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, 2001
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, 2001
- ---------------------------- -----------------------------
Common Stock, $.01 Par Value 39,451,838 shares
Page 1 of 14
ADTRAN, INC.
Quarterly Report on Form 10-Q
For the Quarter Ended March 31, 2001
Table of Contents
-----------------
Item Page
Number PART I. FINANCIAL INFORMATION Number
- ------ ------
1 Financial Statements:
Condensed Balance Sheets as of March 31, 2001 (unaudited)
and December 31, 2000 (audited) 3
Condensed Statements of Income for the three months
Ended March 31, 2001 and 2000 (unaudited) 4
Condensed Statements of Cash Flows for the three
months ended March 31, 2001 and 2000 (unaudited) 5
Notes to Condensed Financial Statements (unaudited) 6
2 Management's Discussion and Analysis of Financial Condition
and Results of Operations 9
3 Quantitative and Qualitative Disclosures About Market Risk 12
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,
2001 2000
----------- ------------
(Unaudited) (Audited)
Current assets:
Cash and cash equivalents.................................. $ 50,794,126 $ 27,971,313
Short-term investments..................................... 62,024,071 60,286,332
Accounts receivable, less allowance for
doubtful accounts of $800,901 and $813,003
in 2001 and 2000, respectively.......................... 69,879,921 82,133,831
Other receivables.......................................... 13,275,608 35,862,774
Inventory.................................................. 96,172,204 89,252,729
Prepaid expenses........................................... 4,234,551 4,032,438
Deferred income taxes...................................... 4,505,008 4,505,008
------------ ------------
Total current assets............................. 300,885,489 304,044,425
Property, plant and equipment, less accumulated
depreciation of $57,431,040 and $53,422,304
in 2001 and 2000, respectively............................. 125,295,582 123,713,176
Other assets.................................................... 469,000 469,000
Long-term investments........................................... 94,051,596 118,109,404
------------ ------------
$520,701,667 $546,336,005
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable........................................... $ 20,528,711 $ 34,113,832
Accrued expenses........................................... 9,839,468 8,560,073
Income taxes payable....................................... 2,868,204 3,734,234
------------ ------------
Total current liabilities............................. 33,236,383 46,408,139
Long term liabilities:
Bonds payable.............................................. 50,000,000 50,000,000
Deferred income taxes...................................... 9,374,880 15,342,435
------------ ------------
Total liabilities..................................... 92,611,263 111,750,574
------------ ------------
Minority interest in subsidiary 160,000 160,000
------------ ------------
Stockholders' equity:
Common stock, par value $.01 per share,
200,000,000 shares authorized: 39,446,644 shares
issued and outstanding in 2001 and 2000................ 394,466 394,466
Additional paid-in capital................................. 96,638,253 96,707,263
Accumulated other comprehensive income..................... 9,302,640 19,870,288
Retained earnings.......................................... 336,864,146 332,905,389
Less treasury stock at cost: 724,492 and 733,192
shares in 2001 and 2000, respectively.................. (15,269,101) (15,451,975)
------------ ------------
Total stockholders' equity................................. 427,930,404 434,425,431
------------ ------------
$520,701,667 $546,336,005
============ ============
See notes to condensed financial statements
3
ADTRAN, INC.
