TELLABS INC
ITEM 1. BUSINESS
Note: A glossary of industry and technical terms used in this Form 10-K appears at the end of this Item 1.
Tellabs, Inc. was incorporated in 1975 as an Illinois corporation. In 1992, our shareholders approved the formation of a holding company structure. Under that new structure the shareholders of Tellabs, Inc., an Illinois corporation, became the shareholders of a new holding company, Tellabs, Inc., a Delaware corporation. Tellabs’ goal is to enrich people’s lives by innovating the way the world connects. We work toward that goal by designing and marketing equipment and services to communications-services providers worldwide.
On December 1, 2009, we acquired WiChorus, Inc. (WiChorus), a supplier of industry-leading infrastructure products for the mobile Internet. This acquisition will enable us to quickly enter a large and fast growing market with a purpose-built 4G, LTE, and WiMax mobile-network solution that can be used in today’s 3G networks and complements our IP mobile backhaul portfolio.
In November 2004, we acquired Advanced Fibre Communications, Inc. (AFC) of Petaluma, California, a leading supplier in North America of “last-mile access” products. We deliver residential voice, data and video services over fiber-optic networks. In addition, in December 2004, we acquired Vinci Systems, Inc. (Vinci), a privately held developer of customer-premises equipment used for fiber access. This acquisition accelerated our ability to deliver cost-reduced and feature-enhanced components of the solution we acquired with AFC. Beginning in 2008, we reduced our investment in this residential access business and focused on more profitable opportunities in mobile, optical and business markets.
Our products and services enable our customers to deliver wireline and wireless voice, data and video services to business and residential customers. We sell our products domestically and internationally through our field sales force and distributors/partners. Our customers are primarily communication services providers, including local exchange carriers (LECs); global wireline and wireless service providers, multiple system operators (MSOs), and competitive service providers (CSPs). Our customer base also includes distributors, original equipment manufacturers (OEMs), system integrators and government agencies.
While we market our products under a variety of solution names, we run our business and report operating results in three segments: Broadband, Transport and Services.
Within the Broadband segment, we market our products in three areas: data, access and managed access.
Data products include next generation packet-switched products that enable wireline and wireless carriers to deliver business services and next-generation mobile voice and Internet services to their customers. Data products include the Tellabs® 8600 managed edge system, the Tellabs® 8800 multiservice router (MSR) series and the Tellabs® SmartCore™ 9100 platform.
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The Tellabs 8600 system is an aggregation platform for next-generation wireless providers. It provides a cost-efficient way to migrate from 2G to 3G and 4G networks by using pseudowire technology to manage TDM, frame relay, ATM, Ethernet and IP traffic in a single device. It is ideal for current customers of the Tellabs® 6300 and the Tellabs® 8100 managed access systems because it fully integrates with those platforms under the Tellabs® 8000 network manager.
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The Tellabs 8800 MSR series enables service providers to leverage existing infrastructure to seamlessly and cost-effectively integrate all their networks (ATM, Frame Relay, Ethernet and IP) onto a converged MPLS network, while retaining quality of service. This capability enables users to share information regardless of their access technology. The Tellabs 8800 MSR is unique in its ability to take in traffic of any network type and route it over any other network type.
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The Tellabs SmartCore™ 9100 platform is a mobile core gateway designed for the new generation of 4G mobile networks. This platform addresses High-Speed Packet Access (HSPA) and Evolved HSPA (HSPA+), WiMAX and Long Term Evolution (LTE) mobile packet core needs. In addition, the platform can be used in today’s 3G networks to provide a smooth migration path to 4G. Content inspection capabilities and ample resources for state information enable Quality of Service (QoS) support, policy enforcement and billing for large numbers of subscribers. The platform enables the wireless carrier to create new revenue-generating services by delivering personalized content to mobile users.
Access includes products that enable service providers to deliver bundled voice, video and high-speed Internet/data services over copper or fiber networks. Specifically, access products enable service providers to deliver these services over the “last mile” of the communications network, the part of the network that is closest to homes and businesses. Access offerings include the Tellabs® 1000 multiservice access series, the Tellabs® 1100 multiservice access series and the Tellabs® 1600 optical network terminal series (ONTs).
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The Tellabs 1000 series can be configured as a digital loop carrier (DLC), a digital subscriber line access multiplexer (DSLAM), a fiber-to-the-premise (FTTP), optical line terminal (OLT) for broadband passive optical networks (BPON), or a voice gateway for voice over Internet protocol (VoIP).
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The Tellabs 1100 series can be configured as DLC, DSLAM, and FTTP OLT for gigabit passive optical networks (GPON), as well as for fiber-to-the-curb (FTTC), or fiber-to-the-node (FTTN) network architectures. In addition, this platform can be used to deliver enterprise GPON services such as fiber-to-the-desktop (FTTD).
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The Tellabs 1600 series of ONTs consists of remote devices installed at user locations (i.e., single-family homes, multi-dwelling units, and small businesses) in both BPON and GPON FTTP and FTTD network architectures.
Managed access includes aggregation and transport products that deliver wireless and business services primarily outside of the United States. Voice-over-cable products, used to deliver voice and data services over cable television networks, also are included in this segment. Managed access products include the Tellabs 6300 managed transport system, the Tellabs 8000 network manager and the Tellabs 8100 managed access system.
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The Tellabs 6300 system is a packet optical transport and access platform that serves wireline and wireless operators primarily outside of North America.
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The Tellabs 8100 managed access system is used outside of North America in business service and wireless networks.
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The Tellabs 8000 network manager provides full network management across a wide range of Tellabs products. The Tellabs 8000 manager fully supports the Tellabs® 3700 multimedia controller, Tellabs® 5500 digital cross-connect, Tellabs® 5320 L/S digital cross-connect, Tellabs 6300 managed transport system, Tellabs® 7100 optical transport system, Tellabs® 7300 metro Ethernet switching series, Tellabs 8100 managed access system, Tellabs 8600 managed edge system, and Tellabs 8800 multiservice router series. The network manager offers end-to-end management for 2G and 3G mobile backhaul applications, carrier-class Internet, virtual private network (VPN) and extranet services for corporate customers, business broadband Internet access and corporate voice services.
The Transport segment includes solutions that enable service providers to transport services and manage bandwidth by adding capacity when and where it’s needed. Wireline and wireless providers use these to support wireless services, business services for enterprises, and triple-play voice, video and data services for consumers. Products include the Tellabs® 3000 voice-quality enhancement products, the Tellabs® 5000 series of digital cross-connect systems, the Tellabs® 7100 optical transport system and the Tellabs® 7300 metro Ethernet switching series.
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The Tellabs 3000 series enables service providers to improve voice quality and ensure calls are echo-free. Wireless operators have directly attributed revenue accretion and customer retention to this higher quality service.
