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 26, 1997
[ ] 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 26, 1997, 181,474,547 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 6. Exhibits and Reports on Form 8-K 12
SIGNATURE 13
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TELLABS, INC.
CONDENSED CONSOLIDATED COMPARATIVE BALANCE SHEETS
(Unaudited)
Sept. 26, Dec. 27
1997 1996
Assets ----------- ---------
Current assets (In thousands)
Cash and cash equivalents $127,853 $90,446
Investments in marketable securities 375,701 136,421
Accounts receivable, less allowance 202,776 167,928
Inventories
Raw materials 33,856 30,961
Work in process 16,969 12,046
Finished goods 33,824 35,512
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84,649 78,519
Other current assets 1,757 2,150
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Total Current Assets 792,736 475,464
Property, plant, and equipment 319,972 267,014
Less accumulated depreciation 120,475 104,254
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199,497 162,760
Goodwill, net 63,007 64,785
Intangibles and other assets, net 46,734 40,814
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$1,101,974 $743,823
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Liabilities
Current Liabilities
Accounts payable 40,039 36,931
Accrued liabilities 120,228 71,258
Income taxes 40,955 23,435
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Total Current Liabilities 201,222 131,624
Long-term debt 3,949 2,850
Other long-term liabilities 13,840 10,964
Deferred income taxes 5,329 7,109
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 181,474,547
shares issued and outstanding at September 26, 1997
and 179,652,633 at December 27, 1996 1,815 1,797
Additional paid-in capital 125,765 94,854
Cumulative foreign currency translation adjustment (26,338) 3,937
Unrealized net holding gains on
available-for-sale securities 121,101 21,551
Retained earnings 655,291 469,137
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Total Stockholders' Equity 877,634 591,276
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$1,101,974 $743,823
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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 Nine Months Ended
Sept. 26, Sept. 27, Sept. 26, Sept. 27,
1997 1996 1997 1996
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(In thousands, except per share data)
Net sales $309,408 $234,340 $849,232 $596,069
Cost of sales 115,829 94,811 322,694 246,451
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Gross Profit 193,579 139,529 526,538 349,618
Marketing, general & admin expense 58,734 42,479 160,158 115,356
Research and development expense 40,039 28,137 110,807 74,629
Acquired in-process research
and development - - - 74,658
Goodwill amortization 1,493 1,196 4,516 2,513
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Total Operating Expense 100,266 71,812 275,481 267,156
Operating Profit 93,313 67,717 251,057 82,462
Interest income 3,031 1,746 8,446 5,608
Interest expense (14) (488) (312) (1,017)
Other (expense) income, net 1,104 (451) 22,862 (31)
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Earnings before income taxes 97,434 68,524 282,053 87,022
Income taxes 33,127 22,407 95,898 28,456
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Net Earnings $64,307 $46,117 $186,155 $58,566
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Earnings per share * $0.34 $0.25 $1.00 $0.32
========= ========= =========== =========
Average number of shares of
common stock and common stock
equivalents outstanding * 186,532 184,876 186,181 184,400
* 1996 share amounts are restated to give effect to the two-for-one
stock split effective November 15, 1996.
The accompanying notes are an integral part of these statements.
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TELLABS, INC.
CONDENSED CONSOLIDATED COMPARATIVE STATEMENTS OF CASH FLOW
(Unaudited)
For The Nine Months Ended
Sept. 26, Sept. 27,
1997 1996
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(In thousands)
Cash Flows from Operating Activities:
Net earnings $186,155 $58,566
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation and amortization 32,224 23,375
Provision for doubtful receivables 2,419 1,937
Deferred income taxes (3,844) (20,004)
Gain on sale of stock held as an investment (20,803) -
Acquired in-process research and development - 74,658
Net (increase) decrease in current assets,
net of effects from acquisitions:
Accounts receivable (45,704) (32,423)
Inventories (9,128) (13,657)
Other current assets 446 (764)
Net increase (decrease) in current liabilities,
net of effects from acquisitions:
Accounts payable 4,093 9,273
Accrued liabilities (7,061) 8,181
Income taxes 19,572 (8,302)
Net increase in other assets (17,444) (3,778)
Net (decrease) increase in other liabilities 3,062 (433)
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Net Cash Provided in Operating Activities 143,987 96,629
Cash Flows from Investing Activities:
Acquisition of property, plant and equipment, net (65,262) (45,060)
Payments for purchases of marketable securities (191,237) (72,929)
Proceeds from sales of marketable securities 133,194 81,792
Payments for acquisitions, net of cash acquired (7,821) (91,732)
Origination of loan receivable - (5,822)
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Net Cash Used by Investing Activities (131,126) (133,751)
Cash Flows from Financing Activities:
Proceeds from notes payable - 40,000
Payments of notes payable - (30,000)
Common stock sold through stock-option plans 30,928 16,263
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Net Cash Provided by Financing Activities 30,928 26,263
Effect of exchange rate changes on cash (6,382) 547
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Net (decrease) increase in cash and cash equivalents 37,407 (10,312)
Beginning of period cash and cash equivalents 90,446 92,485
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End of period cash and cash equivalents $127,853 $82,173
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TELLABS, INC.
