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 June 28, 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 (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 June 28, 1996, 89,063,591 common shares of Tellabs, Inc. were
outstanding.
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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 1. Legal Proceedings 12
Item 4. Submission of Matters to a Vote of
Security Holders 12
Item 6. Exhibits and Reports on Form 8-K 12
SIGNATURE 13
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TELLABS, INC.
CONDENSED CONSOLIDATED COMPARATIVE BALANCE SHEETS
(Unaudited) June 28, Dec. 29
1996 1995
Assets --------- ---------
Current assets (In thousands)
Cash and cash equivalents $88,934 $92,485
Investments in marketable securities 53,268 69,751
Accounts receivable, less allowance 121,266 127,565
Inventories
Raw materials 33,699 31,302
Work in process 13,298 11,694
Finished goods 27,325 24,719
--------- ---------
74,322 67,715
Other current assets 10,249 8,854
--------- ---------
Total Current Assets 348,039 366,370
Property, plant, and equipment 229,822 201,441
Less accumulated depreciation 95,785 84,419
--------- ---------
134,037 117,022
Goodwill 64,035 44,958
Intangible and other assets 41,238 23,701
--------- ---------
$587,349 $552,051
Liabilities ========= =========
Current Liabilities
Notes payable $34,996 $ -
Accounts payable 29,295 30,097
Accrued liabilities 38,750 42,183
Income taxes 17,085 26,284
--------- ---------
Total Current Liabilities 120,126 98,564
Long-term debt 2,850 2,850
Other long-term liabilities 12,708 6,179
Deferred income taxes 8,285 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 89,063,591
shares issued and outstanding at June 28, 1996
and 88,798,372 at December 29, 1995 891 888
Additional paid-in capital 76,403 72,385
Cumulative foreign currency translation adjustment 2,511 7,842
Unrealized net holding (losses) gains
on available-for-sale securities (944) 48
Retained earnings 364,519 352,070
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Total Stockholders' Equity 443,380 433,233
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$587,349 $552,051
========= =========
The accompanying notes are an integral part of these statements.
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TELLABS, INC.
CONDENSED CONSOLIDATED COMPARATIVE STATEMENTS OF EARNINGS
(Unaudited)
Three Months Ended Six Months Ended
June 28, June 30, June 28, June 30,
1996 1995 1996 1995
--------- --------- --------- ---------
(In thousands, except per share data)
Net sales $189,473 $159,939 $361,729 $302,151
Cost of sales 77,158 68,983 151,640 131,926
--------- --------- --------- ---------
Gross Profit 112,315 90,956 210,089 170,225
Marketing, general & admin expense 39,264 33,456 72,877 61,126
Research and development expense 24,890 19,236 46,492 39,024
Acquired in-process research
and development 74,658 --- 74,658 ---
Goodwill amortization 706 602 1,317 1,267
--------- --------- --------- ---------
Total Operating Expense 139,518 53,294 195,344 101,417
Operating (Loss) Profit (27,203) 37,662 14,745 68,808
Interest income 1,887 1,340 3,862 2,466
Interest expense (501) (37) (529) (68)
Other (expense) income, net (152) (770) 420 (700)
--------- --------- --------- ---------
(Loss) Earnings before income taxes (25,969) 38,195 18,498 70,506
Income taxes (benefit) (7,291) 11,077 6,049 20,447
--------- --------- --------- ---------
Net (Loss) Earnings ($18,678) $27,118 $12,449 $50,059
========= ========= ========= =========
(Loss) Earnings per share ($0.20) $0.30 $0.14 $0.55
========= ========= ========= =========
Average number of shares of
common stock outstanding 92,142 91,835 92,081 91,568
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TELLABS, INC.