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The Tellabs 5000 series of digital cross-connects manages and routes voice, data and video traffic and combines, consolidates and segregates signals to maximize efficiency. It also provides a centralized point for network performance monitoring and testing, as well as converting different signal formats. The Tellabs® 5500 digital cross-connect is used by every major service provider in North America. It enables service providers to reduce equipment and maintenance costs and maximize network profitability.
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The Tellabs 7100 optical transport system enables service providers to deliver high-speed wavelength services and alleviate bandwidth bottlenecks. The Tellabs 7100 system integrates optical and electrical transport via wavelength
selective switches (WSS), ROADM (reconfigurable optical add-drop multiplexing), Ethernet switching, next-generation SONET/SDH MSPPs (multiservice provisioning platforms) and DWDM (dense wave-division multiplexing) into a single platform. It decreases capital and operating expenses by eliminating network elements and reducing equipment interconnections. The Tellabs 7300 metro Ethernet switching series extends a Tellabs 7100 or Tellabs 8000 network solution to the customer’s premises for any size application. The Tellabs 7300 series offers a portfolio of Ethernet switching products that address service management, provisioning, monitoring and troubleshooting.
The Services segment delivers deployment, training, support and network design/consulting services to Tellabs’ customers. Through these offerings, Tellabs supports our customers through all phases of running a network: planning, building and operating.
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Services in the planning phase include network architecture and design, network and applications planning, network management design, migration planning and others.
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Building services include applications integration, program and project management, installation, testing, network integration, third-party systems integration and others.
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Once networks are deployed, Tellabs offers a variety of operating services including network optimization, onsite engineering, network monitoring, remote and onsite support, capacity management, training and others.
COMPETITION
We sell our products and services in global markets where competition is intense. Our customers base their purchasing decisions on multiple factors including: product features, performance, price, total cost of ownership, quality, reliability, capacity, and customer service. Breadth of product line, customer-oriented planning and delivery, emerging technology, vendor financial stability and relationships, incumbency and responsiveness to their needs are also factored into these decisions.
Tellabs’ competition comes primarily from telecommunications and data networking infrastructure vendors. These vendors include large and small companies that compete directly or indirectly with our offerings.
SALES ORGANIZATION
Our sales organization includes direct sales personnel and sales support personnel around the world. In North America (United States and Canada), the sales organization is structured by customer type, e.g., Local Exchange Carriers (LECs), Wireless Operators, Multiple Services Operators (MSOs), Competitive Service Providers (CSPs), etc. Outside North America, the sales organization is structured on a regional basis: Latin America (Mexico, Central and South America, and the Caribbean), EMEA (Europe, Middle East and Africa) and Asia Pacific (Australia, the Far East, and the Indian Sub-continent).
Our direct sales force accounts for the majority of sales. In North America, our products and services are also sold through value-added resellers and distributors. Outside North America, we have business relationships with independent sales representatives and distributors, as well as other public and private network providers that distribute products. Some of our distributors provide information on our products through their catalogs and through trade-show demonstrations. Our field sales force also provides technical support to distributors. Direct sales organizations and selected distributors generated the following 2009 revenue:
CUSTOMERS
Traditional telecommunications service providers are our historical customer base and continue to represent the largest contributors to our revenue. Tellabs has relationships with major wireless and wireline carriers and broadband service providers around the world. We serve 43 of the world’s top 50 providers. We deliver the technology that enables our customers to offer new products and services and reduce their operating expenses. We see opportunities in growing markets, including: mobile, optical and business, as well as professional services.
Revenue from customers within North America was 66% of consolidated revenue in 2009, compared with 68% in 2008 and 74% in 2007. Revenue from customers outside North America was 34% of consolidated revenue in 2009, compared with 32% in 2008 and 26% in 2007.
Carrier consolidation has reduced the number of customers for our products and services. The remaining carriers are large and can exert considerably more pricing pressure than in years past. These carriers may focus their future purchases with a few large suppliers, which could also adversely affect our revenue. In addition, we face more global competition, especially in the newly emerging growth areas we target.
We had two customers in 2009 who contributed more than ten percent of our revenue. Revenue from Verizon (including Verizon Wireless) was 30% of consolidated revenue in 2009, compared with 33% in 2008 and 37% in 2007. Revenue from AT&T (including the former BellSouth and Cingular) was 21% of consolidated revenue in 2009 and 16% in 2008 and 2007. No other customer in 2009, 2008, or 2007 accounted for more than 10% of consolidated revenue.
We have executed product and service supply agreements (“Supply Agreements”) with several of our large customers that detail the commercial terms and conditions for sales. These Supply Agreements with our largest customers are requirements based and usually do not obligate the customer to a specific volume of business. The vast majority of our sales, whether to customers with Supply Agreements or otherwise, result from periodic purchase orders. A summary of the status of the Supply Agreements with Verizon and AT&T follows:
Verizon. We supply Verizon and its affiliated companies products and services under several agreements, including agreements with companies acquired by Verizon. We provide the following products from our Transport segment: Tellabs 3000 Voice-Quality Enhancement Systems, Tellabs 5500 Digital Cross Connect products and Tellabs 7100 Optical Transport Systems. In the Broadband segment we provide Verizon with the Tellabs 1600 Optical Network Terminal Series, Tellabs 1000 Multiservice Access Platform and the Tellabs 8800 Multiservice Router products. Verizon also procures engineering, furnishing and installation (EF&I) and support services from our Services segment. These products and services are provided under various supply agreements. These supply agreements are with multiple Verizon entities and may include separate products and services or a combination of products and services. The supply agreements also may relate to products in one segment or across multiple segments of our business. These agreements have different expiration dates. The earliest expiration date is June 30, 2010, and the latest expiration date is December 15, 2013. All of these agreements can be extended by written agreement of the parties.
AT&T. We supply AT&T and its affiliated companies products and services under several agreements, including agreements with companies acquired by AT&T. We provide the following products from our Transport segment: Tellabs 5500 Digital Cross Connect products and the Tellabs 7100 Optical Transport Systems. In the Broadband segment we provide AT&T with the Tellabs 1000 Multiservice Access Platform, Tellabs 1100 Multiservice Access Platform, the Tellabs 8600 Managed Edge System and the Tellabs 8800 Multiservice Router products. AT&T procures support services and professional services from our Services segment. These products and services are provided under various agreements. These supply agreements are with multiple AT&T entities and may include separate products and services or a combination of products and services. The supply agreements also may relate to products in one segment or across multiple segments of our business. These agreements have different expiration dates. The earliest expiration date is May 1, 2010, and the latest expiration date is March 18, 2014. All of these agreements can be extended by written agreement of the parties.
We evaluated the materiality of each of these contracts with AT&T and Verizon and have determined that currently none of these contracts with our principal customers is required to be filed as material contracts pursuant to Items 101(c)(1)(vii) and 601(b)(10) of Regulation S-K.
