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, 1999 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, 1999 Common Stock, $.01 Par Value 39,412,479 shares Page 1 of 15
ADTRAN, INC. Quarterly Report on Form 10-Q For the Quarter Ended March 31, 1999 Table of Contents Item Page Number PART I. FINANCIAL INFORMATION Number 1 Financial Statements (unaudited): Condensed Balance Sheets as of March 31, 1999 and December 31, 1998 (audited) 3 Condensed Statements of Income for the three months ended March 31, 1999 and 1998 4 Condensed Statements of Cash Flows for the three months ended March 31, 1999 and 1998 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 14 SIGNATURE 15
<TABLE> PART I. FINANCIAL INFORMATION Item 1. Financial Statements ADTRAN, INC. CONDENSED BALANCE SHEETS ASSETS March 31, December 31, 1999 1998 <S> <C> <C> Current assets: Cash and cash equivalents $36,574,151 $ 10,009,320 Short-term investments 28,547,550 40,795,068 Accounts receivable, less allowance for doubtful accounts of $862,002 and $958,805 in 1999 and 1998, respectively 48,643,334 46,588,319 Other receivables 912,783 697,074 Inventory 55,149,436 65,700,576 Prepaid expenses 1,826,747 1,354,366 Deferred income taxes 2,416,686 2,416,685 ------------------------------- Total current assets 174,070,687 167,561,408 Property, plant and equipment,less accumulated depreciation of $32,527,83 and $29,902,941 in 1999 and 1998, respectively 85,872,913 78,894,317 Other assets 220,000 220,000 Long-term investments 55,728,963 55,035,000 -------------------------------- $315,892,563 $301,710,725 ================================ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $10,301,202 $10,980,097 Accrued salaries 2,956,443 1,828,462 Accrued income taxes 5,800,876 1,060,795 Accrued taxes other than income taxes 304,861 252,548 Warranty liability 1,519,945 1,519,945 Compensated absences 1,523,974 1,384,802 -------------------------------- Total current liabilities 22,407,301 17,026,649 Long term liabilities: Bonds payable 50,000,000 50,000,000 Deferred income taxes 3,295,140 3,295,140 ------------------------------- Total liabilities 75,702,441 70,321,789 ------------------------------- Stockholders' equity: Common stock, par value $.01 per share 200,000,000 shares authorized: 39,430,279 and 39,423,479 shares issued in 1999 and 1998, respectively 394,303 394,235 Additional paid-in capital 90,649,817 90,640,451 Retained earnings 172,680,799 163,570,297 Less treasury stock at cost: 1,120,081 and 1,100,081 shares in 1999 and 1998, respectively (23,534,797) (23,216,047) ---------------------------------- Total stockholders' equity 240,190,122 231,388,936 --------------------------------- $315,892,563 $301,710,725 ================================= </TABLE> See notes to condensed financial statements
<TABLE> ADTRAN, INC. CONDENSED STATEMENTS OF INCOME Audited Three Months Ended March 31, 1999 1998 <S> <C> <C> Sales $77,162,648 $65,327,234 Cost of sales 37,668,543 29,408,537 --------------------------- Gross profit 39,494,105 35,918,697 Selling, general and administrative expenses 16,594,352 13,257,590 Research and development expenses 9,673,687 8,378,356 --------------------------- Income from operations 13,226,066 14,282,751 Interest expense (570,000) (534,428) Other income, net 1,043,938 1,354,961 ---------------------------- Income before income taxes 13,700,004 15,103,284 Provision for income taxes (4,589,501) (5,210,633) ---------------------------- Net income $ 9,110,503 $ 9,892,651 ============================ Weighted average shares outstanding assuming dilution (1) 38,447,082 39,538,761 ============================ Earnings per common share assuming dilution (1)........ $ .24 $ .25 ============================ Earnings per common share - basic $ .24 $ .25 ============================ </TABLE> (1) Assumes exercise of dilutive stock options calculated under the treasury stock method. See notes to condensed financial statements
