UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended July 3, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 0-9692
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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 (630) 378-8800
--------------
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange
on which registered
None N/A
-------------------- ---------
Securities registered pursuant to Section 12 (g) of the Act:
Common shares, with $ .01 par value
------------------------------------
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements
for the past 90 days.
YES [X] NO[ ]
On July 3, 1998, 182,529,304 common shares of Tellabs, Inc. were
outstanding.
-1-
TELLABS, INC.
INDEX
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Comparative
Balance Sheets 3
Condensed Consolidated Comparative
Statements of Earnings 4
Condensed Consolidated Comparative
Statements of Cash Flow 5
Notes to Condensed Consolidated Comparative
Financial Statements 7
Item 2. Management's Discussion and Analysis 8
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of
Security Holders 12
Item 6. Exhibits and Reports on Form 8-K 12
SIGNATURE 13
-2-
TELLABS, INC.
CONDENSED CONSOLIDATED COMPARATIVE BALANCE SHEETS
(Unaudited) July 3, Jan. 2,
1998 1998
Assets ------------ -----------
Current assets (In thousands)
Cash and cash equivalents $267,489 $109,048
Investments in marketable securities 310,311 377,986
Accounts receivable, less allowance 293,628 284,084
Inventories
Raw materials 32,202 28,335
Work in process 23,593 15,664
Finished goods 44,428 45,615
------------ -----------
100,223 89,614
Other current assets 4,538 2,202
------------ -----------
Total Current Assets 976,189 862,934
Property, plant, and equipment 361,264 338,296
Less accumulated depreciation 138,057 128,967
------------ -----------
223,207 209,329
Goodwill 52,361 61,453
Intangible and other assets 44,222 49,663
------------ -----------
$1,295,979 $1,183,379
Liabilities ============ ===========
Current Liabilities
Accounts payable $57,185 $50,422
Accrued liabilities 63,312 115,917
Income taxes 72,782 59,481
------------ -----------
Total Current Liabilities 193,279 225,820
Long-term debt 2,850 2,850
Other long-term liabilities 17,544 14,870
Deferred income taxes 10,186 6,730
Stockholders' Equity
Preferred stock, with $.01 par value-
5,000,000 shares authorized, no shares issued - -
Common stock, with $.01 par value -
500,000,000 shares authorized 182,529,304
shares issued and outstanding at July 3, 1998
and 181,626,660 at January 2, 1998 1,825 1,816
Additional paid-in capital 153,421 130,378
Cumulative foreign currency
translation adjustment (36,639) (27,901)
Unrealized net holding gains on
available-for-sale securities 33,401 95,990
Retained earnings 920,112 732,826
------------ -----------
Total Stockholders' Equity 1,072,120 933,109
------------ -----------
$1,295,979 $1,183,379
============ ===========
The accompanying notes are an integral part of these statements.
-3-
TELLABS, INC.
CONDENSED CONSOLIDATED COMPARATIVE STATEMENTS OF EARNINGS
(Unaudited)
Three Months Ended Six Months Ended
July 3, June 27, July 3, June 27,
1998 1997 1998 1997
---------- ---------- ------------ -----------
(In thousands, except per-share data)
Net sales $387,719 $292,701 $715,221 $539,824
Cost of sales 138,885 111,445 259,104 206,865
---------- ---------- ------------ -----------
Gross Profit 248,834 181,256 456,117 332,959
Marketing, general &
administrative expense 75,418 55,850 142,019 101,424
Research and
development expense 47,919 37,532 91,225 70,768
Asset impairment 24,793 - 24,793 -
Goodwill amortization 1,374 1,517 2,850 3,023
---------- ---------- ------------ -----------
Total Operating Expense 149,504 94,899 260,887 175,215
Operating Profit 99,330 86,357 195,230 157,744
Interest income 4,710 3,032 8,749 5,415
Interest expense (76) (182) (161) (298)
Other income, net 72,395 687 73,643 21,758
---------- ---------- ------------ -----------
Earnings before income tax 176,359 89,894 277,461 184,619
Income tax 57,317 31,133 90,175 62,771
---------- ---------- ------------ -----------
Net Earnings $119,042 $58,761 $187,286 $121,848
========== ========== ============ ===========
Earnings per share
- Basic $0.65 $0.33 $1.03 $0.68
========== ========== ============ ===========
- Diluted $0.63 $0.32 $1.00 $0.66
========== ========== ============ ===========
Average number of shares of
common stock outstanding
- Basic 182,390 180,749 182,132 180,437
- Diluted 187,482 186,055 187,214 185,883
The accompanying notes are an integral part of these statements.
