UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 29, 1995
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 0-9692
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TELLABS, INC.
---------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 36-3831568
--------------------------- --------------------
(State of Incorporation) (I.R.S. Employer Identification No.)
4951 Indiana Avenue, Lisle, Illinois 60532
---------------------------------------- ----------
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code (708) 969-8800
----------------
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange
on which registered
None N/A
--------------------------- ---------
Securities registered pursuant to Section 12 (g) of the Act:
Common shares, with $ .01 par value
-----------------------------------
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements
for the past 90 days.
YES [X] NO[ ]
On September 29, 1995, 88,547,802 common shares of Tellabs, Inc. were
outstanding.
-1-
TELLABS, INC.
INDEX
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Comparative
Balance Sheets 3
Condensed Consolidated Comparative
Statements of Earnings 4
Condensed Consolidated Comparative
Statements of Cash Flow 5
Notes to Condensed Consolidated Comparative
Financial Statements 6
Item 2. Management's Discussion and Analysis 7
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 11
Item 6. Exhibits and Reports on Form 8-K 11
SIGNATURE 12
-2-
TELLABS, INC.
CONDENSED CONSOLIDATED COMPARATIVE BALANCE SHEETS
(Unaudited)
Sept. 29, Dec. 30
1995 1994
Assets --------- ---------
Current assets (In thousands)
Cash and cash equivalents $70,046 $51,460
Investments in marketable securities -
available for sale 69,807 23,209
Accounts receivable, less allowance 98,814 84,397
Inventories
Raw materials 35,339 20,898
Work in process 12,894 12,396
Finished goods 20,357 18,587
--------- ---------
68,590 51,881
Other current assets 9,714 9,609
--------- ---------
Total Current Assets 316,971 220,556
Property, plant, and equipment 190,333 166,931
Less accumulated depreciation 80,095 69,300
--------- ---------
110,238 97,631
Goodwill 46,802 44,252
Other assets 25,344 27,628
--------- ---------
$499,355 $390,067
Liabilities ========= =========
Current Liabilities
Accounts payable $22,487 $22,606
Accrued liabilities 36,067 38,816
Income taxes 31,132 20,817
--------- ---------
Total Current Liabilities 89,686 82,239
Long-term debt 2,850 2,850
Other long-term liabilities 7,521 10,416
Deferred income taxes 5,672 1,772
Stockholders' Equity
Preferred stock, with $.01 par value-
5,000,000 shares authorized, no shares issued - -
Common stock, with $.01 par value -
200,000,000 shares authorized 88,547,802
shares issued and outstanding at September 29, 1995
and 87,288,692 at December 30, 1994 885 436
Additional paid-in capital 67,724 54,150
Cumulative foreign currency translation adjustment 11,415 2,102
Unrealized net holding losses on
available-for-sale securities (362) (803)
Retained earnings 313,964 236,905
--------- ---------
Total Stockholders' Equity 393,626 292,790
--------- ---------
$499,355 $390,067
========= =========
The accompanying notes are an integral part of these statements.
-3-
TELLABS, INC.
CONDENSED CONSOLIDATED COMPARATIVE STATEMENTS OF EARNINGS
(Unaudited)
Three Months Ended Nine Months Ended
Sept. 29, Sept. 30, Sept. 29, Sept. 30,
1995 1994 1995 1994
--------- --------- --------- ---------
(In thousands, except per share data)
Net sales $151,754 $123,015 $453,905 $345,582
Cost of sales 67,339 56,350 199,265 158,874
--------- --------- --------- ---------
Gross Profit 84,415 66,665 254,640 186,708
Marketing, general & admin expense 26,619 25,210 87,745 73,211
Research and development expense 20,251 16,293 59,275 48,184
Goodwill amortization 654 598 1,921 1,792
--------- --------- --------- ---------
Total Operating Expense 47,524 42,101 148,941 123,187
Operating Profit 36,891 24,564 105,699 63,521
Interest income (1,636) (898) (4,102) (2,413)
Interest expense 28 399 96 1,634
Foreign exchange (gain) loss, net (104) 302 713 817
Other (income) expense, net (46) 304 (163) 896
--------- --------- --------- ---------
Earnings before income taxes 38,649 24,457 109,155 62,587
Income taxes 11,208 6,359 31,655 16,273
--------- --------- --------- ---------
Net Earnings $27,441 $18,098 $77,500 $46,314
========= ========= ========= =========
Earnings per share * $0.30 $0.20 $0.85 $0.51
========= ========= ========= =========
Average number of shares of
common stock and common stock
equivalents outstanding * 91,926 90,947 91,688 90,437
* 1994 share amounts are restated to give effect to the two-for-one
stock split effective May 19, 1995.
