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 27, 1996
[ ] 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.
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(Exact name of registrant as specified in its charter)
Delaware 36-3831568
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(State of Incorporation) (I.R.S. Employer Identification No.)
4951 Indiana Avenue, Lisle, Illinois 60532
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(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code (630) 378-8800
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Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange
on which registered
None N/A
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Securities registered pursuant to Section 12 (g) of the Act:
Common shares, with $ .01 par value
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(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 27, 1996, 179,271,568 common shares of Tellabs, Inc.
were outstanding, including the effect of the two-for-one stock split
payable in the form of a stock dividend to be distributed on November
15, 1996 to stockholders of record as of October 31, 1996.
-1-
TELLABS, INC.
INDEX
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Comparative
Balance Sheets 3
Condensed Consolidated Comparative
Statements of Earnings 4
Condensed Consolidated Comparative
Statements of Cash Flow 5
Notes to Condensed Consolidated Comparative
Financial Statements 7
Item 2. Management's Discussion and Analysis 8
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 12
SIGNATURE 13
-2-
TELLABS, INC.
CONDENSED CONSOLIDATED COMPARATIVE BALANCE SHEETS
(Unaudited)
Sept. 27, Dec. 29
1996 1995
Assets --------- ---------
Current assets (In thousands)
Cash and cash equivalents $82,173 $92,485
Investments in marketable securities 60,115 69,751
Accounts receivable, less allowance 157,582 127,565
Inventories
Raw materials 39,897 31,302
Work in process 14,288 11,694
Finished goods 30,715 24,719
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84,900 67,715
Other current assets 9,851 8,854
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Total Current Assets 394,621 366,370
Property, plant, and equipment 248,885 201,441
Less accumulated depreciation 98,680 84,419
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150,205 117,022
Goodwill 63,769 44,958
Intangibles and other assets 41,045 23,701
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$649,640 $552,051
========= =========
Liabilities
Current Liabilities
Notes payable $9,996 $ -
Accounts payable 39,941 30,097
Accrued liabilities 54,887 42,183
Income taxes 17,594 26,284
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Total Current Liabilities 122,418 98,564
Long-term debt 2,850 2,850
Other long-term liabilities 10,652 6,179
Deferred income taxes 8,653 11,225
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 179,271,568
shares issued and outstanding at September 27, 1996
and 177,596,744 at December 29, 1995 1,793 888
Additional paid-in capital 88,640 72,385
Cumulative foreign currency translation adjustment 5,619 7,842
Unrealized net holding (losses) gains on
available-for-sale securities (724) 48
Retained earnings 409,739 352,070
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Total Stockholders' Equity 505,067 433,233
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$649,640 $552,051
========= =========
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. 27, Sept. 29, Sept. 27, Sept. 29,
1996 1995 1996 1995
--------- --------- --------- ---------
(In thousands, except per share data)
Net sales $234,340 $151,754 $596,069 $453,905
Cost of sales 94,811 67,339 246,451 199,265
--------- --------- --------- ---------
Gross Profit 139,529 84,415 349,618 254,640
Marketing, general & admin expense 42,479 26,619 115,356 87,745
Research and development expense 28,137 20,251 74,629 59,275
Acquired in-process research
and development - - 74,658 -
Goodwill amortization 1,196 654 2,513 1,921
--------- --------- --------- ---------
Total Operating Expense 71,812 47,524 267,156 148,941
Operating Profit 67,717 36,891 82,462 105,699
Interest income 1,746 1,636 5,608 4,102
Interest expense (488) (28) (1,017) (96)
Other (expense) income, net (451) 150 (31) (550)
--------- --------- --------- ---------
Earnings before income taxes 68,524 38,649 87,022 109,155
Income taxes 22,407 11,208 28,456 31,655
--------- --------- --------- ---------
Net Earnings $46,117 $27,441 $58,566 $77,500
========= ========= ========= =========
Earnings per share $0.25 $0.15 $0.32 $0.42
========= ========= ========= =========
Average number of shares of
common stock and common stock
equivalents outstanding * 184,876 183,852 184,400 183,375
* Restated to give effect to the two-for-one stock split payable in the
form of a stock dividend.
The accompanying notes are an integral part of these statements.
-4-
TELLABS, INC.