-4-
TELLABS, INC.
CONDENSED CONSOLIDATED COMPARATIVE STATEMENTS OF CASH FLOW
(Unaudited - In thousands)
For The Six Months Ended
July 3, June 27,
1998 1997
Cash Flows from Operating Activities: --------- ---------
Net earnings $187,286 $121,848
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation and amortization 25,645 21,435
Provision for doubtful receivables 2,950 1,545
Deferred income taxes 3,670 (1,293)
Gain on sale of stock held as an investment (74,126) (20,873)
Asset impairment charge 24,793 ---
Net changes in assets and liabilities,
net of effects from acquisitions:
Accounts receivable (15,018) (10,194)
Inventories (13,066) (9,466)
Other current assets (2,398) (169)
Long-term assets (13,907) (10,265)
Accounts payable 7,201 8,302
Accrued liabilities (9,850) (12,896)
Income taxes 13,916 2,461
Long-term liabilities 2,736 1,913
------------ -----------
Net Cash Provided by Operating Activities 139,832 92,348
Cash Flows from Investing Activities:
Acquisition of property, plant and equipment, net (37,291) (36,885)
Payments for purchases of marketable securities (227,384) (124,882)
Proceeds from sales of marketable securities 262,631 56,914
Payments for acquisitions, net of cash acquired --- (7,821)
------------ -----------
Net Cash Used by Investing Activities (2,044) (112,674)
Cash Flows from Financing Activities:
Common stock sold through stock-option plans * 22,428 19,848
------------ -----------
Net Cash Provided by Financing Activities 22,428 19,848
Effect of exchange rate changes on cash (1,775) (3,811)
------------ -----------
Net increase (decrease) in cash
and cash equivalents 158,441 (4,289)
Beginning of period cash and cash equivalents 109,048 90,446
------------ -----------
End of period cash and cash equivalents $267,489 $86,157
============ ===========
-5-
TELLABS, INC.
CONDENSED CONSOLIDATED COMPARATIVE STATEMENTS OF CASH FLOW (continued)
(Unaudited - In thousands)
For The Six Months Ended
July 3, June 27,
1998 1997
Supplemental Disclosures: --------- ---------
Interest paid $151 $123
Income taxes paid $54,598 $46,130
Supplemental Schedule of Non-Cash Investing and Financing Activities:
During 1997, in acquiring all of the outstanding shares of Trelcom Oy
and certain wavelength-division multiplexing and optical networking
technology and related assets from IBM, the Company paid direct costs
totaling $8,434,000.
In conjunction with the acquisitions, the purchase prices are currently
allocated as follows:
(In thousands)
----------
Fair value of assets acquired $1,777
Cost in excess of fair value 8,098
Liabilities assumed (1,441)
----------
Cash paid for acquisitions $8,434
==========
* "Common stock sold through stock option plans" contains non-cash
deferred tax benefits of $16,127,000 and $14,143,000 during the first
six months of 1998 and 1997, respectively.
The accompanying notes are an integral part of these statements.
-6-
TELLABS, INC.
NOTES TO CONDENSED CONSOLIDATED COMPARATIVE FINANCIAL STATEMENTS
1. Financial Information:
The unaudited financial information reflects all adjustments (consisting
only of normal recurring accruals) which are, in the opinion of
management, necessary for a fair presentation of the statements
contained herein. Certain reclassifications have been made in the 1997
financial statements to conform to the 1998 presentation.
In accordance with Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income", total comprehensive income for the
three months ended July 3, 1998 and June 27, 1997 was $33,330,000 and
$95,204,000, respectively. Total comprehensive income for the six
months ended July 3, 1998 and June 27, 1997 was $115,959,000 and
$172,187,000, respectively.
2. Basis of Presentation:
These financial statements are presented in accordance with the
requirements of Form 10-Q and consequently may not include all
disclosures normally required by generally accepted accounting
principles or those normally reflected in the Company's Annual Report on
Form 10-K. Accordingly, the financial statements and notes herein
should be read in conjunction with the financial statements and related
notes in the Company's Form 10-K for the year ended January 2, 1998.
