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 SEPTEMBER 30, 1996
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)
(205) 971-8000
(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 October 31, 1996
- -------------------------------------- -------------------------------
Common Stock, $.01 Par Value 38,760,494 shares
ADTRAN, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 1996
TABLE OF CONTENTS
ITEM PAGE
NUMBER NUMBER
- ------ ------
PART I. FINANCIAL INFORMATION
1 Financial Statements:
Condensed Balance Sheets as of December 31, 1995
and September 30, 1996 3
Condensed Statements of Income for the three and nine
months ended September 30, 1995 and 1996 4
Condensed Statements of Cash Flows for the nine
months ended September 30, 1995 and 1996 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
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ADTRAN, INC.
CONDENSED BALANCE SHEETS
ASSETS
December 31, September 30,
1995 1996
----------- -------------
(Unaudited)
Current assets:
Cash and cash equivalents....................... $ 35,027,609 $ 33,819,943
Short-term investments.......................... 24,652,689 27,525,080
Accounts receivable, less allowance for
doubtful accounts of $544,526 and $673,965
in 1995 and 1996, respectively 29,234,803 33,903,289
Other receivables............................... 857,303 279,565
Inventory....................................... 44,997,195 43,046,156
Prepaid expenses................................ 683,594 3,770,457
Deferred tax assets............................. 1,068,861 1,068,861
------------ ------------
Total current assets.......................... 136,522,054 143,413,351
Property, plant, and equipment, less accumulated
depreciation of $8,877,504 and $10,196,709
in 1995 and 1996, respectively.................. 29,245,252 49,933,398
------------ ------------
$165,767,306 $193,346,749
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................ $ 9,740,587 $ 8,178,164
Accrued salaries................................ 1,332,141 1,475,731
Accrued income taxes............................ 1,310,841 0
Accrued taxes other than income taxes.......... 586,150 426,248
Accrued interest payable........................ 74,305 56,089
Warranty liability.............................. 523,027 648,027
Accrued vacation................................ 489,278 689,352
------------ ------------
Total current liabilities 14,056,329 11,473,611
------------ ------------
Long term liabilities:
Long term debt.................................. 20,000,000 20,000,000
Deferred income taxes........................... 967,666 967,666
------------ ------------
Total liabilities.............................. 35,023,995 32,441,277
------------ ------------
Stockholders' equity:
Common stock, par value $.01 per share
60,000,000 shares authorized; 37,462,275
and 38,716,844 shares issued in 1995 and
1996, respectively............................. 374,623 387,168
Additional paid-in capital...................... 89,404,177 90,086,912
Retained earnings............................... 40,964,511 70,431,392
------------ ------------
Total stockholders' equity...................... 130,743,311 160,905,472
------------ ------------
$165,767,306 $193,346,749
============ ============
See notes to condensed financial statements
3
ADTRAN, INC.
CONDENSED STATEMENTS OF INCOME
UNAUDITED
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1995 1996 1995 1996
Sales......................................... $48,002,263 $62,634,637 $131,560,833 $180,484,338
Cost of sales................................. 24,554,375 32,930,249 67,714,515 95,352,361
----------- ----------- ------------ ------------
Gross profit............................... 23,447,888 29,704,388 63,846,318 85,131,977
Selling, general and administrative expenses.. 7,071,049 8,472,083 19,087,212 23,494,632
Research and development expenses............. 5,127,080 6,269,711 13,995,328 17,897,106
----------- ----------- ------------ ------------
Income from operations..................... 11,249,759 14,962,594 30,763,778 43,740,239
Interest expense.............................. (210,290) (219,597) (857,785) (666,467)
Other income (expense)........................ 882,696 643,159 2,151,370 1,722,446
----------- ----------- ------------ ------------
Income before income taxes.................... 11,922,165 15,386,156 32,057,363 44,796,218
Provision for income taxes.................... (4,152,490) (5,980,599) (11,165,579) (16,427,053)
----------- ----------- ------------ ------------
Net income................................. $ 7,769,675 $ 9,405,557 $ 20,891,784 $ 28,369,165
=========== =========== ============ ============
Net income per common and common
equivalent share $ .20 $ .24 $ .53 $ .72
=========== =========== ============ ============
Weighted average common and common
equivalent shares outstanding 39,518,679 39,579,894 39,179,784 39,568,602
=========== =========== ============ ============
See notes to condensed financial statements
4
ADTRAN, INC.