Major service providers require product approval prior to adopting a vendor’s products for use in their networks. We are involved in a constant process of submitting new and succeeding generations of products for approval and our products are widely deployed in these service provider networks. However, we cannot be certain that we will obtain these approvals in the future, or that sales of these products will continue to occur.
BACKLOG
Total product and service backlog was $383 million at January 1, 2010, and $322 million at January 2, 2009. Backlog is defined as revenue to be recognized on confirmed product and service orders. We expect to ship nearly the entire January 1, 2010, backlog in 2010. We consider backlog to be an indicator, but not the sole predictor, of future revenue.
RESEARCH AND DEVELOPMENT
Tellabs believes the development of new products and enhancement of existing products is vital to our long-term success. As of January 1, 2010, research and development employees totaled 1,278, representing 39% of our total workforce. We conduct research and development at several facilities around the world. In addition to our internal efforts to develop new products, we undertake research and development and product-oriented acquisitions and alliances, from time to time. These alliances provide us access to technology and innovations that we believe will be important to our customers. Research and development expenses were $268.7 million in 2009, compared with $305.2 million in 2008 and $343.1 million in 2007.
MANUFACTURING
We outsource the manufacturing of our products to contract manufacturers. Tellabs’ strategy is to use two primary contract manufacturers, although we do have written agreements with other contract manufacturers. We are active in the order, configuration and system assembly operations for our products.
The current concentration of our contract manufacturers is not dependent upon a limited number of suppliers capable of producing our products, but rather the result of a strategic initiative. Consolidating contract manufacturers is a common business model followed in our industry in order to improve production efficiency and innovation resulting from close working relationships with a few key suppliers. Our largest contract manufacturers in 2009 were Jabil and Flextronics; however, we also used Sanmina-SCI Corporation, AsteelFlash and BreconRidge to supplement the two main contract manufacturers. The facilities owned and operated by these contract manufacturers for the production of our products are located in Mexico, Canada, Malaysia, China and the United States. Tellabs can switch production between contract manufacturers without significant impact on production.
Our agreements with contract manufacturers are evergreen or self-renewing and include at least a six-month termination clause in order to minimize the business impact to either party. Tellabs provides a 12-month non-binding rolling forecast. The contract manufacturers procure parts according to production strategy and piece part lead times. Production strategies range from build to forecast, build to order, and replenish to stated inventory levels. The build strategies expose Tellabs to the risk that our customers will not order those products for which we have forecast sales, or will purchase less than we have forecast. As a result, we may incur carrying charges or obsolete material charges for components purchased by our contract manufacturers. We work closely with our contract manufacturers to manage material, quality, cost and delivery times, and we continually evaluate their services to ensure performance on a reliable and cost-effective basis. Each contract manufacturer provides Tellabs with a minimum six-month product warranty.
We require our contract manufacturers to handle and dispose of any hazardous waste material from our manufacturing activities in compliance with all applicable laws and regulations. We perform periodic audits and inspections of our contract manufacturers to verify compliance. The additional cost of complying with environmental regulations has not had a material impact on capital expenditures, earnings or our competitive position.
As is common in our industry, our products contain components that generally are available from multiple suppliers, as well as components of primarily Tellabs’ proprietary design that are sourced from a single supplier.
In some cases, long lead times may be required to develop alternative sources for proprietary components. If component supplies become limited, which has occurred on occasion, or if a proprietary component supplier is unable to meet our requirements and we cannot quickly source that component from another supplier, the resulting shortages could result in production delays and/or expedite costs that may affect our business adversely. To limit this risk with respect to our single source suppliers, we frequently negotiate for
the right to use their technology or to allow a third party to manufacture their products, or require that they maintain a sufficient inventory of components, in the event the supplier were to go out of business or is otherwise unable to meet our requirements.
We typically enter into written agreements with our principal contract manufacturers and suppliers. Under the terms of our typical manufacturing supply agreements with our principal contract manufacturers and suppliers, we are generally not obligated to use their services or purchase their products unless and until we place a firm purchase order. These agreements generally apply to multiple products and across product segments.
EMPLOYEES
At January 1, 2010, we had 3,295 employees. We employed 1,278 individuals in research and product development; 1,254 in the sales, sales support, customer service and marketing areas; and 763 in support activities. We consider our employee relations to be good. We are not a party to collective bargaining agreements.
INTELLECTUAL PROPERTY
We maintain an active program to legally protect our investment in technology through intellectual property rights. The nature and extent of legal protection associated with each such intellectual property right depends on, among other things, the type of intellectual property right and the given jurisdiction in which such right arises. We believe that our intellectual property rights are valuable and important to our business (including each of our segments).
We have various trade and service marks, both registered and unregistered, in the United States and in many foreign countries (collectively, “Marks”). These Marks are important because they differentiate our products and services within our industry. We are not aware of any factor that would inhibit our ability to use any of our major Marks.
We hold numerous U.S. and foreign patents, and we have numerous applications for patents pending in the United States and abroad, respectively. Our patents expire at various dates between April 2010 and March 2028, with approximately half of our patents expiring after 2019. We are not substantially dependent on any single patent. We maintain an active program that seeks to legally protect, through patents, various developments and innovations. There is no assurance, however, that we will be able to obtain or maintain each patent that we pursue. We also cannot predict whether patents that we obtain will necessarily provide us with any competitive advantage or whether such patents will be challenged by third parties. Beyond patents, we rely on copyright, trade secret and other mechanisms designed to help establish, secure, maintain and protect our intellectual property.
Through various licensing arrangements, we grant certain rights to our intellectual property and receive certain rights to intellectual property of others. We expect to maintain current licensing arrangements and to secure licensing arrangements in the future, as needed, and to the extent available on reasonable terms and conditions, to support continued development and marketing of our products and services. Some of these licensing arrangements require or may require royalty payments and other licensing fees. The amount of these payments and fees may depend on various factors, including but not limited to, the structure of royalty payments, offsetting considerations, if any, and the degree of use of the licensed technology. We are not substantially dependent on any single license.
We believe that the duration of legal protection for our intellectual property is adequate relative to the expected lives of our products and services.
BUSINESS SEGMENT AND GEOGRAPHICAL INFORMATION
We are reporting operating results for three segments: Broadband, Transport and Services. Information on revenue by segment, revenue by country and net long-lived assets by country for the fiscal years ended January 1, 2010, January 2, 2009, and December 28, 2007, is set forth in the footnotes to our consolidated financial statements in our 2009 Annual Report, included herein as Exhibit 13, and incorporated herein by reference.
HOW TO OBTAIN OUR SEC REPORTS
We file annual, quarterly and other periodic reports, proxy statements and other information with the SEC. These filings are available to the public at the SEC’s Web site at www.sec.gov. No information from this Web page is incorporated herein by reference.
Copies of our most recent annual stockholder report and proxy statement are available directly on the SEC’s Web site free of charge as soon as reasonably practicable after we furnish the material to the SEC. Our Web site includes direct links to the SEC’s Web site for our annual, quarterly and other filings.