-4-
TELLABS, INC.
CONDENSED CONSOLIDATED COMPARATIVE STATEMENTS OF CASH FLOW
(Unaudited)
For The Nine Months Ended
Sept. 29, Sept. 30,
1995 1994
--------- ---------
(In thousands)
Cash Flows from Operating Activities:
Net earnings $77,500 $46,314
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation and amortization 16,928 14,018
Provision for doubtful receivables 854 296
Deferred income taxes 3,649 423
Gain on sale of long-term investment (929) ---
Net (increase) decrease in current assets:
Accounts receivable (12,241) (1,989)
Inventories (14,907) (1,316)
Other current assets 402 (128)
Net increase (decrease) in current liabilities:
Accounts payable (590) (704)
Accrued liabilities (3,497) 6,127
Income taxes 8,007 (2,388)
Net increase in other assets (4,712) (3,638)
Net (decrease) increase in other liabilities (2,994) 8,989
--------- ---------
Net Cash Provided by Operating Activities 67,470 66,004
Cash Flows from Investing Activities:
Acquisition of property,plant and equipment,net (21,975) (14,384)
Payments for purchases of marketable securities (77,731) (10,618)
Proceeds from sales of marketable securities 31,575 4,749
Payments for purchases of long-term investment (1,215) (2,000)
Proceeds from sale of long-term investment 3,429 ---
--------- ---------
Net Cash Used by Investing Activities (65,917) (22,253)
Cash Flows from Financing Activities:
Payments of notes payable --- (45,000)
Common stock sold through stock-option plans 13,581 6,102
--------- ---------
Net Cash Provided (Used) by Financing Activities 13,581 (38,898)
Effect of exchange rate changes on cash 3,452 3,507
--------- ---------
Net increase in cash and cash equivalents 18,586 8,360
Beginning of period cash and cash equivalents 51,460 29,589
--------- ---------
End of period cash and cash equivalents $70,046 $37,949
========= =========
Supplemental Disclosures:
Interest paid $82 $1,657
Income taxes paid $12,186 $7,503
The accompanying notes are an integral part of these statements.
-5-
TELLABS, INC.
NOTES TO CONDENSED CONSOLIDATED COMPARATIVE FINANCIAL STATEMENTS
1. Financial Information:
The unaudited financial information reflects all adjustments (consisting
only of normal recurring accruals) which are, in the opinion of
management, necessary for a fair presentation of the statements
contained herein. Certain reclassifications have been made in the 1994
financial statements to conform to the 1995 presentation.
2. Basis of Presentation:
These financial statements are presented in accordance with the
requirements of Form 10-Q and consequently may not include all
disclosures normally required by generally accepted accounting
principles or those normally reflected in the Company's Annual Report on
Form 10-K. Accordingly, the financial statements and notes herein
should be read in conjunction with the financial statements and related
notes in the Company's Form 10-K for the year ended December 30, 1994.
-6-
MANAGEMENT'S DISCUSSION AND ANALYSIS
LIQUIDITY AND CAPITAL RESOURCES
During the first nine months of 1995, the Company's cash, cash
equivalents and marketable securities portfolio increased $65,184,000 to
a new high of $139,853,000. The Company's record earnings of
$77,500,000 were the primary contributor.
Operating activities provided cash through the aforementioned net
earnings. This was partially offset by increases in inventories and
accounts receivable, and reductions in accrued liabilities. Total
inventories increased $16,709,000 during the first nine months of 1995.
