingly, the financial statements and notes herein are to be read in conjunction with our Annual Report on Form 10-K for the year ended December 28, 2012.
In our opinion, the accompanying unaudited 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.
2. Restructuring and Other Charges
On January 31, 2013, management initiated a restructuring plan that is designed to align expenses with revenue. Tellabs is discontinuing the development of the 9200 product and reducing operating expenses. The pretax charges for this plan will consist of approximately $16 million for workforce reductions of approximately 300 employees, $15 million for facility- and asset-related charges, and $4 million for software license and other contract cancellations. During the first quarter of 2013, we incurred restructuring expense for this plan of $32.8 million, which consists of $16.2 million for severance-related charges, $12.4 million for facility- and asset-related charges, and $4.2 million for other obligations. By segment, total charges to date under this plan are $0.9 million for Optical, $31.5 million for Data, and $0.4 million for Services. Estimated cash payments under this plan are expected to be $21.5 million of which $4.8 million has been paid through the first quarter of 2013. Other than the cash payments, actions under this plan are expected to be substantially completed by the end of the fourth quarter of 2013.
On October 24, 2012, management initiated a restructuring plan that is designed to further align expenses with revenue and current market conditions. In order to reduce costs and operating expenses, this plan includes moving certain functions to lower cost geographies. The pretax charges will consist of approximately $9 million for severance-related charges that will affect approximately 200 employees, and $2 million for facility- and asset-related charges. Restructuring expense for this plan for the first quarter of 2013 was $0.1 million, which consists of a credit of $0.2 million for severance-related charges and an expense of $0.3 million for facility- and asset-related charges. Cumulative restructuring charges for this plan are $9.5 million, which consists of $9.0 million for severance-related charges and $0.5 million for facility- and asset-related charges. By segment, total charges to date under this plan are $2.2 million for Optical, $3.8 million for Data, $0.8 million for Access, and $2.7 million for Services. Estimated cash payments under this plan are expected to be $9.3 million, of which $2.7 million has been paid through the first quarter of 2013. Other than the cash payments, actions under this plan are expected to be substantially completed by the end of the fourth quarter of 2013.
On January 30, 2012, management initiated a restructuring plan that aligns expenses with revenue. Tellabs stopped new development on the Tellabs® SMARTCORE 9100 series for mobile packet core and consolidated research and development into fewer locations. Restructuring expense for this plan for the first quarter of 2013 was $1.5 million, which consists of a credit of $0.1 million for workforce adjustments and an expense of $1.6 million for facility- and asset-related charges. Cumulative restructuring charges for this plan are $110.3 million, which consists of $23.1 million for severance-related charges, $38.3 million for facility- and asset-related charges, $47.7 million for the accelerated amortization of abandoned intangible assets, and $1.2 million for other obligations. By segment, total charges to date under this plan are $4.4 million for Optical, $102.2 million for Data, $1.5 million for Access, and $2.2 million for Services. Estimated cash payments under this plan are expected to be $32.9 million, of which $24.6 million has been paid through the first quarter of 2013. Other than the cash payments, actions under this plan were completed in the first quarter of 2013.
Restructuring expense for previous restructuring plans in the first quarter of 2013 was $0.3 million, which consists of a credit of $0.1 million for severance-related adjustments and an expense of $0.4 million for facility- and asset-related charges.
The balance for restructuring plans relates to net lease obligations that expire through 2017 and cash severance that we expect to pay through the first quarter of 2015.
7
The following table summarizes restructuring and other charges recorded for the plans mentioned above, as well as adjustments to reserves recorded for prior restructurings:
First Quarter | ||||||||
3/29/13 | 3/30/12 | |||||||
Severance and other termination benefits |
$ | 15.8 | $ | 24.1 | ||||
Facility and other exit costs |
14.7 | 33.0 | ||||||
Other obligations |
4.2 | 1.2 | ||||||
Accelerated amortization of intangible assets |
| 47.7 | ||||||
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Total restructuring and other charges |
$ | 34.7 | $ | 106.0 | ||||
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The following table summarizes restructuring and other charges activity by segment for the first quarter of 2013 and the status of the reserves at March 29, 2013:
Balance at 12/28/12 |
Restructuring Expense |
Cash Payments |
Other Activities 1 |
Balance at 3/29/13 |
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2013 Restructuring Plan |
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Optical |
$ | | $ | 0.9 | $ | (0.3 | ) | $ | | $ | 0.6 | |||||||||
Data |
| 31.5 | (4.4 | ) | (11.7 | ) | 15.4 | |||||||||||||
Access |
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Services |
| 0.4 | (0.1 | ) | | 0.3 | ||||||||||||||
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Subtotal 2013 Restructuring Plan |
| 32.8 | (4.8 | ) | (11.7 | ) | 16.3 | |||||||||||||
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2012 Restructuring Plans |
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Optical |
3.9 | (0.4 | ) | (0.8 | ) | | 2.7 | |||||||||||||
Data |
8.6 | 2.2 | (2.3 | ) | 0.5 | 9.0 | ||||||||||||||
Access |
1.5 | (0.1 | ) | (0.3 | ) | | 1.1 | |||||||||||||
Services |
2.8 | (0.1 | ) | (0.8 | ) | | 1.9 | |||||||||||||
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Subtotal 2012 Restructuring Plans |
16.8 | 1.6 | (4.2 | ) | 0.5 | 14.7 | ||||||||||||||
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Previous Restructuring Plans |
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Optical |
0.6 | | (0.3 | ) | | 0.3 | ||||||||||||||
Data |
3.1 | 0.3 | (0.6 | ) | | 2.8 | ||||||||||||||
Access |
1.4 | | (0.3 | ) | | 1.1 | ||||||||||||||
Services |
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Subtotal Previous Restructuring Plans |
5.1 | 0.3 | (1.2 | ) | | 4.2 | ||||||||||||||
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Total All Restructuring Plans |
$ | 21.9 | $ | 34.7 | $ | (10.2 | ) | $ | (11.2 | ) | $ | 35.2 | ||||||||
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1 Other activities include accelerated depreciation of property, plant and equipment to be disposed, the effects of currency translation as well as other changes that do not flow through restructuring expense.
3. Fair Value Measurements
Our financial instruments consist of cash equivalents, accounts receivable, accounts payable, marketable securities and derivatives. The carrying value of the cash equivalents, accounts receivable and accounts payable are reasonable estimates of their fair value because of their short-term nature. We determine the fair value of marketable securities and derivatives based on observable inputs such as quoted prices in active markets, or other than quoted prices in active markets, that are observable either directly or indirectly.
Fair value is measured as an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions, a three-tier fair value hierarchy has been established, which prioritizes the inputs used in measuring fair value as follows:
8
| Level 1 Observable inputs, such as quoted prices in active markets; |
| Level 2 Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and |
| Level 3 Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions. |
A financial instruments level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. In determining fair value for recurring financial assets and liabilities, we separate our financial instruments into three categories: marketable securities, other marketable securities and loan related to other marketable securities, and derivative financial instruments. These assets and liabilities are all valued based on the market approach that uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities.
Marketable Securities
We use a third-party provider to determine fair values of marketable securities. The third-party provider receives market prices for each marketable security from a variety of industry-standard data providers, security master files from large financial institutions and other third-party sources with reasonable levels of price transparency. The third-party provider uses these multiple prices as inputs into a pricing model to determine a weighted average price for each security. Tellabs management compares the third-party pricing with pricing from outside investment managers and other market sources to ensure the third-party pricing is reasonable. We classify U.S. Treasury bills and bonds as Level 1 based upon quoted prices in active markets. All other marketable securities are classified as Level 2 based upon the other than quoted prices with observable market data. The type of instruments valued based upon the observable market data include U.S. government sponsored enterprise (agency) debt obligations, Federal Deposit Insurance Corporation (FDIC)-backed corporate debt obligations, investment grade corporate bonds, state and municipal debt obligations, mortgaged backed debt obligations guaranteed by the Government National Mortgage Association (GNMA), certain FDIC-backed bank certificates of deposit, foreign government debt obligations and foreign corporate debt obligations guaranteed by foreign governments.
Other Marketable Securities and Loan Related to Other Marketable Securities
We classify holdings in other marketable securities (Cisco common stock) and the related loan as Level 1 in the fair value hierarchy. We classify these as Level 1 since they are actively traded through a governed exchange.
Derivative Financial Instruments
Our foreign currency forward contracts are executed as exchange-traded. Market participants can be described as large money center or regional banks. Exchange-traded derivatives typically fall within Level 1 or Level 2 in the fair value hierarchy depending on whether they are deemed to be actively traded or not.
We have elected to value derivatives as Level 2, using observable market data at the measurement date and standard valuation techniques to convert future amounts to a single present amount (discounted). Key inputs for currency derivatives are the spot rate, interest rates and credit derivative swap spreads. The spot rate for each currency is the same spot rate used for all balance sheet translations at the measurement date. The following values are calculated from commonly quoted intervals available from a third-party financial information provider. Forward points and LIBOR rates are used to calculate a discount rate to apply to assets and liabilities. One-year credit default swap spreads are used to discount derivative assets, all of which have final maturities of less than 12 months. We calculate the discount to the derivative liabilities to reflect the potential credit risk to lenders and have used the spread over LIBOR based on the credit risk of our counterparties. Each asset is individually discounted to reflect our potential credit risk and we have used the spread over LIBOR based on similar credit risk. We do not adjust the fair value for immaterial credit risk.
We have applied a valuation method for financial assets and liabilities consistently during this period and prior periods. The following table sets forth by level within the fair value hierarchy Financial instruments owned at fair value. Assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.
