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 March 31, 1998
OR
[ ] Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Transition Period from ______ to ______
Commission File Number 0-24612
ADTRAN, INC.
(Exact name of Registrant as specified in its charter)
Delaware 63-0918200
(State of Incorporation) (I.R.S. Employer
Identification No.)
901 Explorer Boulevard, Huntsville, Alabama 35806-2807 (Address of
principal executive offices, including zip code)
(256) 963-8000
(Registrant's telephone number, including area code)
---------------
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 o 1934 during
the preceding twelve 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
Indicate the number of shares outstanding of each of the issuer's classes of
Common Stock as of the latest practicable date:
Class Outstanding at April 30, 1998
Common Stock, $.01 Par Value 39,410,479 shares
Page 1 of 14
Index of Exhibits on Page 14
ADTRAN, INC.
Quarterly Report on Form 10-Q
For the Quarter Ended March 31, 1998
Table of Contents
Item Page
Number PART I. FINANCIAL INFORMATION Number
1 Financial Statements:
Condensed Balance Sheets as of March 31, 1998
and December 31, 1997 3
Condensed Statements of Income for the three months
ended March 31, 1998 and 1997 4
Condensed Statements of Cash Flows for the three
months ended March 31, 1998 and 1997 5
Notes to Condensed Financial Statements 6
2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
PART II. OTHER INFORMATION
6 Exhibits and Reports on Form 8-K 12
SIGNATURE 13
INDEX OF EXHIBITS 14
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
ADTRAN, INC.
CONDENSED BALANCE SHEETS
ASSETS
March 31, December 31,
1998 1997
(Unaudited)
Current assets:
Cash and cash equivalents................................ $28,408,336 $45,340,961
Short-term investments................................... 63,423,723 37,833,240
Accounts receivable, less allowance for
doubtful accounts of $833,228 and $893,389
in 1998 and 1997, respectively........................ 37,549,813 40,906,887
Other receivables........................................ 785,314 343,463
Inventory................................................ 39,003,378 39,369,103
Prepaid expenses......................................... 2,039,118 1,148,288
Deferred income taxes.................................... 2,458,136 2,458,136
--------- ---------
Total current assets 173,667,818 167,400,078
Property, plant and equipment, less accumulated
depreciation of $22,863,074 and $20,900,272
in 1998 and 1997, respectively........................... 66,660,649 64,801,132
Other assets.................................................. 200,000 200,000
Long-term investments......................................... 55,035,000 50,000,000
---------- ----------
$295,563,467 $282,401,210
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable......................................... $ 9,594,748 $ 9,121,270
Accrued salaries......................................... 1,752,673 1,927,364
Accrued income taxes..................................... 7,277,194 4,579,345
Accrued taxes other than income taxes.................... 250,744 180,611
Warranty liability....................................... 1,435,259 1,435,259
Compensated absences..................................... 1,153,397 972,651
--------- -------
Total current liabilities 21,464,015 18,216,500
Long term liabilities:
Bonds payable............................................ 50,000,000 50,000,000
Deferred income taxes.................................... 2,147,635 2,147,635
--------- ---------
Total liabilities 73,611,650 70,364,135
---------- ----------
Stockholders' equity:
Common stock, par value $.01 per share
200,000,000 shares authorized: 39,407,179 and
39,381,264 shares issued in 1998 and 1997, respectively 394,072 393,813
Additional paid-in capital............................... 90,604,447 90,582,615
Retained earnings........................................ 133,153,298 123,260,647
Less 100,000 shares treasury stock at cost........... (2,200,000) (2,200,000)
------------ ------------
Total stockholders' equity............................... 221,951,817 212,037,075
----------- -----------
$295,563,467 $282,401,210
============ ============
See notes to condensed financial statements
ADTRAN, INC.
CONDENSED STATEMENTS OF INCOME
Unaudited
Three Months Ended
March 31,
1998 1997
Sales......................................................... $65,327,234 $61,230,184
Cost of sales................................................. 29,408,537 29,438,797
---------- ----------
Gross profit........................................ 35,918,697 31,791,387
Selling, general and administrative expenses.................. 13,257,590 10,537,516
Research and development expenses............................. 8,378,356 6,995,257
--------- ---------
Income from operations.............................. 14,282,751 14,258,614
Interest expense.............................................. (534,428) (242,534)
Other income, net............................................. 1,354,960 862,465
--------- -------
Income before income taxes.................................... 15,103,284 14,878,545
Provision for income taxes.................................... (5,210,633) (5,356,277)
----------- -----------
Net income.......................................... $ 9,892,651 $ 9,522,268
=========== ===========
Weighted average shares outstanding assuming dilution (1)..... 39,538,761 39,543,424
========== ==========
Earnings per common share assuming dilution (1)............... $ .25 $ .24
-------------- --------------
Earnings per common share - basic............................ $ .25 $ .24
-------------- --------------
(1) Assumes exercise of dilutive stock options calculated under the treasury
stock method.