3. Earnings Per Share Reconciliation
The following table sets forth the computation of basic and diluted
earnings per share: (In thousands, except per-share data)
Three Months Ended Six Months Ended
07/03/98 06/27/97 07/03/98 06/27/97
Numerator: ---------- ---------- ------------ -----------
Net Income $119,042 $58,761 $187,286 $121,848
Denominator:
Denominator for basic
earnings per share -
weighted-average shares 182,390 180,749 182,132 180,437
Effect of Dilutive Securities:
employee stock options
and awards 5,092 5,306 5,082 5,446
---------- ---------- ------------ -----------
Denominator for diluted
earnings per share - adjusted
weighted-average shares
and assumed conversions 187,482 186,055 187,214 185,883
========== ========== ============ ===========
Basic earnings per share $0.65 $0.33 $1.03 $0.68
========== ========== ============ ===========
Diluted earnings per share $0.63 $0.32 $1.00 $0.66
========== ========== ============ ===========
-7-
MANAGEMENT'S DISCUSSION AND ANALYSIS
LIQUIDITY AND CAPITAL RESOURCES
At the end of the first half of 1998, the Company's cash and cash
equivalents amounted to $267,489,000, an increase of $158,441,000 from
the balance at the end of 1997. The increase was primarily due to the
Company's record earnings, along with the receipt of $75,644,000 from
the proceeds of a sale of stock and the settlement of related hedge
contracts. The Company's marketable securities portfolio decreased to
$310,311,000, from the 1997 year-end balance of $377,986,000. The
decrease of $67,675,000 was due to the aforementioned partial sale of
an investment held in the available-for-sale portfolio and the decrease
in the market value of the remainder of the investment, offset by
additions to the Company's marketable securities portfolio.
Accounts receivable, net of allowance, increased $9,544,000 during the
first half of 1998 as a result of record second-quarter sales.
Inventory balances showed an increase of $10,609,000 during the first
six months of 1998 to support expected higher demand for the remainder
of the year. During the second quarter of 1998, the Company determined
that the value of assets acquired as part of the 1996 acquisition of the
Company's Wireless Systems Division was impaired, resulting in the
write-off of goodwill and other assets. The impairment write-off, along
with regular amortization, caused the decrease in the goodwill balance
of $9,092,000, when compared to the 1997 year-end balance. Other
long-term assets decreased $5,441,000 from the year-end balance
reflecting the aforementioned impairment of intangible assets, offset by
additional capitalization of the Company's costs to develop a
globally-integrated information system. Accrued liabilities experienced
a decrease of $52,605,000 from the balance at January 3, 1997 primarily
due to deferred taxes related to the mark-to-market adjustment of the
marketable securities, as well as first quarter payments for normal
year-end obligations.
The Company made a net investment of approximately $37,000,000 in
property, plant and equipment during the first two quarters of 1998.
These expenditures were driven by the Company's on-going expansion of
its manufacturing and research and development capacity world-wide. The
expansion of the facilities in Finland was completed during the first
half of 1998, while the new facility in Ireland is expected to be
completed during the second half of the year. The Company currently
expects gross capital additions for 1998 to approximate $70,000,000, the
majority of which is planned for the facilities in Ireland and Finland
and the purchase of equipment and other tangible assets to be installed
in the newly-expanded facilities.
Net working capital at July 3, 1998 was $782,910,000, compared with net
working capital of $637,114,000 at January 2, 1998. The Company's
current ratio at the end of the second quarter was 5.1 to 1. The
increase in net working capital was primarily due to the cash generated
by operating activities. Management believes that the existing level of
working capital will be adequate for the Company's liquidity needs
related to normal operations, both currently and in the foreseeable
future. Sufficient resources exist to support the Company's growth
either through currently available cash, through cash generated from
future operations, or through additional short-term or long-term
financing.
-8-
RESULTS OF OPERATIONS
Sales for the second quarter of 1998 were a record $387,719,000, up 33
percent from sales in the second quarter of 1997 of $292,701,000. Sales
of the Company's SONET-based TITAN (a registered trademark of Tellabs
Operations, Inc.) 5500 digital cross-connect systems (the TITAN 5500
system) drove the majority of the sales growth during the second quarter
of 1998 with an increase of 51 percent over the second quarter 1997
sales level. The increase in TITAN 5500 system sales was primarily
driven by increased demand among existing customers.
