UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended April 3, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 0-9692
---------
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 April 3, 1998, 182,206,783 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 6. Exhibits and Reports on Form 8-K 11
SIGNATURE 12
-2-
TELLABS, INC.
CONDENSED CONSOLIDATED COMPARATIVE BALANCE SHEETS
(Unaudited)
April 3, Jan. 2,
1998 1998
Assets ----------- -----------
Current assets (In thousands)
Cash and cash equivalents $178,029 $109,048
Investments in marketable securities 422,457 377,986
Accounts receivable, less allowance 259,595 284,084
Inventories
Raw materials 38,670 28,335
Work in process 19,006 15,664
Finished goods 36,791 45,615
----------- -----------
94,467 89,614
Other current assets 1,376 2,202
----------- -----------
Total Current Assets 955,924 862,934
Property, plant, and equipment 352,108 338,296
Less accumulated depreciation 134,170 128,967
----------- -----------
217,938 209,329
Goodwill 58,482 61,453
Other assets 54,373 49,663
----------- -----------
$1,286,717 $1,183,379
=========== ===========
Liabilities
Current Liabilities
Accounts payable $48,098 $50,422
Accrued liabilities 123,620 115,917
Income taxes 57,417 59,481
----------- -----------
Total Current Liabilities 229,135 225,820
Long-term debt 2,850 2,850
Other long-term liabilities 15,494 14,870
Deferred income taxes 6,188 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 182,206,783
shares issued and outstanding at April 3, 1998
and 181,626,660 at January 2, 1998 1,822 1,816
Additional paid-in capital 147,684 130,378
Cumulative foreign currency translation adjustment (43,150) (27,901)
Unrealized net holding gains on
available-for-sale securities 125,624 95,990
Retained earnings 801,070 732,826
----------- -----------
Total Stockholders' Equity 1,033,050 933,109
----------- -----------
$1,286,717 $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
April 3, March 28,
1998 1997
----------- -----------
(In thousands, except
per share data)
Net sales $327,502 $247,123
Cost of sales 120,219 95,420
----------- -----------
Gross Profit 207,283 151,703
Marketing, general & administrative expense 66,601 45,574
Research and development expense 43,306 33,236
Goodwill amortization 1,476 1,506
----------- -----------
Total Operating Expense 111,383 80,316
----------- -----------
Operating Profit 95,900 71,387
Interest income (4,039) (2,383)
Interest expense 85 116
Other income, net (1,248) (21,071)
----------- -----------
Earnings before income taxes 101,102 94,725
Income taxes 32,858 31,638
----------- -----------
Net Earnings $68,244 $63,087
=========== ===========
Earnings per share
- Basic $0.38 $0.35
- Diluted $0.37 $0.34
Average number of shares of
common stock outstanding
- Basic 181,873 180,125
- Diluted 186,947 185,711
The accompanying notes are an integral part of these statements.
-4-
TELLABS, INC.
CONDENSED CONSOLIDATED COMPARATIVE STATEMENTS OF CASH FLOW
(Unaudited)
For The Three Months Ended
April 3, March 28,
1998 1997
--------- ---------
(In thousands)
Cash Flows from Operating Activities:
Net earnings $68,244 $63,087
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation and amortization 12,820 10,478
Provision for doubtful receivables 288 1,167
Deferred income taxes 496 (1,004)
Gain on sale of marketable securities (476) (20,878)
Net changes in assets and liabilities,
net of effects from acquisitions:
Accounts receivable 19,781 1,130
Inventories (6,240) (4,047)
Other current assets 780 1,118
Long term assets (7,259) (2,931)
Accounts payable (1,774) 1,529
Accrued liabilities (11,731) (18,211)
Income taxes (556) 11,730
Long term liabilities 747 1,810
----------- -----------
Net Cash Provided by Operating Activities 75,120 44,978
Cash Flows from Investing Activities:
Acquisition of property, plant and equipment, net (21,078) (15,360)
Payments for purchases of marketable securities (103,602) (61,323)
Proceeds from sales and maturities of
marketable securities 105,041 52,178
Payments for acquisitions, net of cash acquired 0 (7,821)
----------- -----------
Net Cash Used for Investing Activities (19,639) (32,326)
Cash Flows from Financing Activities:
Common stock sold through stock-option plans * 17,019 11,196
----------- -----------
Net Cash Provided by Financing Activities 17,019 11,196
Effect of exchange rate changes on cash (3,519) (3,498)
----------- -----------
Net increase in cash and cash equivalents 68,981 20,350
Beginning of period cash and cash equivalents 109,048 90,446
----------- -----------
End of period cash and cash equivalents $178,029 $110,796
=========== ===========
-5-
TELLABS, INC.