See notes to condensed financial statements
ADTRAN, INC.
CONDENSED STATEMENTS OF CASH FLOWS
Unaudited
Three Months Ended
March 31,
1998 1997
Cash flow from operating activities:
Net income............................................... $ 9,892,651 $9,522,268
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation.......................................... 1,963,469 1,716,073
Gain on sale of property, plant and equipment.. (667) (2,197)
Loss on short-term investments........................ 0 5,720
Change in operating assets:
Accounts receivable.............................. 3,357,074 1,120,839
Inventory........................................... 365,725 (7,289,699)
Other receivables................................ (441,851) 66,984
Prepaid expenses................................. (890,830) 295,959
Change in operating liabilities:
Accounts payable................................. 473,478 1,558,845
Accrued salaries................................. (174,691) (959,765)
Accrued income taxes............................. 2,697,849 3,805,845
Accrued taxes other than income taxes............ 70,133 (1,679)
Compensated absences............................. 180,746 166,586
------- -------
Net cash provided by operating activities................ 17,493,086 10,005,779
---------- ----------
Cash flows from investing activities:
Expenditures for property, plant and equipment........... (3,832,319) (7,536,817)
Proceeds from the disposition of property, plant and
equipment............................................. 10,000 14,671
(Purchase) Redemption of short-term investments.......... (25,590,483) 2,000,000
Purchase of long-term investments........................ (5,035,000)
------------ -----------
Net cash used in investing activities.................... (34,447,802) (5,522,146)
------------ -----------
Cash flows from financing activities:
Proceeds from issuance of common stock................... 22,091 220,080
------ -------
Net cash provided by financing activities................ 22,091 220,080
------ -------
Net(decrease)increase in cash and cash equivalents....... (16,932,625) 4,703,713
Cash and cash equivalents, beginning of period................ 45,340,961 44,839,131
---------- ----------
Cash and cash equivalents, end of period...................... $28,408,336 $49,542,844
=========== ===========
See notes to condensed financial statements
ADTRAN, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
The interim condensed balance sheet of ADTRAN, Inc. (the "Company") at
December 31, 1997 has been derived from audited consolidated financial
statements, but does not include all disclosures required by generally accepted
accounting principles. The accompanying unaudited condensed financial statements
have been prepared pursuant to the rules and regulations for reporting on Form
10-Q. Accordingly, certain information and notes required by generally accepted
accounting principles for complete financial statements are not included herein.
In the opinion of management, all adjustments necessary for a fair presentation
of these interim statements have been included and are of a normal and recurring
nature. Operating results for the three months ended March 31, 1998 are not
necessarily indicative of the results that may be expected to occur for the year
ending December 31, 1998. The interim statements should be read in conjunction
with the financial statements and notes thereto included in the Company's latest
Annual Report on Form 10-K.
2. INVENTORY
At March 31, 1998 and December 31, 1997, inventory consisted of the following:
March 31, December 31,
1998 1997
Raw materials $23,901,580 $24,199,720
Work in progress 3,283,225 2,565,179
Finished goods 11,818,573 12,604,204
---------- ----------
$39,003,378 $39,369,103
=========== ===========
3. THE ALABAMA STATE INDUSTRIAL DEVELOPMENT AUTHORITY
In conjunction with an expansion of its Huntsville,Alabama facility, the
Company was approved for participation in an incentive program offered by the
Alabama State Industrial Development Authority (the "Authority"). Pursuant to
such program, on January 13, 1995, the Authority issued $20,000,000 of its
taxable revenue bonds pursuant to such program and loaned the proceeds from the
sale of the bonds to the Company. The bonds were originally purchased by AmSouth
Bank of Alabama, Birmingham, Alabama (the "Bank"). Effective April 25, 1997,
First Union National Bank of Tennessee, Nashville, Tennessee (the "Bondholder")
purchased the original bond from the Bank and made additional advances of
$30,000,000 to the Authority increasing the total amount to $50,000,000. An
Amended and Restated Taxable Revenue Bond (ADTRAN, Inc. Project) Series 1995 was
issued and the original financing agreement was amended. The Amended and
Restated Bond bears interest, payable monthly, at the rate of 45 basis points
over the money market rate of the Bondholder and will mature on January 1, 2020.
