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 October 2, 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 October 2, 1998, 194,252,929 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 9
PART II. OTHER INFORMATION
Item 5. Other Information 13
Item 6. Exhibits and Reports on Form 8-K 13
SIGNATURE 14
-2-
TELLABS, INC.
CONDENSED CONSOLIDATED COMPARATIVE BALANCE SHEETS
(Unaudited)
Oct. 2, Jan. 2,
1998 1998
Assets ----------- -----------
Current assets (In thousands)
Cash and cash equivalents $233,455 $109,048
Investments in marketable securities 376,350 377,986
Accounts receivable, less allowance 322,303 284,084
Inventories
Raw materials 51,579 28,335
Work in process 26,221 15,664
Finished goods 61,893 45,615
----------- -----------
139,693 89,614
Other current assets 9,126 2,202
----------- -----------
Total Current Assets 1,080,927 862,934
Property, plant, and equipment 401,406 338,296
Less accumulated depreciation 154,157 128,967
----------- -----------
247,249 209,329
Goodwill, net 53,423 61,453
Intangibles and other assets, net 59,904 49,663
----------- -----------
$1,441,503 $1,183,379
=========== ===========
Liabilities
Current Liabilities
Accounts payable $59,472 $50,422
Accrued liabilities 71,751 115,917
Income taxes 47,038 59,481
----------- -----------
Total Current Liabilities 178,261 225,820
Long-term debt 2,850 2,850
Other long-term liabilities 17,724 14,870
Deferred income taxes 9,139 6,730
Stockholders' Equity
Preferred stock: authorized 5,000,000 shares of
$.01 par value; no shares issued and outstanding - -
Common stock: 500,000,000 shares of $.01 par
value; 194,252,929 and 181,626,660 shares
issued and outstanding 1,943 1,816
Additional paid-in capital 182,079 130,378
Cumulative foreign currency translation adjustment (8,781) (27,901)
Unrealized net holding gains on
available-for-sale securities 10,743 95,990
Retained earnings 1,047,545 732,826
----------- -----------
Total Stockholders' Equity 1,233,529 933,109
----------- -----------
$1,441,503 $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 Nine Months Ended
Oct. 2, Sept. 26, Oct. 2, Sept. 26,
1998 1997 1998 1997
--------- --------- ----------- -----------
(In thousands, except per-share data)
Net sales $423,548 $309,408 $1,138,769 $849,232
Cost of sales 146,240 115,829 405,344 322,694
--------- --------- ----------- -----------
Gross Profit 277,308 193,579 733,425 526,538
Marketing, general and
administrative expense 83,759 58,734 225,778 160,158
Research and
development expense 52,221 40,039 143,446 110,807
Asset impairment - - 24,793 -
Merger costs 12,991 - 12,991 -
Goodwill amortization 1,334 1,493 4,184 4,516
--------- --------- ----------- -----------
Total Operating Expense 150,305 100,266 411,192 275,481
Operating Profit 127,003 93,313 322,233 251,057
Interest income 6,948 3,031 15,697 8,446
Interest expense (79) (14) (240) (312)
Other (expense) income, net (3,853) 1,104 69,790 22,862
--------- --------- ----------- -----------
Earnings before income taxes 130,019 97,434 407,480 282,053
Income taxes 42,256 33,127 132,431 95,898
--------- --------- ----------- -----------
Net Earnings $87,763 $64,307 $275,049 $186,155
========= ========= =========== ===========
Earnings per share
- Basic $0.46 $0.35 $1.49 $1.03
========= ========= =========== ===========
- Diluted $0.45 $0.34 $1.45 $1.00
========= ========= =========== ===========
Average number of shares of
common stock outstanding
- Basic 190,396 181,274 184,886 180,716
- Diluted 195,128 186,576 189,852 186,114
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
Oct. 2, Sept. 26,
1998 1997
--------- ---------
(In thousands)
Cash Flows from Operating Activities:
Net earnings $275,049 $186,155
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation and amortization 38,916 32,224
Provision for doubtful receivables 6,382 2,419
Deferred income taxes 3,876 (3,844)
Gain on the sale of investments (74,152) (21,015)
Asset impairment charge 24,793 -
Merger costs 12,991 -
Net changes in assets and liabilities,
net of effects from acquisitions:
Accounts receivable (30,601) (45,704)
Inventories (42,752) (9,128)
Other current assets 2,092 446
Long-term assets (31,405) (17,444)
Accounts payable 6,742 4,093
Accrued liabilities (2,106) (7,061)
Income taxes (14,301) 19,572
Long-term liabilities 2,751 3,062
----------- -----------
Net Cash Provided by Operating Activities 178,275 143,775
Cash Flows from Investing Activities:
Acquisition of property, plant and equipment, net (56,186) (65,262)
Payments for purchases of marketable securities (380,952) (191,237)
Proceeds from sales of marketable securities 329,376 133,406
Payments for acquisitions, net of cash acquired - (7,821)
Cash acquired in merger, net of merger costs 12,728 -
----------- -----------
Net Cash Used in Investing Activities (95,034) (130,914)
Cash Flows from Financing Activities:
Common stock sold through stock-option plans * 37,530 30,928
----------- -----------
Net Cash Provided by Financing Activities 37,530 30,928
Effect of exchange rate changes on cash 3,636 (6,382)
----------- -----------
Net increase in cash and cash equivalents 124,407 37,407
Beginning of period cash and cash equivalents 109,048 90,446
----------- -----------
End of period cash and cash equivalents $233,455 $127,853
=========== ===========
-5-
TELLABS, INC.
