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, 2000
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 of 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, 2000
- ---------------------------- -----------------------------
Common Stock, $.01 Par Value 38,665,448 shares
Page 1 of 17
ADTRAN, INC.
For the Quarter Ended March 31, 2000
Table of Contents
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Item Page
Number Number
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PART I. FINANCIAL INFORMATION
1 Financial Statements (unaudited):
Condensed Balance Sheets as of March 31, 2000 and
December 31, 1999 (audited) 3
Condensed Statements of Income for the three months
ended March 31, 2000 and 1999 4
Condensed Statements of Cash Flows for the three
months ended March 31, 2000 and 1999 5
Notes to Condensed Financial Statements 6
2 Management's Discussion and Analysis of Financial Condition
and Results of Operations 9
PART II. OTHER INFORMATION
6 Exhibits and Reports on Form 8-K 13
SIGNATURE 14
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
ADTRAN, INC.
CONDENSED BALANCE SHEETS
ASSETS
March 31, December 31,
2000 1999
------------ ------------
(Unaudited)
Current assets:
Cash and cash equivalents.................................. $ 25,749,433 $ 37,500,674
Short-term investments..................................... 68,756,490 41,080,776
Accounts receivable, less allowance for
doubtful accounts of $986,771 and $1,018,400
in 2000 and 1999 respectively........................... 61,985,268 60,036,876
Other receivables.......................................... 5,036,297 4,458,525
Inventory.................................................. 59,692,478 58,568,773
Prepaid expenses........................................... 3,547,094 1,410,286
Deferred income taxes...................................... 4,069,937 4,069,937
------------ ------------
Total current assets.............................. 228,836,997 207,125,847
Property, plant and equipment, less accumulated
depreciation of $43,370,061 and $40,416,461
in 2000 and 1999, respectively............................. 110,892,563 104,587,755
Other assets.................................................... 220,000 220,000
Long-term investments........................................... 243,878,577 244,362,579
------------ ------------
$583,828,137 $556,296,181
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable........................................... $ 15,908,709 $ 12,773,848
Accrued salaries........................................... 1,677,782 3,240,692
Accrued income taxes....................................... 9,615,585 6,096,459
Accrued taxes other than income taxes...................... 741,068 728,077
Warranty liability......................................... 1,519,945 1,519,945
Interest payable........................................... 196,333 0
Compensated absences....................................... 1,841,227 1,619,534
------------ ------------
Total current liabilities............................ 31,500,649 25,978,555
Long term liabilities:
Bonds payable.............................................. 50,000,000 50,000,000
Deferred income taxes...................................... 80,265,155 80,265,155
------------ ------------
Total liabilities..................................... 161,765,804 156,243,710
------------ ------------
Stockholders' equity:
Common stock, par value $.01 per share
200,000,000 shares authorized: 39,466,644 and
39,466,644 shares issued in 2000 and 1999, respectively 394,466 394,466
Additional paid-in capital................................. 90,577,688 90,832,913
Accumulated other comprehensive income..................... 116,000,000 116,000,000
Retained earnings.......................................... 231,629,016 214,834,541
Less treasury stock at cost: 785,611 and 1,047,225
shares in 2000 and 1999, respectively.................. (16,538,837) (22,009,449)
------------ ------------
Total stockholders' equity................................. 422,062,333 400,052,471
------------ ------------
$583,828,137 $556,296,181
============ ============
See notes to condensed financial statements
3
ADTRAN, INC.
CONDENSED STATEMENTS OF INCOME
Unaudited
Three Months Ended
March 31,
2000 1999
Sales................................................ $99,470,351 $77,162,648
Cost of sales........................................ 45,065,863 37,668,543
----------- -----------
Gross profit............................... 54,404,488 39,494,105
Selling, general and administrative expenses......... 18,672,699 16,594,352
Research and development expenses.................... 11,261,968 9,673,687
----------- -----------
Income from operations..................... 24,469,821 13,226,066
Interest expense..................................... (576,333) (570,000)
Other income, net.................................... 1,553,052 1,043,938
----------- -----------
Income before income taxes........................... 25,446,540 13,700,004
Provision for income taxes........................... (8,652,065) (4,589,501)
----------- -----------
Net income................................. $16,794,475 $ 9,110,503
=========== ===========
Weighted average shares outstanding assuming
dilution (1)........................................ 39,915,234 38,447,082
=========== ===========
Earnings per common share assuming dilution (1)...... $ .42 $ .24
=========== ===========
Earnings per common share - basic.................... $ .44 $ .24
=========== ===========
(1) Assumes exercise of dilutive stock options calculated under the treasury
stock method.