CONDENSED CONSOLIDATED COMPARATIVE STATEMENTS OF CASH FLOW
(Unaudited)
For The Three Months Ended
April 3, March 28,
1998 1997
--------- ---------
Supplemental Disclosures: (In thousands)
Interest paid $109 $82
Income taxes paid $19,540 $10,427
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 $12,820,000 and $8,466,000
during the first quarter 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 April 3, 1998 and March 28, 1997 was approximately
$82,629,000 and $76,983,000, 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
04/03/98 03/28/97
Numerator: --------- -----------
Net Income $68,244 $63,087
Denominator:
Denominator for basic earnings
per share -
weighted-average shares 181,873 180,125
Effect of Dilutive Securities:
employee stock options and awards 5,074 5,586
--------- -----------
Denominator for diluted earnings
per share -
adjusted weighted-average shares
and assumed conversions 186,947 185,711
========= ===========
Basic earnings per share $0.38 $0.35
========= ===========
Diluted earnings per share $0.37 $0.34
========= ===========
-7-
MANAGEMENT'S DISCUSSION AND ANALYSIS
LIQUIDITY AND CAPITAL RESOURCES
During the first quarter of 1998, the Company's cash, cash equivalents
and marketable securities portfolio increased $113,452,000 to an
all-time high of $600,486,000. This increase was primarily the result
of the Company's record first quarter earnings of $68,244,000 combined
with the mark-to-market adjustment of $49,510,000 for a single
investment.
The Company invested approximately $21,078,000 in property, plant, and
equipment during the first quarter of 1998. These expenditures were
part of the Company's on-going expansion of its manufacturing and
research and development capacity world-wide. Construction at the
Finland facility was completed during the quarter, while the Company
anticipates the expansion in Ireland to be completed during the second
half of 1998. The Company currently expects total capital expenditures
for 1998 to approximate $100,000,000, the majority of which is planned
for the aforementioned expansions and the purchase of equipment and
other tangible assets to be installed in all of the newly-expanded
facilities.
In conjunction with the Company's decision to change the primary focus
of the Wireless Systems Division, the value of the assets (intangibles
and others) resulting from the acquisition are being reevaluated.
Accrued liabilities increased by $7,703,000 as a result of an increase
in deferred taxes, primarily related to the mark-to-market adjustment of
the marketable securities, partially offset by payments made by the
Company for year-end obligations related to employee compensation
programs.
Net working capital at April 3, 1998 was $726,789,000, compared with
working capital of $637,114,000 at January 2, 1998. The Company's
current ratio at the end of the first quarter was 4.2 to 1. This
increase in working capital was primarily due to the cash generated by
operating activities and the increase in the value of marketable
securities held as investments.
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 and capital expenditures 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 first quarter of 1998 were a record $327,502,000, up 32.5
percent from the first quarter record of $247,123,000 set in 1997.
Sales growth during the first quarter of 1998, as compared to the first
quarter of 1997, was driven primarily by a 39.6 percent increase in
sales of the SONET-based TITAN (a registered trademark of Tellabs
Operations, Inc.) 5500 digital cross-connect system (TITAN 5500 system).
-8-
Expansion of the customer base and increased demand by the Company's
existing customers in response to optical interface enhancements to the
TITAN 5500 system were the primary drivers for the increased sales.
International sales, which grew by 21.7 percent from the same quarter of
the prior year, were led by the 26.1 percent increase in sales of the
MartisDXX (a trademark of Tellabs Oy) integrated access and transport
system (the MartisDXX system). MartisDXX system sales growth,
principally due to expansion of the customer base, was dampened by
adverse exchange rate effects during the quarter.