CONDENSED CONSOLIDATED COMPARATIVE STATEMENTS OF CASH FLOW (continued)
(Unaudited - In thousands)
For The Nine Months Ended
Oct. 2, Sept. 26,
1998 1997
--------- ---------
Supplemental Disclosures:
Interest paid $181 $236
Income taxes paid $113,686 $57,089
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, Tellabs, Inc. ("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 $25,366,000 and $20,962,000 during the first
nine 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 October 2, 1998, and September 26, 1997, was
$92,963,000 and $83,243,000, respectively. Total comprehensive income
for the nine months ended October 2, 1998, and September 26, 1997, was
$208,922,000 and $255,430,000, 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.
During the third quarter of 1998, the Company completed its merger with
Coherent Communications Systems Corporation ("Coherent"). This
transaction will be accounted for as an immaterial pooling of interests.
Therefore, the Company will not restate any prior quarterly or annual
financial results to reflect this transaction.
-7-
TELLABS, INC.
NOTES TO CONDENSED CONSOLIDATED COMPARATIVE FINANCIAL STATEMENTS
(continued)
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 Nine Months Ended
10/02/98 09/26/97 10/02/98 09/26/97
Numerator: -------- -------- -------- --------
Net Income $87,763 $64,307 $275,049 $186,155
Denominator:
Denominator for basic
earnings per share -
weighted-average shares 190,396 181,274 184,886 180,716
Effect of Dilutive Securities:
employee stock options
and awards 4,732 5,302 4,966 5,398
------ ------ ------ ------
Denominator for diluted
earnings per share - adjusted
weighted-average shares
and assumed conversions 195,128 186,576 189,852 186,114
======= ======= ======= =======
Basic earnings per share $0.46 $0.35 $1.49 $1.03
======= ======= ======= =======
Diluted earnings per share $0.45 $0.34 $1.45 $1.00
======= ======= ======= =======
-8-
MANAGEMENT'S DISCUSSION AND ANALYSIS
LIQUIDITY AND CAPITAL RESOURCES
During the first nine months of 1998, the Company's cash and cash
equivalents increased to $233,455,000 from the 1997 year-end balance of
$109,048,000. The increase was driven by cash flows from operations of
approximately $178,275,000, offset by payments to invest in marketable
securities, net of proceeds from maturities, of approximately
$51,576,000. The value of the Company's marketable securities portfolio
at the end of the third quarter of 1998 remained almost unchanged when
compared to the 1997 year-end balance. The aforementioned net
purchases of investments in marketable securities were offset by a
decrease in the market value of a particular investment.
Accounts receivable, net of allowance, increased $38,219,000 during the
first three quarters of 1998 due to record third-quarter sales. The
increase in the inventory balance of $50,079,000, when compared to the
1997 year-end balance, reflects levels necessary to support expected
fourth-quarter sales. 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. Goodwill
decreased $8,030,000 during the first nine months of 1998 as a result of
the aforementioned write-off and the regular amortization of the
balance. Other long-term assets increased $10,241,000 due to further
capitalization of the Company's costs to develop a globally-integrated
information system and the addition of various intangible assets and
other long-term investments.
The Company made a net investment of approximately $63,000,000 in
property, plant and equipment during the first nine months of the year.
The additions were primarily comprised of the Company's continued
expansion of manufacturing and research and development capacity
worldwide. The expansion of the facilities in Finland was completed
during the first half of 1998, while the new facility in Ireland was
opened during the third quarter of 1998. The Company expects net
capital additions for 1998 to approximate $85,000,000, the majority of
which is planned for the purchase of equipment and other tangible assets
to be installed in the newly-expanded facilities.