9
Assets and liabilities measured at fair value on a recurring basis are:
Fair Value Measurements at March 29, 2013 | ||||||||||||||||
Balance at 3/29/13 |
Quoted Prices in Active Markets for Identical Assets (Level 1) |
Significant Other Observable Inputs (Level 2) |
Significant Unobservable Inputs (Level 3) |
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Assets |
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Investments in marketable securities |
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U.S. government debt obligations |
$ | 18.5 | $ | 18.5 | $ | | $ | | ||||||||
Corporate debt obligations |
43.0 | | 43.0 | | ||||||||||||
Mortgaged backed debt obligations guaranteed by GNMA |
92.9 | | 92.9 | | ||||||||||||
Certificates of deposit guaranteed by FDIC |
1.7 | | 1.7 | | ||||||||||||
Foreign government debt obligations |
20.5 | | 20.5 | | ||||||||||||
Foreign corporate debt obligations guaranteed by foreign governments |
24.7 | | 24.7 | | ||||||||||||
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|
|
|
|
|||||||||
Subtotal |
201.3 | 18.5 | 182.8 | | ||||||||||||
Other marketable securities |
209.6 | 209.6 | | | ||||||||||||
Derivative financial instruments |
0.2 | | 0.2 | | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total assets |
$ | 411.1 | $ | 228.1 | $ | 183.0 | $ | | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Liabilities |
||||||||||||||||
Loan related to other marketable securities |
$ | 209.6 | $ | 209.6 | $ | | $ | | ||||||||
Derivative financial instruments |
0.2 | | 0.2 | | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total liabilities |
$ | 209.8 | $ | 209.6 | $ | 0.2 | $ | | ||||||||
|
|
|
|
|
|
|
|
Fair Value Measurements at December 28, 2012 | ||||||||||||||||
Balance at 12/28/12 |
Quoted Prices in Active Markets for Identical Assets (Level 1) |
Significant Other Observable Inputs (Level 2) |
Significant Unobservable Inputs (Level 3) |
|||||||||||||
Assets |
||||||||||||||||
Investments in marketable securities |
||||||||||||||||
U.S. government debt obligations |
$ | 31.1 | $ | 31.1 | $ | | $ | | ||||||||
Corporate debt obligations |
9.6 | | 9.6 | | ||||||||||||
Mortgaged backed debt obligations guaranteed by GNMA |
55.5 | | 55.5 | | ||||||||||||
Certificates of deposit guaranteed by FDIC |
1.2 | | 1.2 | | ||||||||||||
Foreign government debt obligations |
161.1 | | 161.1 | | ||||||||||||
Foreign corporate debt obligations guaranteed by foreign governments |
122.2 | | 122.2 | | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Subtotal |
380.7 | 31.1 | 349.6 | | ||||||||||||
Other marketable securities |
195.1 | 195.1 | | | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total assets |
$ | 575.8 | $ | 226.2 | $ | 349.6 | $ | | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Liabilities |
||||||||||||||||
Loan related to other marketable securities |
$ | 195.1 | $ | 195.1 | $ | | $ | | ||||||||
Derivative financial instruments |
0.1 | | 0.1 | | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total liabilities |
$ | 195.2 | $ | 195.1 | $ | 0.1 | $ | | ||||||||
|
|
|
|
|
|
|
|
10
4. Investments
Investments in marketable securities
At March 29, 2013, and December 28, 2012, available-for-sale marketable securities consisted of the following:
March 29, 2013 |
Amortized Cost |
Unrealized Gain |
Unrealized Loss |
Fair Value |
||||||||||||
U.S. government debt obligations |
$ | 18.5 | $ | | $ | | $ | 18.5 | ||||||||
Corporate debt obligations |
43.0 | 0.1 | (0.1 | ) | 43.0 | |||||||||||
Mortgaged backed debt obligations guaranteed by GNMA |
92.6 | 0.5 | (0.2 | ) | 92.9 | |||||||||||
Certificates of deposit guaranteed by FDIC |
1.7 | | | 1.7 | ||||||||||||
Foreign government debt obligations |
20.4 | 0.1 | | 20.5 | ||||||||||||
Foreign corporate debt obligations guaranteed by foreign governments |
24.6 | 0.1 | | 24.7 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | 200.8 | $ | 0.8 | $ | (0.3 | ) | $ | 201.3 | |||||||
|
|
|
|
|
|
|
|
|||||||||
December 28, 2012 |
||||||||||||||||
U.S. government debt obligations |
$ | 31.1 | $ | | $ | | $ | 31.1 | ||||||||
Corporate debt obligations |
9.5 | 0.1 | | 9.6 | ||||||||||||
Mortgaged backed debt obligations guaranteed by GNMA |
54.9 | 0.6 | | 55.5 | ||||||||||||
Certificates of deposit guaranteed by FDIC |
1.2 | | | 1.2 | ||||||||||||
Foreign government debt obligations |
159.3 | 1.8 | | 161.1 | ||||||||||||
Foreign corporate debt obligations guaranteed by foreign governments |
121.5 | 0.7 | | 122.2 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | 377.5 | $ | 3.2 | $ | | $ | 380.7 | ||||||||
|
|
|
|
|
|
|
|
The following table summarizes the maturities of our available-for-sale marketable securities at March 29, 2013:
Amortized Cost |
Fair Value | |||||||
Less than 12 months |
$ | 64.9 | $ | 65.1 | ||||
Due in 1 to 5 years |
43.3 | 43.3 | ||||||
Due after 5 years |
92.6 | 92.9 | ||||||
|
|
|
|
|||||
Total |
$ | 200.8 | $ | 201.3 | ||||
|
|
|
|
Gross unrealized gains and losses related to fixed-income securities were caused by interest rate fluctuations. No other-than-temporary impairments were recorded in the first quarter of 2013 and 2012.
Investments in marketable securities with unrealized losses at March 29, 2013, were as follows:
Unrealized Loss Less than 12 months |
Unrealized Loss Greater than 12 months |
Total | ||||||||||||||||||||||
March 29, 2013 |
Fair Value |
Unrealized Loss |
Fair Value |
Unrealized Loss |
Fair Value |
Unrealized Loss |
||||||||||||||||||
Corporate debt obligations |
$ | 28.8 | $ | (0.1 | ) | $ | | $ | | $ | 28.8 | $ | (0.1 | ) | ||||||||||
Mortgaged backed debt obligations guaranteed by GNMA |
42.9 | (0.2 | ) | | | 42.9 | (0.2 | ) | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total |
$ | 71.7 | $ | (0.3 | ) | $ | | $ | | $ | 71.7 | $ | (0.3 | ) | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
Investments in marketable securities with unrealized losses at December 28, 2012, were negligible.
11
The following table presents gross realized gains and losses related to fixed income investments:
First Quarter | ||||||||
3/29/13 | 3/30/12 | |||||||
Gross realized gains |
$ | 1.6 | $ | 0.3 | ||||
Gross realized losses |
(0.4 | ) | (0.3 | ) | ||||
|
|
|
|
|||||
Total |
$ | 1.2 | $ | | ||||
|
|
|
|
Other marketable securities and Loan related to other marketable securities
With the acquisition of Advanced Fibre Communications, Inc. (AFC) in 2004, we acquired 10.6 million shares of Cisco common stock, shown as Other marketable securities in Current Assets in our Consolidated Balance Sheets. Our Cisco common stock is classified as a trading security. In addition, we have a share loan arrangement with a financial institution for the same number of shares of Cisco common stock shown as Loan related to other marketable securities in Current Liabilities in our Consolidated Balance Sheets, which is due on demand.
As a result, we own the same number of Cisco shares as we have borrowed under the share loan arrangement; thereby, eliminating any market risk exposure associated with the share loan arrangement as increases (or decreases) in the value of Cisco stock are off-set equally by increases (or decreases) in the value of the shares of Cisco stock we own. In the event the counter-party financial institution to the share loan arrangement demands return of the borrowed Cisco shares, we will settle the obligation with our Cisco shares or with shares borrowed from another lender.
Other marketable securities and Loan related to other marketable securities was $209.6 million at a market price of $20.90 per share at March 29, 2013, and $195.1 million at a market price of $19.45 per share at December 28, 2012. The fees associated with the stock loan agreement were $0.3 million in the first quarter of 2013 and the first quarter of 2012, are included in Interest income, net in the Consolidated Statements of Operations.
Additionally, in connection with our acquisition of AFC, we recorded a tax liability associated with a deferred gain relating to a settled hedging arrangement on the acquired Cisco shares. The deferred tax liability was $184.0 million as of March 29, 2013, and as of December 28, 2012.
The Cisco shares and related loan discussed above are maintained by us in order to defer recognition of the tax gain for income tax purposes. In the fourth quarter of 2012, we settled 0.6 million shares, reducing the number of borrowed shares to 10.0 million. In the future we may settle all or a portion of the remaining borrowed shares to the extent we are able to offset the gain by utilizing net operating loss or tax credit carryforwards. To the extent we cannot offset all or a portion of the gain, we may incur cash tax payments that could significantly reduce our cash and cash equivalents.
Long-term equity investments
In addition to the above investments, we maintain investments in partnerships and start-up technology companies. We include these investments in Other Assets, at cost. These investments totaled $1.7 million at March 29, 2013, and $1.8 million at December 28, 2012. We review each investment quarterly, including historical and projected financial performance, expected cash needs and recent funding events. We recognize other-than-temporary impairments if the market value of the investment is below its cost basis for an extended period of time or if the issuer has experienced significant financial declines or difficulties in raising capital to continue operations. We did not record otherthan-temporary impairments for the first quarters ended March 29, 2013 and March 30, 2012. Gains on the sale of long-term equity investments and other-than-temporary impairments are included in Other income (expense), net in the Consolidated Statements of Operations.
5. Derivative Financial Instruments
Financial Contracts and Market Risk
We conduct business on a global basis in U.S. and foreign currencies, subjecting us to risks associated with fluctuating foreign exchange rates. To mitigate these risks, we use derivative foreign exchange contracts to address nonfunctional exposures that are expected to be settled in one year or less. The derivative foreign exchange contracts consist of foreign currency forward and option contracts.
Derivative financial contracts involve elements of market and credit risk. The market risk that results from these contracts relates to changes in foreign currency exchange rates, which generally are offset by changes in the value of the underlying assets or liabilities being held. Credit risk relates to the risk of nonperformance by a counterparty to one of the derivative
12
contracts. We do not believe there is a significant credit risk associated with our hedging activities. We monitor the counterparties credit ratings and other market data to minimize credit risk. In addition, we also limit the aggregate contract amount entered into with any one financial institution to mitigate credit risk.
Balance Sheet Hedges (Non-designated Hedges)
Short-term monetary assets and liabilities denominated in currencies other than the functional currency are remeasured through income as foreign currency rates fluctuate. Changes in the value of derivative contracts intended to offset these fluctuations are also recorded in income. These derivative contracts are not designated as hedges. At March 29, 2013, we held non-designated foreign currency forward contracts in 13 currencies, with a gross notional equivalent of $102.6 million. At March 30, 2012, we held non-designated foreign currency forward contracts in 12 currencies, with a gross notional equivalent of $167.7 million.
Net Investment Hedges
We did not enter into a net investment hedge in the first quarter of 2013. In the first quarter of 2012, we entered into three-month foreign currency forward contracts and a three-month foreign currency collar contract, designated as net investment hedges, to hedge a portion of our net investment in one of our foreign subsidiaries to preserve the U.S. dollar value of our Euro cash. Effective changes in the fair value of these contracts, less applicable deferred income taxes are recorded within Accumulated other comprehensive income. Those amounts will be reflected in income only when we dispose of the investment in the foreign subsidiary. We conduct monthly effectiveness tests of net investment hedges on a spot-to-spot basis, excluding forward points, and any measurement of ineffectiveness is recorded in income. As of March 29, 2013, we had a net unrealized gain of $12.8 million in Accumulated other comprehensive income related to settled contracts. At March 29, 2013, we did not have any net investments hedges outstanding. As of March 30, 2012, we had a net unrealized gain of $14.5 million in Accumulated other comprehensive income, which includes a net gain of $14.2 million related to settled contracts and a net gain of $0.3 million related to unsettled contracts.
The fair value of derivative instruments in the Consolidated Balance Sheet as of March 29, 2013, was as follows:
Asset Derivatives Reported in Miscellaneous Receivables and Other Current Assets |
Liability Derivatives Reported in Other Accrued Liabilities |
|||||||
Net investment hedges |
$ | | $ | | ||||
Balance sheet hedges (Non-designated hedges) |
0.2 | 0.2 | ||||||
|
|
|
|
|||||
Total derivatives |
$ | 0.2 | $ | 0.2 | ||||
|
|
|
|
The fair value of derivative instruments in the Consolidated Balance Sheet as of December 28, 2012, was as follows:
Asset Derivatives Reported in Miscellaneous Receivables and Other Current Assets |
Liability Derivatives Reported in Other Accrued Liabilities |
|||||||
Balance sheet hedges (Non-designated hedges) |
$ | | $ | 0.1 |
The effect of derivative instruments designated as hedging instruments on the Consolidated Statements of Operations for the three months ended March 29, 2013, and March 30, 2012, was as follows:
Loss Recognized in Accumulated OCI, net (Effective Portion) |
Gain Recognized in Other Income (Expense), net: Excluded from Effectiveness testing |
|||||||||||||||
3/29/13 | 3/30/12 | 3/29/13 | 3/30/12 | |||||||||||||
Net investment hedges |
$ | | $ | (4.2 | ) | $ | | $ | 0.1 |
13
The effect of derivative instruments not designated as hedging instruments on the Consolidated Statements of Operations for the three months ended March 29, 2013, and March 30, 2012, was as follows:
(Loss) Gain Recognized in Other Income Expense, net 1 |
||||||||
3/29/13 | 3/30/12 | |||||||
Foreign currency forward and option contracts |
$ | (7.7 | ) | $ | 1.4 |
1 | The gains or losses from changes in the fair value of the derivative contracts are generally offset by gains or losses of the underlying transactions being hedged. |
6. Product Warranties
We provide warranties for all of our products. The specific terms and conditions of those warranties vary depending on the product. We provide a basic limited warranty for periods ranging from 90 days to 6 years.