See notes to condensed financial statements
4
ADTRAN, INC.
CONDENSED STATEMENTS OF CASH FLOWS
Unaudited
Three Months Ended
March 31,
2000 1999
------------ -----------
Cash flows from operating activities:
Net income.................................................... $ 16,794,475 $ 9,110,503
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation................................................ 2,953,096 2,624,898
Provisions for losses on inventory............................ 2,236,639 784,526
(Gain) loss on short-term investments...................... (3,999) 37,050
Change in operating assets:
Accounts receivable..................................... (1,948,392) (2,055,016)
Inventory............................................... (3,360,344) 9,766,614
Other receivables....................................... (577,772) (215,709)
Prepaid expenses........................................ (2,136,808) (472,382)
Change in operating liabilities:
Accounts payable........................................ 3,134,861 (678,894)
Accrued salaries........................................ (1,562,910) 1,127,980
Accrued income taxes.................................... 3,519,126 4,740,081
Accrued taxes other than income taxes................... 12,991 52,313
Accrued interest........................................ 196,333 0
Compensated absences.................................... 221,693 139,172
------------ -----------
Net cash provided by operating activities..................... 19,478,989 24,961,136
------------ -----------
Cash flows from investing activities:
Expenditures for property, plant and equipment................ (9,257,904) (9,603,494)
(Purchase) Redemption of short-term investments............... (27,671,715) 12,210,468
Purchase of long-term investments............................. 484,002 (693,963)
------------ -----------
Net cash used in investing activities......................... (36,445,617) 1,913,011
------------ -----------
Cash flows from financing activities:
Proceeds from issuance of common stock........................ 5,215,387 9,434
(Purchase) Redemption of treasury stock....................... 0 (318,750)
------------ -----------
Net cash provided by (used in) financing activities........... 5,215,387 (309,316)
------------ -----------
Net (decrease) increase in cash and cash equivalents.......... (11,751,241) 26,564,831
Cash and cash equivalents, beginning of period.................... 37,500,674 10,009,320
------------ -----------
Cash and cash equivalents, end of period.......................... $ 25,749,433 $36,574,151
============ ===========
See notes to condensed financial statements
5
ADTRAN, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
The interim condensed balance sheet of ADTRAN, Inc. at December 31, 1999 has
been derived from audited financial statements, but does not include all
disclosures required by generally accepted accounting principles. The
accompanying unaudited condensed financial statements of ADTRAN 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, 2000 are not
necessarily indicative of the results that may be expected to occur for the year
ending December 31, 2000. The interim statements should be read in conjunction
with the financial statements and notes thereto included in ADTRAN'S latest
Annual Report on Form 10-K.
2. INVENTORY
At March 31, 2000 and December 31, 1999, inventory consisted of the following:
March 31, December 31,
2000 1999
-------- -----------
Raw materials $32,305,769 $30,143,435
Work in progress 12,173,245 15,763,155
Finished goods 15,213,464 12,662,183
----------- -----------
$59,692,478 $58,568,773
=========== ===========
3. RECENT ACCOUNTING DEVELOPMENTS
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 133 requires all derivatives to be
measured at fair value and recognized as either assets or liabilities on the
balance sheet. Changes in such fair value are required to be recognized
immediately in net income to the extent the derivatives are not effective as
hedges. SFAS No. 133 is effective for ADTRAN beginning January 1, 2001. ADTRAN
does not currently hold any derivative financial instruments.
6
4. EARNINGS PER SHARE
A summary of the calculation of basic and diluted earnings per share for the
three months ended March 31, 2000 and 1999 is as follows:
For the Three Months Ended March 31, 2000
----------------------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
Basic EPS
Income available to common stockholders $16,795,190 38,567,918 $0.44
Effect of Dilutive Securities
Stock Options 1,347,316
Diluted EPS
Income available to common stockholders
+ assumed conversions $16,795,190 39,915,234 $0.42
For the Three Months Ended March 31, 1999
----------------------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
Basic EPS
Income available to common stockholders $9,110,503 38,326,332 $0.24
Effect of Dilutive Securities
Stock Options 120,750
Diluted EPS
Income available to common stockholders
+ assumed conversions $9,110,503 38,447,082 $0.24
7
5. Segment Information
ADTRAN operates two reportable segments - (1) the Carrier Network Division and
(2) the Enterprise Network Division. We evaluate the performance of our segments
based on gross profit; therefore, selling, general and administrative expenses,
as well as research and development expenses, interest income/expense, and the
provision for taxes are reported on an entity wide basis only. There are no
intersegment revenues.