Accrued liabilities decreased $44,166,000 from the balance at January 2,
1998 primarily due to a decrease in deferred taxes related to the
mark-to-market adjustment of marketable securities. Approximately
11,200,000 shares of common stock were issued as part of the third
quarter merger with Coherent. The issuance of these shares contributed
to the increase in common stock and additional paid-in capital of
$51,828,000. Also as a result of the merger with Coherent, the Company
acquired approximately $39,670,000 of retained earnings.
-9-
Net working capital at October 2, 1998 was $902,666,000, compared with
net working capital of $637,114,000 at January 2, 1998. The Company's
current ratio at the end of the third quarter was 6.1 to 1. The
increase in net working capital when compared to the 1997 year-end
level was primarily due to the net cash generated by 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 during the third quarter of 1998 were $423,548,000, the highest
sales in any quarter in the Company's history, which was an increase of
37 percent from sales in the third quarter of 1997 of $309,408,000.
Substantial growth was realized in both the domestic and international
markets. The domestic growth was driven by the Company's SONET-based
TITAN (a registered trademark of Tellabs Operations, Inc.) 5500 digital
cross-connect systems (the TITAN 5500 system), which experienced overall
sales growth of 34 percent over the same period in 1997. Sales of the
MartisDXX (a trademark of Tellabs Oy) integrated access and transport
systems (the MartisDXX system) pushed the international sales growth by
showing a sales increase of 29 percent in the third quarter of 1998,
when compared to the third quarter of 1997. Digital echo canceller
sales increased over 150 percent from 1997 sales levels, due in large
part to the additional sales from the merger with Coherent.
Earnings for the third quarter of 1998 were $87,763,000, up 37 percent
from the 1997 third quarter earnings of $64,307,000. Third quarter 1998
earnings included a pre-tax charge of $12,991,000 for costs related to
the Coherent merger and the unsuccessful merger attempt with CIENA
Corporation. Excluding this one-time charge, third quarter 1998
earnings are 50 percent higher than the earnings in third quarter of
1997. Diluted earnings per share were 45 cents in the third quarter of
1998 (or, 49 cents per share, excluding such merger costs), compared
with 34 cents per share for the third quarter of 1997.
The gross profit margin percentage for the third quarter of 1998
increased to 65.5 percent from 62.6 percent in the third quarter of
1997. This increase is primarily the result of increased service
revenue related to TITAN 5500 installations, along with greater
efficiencies realized by the Company's manufacturing operations.
Excluding the merger costs expensed during the third quarter of 1998,
operating expenses increased by 37 percent over the third quarter of
1997. Expenses incurred for the installation of TITAN products and the
Company's commitment to expand its service and support capabilities and
research and development efforts worldwide were the drivers of the
increase. In addition, 1998 third quarter operating expenses included
expenses of the Coherent operations, which are not included in the 1997
results.
The Company incurred an other non-operating loss of $3,853,000 during
the third quarter of 1998, compared to other income of $1,104,000 during
the third quarter of 1997. The strength of the U.S. dollar and Swedish
-10-
krona versus the Finnish markka, and the U.S. dollar versus the Irish
punt during 1997, and the subsequent weakening of the same currencies in
1998 caused the swing in other income. Interest income increased to
$6,948,000 in the third quarter of 1998, up 129 percent from $3,031,000
in the third quarter of 1997. This increase was due to significantly
higher cash balances.
The effective tax rate was approximately 32.5 percent for the third
quarter of 1998 and 34.0 percent for the third 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, as well as 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.
Sales for the first nine months of 1998 were $1,138,769,000, which was
an increase of 34 percent from sales of $849,232,000 for the same period
in 1997. Domestic sales increased 43 percent for the first nine months
of 1998, compared to 1997, primarily due to a 42 percent increase in
TITAN 5500 system sales. MartisDXX system sales increased 25 percent
over sales levels in 1997 driving the international sales growth of 17
percent. Sales of digital echo cancellers during the first nine months
of 1998 increased 57 percent when compared to 1997 partially due to the
inclusion of Coherent products.
Net earnings for the first nine months of 1998 were $275,049,000, which
included a pre-tax gain of on the sales of stock held as an investment
and the settlement of related hedge contracts of $73,374,000, a pre-tax
charge for impaired assets of $24,793,000, and a pre-tax charge for the
aforementioned merger costs of $12,991,000, compared to $186,155,000,
which included a pre-tax gain of $20,803,000 for the sale of stock
held as an investment. Diluted earnings per share were $1.45 for the
first nine months of the year ($1.32 excluding the effect of the stock
sale, the asset impairment charge, and the merger costs) compared to
$1.00 for the same period in 1997 (93 cents per share excluding the
effect of the stock sale).
The gross profit margin for the first nine months of 1998 improved to
64.4 percent versus 62.0 percent for the first nine months of 1997.
This increase reflects higher service revenues related to new TITAN
installations and increased efficiencies in the Company's production
efforts.