CONDENSED CONSOLIDATED COMPARATIVE STATEMENTS OF CASH FLOW
(Unaudited)
For The Nine Months Ended
Sept. 27, Sept. 29,
1996 1995
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(In thousands)
Cash Flows from Operating Activities:
Net earnings $58,566 $77,500
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation and amortization 23,375 16,928
Provision for doubtful receivables 1,937 854
Deferred income taxes (20,004) 3,649
Acquired in-process research and development 74,658 ---
Gain on sale of long-term investment --- (929)
Net (increase) decrease in current assets,
net of effects from acquisitions:
Accounts receivable (32,423) (12,241)
Inventories (13,657) (14,907)
Other current assets (764) 402
Net increase (decrease) in current liabilities,
net of effects from acquisitions:
Accounts payable 9,273 (590)
Accrued liabilities 8,181 (3,497)
Income taxes (8,302) 8,007
Net increase in other assets (3,778) (4,712)
Net decrease in other liabilities (433) (2,994)
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Net Cash Provided by Operating Activities 96,629 67,470
Cash Flows from Investing Activities:
Acquisition of property, plant and equipment, net (45,060) (21,975)
Payments for purchases of marketable securities (72,929) (77,731)
Proceeds from sales of marketable securities 81,792 31,575
Payments for acquisitions, net of cash acquired (91,732) ---
Origination of loan receivable (5,822) ---
Payments for purchases of long-term investment --- (1,215)
Proceeds from sale of long-term investment --- 3,429
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Net Cash Used by Investing Activities (133,751) (65,917)
Cash Flows from Financing Activities:
Proceeds from notes payable 40,000 ---
Payments of notes payable (30,000) ---
Common stock sold through stock-option plans 16,263 13,581
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Net Cash Provided by Financing Activities 26,263 13,581
Effect of exchange rate changes on cash 547 3,452
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Net (decrease) increase in cash and cash equivalents (10,312) 18,586
Beginning of period cash and cash equivalents 92,485 51,460
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End of period cash and cash equivalents $82,173 $70,046
========= =========
-5-
TELLABS, INC.
CONDENSED CONSOLIDATED COMPARATIVE STATEMENTS OF CASH FLOW (continued)
(Unaudited - In thousands)
For The Nine Months Ended
Sept. 27, Sept. 29,
1996 1995
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Supplemental Disclosures:
Interest paid $1,004 $82
Income taxes paid $46,540 $12,186
Supplemental Schedule of Non-Cash Investing and Financing Activities:
In acquiring all of the outstanding shares of Steinbrecher Corporation
and TRANSYS Network's SONET product line, the Company paid direct costs
totaling $94,261,000. In conjunction with the acquisitions, liabilities
were assumed as follows:
(in thousands)
Fair value of assets acquired $104,944
Cost in excess of fair value 22,977
Direct costs paid (94,261)
---------
Liabilities assumed $33,660
=========
The accompanying notes are an integral part of these statements.
-6-
TELLABS, INC.
NOTES TO CONDENSED CONSOLIDATED COMPARATIVE FINANCIAL STATEMENTS
1. Financial Information:
The unaudited financial information reflects all adjustments (consisting
only of normal recurring accruals) which are, in the opinion of
management, necessary for a fair presentation of the statements
contained herein. Certain reclassifications have been made in the 1995
financial statements to conform to the 1996 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 29, 1995.
3. Subsequent Event - Stock Split:
On October 24, 1996, the Board of Directors declared a two-for-one stock
split of the Company's common stock, payable in the form of a 100
percent stock dividend. This dividend will be distributed on
November 15, 1996, to stockholders of record as of October 31, 1996.
All references to the number of common shares and per share amounts have
been retroactively restated to give effect to the stock dividend.
-7-
MANAGEMENT'S DISCUSSION AND ANALYSIS
LIQUIDITY AND CAPITAL RESOURCES
During the first nine months of 1996, the Company's cash, cash
equivalents and marketable securities portfolio decreased by $19,948,000
to $142,288,000. This decrease was primarily the net result of the
Company's earnings of $58,566,000 being offset by the use of cash and
cash equivalents to fund the Company's second quarter acquisitions of
Steinbrecher Corporation (Tellabs Wireless) and, through the Tellabs
Transport Group (Tellabs TG), TRANSYS Network's SONET product line.
Operating activities provided the Company with $96,629,000 in cash as a
result of the net earnings of $58,566,000, along with non-cash items of
depreciation and amortization and the one-time charge for acquired
in-process research and development. Accounts receivable increased
$30,017,000 from the year-end balance primarily due to third quarter
sales which were higher than fourth quarter 1995 sales. Inventories
increased $17,185,000 to a third quarter balance of $84,900,000
representing the inventories necessary to support fourth quarter
domestic and international sales and those acquired in the Tellabs
Wireless acquisition.
Goodwill increased $18,811,000 due to the Tellabs TG and Tellabs
Wireless acquisitions. Intangible assets increased $17,344,000 due
primarily to the developed research and development acquired in the
Tellabs Wireless acquisition. Both the goodwill and intangible assets
acquired in these acquisitions are being amortized over 10 years.