Copies of our annual, quarterly and current reports, proxy statements and certain other information filed with the SEC, as well as amendments thereto are available on our Web site free of charge. Our Web site is located at www.tellabs.com. We will provide this information either electronically or in paper form free of charge upon request.
GLOSSARY OF TECHNICAL TERMS
2G Mobile - Digital wireless networks that carry voice and low-speed data.
3G Mobile - Wireless networks built for digital voice and high-speed data, including video.
4G Mobile - The future generation of wireless networks, designed to offer broadband speeds and integrate different types of mobile technology.
Access - Equipment that provides a connection between service providers’ central offices and homes, businesses and other user locations.
ANSI (American National Standards Institute) - A private non-profit organization that oversees the development of standards for products, services, processes and personnel in the United States.
ATM (Asynchronous Transfer Mode) - A high-speed, high-bandwidth transmission technology that carries data traffic in fixed-size cells.
Bandwidth - The carrying capacity of a communications channel.
Broadband - A high-bandwidth fiber optic, coaxial or hybrid line with more capacity than a voice-grade phone line, which is capable of carrying numerous voice, data and video channels at once.
BPON - Broadband passive optical network, fiber-access systems that deliver high bandwidth to homes and businesses.
Carrier Ethernet - A scalable, manageable carrier-class network that delivers standardized Ethernet services with Quality of Service and high levels of reliability.
Cloud Computing - A process that involves delivering hosted or virtualized services over the Internet.
Data - Any network traffic other than voice phone calls. Increasingly, phone calls and video are encoded and transported as data.
Deployment Services - Services such as installation, training and support.
Digital - Systems that transport information in the binary 1s and 0s format, like a computer code, to improve clarity and quality.
Digital Cross-Connect - A specialized high-speed data channel switch that connects transmission paths based on network needs (rather than call by call). Digital cross-connects manage and reroute network traffic, and combine, consolidate and segregate signals to maximize efficiency.
DLC (Digital Loop Carrier) - A system that uses digital transmission to extend the range of a signal farther than would be possible using only copper wires.
DSLAM (Digital Subscriber Line Access Multiplexer) - A device that serves as an interface between a number of subscribers’ premises and the carrier network.
DWDM (Dense Wavelength Division Multiplexing) - A way to increase the capacity of optical fiber by carrying multiple wavelengths or colors of light, rather than only one color.
Dynamic Optical Networking - A self-tuning optical network with dynamic provisioning and restoration of wavelengths.
Ethernet - A data network standard to connect computers, printers, workstations, terminals and servers.
Fiber Access - Fiber-optic systems that extend to homes or neighborhoods to deliver broadband services, including voice, data and video.
Frame Relay - Switching interface standard that transmits bursts of data over wide-area networks (WANs).
Gateway - A network device that acts as an entrance to another network and performs functions including signaling control, QoS and security.
FTTC, FTTN, FTTP, FTTD (Fiber to the Curb, Fiber to the Node, Fiber to the Premises, Fiber to the Desktop) - Fiber-optic cable extended directly to homes or neighborhoods to deliver broadband communication services, including voice, data and video.
GPON - Gigabit passive optical network, the next generation of fiber-access systems, which delivers four times more bandwidth than BPON.
HSPA+ (Evolved High-Speed Packet Access) - A 3G wireless broadband standard.
Internet - The world’s largest decentralized network of computers and network servers.
IP (Internet Protocol) - Rules that enable cooperating computers to share information across a network.
LAN (Local-Area Network) - A computer or data network that covers a small physical area, like a home, office, or small group of buildings.
LTE (Long Term Evolution) -The next generation of mobile communications services with improved performance and faster speeds.
Managed Access - An access and transport system that simplifies end-to-end management of mobile transport and business services.
Mobile - Wireless communications networks that use radio frequencies rather than cables.
Mobile Backhaul - A process of aggregating and transmitting mobile traffic from remote sites to a main transmission network.
Mobile Packet Core - The signaling and gateway core infrastructure in a mobile network for 3G and 4G networks.
MPLS (MultiProtocol Label Switching) - A packet-switching standard that assigns levels of priority to multiple traffic types within a data stream to assure Quality of Service (QoS).
MSPP (Multiservice Provisioning Platform) - A system that consolidates the number of separate devices needed to provide transport, switching and routing services.
Multiservice Router (MSR) - A network switch that handles both data and the real-time transmission of video and voice with high reliability and quality.
Network - A system of equipment and connections for the transmission of signals that carry voice, video and data.
Network Management - A set of procedures, software, equipment and operations techniques designed to keep a network operating at maximum efficiency.
Offloading - A process of transferring data or bypassing non-required network elements to reduce costs.
OLT (Optical Line Terminal) - A device that terminates a fiber-access network in a service provider’s central office.
Optical Network - A communication system using fiber optics as the means for carrying information between equipment.
ONT (Optical Network Terminal) - A device that connects a fiber-access network to a home or business to deliver voice, data and video services.
Optical Transport - A technology that transmits communications traffic in the form of laser light over fiber-optic cable.
Professional Services - Services such as network optimization, business case analysis and network performance enhancements.
Pseudowire - A virtual connection that transports both traditional and new services over a converged packet network.
QoS (Quality of Service) - Measurement of the integrity of traffic moving over a network. QoS is especially important for real-time transmissions such as financial transactions, voice and video.
ROADM (Reconfigurable Optical Add/Drop Multiplexer) - A system that enables the remote configuration of any wavelength on any network element, reducing the need to dispatch technicians.
Router - A device that sends internet protocol (IP) traffic, or packets, to specific destinations.
SDH (Synchronous Digital Hierarchy) - Transport format for transmitting high-speed digital information over fiber-optic facilities outside of North America, comparable to SONET.
Smartphone - A mobile device that integrates the functionality of a mobile phone, personal digital assistant or other information appliance, often with personal computer functionality.
SONET (Synchronous Optical NETwork) - Transport format for sending high-speed digital signals through fiber-optics in North America, comparable to SDH.
TDM (Time Division Multiplexing) - Technology that combines multiple streams of traffic by assigning timeslots, sequentially in turn from each input onto a combined higher speed channel.
Transport - The process of moving voice, data or video across communications networks.
Triple-Play Services - Offering of voice, video and data from a single service provider.
VoIP (Voice over Internet Protocol) - The transmission of phone calls over data or Internet links.
VQE (Voice-Quality Enhancement) - A technique that improves sound quality by isolating and filtering out unwanted signals and sounds such as echoes and background noise.
WiMax - A technology that provides wireless transmission of data for both point-to-point and mobile applications.
Wireless - Mobile networks that use radio frequency rather than cables.
Wireline - Networks that use cables rather than radio frequency.
ITEM 1A. RISK FACTORS
Our operating results will fluctuate, which may cause volatility in our stock price.