<TABLE> ADTRAN, INC. CONDENSED STATEMENTS OF CASH FLOWS Unaudited Three Months Ended March 31, 1999 1998 <S> <C> <C> Cash flows from operating activities: Net income $9,110,503 $9,892,651 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 2,624,898 1,963,469 Gain on sale of property, plant and equipment 0 (667) Loss on short-term investments 37,050 0 Change in operating assets: Accounts receivable (2,055,016) 3,357,074 Inventory 10,551,140 365,725 Other receivables (215,709) (441,851) Prepaid expenses (472,382) (890,830) Change in operating lieabilities: Accounts payable (678,894) 473,478 Accrued salaries 1,127,980 (174,691) Accrued income taxes 4,740,081 2,697,849 Accrued taxes other than income taxes 52,313 70,133 Compensated absences 139,172 180,746 ------------------------- Net cash provided by operating activities 24,961,136 17,493,086 -------------------------- Cash flows from investing activities: Expenditures for property, plant and equipment (9,603,494) (3,832,319) Proceeds from the disposition of property, plant and 0 10,000 equipment Redemption (Purchase) of short-term investments 12,210,468 (25,590,483) Purchase of long-term investments (693,963) (5,035,000) --------------------------- Net cash provided by (used in) investing activitie 1,913,011 (34,447,802) ---------------------------- Cash flows from financing activities: Proceeds from issuance of common stock 9,434 22,091 Purchase of treasury stock (318,750) 0 -------------------------- Net cash (used in) provided by financing activities (309,316) 22,091 -------------------------- Net increase (decrease) in cash 26,564,831 (16,932,625) and cash equivalents Cash and cash equivalents, beginning 10,009,320 45,340,961 of period ------------------------- Cash and cash equivalents, end of period $36,574,151 $28,408,336 ========================= </TABLE> 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, 1998 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 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. 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, 1999 are not necessarily indicative of the results that may be expected to occur for the year ending December 31, 1999. 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 1 2. INVENTORY At March 31, 1999 and December 31, 1998, inventory consisted of the following: March 31, December 31, 1999 1998 Raw materials $30,201,434 $39,787,631 Work in progress 10,391,538 7,935,771 Finished goods 14,556,464 17,977,174 ----------- ----------- $55,149,436 $65,700,576 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 fiscal years beginning after June 15, 1999 and is effective for interim periods in the initial year of adoption. The Company does not currently hold any derivative financial instruments.
4. EARNINGS PER SHARE A summary of the calculation of basic and diluted earnings per share for the three months ended March 31, 1999 and 1998 is as follows: <TABLE> For the Three Months Ended March 31, 1999 <S> <C> <C> <C> 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 conversions + assumed conversions $9,110,503 38,447,082 $0.24 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 237,424 DILUTED EPS Income available to common stockholders + assumed conversions $9,892,651 39,538,761 $.25 </TABLE>
5. SEGMENT INFORMATION The Company operates two reportable segments - (1) the Carrier Network Division (formerly Telco) and (2) the Enterprise Network Division (formerly CPE). The Company evaluates the performance of its segments based on gross profit; therefore, selling, general and administrative costs, as well as research and development, 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 the Company for the three months ended March 31, 1999 and 1998. Asset information by reportable segment is not reported, since the Company does not produce such information internally. First Quarter First Quarter 1999 1998 Sales Gross Sales Gross Profit Profit (in thousands) Carrier Network $47,652 $24,407 $40,696 $22,378 Enterprise Network 29,511 15,087 24,631 13,541 ------------------------------------------- Total $77,163 $39,494 $65,327 $35,919 The following table presents sales information by geographic area for the quarters ended March 31: Sales (in thousands) First First Quarter Quarter 1999 1998 United States $74,656 $60,954 Foreign 2,507 4,373 ------------------------- $77,163 $65,327
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), what is now referred to by the Company as the Carrier Network Division, and to private end-users in the Enterprise Network Division (formerly known as the Customer Premises Equipment or 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, 1999 COMPARED TO THREE MONTHS ENDED MARCH 31, 1998 SALES The Company's sales increased 18.1% from $65,327,234 in the three months ended March 31, 1998 to $77,162,648 in the three months ended March 31, 1999. The increased sales resulted from an increase in sales volume to existing customers and from increased market penetration. Carrier Network (formerly known as Telco) sales increased from $40,696,014 in the three months ended March 31, 1998 to $47,651,669 in the three months ended March 31, 1999. The increase in Carrier Network sales in the 1999 period resulted primarily from