Accrued liabilities increased from the year-end balance by $12,704,000,
primarily due to liabilities assumed as part of the acquisitions. Other
long-term liabilities increased by $4,473,000 since year end, primarily
due to deferred compensation plan deferrals and the capital lease
obligations of Tellabs Wireless.
The Company decreased its investment in marketable securities by
$9,636,000 as cash balances were utilized to pay down the short term
debt used to fund the second quarter acquisitions. The Company
invested approximately $45,000,000 in property, plant and equipment
during the first nine months of the year (exclusive of acquisitions).
This investment was primarily to increase manufacturing capacity and
expand research and development efforts worldwide. The Company
currently expects total capital expenditures for 1996 to approximate
$60,000,000. Fourth quarter 1996 expenditures will be used primarily
for the 308,000 square foot addition to the Bolingbrook, Illinois
facility, which is expected to be completed in mid-1997, along with
additions in Finland.
The Company utilized $40,000,000 of bank debt to finance the
acquisition of Tellabs Wireless. By the end of the third quarter of
1996, $30,000,000 of this loan was repaid. The remaining $10,000,000
balance has been repaid during October. Finally, additional cash of
$16,263,000 was provided to the Company through the exercise of stock
options under the Company's stock-option plans.
Net working capital at September 27, 1996 was $272,203,000, compared
with working capital of $267,806,000 at December 29, 1995. The
Company's current ratio at the end of the third quarter was 3.2 to 1.
Management believes that this level of working capital will be
-8-
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 1996 were $234,340,000, up 54.4 percent
from third quarter sales of $151,754,000 in 1995. Domestic sales
increased 62.6 percent due to a 101.1 percent increase in TITAN (a
registered trademark of Tellabs Operations, Inc.) 5500 digital
cross-connect systems offset by expected decreases in voice frequency
and CROSSNET (a registered trademark of Tellabs Operations, Inc.)
products. International sales increased 46.1 percent due primarily to
a 106.1 percent increase in Martis DXX (a trademark of Martis Oy)
integrated access and transport system sales offset by expected
decreases in echo, t-coder and CROSSNET products.
Net earnings for the third quarter of 1996 were a record $46,117,000,
up 68.1 percent from $27,441,000 a year earlier. Earnings per share for
the current quarter were 25 cents compared with 15 cents for the third
quarter of 1995. Earnings per share amounts have been restated to
give effect to the two-for-one stock split effective November 15,
1996. The increase in earnings for the third quarter of 1996 was
primarily the result of the significant sales growth during the quarter.
The gross profit margin for the third quarter of 1996 improved to 59.5
percent from 55.6 percent for the same time period in 1995. This
improvement reflects the sales of higher-margin products and also the
continuation of highly productive and efficient manufacturing
operations.
Operating expenses of $71,812,000 for the third quarter of 1996
increased 51.1 percent over operating expenses of $47,524,000 for the
third quarter of 1995. The increase in operating expenses is reflective
of the Company's growth. During the third quarter of 1996, new items
such as the expenses of Tellabs Wireless, Tellabs TG and the enterprise
wide business system conversion were included in operating
expenses. Headcount and related expenses grew to support and service
international and domestic products while additional expenses were
incurred related to employee compensation programs. Total operating
expenses for the third quarter of 1996 were 30.6 percent of sales
compared to 31.3 percent for the same period in 1995.
Interest income contributed $1,746,000 to pre-tax income in the third
quarter of 1996, up 6.7 percent from $1,636,000 in the third quarter
of 1995. This increase was due to an increase in average cash
balances, offset by lower investment yields. Interest expense was
$488,000 for the third quarter of 1996 compared to $28,000 for the third
quarter of 1995. The increase in interest expense for the quarter was
primarily due to the interest expense resulting from the short term
borrowings used for the Tellabs Wireless acquisition.
Other expense of $451,000 for the third quarter of 1996 was primarily
related to foreign exchange losses which were the result of the weakened
U.S. dollar against the Finnish markka and Irish punt, as well as the
strength of the Finnish markka versus other European currencies. Other
-9-
income of $150,000 for the third quarter of 1995 was primarily
the result of foreign exchange gains which 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 effective tax rate was approximately 32.7 percent for the third
quarter of 1996 and 29 percent for the third quarter of 1995. The
increase in the effective tax rate for 1996 is primarily due to the
increase in domestic taxable income and the decreasing effect of the
research and development tax credit as a percentage of the total. The
1996 effective tax rate reflects adjustments from the Federal statutory
rate primarily attributable to foreign tax rate benefits.
