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, 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 October 31, 2001
----------------------------- -------------------------------
Common Stock, $.01 Par Value 39,462,838 shares
ADTRAN, INC.
Quarterly Report on Form 10-Q
For the Quarter Ended September 30, 2001
Table of Contents
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Item Page
Number Number
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PART I. FINANCIAL INFORMATION
1 Financial Statements: 3
Condensed Balance Sheets as of September 30, 2001 (unaudited) and
December 31, 2000 (audited) 3
Condensed Statements of Income for the three months
and nine months ended September 30, 2001 and 2000 (unaudited) 4
Condensed Statements of Cash Flows for the nine
months ended September 30, 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 10
3 Quantitative and Qualitative Disclosures About Market Risk 14
PART II. OTHER INFORMATION
6 Exhibits and Reports on Form 8-K 15
SIGNATURE 16
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
---------------------------
ADTRAN, INC.
CONDENSED BALANCE SHEETS
ASSETS
September 30, December 31,
2001 2000
-------------- -------------
(Unaudited) (Audited)
Current assets:
Cash and cash equivalents.................................. $107,145,382 $ 27,971,313
Short-term investments..................................... 12,161,842 60,286,332
Accounts receivable, less allowance for
doubtful accounts of $681,562 and $813,003
in 2001 and 2000, respectively.......................... 65,191,577 82,133,831
Other receivables.......................................... 7,626,851 35,862,774
Inventory.................................................. 72,131,820 89,252,729
Prepaid expenses........................................... 3,408,573 4,032,438
Deferred income taxes...................................... 4,505,008 4,505,008
------------ ------------
Total current assets............................. 272,171,053 304,044,425
Property, plant and equipment, less accumulated
depreciation of $65,901,740 and $53,422,304
in 2001 and 2000, respectively............................. 122,638,651 123,713,176
Other assets.................................................... 489,000 469,000
Long-term investments........................................... 120,909,770 118,109,404
------------ ------------
$516,208,474 $546,336,005
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable........................................... $ 15,773,077 $ 34,113,832
Accrued expenses........................................... 9,896,895 8,560,073
Income taxes payable....................................... 0 3,734,234
------------ ------------
Total current liabilities............................ 25,669,972 46,408,139
Long term liabilities:
Bonds payable.............................................. 50,000,000 50,000,000
Deferred income taxes...................................... 7,922,227 15,342,435
------------ ------------
Total liabilities..................................... 83,592,199 111,750,574
------------ ------------
Minority interest in subsidiary 0 160,000
------------ ------------
Stockholders' equity:
Common stock, par value $.01 per share,
200,000,000 shares authorized; 39,446,644 shares
issued in 2001 and 2000................................. 394,466 394,466
Additional paid-in capital................................. 96,386,734 96,707,263
Accumulated other comprehensive income..................... 7,207,989 19,870,288
Retained earnings.......................................... 346,450,459 332,905,389
Less treasury stock at cost: 860,322 and 733,192
shares in 2001 and 2000, respectively.................. (17,823,373) (15,451,975)
------------ ------------
Total stockholders' equity................................. 432,616,275 434,425,431
------------ ------------
$516,208,474 $546,336,005
============ ============
See notes to condensed financial statements
3
ADTRAN, INC.