increased sales of High bit-rate Digital Subscriber Line ("HDSL") products and Integrated Services Digital Network ("ISDN") products. Carrier Network sales as a percentage of total sales decreased from 62.3% in the three months ended March 31, 1998 to 61.8% in the three months ended March 31, 1999. Sales of Enterprise Network (formerly known as CPE) products increased 19.8% from $24,631,220 in the three months ended March 31, 1998 to $29,510,979 in the three months ended March 31, 1999, as a result of increased sales of "T-1" products, (a digital transmission link with a capacity of 1.544 megabits per second used predominantly in North America). As a percentage of total sales, Enterprise Network sales increased from 37.7% in the three months ended March 31, 1998 to 38.2% in the three months ended March 31, 1999. 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 28.1% from $29,408,537 in the three months ended March 31, 1998 to $37,668,543 in the three months ended March 31, 1999, due primarily to the increased sales mix and volume of the more expensive HDSL products. As a percentage of sales, cost of sales increased from 45.0%in the three months ended March 31, 1998 to 48.8% in the three months ended March 31, 1999. Carrier Network cost of sales increased 26.9% from $18,318,666 in the three months ended March 31, 1998 to $23,244,312 in the three months ended March 31, 1999. Carrier Network cost of sales as a percentage of Carrier Network sales increased from 45.0% in the three months ended March 31, 1998 to 48.8% in the three months ended March 31, 1999. Enterprise Network cost of sales increased slightly from $11,089,871 in the three months ended March 31, 1998 to $14,424,231 in the three months ended March 31, 1999. Enterprise Network cost of sales as a percentage of Enterprise Network sales increased from 45.0% in the three months ended March 31, 1998 to 48.9% in the three months ended March 31, 1999. 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 25.2% from $13,257,590 in the three months ended March 31, 1998 to $16,594,352 in the three months ended March 31, 1999. 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 20.3% in the three months ended March 31, 1998 to 21.5% in the three months ended March 31, 1999. RESEARCH AND DEVELOPMENT EXPENSES Research and development expenses increased 15.5% from $8,378,356 in the three months ended March 31, 1998 to $9,673,687 in the three months ended March 31, 1999. The increase was due to increased investment in product development and cost reduction through engineering. As a percentage of sales, research and development expenses decreased from 12.8% in the three months ended March 31, 1998 to 12.5% in the three months ended March 31, 1999. The Company 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 6.7% from $534,428 in the three months ended March 31, 1998 to $570,000 in the three months ended March 31, 1999. See "Liquidity and Capital Resources" below. NET INCOME As a result of the above factors, net income decreased slightly from $9,892,651 in the three months ended March 31, 1998 to $9,110,503 in the three months ended March 31, 1999. As a percentage of sales, net income decreased from 15.1% in the three months ended March 31, 1998 to 11.8% in the three months ended March 31, 1999. LIQUIDITY AND CAPITAL RESOURCES The Company is continuing a project to expand its facilities in Huntsville in several phases over the next two years at a cost of approximately $150,000,000, of which $57,428,780 had been incurred as of March 31, 1999. The debt associated with $50,000,000 of this project was approved for participation in an incentive program offered by the Alabama State Industrial Development Authority (the "Authority") under which the Authority issued $50,000,000 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. 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 increased slightly from $150,534,759 as of December 31, 1998 to $151,663,386 as of March 31, 1999 due to cash generated from operations. The Company 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 decreased 16% from December 31, 1998 to March 31, 1999. This decrease was attributable to the increased shipments of existing stock, planned for and built up in 1998. On March 31, 1997, the Board of Directors authorized the Company to re-purchase up to 1,000,000 shares of the Company's outstanding common stock. In October 1998, the Board approved the re-purchase of an additional 2,000,000 shares. As of March 31, 1999, the Company had re-purchased 1,120,081 shares of its common stock at a total cost of $23,534,797. Capital