CONDENSED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended
March 31,
2001 2000
------------ -----------
Sales................................................ $105,275,747 $99,470,351
Cost of sales........................................ 59,841,309 45,065,863
------------ -----------
Gross profit..................................... 45,434,438 54,404,488
Selling, general and administrative expenses......... 26,064,836 18,672,699
Research and development expenses.................... 14,848,714 11,261,968
------------ -----------
Income from operations........................... 4,520,888 24,469,821
Interest expense..................................... (503,556) (576,333)
Other income, net.................................... 1,980,787 1,553,052
------------ -----------
Income before income taxes........................... 5,998,119 25,446,540
Provision for income taxes........................... (2,039,362) (8,652,065)
------------ -----------
Net income....................................... $ 3,958,757 $16,794,475
============ ===========
Weighted average shares outstanding.................. 38,718,662 38,567,916
============ ===========
Weighted average shares outstanding assuming
dilution (1)........................................ 38,863,521 39,915,234
============ ===========
Earnings per common share - basic.................... $.10 $.44
============ ===========
Earnings per common share assuming dilution (1)..... $.10 $.42
============ ===========
(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,
2001 2000
------------ ------------
Cash flows from operating activities:
Net income.................................................... $ 3,958,757 $ 16,794,475
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation................................................ 4,009,675 2,953,096
Loss (gain) on sale of short-term investments............... 17,134 (3,999)
Change in operating assets and liabilities:
Accounts receivable....................................... 12,253,910 (1,948,392)
Inventory................................................. (6,919,475) (1,123,705)
Other receivables......................................... 22,586,228 (577,772)
Prepaid expenses.......................................... (202,113) (2,136,808)
Accounts payable.......................................... (13,585,121) 3,810,056
Income taxes payable...................................... (866,030) 3,519,126
Accrued expenses.......................................... 1,279,395 (1,807,088)
------------ ------------
Net cash provided by operating activities..................... 22,532,360 19,478,989
------------ ------------
Cash flows from investing activities:
Expenditures for property, plant and equipment................ (5,591,143) (9,257,904)
Proceeds from sales of short-term investments................. 14,233,193 16,196,001
Purchases of short-term investments........................... (15,988,066) (43,867,716)
Proceeds from sales of long-term investments.................. 9,991,030 980,381
Purchases of long-term investments............................ (2,468,426) (496,379)
------------ ------------
Net cash provided by (used in) investing activities........... 176,588 (36,445,617)
------------ ------------
Cash flows from financing activities:
Proceeds from issuance of common stock........................ 113,865 5,215,387
------------ ------------
Net cash provided by financing activities..................... 113,865 5,215,387
------------ ------------
Net increase (decrease) in cash and cash equivalents.......... 22,822,813 (11,751,241)
Cash and cash equivalents, beginning of period.................. 27,971,313 37,500,674
------------ ------------
Cash and cash equivalents, end of period........................ $ 50,794,126 $ 25,749,433
============ ============
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. ("ADTRAN") at December 31,
2000 has been derived from audited financial statements, but does not include
all disclosures required by accounting principles generally accepted in the
United States of America. The accompanying unaudited condensed financial
statements of ADTRAN have been prepared pursuant to the rules and regulations
for reporting on Quarterly Reports 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, 2001 are not necessarily
indicative of the results that may be expected to occur for the year ending
December 31, 2001. 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, 2001 and December 31, 2000, inventory consists of the following:
March 31, December 31,
2001 2000
----------- ------------
Raw materials $54,447,885 $50,011,508
Work in progress 8,103,036 12,606,275
Finished goods 33,621,283 26,634,946
----------- -----------
$96,172,204 $89,252,729
=========== ===========
3. COMPREHENSIVE INCOME
Comprehensive income consists of net income and unrealized gains and losses on
marketable securities, net of deferred taxes. Comprehensive income of
$13,261,397 at March 31, 2001, consists of net income of $3,958,757 and
unrealized gains on marketable securities of $9,302,640 (net of deferred tax of
$5,257,652).
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4. EARNINGS PER SHARE
A summary of the calculation of basic and diluted earnings per share (EPS) for
the three months ended March 31, 2001 and 2000 is as follows:
For the Three Months Ended March 31, 2001
----------------------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
Basic EPS
Income available to common stockholders $3,958,757 38,718,662 $.10
Effect of Dilutive Securities
Stock Options 144,859
Diluted EPS
Income available to common stockholders
plus assumed conversions $3,958,757 38,863,521 $.10
For the Three Months Ended March 31, 2000
----------------------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
Basic EPS
Income available to common stockholders $16,794,475 38,567,916 $.44
Effect of Dilutive Securities
Stock Options 1,347,318
Diluted EPS
Income available to common stockholders
plus assumed conversions $16,794,475 39,915,234 $.42
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 costs, as
well as research and development, interest income/expense, and the provision for
income 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's segments for the three months ended March 31, 2001 and 2000,
respectively. Asset information by reportable segment is not reported, since
ADTRAN does not produce such information internally.