CONDENSED CONSOLIDATED COMPARATIVE STATEMENTS OF CASH FLOW
(Unaudited - In thousands)
For The Six Months Ended
June 28, June 30,
1996 1995
Cash Flows from Operating Activities: --------- ---------
Net earnings $12,449 $50,059
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation and amortization 14,445 11,017
Provision for doubtful receivables 955 985
Deferred income taxes (21,056) 2,719
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 3,913 (2,496)
Inventories (3,549) (12,011)
Other current assets (392) 398
Net increase (decrease) in current liabilities,
net of effects from acquisitions:
Accounts payable (1,248) (2,052)
Accrued liabilities (7,722) (3,239)
Income taxes (8,494) 3,055
Net increase in other assets (2,259) (4,469)
Net increase (decrease) in other liabilities 1,643 (3,661)
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Net Cash Provided by Operating Activities 63,343 39,376
Cash Flows from Investing Activities:
Acquisition of property, plant and equipment, net (23,797) (15,417)
Payments for purchases of marketable securities (54,247) (48,231)
Proceeds from sales of marketable securities 69,738 13,546
Payments for acquisitions, net of cash acquired (91,732) ---
Origination of loan receivable (5,822) ---
Payments for purchases of long-term investments --- (1,215)
Proceeds from sale of long-term investment --- 3,429
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Net Cash Used by Investing Activities (105,860) (47,888)
Cash Flows from Financing Activities:
Proceeds from notes payable 40,000 ---
Payments of notes payable (5,000) ---
Common stock sold through stock-option plans 4,020 12,362
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Net Cash Provided (Used) by Financing Activities 39,020 12,362
Effect of exchange rate changes on cash (54) 3,221
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Net increase in cash and cash equivalents (3,551) 7,071
Beginning of period cash and cash equivalents 92,485 51,460
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End of period cash and cash equivalents $88,934 $58,531
========= =========
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TELLABS, INC.
CONDENSED CONSOLIDATED COMPARATIVE STATEMENTS OF CASH FLOW (continued)
(Unaudited - In thousands)
For The Six Months Ended
June 28, June 30,
1996 1995
Supplemental Disclosures: --------- ---------
Interest paid $482 $52
Income taxes paid $34,790 $11,080
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.
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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.
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MANAGEMENT'S DISCUSSION AND ANALYSIS
LIQUIDITY AND CAPITAL RESOURCES
During the first half of 1996, the Company's cash, cash equivalents and
marketable securities portfolio decreased by $20,034,000 to
$142,202,000. The primary contributor to the decrease was the use of
cash and cash equivalents to fund two acquisitions made during the
second quarter of 1996. In April 1996, the Company acquired all of the
outstanding shares of Steinbrecher Corporation (Tellabs Wireless) for
approximately $77,000,000 in cash, of which $37,000,000 was cash on
hand, and the remaining $40,000,000 was newly acquired bank debt. In
June 1996, the Company through the Tellabs Transport Group (Tellabs TG)
acquired TRANSYS Network's SONET product line for approximately
$17,000,000 in cash.
Operating activities provided the Company with $63,343,000 in cash as a
result of the net earnings of $12,449,000, along with noncash items of
depreciation and amortization and the one-time charge for acquired
in-process research and development. Accounts receivable also provided
cash by decreasing $6,299,000 from the year-end balance primarily due to
strong sales at the end of the fourth quarter. Inventories increased
$6,607,000 to a second quarter balance of $74,322,000 representing the
inventories purchased in the Tellabs Wireless acquisition and also
inventories held internationally. Accrued liabilities decreased from
the year-end balance by $3,434,000, primarily due to payments made
during the first quarter for year-end obligations related to employee
compensation programs. Goodwill increased $19,077,000 due to the
Tellabs TG and Tellabs Wireless acquisitions. Intangible assets
increased $17,537,000 due primarily to the developed research and
development acquired in the Tellabs Wireless acquisition. Both the
goodwill and intangible assets acquired in these acquisitions will be
amortized over 10 years. Other long-term liabilities increased by
$6,530,000 since year end, primarily due to warranty and capital lease
obligations of Tellabs Wireless.
The Company decreased its investment in marketable securities by
$16,483,000 as cash balances were utilized to fund the second quarter
acquisitions. The Company invested approximately $24,000,000 in
property, plant and equipment during the first half of the year
(exclusive of the 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 $55,000,000. The remaining 1996
expenditures are expected to be for manufacturing capacity and research
and development equipment in Illinois, Texas and Finland.
The Company utilized $40,000,000 of bank debt to finance the
acquisition of Tellabs Wireless. During the second quarter $5,000,000
of this loan was paid and the remainder is expected to be paid during
the second half of the year. Finally, additional cash of $4,020,000 was
provided to the Company through the exercise of stock options under the
Company's stock-option plans.