expenditures totaling $23,095,854 for the year ended December 31, 1998 and $9,603,494 in the first three months of 1999 were used to expand the Company's headquarters and to purchase equipment. At March 31, 1999, the Company's cash on hand of $36,574,151, short- term investments of $28,547,550 and $10,000,000 available under a bank line of credit placed the Company's potential cash availability at $75,121,701, 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 2000. The Company intends to finance its operations in the future with cash flow from operations, 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 READINESS DISCLOSURE The Company conducted a year 2000 program to assess and mitigate the impact of the year 2000 issue. The Company believes that all critical information technology and non-information technology hardware and software systems are year 2000 compliant, including, but not limited to, business systems, network infrastructure, manufacturing equipment, engineering tools, customer products and plant facilities. The Company has completed the inventory and assessment phases of its year 2000 program. The Company's operations are not dependent upon older legacy source code or mainframe computers as is often the case with systems with significant year 2000 issues. Therefore, there is little or no date-related code remediation or conversion necessary to maintain normal business activities. The primary remaining effort in the year 2000 program is to review and validate the conclusions reached by the Company's year 2000 assessment. The Company does not believe that costs associated with bringing the Company's computer systems into full compliance with the year 2000 issue will result in a material expense to the Company. In July of 1998, the Company completed the implementation of new business software and hardware which the Company believes is year 2000 compliant. The Company upgraded some secondary systems which were identified with minor year 2000 issues. Likewise, testing and year 2000 simulations were performed on all Company systems to verify date processing capabilities. As of March 31, 1999 all critical systems have been tested and are believed to be year 2000 compliant. The Company has also contacted and assessed its suppliers and subcontractors regarding the year 2000 issue and concluded that those suppliers and subcontractors, which have a material relationship with the Company, are not expected to cause significant business interruptions to occur as a result of the year 2000 issue. The Company's assessment of suppliers has identified those most critical to the Company's operations and a contingency plan has been drafted to handle issues in the future. The Company's primary external subcontractors are conducting their own independent internal year 2000 programs and are being assisted by the Company with their year 2000 preparations where appropriate. The Company believes that its products are year 2000 compliant. Company engineers have confirmed product design specifications and have verified product date processing functionality. Customers are provided individual responses to product inquiries and the Company has posted detailed year 2000 information on its web site. The Company does not believe that it will have any material exposure to contingencies related to the year 2000 issue for products it has sold. 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 its internal systems or on those systems of its major suppliers and customers. However, there can be no guarantee that the systems of other companies on which the Company relies will be timely converted, or that a failure to convert by another company would not have a material adverse impact on the Company. Furthermore, despite the Company's assessments, there can be no guarantee that there will not be a year 2000 problem arising from the Company's own system that may have a material adverse impact on the Company. As of March 31, 1999 the Company had spent approximately $140,000 for year 2000 compliance. The Company anticipates spending an additional $40,000 during 1999. The Company does not separately track these internal costs incurred for the Y2K project. However, this cost consisted primarily of the related payroll costs of its information systems group.
PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K (a) The following exhibits are being filed with this report. None (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, 1999 /s/ John R. Cooper --------------------------- John R. Cooper Vice President - Finance and Chief Financial Officer