This increase supported the growth in sales of both the Martis DXX (a
trademark of Martis Oy) multiplexer and the Company's SONET-based TITAN
(a registered trademark of Tellabs Operations, Inc.) 5500 digital
cross-connect system, as well as, anticipated future sales of the
CABLESPAN (a trademark of Tellabs Operations, Inc.) products recently
developed through a joint venture arrangement with Advanced Fibre
Communications (AFC). Accounts receivable increased $14,417,000 due to
the growth of the business since year-end. Accrued liabilities
decreased $2,749,000 from the December 30, 1994 balance due to payments
made during the first quarter for year-end obligations related to
employee compensation programs.
The Company invested the cash provided by operating activities in higher
yielding marketable securities and in property, plant, and equipment.
Net investments in property, plant, and equipment totalled approximately
$21,975,000. Additions were made primarily at the Company's Finnish
subsidiary in order to increase manufacturing capacity. The Company
currently expects total capital expenditures in 1995 to approximate
$32,000,000. The majority of the remaining 1995 expenditures made in
will be to increase manufacturing capacity both domestically and
internationally. Additionally, cash of $3,429,000 was provided by the
sale of stock previously held as a long-term investment.
Net working capital at September 29, 1995 was $227,285,000, compared
with working capital of $138,317,000 at December 30, 1994. The
Company's current ratio at the end of the third quarter was 3.5 to 1.
This increase in working capital was primarily due to operating
activities. Management believes that this level of working capital will
be adequate for the Company's liquidity needs related to normal
operations both currently and in the foreseeable future. Sufficient
resources exist to support the Company's growth either through currently
available cash, through cash generated from future operations, or
through additional short-term or long-term financing.
RESULTS OF OPERATIONS
Sales for the third quarter of 1995 were $151,754,000, up 23 percent
from the previous third quarter sales of $123,015,000 in 1994. The
growth in the domestic sales channel was highlighted by a 54.9 percent
increase in the TITAN digital cross-connect systems. Sales also grew
internationally, led by a 58.5 percent increase in the Martis DXX
multiplexer.
-7-
Net earnings for the third quarter of 1995 were a record $27,441,000, up
51.6 percent from $18,098,000 a year earlier. Earnings per share for
the current quarter were 30 cents compared with 20 cents for the third
quarter of 1994. (The third quarter of 1994 per share amounts are
restated to reflect the two-for-one stock split effective May 19, 1995.)
The increase in earnings for the third quarter of 1995 was primarily
based on the growth in sales and an increase in the gross margin percent
from 54.2 percent in 1994 to 55.6 percent in 1995. This improvement in
the gross margin percent was realized through continued efficiencies in
manufacturing operations and in product mix, as volume increased.
Operating expenses of $47,524,000 for the third quarter of 1995
increased 12.9 percent over operating expenses of $42,101,000 for the
third quarter of 1994. Increased headcount and the related expenses
necessary to support and service domestic and international products,
particularly the Martis DXX system, were the primary reasons for this
increase in operating expenses. Total operating expenses for the third
quarter of 1995 were 31.3 percent of sales compared to 34.2 percent for
the same period in 1994.
Interest income contributed $1,636,000 to pre-tax income in the third
quarter of 1995, up 82.2 percent from $898,000 in the third quarter of
1994. This increase was due to a significant increase in average cash
balances.
Interest expense was $28,000 for the third quarter of 1995 compared to
$399,000 for the third quarter of 1994. The 1994 interest expense was
related to the bank debt used to finance the acquisition of Martis Oy.
The debt was entirely repaid by the fourth quarter of 1994.
Foreign exchange gains of $104,000 incurred during the third quarter of
1995 were the result of the strengthened Canadian dollar against the
U.S. dollar and the overall strength of the U.S. dollar against the
Finnish markka. The foreign exchange losses of $302,000 for the third
quarter of 1994 were the result of the weakened U.S. dollar versus the
Irish punt and the strength of the Finnish markka against all other
Scandinavian currencies and the German deutschemark.
The effective tax rate was approximately 29 percent for the third
quarter of 1995 and 26 percent for the third quarter of 1994. The
increase in the effective tax rate for 1995 is primarily due to the
increase in the domestic taxable income and to the decreasing effect of
the research and development tax credit as a percentage of the total.
The research and development tax credit expired effective June 30, 1995.