CONDENSED STATEMENTS OF CASH FLOWS
UNAUDITED
NINE MONTHS ENDED
SEPTEMBER 30,
1995 1996
------------- ------------
Cash flows from operating activities:
Net income........................................................... $ 20,891,784 $ 28,369,165
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation....................................................... 2,185,673 3,409,150
Provision for losses on accounts receivable........................ 149,736 154,598
Provision for losses on inventory.................................. 2,141,686 2,733,676
Provision for losses on warranty claims............................ 529,729
(Gain) loss on sale of property, plant and equipment.............. 8,842 30,204
(Gain) loss on short term investments.............................. 54,056 405,789
Change in operating assets:
Accounts receivable.............................................. (8,470,202) (4,823,084)
Inventory........................................................ (12,751,038) (782,637)
Other receivables................................................ (628,345) 577,738
Prepaid expenses................................................. (400,871) (3,086,863)
Change in operating liabilities:
Accounts payable................................................. 523,375 (1,562,423)
Accrued salaries................................................. (202,677) 143,590
Accrued income taxes............................................. 1,635,755 (213,125)
Accrued taxes other than income taxes............................ 75,032 (159,902)
Accrued interest payable......................................... 56,250 (18,216)
Accrued vacation................................................. 174,489 200,074
Warranty liabilities............................................. 50,000 (404,729)
------------ ------------
Net cash provided by operating activities............................ 5,493,545 25,502,734
------------ ------------
Cash flows from investing activities:
Expenditures for property, plant and equipment....................... (8,453,509) (24,132,103)
Proceeds from the disposition of property, plant and equipment....... 6,000 4,602
Net (purchase) sale of short-term investments....................... (23,241,831) (3,278,180)
------------ ------------
Net cash provided by (used in) investing activities................. (31,689,340) (27,405,681)
------------ ------------
Cash flows from financing activities:
Proceeds from bond issuance.......................................... 20,000,000
Proceeds from public offering........................................ 15,690,000
Proceeds from issuance of common stock............................... 302,026 695,281
------------ ------------
Net cash provided by financing activities........................... 35,992,026 695,281
------------ ------------
Net increase (decrease) in cash and
cash equivalents................................................... 9,796,231 (1,207,666)
Cash and cash equivalents, beginning of period........................ 18,765,178 35,027,609
------------ ------------
Cash and cash equivalents, end of period.............................. $ 28,561,409 $ 33,819,943
============ ============
Supplemental disclosure of cash flow information:
Cash paid during the period for interest,
net of $136,251 and $298,775 of capitalized
interest in 1995 and 1996, respectively.......................... $ 1,054,036 $ 983,458
============ ============
Cash paid during the period for taxes............................. $ 9,529,825 $ 18,835,818
============ ============
See notes to condensed financial statements
5
ADTRAN, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed statements of ADTRAN, Inc. (the
"Company") 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. 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.
Interim statements are subject to possible adjustments in connection with the
annual audit of the Company's accounts for the full year 1996. 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 nine months ended September 30, 1996 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1996.
2. INVENTORY
At December 31, 1995 and September 30, 1996, inventory consisted of the
following:
December 31, September 30,
1995 1996
------------ -------------
Raw materials.................... $27,390,750 $27,276,202
Work in progress................. 4,428,437 2,715,783
Finished goods................... 13,178,008 13,054,171
----------- -----------
$44,997,195 $43,046,156
=========== ===========
3. THE ALABAMA STATE INDUSTRIAL DEVELOPMENT AUTHORITY
In conjunction with the expansion of its Huntsville, Alabama facility, the
Company is participating in an incentive program offered by the Alabama State
Industrial Development Authority (the "Authority"). Pursuant to such program, in
January 1995, the Authority issued $20,000,000 of its taxable revenue bonds and
loaned the proceeds from the sale of the bonds to the Company. The bonds were
purchased by AmSouth Bank of Alabama, Birmingham, Alabama (the "Bank"), and the
Company and the Bank have agreed to keep the proceeds from such bonds invested
in short-term commercial paper until such time as the proceeds are needed by the
Company to pay the costs of construction. Prior to the Company using the
proceeds for construction costs, the Company, the Authority and the Bank would
be required to enter into further documentation to allow such use of proceeds.
The Company has agreed to make payments to the Authority in amounts necessary to
pay the principal of and interest on such bonds. The bonds bear interest,
payable monthly, at the rate of 87.5 basis points over the 30 day London inter-
bank offered rate and mature on January 1, 2020. Construction on the project
began in March 1995 and certain phases should be completed by the end of 1996.
4. RECENTLY ISSUED ACCOUNTING STANDARDS
Statement of Financial Accounting Standards No. 123 (SFAS 123), Accounting
for Stock-Based Compensation, will require the Company, for the year ended
December 31, 1996, to either account for the estimated fair value of stock
options granted as compensation expense or continue to account for them under
present rules. If the Company chooses to continue to account for stock options
granted under present rules, as management believes is likely, disclosure will
be required of the pro forma impact of accounting for the estimated fair value
of stock options granted as compensation expense.