Our operating results have varied significantly from quarter to quarter, and those results may continue to fluctuate due to a variety of factors, many of which are beyond our control. These factors include, but are not limited to:
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changing conditions in the U.S. and global economy generally as well as in the telecommunications market;
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the volume and timing of orders from and shipments to customers;
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the timing of, and our ability to obtain, new customer contracts;
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the ability to attract, retain and motivate qualified personnel;
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the ability to maintain solid and healthy customer and supplier relationships and favorable contract terms;
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the timing of, and our ability to recognize revenue for, product and service sales;
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the potential deferral of customer acceptance of new products compared with our existing products;
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the ability to maintain adequate and effective systems to support business processes and sustain the current and future needs of the business;
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the market acceptance of new and enhanced versions of our products and services;
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variations in the mix of products and services we sell, and the demand and market acceptance of those products and services;
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our utilization of production capacity and employees, and our ability to manufacture and ship products efficiently;
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the availability and cost of key components;
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the ability to obtain reliable and high-quality components for our products;
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introductions or announcements of new products by competitors;
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changes in accounting rules and interpretations;
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our ability to integrate and operate acquired businesses and technologies;
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the potential impairment of investments, goodwill and intangible assets;
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the ability to prevail or mitigate liability in legal disputes and resulting litigation;
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seasonality, which has often caused revenue to differ from quarter to quarter; and
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the ability to satisfy and comply with applicable laws, rules and regulations in the various locations where we operate our business and sell our products and services, including international locations.
Our recent operating results may not be a good predictor of our results in future periods. We base our expense levels in part on expectations of future revenue. If revenue levels in a particular period are lower than expected, our operating results will be adversely affected and could result in further restructurings and asset impairments. The failure to meet the expectations of the investment community may cause our stock price to decline, possibly substantially. A significant stock price decline could result in litigation, which could be costly, lengthy and divert management’s attention and resources from business operations.
Current economic conditions and uncertain economic outlook could adversely affect our results of operations and financial condition.
The global economy is currently undergoing a period of unprecedented volatility, which has affected the demand for equipment, services and supplies. A further decline or prolonged period of economic decline could have a material adverse effect on our results of operations and financial condition and exacerbate the other risk factors related to our business. Possible effects of current and future adverse economic conditions on our business include: decrease in purchases or usage of our products, services and supplies by consumers and business customers if increased unemployment leads to lower utilization of telecommunications and internet services. Our customers or channel partners may stop or decrease purchasing due to their efforts to reduce inventory and conserve cash and/or their inability to obtain financing. We may also experience disruptions in our business due to our inability to obtain equipment, parts and supplies from our suppliers - and our suppliers from their suppliers - if marginal supply businesses fail; collection delinquencies due to insolvency of our customers or shortage of cash to support their businesses; and decrease in our ability to hedge currency
exposures due to higher hedging costs because of extreme volatility of exchange rates. In addition, a prolonged economic downturn could impact the viability of our current vision and strategy. If our strategy is not re-evaluated in a timely fashion our future growth and operating results could be adversely impacted. To the extent we are not able to continue to generate ample cash from operations, it may also adversely impact our ability to invest in the growth of our business, repurchase shares or pay dividends.
We are exposed to fluctuations in the market values of our investments and in interest rates; impairment of our investments could have a material effect on our financial statements.
We maintain an investment portfolio of various holdings, types and maturities. These securities are generally classified as available-for-sale and, consequently, are recorded on our Consolidated Balance Sheets at fair value with unrealized gains or losses reported as a separate component of accumulated other comprehensive income, net of tax. If the fair value declines, we may recognize the decline in earnings below the cost basis when the decline is judged to be other-than-temporary. In addition, certain of our investments are subject to general credit, liquidity, interest rate and market risks. Fluctuating interest rates can add significant variability to interest income. Market risks associated with our investment portfolio may have an adverse effect on our liquidity, financial condition and results of operations. For information regarding the sensitivity of and risks associated with the market value of investments and interest rates, refer to the section titled “Quantitative and Qualitative Disclosures About Market Risk” included in this report and in our 2009 Annual Report, included herein as Exhibit 13.
The market for communications equipment products and services is rapidly changing, very competitive and can fluctuate unpredictably from quarter to quarter.
The market for communications network equipment products and integration services is rapidly changing. Our success will depend in part on our ability to develop and introduce new products and successfully compete with telecommunications equipment providers, particularly those who are larger than us or are in geographies that have lower cost structures. Such competitors may be able and willing to offer lower product and service prices due to economies of scale, more favorable economic conditions or a desire to capture market share (whether profitable or not). We cannot predict with certainty technological trends or new products in the market, something that our competitors may be able to do more accurately and rapidly. In addition, we cannot predict whether our products and services will meet with market acceptance or profitability. These factors may lead to an inability to successfully compete, which may adversely affect our business, financial condition, operating results or prospects.
Our revenue and results of operations can fluctuate unpredictably from quarter to quarter. Our budgeted expense levels depend in part on our expectations of long-term future revenue and gross margin and substantial reductions in expense are difficult and can take time to implement. Uncertainty or lack of visibility into customer spending, and changes in economic or market conditions, can make it difficult to prepare reliable estimates of future revenue and corresponding expense levels. Consequently, our level of operating expense or inventory may be high relative to our revenue, which could harm our ability to achieve or maintain profitability. Additional factors that contribute to fluctuations in our revenue and operating results include:
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economic and market conditions affecting us and our customers;
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changes in capital spending by large communications service providers;
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the timing and size of orders, including our ability to recognize revenue under customer contracts; and
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variations in the mix between higher and lower margin products and services and the level of pricing pressure we encounter.
Many factors affecting results of operations are beyond our control, particularly in the case of large service provider orders and multi-vendor or multi-technology network infrastructure builds where the achievement of certain thresholds for acceptance is subject to the readiness and performance of the customer or other providers, and changes in customer requirements or installation plans. As a consequence, our results for a particular quarter may be difficult to predict, and our prior results are not necessarily indicative of results likely in future periods. Capital spending in the telecommunications industry is cyclical and can be curtailed or deferred on short notice even within a quarter so we may not have visibility to the changed behavior until a quarter is almost concluded. The factors above may cause our operating results to fall below the expectations of securities analysts or investors, which may cause our stock price to decline.
Demand for our products may decrease if we do not anticipate and adapt to changing technology and customer requirements.
Communications companies face evolving industry standards, changing market conditions, and frequent introductions of new or enhanced products and services. The introduction of new products and technologies or the adoption of new industry standards can quickly make existing products or products under development obsolete or unmarketable. To grow and remain competitive, we must adapt to these changing technologies and industry standards, enhance our existing solutions and introduce new solutions to address our customers’ changing demands. If our development strategy does not align with our portfolio vision and customer expectations, it could negatively impact our investment in research and development.