The 1995 effective tax rate reflects adjustments from the Federal
statutory rate primarily attributable to foreign tax rate benefits.
Sales for the first nine months of 1995 were $453,905,000, an increase
of 31.3 percent from sales of $345,582,000 for the same period in 1994.
All major product areas experienced growth for the first nine months of
1995 versus the same period in 1994. The growth in sales was led by the
international sales channel as the Martis DXX system sales increased 104
percent over the same period last year. The domestic sales increase
of 20.8 percent was primarily generated by the Company's SONET-based
TITAN 5500 digital cross-connect system.
Net earnings for the first nine months of 1995 were $77,500,000 compared
to $46,314,000 in 1994. Primary and fully diluted earnings per share
-8-
were 85 cents for the first nine months of the year compared to 51 cents
for the same time period in 1994. (The 1994 per share amounts are
restated to reflect the two-for-one stock split effective May 19, 1995.)
The growth in earnings for the first nine months of 1995 was due to the
increase in revenues and an increase in gross margin to 56.1 percent
from 54.0 percent for the same time period in 1994. The increase in
gross margin was realized through continued efficiencies in
manufacturing operations and in product mix as volume increased. The
gross margin percent for the total year 1995 is expected to remain at
approximately 56 percent.
Operating expenses for the first nine months of 1995 were $148,941,000,
a 20.9 percent increase over the same period in 1994. Increased
headcount and the related expenses necessary to support and service
domestic and international products, particularly the Martis DXX system,
were the primary reasons for this increase in operating expenses. Total
operating expenses, as a percent of sales, decreased from 35.6 percent
during the first nine months of 1994 to 32.8 percent for the same period
in 1995. This 2.8 percent decrease resulted from a greater percentage
increase in sales as compared to operating expenses. Operating
expenses for all of 1995 are expected to approximate 33 percent of
sales.
Interest income contributed $4,102,000 to pretax income during the first
nine months of 1995, an increase of 70 percent from $2,413,000 in 1994.
This increase was due to significantly higher average cash balances and
higher market interest rates in 1995.
The foreign exchange losses of $713,000 incurred during the first nine
months of 1995 were a result of the weakened U.S. dollar against the
Finnish markka and the Irish punt. The foreign exchange losses of
$817,000 that were reported during the first nine months of 1994
primarily resulted from the weakened U.S. dollar against the Irish punt,
the weakened Canadian dollar against the U.S. dollar, and the strength
of the Finnish markka against all Scandinavian currencies and the German
deutschemark.
Interest expense was $96,000 during the first nine months of 1995
compared to $1,634,000 during the same period in 1994. The 1994
interest expense was related to the bank debt used to finance the
acquisition of Martis Oy. The debt was entirely repaid by the fourth
quarter of 1994. Other non-operating income for 1995 was $163,000.
This resulted from a gain on the sale of a long-term investment being
partially offset by losses of a joint venture. Other non-operating
expense in 1994 of $896,000 was primarily due to capital losses on fixed
assets combined with joint venture losses.
The effective tax rate was approximately 29 percent for the first nine
months of 1995 compared to 26 percent for the same period in 1994. The
increase in the effective tax rate for 1995 is primarily due to the
increase in the domestic taxable income and to the decreasing effect of
the research and development tax credit as a percentage of the total.
The research and development tax credit expired effective June 30, 1995.
The 1995 effective tax rate reflects adjustments from the Federal
statutory rate primarily attributable to foreign tax rate benefits.
-9-
Ongoing Developments
One area of expanding interest for the Company is the local exchange
loop. As telecommunications service providers and cable system
operators seek to expand the services offered to their customers, the
local loop becomes an increasingly competitive portion of the
marketplace. Legislation directed toward expanding competition in the
local loop environment (The Communication Act of 1995) was recently
approved in both the U.S. Senate and House of Representatives and the
two bills will soon be reviewed by a joint committee to resolve
differences between the bills before forwarding the joint bill to the
Administration. Present indications are, however, that a veto of this
legislation is as likely as passage.