The estimate of warranty liability involves many factors, including the number of units shipped, historical and anticipated rates of warranty claims, and cost per claim. We periodically assess the adequacy of the recorded warranty liability and adjust the amounts as necessary. Other adjustments to accruals for product warranties represent reductions due to favorable experience to previous estimates.
We classify the portion of warranty liability that we expect to incur in the next 12 months as a current liability. We classify the portion of warranty liability that we expect to incur more than 12 months in the future as a long-term liability. Product warranty liabilities are as follows:
First Quarter | ||||||||
3/29/13 | 3/30/12 | |||||||
Balance beginning of period |
$ | 15.8 | $ | 17.0 | ||||
Accruals for product warranties |
1.2 | 1.9 | ||||||
Settlements |
(1.2 | ) | (0.9 | ) | ||||
Other adjustments to accruals for product warranties |
| (0.7 | ) | |||||
|
|
|
|
|||||
Balance end of period |
$ | 15.8 | $ | 17.3 | ||||
|
|
|
|
Balance sheet classification end of period | Balance at 3/29/13 |
Balance at 3/30/12 |
||||||
Other accrued liabilities |
$ | 6.4 | $ | 8.2 | ||||
Other long-term liabilities |
9.4 | 9.1 | ||||||
|
|
|
|
|||||
Total product warranty liabilities |
$ | 15.8 | $ | 17.3 | ||||
|
|
|
|
7. Equity-Based Compensation
The Tellabs, Inc. Amended and Restated 2004 Incentive Compensation Plan (2004 Plan) provides for the grant of short-term and long-term incentives, including stock options, stock appreciation rights (SARs), restricted stock and performance stock units (PSUs). Equity-based grants vest over one to three years, with the majority vesting over a three-year period. We recognize compensation expense for stock options, restricted stock and PSUs over the service period based on the fair value on the grant date. Stock options and SARs granted but unexercised expire 10 years from the grant date. Stockholders previously approved 53,889,977 shares for grant under the 2004 Plan, of which 14,583,738 remain available for grant at March 29, 2013.
Stock Options
We estimate the fair value of stock options using the Black-Scholes option-pricing model. This model requires the use of assumptions that will have a significant impact on the fair value estimate. There were no stock options granted during the first quarter of 2013.
14
The following table summarizes the assumptions used to compute the weighted average fair value of stock option grants:
3/30/12 | ||||
Expected volatility |
43.3 | % | ||
Risk-free interest rate |
0.9 | % | ||
Expected term (in years) |
5.3 | |||
Expected dividend yield |
2.0 | % |
We based our calculation of expected volatility on a combination of historical and implied volatility for options granted. We based the risk-free interest rate on the U.S. Treasury yield curve in effect at the date of grant. We estimated the expected term of the options using their vesting period, post-vesting employment termination behavior and historical exercise patterns. We based the expected dividend yield on the options exercise price and annualized dividend rate at the date of grant.
The following is a summary of stock option activity during 2013 as of March 29, 2013:
Shares | Weighted Average Exercise Price |
Weighted Average Remaining Contractual Term (in years) |
Aggregate Intrinsic Value (in millions) |
|||||||||||||
Outstanding beginning of year |
16,713,155 | $ | 7.50 | |||||||||||||
Exercised |
(320 | ) | $ | 0.16 | ||||||||||||
Forfeited/expired |
(367,125 | ) | $ | 7.34 | ||||||||||||
|
|
|||||||||||||||
Outstanding end of period |
16,345,710 | $ | 7.51 | 3.3 | $ | | ||||||||||
|
|
|||||||||||||||
Exercisable end of period |
14,623,423 | $ | 7.82 | 2.7 | $ | | ||||||||||
Shares vested or expected to vest |
16,239,399 | $ | 7.53 | 3.3 | $ | |
The aggregate intrinsic value in the preceding table represents the total pretax intrinsic value, based on our closing stock price as of March 29, 2013, that the option holders would have received had all holders exercised their options as of that date. The aggregate intrinsic value of exercised stock options during the first quarter of 2013 was negligible.
Cash-Settled Stock Appreciation Rights
The 2004 Plan provides for the granting of cash-settled SARs in conjunction with, or independent of, the stock options under the 2004 Plan. These SARs allow the holder to receive in cash the difference between the cash-settled SARs grant price (the market value of our stock on the grant date) and the market value of our stock on the date the holder exercises the SAR. There were no SARs granted during the first quarter of 2013. There were no cash payments during the first quarters of 2013 and 2012.
The following is a summary of cash-settled SARs activity during 2013 as of March 29, 2013:
Shares | Weighted Average Exercise Price |
|||||||
Outstanding beginning of year |
456,195 | $ | 6.67 | |||||
Forfeited/expired |
(10,500 | ) | $ | 5.83 | ||||
|
|
|||||||
Outstanding end of period |
445,695 | $ | 6.69 | |||||
|
|
Restricted Stock
The fair market value of restricted stock vested was $2.1 million in the first quarter of 2013. The weighted average grant date fair value of restricted stock was $2.09 per share in the first quarter of 2013, and $3.99 per share in the first quarter of 2012.
15
The following is a summary of restricted stock activity during 2013 as of March 29, 2013:
Shares | Weighted Average Grant Date Fair Value |
|||||||
Non-vested beginning of year |
3,899,865 | $ | 4.68 | |||||
Granted |
202,278 | $ | 2.09 | |||||
Vested |
(1,011,590 | ) | $ | 4.68 | ||||
Forfeited |
(162,642 | ) | $ | 4.71 | ||||
|
|
|||||||
Non-vested end of period |
2,927,911 | $ | 4.49 | |||||
|
|
Performance Stock Units
The 2004 Plan provides for the granting of PSUs. We granted 5,282,045 PSUs in the first quarter of 2013 and 1,877,064 PSUs in the first quarter of 2012. The PSUs granted in the first quarter of 2013 entitle the recipients to receive shares of our common stock commencing in the first quarter of 2014, contingent on the achievement of operating earnings, performance related to revenue and attainment of strategic objectives for the 2013 fiscal year. Following achievement of these measures and subject to continued employment, one-third of such shares will be issued in annual installments beginning in the first quarter of 2014. At maximum target performance, we will issue one share for each PSU granted. The weighted average price of PSUs granted in the first quarter of 2013 was $2.20 per share and the weighted average price of PSUs granted in the first quarter of 2012 was $3.99 per share.
The PSUs granted in 2012 entitle the recipients to receive shares of our common stock commencing in the first quarter of 2013, contingent on the achievement of operating earnings targets and strategic goals for the 2012 fiscal year. Under the executive plan, 100% of the PSUs were earned and one share for each PSU will be paid out, subject to continued employment. We issued one-third (255,573 shares) of the total shares in the first quarter of 2013 and generally, one-third of such shares will be issued in annual installments in the first quarter of 2014 and the first quarter of 2015.
The following is a summary of PSU activity during 2013 as of March 29, 2013:
Shares | Weighted Average Grant Date Fair Value |
|||||||
Non-vested beginning of year |
1,633,866 | $ | 4.40 | |||||
Granted |
5,282,045 | $ | 2.20 | |||||
Vested |
(941,843 | ) | $ | 4.60 | ||||
Forfeited |
(131,839 | ) | $ | 4.26 | ||||
|
|
|||||||
Non-vested end of period |
5,842,229 | $ | 2.38 | |||||
|
|
Equity-Based Compensation Expense
The following table sets forth the total equity-based compensation expense resulting from stock options, SARs, restricted stock, and PSUs by line item on the Statements of Operations:
First Quarter | ||||||||
3/29/13 | 3/30/12 | |||||||
Cost of revenue products |
$ | 0.2 | $ | 0.4 | ||||
Cost of revenue services |
0.4 | 0.5 | ||||||
Research and development |
0.6 | 1.8 | ||||||
Sales and marketing |
0.5 | 0.9 | ||||||
General and administrative |
1.4 | 2.0 | ||||||
|
|
|
|
|||||
Equity-based compensation expense before income taxes |
3.1 | 5.6 | ||||||
Income tax benefit |
(0.1 | ) | (0.1 | ) | ||||
|
|
|
|
|||||
Total equity-based compensation expense after income taxes |
$ | 3.0 | $ | 5.5 | ||||
|
|
|
|
16
The following table sets forth the total equity-based compensation expense by type:
First Quarter | ||||||||
3/29/13 | 3/30/12 | |||||||
Stock options |
$ | 0.6 | $ | 1.1 | ||||
Cash-settled SARs |
| 0.1 | ||||||
Restricted stock |
2.1 | 3.4 | ||||||
Performance stock units |
0.4 | 1.0 | ||||||
|
|
|
|
|||||
Total |
$ | 3.1 | $ | 5.6 | ||||
|
|
|
|
As of March 29, 2013, we had $10.9 million of unrecognized equity-based compensation cost that we expect to recognize over a weighted average period of 1.6 years.
8. Income Taxes
We recorded a tax benefit of $3.0 million in the first quarter of 2013, compared with a tax provision of $3.7 million in the first quarter of 2012. The effective rate for the quarter is below the federal statutory rate of 35% due to limitations on our ability to record a tax benefit on losses from domestic operations combined with a tax benefit on losses from foreign operations.
9. Accumulated Other Comprehensive Income
Accumulated other comprehensive income has no impact on our net loss but is reflected in our consolidated balance sheet through adjustments to stockholders equity. Accumulated other comprehensive income derives from unrealized gains (losses) and related adjustments on available-for-sale securities, foreign currency translation adjustments, unrecognized prior service costs and unrecognized net gains (losses) on our retiree medical plan.
Accumulated other comprehensive income (net of tax) for the first three months of 2013 consists of the following:
Unrealized Net Gain (Loss) on Available-for-Sale Securities |
Foreign Currency Translation Adjustments |
Unrecognized Prior Service Cost |
Unrecognized Net Gain on Retiree Medical Plan |
Accumulated Other Comprehensive Income |
||||||||||||||||
Balance at December 28, 2012 |
$ | 2.4 | $ | 94.9 | $ | (0.1 | ) | $ | 1.8 | $ | 99.0 | |||||||||
Amounts reclassified from other comprehensive income |
(2.0 | ) | | | | (2.0 | ) | |||||||||||||
Other comprehensive loss |
(0.3 | ) | (8.1 | ) | | | (8.4 | ) | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Net other comprehensive loss |
(2.3 | ) | (8.1 | ) | | | (10.4 | ) | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Balance at March 29, 2013 |
$ | 0.1 | $ | 86.8 | $ | (0.1 | ) | $ | 1.8 | $ | 88.6 | |||||||||
|
|
|
|
|
|
|
|
|
|
Amounts reclassified from accumulated other comprehensive income to net loss in the Consolidated Statements of Operations were as follows:
First Quarter |
Affected Line Item in the Consolidated | |||||||||
Details about Accumulated Other Comprehensive Income Components |
3/29/13 | 3/30/12 | ||||||||
Unrealized net gain (loss) on available-for-sale securities |
$ | 2.6 | $ | (0.3 | ) | Other income (expense), net | ||||
(0.6 | ) | | Income tax expense | |||||||
|
|
|
|
|||||||
$ | 2.0 | $ | (0.3 | ) | Net of tax | |||||
|
|
|
|
10. Segment Information
We report in four segments: Optical, Data, Access and Services.
Optical segment products are primarily used to manage large volumes of telecommunication traffic in metro areas. The Optical segment includes Tellabs® 5000 Series of Digital Cross-Connect systems, the Tellabs® 6300 Managed Transport System, the Tellabs® 7100 OTS and the Tellabs® 7300 Metro Ethernet Switching Series.
17
Data segment products are primarily used in mobile backhaul applications, and for business services and various edge routing applications. The Data segment includes the Tellabs® 8100 Managed Access Systems and the Tellabs 8600 and 8800 Smart Routers.