CONDENSED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
2001 2000 2001 2000
------------ ------------ ------------ ------------
Sales................................................. $95,513,062 $127,276,696 $297,986,682 $341,193,702
Cost of sales......................................... 53,114,239 61,323,706 164,594,872 159,165,772
----------- ------------ ------------ ------------
Gross profit................................ 42,398,823 65,952,990 133,391,810 182,027,930
Selling, general and administrative expenses.......... 22,120,077 22,968,133 73,022,848 63,068,043
Research and development expenses..................... 15,180,334 12,766,314 44,954,097 37,022,104
----------- ------------ ------------ ------------
Operating income............................ 5,098,412 30,218,543 15,414,865 81,937,783
Interest expense...................................... (461,458) (589,000) (1,443,654) (1,741,667)
Other income, net..................................... 1,758,025 2,797,520 5,447,036 5,932,258
Net realized investment gains......................... 0 84,040,125 0 84,040,125
----------- ------------ ------------ ------------
Income before income taxes............................ 6,394,979 116,467,188 19,418,247 170,168,499
Provision for income taxes............................ (1,445,265) (39,598,846) (5,873,176) (57,857,532)
----------- ------------ ------------ ------------
Net income.................................. $ 4,949,714 $ 76,868,342 $ 13,545,071 $112,310,967
=========== ============ ============ ============
Weighted average shares outstanding................... 38,639,907 38,690,560 38,656,006 38,633,914
=========== =========== ============ ============
Weighted average shares outstanding assuming
dilution (1)......................................... 38,679,763 39,748,566 38,764,304 39,827,843
=========== ============ ============ ============
Earnings per common share - basic..................... $ .13 $ 1.99 $ .35 $ 2.91
=========== ============ ============ ============
Earnings per common share assuming-dilution (1)....... $ .13 $ 1.93 $ .35 $ 2.82
=========== ============ ============ ============
(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)
Nine Months Ended
September 30,
2001 2000
------------ -------------
Cash flows from operating activities:
Net income................................................... $ 13,545,071 $ 112,310,967
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation.............................................. 12,489,306 9,536,588
Gain on sale of property, plant and equipment............. -- (830)
Loss on sale of short-term investments.................... 145,736 134,847
Gain on sale of long-term investments..................... -- (85,368,216)
Change in operating assets and liabilities:
Accounts receivable.................................. 16,942,254 (20,140,805)
Inventory............................................ 17,120,909 (26,762,477)
Other receivables.................................... 28,220,712 (7,355,217)
Prepaid expenses and other assets.................... 603,865 (3,466,177)
Accounts payable..................................... (18,340,755) 14,209,349
Income taxes payable................................. (3,734,234) 23,630,263
Accrued expenses..................................... 1,336,822 3,316,079
------------ -------------
Net cash provided by operating activities.................... 68,329,686 20,044,371
------------ -------------
Cash flows from investing activities:
Expenditures for property, plant and equipment............... (11,415,032) (27,089,785)
Proceeds from sales of short-term investments................ 83,483,545 50,907,900
Purchases of short-term investments.......................... (35,956,805) (162,843,646)
Proceeds from sales of long-term investments................. 28,135,929 87,194,072
Purchases of long-term investments........................... (50,711,327) (5,763,409)
------------ -------------
Net cash provided by (used in) investing activities.......... 13,536,310 (57,594,868)
------------ -------------
Cash flows from financing activities:
Purchase of treasury stock................................... (2,955,575) --
Proceeds from issuance of common stock....................... 263,648 6,580,979
------------ -------------
Net cash provided by (used in) financing activities.......... (2,691,927) 6,580,979
------------ -------------
Net increase (decrease) in cash and cash equivalents......... 79,174,069 (30,969,518)
Cash and cash equivalents, beginning of period.................... 27,971,313 37,500,674
------------ -------------
Cash and cash equivalents, end of period.......................... $107,145,382 $ 6,531,156
============ =============
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 September 30,
2001 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 nine months ended September 30, 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 September 30, 2001 and December 31, 2000, inventory consisted of the
following:
September 30, December 31,
2001 2000
------------- ------------
Raw materials $44,694,570 $50,011,508
Work in progress 7,223,169 12,606,275
Finished goods 20,214,081 26,634,946
----------- -----------
$72,131,820 $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
$20,753,060 at September 30, 2001, consists of net income of $13,545,071 and
unrealized gains on marketable securities of $7,207,989 (net of deferred tax of
$3,805,999). Comprehensive income of $140,672,549 at December 31, 2000, consists
of net income of $120,802,261 and unrealized gains on marketable securities of
$19,870,288 (net of deferred tax of $11,645,134).
6
4. EARNINGS PER SHARE
A summary of the calculation of basic and diluted earnings per share (EPS) for
the three months and nine months ended September 30, 2001 and 2000 is as
follows:
For the Three Months Ended September 30, 2001
----------------------------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
Basic EPS
Income available to common stockholders $4,949,714 38,639,907 $0.13
Effect of Dilutive Securities
Stock Options 39,856
Diluted EPS
Income available to common stockholders
Plus assumed conversions $4,949,714 38,679,763 $0.13
For the Nine Months Ended September 30, 2001
-----------------------------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
Basic EPS
Income available to common stockholders $13,545,071 38,656,006 $0.35
Effect of Dilutive Securities
Stock Options 108,298
Diluted EPS
Income available to common stockholders
Plus assumed conversions $13,545,071 38,764,304 $0.35
7
Earnings Per Share (continued)
For the Three Months Ended September 30, 2000
-----------------------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
Basic EPS
Income available to common stockholders $76,868,342 38,690,560 $1.99
Effect of Dilutive Securities
Stock Options 1,058,006
Diluted EPS
Income available to common stockholders
Plus assumed conversions $76,868,342 39,748,566 $1.93
For the Nine Months Ended September 30, 2000
-----------------------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
Basic EPS
Income available to common stockholders $112,310,967 38,633,914 $2.91
Effect of Dilutive Securities
Stock Options 1,193,929
Diluted EPS
Income available to common stockholders
Plus assumed conversions $112,310,967 39,827,843 $2.82
8
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 provision for
income taxes are reported on an entity wide basis only. There are no inter-
segment revenues.