Earnings for the second quarter of 1998 were a record $119,042,000, up
from the 1997 second quarter earnings of $58,761,000. Second quarter
1998 earnings included a pre-tax gain on the sale of stock of
$73,374,000 ($49,528,000 net of tax), offset by a pre-tax charge taken
for impaired assets at the Company's Wireless Systems Division of
$24,793,000 ($16,736,000 net of tax). Diluted earnings per share were
63 cents in the second quarter of 1998 (or, 46 cents per share,
excluding the after-tax gain on the stock sale and the asset impairment
charge), compared with 32 cents per diluted share for the second quarter
of 1997.
The gross profit margin percentage for the second quarter of 1998
increased to 64.2 percent from 61.9 percent in the second quarter of
1997. This increase primarily reflects greater efficiencies realized
by the Company's manufacturing operations during the quarter.
Operating expenses for the second quarter of 1998 increased by 31.4
percent over the second quarter of 1997, excluding the asset impairment
charge taken in the second quarter of 1998. This increase in expenses
is primarily the result of expenses incurred for the installation of
TITAN products. The Company's commitment to product research and
development, as well as expansion of service and support capabilities,
both domestically and internationally, also contributed to the increase.
Other income of $72,395,000 for the second quarter, was up considerably
from income of $687,000 in the second quarter of 1997. During the
second quarter of 1998, the Company realized a gain on the sale of stock
and the settlement of related hedge contracts of $73,374,000. During
the second quarter of 1998, the Company experienced foreign exchange
losses of $1,097,000, compared to the foreign exchange gains of $531,000
in the same quarter of 1997. The strength of the U.S. dollar against
the Finnish markka and the Irish punt during 1997, and subsequent
weakening of the U.S. dollar against these same currencies during 1998
caused the swing in net foreign exchange income. Interest income
increased to $4,710,000 in the second quarter of 1998, up 55.3 percent
from $3,032,000 in the second quarter of 1997. This increase was due to
significantly higher cash balances.
The effective tax rate was approximately 32.5 percent for the second
quarter of 1998, compared to 34.6 percent for the second quarter of
1997. The decrease in the effective tax rate for 1998 in comparison to
the rate for 1997 is primarily due to the tax benefits associated with
contributions to the Tellabs Foundation, a non-profit organization
established by the Company, as well as deductions from the asset
impairment charge at the Company's Wireless Systems Division. Overall,
the Company's 1998 and 1997 effective tax rates reflect the benefits of
lower foreign tax rates as compared to the U.S. Federal statutory rate.
-9-
Sales for the first six months of 1998 of $715,221,000 were an increase
of 32.5 percent over the then record sales of $539,824,000 during the
first six months of 1997. Growth in domestic sales during the first
half of 1998 of 41 percent, when compared to the same period during
1997, was primarily due to a 46 percent increase in TITAN 5500 system
sales. International sales for the first half of 1998 grew a modest 16
percent from the same period in 1998. This increase was driven by a 23
percent increase in MartisDXX system sales despite the softer demand
experienced from the Asian economic crisis.
Net earnings for the first six months of 1998 were $187,286,000, which
included a pre-tax gain on the sale of stock and the settlement of
related hedge contracts of $73,374,000 and a pre-tax charge for
impaired assets of $24,793,000, compared to net earnings of
$121,848,000 in 1997, which included a pre-tax gain of $20,803,000
($13,855,000 net of tax) for the sale of stock held as an investment.
Diluted earnings per share were $1.00 for the first six months of 1998
($0.83 excluding the stock sale and asset impairment charge) compared to
$0.66 in 1997 ($0.59 excluding the effect of the stock sale).
The gross profit margin for the first six months of 1998 improved to
63.8 percent, surpassing the previous record of 61.7 percent for the
first six months of 1997. This improvement reflects a sales mix that
shifted toward higher-margin products as well as continued improvement
in manufacturing efficiencies.
Operating expenses for the first six months of 1998 increased 34.7
percent over the same period in 1997, excluding the asset impairment
charge taken in the second quarter of 1998. Expenses incurred for the
installation of TITAN products were the largest component of the
increase. Also contributing to the year-over-year increase was the
Company's commitment to product research and development, as well as
expansion of service and support capabilities, both domestically and
internationally. Operating expenses, as a percentage of sales,
increased only slightly from 32.5 percent in 1997 to 33.0 percent in
1998.
Other income was $73,643,000 for the first half of 1998 compared to
$21,758,000 during the first half of 1997. The first half of both 1998
and 1997 saw gains related to the sale of stock held as an investment.