Sales for the first nine months of 1996 were $596,069,000, an increase
of 31.3 percent from sales of $453,905,000 for the same period in
1995. Domestic sales increased 44.4 percent due primarily to TITAN 5500
system sales. International sales increased 12.7 percent due to a 44.2
percent increase in Martis DXX sales offset by expected decreases in the
sales of echo canceller and CROSSNET products.
Net earnings for the first nine months of 1996 were $58,566,000
compared to $77,500,000 in 1995. Earnings per share were 32 cents
for the first nine months of the year compared to 42 cents for
the same time period in 1995. Earnings per share amounts have been
restated to give effect to the two-for-one stock split effective
November 15, 1996. The decrease in earnings for the first nine months
of 1996 was primarily the result of the one-time, net of tax charge of
$54,100,000 for acquired in-process research and development relating
to the Tellabs Wireless acquisition.
The gross profit margin for the first nine months of 1996 improved to
58.7 percent from 56.1 percent for the same time period in 1995. This
improvement reflects both the sales of higher-margin products and the
continuation of highly productive and efficient manufacturing
operations. The gross profit margin for all of 1996 is expected to be
approximately 59 percent.
Excluding the one-time charge to earnings for the acquired in-process
research and development, operating expenses for the first nine months
of 1996 were $192,498,000, a 29.2 percent increase from the same period
in 1995. The increase in operating expenses is reflective of the
Company's growth. During the first nine months of 1996, new items such
as the expenses of Tellabs Wireless, Tellabs TG and the enterprise wide,
business system conversion were included in operating expenses.
Headcount and related expenses grew to support and service
international and domestic products while additional expenses were
incurred related to employee compensation programs. Total operating
expenses, as a percent of sales, decreased from 32.8 percent during the
first nine months of 1995 to 32.3 percent for the same period in 1996
exclusive of the one-time charge. Operating expenses for all of 1996
are expected to approximate 31 percent of sales, exclusive of the
one-time charge.
Interest income contributed $5,608,000 to pretax income during the
first nine months of 1996, an increase of 36.7 percent from $4,102,000
in 1995. This increase was due to higher average cash balances
throughout the year, as well as a shift in investment options from
federally tax free municipal bonds to fully taxable investments.
-10-
Interest expense was $1,017,000 during the first nine months of 1996
compared to $96,000 during the same period in 1995. The 1996 interest
expense was related to the bank debt that was used to finance the
Tellabs Wireless acquisition.
Other expense of $31,000 for the first nine months of 1996 was primarily
the result of foreign exchange losses of $252,000, resulting from the
weakened U.S. dollar against the Finnish markka and the Irish punt,
offset by other income of $221,000. Other expense for the first nine
months of 1995 was $550,000. This resulted from foreign exchange losses
of $713,000, also resulting from the weakened U.S. dollar against the
Finnish markka and the Irish punt, being partially offset by other
income of $163,000.
The effective tax rate was approximately 32.7 percent for the first
nine months of 1996 compared to 29 percent for the same period in 1995.
The increase in the effective tax rate for 1996 is primarily due to the
increase in domestic taxable income, the tax effects of the in-process
research and development one-time charge taken in conjunction with the
Tellabs Wireless acquisition and the decreasing effect of the research
and development tax credit as a percentage of the total. The 1996
effective tax rate reflects adjustments from the Federal statutory
rate primarily attributable to foreign tax rate benefits.
Except for historical information, the matters discussed or incorporated
by reference in this Quarterly Report on Form 10-Q are forward-looking
statements that involve risks and uncertainties including, but not
limited to, economic conditions, product demand and industry capacity,
competitive products and pricing, manufacturing efficiencies, research
and new product development, protection of intellectual property,
patents and technology, ability to attract and retain highly qualified
personnel, availability of components and critical manufacturing
equipment, facility construction and startups, the regulatory and trade
environment, and other factors indicated from time to time in the
Company's filings with the Securities and Exchange Commission.
-11-
PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K
(A) Exhibits:
Exhibit 27 - Financial Data Schedule.
(B) Reports on Form 8-K:
The Registrant filed a report on Form 8-K on August 22,
1996, prior to the filing of this quarterly report of
Form 10-Q, with respect to the change in the registrant's
certifying accountant.
The Registrant filed a report on Form 8-K on October 31,
1996, prior to the filing of this quarterly report of
Form 10-Q, with respect to declaration of a two-for-one
stock split payable in the form of a 100 percent dividend
on November 15, 1996, to stockholders of record on
October 31, 1996.
-12-
TELLABS, INC.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TELLABS, INC.
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(Registrant)
s\ J. Peter Johnson
--------------------
J. Peter Johnson
Vice President/Controller
& Chief Accounting Officer
November 1, 1996
- -----------------
(Date)
-13-
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