CONDENSED CONSOLIDATED COMPARATIVE STATEMENTS OF CASH FLOW (continued)
(Unaudited - In thousands)
For The Nine Months Ended
Sept. 26, Sept. 27,
1997 1996
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Supplemental Disclosures:
Interest paid $236 $1,004
Income taxes paid $57,089 $46,540
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.
During 1996, 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, the purchase prices are currently
allocated as follows:
(in thousands) 1997 1996
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Fair value of assets acquired $1,777 $104,944
Cost in excess of fair value 8,098 22,977
Liabilities assumed (1,441) (33,660)
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Cash paid for acquisitions $8,434 $94,261
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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 1996
financial statements to conform to the 1997 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 27, 1996.
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MANAGEMENT'S DISCUSSION AND ANALYSIS
LIQUIDITY AND CAPITAL RESOURCES
During the first nine months of 1997, the Company's cash, cash
equivalents and marketable securities portfolio increased by
$276,687,000 to $503,554,000. The increase was primarily due to the
mark-to-market adjustment of $163,718,000 for a single investment and
additions to the remainder of the Company's marketable securities
portfolio of $75,562,000. The Company's earnings, combined with the
$21,396,000 received from the sale of stock held as an investment,
produced the increase in cash during the period, offset by payments for
the two first-quarter 1997 acquisitions.
Third-quarter sales contributed to an increase of $34,848,000 in
accounts receivable, net of allowance, when compared to the balance at
the end of 1996. The inventory increase of $6,130,000 from the year-end
balance reflects levels necessary to support expected fourth quarter
domestic and international sales. Goodwill, despite the addition of the
goodwill created as part of the first-quarter acquisitions, decreased
$1,778,000 during the first nine months of 1997 as the result of
amortization of the goodwill balances and the effects of exchange rate
fluctuations.
Intangibles and other assets increased $5,920,000 from the year-end
balance reflecting additional capitalization of the Company's costs to
configure a globally-integrated information system, which was
implemented at the Shannon, Ireland facility during the third quarter
and is being implemented at the Illinois and Texas facilities at the
beginning of the fourth quarter. This was partially offset by the
reclassification of the remaining portion of an investment to
short-term. Accrued liabilities increased $48,970,000 from the balance
at December 27, 1996 due to a $57,913,000 increase in deferred taxes,
most of which was related to the mark-to-market adjustment of marketable
securities, offset by payments for normal year-end obligations.
The Company invested approximately $65,262,000 in property, plant and
equipment during the first nine months of the year (exclusive of the
acquisitions). These expenditures included the Company's on-going
expansion of the manufacturing and research and development capacity at
the Espoo, Finland facility, the initial phase of construction of the
Shannon, Ireland expansion and completion of the expansion at the
Bolingbrook, Illinois facility. The Company expects net capital
additions for 1997 to approximate $95,000,000, the majority of which is
planned for the aforementioned expansions and the purchase of equipment
and other tangible assets to be installed in the newly-expanded
facilities.
Net working capital at September 26, 1997 was $591,514,000, compared
with net working capital of $343,840,000 at December 27, 1996. The
Company's current ratio at the end of the third quarter was 3.9 to 1.