In addition, new product developments often require long-term forecasting of market trends, development and implementation of new technologies and processes, and substantial capital commitment. We have invested, and will continue to invest, substantial resources for new product development. We often must make these investments before knowing if the resulting new product will meet with market acceptance or generate revenue. We currently incur costs and expenses in preparation for the deployment of several new products. These costs will precede revenue generation and profits from those products.
We may experience difficulties that could delay or prevent the successful design, development, introduction or marketing of new products. Also, failure to designate appropriate resources to develop new products could negatively impact our time to market. These new products and product enhancements must meet the requirements of current and prospective customers and achieve significant market acceptance.
The success of new products depends on several factors, including proper new product definition, component costs, timely completion and introduction of products, differentiation of new products from those of our competitors, and market acceptance. We cannot assure that we will successfully identify new product opportunities, develop and bring new products to market in a timely manner, or achieve market acceptance of our products. The products and technologies that we pursue may not have the market success we anticipate, and we may not successfully identify and invest in other advanced technologies. If we fail to anticipate or respond on a cost-effective and timely basis to technological developments, changes in industry standards or customer requirements; if we have any significant delays in product development or introduction; or if our products are not accepted in the marketplace to the extent we expect, our business, financial condition, operating results or prospects could be adversely affected.
Our new products will be early in their life cycles and will face challenges for market acceptance.
We made and will continue to make significant investments in new products. If we do not achieve a balance between declining sales of mature products and increased sales and margins on new products there could be an adverse impact on our operating results. These new products are early in their life cycles and are subject to uncertain market demand. They also may face obstacles in manufacturing, deployment and competitive response. Customers may not invest the additional capital required for initial system deployment. Additionally, as customers complete infrastructure deployments, they may require greater levels of service, support and financing than we provided in the past. We cannot ensure that we can provide products, services, support and financing to effectively compete for these market opportunities. We may also be delayed in recognizing revenue related to our new products and related services and may be required to recognize costs and expenses for such products before we can recognize the related revenue. Such uncertainty and delay could have a material adverse effect on our business, financial condition, operating results and prospects.
A limited number of our customers represent a large portion of our revenue.
A large portion of our revenue will likely depend on sales to a limited number of customers in specific geographic areas. Traditional telecommunications service providers are our historical customer base and continue to represent the largest contributor to our revenue. We cannot assure that these customers will continue to purchase products from us. If a significant existing customer merges with another company, we cannot assure that it will continue to purchase our products at prior levels or at all. The loss of one or more large existing customers or a decrease in the level of purchases from these customers could have a material adverse effect on our business, financial condition, operating results and prospects.
Consolidation among our largest customers may lead those combined customers to limit their communications equipment purchases to several large vendors, rather than the current practice of purchasing from a number of different sized vendors. Since we are not among the largest communications equipment vendors, we may lose our ability to sell our products and services to those customers. The loss of our ability to sell to one or more of our large customers could have a material adverse effect on our business, financial condition, operating results and prospects.
Due to our dependence on a large portion of our revenue from a limited number of customers, our bargaining power with respect to prices and contractual terms is often limited. Therefore, we could be, and in some cases have been, required to grant pricing or other concessions to obtain new business or maintain existing business and the resulting pricing may not be sustainable. Such a situation may negatively affect our operating results.
Our revenue depends on the capital spending programs and financial capabilities of our customers and ultimately on the demand for new telecommunications services from their consumer and business customers.
Our primary customers are communications service providers. Our ability to generate revenue depends on the capital spending patterns and financial capabilities of these customers, which in turn depend on the stage of completion of expanding network infrastructures; the availability of funding; and the extent to which our customers are affected by regulatory, economic, and business conditions in the geographic areas where they operate. Additionally, our larger customers typically have long implementation cycles; and often require acceptance provisions, which can lead to revenue deferrals. The telecommunications industry recently was affected by financial problems and reduced capital spending by carriers. These conditions adversely affected our operating results in several prior fiscal years and, if these conditions return, could have a material adverse effect on our business, operating results, and financial condition. Further, we cannot assure that network operators or other customers will pursue infrastructure upgrades that require our products and solutions. Infrastructure improvements may be delayed or prevented by a variety of factors including cost, regulatory obstacles, mergers, lack of consumer demand for advanced telecommunications services and alternative approaches to service delivery. Reductions in capital expenditures by companies in the telecommunications industry could seriously harm our revenue, net income and cash flows.
Our business would be adversely affected if we are unable to attract and retain key personnel.
Our success depends largely on our ability to attract, develop and retain highly skilled technical, managerial, sales and marketing personnel. Competition for these personnel is intense and we may fail to retain or attract key personnel if we do not provide them with the proper vision, leadership and growth opportunities. The loss of services of any of our key personnel, the inability to retain and attract qualified personnel in the future, or delays in hiring required personnel, particularly engineering and sales personnel, could make it difficult to meet our strategic goals and remain competitive as a technology company.
We may not realize expected benefits from restructuring initiatives.
In the past, we have restructured our business and reduced our workforce in response to industry and market conditions. In light of the rapidly changing market for communications equipment, we may have to restructure in the future to achieve certain cost savings and to strategically realign our resources. As we further restructure our business or reduce our workforce, we may be required to record additional liabilities. We cannot predict whether we will realize expected synergies and improved operating performance as a result of any current or future restructuring and streamlining of operations. We also cannot predict whether any restructuring and streamlining of operations will adversely affect our ability to retain key employees, which, in turn, would adversely affect our operating results. Further, in the event the market fluctuates up or down, we may not have the appropriate level of resources and personnel to appropriately react to the change. If we cannot effectively reduce our cost structure while continuing to invest in growth opportunities, we may fail to meet strategic and market expectations, which could have an adverse effect on our operating results and share price.
We operate in a highly competitive industry.
Our products and services continue to face competitive pressures. Our success in competing with other communications equipment providers will depend primarily on the following:
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the price, quality and reliability of our products;
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our engineering, manufacturing and marketing skills;
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our ability to offer solutions and compete with providers providing end-to-end solutions;
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our delivery and service capabilities;
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our control of operating expenses and management of assets;
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overall financial strength and stability; and
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our ability to integrate acquired businesses effectively.
We also may face more intense competition in certain markets. Pricing pressures could increase from current and future competitors and customers. Many current competitors have, and future competitors also may have, more engineering, manufacturing, marketing, and financial and personnel resources available to them, may have better access to such resources and may be better able to attract
and retain highly qualified personnel. Consolidation among communications equipment providers as well as entrants into the communications equipment market also may affect competition. As a result, other providers may respond more quickly to new or emerging technologies and changes in customer requirements and be able to offer a wider range of products and services, separately, bundled together or as end-to-end solutions. In addition, technological change, the increasing addition of Internet, data, video, voice and other services to networks, the possibility of regulatory changes and industry consolidation will likely continue to cause rapid evolution in the competitive environment. The full scope and nature of these changes are difficult to predict. Increased competition, particularly from Asia-based competitors, could lead to price cuts, reduced gross margins and loss of market share, which may adversely affect our business, operating results and financial condition.