The table below presents information about the reported sales and gross profit
of ADTRAN's segments for the three months and nine months ended September 30,
2001 and 2000. Asset information by reportable segment is not reported, since
ADTRAN does not produce such information internally.
Three Months Ended Nine Months Ended
September 30, 2001 September 30, 2001
Sales Gross Profit Sales Gross Profit
------------ ------------ ------------ ------------
Carrier Network $ 55,813,387 $21,353,729 $185,283,724 $ 73,588,743
Enterprise Network 39,699,675 21,045,094 112,702,958 59,803,067
------------ ----------- ------------ ------------
Total $ 95,513,062 $42,398,823 $297,986,682 $133,391,810
============ =========== ============ ============
Three Months Ended Nine Months Ended
September 30, 2000 September 30, 2000
Sales Gross Profit Sales Gross Profit
------------- ------------ ------------ -------------
Carrier Network $ 79,911,989 $38,846,847 $224,501,259 $115,269,078
Enterprise Network 47,364,707 27,106,143 116,692,443 66,758,852
------------ ----------- ------------ ------------
Total $127,276,696 $65,952,990 $341,193,702 $182,027,930
============ =========== ============ ============
The following table presents sales information by geographic area for the three
months and nine months ended September 30, 2001 and 2000.
Three Months Ended Nine Months Ended
September 30, September 30, September 30, September 30,
2001 2000 2001 2000
------------- ------------- ------------- -------------
United States $88,662,414 $123,061,429 $285,368,513 $331,772,796
Foreign 6,850,648 4,215,267 12,618,169 9,420,906
----------- ------------ ------------ ------------
Total $95,513,062 $127,276,696 $297,986,682 $341,193,702
=========== ============ ============ ============
9
6. RECENTLY ISSUED ACCOUNTING STANDARDS
In June 2001, the Financial Accounting Standards Board issued SFAS No. 141,
Business Combinations, which has an effective date of June 30, 2001 for all
business combinations initiated after this date. This statement supersedes APB
Opinion No. 16, Business Combinations, and FASB Statement No. 38, Accounting for
Preacquisition Contingencies of Purchased Enterprises. This statement requires
all business combinations within the scope of the Statement to be accounted for
using the purchase method of accounting. For business combinations completed
prior to June 30, 2001, the statement requires companies to recognize intangible
assets apart from goodwill and expand the disclosures about assets acquired and
liabilities assumed. The impact of SFAS No. 141 on the financial statements is
not expected to be material.
In June 2001, the Financial Accounting Standards Board issued SFAS No. 142,
Goodwill and Other Intangible Assets, which has an effective date starting with
fiscal years beginning after December 15, 2001. This statement supersedes APB
Opinion No. 17, Intangible Assets. This statement addresses how intangible
assets that are acquired individually or with a group of other assets should be
accounted for in financial statements upon their acquisition. This statement
also addresses how goodwill and other intangible assets should be accounted for
after they have been initially recognized in the financial statements. Goodwill
will cease to be amortized upon the implementation of the statement and
companies will test goodwill at least annually for impairment. The impact of
SFAS No. 142 on the financial statements is not expected to be material.
In August 2001, the Financial Accounting Standards Board issued SFAS No. 143,
Accounting for Asset Retirement Obligations ("ARO"), which has an effective date
for financial statements for fiscal years beginning after June 15, 2002. This
statement addresses the diversity in practice for recognizing asset retirement
obligations and requires that obligations associated with the retirement of a
tangible long-lived asset be recorded as a liability when those obligations are
incurred, with the amount of the liability initially measured at fair value.
Upon initially recognizing a liability for an ARO, an entity must capitalize the
cost by recognizing an increase in the carrying amount of the related long-lived
asset. Over time, the liability is accreted to its present value each period,
and the capitalized cost is depreciated over the useful life of the related
asset. Upon settlement of the liability, an entity either settles the obligation
for its recorded amount or incurs a gain or loss upon settlement. The impact of
SEAS No. 143 is not expected to be material to the Company's financial
statements.