The increase in net working capital was primarily due to the increase in
the value of the Company's marketable securities portfolio and the 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 financial resources exist to support the Company's
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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 1997 were a record $309,408,000, up 32
percent from the previous third quarter record of $234,340,000 set in
1996. The growth in sales was primarily the result of the combined
sales of the Company's SONET-based TITAN (a registered trademark of
Tellabs Operations, Inc.) 5500 digital cross-connect systems (the TITAN
5500 system) and the MartisDXX (a trademark of Tellabs Oy) integrated
access and transport systems (the MartisDXX system). The continued
strength of domestic sales was led by sales of the TITAN 5500 system,
which increased 41 percent over the same period last year. The increase
in sales of the TITAN 5500 system has been driven by the continued
demand for transportation of increasing quantities of voice, data and
multimedia information across telecommunications networks worldwide.
International sales, which grew 33 percent compared to the same quarter
last year, were led by a 27 percent increase in sales of the MartisDXX
system as sales of the system continue to expand outside the
Scandinavian markets. Echo cancellation products contributed to the
third quarter performance with a 6 percent increase over the third
quarter 1996. CABLESPAN (a registered trademark of Tellabs Operations
Inc.) cable transport systems also contributed to third quarter sales
by a more than doubling the prior year's third quarter sales.
Earnings for the third quarter of 1997 were $64,307,000, up 39 percent
from the 1996 third quarter earnings of $46,117,000. Earnings per share
were 34 cents in the third quarter of 1997, compared with 25 cents per
share for the third quarter of 1996. The 1996 earnings per share
amounts have been restated to reflect the effect of the two-for-one
stock split effective November 15, 1996.
In February 1997, the Financial Accounting Standards Board issued
Statement No. 128, "Earnings per Share" (FAS No. 128), which is
required to be adopted for the 1997 fiscal year-end. At that time, the
Company will be required to change the method currently used to compute
earnings per share and to restate all prior periods. Under the new
requirements for calculating basic earnings per share, the dilutive
effect of stock options will be excluded. The impact is expected to
result in an increase of one cent to basic earnings per share for both
the third quarter of 1997 and the third quarter of 1996. Basic earnings
per share for the nine months ended September 26, 1997 are expected to
increase by three cents per share, while basic earnings per share for
the nine months ended September 27, 1996 are expected to increase by one
cent per share.
The gross profit margin percentage for the third quarter of 1997
increased to 62.6 percent from 59.5 percent in the third quarter of
1996. This increase reflects continuing productive and highly efficient
manufacturing operations, a more profitable product mix, and increased
service revenues related to new TITAN installations.
Operating expenses for the third quarter of 1997 increased by 40
percent over the third quarter of 1996. This increase in expenses
reflects the Company's commitment to expand its service and support
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capabilities and to augment its product research and development efforts
worldwide in order to meet the needs of the Company's customers.
Interest income increased to $3,031,000 in the third quarter of 1997, up
74 percent from $1,746,000 in the third quarter of 1996. This
increase was due to significantly higher cash balances, offset by lower
market interest rates. Interest expense decreased to only $14,000 for
the third quarter of 1997, from $488,000 in the third quarter of 1996.
The higher interest expense during the third quarter of 1996 was the
result of interest expenses related to the short-term borrowings used
to help finance the Tellabs Wireless Systems Division acquisition.
Other income of $1,104,000 for the third quarter of 1997 was primarily
related to foreign exchange gains of $737,000. These gains were the
result of a strengthened U.S. dollar and Swedish krona versus the
Finnish markka, and the U.S. dollar versus the Irish punt. Other
expense of $451,000 for the third quarter of 1996 was primarily related
to foreign exchange losses of $489,000. These losses were the result of
a weakened U.S. dollar against the Finnish markka and Irish punt, as
well as the strength of the Finnish markka versus other European
currencies.
The effective tax rate was approximately 34.0 percent for the third
quarter of 1997 and 32.7 percent for the third quarter of 1996. The
increase in the effective tax rate for 1997 is primarily due to the
increase in domestic taxable income. The 1997 and 1996 effective tax
rates reflect adjustments from the Federal statutory rate primarily
attributable to foreign tax rate benefits.
Sales for the first nine months of 1997 were $849,232,000, which was an
increase of 42 percent from sales of $596,069,000 for the same period in
1996. Domestic sales increased 41 percent for the first nine months of
1997, compared to 1996, primarily due to a 59 percent increase in TITAN
5500 system sales. International sales for the first nine months of
1997 increased by 45 percent from the same period in 1996. This
increase was driven by a 50 percent increase in MartisDXX system sales
reflecting continued expansion outside of the Scandinavian markets.