Three Months Ended Three Months Ended
March 31, 2001 March 31, 2000
Sales Gross Profit Sales Gross Profit
------------ ------------- ----------- ------------
Carrier Network $ 69,217,660 $26,172,558 $67,535,789 $36,108,258
Enterprise Network 36,058,087 19,261,880 31,934,562 18,296,230
------------ ----------- ----------- -----------
Total $105,275,747 $45,434,438 $99,470,351 $54,404,488
------------ ----------- ----------- -----------
The following table presents sales information by geographic area for the three
months ended March 31, 2001 and 2000, respectively.
Three Months Ended
March 31, March 31,
2001 2000
------------ -----------
United States $101,626,918 $96,442,449
Foreign 3,648,829 3,027,902
------------ -----------
Total $105,275,747 $99,470,351
------------ -----------
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Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
-----------------------------------------------------------------------
OF OPERATIONS
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OVERVIEW
ADTRAN designs, develops, manufactures, markets and services a broad range of
high-speed digital transmission products utilized by providers of
telecommunications services (serviced by ADTRAN's Carrier Networks Division or
CN) and corporate end-users (serviced by ADTRAN's Enterprise Networks Division
or EN) to implement advanced digital data services over existing telephone
networks. We currently sell our products to a large number of carriers,
including all RBOCs, and to private and public enterprises worldwide.
ADTRAN'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 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 ADTRAN'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, we seek in most instances to be a
low-cost, high-quality provider of products in our markets. ADTRAN's success
to-date is attributable in large measure to our ability to design our products
initially with a view to their subsequent re-design, allowing both increased
functionality and reduced manufacturing costs in each succeeding product
generation. This strategy enables ADTRAN to sell succeeding generations of
products to existing customers while increasing our market share by selling
these enhanced products to new customers.
While ADTRAN has 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. We operate with
very little order backlog. A substantial majority of our sales in each quarter
results from orders booked in that quarter and firm purchase orders released in
that quarter by customers under agreements containing non-binding purchase
commitments. Furthermore, a majority of customers typically require prompt
delivery of products. This results in a limited backlog of orders for these
products and requires us to maintain sufficient inventory levels to satisfy
anticipated customer demand. If near-term demand for ADTRAN's products
declines, or if 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 ADTRAN's 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.
ADTRAN's 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
ADTRAN or our competitors. Accordingly, ADTRAN's historical financial
performance is not necessarily a meaningful indicator of future results, and, in
general, management expects that ADTRAN's financial results may vary from period
to period.
This Form 10-Q contains "forward-looking statements" within the meaning of
Section 21E of the Securities Exchange Act of 1934, as amended, which represent
ADTRAN's expectations of beliefs, including, but not limited to, statements
concerning (i) the business and financial outlook, (ii) our business, financial
condition or results of operations, and (iii) our business strategy. 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
9
which speak only as of the date hereof. Readers are also urged to carefully
review and consider the various disclosures, including, but not limited to, the
disclosures described under the captions "Management's Discussion and Analysis
of financial Condition and Results of Operations" and "Liquidity and Capital
Resources," and those discussed in ADTRAN's filings with the Securities and
Exchange Commission, as well as the general economic conditions and industry
trends which could cause actual results or outcomes to differ materially from
those expressed in any forward-looking statements.
RESULTS OF OPERATIONS - Three Months Ended march 31, 2001 Compared to Three
Months Ended march 31, 2000
SALES
ADTRAN's sales increased 5.8% from $99,470,351 in the three months ended March
31, 2000 to $105,275,747 in the three months ended March 31, 2001. The
increased sales resulted from an increase in sales volume to existing customers
and from increased market penetration. Carrier Network sales increased from
$67,535,789 in the three months ended March 31, 2000 to $69,217,660 in the three
months ended March 31, 2001. Carrier Network sales as a percentage of total
sales decreased from 67.9% in the three months ended March 31, 2000 to 65.7% in
the three months ended March 31, 2001. Sales of Enterprise Network products
increased from $31,934,562 in the three months ended March 31, 2000 to
$36,058,087 in the three months ended March 31, 2001. The increase was due to
strong growth in our Systems products. As a percentage of sales, Enterprise
Network sales increased from 32.1% in the three months ended March 31, 2000 to
34.3% in the three months ended March 31, 2001. The financial effect of the
increase in overall unit volume was offset somewhat by lower unit selling prices
for many of ADTRAN's products.