The Company has agreed to make payments to the Authority in amounts necessary to
pay the principal of and interest on the original bond and the Amended and
Restated Bond. Construction on the project began in March 1995 and certain
phases were completed by March 31, 1998. There can be no assurance that the
State of Alabama will continue to make these corporate income tax credits
available in the future, and the Company therefore may not realize the full
benefit of these incentives.
4. RECENT ACCOUNTING DEVELOPMENTS
In June 1997, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 130, Reporting Comprehensive
Income, which requires the reporting and display of comprehensive income and its
components in an entity's financial statements, and SFAS No. 131, Disclosures
about Segments of an Enterprise and Related Information, which specifies revised
guidelines for determining an entity's operating segments and the type and level
of financial information to be required. The Company is required to adopt these
standards in 1998. The Company does not expect the impact of these
pronouncements to be material.
5. EARNINGS PER SHARE
A summary of the calculation of basic and diluted earnings per share for the
three months ended March 31, 1998 and 1997 is as follows:
For the Three Months Ended March 31, 1998
Income Shares Per-Share
(Numerator) (Denominator) Amount
Basic EPS
Income available to common stockholders $9,892,651 39,301,337 $.25
Effect of Dilutive Securities
Stock Options 0 237,424
Diluted EPS
Income available to common stockholders
+ assumed conversions $9,892,651 39,538,761 $.25
For the Three Months Ended March 31, 1997
Income Shares Per-Share
(Numerator) (Denominator) Amount
Basic EPS
Income available to common stockholders $9,522,268 39,030,371 $.24
Effect of Dilutive Securities
Stock Options 0 513,053
Diluted EPS
Income available to common stockholders
+ assumed conversions $9,522,268 39,543,424 $.24
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Overview
ADTRAN, Inc. (the "Company") designs, develops, manufactures, markets and
services a broad range of high speed digital transmission products utilized by
telephone companies ("Telcos") and corporate end-users to implement advanced
digital data services over existing telephone networks. The Company currently
sells its products to Telcos (including all of the Regional Bell Operating
Companies), and private end-users in the Customer Premises Equipment ("CPE")
market.
The Company's sales have increased each year due primarily to increases in the
number of units sold to both new and existing customers. These annual sales
increases reflect the Company's strategy of increasing unit volume and market
share through the introduction of succeeding generations of products having
lower selling prices and increased functionality as compared to the prior
generation of a product and to the products of competitors. An important part of
the Company's strategy is to engineer the reduction of the product cost of each
succeeding product generation and then to lower the product's price based on the
cost savings achieved. As a part of this strategy, the Company seeks in most
instances to be a low-cost, high-quality provider of products in its markets.
The Company's success to date is attributable in large measure to its ability to
initially design its products with a view to their subsequent re-design,
allowing efficient enhancements of the product in each succeeding product
generation. This strategy has enabled the Company to sell succeeding generations
of products to existing customers as well as to increase its market share by
selling these enhanced products to new customers.
The Company intends to retain all earnings for use in the development of its
business and does not anticipate paying any cash dividends in the foreseeable
future.
When used in this Form 10-Q, the words "believe," "anticipate," "think,"
"intend," "will be," and similar expressions identify forward-looking
statements. Such statements are subject to certain risks and uncertainties which
could cause actual results to differ materially from those projected. Readers
are cautioned not to place undue reliance on these forward-looking statements
which speak only as of the date hereof. Readers are also urged to carefully
review and consider the various disclosures made by the Company which attempt to
advise interested parties of the factors which affect the Company's business,
including the disclosures made in other periodic reports on Forms 10-K, 10-Q and
8-K filed with the Securities and Exchange Commission.