Net working capital at June 28, 1996 was $227,913,000, compared with
working capital of $267,806,000 at December 29, 1995. The Company's
current ratio at the end of the second quarter was 2.9 to 1. The
decrease in working capital was primarily due to the use of cash and
-8-
cash equivalents and additional debt (as previously described) to
finance the Company's second quarter acquisitions. 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 financial 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 second quarter of 1996 were a record $189,473,000, up 18
percent from the previous second quarter record of $159,939,000 set in
1995. The growth in sales was primarily due to continued strong
domestic sales of TITAN (a registered trademark of Tellabs Operations,
Inc.) 5500 digital cross-connect systems, which increased 58 percent
over the same period last year. While international sales were slightly
higher than the same quarter last year, Martis DXX (a trademark of
Martis Oy) system sales increased 29 percent. Expected softness in the
echo control, CROSSNET (a registered trademark of Tellabs Operations, Inc.)
and voice frequency markets continued, as these products experienced
quarter-to-quarter decreases.
Earnings were down over the prior year's second quarter principally as a
result of a one-time research and development charge of $74,658,000
($54,100,000 net of tax) related to the acquisition of Tellabs
Wireless. The loss for the second quarter of 1996 was $18,678,000,
compared to earnings of $27,118,000 for the second quarter of 1995. The
loss per share for the current quarter was 20 cents compared with
earnings per share of 30 cents for the second quarter of 1995.
The gross profit margin for the second quarter of 1996 improved
significantly to a record level 59.3 percent versus 56.9 percent in the
second quarter of 1995. This improvement reflects the sales of
higher-margin products.
Excluding the one-time charge to earnings for the acquired in-process
research and development, operating expenses increased by 22 percent
over the second quarter of 1995. Contributing to the increase are the
expenses of Tellabs Wireless, which were included for the first time,
along with the expenses associated with the continued development of
products and marketing efforts both domestically and internationally.
Total operating expenses for the second quarter of 1996, net of the
one-time charge, were 34.2 percent of sales compared to 33.3 percent for
the same period in 1995.
Interest income contributed $1,887,000 to pretax income in the second
quarter of 1996, up 40.8 percent from $1,340,000 in the second quarter
of 1995. This increase was due to higher average cash balances,
offset by lower market interest rates.
Interest expense was $501,000 for the second quarter of 1996 compared
to $37,000 for the second quarter of 1995. The increase in 1996
interest expense was related to the bank debt used to finance the
Tellabs Wireless acquisition.
Other expense of $152,000 for the second quarter of 1996 was primarily
related to foreign exchange losses which were the result of the
-9-
weakness of the U.S. dollar against the Irish punt and Finnish markka.
The other expense of $770,000 in the second quarter of 1995 was
generated by foreign exchange losses of $431,000 and losses associated
with the joint venture between the Company and Advanced Fibre
Communications, Inc. (AFC).
The effective tax rate was approximately a benefit of 28.1 percent for
the second quarter of 1996 and 29 percent for the second quarter of
1995. The decrease in the effective tax rate for 1996 is primarily due
to the effects of the in-process research and development one-time
charge taken in conjunction with the Tellabs Wireless acquisition. The
1996 effective tax rate reflects adjustments from the Federal statutory
rate primarily attributable to foreign tax rate benefits.
Sales for the first six months of 1996 were $361,729,000, an increase of
19.7 percent from sales of $302,151,000 for the same period in 1995.
The domestic sales increase of 34 percent was primarily generated by a
61.8 percent increase in TITAN 5500 system sales with softer sales in
CROSSNET, echo and voice frequency, as expected. Although international
sales decreased in total by 2.5 percent from record sales for the first
half of 1995, Martis DXX system sales increased 19 percent.
Net earnings for the first six months of 1996 were $12,449,000 compared
to $50,059,000 in 1995. Primary and fully diluted earnings per share
were 14 cents for the first six months of the year compared to 55 cents
for the same time period in 1995. The decrease in earnings was
primarily the result of the one-time charge of $74,658,000 for
acquired in-process research and development relating to the Tellabs
Wireless acquisition.