Access segment products are primarily used to enable service providers to bundle Internet, video, and voice over high-speed fiber-based networks and in Optical LAN applications. The Access segment includes the Tellabs® 1000 and 1100 Multi-service Access systems, and the Tellabs® 1600 Optical Network Terminals.
The Services segment delivers deployment, training, support and professional services to Tellabs customers. Through these offerings, Tellabs serves its customers through the phases of planning, deploying and operating a network.
We define segment profit (loss) as gross profit less research and development expenses. Segment profit (loss) excludes sales and marketing expenses, general and administrative expenses, the amortization of intangibles, restructuring and other charges, and the impact of equity-based compensation.
Consolidated revenue by segment follows:
First Quarter | ||||||||
3/29/13 | 3/30/12 | |||||||
Optical |
$ | 93.1 | $ | 104.4 | ||||
Data |
32.9 | 69.4 | ||||||
Access |
39.0 | 35.9 | ||||||
Services |
44.4 | 48.2 | ||||||
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|
|
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Total revenue |
$ | 209.4 | $ | 257.9 | ||||
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|
|
Segment profit (loss) and reconciliation to operating loss by segment follows:
First Quarter | ||||||||
3/29/13 | 3/30/12 | |||||||
Optical |
$ | 12.8 | $ | 14.8 | ||||
Data |
(14.8 | ) | (5.0 | ) | ||||
Access |
8.2 | 6.4 | ||||||
Services |
14.6 | 15.2 | ||||||
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Total segment profit |
$ | 20.8 | $ | 31.4 | ||||
Sales and marketing expenses |
(27.0 | ) | (36.4 | ) | ||||
General and administrative expenses |
(17.6 | ) | (21.1 | ) | ||||
Equity-based compensation |
(1.2 | ) | (2.6 | ) | ||||
Intangible asset amortization |
(1.1 | ) | (2.2 | ) | ||||
Restructuring and other charges |
(34.7 | ) | (106.0 | ) | ||||
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|||||
Operating loss |
$ | (60.8 | ) | $ | (136.9 | ) | ||
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|
The segments use many of the same assets. For internal reporting purposes, we do not allocate assets by segment and therefore asset, depreciation and amortization, or capital expenditure by segment information is not provided to our chief operating decision maker.
11. Contingencies
Legal Proceedings
We are subject to legal claims and litigation arising in the ordinary course of business, such as employment or intellectual property claims, including the matters described below. We are unable to determine the likelihood of an unfavorable outcome against us and are unable to reasonably estimate a range of loss, if any.
18
Fujitsu Network Communications Inc. v. Tellabs, Inc. On January 28, 2008, Fujitsu Network Communications, Inc. and Fujitsu Limited filed a complaint in the United States District Court for the Eastern District of Texas against Tellabs in a case captioned Fujitsu Network Communications, Inc. and Fujitsu Limited v. Tellabs, Inc. and Tellabs Operations, Inc., Civil Action No. 6:08-cv-00022-LED. The complaint alleges infringement of U.S. Patent Nos. 5,526,163 (163 patent), 5,521,737 (737 patent), 5,386,418 (418 patent) and 6,487,686 (686 patent), and seeks unspecified damages including enhanced damages, as well as attorney fees and other remedies including injunctive relief. The case was thereafter transferred to the United States District Court for the Northern District of Illinois (Case No. 1:09-cv-04530). As to Fujitsus 686 patent, on November 4, 2010, the Court dismissed with prejudice Fujitsus claim for infringement of the patent and Fujitsu signed a covenant not to sue Tellabs for infringement of the patent as to any Tellabs products as they currently exist or existed in the past. As to Fujitsus 418 patent, on March 31, 2011, the Court denied Tellabs motion for summary judgment of invalidity based on indefiniteness and granted Fujitsus motion for summary judgment for judicial correction of an error in asserted Claim 1. On September 26, 2012, the Court granted a motion by Tellabs for summary judgment of invalidity of all asserted claims of the 418 patent, and judgment was entered in favor of Tellabs on its counterclaim for declaratory judgment of invalidity of the patent. Fujitsus appeal of this order and judgment was withdrawn and the appeal dismissed. As to Fujitsus 737 patent, on September 27, 2012, the Court denied a motion by Tellabs for summary judgment of invalidity. A trial date of January 14, 2013 had been set by the Court to commence trial of Fujitsus 163 and 737 patents, however on November 1, 2012, the scheduled trial date was struck from the Courts calendar in favor of an alternative trial date to be later determined. On December 21, 2012, the Court granted a motion by Tellabs for summary judgment on lost profits damages, and as a result Fujitsu Limited is precluded from pursuing the theory of lost profits. Tellabs contests any liability and will continue to vigorously defend itself accordingly.
Tellabs Operations, Inc. v. Fujitsu Limited and Fujitsu Network Communications Inc. On June 11, 2008, Tellabs Operations, Inc. filed a complaint in the United States District Court for the Northern District of Illinois against Fujitsu Limited and Fujitsu Network Communications, Inc. in a case captioned Tellabs Operations, Inc. v. Fujitsu Limited and Fujitsu Network Communications, Inc. Civil Action No. 1:08-cv-3379. The complaint alleged infringement of Tellabs Operations, Inc.s U.S. Patent No. 7,369,772 (772 patent), and sought unspecified damages including enhanced damages, as well as attorney fees and other remedies including injunctive relief. Fujitsu Limited brought counterclaims alleging infringement of two U.S. patents, namely U.S. Patent Nos. 5,533,006 (006 patent) and 7,227,681 (681 patent), seeking unspecified damages including enhanced damages, as well as attorney fees and other remedies including injunctive relief. On March 31, 2011, the Court issued an Order granting Tellabs motion for summary judgment of invalidity of all claims of Fujitsus 006 patent. As to Tellabs 772 patent, Fujitsu pursued an inter partes reexamination of the patent in the Patent Office which resulted in a December 12, 2011, decision by the Board of Patent Appeals and Interferences (BPAI) to reverse the Examiners decision to not reject the claims of the patent, as well as a January 9, 2013, BPAI decision affirming the Examiners rejection of amended claims of the patent. On February 14, 2013, Tellabs moved to dismiss all claims related to the 772 patent. As to Fujitsus 681 patent, in July, 2012, the Court denied a Tellabs motion for summary judgment of invalidity and granted Fujitsus motion for summary judgment finding no inequitable conduct. Trial on Fujitsus 681 patent commenced on August 27, 2012, and concluded on September 7, 2012, whereupon the jurys verdict the Court entered judgment in favor of Tellabs on Fujitsus claim for infringement of the 681 patent and in favor of Fujitsu on Tellabs claim for invalidity of the same patent, and the parties respective post-trial motions were denied by the Court on January 24, 2013. Both Tellabs and Fujitsu are appealing the denial of post-trial motions related to the 681 patent. On February 19, 2013, the Court granted Tellabs motion to dismiss claims related to Tellabs 772 patent and terminated Civil Action No. 1:08-cv-3379.
Fujitsu Limited v. Tellabs, Inc. On April 30, 2012, Fujitsu Limited filed a complaint in the United States District Court for the Northern District of Illinois against Tellabs in a case captioned Fujitsu Limited v. Tellabs Operations, Inc., Tellabs, Inc., and Tellabs North America, Inc., Civil Action No. 1:12-cv-03229. The complaint alleges infringement of U.S. Patent Nos. 5,526,163, 5,521,737, 5,386,418 and 7,227,681, the same patents at issue in pending Civil Action Nos. 1:09-cv-04530 and 1:08-cv-3379, and seeks unspecified damages including enhanced damages, as well as attorney fees and other remedies including injunctive relief. The complaint includes allegations of infringement that Fujitsu previously sought unsuccessfully to add to pending Civil Action Nos. 1:09-cv-04530 and 1:08-cv-3379. On June 4, 2012, the Tellabs defendants filed a motion to dismiss the Complaint pursuant to Fed. R. Civ. P. 12(B)(6), which the Court granted in part and denied in part on January 30, 2013. Tellabs response to the complaint is currently due May 1, 2013.
Telcordia Technologies Inc. v. Tellabs, Inc. On May 4, 2009, Telcordia Technologies, Inc. filed a complaint against Tellabs in the United States District Court for the District of New Jersey in a case captioned Telcordia Technologies Inc. v. Tellabs, Inc., Civil Action No. 2:09-cv-02089. The complaint alleges infringement of U.S. Patent Nos. 4,893,306, 4,835,763 and Re. 36,633, and seeks unspecified damages including enhanced damages, as well as attorney fees and other remedies including injunctive relief. On July 27, 2009, Telcordia filed a first amended complaint adding Tellabs Operations, Inc. and Tellabs North America, Inc. as additional defendants. On December 15, 2009, the Court granted Tellabs motion to transfer, which resulted in a transfer of the action to the United States District Court for the District of Delaware (Case No. 1:2009cv00978). On April 12, 2013, after a period of inactivity in the case, the Court closed the case with a Docket Text that reads: Case Closed.
19
Cheetah Omni, LLC v. Alcatel-Lucent USA Inc. et al. On July 29, 2011, a complaint was filed in the United States District Court for the Eastern District of Texas, Tyler Division, against Tellabs and several other companies in a case captioned Cheetah Omni LLC v. Alcatel-Lucent USA Inc. et al., Civil Action No. 6:11cv390. The complaint includes allegations of infringement by Tellabs, Inc., Tellabs Operations, Inc., and Tellabs North America, Inc., of U.S. Patent Nos. 6,888,661; 6,847,479; 6,856,459; and 6,940,647, and seeks unspecified damages, as well as interest, costs, disbursements, attorney fees and other remedies including injunctive relief. The accused products include products from the Tellabs 7100 product line. On December 5, 2012, the Court entered an order staying the proceedings with respect to US Patents 6,888,661 and 6,847,479 until such time as an injunction issued by the Court of the Eastern District of Michigan in a separate action involving the two patents is lifted. The parties are in discovery, and a Markman hearing was held on February 14, 2013, and on April 11, 2013, the Court issued an order that construes disputed claim language of various patents in suit. A trial date has been set for March 10, 2014.
Internet Machines LLC v. Avnet, Inc., et al. On February 13, 2012, a second amended complaint was filed in the United States District Court for the Eastern District of Texas, Tyler Division, naming Tellabs, Inc. among several defendants in a case captioned Internet Machines LLC v. Avnet, Inc., et al., Civil Action Nos. 6:10-CV-548-MHS and 6:11-CV-250-MHS (Consolidated). The plaintiff thereafter filed a third amended complaint on March 2, 2012. The amended complaints allege infringement of U.S. Patent Nos. 7,454,552, 7,421,532, 7,814,259 and 7,945,722, and seek unspecified damages including enhanced damages, as well as interest, costs, expenses, attorney fees and other remedies including injunctive relief. On March 27, 2012, Tellabs filed its answer, defenses and counterclaims in response to the third amended complaint. On September 4, 2012, the Court issued an Order granting a motion by the defendants to stay the litigation, whereby the litigation is stayed pending entry of a final non-appealable judgment in a prior proceeding in which Tellabs is not named (Internet Machines LLC v. Alienware Corp., No 6:10-cv-23 (E.D. Tex. Filed Feb. 2, 2010)).
Mahmood Alizadeh v. Tellabs, Inc., et al. and Lawrence Sasala v. Tellabs, Inc., et al. Beginning on January 23, 2013, two purported stockholder class action lawsuits were filed in the United States District Court for the Northern District of Illinois, against Tellabs, Inc. and certain of our current or former officers alleging violations of the federal securities laws. The two stockholder class action lawsuits, which have been consolidated, purport to bring claims on behalf of those who purchased the Companys publicly traded securities between October 26, 2010, and April 26, 2011. Plaintiffs allege that defendants made false and misleading statements regarding the Companys revenues and prospects, and seek unspecified compensatory damages and other relief. The Company believes these claims are without merit and intends to defend the actions vigorously.