6
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), Original Equipment Manufacturers ("OEMs") and, since 1991, 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 also strives to introduce forward looking designs which
provide a technological and competitive advantage. In some cases this product
advancement will make obsolete prior products of the Company. The Company's
success to date is attributable in large measure to its ability to 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.
7
RESULTS OF OPERATIONS - THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 1995
COMPARED TO THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 1996
SALES
The Company's sales increased 30.5% from $48,002,263 in the three months
ended September 30, 1995 to $62,634,637 in the three months ended September 30,
1996. Similarly, sales increased 37.2% from $131,560,833 in the nine months
ended September 30, 1995 to $180,484,338 in the nine months ended September 30,
1996. The increased sales resulted from increased sales volume to existing
customers and from increased market penetration. Sales to Telcos increased
18.9% from $29,339,770 in the three months ended September 30, 1995 to
$34,876,761 in the three months ended September 30, 1996 and increased 44.0%
from $74,728,552 in the nine months ended September 30, 1995 to $107,595,394 in
the nine months ended September 30, 1996. The increase in Telco sales in the
1996 periods resulted primarily from increased sales of Integrated Services
Digital Network ("ISDN") products and increased sales of High bit-rate Digital
Subscriber Line ("HDSL") products. Telco sales as a percentage of total sales
decreased from 61.1% in the three months ended September 30, 1995 to 55.7% in
the three months ended September 30, 1996 and increased from 56.8% in the nine
months ended September 30, 1995 to 59.6% in the nine months ended September 30,
1996. The increase in Telco sales as a percentage of total sales was due to
increased sales volume of ISDN and HDSL products during the 1996 periods to
Telcos. Sales of CPE products increased 39.4% from $14,291,941 in the three
months ended September 30, 1995 to $19,928,445 in the three months ended
September 30, 1996 and increased CPE 37.8% from $36,766,237 in the nine months
ended September 30, 1995 to $50,653,819 in the nine months ended September 30,
1996 as a result of increased CPE sales of ISDN products and T1 Service Unit
("TSU") products. OEM sales increased 79.1% from $4,370,552 in the three months
ended September 30, 1995 to $7,829,431 in the three months ended September 30,
1996 and increased 10.8% from $20,066,044 in the nine months ended September 30,
1995 to $22,235,124 in the nine months ended September 30, 1996. This increase
was due to new contracts for customer funded modifications of standard DDS, ISDN
and HDSL designs. OEM products are generally customized versions of the
Company's Telco and CPE products. 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 increased 34.1% from $24,554,375 in the three months ended
September 30, 1995 to $32,930,249 in the three months ended September 30, 1996
and increased 40.8% from $67,714,515 in the nine months ended September 30,
1995 to $95,352,361 in the nine months ended September 30, 1996, primarily as a
result of the increase in sales. As a percentage of sales, cost of sales
increased from 51.2% in the three months ended September 30, 1995 to 52.6% in
the three months ended September 30, 1996 and increased from 51.5% in the nine
months ended September 30, 1995 to 52.8% in the nine months ended September 30,
1996. 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 sometimes results in variations in the
Company's gross profit margin due to timing differences between the lowering of
product selling prices and the full recognition of cost reductions. 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.
8
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased 19.8% from $7,071,049
in the three months ended September 30, 1995 to $8,472,083 in the three months
ended September 30, 1996 and increased 23.1% from $19,087,212 in the nine months
ended September 30, 1995 to $23,494,632 in the nine months ended September 30,
1996. The increases were due to additional sales and support expenditures
necessary as a result of the Company's expanded sales base. However, the larger
sales base caused selling, general and administrative expenses as a percentage
of sales to decrease from 14.7% in the three months ended September 30, 1995 to
13.5% in the three months ended September 30, 1996 and to decrease from 14.5% in
the nine months ended September 30, 1995 to 13.0% in the nine months ended
September 30, 1996.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses increased 22.3% from $5,127,080 in the
three months ended September 30, 1995 to $6,269,711 in the three months ended
September 30, 1996 and increased 27.9% from $13,995,328 in the nine months ended
September 30, 1995 to $17,897,106 in the nine months ended September 30, 1996.
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, however, research and development expenses declined from
10.7% in the three months ended September 30, 1995 to 10.0% in the three months
ended September 30, 1996 and declined from 10.6% in the nine months ended
September 30, 1995 to 9.9% in the nine months ended September 30, 1996 due to
the increased sales in the 1996 periods.