The table below presents information about the reported sales and gross profit
of ADTRAN for the three months ended March 31, 2000 and 1999. We do not report
Asset information by reportable segment because we do not produce that
information internally.
Three Months Ended Three Months Ended
March 31, 2000 March 31, 1999
Sales Gross Profit Sales Gross Profit
------------------------------------------------------------------------------------------
Carrier Network $67,535,789 $36,108,258 $47,651,669 $24,407,357
Enterprise Network 31,934,562 18,296,230 29,510,979 15,086,748
------------------------------------------------------------------------------------------
Total $99,470,351 $54,404,488 $77,162,648 $39,494,105
The following table presents sales information by geographic area for the three
months ended March 31, 2000 and 1999.
Sales Three Months Ended
March 31, March 31,
2000 1999
----------------------------------------
United States $96,442,449 $74,655,583
Foreign 3,027,902 2,507,065
----------------------------------------
Total $99,470,351 $77,162,648
8
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
-----------------------------------------------------------------------
OF OPERATIONS
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Overview
ADTRAN, Inc. designs, develops, manufactures, markets and services a broad range
of high speed digital transmission products utilized by providers of
telecommunications services and corporate end-users to implement advanced
digital data services over existing telephone networks. We currently sell our
products to a large number of carriers (including all of the Regional Bell
operating companies) and private end-users in the Enterprise Network market.
We have increased our sales in each year primarily by increasing the number of
units sold to both new and existing customers. These annual sales increases
reflect our 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 both to the prior generation of a
product and to the products of competitors. An important part of our 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, we seek in most instances to be a low-
cost, high-quality provider of products in our markets. Our success to-date is
attributable in large measure to our ability to initially design our products
with a view to their subsequent re-design, allowing efficient enhancements of
the product in each succeeding product generation. This strategy has enabled us
to sell succeeding generations of products to existing customers as well as to
increase our market share by selling these enhanced products to new customers.
While we have experienced increased sales in each year, our operating results
have fluctuated on a quarterly basis in the past, and operating results may vary
significantly in future periods due to a number of factors. A majority of our
customers typically require prompt delivery of products within a short period of
time after placing their orders. Consequently, we operate with very little
order backlog and must maintain sufficient inventory levels to satisfy
anticipated customer demand. A substantial majority of our sales in each
quarter result from orders booked in that quarter and firm purchase orders
released in that quarter by customers under agreements containing nonbinding
purchase commitments. If near term demand for our products declines or if
significant potential sales in any quarter do not occur as anticipated, our
financial results will be adversely affected. Operating expenses are relatively
fixed in the short term; therefore, a shortfall in quarterly revenues could
impact our financial results significantly in a given quarter. Further,
maintaining sufficient inventory levels to assure prompt delivery of our
products increases the amount of inventory which may become obsolete and
increases the risk that the obsolescence of such inventory may have an adverse
effect on our business and operating results. Our operating results may also
fluctuate as a result of a number of other factors, including increased
competition, customer order patterns, changes in product mix, product warranty
returns and announcements of new products by us or our competitors.
Accordingly, our historical financial performance is not necessarily a
meaningful indicator of future results, and, in general, we expect that our
financial results may vary from period to period.
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 ADTRAN which
attempt to advise interested parties of the factors which affect our 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.
9
Results of Operations - Three Months Ended March 31, 2000 Compared to Three
Months Ended March 31, 1999
SALES
ADTRAN's sales increased 28.9% from $77,162,648 in the three months ended March
31, 1999 to $99,470,351 in the three months ended March 31, 2000. The increased
sales resulted from an increase in sales volume to existing customers and from
increased market penetration. The financial effect of the increase in overall
unit volume was offset somewhat by lower unit selling prices for many of our
products. Carrier Network sales increased from $47,651,669 in the three months
ended March 31, 1999 to $67,535,789 in the three months ended March 31, 2000.
The increase in Carrier Network sales for the 2000 period resulted from
increased sales of Total Reach, and High bit-rate Digital Subscriber Line
("HDSL") products. Carrier Network sales as a percentage of total sales
increased from 61.8% in the three months ended March 31, 1999 to 67.9% in the
three months ended March 31, 2000. Enterprise Network sales increased from
$29,510,979 in the three months ended March 31, 1999 to $31,934,562 in the three
months ended March 31, 2000, as a result of increased sales of our ATLAS, and
MX2800 products. As a percentage of total sales, Enterprise Network sales
decreased from 38.2% in the three months ended March 31, 1999 to 32.1% in the
three months ended March 31, 2000.