Results of Operations - Three Months Ended March 31, 1998 Compared to
Three Months Ended March 31, 1997
Sales
The Company's sales increased 6.7% from $61,230,184 in the three months ended
March 31, 1997 to $65,327,234 in the three months ended March 31, 1998. The
increased sales resulted from an increase in sales volume to existing customers
and from increased market penetration. Sales to Telcos increased slightly from
$40,388,176 in the three months ended March 31, 1997 to $40,696,014 in the three
months ended March 31, 1998. The increase in Telco sales in the 1998 period
resulted primarily from increased sales of High bit-rate Digital Subscriber Line
("HDSL") products and Integrated Services Digital Network ("ISDN") products).
Telco sales as a percentage of total sales decreased from 66.0% in the three
months ended March 31, 1997 to 62.3% in the three months ended March 31, 1998.
Sales of CPE products increased 18.2% from $20,842,008 in the three months ended
March 31, 1997 to $24,631,220 in the three months ended March 31, 1998, as a
result of increased sales of ("T-1") products, (a digital transmission link
with a capacity of 1.544 Mbit/s used predominantly in North America). The
financial effect of the increase in overall unit volume was offset somewhat by
lower unit selling prices for many of the Company's products.
Cost of Sales
Cost of sales decreased slightly from $29,438,797 in the three months ended
March 31, 1997 to $29,408,537 in the three months ended March 31, 1998, due to
reduction of unit costs. As a percentage of sales, cost of sales decreased from
48.1% in the three months ended March 31, 1997 to 45.0% in the three months
ended March 31, 1998. An important part of the Company's strategy is to reduce
the product cost of each succeeding product generation and then to lower the
product's price based on the cost savings achieved. This strategy sometimes
results in variations in the Company's gross profit margin due to timing
differences between the recognition of cost reductions and the lowering of
product selling prices. In view of the rapid pace of new product introductions
by the Company, this strategy may result in variations in gross profit margins
that, for any particular financial period, can be difficult to predict.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased 25.8% from $10,537,516 in
the three months ended March 31, 1997 to $13,257,590 in the three months ended
March 31, 1998. The increase was due to additional sales and support
expenditures necessary as a result of the Company's expanded sales base.
Selling, general and administrative expenses as a percentage of sales increased
from 17.2% in the three months ended March 31, 1997 to 20.3% in the three months
ended March 31, 1998. Sales and support organization expansion, which resulted
in increased costs during the quarter, will continue because they are necessary
to position the Company to accumulate market share and maintain growth over the
longer term.
Research and Development Expenses
Research and development expenses increased 19.8% from $6,995,257 in the three
months ended March 31, 1997 to $8,378,356 in the three months ended March 31,
1998. The increase was due to increased engineering costs associated with new
product introductions and product cost and feature enhancement activities. As a
percentage of sales, research and development expenses increased from 11.4% in
the three months ended March 31, 1997 to 12.8% in the three months ended March
31, 1998. ADTRAN will continue to invest in these product development activities
because they are necessary to position the Company to accumulate market share
and maintain growth over the longer term.
Interest Expense
Interest expense increased 120% from $242,534 in the three months ended March
31, 1997 to $534,428 in the three months ended March 31, 1998. This increase was
due to an increase in bonds payable from $20,000,000 during the first quarter
of 1997 to $50,000,000 in the first quarter of 1998. See "Liquidity and Capital
Resources" below.
Net Income
As a result of the above factors, net income increased 3.9% from $9,522,268 in
the three months ended March 31, 1997 to $9,892,651 in the three months ended
March 31, 1998. As a percentage of sales, net income decreased slightly from
15.6% in the three months ended March 31, 1997 to 15.1% in the three months
ended March 31, 1998.
Liquidity and Capital Resources
The Company is continuing a project to expand its facilities in Huntsville in
several phases over the next four years at a cost of approximately $150,000,000,
of which $51,399,000 had been incurred at March 31, 1998. The debt
associated with $50,000,000 of this project has been approved for participation
in an incentive program offered by the Alabama State Industrial Development
Authority (the "Authority"). The Authority issued an additional $30,000,000 of
its taxable revenue bonds (the "Amended and Restated Bond"), pursuant to such
program and loaned the proceeds from the sale of the Amended and Restated Bond
to the Company, increasing the Company's long-term debt to $50,000,000 as of
April 25, 1997. The Company will make payments to the Authority in amounts
necessary to pay the principal of and interest on the Amended and Restated Bond,
which matures on January 1, 2020.