John Nicholas v. Michael J. Birck, et al. On March 19, 2013, a shareholder derivative complaint was filed in the United States District Court for the Northern District of Illinois against current and former officers and directors of the Company alleging breaches of fiduciary duties, insider trading and unjust enrichment between October 26, 2010 and July 27, 2012. The Company is named as a nominal defendant. The Plaintiff seeks to recover unspecified damages on behalf of the Company and other relief. The Company intends to bring a motion to dismiss on the ground that the complaint fails to allege facts establishing that a demand on the Tellabs Board of Directors is excused under Delaware law.
Apart from the matters described above, we are and in the future may be subject to various legal proceedings, claims and litigation arising in the ordinary course of business.
The proceedings described above, including the Fujitsu matters, the Telcordia matter, the Cheetah Omni matter, the Internet Machines matter, the stockholder class action matters and the shareholder derivative complaint, involve costly litigation and may result in diverting managements time, attention and resources, delaying or halting product shipments or services delivery, requiring us to pay amounts in any damages and/or settlements, requiring us to enter into royalty-bearing licensing arrangements or to obtain substitute technology of lower quality or higher costs, and otherwise imposing obligations or restrictions on us and our business. We may be unsuccessful in any such litigation, despite the time, money, energy and bases for our assertion and/or defense of the matters. We may also be unable, if necessary, to enter into licensing arrangements or to obtain substitute technology on commercially reasonable terms or any terms. Any such settlements or inability to prevail or mitigate any liability or to obtain such licensing arrangements or substitute technology may adversely affect our business, financial condition and operating results.
12. Stock Repurchase Programs
We repurchase outstanding common stock under two plans authorized by our Board of Directors. In addition, we purchase shares to cover withholding taxes on shares issued under employee stock plans.
We intend to use cash generated by employee stock option exercises (other than those of Company officers and board members) to repurchase stock through the use of a 10b5-1 plan. There were no purchases in the first quarter of 2013 under this plan.
20
We intend to continue to make repurchases of our outstanding common stock under a previously authorized $600 million repurchase plan. As of March 29, 2013, we have purchased 68.1 million shares of our common stock under the $600 million repurchase plan at a total cost of $401.2 million, leaving $198.8 million available to be purchased under this plan. We purchased 11.5 million shares for $25.7 million in the first quarter of 2013 under this plan.
We may change our repurchase activity and we provide no assurance that we will continue our repurchase activity in the future.
In addition, we purchased 0.6 million shares for $1.3 million in the first quarter of 2013 to cover minimum withholding taxes on shares issued under employee stock plans.
We record repurchased shares as Treasury stock.
13. Net Loss Per Share
The following table sets forth the computation of net loss per share:
First Quarter | ||||||||
3/29/13 | 3/30/12 | |||||||
Numerator: |
||||||||
Net loss |
$ | (55.9 | ) | $ | (139.8 | ) | ||
|
|
|
|
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Denominator: |
||||||||
Denominator for basic net loss per share |
359.4 | 365.7 | ||||||
Effect of dilutive securities: |
||||||||
Employee stock options and restricted and performance stock awards |
| | ||||||
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|
|
|
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Denominator for diluted net loss per share |
359.4 | 365.7 | ||||||
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|
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Net loss per share, basic |
$ | (0.16 | ) | $ | (0.38 | ) | ||
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Net loss per share, diluted 1 |
$ | (0.16 | ) | $ | (0.38 | ) | ||
|
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|
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1 | Dilutive securities are not included in the computation of diluted earnings per share when a company is in a loss position. As such, the numerator and the denominator used in computing both basic and diluted net loss per share for the first quarter of 2013 and the first quarter of 2012 are the same. Diluted weighted average shares outstanding were 360.9 million in the first quarter of 2013, and 367.9 million in the first quarter of 2012. |
Item 2. Managements Discussion and Analysis of Results of Operations and Financial Condition
Introduction and Overview of Business
Tellabs designs, develops and supports telecommunications networking products. We generate revenue principally through the sale of these products to communications service providers worldwide as both stand-alone network elements and as elements of solutions integrated under a common network management system. We also generate revenue by providing services to our customers.
We report in four segments: Optical, Data, Access and Services.
Optical segment products are primarily used to manage large volumes of telecommunication traffic in metro areas. The Optical segment includes the Tellabs® 5000 Series of Digital Cross-Connect systems, the Tellabs® 6300 Managed Transport System, the Tellabs® 7100 OTS and the Tellabs® 7300 Metro Ethernet Switching Series.
Data segment products are primarily used in mobile backhaul applications, and for business services and various edge routing applications. The Data segment includes the Tellabs® 8100 Managed Access Systems and the Tellabs 8600 and 8800 Smart Routers.
21
Access segment products are primarily used to enable service providers to bundle Internet, video, and voice over high-speed fiber-based networks and in Optical LAN applications. The Access segment includes the Tellabs® 1000 and 1100 Multi-service Access systems, and the Tellabs® 1600 Optical Network Terminals.
The Services segment delivers deployment, training, support and professional services to Tellabs customers. Through these offerings, Tellabs serves its customers through the phases of planning, deploying and operating a network.
RESULTS OF OPERATIONS
First-quarter 2013 revenue was $209.4 million. Our business outside North America was challenged, with continuing weakness in Western Europe and regulatory uncertainty in Mexico. As customers migrate to new technologies, revenue from earlier-developed products and services declines and overall corporate profitability suffers. This situation is compounded when customers are slow to adopt our new products and services. In the face of these market conditions, Tellabs is streamlining its costs and operating expenses with the goal of enhancing Tellabs solutions for future revenue growth while achieving nominal profitability.
Net loss in the first quarter of 2013 was $55.9 million or $0.16 per share (basic and diluted), compared with net loss of $139.8 million or $0.38 per share (basic and diluted) in the first quarter of 2012. Operating expenses during the first quarter of 2013 included $34.7 million of restructuring and other charges primarily related to the restructuring plan announced in January 2013. Operating expenses during the first quarter of 2012 included $106.0 million of restructuring and other charges primarily related to the restructuring plan announced in January 2012. Excluding these charges and other non-GAAP items, net loss in the first quarter of 2013 was $13.6 million or $0.04 per share (basic and diluted) compared with net loss of $15.3 million or $0.04 per share (basic and diluted) in the first quarter of 2012.
Revenue (in millions)
First Quarter | ||||||||||||
2013 | 2012 | Change | ||||||||||
Products |
$ | 165.0 | $ | 209.7 | (21.3 | )% | ||||||
Services |
44.4 | 48.2 | (7.9 | )% | ||||||||
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|
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Total revenue |
$ | 209.4 | $ | 257.9 | (18.8 | )% | ||||||
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|
|
First quarter 2013 compared with first quarter 2012
Total revenue was $209.4 million, compared with $257.9 million, as higher revenue in the Access segment was more than offset by lower revenue in the Data, Optical and Services segments. On a geographic basis, revenue from customers in North America (United States and Canada) was $122.8 million (or 59% of total revenue), compared with $126.6 million (or 49% of total revenue). Revenue from customers outside North America was $86.6 million (or 41% of total revenue), compared with $131.3 million (or 51% of total revenue), as we saw lower revenue across all geographic regions outside North America.
Gross Margin
First Quarter | ||||||||||||
2013 | 2012 | % Point Change |
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Products |
35.2 | % | 38.6 | % | (3.4 | ) | ||||||
Services |
32.0 | % | 30.5 | % | 1.5 | |||||||
Consolidated |
34.5 | % | 37.1 | % | (2.6 | ) |
In the first quarter of 2013, products gross margins declined compared with the year-ago period, primarily as a result of the lower overall level of product revenue, including higher-margin Tellabs® 5000 and 8100 systems. Services gross margins increased in the first quarter of 2013, compared with the year-ago period. The increase was driven primarily by reduced services costs.
22
Operating Expenses (in millions)
First Quarter | Percent of Revenue | |||||||||||||||||||
2013 | 2012 | Change | 2013 | 2012 | ||||||||||||||||
Research and development |
$ | 52.7 | $ | 66.9 | $ | (14.2 | ) | 25.2 | % | 25.9 | % | |||||||||
Sales and marketing |
27.0 | 36.4 | (9.4 | ) | 12.9 | % | 14.1 | % | ||||||||||||
General and administrative |
17.6 | 21.1 | (3.5 | ) | 8.4 | % | 8.2 | % | ||||||||||||
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Subtotal |
97.3 | 124.4 | (27.1 | ) | 46.5 | % | 48.2 | % | ||||||||||||
Intangible asset amortization |
1.1 | 2.2 | (1.1 | ) | ||||||||||||||||
Restructuring and other charges |
34.7 | 106.0 | (71.3 | ) | ||||||||||||||||
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Total operating expenses |
$ | 133.1 | $ | 232.6 | $ | (99.5 | ) | |||||||||||||
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Operating expenses decreased in the first quarter of 2013, compared with the year ago period, primarily due to lower restructuring and other charges in the first quarter of 2013, compared with the first quarter of 2012. Excluding intangible asset amortization and restructuring and other charges, operating expenses in the first quarter of 2013 were $97.3 million, down $27.1 million from $124.4 million in the first quarter of 2012. Restructuring and other charges are due to severance ($15.8 million) and facility- and asset-related charges ($18.9 million).
Other Income (in millions)
First Quarter | ||||||||||||
2013 | 2012 | Change | ||||||||||
Interest income, net |
$ | 0.7 | $ | 1.8 | $ | (1.1 | ) | |||||
Other income (expense), net |
1.2 | (1.0 | ) | 2.2 | ||||||||
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Total other income |
$ | 1.9 | $ | 0.8 | $ | 1.1 | ||||||
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Interest income was down in the first quarter of 2013, compared with the first quarter of 2012, due to lower interest rates and lower investment balances. Other income (expense), net, was higher in the first quarter of 2013, compared with the first quarter of 2012, primarily due to gains on sales of marketable securities in the first quarter of 2013.
Income Taxes
In the first quarter of 2013, we reported a tax benefit of $3.0 million, compared with tax expense of $3.7 million in the first quarter of 2012. Tax expense decreased due to a loss incurred from foreign operations in the first quarter of 2013, compared to income in the first quarter of 2012. Because we continue to maintain a valuation allowance against our domestic deferred tax assets, no tax benefit was recorded on losses from domestic operations. During the first quarter of 2013, we increased our deferred tax asset by $1.5 million to record the effects of the American Taxpayer Relief Act (ATRA) for the 2012 tax year. This increase, which primarily represents an increase in U.S. research and development credits, was offset by an increase in our valuation allowance and had no impact on the tax benefit recorded in the first quarter of 2013.
Segment Revenue (in millions)
First Quarter | ||||||||||||
2013 | 2012 | Change | ||||||||||
Optical |
$ | 93.1 | $ | 104.4 | (10.8 | )% | ||||||
Data |
32.9 | 69.4 | (52.6 | )% | ||||||||
Access |
39.0 | 35.9 | 8.6 | % | ||||||||
Services |
44.4 | 48.2 | (7.9 | )% | ||||||||
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|
|||||||||
Total revenue |
$ | 209.4 | $ | 257.9 | (18.8 | )% | ||||||
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|
Segment Profit (Loss)* (in millions)
First Quarter | ||||||||||||
2013 | 2012 | Change | ||||||||||
Optical |
$ | 12.8 | $ | 14.8 | (13.5 | )% | ||||||
Data |
(14.8 | ) | (5.0 | ) | N/M | |||||||
Access |
8.2 | 6.4 | 28.1 | % | ||||||||
Services |
14.6 | 15.2 | (3.9 | )% | ||||||||
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Total segment profit |
$ | 20.8 | $ | 31.4 | (33.8 | )% | ||||||
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* | We define segment profit (loss) as gross profit less research and development expenses. Segment profit (loss) excludes sales and marketing expenses, general and administrative expenses, the amortization of intangibles, restructuring and other charges, and the impact of equity-based compensation. |
23
First quarter 2013 compared with first quarter 2012
Optical
Revenue from the Optical segment was $93.1 million, compared with $104.4 million. Within this segment, increased revenue from the Tellabs® 7100 optical transport systems was more than offset by lower revenue from the Tellabs® 6300 managed transport systems and the Tellabs® 5000 digital cross-connect systems. Optical segment profit was $12.8 million, compared with $14.8 million. The decline in optical segment profitability was primarily driven by the lower overall revenue level and higher research and development expenses, which more than offset improved product gross margins.