The gain in 1997 was $20,803,000, while the gain on the stock sale,
along with the settlement of related hedge contracts was $73,374,000 in
1998. Other income in the first half of 1998 included foreign exchange
losses of $190,000 compared to gains of $875,000 during the first six
months of 1997. The gains in 1997 were a result of a stronger U.S.
dollar versus the Finnish markka and Irish punt in 1997 compared to a
weaker U.S. dollar against those currencies in 1998.
The effective tax rate was approximately 32.5 percent for the first six
months of 1998 compared to 34.0 percent for the same period in 1997.
The decrease in the effective tax rate for 1998 is primarily due to the
tax benefits associated with contributions to the Tellabs Foundation, as
well as deductions from the asset impairment charge at the Company's
Wireless Systems Division. Overall, the Company's 1998 and 1997
effective tax rates also reflect the benefits of lower foreign tax rates
as compared to the U.S. Federal statutory rate.
-10-
SUBSEQUENT EVENTS
On August 3, 1998, the Company completed its merger with Coherent
Communications Systems Corporation (Coherent). Under the terms of the
merger agreement, Coherent stockholders received 0.72 shares of the
Company's common stock for each share of Coherent common stock they
held. The transaction will be accounted for as a pooling-of-interests.
Coherent will operate as a wholly-owned subsidiary of the Company and
Coherent's common stock will no longer be quoted on the Nasdaq National
Market.
Except for historical information, the matters discussed or incorporated
by reference in this Quarterly Report on Form 10-Q are forward-looking
statements that involve risks and uncertainties including, but not
limited to, economic conditions, product demand and industry capacity,
competitive products and pricing, manufacturing efficiencies, research
and new product development, protection of and access to intellectual
property, patents and technology, ability to attract and retain highly
qualified personnel, availability of components and critical
manufacturing equipment, ability of vendors and third parties to respond
to Year 2000 issues, facility construction and start-ups, the regulatory
and trade environment, the availability and terms of future acquisitions
and the uncertainties relating to the synergies, charges, and expenses
associated with the proposed mergers described in the Company's filings,
as well as other risks that may be detailed from time to time in the
Company's filings with the Securities and Exchange Commission. The
Company's actual future results could differ materially from those
discussed here. The Company undertakes no obligation to revise or
update these forward-looking statements.
-11-
PART II. OTHER INFORMATION
ITEM 4. Submission of Matters to a Vote of Security Holders
The Company's Annual Meeting of Stockholders was held on April 15, 1998.
At this meeting, Michael J. Birck and Frederick A. Krehbiel were
re-elected as directors. These directors were elected for a term of
office expiring at the Company's Annual Meeting of Stockholders in 2001.
In addition, the following directors are continuing in office for the
terms indicated: Brian J. Jackman, Stephanie Pace Marshall, and William
F. Souders for terms expiring at the Company's Annual Meeting of
Stockholders in 1999, and John D. Foulkes, Peter A. Guglielmi, and
Jan H. Suwinski for terms expiring at the Company's Annual Meeting of
Stockholders in 2000.
Set forth below is a separate tabulation of the votes cast for and votes
withheld with respect to each nominee for director elected at this
meeting:
Votes For Votes Withheld
Michael J. Birck 155,324,079 2,039,173
Frederick A. Krehbiel 155,317,109 2,046,143
In addition, stockholders approved the 1998 Stock Option Plan by the
following vote:
For 152,343,269
Opposed 4,582,465
Withheld 437,518
ITEM 6. Exhibits and Reports on Form 8-K
(A) Exhibits:
Exhibit 27 - Financial Data Schedule.
(B) Reports on Form 8-K
The Registrant filed a report on Form 8-K on June 4, 1998, to
announce that the Company had entered into an Agreement and
Plan of Merger with CIENA Corporation ("CIENA"), whereby
CIENA would become a wholly-owned subsidiary of the Company.
The Registrant filed a report on Form 8-K on July 24, 1998,
with respect to the issuance of a second quarter letter to
stockholders and a press release announcing that the merger
of the Company and Coherent Communications Systems
Corporation is expected to be completed in early August.
-12-
TELLABS, INC.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TELLABS, INC.
----------------
(Registrant)
s\ J. Peter Johnson
-------------------
J. Peter Johnson
Vice President/Controller
& Chief Accounting Officer
August 15, 1998
- ---------------- (Date)
-13-
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