Conditions in international markets will affect our operations.
Sales outside of North America generated 34% of our revenue in 2009 and 32% in 2008. Due to our international sales and our international operations and research and development organizations, we are subject to the risks of conducting business internationally. These risks include:
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local economic and market conditions;
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political and economic instability;
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reliance on third parties, who may be competitors, to sell and service our products in certain applications in certain countries;
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reliance on employees and third parties in various geographies to complete product developments;
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unexpected changes in legislative or regulatory requirements;
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fluctuations in currency exchange rates;
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tariffs and other barriers and restrictions, including established relationships between government-controlled carriers and local equipment vendors;
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longer payment cycles;
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difficulties in enforcing intellectual property and contract rights;
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greater difficulty in accounts receivable collection;
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potentially adverse taxes, including any U.S. taxes imposed on our actual or deemed repatriation of earnings of foreign subsidiaries;
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potentially lower margins and less certainty of support for customer relationships where foreign sales are made through local distributors; and
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the burdens of complying with a variety of foreign laws and telecommunications standards.
We also are subject to general geopolitical risks, such as political and economic instability and changes in diplomatic and trade relationships. We maintain business operations and have sales in many international markets. Economic conditions in many of these markets represent significant risks. We cannot predict whether sales and business operations in these markets will be adversely affected by these conditions. Instability in foreign markets, particularly in Asia, Latin America and the Middle East, could have a negative impact on our business, financial condition and operating results. In addition to the effect of international economic instability on foreign sales, domestic sales to U.S. customers with significant foreign operations could be adversely impacted by these economic conditions, which may adversely affect our business, financial condition and operating results in the future.
We are exposed to fluctuations in currency exchange rates that could negatively impact our financial results and cash flows.
Because we conduct a portion of our business outside the United States, we face exposure to adverse movements in foreign currency exchange rates. These exposures may change over time as business practices evolve, and they could have a material adverse impact on our financial results and cash flows. Additionally, we have exposures to emerging market currencies, which can have extreme currency volatility. A weakened U.S. dollar will increase the cost of local operating expenses and procurement of raw materials to the extent that we must purchase components in foreign currencies. An increase in the value of the dollar could increase the real cost to our customers outside the United States where we sell in U.S. dollars.
We may encounter difficulties obtaining necessary raw materials and supplies.
Our ability to make and service our products and meet customer demands depends on our ability to obtain timely deliveries of important raw materials and supplies within certain quality standards. The availability of these raw materials and supplies is subject to market forces beyond our control. From time to time there may not be sufficient quantities of raw materials and supplies in the marketplace to meet the customer demand for our products. In addition, the costs to obtain these raw materials and supplies are subject to price fluctuations. Many companies use the same raw materials and supplies to produce their products that we use to produce our products. Companies with more resources may have a competitive advantage in obtaining raw materials and supplies due to greater buying power. Reduced supply or higher prices for raw materials and supplies may adversely affect our business, operating results and financial condition. In addition, we currently purchase certain key components from sole or limited-source vendors, and most of our component purchases are on a purchase-order basis without guaranteed supply arrangements. If supply is disrupted, we may be unable to find an alternative source in a timely manner, at favorable prices or of acceptable quality. These circumstances may limit our ability to meet scheduled deliveries to customers and may increase our expenses.
We depend on contract manufacturers and third-party service providers.
We have purchase agreements with contract manufacturers that require them to buy components used to manufacture our products and authorize them to buy components in accordance with agreed-upon lead times. As customers increasingly demand shorter delivery timeframes, the difficulty of accurately forecasting component needs creates additional risk. Failure to estimate requirements accurately can lead to monetary penalties, excess or obsolete inventory, or manufacturing disruptions. Further, since we do not, in every instance, have a contractual relationship with suppliers to our contract manufacturers, we are subject to and dependent on the terms of the agreements between the contract manufacturer and the supplier. As a result, we have limited ability to take legal action against suppliers if a component fails or is outside of the quality standards we set. In addition, the contract manufacturers may not allocate sufficient resources to the timely completion of our orders in accordance with our quality standards and result in significant interruptions in the supply of products to our customers. Further, if supply to our contract manufacturers is disrupted, we may be unable to find an alternative source in a timely manner, at favorable prices or of acceptable quality. These circumstances may limit our ability to meet scheduled deliveries to customers and may increase our expenses.
We rely on a small number of contract manufacturers to perform the majority of our product manufacturing. The qualification of these manufacturers is an expensive and time-consuming process, and these manufacturers build products for other companies, including our competitors. We constantly review their manufacturing capability to ensure they meet our production requirements in terms of cost, capacity and quality. Periodically, we may decide to transfer the manufacturing of a product from one contract manufacturer to another to better meet our production needs. It is possible that we may not effectively manage this transition or the new contract manufacturer may not perform as well as expected. As a result, we may not be able to fill orders in a timely manner, which could harm our business. These limitations and the failure to deliver products on time may adversely affect our business, operating results and financial condition.
We rely on the use of third-party customer service providers to deliver and install products. We depend on such third-party agents to perform key on-site services for our customers. We cannot control the availability of such resources or the quality of the services provided by such third parties. Scarcity of resources, price fluctuations, and quality or delivery issues may adversely affect our business, operating results and financial condition.
We may be unable to sell certain inventory, which could result in lower gross profit margins and net income.
Some customer requirements include specific configurations of our products, for which we procure the related component parts. In many cases, we forecast and purchase components in advance. If customers do not place orders, if their requirements change, or if they cancel orders, we may be unable to cost-effectively rework these components and/or return them to inventory as available-for-sale. Write-downs and accruals for unrealizable inventory will negatively impact our gross profit margins and net income.
Intellectual property rights may not be adequate to protect our business.
Our future success depends in part on our intellectual property, including our proprietary technology and innovations. We have attempted to protect our intellectual property through various mechanisms such as patents, copyrights, trademarks, contractual obligations and trade secrets. We cannot be assured, however, that the patents we obtain and other intellectual property rights that we hold will necessarily provide us with any competitive advantage. Third parties may attempt to use our intellectual property without authorization. It is difficult to police the unauthorized use of our intellectual property, particularly in certain foreign countries, the laws of which may not protect intellectual property rights to the same extent as the laws of the United States. Litigation may be
necessary to enforce our intellectual property rights, which could be costly and disruptive; there is no guarantee that we will obtain a successful result, no matter how much time, money and energy we spend on litigation. In addition, competitors and others may develop competitive technology independently without violating our proprietary rights. Any inability to secure, protect or enforce proprietary rights could result in loss of any competitive advantage, loss of customer orders and decreased revenue.
We are and may be subject to additional intellectual property infringement claims that are costly and time consuming to defend. These claims could limit our ability to use some technologies.