One of the products expected to address this local loop market is the
CABLESPAN system currently being developed by the Company in a joint
venture arrangement with AFC. The technology platform that forms the
basis for this product was provided to the venture by AFC. AFC is in
litigation with DSC Technologies Corporation and DSC Communications
Corporation (collectively, DSC) relating to the intellectual property
comprising that platform, as has previously been reported in trade
publications and by DSC. DSC is seeking, among other things, a permanent
injunction prohibiting AFC's sale or other use of the property. AFC has
denied DSC's allegations and has filed counterclaims. If AFC were to
lose its rights to the intellectual property, the Company's ability to
continue to promote its CABLESPAN system as currently configured could
be adversely affected. While there can be no assurance that AFC will
prevail in this litigation, it has represented to the Company that it
believes DSC's claims to be without merit. In October, 1995, the
Company was served with a complaint by DSC in litigation related to
DSC's claims against AFC (see Part II, Item I, "Legal Proceedings").
-10-
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
On October 13, 1995, Tellabs Operations, Inc., a
wholly-owned subsidiary of the Company, was served with
a complaint filed by DSC in The Circuit Court of Cook
County, Illinois, alleging misappropriation of DSC's trade
secrets. The complaint seeks a permanent injunction on the
use, disclosure or dissemination of DSC's trade secret
information, actual and exemplary damages, disgorgement of
any unjust enrichment, a constructive trust for the benefit
of DSC holding all profits generated by the alleged
misappropriation of DSC's trade secrets and costs in
connection with the complaint. Pursuant to the terms of the
joint venture agreement between the Company and AFC, AFC is
obligated to defend and indemnify the Company against any
and all damages and costs, including attorney's fees, arising
out of these claims. The Company has tendered the complaint
to AFC pursuant to the joint venture agreement. The Company
believes that it has meritorious defenses to the complaint
and intends to pursue them vigorously.
ITEM 6. Exhibits and Reports on Form 8-K
(A) Exhibits:
Exhibit 11 - Calculation of Per Share Earnings.
Exhibit 27 - Financial Data Schedule.
(B) Reports on Form 8-K:
There were no reports on Form 8-K filed during the
quarter ended September 29, 1995.
-11-
TELLABS, INC.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TELLABS, INC.
----------------
(Registrant)
s/ J. Peter Johnson
-------------------
J. Peter Johnson
Vice President/Controller
& Chief Accounting Officer
October 31, 1995
- ----------------- (Date)
-12-
EXHIBIT 11
TELLABS, INC.
COMPUTATION OF EARNINGS PER SHARE
(Unaudited)
(In thousands, except per share data)
Three Months Ended Nine Months Ended
Sept. 29, Sept. 30, Sept. 29, Sept. 30,
1995 1994 * 1995 1994 *
--------- --------- --------- ---------
PRIMARY EARNINGS PER SHARE
- ------------------------------------
Weighted average number of common
shares outstanding during the period 88,455 86,965 88,049 86,686
Net additional shares assuming
dilutive stock options exercised and
proceeds used to purchase treasury
shares at average fair market value 3,471 3,791 3,530 3,671
--------- --------- --------- ---------
Weighted average number of common
shares and common equivalent shares
outstanding 91,926 90,756 91,579 90,357
========= ========= ========= =========
Net earnings $27,441 $18,098 $77,500 $46,314
========= ========= ========= =========
Primary earnings per share $0.30 $0.20 $0.85 $0.51
========= ========= ========= =========
FULLY DILUTED EARNINGS PER SHARE
- ------------------------------------
Weighted average number of common
shares outstanding during the period 88,455 86,965 88,049 86,686
Net additional shares assuming
dilutive stock options exercised and
proceeds used to purchase treasury
shares at average fair market value 3,471 3,982 3,639 3,751
--------- --------- --------- ---------
Weighted average number of common
shares and common equivalent shares
outstanding 91,926 90,947 91,688 90,437
========= ========= ========= =========
Net earnings $27,441 $18,098 $77,500 $46,314
========= ========= ========= =========
Fully diluted earnings per share $0.30 $0.20 $0.85 $0.51
========= ========= ========= =========
* 1994 share amounts are restated to give effect to the two-for-one
stock split effective May 19, 1995.
-13-
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ENTIRETY BY REFERENCE TO SUCH 10Q.
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