COST OF SALES
Cost of sales increased 32.8% from $45,065,863 in the three months ended March
31, 2000 to $59,841,309 in the three months ended March 31, 2001. As a
percentage of sales, cost of sales increased from 45.3% in the three months
ended March 31, 2000 to 56.8% in the three months ended March 31, 2001. 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
Selling, general and administrative expenses increased 39.6% from $18,672,699 in
the three months ended March 31, 2000 to $26,064,836 in the three months ended
March 31, 2001. The increase was due to additional sales and support
expenditures necessary as a result of our expanded sales base. Selling, general
and administrative expenses as a percentage of sales increased from 18.8% in the
three months ended March 31, 2000 to 24.8% in the three months ended March 31,
2001. Sales and support organization expansion, which resulted in increased
costs during the quarter, will continue because they are necessary to position
ADTRAN to accumulate market share and maintain growth over the long-term.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses increased 31.8% from $11,261,968 in the three
months ended March 31, 2000 to $14,848,714 in the three months ended March 31,
2001. The increase was due to increased investment
10
in product development and cost reduction through engineering. As a percentage
of sales, research and development expenses increased from 11.3% in the three
months ended March 31, 2000 to 14.1% in the three months ended March 31, 2001.
ADTRAN will continue to invest in these product development activities because
they are necessary to position us to accumulate market share and maintain growth
over the long-term.
INTEREST EXPENSE
Interest expense decreased 12.6% from $576,333 for the three months ended March
31, 2000 to $503,556 in the three months ended March 31, 2001.
OTHER INCOME
Other income increased 27.5% from 1,553,052 for the three months ended March 31,
2000 to $1,980,787 in the three months ended March 31, 2001.
NET INCOME
As a result of the above factors, net income decreased 76.4% from $16,794,475 in
the three months ended March 31, 2000 to $3,958,759 in the three months ended
March 31, 2001. As a percentage of sales, net income decreased from 16.9% in the
three months ended March 31, 2000 to 3.8% in the three months ended March 31,
2001.
LIQUIDITY AND CAPITAL RESOURCES
ADTRAN committed to spend approximately an additional $250,000 for finalizing
the construction of Phase IV of our corporate headquarters in Huntsville,
Alabama, which was completed in October 2000. Over the next several years, we
expect to spend approximately an additional $35,000,000 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
therefore, ADTRAN may not realize the full benefit of these incentives. Through
December 31, 2000, 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.
ADTRAN's working capital position increased 3.9% from $257,636,000 as of
December 31, 2000 to $267,649,000 as of March 31, 2001 due to cash generated
from operations as evident in our reduction of accounts receivable and other
receivables. Accounts receivables and other receivables decreased 14.9% and
63.0%, respectively from December 31, 2000 to March 31, 2001. Accounts payable
decreased 39.8% from December 31, 2000 to March 31, 2001. ADTRAN has used, and
expects to continue to use, the cash generated from operations 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 increased 7.8% from
December 31, 2000 to March 31, 2001. The increase is attributable to our
expectations of increased shipments to existing customers.
11
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,
2001, we had re-purchased 1,121,417 shares of our common stock at a total cost
of $23,612,000.
Capital expenditures totaling $32,540,000 for the year ended December 31, 2000
and $5,591,000 in the first three months of 2001 were used to expand our
headquarters and to purchase equipment.
At March 31, 2001, ADTRAN's cash on hand of $50,794,126 and short-term
investments of $62,024,071 placed our potential cash availability at
$112,818,197.
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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- ------------------------------------------------------------------
ADTRAN has not conducted transactions, established commitments or entered into
relationships requiring disclosures beyond those provided elsewhere in this Form
10-Q.
12
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) No reports on Form 8-K were filed during the quarter ended March
31, 2001.
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 10, 2001 /s/ John R. Cooper
------------------
John R. Cooper
Vice President - Finance and
Chief Financial Officer
14