The Company's working capital position improved from $149,183,578 as of December
31, 1997 to $152,203,803 as of March 31, 1998. This improvement in the Company's
working capital position was due primarily to increased earnings. The Company
has used, and expects to continue to use, the remaining proceeds of prior public
offerings for working capital and other general corporate purposes, including
(i) product development activities to enhance its existing products and develop
new products and (ii) expansion of sales and marketing activities. Inventory
decreased 1% from December 31, 1997 to March 31, 1998. This decrease was
attributable to the Company's desire to ship larger orders to customers from
available stock.
Capital expenditures totaling $18,220,850 for the year ended December 31,1997
and $3,832,319 in the first three months of 1998 were used to expand the
Company's headquarters and to purchase equipment.
At March 31, 1998, the Company's cash on hand of $28,408,336, short-term
investments of $63,423,723 and $10,000,000 available under a $10,000,000 bank
line of credit placed the Company's potential cash availability at $101,832,059,
of which a portion is being used to expand the Company's facilities under the
incentive program described above. The Company's $10,000,000 bank line of credit
bears interest at the rate of 87.5 basis points over the 30 day London
inter-bank offered rate. The Company intends to renew its $10,000,000 bank line
of credit upon expiration in May 1998.
The Company intends to finance its operations in the future with cash flow from
operations, the remaining net proceeds of the public offerings, amounts
available under the bank line of credit, borrowed taxable revenue bond proceeds,
and possible additional public financings. These available sources of funds are
expected to be adequate to meet the Company's operating and capital needs for
the foreseeable future.
Year 2000 Compliance
The Company is in the process of reviewing current software and hardware to
assess the impact of the year 2000 issue. Initially, the Company has determined
that most of the Company's current business process software and hardware are
year 2000 compliant. The Company is in the process of implementing new business
process software which has been determined to be year 2000 compliant as well.
This implementation should be completed in 1998. The Company expects to complete
its year 2000 analysis by the end of 1998 and does not believe that costs
associated with bringing the Company's computer systems into full compliance
with year 2000 will result in material costs to the Company. The Company's
products are year 2000 compliant as well and therefore, the Company does not
believe that they have any material exposure to contingencies related to the
year 2000 issue for products it has sold.
The Company is also in the preliminary stages of assessing the impact of the
year 2000 issue on its major vendors and suppliers to determine the extent
to which the Company is vulnerable to those third parties' failure to remediate
their own year 2000 issue. Based on information presently available, the Company
does not anticipate any material impact on its financial condition or results of
operations from the effect of the year 2000 issue on the Company's internal
systems or those of its major suppliers and customers. However, there can be no
guarantee that the systems of other companies on which the Company's system rely
will be timely converted, or that a failure to convert by another company would
not have a material adverse impact on the Company.
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) The following exhibits are being filed with this report.
Exhibit No. Description
27 Financial Data Schedule for the three months
ended March 31, 1998
27.1 Restated Financial Data Schedule for the three months
ended March 31, 1997
27.2 Restated Financial Data Schedule for the three
months ended June 30, 1997
27.3 Restated Financial Data Schedule for the three
months ended September 30, 1997
27.4 Restated Financial Data Schedule for the three
months ended March 31, 1996
27.5 Restated Financial Data Schedule for the
three months ended June 30, 1996
27.6 Restated Financial Data Schedule for the three months
ended September 30, 1996
27.7 Restated Financial Data Schedule for the year ended
December 31, 1996
27.8 Restated Financial Data Schedule for the year
ended December 31, 1995
(b) Reports on Form 8-K. None
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.
ADTRAN, INC.
(Registrant)
Date: May 14, 1998 /s/ John R. Cooper
------------------
John R. Cooper
Vice President - Finance and
Chief Financial Officer
INDEX OF EXHIBITS
Exhibit No. Description Page Number
27 Financial Data Schedule for the three
months ended March 31, 1998 15
27.1 Restated Financial Data Schedule for the
three months ended March 31,1997 16
27.2 Restated Financial Data Schedule for the
three months ended June 30, 1997 17
27.3 Restated Financial Data Schedule for the
three months ended September 30, 1997 18
27.4 Restated Financial Data Schedule for the
three months ended March 31, 1996 19
27.5 Restated Financial Data Schedule for the
three months ended June 30, 1996 20
27.6 Restated Financial Data Schedule for the
three months ended September 30, 1996 21
27.7 Restated Financial Data Schedule for the
three months ended December 31, 1996 22
27.8 Restated Financial Data Schedule for the
year ended December 31, 1995 23