Operating expenses for the first nine months of 1998 increased 36
percent over the same period in 1997, excluding the asset impairment
charge taken in the second quarter of 1998 and the charge for merger
costs taken in the third quarter of 1998. Contributing to the overall
increase are expenses incurred for the installation of TITAN products
and the continuing international and domestic research and development
efforts.
Other income was $69,790,000 for the first nine months of 1998, compared
to $22,862,000 during the same period in 1997. The first nine months of
both 1998 and 1997 included gains on 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
-11-
$73,374,000 in 1998. Other income in the first nine months of 1998
included foreign exchange losses of $3,183,000, compared to gains in
1997 of $1,612,000. The strength of the U.S. dollar and Swedish krona
versus the Finnish markka, and the U.S. dollar versus the Irish punt
during 1997, and the subsequent weakening of the same currencies in 1998
caused the swing in foreign exchange income. Interest income
contributed $15,697,000 to pre-tax income in the first three quarters of
1998, up 86 percent from $8,446,000 in 1997, primarily due to
significantly higher average cash balances in 1998.
The effective tax rate was approximately 32.5 percent for the first
nine months of 1998 and 34.0 percent for the same period in 1997. The
decrease in the 1998 effective tax rate is primarily due to the tax
benefits associated with contributions to the Tellabs Foundation, as
well as 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.
YEAR 2000 READINESS
The Company continues to address its readiness for Year 2000 issues.
At the end of the third quarter of 1998, the Company's products are Year
2000 compliant. However, the Company's information technology (IT)
systems and non-IT systems are not fully compliant, but are expected to
be compliant by the second quarter of 1999. Potentially non-compliant
systems consist only of non-critical systems. The extent of the impact
of the non-compliance would be limited to minor personnel productivity
inefficiencies caused by the need for alternative processes and
procedures. The Company expects to incur expenses of approximately
$1,000,000. In addition, the Company believes that no Year 2000 issues
exist with a material third party. However, actual outcomes and results
could be affected by other factors, including, but not limited to the
continued availability of skilled personnel, cost control, the ability
to locate and remediate software code problems, critical suppliers and
subcontractors meeting their commitments to be Year 2000 ready, and
timely actions by customers.
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, Year 2000 readiness, 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 discusssed here. The Company undertakes no
obligation to revise or update these forward-looking statements.
-12-
PART II. OTHER INFORMATION
ITEM 5. Other Information
The following is notice pursuant to Rule 14a-5(e)(2) and Rule
14a-4(c)(1) under the Securities Exchange Act of 1934, as amended,
regarding the Company's use of discretionary authority with respect
to non-Rule 14a-8 stockholder proposals which may be made at the
1999 Annual Meeting of Stockholders (the "1999 Annual Meeting").
If a proponent of a stockholder proposal at the 1999 Annual Meeting
fails to provide notice of the intent to make such proposal by
personal delivery or mail to the Secretary of the Company on or
before February 1, 1999 (or by an earlier or later date, if such
date is established by amendment to the Company's Bylaws), then any
proxy solicited by management may confer discretionary authority to
vote on such proposal.
The foregoing does not apply to proposals submitted for inclusion
in the Company's proxy statement for the 1999 Annual Meeting or to
nominations of one or more directors for consideration at the 1999
Annual Meeting. As stated more fully in the Company's proxy
statement for its 1998 Annual Meeting of Stockholders, notice of
such proposals or of the intent to make such nomination or
nominations must be made by personal delivery or by mail to the
Secretary of the Company no later than November 16, 1998.
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 17, 1998,
with respect to the issuance of a press release announcing
third quarter results for CIENA Corporation ("CIENA"),
reaffirmations of their recommendations in favor of the
proposed merger by the Boards of Directors of the Registrant
and CIENA, and a clarification of previously reported proxy
material.
The Registrant filed a report on Form 8-K on August 21, 1998,
with respect to the issuance of a press release announcing the
adjournment of the Registrant's and CIENA's August 21, 1998,
stockholders meetings to vote on the proposed merger.
The Registrant filed a report on Form 8-K on August 31, 1998,
detailing amendments to the Agreement and Plan of Merger
between the Registrant, CIENA, and White Oak Merger
Corporation, as well as the Stock Option Agreement between the
Registrant and CIENA.
-13-
PART II. OTHER INFORMATION
(continued)
(B) Reports on Form 8-K (continued)
The Registrant filed a report on Form 8-K on September 3,
1998, with respect to a press release announcing the
adjournment of the Registrant's and CIENA's special
stockholders meetings scheduled for September 9, 1998.
The Registrant filed a report on Form 8-K on September 14,
1998, announcing the termination of its proposed merger with
CIENA.
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
November 12, 1998
- -----------------
(Date)
-14-
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