Data
Revenue from the Data segment was $32.9 million, compared with $69.4 million, primarily on lower revenue from the Tellabs® 8600 and 8800 smart routers and the Tellabs® 8100 managed access systems. Data segment loss, driven primarily by the lower revenue level and lower gross margins, was $14.8 million, compared with segment loss of $5.0 million.
Access
Revenue from the Access segment was $39.0 million, compared with $35.9 million. Within this segment, we saw increased revenue from the Tellabs® 1600 single-family Optical Network Terminals (ONTs) and the Tellabs® 1000 access systems and flat revenue from the Tellabs® 1100 access systems. Access segment profit, driven primarily by the higher level of revenue and improved product gross margins, grew to $8.2 million, up 28.1% from $6.4 million.
Services Segment
Revenue from the Services segment was $44.4 million, compared with $48.2 million. The decline in segment revenue was driven primarily by lower deployment, support agreement and professional services revenue. Services segment profit was $14.6 million, compared with $15.2 million. The decrease in segment profit was driven primarily by the lower level of Services revenue, which more than offset improved services gross margins.
Financial Condition, Liquidity & Capital Resources
Our principal source of liquidity consists of cash, cash equivalents and marketable securities of $571.6 million as of March 29, 2013, which decreased by $32.8 million since year-end 2012. We used $5.4 million in cash from operations, of which $10.2 million was related to cash restructuring payments. During the quarter, we repurchased 11.5 million shares of common stock at a cost of $25.7 million. Of the total cash, cash equivalents and marketable securities, as of March 29, 2013, $91.4 million was held by subsidiaries outside the United States.
We repatriated $375.5 million of our cash held by non-U.S. subsidiaries during the first quarter of 2013. Except for withholding taxes of $1.1 million, we expect net operating loss carry-forwards and foreign tax credits to offset any remaining cash tax liability related to the repatriation. We anticipate that future foreign earnings will be deemed to be permanently reinvested, although we could elect to repatriate funds held in one or more foreign jurisdictions. If applicable, withholding taxes could reduce the net amount of any future repatriation, and we could be required to accrue and remit applicable U.S. income taxes to the extent a tax liability results after utilization of net operating loss carryforwards and available tax credits.
The Tellabs Board of Directors did not authorize a cash dividend for the first quarter of 2013. We provide no assurance as to a future declaration or payment of a cash dividend or do we provide future assurance of a repurchase of common stock.
We believe that our investments are highly liquid instruments. We may rebalance the portfolio from time to time, which may affect the duration, credit structure, liquidity and future income of investments.
Based on historical performance and current forecasts, we believe the companys cash, cash equivalents and marketable securities will satisfy working capital needs, capital expenditures and other liquidity requirements related to existing operations for the next 12 months. Future available sources of working capital, including cash, cash equivalents, and marketable securities, cash generated from future operations, short-term or long-term financing, equity offerings or any combination of these sources, should allow us to meet our long-term liquidity needs. Current policy is to use cash, cash equivalents and marketable securities to fund business operations, to expand business, potentially through acquisitions, to repurchase common stock and to potentially pay a cash dividend.
GAAP Sequential Comparisons
We believe that comparing some quarterly Statement of Operations data on a sequential basis provides important supplemental information to management and investors regarding financial and business trends relating to our financial results. Commonly compared sequential comparisons of GAAP data include total revenue, geographic revenue split, and segment revenue and profit.
24
First quarter 2013 compared with fourth quarter 2012
Total revenue, was $209.4 million, compared with $242.2 million as revenue declined across each operating segment. Revenue from customers in North America was $122.8 million (or 59% of total revenue), compared with $132.1 million (or 55% of total revenue). Revenue from customers outside North America was $86.6 million, (or 41% of total revenue), compared with $110.1 million (or 45% of total revenue) as flat revenue in the Asia Pacific region was offset by lower revenue in the Latin American Caribbean region and the Europe, Middle East and Africa region.
Optical
Revenue from the Optical segment was $93.1 million, compared with $97.2 million. Within this segment, increased revenue from the Tellabs® 7100 optical transport systems was more than offset by lower revenue from the Tellabs® 5000 digital cross-connect systems and the Tellabs® 6300 managed transport systems. Optical segment profit, driven by the lower level of revenue and reduced product gross margins, was $12.8 million, compared with $22.3 million.
Data
Revenue from the Data segment was $32.9 million, compared with $52.2 million, primarily on lower revenue from the Tellabs® 8600 and 8800 smart routers and the Tellabs® 8100 managed access systems. Data segment loss, driven by the lower revenue level and lower product gross margins, was $14.8 million compared with segment loss of $8.6 million.
Access
Revenue from the Access segment was $39.0 million, compared with $41.0 million. Within this segment, increased revenue from the Tellabs® 1600 single-family Optical Network Terminals (ONTs) was more than offset by lower revenue from the Tellabs® 1100 access systems and the Tellabs® 1000 access systems. Access segment profit was $8.2 million, compared with $8.4 million. The decline in Access segment profit was driven primarily by lower revenue and increased research and development expenses, which more than offset improved product gross margins.
Services
Revenue from the Services segment was $44.4 million, compared with $51.8 million. The decrease in segment revenue was driven primarily by the lower level of deployment, support agreement and professional services revenue. Services segment profit, driven primarily by the overall lower level of revenue, was $14.6 million, compared with $22.0 million.
Non-GAAP Financial Measures and Comparisons
We believe that comparing some quarterly non-GAAP financial measures on a sequential basis provides important supplemental information to management and investors regarding financial and business trends relating to our financial results. Commonly compared non-GAAP financial data includes gross profit as a percentage of revenue, operating expenses, operating earnings, net earnings and net earnings per share. A complete reconciliation between non-GAAP financial measures and the GAAP financial measures, along with an explanation of why we believe non-GAAP measures to be of value to management and investors, is contained in the Reconciliation of Non-GAAP Adjustments on pages 26 through 28.
First quarter 2013 compared with fourth quarter 2012
Non-GAAP gross profit margin was 34.8%, compared with 42.2%. The decrease in non-GAAP gross profit margin was driven primarily by the lower overall level of product revenue, including higher-margin Tellabs® 5000 and 8100 systems, and lower services gross margins.
Non-GAAP operating expenses were $94.8 million, compared with $99.4 million, as we continued to see the impact of restructuring and other cost-reduction activities.
Non-GAAP operating loss was $21.9 million, compared with operating earnings of $2.7 million, as lower revenue and gross margins more than offset reduced operating expenses.
Driven primarily by the lower overall revenue level, non-GAAP net loss was $13.6 million or $0.04 per share (basic and diluted), compared with net earnings of $3.2 million or $0.01 per share (basic and diluted).
25
TELLABS, INC.
RECONCILIATION OF NON-GAAP ADJUSTMENTS (1)
(Unaudited)
Quarter Ended | ||||||||
In millions, except per-share data | 3/29/13 | 3/30/12 | ||||||
Gross Profit Reconciliation (GAAP/non-GAAP) |
||||||||
GAAP gross profit |
$ | 72.3 | $ | 95.7 | ||||
|
|
|
|
|||||
Equity-based compensation - products (b) |
0.2 | 0.3 | ||||||
Equity-based compensation - services (b) |
0.4 | 0.5 | ||||||
|
|
|
|
|||||
Total adjustments related to gross profit |
0.6 | 0.8 | ||||||
|
|
|
|
|||||
Non-GAAP gross profit |
$ | 72.9 | $ | 96.5 | ||||
|
|
|
|
|||||
Non-GAAP gross profit percentage |
34.8 | % | 37.4 | % | ||||
Non-GAAP gross profit percentage - products |
35.3 | % | 38.8 | % | ||||
Non-GAAP gross profit percentage - services |
32.9 | % | 31.5 | % | ||||
Operating Expenses Reconciliation (GAAP/non-GAAP) |
||||||||
GAAP operating expenses |
$ | 133.1 | $ | 232.6 | ||||
|
|
|
|
|||||
Equity-based compensation - research and development (b) |
0.6 | 1.8 | ||||||
Equity-based compensation - sales and marketing (b) |
0.5 | 0.9 | ||||||
Equity-based compensation - general and administrative (b) |
1.4 | 2.0 | ||||||
Intangible asset amortization (c) |
1.1 | 2.2 | ||||||
Restructuring and other charges (d), (e) |
34.7 | 106.0 | ||||||
|
|
|
|
|||||
Total adjustments related to operating expenses |
38.3 | 112.9 | ||||||
|
|
|
|
|||||
Non-GAAP operating expenses |
$ | 94.8 | $ | 119.7 | ||||
|
|
|
|
|||||
Operating Loss Reconciliation (GAAP/non-GAAP) |
||||||||
GAAP operating loss |
$ | (60.8 | ) | $ | (136.9 | ) | ||
|
|
|
|
|||||
Total adjustments related to gross profit |
0.6 | 0.8 | ||||||
Total adjustments related to operating expenses |
38.3 | 112.9 | ||||||
|
|
|
|
|||||
Non-GAAP operating loss |
$ | (21.9 | ) | $ | (23.2 | ) | ||
|
|
|
|
|||||
Non-GAAP operating loss as a percentage of revenue |
-10.5 | % | -9.0 | % | ||||
Net Loss Reconciliation (GAAP/non-GAAP) |
||||||||
GAAP net loss |
$ | (55.9 | ) | $ | (139.8 | ) | ||
|
|
|
|
|||||
Total adjustments related to gross profit |
0.6 | 0.8 | ||||||
Total adjustments related to operating expenses |
38.3 | 112.9 | ||||||
Income tax effect (g) |
3.4 | 10.8 | ||||||
|
|
|
|
|||||
Non-GAAP net loss |
$ | (13.6 | ) | $ | (15.3 | ) | ||
|
|
|
|
|||||
Non-GAAP net loss per share - basic |
$ | (0.04 | ) | $ | (0.04 | ) | ||
|
|
|
|
|||||
Non-GAAP net loss per share - diluted |
$ | (0.04 | ) | $ | (0.04 | ) | ||
|
|
|
|
(1) | Reconciliation of non-GAAP Adjustments |
In addition to reporting financial results in accordance with U.S. generally accepted accounting principles (GAAP), Tellabs, Inc. has provided non-GAAP financial measures as additional information to evaluate our operating performance. These operating performance measures have not been prepared in accordance with GAAP and may be different from measures used by other companies. Whenever we use non-GAAP financial performance measures, we provide a reconciliation of non-GAAP financial performance measures to the most closely applicable GAAP financial performance measure. Management believes the non-GAAP financial performance measures are an important measure of operating performance and provides useful information to investors to better evaluate the operating performance of our business as it highlights trends in our business that may not otherwise be apparent when relying solely on GAAP measures and because it facilitates comparisons to historical results of operations. Management uses these non-GAAP financial performance measures as supplements to our GAAP results in order to provide a more complete understanding of the factors and trends affecting our business as well as for business planning and performance management. Management discloses this information publicly along with a reconciliation of the comparable GAAP amounts, to provide access to the detail and general nature of adjustments made to GAAP financial results. While some of these excluded items have been periodically reported in our statements of operations, including significant restructuring and other charges, their occurrence in future periods depends on future business and economic factors, among other evaluation criteria, and the occurrence of such events and factors may frequently be beyond the control of management.
26
TELLABS, INC.