Echo cancellation products contributed to the increase with a 39 percent
increase over the same period in 1996.
Net earnings for the first nine months of 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, were $186,155,000 compared to $112,666,000 in 1996,
which excludes the one-time charge of $74,658,000 ($54,100,000 net of
tax) for acquired in-process research and development relating to the
Tellabs Wireless acquisition.
Earnings per share were $1.00 for the first nine months of the year (93
cents excluding the effect of the stock sale) compared to 32 cents for
the same time period in 1996 (61 cents per share excluding the one-time
research and development charge). The 1996 earnings per share amounts
have been restated to reflect the effect of the two-for-one stock split
effective November 15, 1996.
The gross profit margin for the first nine months of 1997 improved to
62.0 percent versus 58.7 percent for the first nine months of 1996.
This increase reflects continuing productive and highly efficient
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manufacturing operations, a more profitable product mix, and increased
service revenues related to new TITAN installations.
Operating expenses for the first nine months of 1997 increased 43
percent over the same period in 1996, excluding the one-time charge to
earnings for the acquired in-process research and development.
Contributing to the overall increase are the expenses of Tellabs
Wireless, Tellabs Transport Group, and Tellabs Optical Networking Group,
the continuing international and domestic research and development of
products and the expansion of service and support capabilities and the
expenses incurred as part of the implementation of the Company's new
globally-integrated information system.
Interest income contributed $8,446,000 to pretax income during the first
nine months of 1997, an increase of 51 percent from $5,608,000 in
1996. This increase was due to significantly higher average cash
balances throughout the year, partially offset by lower market interest
rates. Interest expense was $312,000 during the first nine months of
1997 compared to $1,017,000 during the same period in 1996. The
significantly higher 1996 interest expense was related to the bank debt
that was used to finance the Tellabs Wireless Systems Division
acquisition.
Other income was $22,862,000 for the first nine months of 1997,
compared to other expense of $31,000 during the same period of 1996.
The majority of the increase represents the gain on the sale of stock
held as an investment of $20,803,000. In addition, foreign exchange
gains of $1,612,000 were recorded for the first nine months of 1997,
versus losses of $252,000 during the same period in 1996. The foreign
exchange gains experienced in 1997 were the result of the strengthened
U.S. dollar and Swedish krona versus the Finnish markka, and the
strength of the U.S. dollar versus the Irish punt. The losses in 1996
were the result of the weakened U.S. dollar against the Finnish markka
and Irish punt.
The effective tax rate was approximately 34.0 percent for the first nine
months of 1997 compared to 32.7 percent for the same period in 1996.
The increase in the effective tax rate for 1997 is primarily due to the
increase in domestic taxable income and the gain on the stock sale,
offset by the tax effects of the in-process research and development
one-time charge taken in conjunction with the Tellabs Wireless
acquisition during 1996. The Company's 1997 and 1996 effective tax
rates reflect the benefits of lower foreign tax rates as compared to the
U.S. Federal statutory rate.
The Company cautions that 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
that may affect the Company's actual results and cause results to differ
materially from such forward-looking statements. Such risks and
uncertainties include but are 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
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indicated from time to time in the Company's filings with the Securities
and Exchange Commission. Such forward-looking statements reflect only
information available at the time of the filing of this report. As a
result, the Company undertakes no obligation to update the statements to
reflect subsequent circumstances or events.
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PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K
(A) Exhibits:
Exhibit 10.17 - Trust Document Amendment
Exhibit 10.18 - 401 (k) Deferred Income Plan Amendment
Exhibit 19.1 - Letter to Stockholders for Third Quarter
(including graphs depicting comparisons of the
Company's gross profit margin, book value per share, and
return on equity for fiscal years 1993 - 1996 and
year-to-date results for 1997 which have been omitted
from this filing.) The Company issued this letter
to stockholders through the Company's website
at www.tellabs.com.
Exhibit 19.2 - 1997 Third Quarter News Release
(incorporated into Exhibit 19.1)
Exhibit 27 - Financial Data Schedule
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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
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J. Peter Johnson
Vice President/Controller
& Chief Accounting Officer
October 17, 1997
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(Date)
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