In October 2001, the Financial Accounting Standards Board issued SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets, which has an
effective date for financial statements for fiscal years beginning after
December 15, 2001. This statement, which supersedes SFAS No. 121, Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of,
requires that long-lived assets that are to be disposed of by sale be measured
at the lower of book value or fair value less cost to sell. Additionally, this
statement expands the scope of discontinued operations to include all components
of an entity with operations that (1) can be distinguished from the rest of the
entity and (2) will be eliminated from the ongoing operations of the entity in a
disposal transaction. The impact of SFAS No. 144 is not expected to be material
to the Company's financial statements.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
------------------------------------------------------------------------
RESULTS OF OPERATIONS
---------------------
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. Although
sales have not increased in this year due to an overall downturn in the
telecommunications market, we have protected revenue by maintaining 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.
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 could 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
10
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, and Section 27A
of the Securities Act of 1933, as amended, which represent ADTRAN's expectations
or 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 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.
11
RESULTS OF OPERATIONS - THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 2001
COMPARED TO THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 2000
SALES
ADTRAN's sales decreased 25.0% from $127,276,696 in the three months ended
September 30, 2000 to $95,513,062 in the three months ended September 30, 2001.
Sales decreased 12.7% from $341,193,702 in the nine months ended September 30,
2000 to $297,986,682 in the nine months ended September 30, 2001. The decrease
in sales for the three months and nine months ended September 30, 2001, is
attributable to two factors: (i) the lowering of HDSL product prices in the
second half of 2000 and (ii) the market wide slow down in the telecommunications
industry. Carrier Network sales decreased from $79,911,989 in the three months
ended September 30, 2000 to $55,813,387 in the three months ended September 30,
2001 and decreased from $224,501,259 in the nine months ended September 30, 2000
to $185,283,724 in the nine months ended September 30, 2001. Carrier Network
sales as a percentage of total sales decreased from 62.8% in the three months
ended September 30, 2000 to 58.4% in the three months ended September 30, 2001
and decreased from 65.8% in the nine months ended September 30, 2000 to 62.2% in
the nine months ended September 30, 2001. Sales of Enterprise Network products
decreased from $47,364,707 in the three months ended September 30, 2000 to
$39,699,675 in the three months ended September 30, 2001. Sales of Enterprise
Network products decreased from $116,692,443 in the nine months ended September
30, 2000 to $112,702,958 in the nine months ended September 30, 2001. As a
percentage of sales, Enterprise Network sales increased from 37.2% in the three
months ended September 30, 2000 to 41.6% in the three months ended September 30,
2001 and increased from 34.2% in the nine months ended September 30, 2000 to
37.8% in the nine months ended September 30, 2001.
COST OF SALES
Cost of sales decreased 13.4% from $61,323,706 in the three months ended
September 30, 2000 to $53,114,239 in the three months ended September 30, 2001
and increased 3.4% from $159,165,772 in the nine months ended September 30, 2000
to $164,594,872 in the nine months ended September 30, 2001. The cost of sales
decrease quarter over quarter is directly related to the difference in third
quarter revenues in each period. The increase in cost of sales for the nine
months ended September 30, 2001 over the nine months ended September 30, 2000,
is attributable to the timing of product price reductions as compared to product
cost savings. As a percentage of sales, cost of sales increased from 48.2% in
the three months ended September 30, 2000 to 55.6% in the three months ended
September 30, 2001 and increased from 46.6% in the nine months ended September
30, 2000 to 55.2% in the nine months ended September 30, 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, as described above, 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.
12
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses remained relatively unchanged from
$22,968,133 in the three months ended September 30, 2000 to $22,120,077 in the
three months ended September 30, 2001 and increased 15.8% from $63,068,043 in
the nine months ended September 30, 2000 to $73,022,848 in the nine months
ended September 30, 2001. Beginning in mid year 2000, ADTRAN increased
expenditures for the expansion of our infrastructure in both sales and support
personnel in an effort to expand our customer base and for increased initiatives
in the EN and international markets. Selling, general and administrative
expenses as a percentage of sales increased from 18.0% in the three months ended
September 30, 2000 to 23.2% in the three months ended September 30, 2001 and
increased from 18.5% in the nine months ended September 30, 2000 to 24.5% in the
nine months ended September 30, 2001. Selling, general and administrative
expenses as a percent of sales will fluctuate whenever there is significant
fluctuation in revenues in periods being compared.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses increased 18.9% from $12,766,314 in the three
months ended September 30, 2000 to $15,180,334 in the three months ended
September 30, 2001 and increased 21.4% from $37,022,104 in the nine months ended
September 30, 2000 to $44,954,097 in the nine months ended September 30, 2001.