RECONCILIATION OF NON-GAAP ADJUSTMENTS (1)
(Unaudited)
Quarter Ended | ||||||||
In millions, except per-share data | 3/29/13 | 12/28/12 | ||||||
Gross Profit Reconciliation (GAAP/non-GAAP) |
||||||||
GAAP gross profit |
$ | 72.3 | $ | 93.4 | ||||
|
|
|
|
|||||
Inventory and purchase commitments adjustment (a) |
| 8.1 | ||||||
Equity-based compensation - products (b) |
0.2 | 0.2 | ||||||
Equity-based compensation - services (b) |
0.4 | 0.4 | ||||||
|
|
|
|
|||||
Total adjustments related to gross profit |
0.6 | 8.7 | ||||||
|
|
|
|
|||||
Non-GAAP gross profit |
$ | 72.9 | $ | 102.1 | ||||
|
|
|
|
|||||
Non-GAAP gross profit percentage |
34.8 | % | 42.2 | % | ||||
Non-GAAP gross profit percentage - products |
35.3 | % | 42.1 | % | ||||
Non-GAAP gross profit percentage - services |
32.9 | % | 42.4 | % | ||||
Operating Expenses Reconciliation (GAAP/non-GAAP) |
||||||||
GAAP operating expenses |
$ | 133.1 | $ | 112.7 | ||||
|
|
|
|
|||||
Equity-based compensation - research and development (b) |
0.6 | 1.3 | ||||||
Equity-based compensation - sales and marketing (b) |
0.5 | 0.6 | ||||||
Equity-based compensation - general and administrative (b) |
1.4 | 1.5 | ||||||
Intangible asset amortization (c) |
1.1 | 1.1 | ||||||
Restructuring and other charges (d) |
34.7 | 8.8 | ||||||
|
|
|
|
|||||
Total adjustments related to operating expenses |
38.3 | 13.3 | ||||||
|
|
|
|
|||||
Non-GAAP operating expenses |
$ | 94.8 | $ | 99.4 | ||||
|
|
|
|
|||||
Operating Loss Reconciliation (GAAP/non-GAAP) |
||||||||
GAAP operating loss |
$ | (60.8 | ) | $ | (19.3 | ) | ||
|
|
|
|
|||||
Total adjustments related to gross profit |
0.6 | 8.7 | ||||||
Total adjustments related to operating expenses |
38.3 | 13.3 | ||||||
|
|
|
|
|||||
Non-GAAP operating (loss) earnings |
$ | (21.9 | ) | $ | 2.7 | |||
|
|
|
|
|||||
Non-GAAP operating (loss) earnings as a percentage of revenue |
-10.5 | % | 1.1 | % | ||||
Net Loss Reconciliation (GAAP/non-GAAP) |
||||||||
GAAP net loss |
$ | (55.9 | ) | $ | (23.3 | ) | ||
|
|
|
|
|||||
Total adjustments related to gross profit |
0.6 | 8.7 | ||||||
Total adjustments related to operating expenses |
38.3 | 13.3 | ||||||
Gain on sale of long-term equity investment (f) |
| (3.0 | ) | |||||
Income tax effect (g) |
3.4 | 7.5 | ||||||
|
|
|
|
|||||
Non-GAAP net (loss) earnings |
$ | (13.6 | ) | $ | 3.2 | |||
|
|
|
|
|||||
Non-GAAP net (loss) earnings per share - basic |
$ | (0.04 | ) | $ | 0.01 | |||
|
|
|
|
|||||
Non-GAAP net (loss) earnings per share - diluted |
$ | (0.04 | ) | $ | 0.01 | |||
|
|
|
|
(1) | Reconciliation of non-GAAP Adjustments |
In addition to reporting financial results in accordance with U.S. generally accepted accounting principles (GAAP), Tellabs, Inc. has provided non-GAAP financial measures as additional information to evaluate our operating performance. These operating performance measures have not been prepared in accordance with GAAP and may be different from measures used by other companies. Whenever we use non-GAAP financial performance measures, we provide a reconciliation of non-GAAP financial performance measures to the most closely applicable GAAP financial performance measure. Management believes the non-GAAP financial performance measures are an important measure of operating performance and provides useful information to investors to better evaluate the operating performance of our business as it highlights trends in our business that may not otherwise be apparent when relying solely on GAAP measures and because it facilitates comparisons to historical results of operations. Management uses these non-GAAP financial performance measures as supplements to our GAAP results in order to provide a more complete understanding of the factors and trends affecting our business as well as for business planning and performance management. Management discloses this information publicly along with a reconciliation of the comparable GAAP amounts, to provide access to the detail and general nature of adjustments made to GAAP financial results. While some of these excluded items have been periodically reported in our statements of operations, including significant restructuring and other charges, their occurrence in future periods depends on future business and economic factors, among other evaluation criteria, and the occurrence of such events and factors may frequently be beyond the control of management.
27
Footnotes to reconciliation of non-GAAP adjustments:
(a) We excluded $8.1 million from cost of revenue - products in the fourth quarter of 2012 for a reserve for inventory and purchase commitments related to the decision to discontinue the 9200 product. At the time of the decision we had not sold any 9200 product for commercial installation and we excluded this charge because we believe that it is not related directly to the underlying performance of our ongoing business operations and we excluded this measure when we review financial results and for business planning and performance management. Although this event is reflected in our GAAP financials, this transaction may limit the comparability of our fundamental, ongoing operations with prior and future periods.
(b) The adjustments to cost of revenue, research and development, sales and marketing, and general and administrative expenses reflect equity-based compensation expense. We exclude these measures when reviewing financial results and for business planning and performance management. We believe that the exclusion of equity-based compensation expense allows for more accurate comparisons of operating results to our peer companies. In addition, we believe this non-cash GAAP measure is not indicative of our fundamental operating performance.
(c) We exclude amortization of intangible assets resulting from acquisitions to evaluate our continuing operational performance. The amortization of purchased intangible assets associated with acquisitions results in recording expense in our GAAP financial statements that were already expensed by the acquired company before the acquisition and for which we have not expended cash. We believe this non-cash GAAP measure is not indicative of our core operating performance. Accordingly, we analyze the performance of operations without regard to such expenses.
(d) We exclude restructuring and other charges because we believe that they are not related directly to the ongoing performance of our fundamental business operations. We exclude these measures when reviewing financial results and for business planning and performance management. Although these events are reflected in our GAAP financials, these transactions may limit the comparability of our fundamental operations with prior and future periods.
(e) In conjunction with the January 30, 2012 Restructuring Plan, we recorded $47.7 million of accelerated amortization for abandoned intangible assets in the first quarter of 2012 related to the mobile packet core technology. We believe this non-cash GAAP measure is not indicative of our core operating performance.
(f) The $3.0 million adjustment to other income (expense), net in the fourth quarter of 2012 reflects a gain on the sale of a long-term equity investment. We exclude gains on sales of long-term equity investments because we believe that they are not related directly to the underlying performance of our working capital assets.
(g) We calculate a separate tax expense and effective tax rate for GAAP and for non-GAAP purposes. For non-GAAP purposes, we use a 32% effective tax rate which represents the projected, long term effective tax rate on non-GAAP pretax income. Our non-GAAP tax rate assumes full use of loss and credit carryforwards without reduction for valuation allowances.
28
Off-Balance Sheet Arrangements
None.
Critical Accounting Policies
There were no material changes in our critical accounting policies during the quarter.
Outlook
We expect second-quarter 2013 revenue to be in a range from $200 million to $220 million. We expect non-GAAP gross margin to be 36%, plus or minus a point or two, depending on product mix. We expect second-quarter non-GAAP operating expense to be in the mid $80 millions.
Forward-Looking Statements
This Managements Discussion and Analysis and other sections of this Form 10-Q, including the statements under the caption Outlook, 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 managements expectations, estimates and assumptions, based on current and available information 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, predict, plan, possible, project, intend, likely, will, should, could, may, foreseeable, would 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: successful expansion into adjacent markets with new and existing products and platforms; product acceptance and profitability; our ability to compete with larger suppliers that can provide end to end solutions; customer concentration; the impact of customer and vendor consolidation; overall negative economic conditions generally and disruptions in credit and capital markets, including specific impacts of these conditions on the telecommunications industry; foreign economic conditions, including currency rate fluctuations; financial condition of telecommunications service providers, equipment vendors and contract manufacturers, including the impact of any bankruptcies; availability of components and critical manufacturing equipment and capacity; product demand and industry capacity; competitive products and pricing; competitive pressures from new entrants to the telecommunications industry; initiatives to improve profitability that may have financial consequences, including further restructuring charges and the ability to realize anticipated savings under such cost-reduction initiatives; exiting businesses and product areas; impairment charges and other cost cutting initiatives and related charges and costs; 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; the regulatory and trade environment; the impact of new or revised accounting rules or interpretations, including revenue recognition requirements; availability and terms of future acquisitions; divestitures and investments; 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 Companys filings with the SEC. For a further description of such risks and future factors, see Item 1A of our most recently filed Form 10-K. Our 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 are advised not to rely on these forward-looking statements when making investment decisions. These factors are not intended to be an all-encompassing list of risks and uncertainties that may affect the operations, performance, development and results of our business. 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. The foregoing discussion should be read in conjunction with the risk factors, financial statements and related notes and managements discussion and analysis included in our Annual Report on Form 10-K for the year ended December 28, 2012.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
As of March 29, 2013, there were no material changes to the market risks disclosure, Part II, Item 7A, Quantitative and Qualitative Disclosures About Market Risk, in our Annual Report on Form 10-K for the year ended December 28, 2012.
29
Item 4. Controls and Procedures
Our management, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of disclosure controls and procedures as of March 29, 2013. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective. There were no changes during the period covered by this Form 10-Q in internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, internal control over financial reporting.
The information set forth under Note 11, Contingencies Legal Proceedings, to the consolidated financial statements included in Part I, Item 1 of this report is incorporated herein by reference.
In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, Item 1A., Risk Factors, in our Annual Report on Form 10-K for the year ended December 28, 2012. The risk factors described in our Annual Report could materially adversely affect our business, financial condition or future results. The risks described in our Annual Report are not the only risks facing our company. Additional risks and uncertainties not currently known to us or that we currently consider immaterial also may materially adversely affect our business, financial condition and/or operating results. There have been no other material changes to the risk factors included in our Annual Report for the year ended December 28, 2012.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Repurchases of Common Stock:
Period of Purchases |
Total Number of Shares Purchased |
Average Purchase Price Per Share |
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs |
Remaining Dollar Value of Shares Available to be Purchased Under the Programs (In millions) 1 |
||||||||||||
12/29/12 through 2/1/13 |
9,573,739 | $ 2.26 | 9,573,739 | $ 202.9 | ||||||||||||
2/2/13 through 3/1/13 |
1,927,239 | $ 2.13 | 1,927,239 | $ 198.8 | ||||||||||||
3/2/13 through 3/29/13 |
| $ | | $ 198.8 | ||||||||||||
|
|
|
|
|||||||||||||
Total |
11,500,978 | $ 2.24 | 11,500,978 | |||||||||||||
|
|
|
|
1 | The amounts in this column represent the remaining amounts under the current $600 million program described below. The Rule 10b5-1 repurchase program described below does not have a repurchase amount limit; therefore, it is not included in the remaining value of shares. |
We repurchase outstanding common stock under two plans authorized by our Board of Directors. In addition, we purchase shares to cover withholding taxes on shares issued under employee stock plans.
We intend to use cash generated by employee stock option exercises (other than those of Company officers and board members) to repurchase stock through the use of a 10b5-1 plan. There were no purchases in the first quarter of 2013 under this plan.
We intend to continue to make repurchases of our outstanding common stock under a previously authorized $600 million repurchase plan. As of March 29, 2013, we have purchased 68.1 million shares of our common stock under the $600 million repurchase plan at a total cost of $401.2 million, leaving $198.8 million available to be purchased under this plan. We purchased 11.5 million shares for $25.7 million in the first quarter of 2013 under this plan.