The gross profit margin for the first six months of 1996 improved to
58.1 percent versus 56.4 percent for the first six months of 1995. This
improvement reflects both the sales of higher-margin products and the
continuation of highly productive and efficient manufacturing
operations.
Excluding the one-time charge to earnings for the acquired in-process
research and development, operating expenses for the first six months of
1996 were $120,686,000, an increase of 19 percent over the same period
in 1995. Contributing to the increase are the expenses of Tellabs
Wireless, along with continuing international and domestic development
and marketing efforts. Total operating expenses during the first six
months of 1996, net of the one-time charge, were 33.4 percent of sales
compared to 33.6 percent for the same period in 1995.
Interest income contributed $3,862,000 to pretax income during the
first six months of 1996, an increase of 56.6 percent from $2,466,000
in 1995. This increase was due to higher average cash balances, offset
by lower market interest rates in 1996.
Interest expense was $529,000 during the first six months of 1996
compared to $68,000 during the same period in 1995. The 1996 interest
expense was related to the bank debt used to finance the Tellabs
Wireless acquisition.
Other income of $420,000 for the first half of 1996 represents foreign
exchange gains of $236,000 that were a result of the strength of the
U.S. dollar versus the Finnish markka, and the weakness of the Finnish
-10-
markka versus other European currencies along with other investment
gains. The other expense for the first half of 1995 of $700,000
represented foreign exchange losses of $817,000 and joint venture losses
offset by a gain on the sale of a long-term investment.
The effective tax rate was approximately 32.7 percent for the first
six months of 1996 compared to 29 percent for the same period in 1995.
The increase in the effective tax rate for 1996 is due to the increase
in domestic taxable income, and to the tax effects of the in-process
research and development one-time charge taken in conjunction with the
Tellabs Wireless acquisition. The 1996 effective tax rate reflects
adjustments from the Federal statutory rate primarily attributable to
foreign tax rate benefits.
-11-
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
Pursuant to a Settlement Agreement and Mutual Release dated as of
June 24, 1996 ("Settlement Agreement") among DSC Technologies
Corporation and DSC Communications Corporation (collectively, "DSC"),
AFC and certain related parties, DSC dismissed with prejudice the
lawsuit (as previously reported in the Company's Annual Report on Form
10-K for the year ended December 29, 1995) filed against Tellabs
Operations, Inc., a wholly-owned subsidiary of the Company, effective as
of July 3, 1996. The Settlement Agreement also releases any claims of
DSC against the Company and provides that AFC maintains all rights to
the technology platform that forms the basis for the Company's CableSpan
(a trademark of Tellabs Operations, Inc.) system. As previously
reported, the Company tendered the lawsuit to AFC to defend and
indemnify the Company and AFC has indemnified the Company against all
costs, including attorney's fees, relating to the lawsuit.
ITEM 4. Submission of Matters to a Vote of Security Holders
The Annual Meeting of Tellabs, Inc. Stockholders was held on April 25,
1996. At this meeting, Brian J. Jackman and William F. Souders were
re-elected as directors and Stephanie Pace Marshall was elected to her
first term as a director. Robert P. Reuss chose not to run for
re-election. These directors were elected for a term of office
expiring at the Company's Annual Meeting of Stockholders in 1999. In
addition, the following directors are continuing in office for the terms
indicated: John D. Foulkes, Peter A. Guglielmi, and Thomas H.
("Tommy") Thompson for terms expiring at the Company's Annual Meeting of
Stockholders in 1997, and Michael J. Birck and Frederick A. Krehbiel
for terms expiring at the Company's Annual Meeting of Stockholders in
1998.
Set forth below is a separate tabulation of the votes cast for and votes
withheld with respect to each nominee for director.
Votes For Votes Withheld
Brian J. Jackman 79,597,449 772,390
William F. Souders 79,605,936 763,903
Stephanie Pace Marshall 79,601,580 768,259
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 July 3,
1996, prior to the filing of this quarterly report of
Form 10-Q, with respect to the acquisition of the SONET
product line from TRANSYS Networks, Inc.
-12-
TELLABS, INC.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TELLABS, INC.
----------------
(Registrant)
s\ J. Peter Johnson
-------------------
J. Peter Johnson
Vice President/Controller
& Chief Accounting Officer
August 7, 1996
- ---------------- (Date)
-13-
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