ADTRAN continually evaluates new product opportunities and engages in intensive
research and product development efforts. To date, ADTRAN has expensed all
product research and development costs as incurred. As a result, ADTRAN may
incur significant research and development expenses prior to the receipt of
revenues from a major new product group. As a percentage of sales, research and
development expenses increased from 10.0% in the three months ended September
30, 2000 to 15.9% in the three months ended September 30, 2001 and increased
from 10.9% in the nine months ended September 30, 2000 to 15.1% in the nine
months ended September 30, 2001. ADTRAN will continue to incur research and
development expenses in connection with its new products and its expansion into
international markets. Research and development expenses as a percent of sales
will fluctuate whenever there is a significant fluctuation in revenues in
periods being compared.
INTEREST EXPENSE
Interest expense decreased 21.7% from $589,000 for the three months ended
September 30, 2000 to $461,458 in the three months ended September 30, 2001 and
decreased 17.1% from $1,741,667 in the nine months ended September 30, 2000 to
$1,443,653 in the nine months ended September 30, 2001.
OTHER INCOME
Other income decreased 37.2% from $2,797,520 for the three months ended
September 30, 2000 to $1,758,025 in the three months ended September 30, 2001
and remained relatively unchanged from $5,932,258 in the nine months ended
September 30, 2000 to $5,447,036 in the nine months ended September 30, 2001.
INCOME TAXES
We have reduced our projected annual tax rate from 34% to 28% because we expect
the lower rate to be the rate applicable to the net income estimated for 2001.
This change resulted in an additional $.02 of third quarter 2001 earnings per
share. In addition, we anticipate a further reduction of tax liability because
we expect to be entitled to substantial refunds for taxes paid in prior years
(particularly capital gains taxes) and future research and development tax
credits. Income taxes (net of taxes on realized investment gains in the year
2000 of $28,573,645) decreased 86.9% from $11,025,201 for the three months ended
September 30, 2000 to $1,445,265 in the three months ended September 30, 2001
and decreased 79.9% from $29,283,887 for the nine months ended September 30,
2000 to $5,873,176 in the nine months ended September 30, 2001. The decrease in
income taxes results primarily from the difference in net income in each period.
NET INCOME
As a result of the above factors, income before realized investment gains (net
of income taxes in the year 2000) decreased 76.9% from $21,401,862 in the three
months ended September 30, 2000 to $4,949,714 in the three months ended
September 30, 2001 and decreased 76.2% from $56,844,727 in the nine months ended
September 30, 2000 to $13,545,071 in the nine months ended September 30, 2001.
As a percentage of sales, income before realized investments gains (net of
income taxes in the year 2000) decreased from 16.8% in the three months ended
September 30, 2000 to 5.2% in the three months ended September 30, 2001 and
decreased from 16.7% in the nine months ended September 30, 2000 to 4.5% in the
nine months ended September 30, 2001.
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LIQUIDITY AND CAPITAL RESOURCES
ADTRAN completed the construction of Phase IV of our corporate headquarters in
Huntsville, Alabama, 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 ADTRAN therefore 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 decreased 4.3% from $257,636,000 as of
December 31, 2000 to $246,501,000 as of September 30, 2001. Accounts
receivables and other receivables decreased 20.6% and 78.7%, respectively from
December 31, 2000 to September 30, 2001. Accounts payable decreased 53.8% from
December 31, 2000 to September 30, 2001. These decreases are directly related
to the overall industry slow down and the consolidation of our subcontractors.
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
decreased 19.2% from December 31, 2000 to September 30, 2001. The decrease in
inventory is attributable to management's continued efforts to streamline our
production process and focus on manufacturing velocity.
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 September 30,
2001, we had re-purchased 1,276,417 shares of our common stock at a total cost
of $26,568,000.
Capital expenditures totaling $27,090,000 in the nine months ended September 30,
2000 and $11,415,000 in the first nine months of 2001 were used to expand our
headquarters and to purchase equipment.
At September 30, 2001, ADTRAN's cash on hand of $107,145,382 and short-term
investments of $12,161,842 placed our potential cash availability at
$119,307,224. At December 31, 2000, cash on hand was $27,971,313 and short-term
investments were $60,286,332 which placed our potential cash availability at
$88,257,645.
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
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ADTRAN has not conducted transactions, established commitments or entered into
relationships requiring disclosures beyond those provided elsewhere in this
Form 10-Q.
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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 September
30, 2001.
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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, 2001 /s/ John R. Cooper
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John R. Cooper
Senior Vice President - Finance and
Chief Financial Officer
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