INTEREST EXPENSE
Interest expense increased 4.4% from $210,290 in the three months ended
September 30, 1995 to $219,597 in the three months ended September 30, 1996 and
decreased 22.3% from $857,785 in the nine months ended September 30, 1995 to
$666,467 in the nine months ended September 30, 1996. This decrease was due to
capitalization of the interest cost as a part of the cost of acquiring certain
assets. The Company currently pays interest on $20,000,000 of revenue bond
proceeds loaned to the Company in January 1995, which proceeds are being used to
expand the Company's facilities in Huntsville, Alabama. See "Liquidity and
Capital Resources" below.
NET INCOME
As a result of the above factors, net income increased 21.1% from $7,769,675
in the three months ended September 30, 1995 to $9,405,557 in the three months
ended September 30, 1996 and increased 35.8% from $20,891,784 in the nine
months ended September 30, 1995 to $28,369,165 in the nine months ended
September 30, 1996. As a percentage of sales, net income decreased from 16.2%
in the three months ended September 30, 1995 to 15.0% in the three months ended
September 30, 1996 and decreased from 15.9% in the nine months ended September
30, 1995 to 15.7% in the nine months ended September 30, 1996.
LIQUIDITY AND CAPITAL RESOURCES
The Company's only long-term debt outstanding as of September 30, 1996
consisted of a loan in the amount of $20,000,000 related to the expansion of the
Company's facilities in Huntsville, Alabama. The Company is continuing a project
to expand its facilities in Huntsville in several phases over the next four
9
years at an approximate cost of up to $68,200,000. Fifty million dollars of
this project has been approved for participation in an incentive program offered
by the Alabama State Industrial Development Authority (the "Authority"). That
program enables participating companies such as the Company to generate Alabama
corporate income tax credits that can be used to offset much of the amount of
the debt and interest incurred to finance the project. In January 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 purchased by AmSouth Bank of Alabama, Birmingham, Alabama, (the
"Bank"), and the Company and the Bank have agreed to keep the proceeds from such
bonds invested in short-term commercial paper until such time as the proceeds
are needed by the Company to pay the costs of construction. Prior to the Company
using the proceeds for construction costs, the Company, the Authority and the
Bank would be required to enter into further documentation to allow such use of
proceeds. The Company has agreed to make payments to the Authority in amounts
necessary to pay the principal of, and interest on, such bonds. The bonds bear
interest, payable monthly, at the rate of 87.5 basis points over the 30 day
London inter-bank offered rate and mature on January 1, 2020. Construction on
the project began in March 1995 and certain phases should be completed by the
end of 1996. The Company expects to use the proceeds of additional revenue bonds
pursuant to such program to equip its expanded facilities over the next four
years. There can be no assurance that the State of Alabama will continue to make
these corporate income tax credits available in the future.
The Company's working capital position improved from $122,465,725 as of
December 31, 1995 to $131,939,740 as of September 30, 1996. 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 4.3% in the nine months ended
September 30, 1996, while sales for the three months ended September 30, 1996
increased 25.5% over sales for the three months ended December 31, 1995. The
decrease in inventory reflects overall efficiencies in reducing inventory
levels.
Capital expenditures totaling $12,790,517 in 1995 and $24,132,103 in the
first nine months of 1996 were used to expand the Company's headquarters and to
purchase equipment.
At September 30, 1996, the Company's cash on hand of $33,819,943, short-term
investments of $27,525,080 and $10,000,000 available under a $10,000,000 bank
line of credit placed the Company's potential cash availability at $71,345,023,
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 and expires in May 1997.
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 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.
10
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
----------- -----------
11 Weighted Average Common and Common Equivalent
Shares Outstanding
27 Financial Data Schedule
(b) The Company filed the following Current Report on Form 8-K during
the quarter ended September 30, 1996.
Form 8-K Financial Statements
Date of Report Item Reported Description Included
- -------------- ------------- --------------------------------------- --------------------
9-11-96 Item 7 Press release dated August 12, 1996 None
announcing the appointment of
Mr. John R. Cooper as Vice President
and Chief Financial Officer of
ADTRAN, Inc.
9-11-96 Item 7 Press release dated August 29, 1996 None
announcing the appointment of
Dr. Melvin Bruce as Vice President
of Engineering of ADTRAN, Inc.
9-11-96 Item 7 Press release dated September 9, 1996 None
announcing the appointment of
Dr. Peter O. Brackett as Vice
President of Technology of
ADTRAN, Inc.
11
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: November 13, 1996 /s/ John R. Cooper
----------------------
John R. Cooper
Vice President and CFO
12
INDEX OF EXHIBITS
EXHIBIT NO. DESCRIPTION
- ---------- -----------
11 Weighted Average Common and Common Equivalent Shares Outstanding
27 Financial Data Schedule
13