The first quarter sales growth was further fueled by all-time record
echo canceller sales during the first quarter of 1998. This echo
canceller sales growth represented a 66 percent increase over the first
quarter of 1997 and a 20.5 percent increase over the previous record
high, achieved during the fourth quarter of 1997.
Record net earnings were also posted during the first quarter of 1998.
Earnings for the first quarter of 1998 were $68,244,000, up 8.2 percent
from the then-record earnings of $63,087,000 a year earlier. Last
year's earnings included a gain on the sale of stock held as an
investment of $13,855,000 (net of taxes). Diluted earnings per share
for the current quarter were 37 cents as compared to 27 cents for the
first quarter of 1997, excluding the effect of the gain on the sale of
the stock. The increase in earnings for the first quarter of 1998 was
primarily the result of the aforementioned sales growth and an increase
in the gross profit margin as a percentage of sales.
The gross profit margin for the first quarter 1998 improved to 63.3
percent from 61.4 percent for the same period in 1997. This
improvement reflects the continued shift in product mix toward
higher-margin TITAN, MartisDXX and echo canceller products and revenues
recognized from customer service installation activities.
Operating expenses for the first quarter of 1998 were $111,383,000, an
increase of 38.7 percent over the operating expenses incurred during the
first quarter of 1997. The marketing and general and administrative
expense increase of $21,027,000 was primarily the result of expenses
incurred to support and install TITAN products. The remaining increase
in these expenses represents investment aimed at expanding world-wide
presence through the addition of staff, opening of new offices and
installation of infrastructure commensurate with business growth.
Research and development expenses, which increased by $10,070,000,
remained relatively consistent at 13.2 percent of sales as compared with
13.4 percent of sales during the first quarter of 1997. Operating
expenses increased as a percentage of sales to 34.0 percent for the
first quarter of 1998 as compared to 32.5 percent for the same period in
1997.
Other income was $1,248,000 for the first quarter of 1998 compared to
$21,071,000 for the first quarter of 1997. The gain on the sale of
stock held as an investment during the first quarter of 1997 of
$20,803,000 was the primary reason for the large decrease in comparison
to 1997. Interest income increased to $4,039,000 in the first quarter
of 1998, up 69.5 percent from $2,383,000 in the first quarter of 1997,
mainly as a result of interest earned on the significantly higher cash
balances.
-9-
The effective tax rate was approximately 32.5 percent for the first
quarter of 1998 compared to 33.4 percent for the first quarter of 1997.
The reduction reflects increased income being generated outside of the
U.S. in those countries with lower tax rates and a donation to the
Tellabs Foundation, which was established during 1995 to make charitable
contributions. The 1998 effective tax rate reflects adjustments from
the Federal statutory rate primarily attributable to foreign tax rate
benefits.
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 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, and
other factors 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 this report is being
filed, as a result the Company undertakes no obligation to update the
statements to reflect subsequent circumstances or events.
-10-
PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K
(A) Exhibits:
Exhibit 19.1 - Letter to Stockholders for First Quarter
(including graphs depicting comparisons of the Company's
gross profit margin, book value per share, and
return on equity for fiscal years 1994 - 1997 and
year-to-date results for 1998 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 - 1998 First Quarter News Release
(incorporated into Exhibit 19.1)
Exhibit 27 - Financial Data Schedule.
(B) Reports on Form 8-K
The Registrant filed a report on Form 8-K on
February 20, 1998, to announce that the Company had
entered into an Agreement and Plan of Merger with
Coherent Communications Systems Corporation ("Coherent")
whereby Coherent would become a wholly-owned subsidiary
the Company.
The Registrant filed a report on Form 8-K on April 20, 1998,
prior to the filing of this report on Form 10-Q, with respect
to the Company's announcement that (1) Coherent had called
a special meeting of its stockholders to approve the merger
agreement and (2) the companies have received a request for
additional information about the merger from the Antitrust
Division of the U.S. Department of Justice.
-11-
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
May 6, 1998
- ----------------
(Date)
-12-