We may change our repurchase activity and we provide no assurance that we will continue our repurchase activity in the future.
In addition, we purchased 0.6 million shares for $1.3 million in the first quarter of 2013 to cover minimum withholding taxes on shares issued under employee stock plans.
30
We record repurchased shares as Treasury stock.
(A) Exhibits
31.1 | CEO Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
31.2 | CFO Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
32.1 | CEO Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
32.2 | CFO Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
101.INS | XBRL Instance Document | |
101.SCH | XBRL Taxonomy Extension Schema Document | |
101.CAL | XBRL Taxonomy Calculation Linkbase Document | |
101.DEF | XBRL Taxonomy Extension Definition Linkbase Document | |
101.LAB | XBRL Taxonomy Extension Label Linkbase Document | |
101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document |
31
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/ Thomas P. Minichiello | ||
Thomas P. Minichiello | ||
Vice President of Finance and Chief Accounting Officer | ||
(Principal Accounting Officer and duly authorized officer) | ||
May 1, 2013 | ||
(Date) |
32
EXHIBIT 31.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Daniel P. Kelly, certify that:
1. | I have reviewed this quarterly report on Form 10-Q of Tellabs, Inc.; |
2. | Based on my knowledge, this 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 report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this 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 report; |
4. | The registrants other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
a) | designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared; |
b) | designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
c) | evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
d) | disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and |
5. | The registrants other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of registrants board of directors: |
a) | all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and |
b) | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting. |
Dated: May 1, 2013
/s/ Daniel P. Kelly |
Daniel P. Kelly |
Chief Executive Officer |
EXHIBIT 31.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Andrew B. Szafran, certify that:
1. | I have reviewed this quarterly report on Form 10-Q of Tellabs, Inc.; |
2. | Based on my knowledge, this 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 report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this 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 report; |
4. | The registrants other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
a) | designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared; |
b) | designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
c) | evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
d) | disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and |
5. | The registrants other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of registrants board of directors: |
a) | all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and |
b) | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting. |
Dated: May 1, 2013
/s/ Andrew B. Szafran |
Andrew B. Szafran |
Chief Financial Officer |
EXHIBIT 32.1
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 ended March 29, 2013, as filed with the Securities and Exchange Commission on the date hereof (the Report), I, Daniel P. Kelly, 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/ Daniel P. Kelly |
Daniel P. Kelly |
Chief Executive Officer |
Date: May 1, 2013 |
A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.
EXHIBIT 32.2
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 ended March 29, 2013, as filed with the Securities and Exchange Commission on the date hereof (the Report), I, Andrew B. Szafran, 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/ Andrew B. Szafran |
Andrew B. Szafran |
Chief Financial Officer |
Date: May 1, 2013 |
A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.
Derivative Financial Instruments - Additional Information (Detail) (USD $)
In Millions, unless otherwise specified |
Mar. 29, 2013
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Mar. 30, 2012
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Derivative [Line Items] | ||
Non-designated foreign currency forward contracts, number of currencies held | 13 | 12 |
Non-designated foreign currency forward contracts, gross notional equivalent amount | $ 102.6 | $ 167.7 |
Net unrealized gain on net investment hedges in Accumulated other comprehensive income | 12.8 | 14.5 |
Settled Contracts
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Derivative [Line Items] | ||
Net unrealized gain on net investment hedges in Accumulated other comprehensive income | 12.8 | 14.2 |
Unsettled Contracts
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Derivative [Line Items] | ||
Net unrealized gain on net investment hedges in Accumulated other comprehensive income | $ 0.3 |
Income Taxes - Additional Information (Detail) (USD $)
In Millions, unless otherwise specified |
3 Months Ended | |
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Mar. 29, 2013
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Mar. 30, 2012
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Income Taxes [Line Items] | ||
Income provision | $ (3.0) | $ 3.7 |
Federal statutory rate | 35.00% |
Schedule of Stock Option Activity (Detail) (USD $)
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3 Months Ended |
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Mar. 29, 2013
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Shares | |
Outstanding - beginning of year | 16,713,155 |
Exercised | (320) |
Forfeited/expired | (367,125) |
Outstanding - end of period | 16,345,710 |
Exercisable - end of period | 14,623,423 |
Shares vested or expected to vest | 16,239,399 |
Weighted Average Exercise Price | |
Outstanding - beginning of year | $ 7.50 |
Exercised | $ 0.16 |
Forfeited/expired | $ 7.34 |
Outstanding - end of period | $ 7.51 |
Exercisable - end of period | $ 7.82 |
Shares vested or expected to vest | $ 7.53 |
Weighted Average Remaining Contractual Term (in years) | |
Outstanding - end of period | 3 years 3 months 18 days |
Exercisable - end of period | 2 years 8 months 12 days |
Shares vested or expected to vest | 3 years 3 months 18 days |
Aggregate Intrinsic Value | |
Outstanding - end of period | |
Exercisable - end of period | |
Shares vested or expected to vest |
Consolidated Revenue by Segment (Detail) (USD $)
In Millions, unless otherwise specified |
3 Months Ended | |
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Mar. 29, 2013
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Mar. 30, 2012
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Segment Reporting Information [Line Items] | ||
Total revenue | $ 209.4 | $ 257.9 |
Optical Segment
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Segment Reporting Information [Line Items] | ||
Segment Revenue | 93.1 | 104.4 |
Data segment
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Segment Reporting Information [Line Items] | ||
Segment Revenue | 32.9 | 69.4 |
Access segment
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Segment Reporting Information [Line Items] | ||
Segment Revenue | 39.0 | 35.9 |
Services segment
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Segment Reporting Information [Line Items] | ||
Segment Revenue | $ 44.4 | $ 48.2 |
Product Warranties (Tables)
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3 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Mar. 29, 2013
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Schedule Of Standard Product Warranty Liabilities | Product warranty liabilities are as follows:
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Balance Sheet Classification of Product Warranty Liabilities |
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Schedule of Restricted Stock Unit Activity (Detail) (Restricted stock, USD $)
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3 Months Ended | |
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Mar. 29, 2013
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Mar. 30, 2012
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Restricted stock
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Shares | ||
Beginning of year | 3,899,865 | |
Granted | 202,278 | |
Vested | (1,011,590) | |
Forfeited | (162,642) | |
Ending of year | 2,927,911 | |
Weighted Average Grant Date Fair Value | ||
Non-vested - beginning of year | $ 4.68 | |
Granted | $ 2.09 | $ 3.99 |
Vested | $ 4.68 | |
Forfeited | $ 4.71 | |
Non-vested - end of period | $ 4.49 |
Effect of Derivative Instruments not Designated as Hedging Instruments on Consolidated Statements of Operations (Detail) (Foreign Currency Forward And Option Contracts, USD $)
In Millions, unless otherwise specified |
3 Months Ended | |||||
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Mar. 29, 2013
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Mar. 30, 2012
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Foreign Currency Forward And Option Contracts
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Derivatives, Fair Value [Line Items] | ||||||
(Loss) Gain Recognized in Other Income Expense, net | $ (7.7) | [1] | $ 1.4 | [1] | ||
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Gross Realized Gains and Losses Related to Fixed Income Investments (Detail) (USD $)
In Millions, unless otherwise specified |
3 Months Ended | |
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Mar. 29, 2013
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Mar. 30, 2012
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Schedule of Available-for-sale Securities [Line Items] | ||
Gross realized gains | $ 1.6 | $ 0.3 |
Gross realized losses | (0.4) | (0.3) |
Total | $ 1.2 |
Computation of Net Loss Per Share (Parenthetical) (Detail)
In Millions, unless otherwise specified |
3 Months Ended | |
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Mar. 29, 2013
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Mar. 30, 2012
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Earnings Per Share Disclosure [Line Items] | ||
Diluted weighted average shares outstanding in the absence of a loss | 360.9 | 367.9 |
Schedule of Assumptions Used to Calculate Weighted Average Fair Value of Stock Option Grants (Detail)
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3 Months Ended |
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Mar. 30, 2012
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Share-based Compensation Arrangement by Share-based Payment Award [Line Items] | |
Expected volatility | 43.30% |
Risk-free interest rate | 0.90% |
Expected term (in years) | 5 years 3 months 18 days |
Expected dividend yield | 2.00% |
Restructuring and Other Charges
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3 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Mar. 29, 2013
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Restructuring and Other Charges | 2. Restructuring and Other Charges On January 31, 2013, management initiated a restructuring plan that is designed to align expenses with revenue. Tellabs is discontinuing the development of the 9200 product and reducing operating expenses. The pretax charges for this plan will consist of approximately $16 million for workforce reductions of approximately 300 employees, $15 million for facility- and asset-related charges, and $4 million for software license and other contract cancellations. During the first quarter of 2013, we incurred restructuring expense for this plan of $32.8 million, which consists of $16.2 million for severance-related charges, $12.4 million for facility- and asset-related charges, and $4.2 million for other obligations. By segment, total charges to date under this plan are $0.9 million for Optical, $31.5 million for Data, and $0.4 million for Services. Estimated cash payments under this plan are expected to be $21.5 million of which $4.8 million has been paid through the first quarter of 2013. Other than the cash payments, actions under this plan are expected to be substantially completed by the end of the fourth quarter of 2013. On October 24, 2012, management initiated a restructuring plan that is designed to further align expenses with revenue and current market conditions. In order to reduce costs and operating expenses, this plan includes moving certain functions to lower cost geographies. The pretax charges will consist of approximately $9 million for severance-related charges that will affect approximately 200 employees, and $2 million for facility- and asset-related charges. Restructuring expense for this plan for the first quarter of 2013 was $0.1 million, which consists of a credit of $0.2 million for severance-related charges and an expense of $0.3 million for facility- and asset-related charges. Cumulative restructuring charges for this plan are $9.5 million, which consists of $9.0 million for severance-related charges and $0.5 million for facility- and asset-related charges. By segment, total charges to date under this plan are $2.2 million for Optical, $3.8 million for Data, $0.8 million for Access, and $2.7 million for Services. Estimated cash payments under this plan are expected to be $9.3 million, of which $2.7 million has been paid through the first quarter of 2013. Other than the cash payments, actions under this plan are expected to be substantially completed by the end of the fourth quarter of 2013. On January 30, 2012, management initiated a restructuring plan that aligns expenses with revenue. Tellabs stopped new development on the Tellabs® SMARTCORE 9100 series for mobile packet core and consolidated research and development into fewer locations. Restructuring expense for this plan for the first quarter of 2013 was $1.5 million, which consists of a credit of $0.1 million for workforce adjustments and an expense of $1.6 million for facility- and asset-related charges. Cumulative restructuring charges for this plan are $110.3 million, which consists of $23.1 million for severance-related charges, $38.3 million for facility- and asset-related charges, $47.7 million for the accelerated amortization of abandoned intangible assets, and $1.2 million for other obligations. By segment, total charges to date under this plan are $4.4 million for Optical, $102.2 million for Data, $1.5 million for Access, and $2.2 million for Services. Estimated cash payments under this plan are expected to be $32.9 million, of which $24.6 million has been paid through the first quarter of 2013. Other than the cash payments, actions under this plan were completed in the first quarter of 2013. Restructuring expense for previous restructuring plans in the first quarter of 2013 was $0.3 million, which consists of a credit of $0.1 million for severance-related adjustments and an expense of $0.4 million for facility- and asset-related charges. The balance for restructuring plans relates to net lease obligations that expire through 2017 and cash severance that we expect to pay through the first quarter of 2015.
The following table summarizes restructuring and other charges recorded for the plans mentioned above, as well as adjustments to reserves recorded for prior restructurings:
The following table summarizes restructuring and other charges activity by segment for the first quarter of 2013 and the status of the reserves at March 29, 2013:
1 Other activities include accelerated depreciation of property, plant and equipment to be disposed, the effects of currency translation as well as other changes that do not flow through restructuring expense. |