COST OF SALES
Cost of sales increased 19.6% from $37,668,543 in the three months ended March
31, 1999 to $45,065,863 in the three months ended March 31, 2000. This is a
direct result of our increased sales volume. As a percentage of sales, cost of
sales decreased from 48.8% in the three months ended March 31, 1999 to 45.3%
in the three months ended March 31, 2000. An important part of ADTRAN'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 ADTRAN'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 ADTRAN, 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 12.5% from $16,594,352 in
the three months ended March 31, 1999 to $18,671,984 in the three months ended
March 31, 2000. The increase was due to additional sales and support
expenditures necessary as a result of ADTRAN's increased sales. Selling, general
and administrative expenses as a percentage of sales decreased from 21.5% in
the three months ended March 31, 1999 to 18.8% in the three months ended March
31, 2000.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses increased 16.4% from $9,673,687 in the three
months ended March 31, 1999 to $11,261,968 in the three months ended March 31,
2000. The increase was due to increased investment in product development and
product cost reduction through engineering. As a percentage of sales, research
and development expenses decreased from 12.5% in the three months ended March
31, 1999 to 11.3% in the three months ended March 31, 2000. ADTRAN will
continue to invest in product development
10
activities because they are necessary to position us, to accumulate market share
and maintain growth over the longer term.
INTEREST EXPENSE
Interest expense increased 1.1% from $570,000 for the three months ended March
31, 1999 to $576,333 in the three months ended March 31, 2000.
NET INCOME
As a result of the above factors, net income increased 84.3% from $9,110,503 in
the three months ended March 31, 1999 to $16,795,190 in the three months ended
March 31, 2000. As a percentage of sales, net income increased from 11.8% in
the three months ended March 31, 1999 to 16.9% in the three months ended March
31, 2000.
Liquidity and Capital Resources
ADTRAN is committed to spend approximately an additional $8,000,000 completing
the construction of Phase IV of our corporate headquarters in Huntsville,
Alabama, with an expected completion date of June 30, 2000. Over the next
several years, we expect to spend approximately an additional $25,000,000 to
equip Phase IV. Fifty million dollars of ADTRAN's Phase III expansion was
approved for participation in an incentive program offered by the Alabama State
Industrial Development Authority (the "Authority"). The incentive program
enables participating companies to generate Alabama corporate income tax credits
that can be used to reduce the amount of Alabama corporate income taxes that
would otherwise be payable. There can be no assurance that the State of Alabama
will continue to make these corporate income tax credits available in the
future, and ADTRAN therefore may not realize the full benefit of these
incentives. Through December 31, 1999, the Authority had issued $50,000,000 of
its taxable revenue bonds pursuant to the incentive program and loaned the
proceeds from the sale of the bonds to ADTRAN. ADTRAN is required to make
payments to the Authority in the amounts necessary to pay the principal of and
interest on the Authority's Taxable Revenue Bond, Series 1995, as amended,
currently outstanding in the aggregate principal amount of $50,000,000. The
bond matures on January 1, 2020, and bears interest at the rate of 45 basis
points over the money market rate of First Union National Bank of Tennessee.
Our working capital position increased 9.1% from $181,147,000 as of December 31,
1999 to $197,556,000 as of March 31, 2000 due to cash generated from operations.
We have used, and expect to continue to use, the cash generated from operations
for working capital and other general corporate purposes, including (i) product
development activities to enhance our existing products and develop new products
and (ii) expansion of sales and marketing activities. Inventory increased 1.9%
from December 31, 1999 to March 31, 2000, as a result of increased sales volume.
On March 31, 1997, the Board of Directors authorized ADTRAN to re-purchase up to
1,000,000 shares of our outstanding common stock. In October 1998, the Board
approved the re-purchase of an additional 2,000,000 shares. As of March 31,
2000, ADTRAN had re-purchased 1,120,136 shares of its common stock at a total
cost of $23,573,000.
Capital expenditures totaling $36,237,000 for the year ended December 31, 1999
and $9,258,000 in the first three months of 2000 were used to expand our
headquarters and to purchase equipment.
At March 31, 2000, ADTRAN's cash on hand of $25,749,433 and short-term
investments of $68,756,490 placed our potential cash availability at
$94,505,923.00. ADTRAN has determined not to renew its $10,000,000 bank line of
credit, which expired on March 29, 2000.
11
We intend to finance our operations in the future with cash flow from operations
and remaining borrowed taxable revenue bond proceeds. We believe these available
sources of funds to be adequate to meet our operating and capital needs for the
foreseeable future.
12
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) The following exhibits are being filed with this report.
27 - Financial Data Schedule
(b) Reports on Form 8-K. None
13
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 12, 2000 /s/ John R. Cooper
------------------
John R. Cooper
Vice President - Finance and
Chief Financial Officer
14