As competition in the communications equipment industry increases and the functionality of the products in this industry converges, companies in the industry increasingly become the target of infringement claims and other intellectual property disputes. Third parties have and may in the future assert infringement claims against us or our customers or partners in connection with our products, services or other aspects of our business. From time to time we receive notices or claims based on third-party patents or other proprietary rights, including notices or claims that may originate from competitors. Any such third parties may choose to litigate their claims, or we may pursue litigation to determine the scope and validity of any such proprietary rights. We may be unsuccessful in any such litigation. We may be unable to secure, on commercially reasonable terms, any licenses that we seek. Third-party claims, whether with or without merit, potentially can result in:
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costly litigation;
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diverting management’s time, attention and resources;
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delaying or halting product shipments or services delivery;
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requiring us to pay damages;
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requiring us to enter into royalty-bearing licensing arrangements or to obtain substitute technology of lower quality or higher cost; or
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otherwise imposing obligations or restrictions that could adversely affect our business, financial condition and operating results.
Product quality or performance problems could impact our business.
The development and production of new products with high technology content often involves problems with components and manufacturing methods. If significant problems in reliability, quality or network monitoring develop, including those due to defects in product, a number of negative effects on our business could result, including:
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costs to fix defects;
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high service and warranty expenses;
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payment of liquidated damages for performance failures;
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high inventory obsolescence expense;
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high levels of product returns;
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delays or interruptions in product turn-up;
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delays in collecting accounts receivable;
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reduced orders from existing customers; and
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declining interest from potential customers.
We may be unable to identify or complete strategic acquisitions, investments and dispositions.
Our long-term growth strategy includes building value for the company through a variety of methods. These methods may include acquisition of, investment in, or joint ventures in, adjacent or complementary businesses, products, services or technologies and potential divestitures of certain portions of our business. We cannot assure that we will be able to identify suitable third parties for these transactions. If we are unable to identify suitable third parties for strategic transactions we may not be able to capitalize on market opportunities with existing and new customers, which could inhibit our ability to gain market share. Even if we identify suitable third parties to participate in these transactions, we cannot assure that we will be able to make them on commercially acceptable terms, if at all. If we acquire a company, it may be difficult to assimilate its businesses, products, services, technologies and personnel into our operations. These difficulties could disrupt our ongoing business, distract our management and workforce,
increase our expenses and adversely affect our operating results and ability to compete and gain market share. In addition, we may incur debt or be required to issue equity securities to pay for future acquisitions or investments. The issuance of any equity securities could be dilutive to our stockholders. We also may need to make further investments to support the acquired company and may have difficulty identifying and acquiring appropriate resources. If we divest or otherwise exit certain portions of our business, we may be required to record additional expenses, for items such as workforce reduction costs, closure of excess facilities and excess inventory write-offs. Furthermore, estimates with respect to the useful life and ultimate recoverability of our carrying basis of assets, including goodwill and purchased intangible assets, could change as a result of such disposition.
Our reported financial results could suffer if there is an impairment of goodwill or other intangible assets.
We are required to annually test our goodwill to determine if impairment has occurred. For evaluation purposes, each segment with a goodwill balance is reviewed for possible goodwill impairment. Goodwill impairment is reviewed annually and when impairment indicators exist, by comparing the segment’s net book value to fair value. If the segment’s fair value is greater than its book value and no other impairment indicators exist, further impairment tests are not deemed necessary and no impairment loss is recorded. If intangible assets are deemed to be impaired, an impairment loss equal to the amount by which the carrying amount exceeds the fair value of the assets would be recognized. Events or circumstances could arise in the future that may create a need to record an impairment adjustment that could have a material adverse affect on our financial statements.
We are subject to numerous and changing industry regulations and standards.
Our products must comply with a significant number of communications industry technological regulations and standards, which vary between U.S. and international markets. Our products also must interoperate with third-party products. Testing to ensure compliance with technological standards and interoperability requires significant time and money. If we fail to ensure compliance with evolving standards and regulations in a timely manner or fail to maintain interoperability with equipment from other companies, we could experience customer contract penalties, delayed or lost customer orders, decreased revenue and reduced net income that may adversely affect our business, financial condition and operating results. To remain competitive, and in some cases remain compliant with customer requirements, we also must comply with industry certifications such as ISO (International Organization for Standardization) and TL 9000, a quality management system developed for the telecommunications industry.
We operate in an environment subject to changing government regulations.
The communications equipment industry is subject to government regulation in the United States and other countries. Our business depends on the continued growth of the telecommunications industry worldwide. Federal and state agencies regulate most of our domestic customers, and foreign customers also are subject to regulation. In particular, there may be future changes in U.S. telecommunications regulations that could slow the expansion of service providers’ network infrastructures and adversely affect our business, operating results and financial condition. Future changes in tariffs by regulatory agencies or application of tariff requirements to currently untariffed services could adversely affect the sales of our products for certain classes of customers. Moreover, uncertainty regarding future legislation and government policies combined with emerging competition also may affect the demand for our products. Competition could intensify as a result of future regulatory changes or new regulations in the markets where we operate and sell our products and services, which could adversely affect our business, operating results and financial condition.
Our failure or the failure of our contract manufacturers to comply with applicable environmental laws and regulations worldwide could adversely impact our business and results of operations.
The manufacture, assembly and testing of our products may require the use of hazardous materials that are subject to a broad array of environmental, health and safety laws and regulations. Our failure or the failure of our contract manufacturers to comply with any of these applicable laws or regulations could result in:
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regulatory penalties, fines and legal liabilities;
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suspension of production; or
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curtailment of our operations or sales.
In addition, our failure or the failure of our contract manufacturers to properly manage the use, transportation, emission, discharge, storage, recycling or disposal of hazardous materials could subject us to increased costs or future liabilities. Existing and future environmental laws and regulations may restrict our use of certain materials to manufacture, assemble and test products. Any of these consequences could adversely impact our business and results of operations by increasing our expenses and/or requiring us to alter our manufacturing processes.
If we are not able to build, sustain and utilize proper information technology infrastructure effectively, our business could suffer.
We depend on information technology as an enabler to improve the effectiveness of our operations and to interface with our customers, as well as to maintain financial accuracy and efficiency. If we do not allocate and effectively manage the resources necessary to build, sustain and utilize the proper technology infrastructure, we could be subject to transaction errors, processing inefficiencies, the loss of customers, inaccurate or incomplete data, business disruptions, or the loss of or damage to intellectual property through security breach.
As our operations grow in both complexity and scope, we will continuously need to improve and upgrade our systems and infrastructure while maintaining the reliability and integrity of our systems and infrastructure. The expansion of our systems and infrastructure may require us to commit substantial financial, operational and technical resources before the volume of our business increases, with no assurance that the volume of business will increase. Any other upgrades to our systems and information technology, or new technology, now and in the future, will require that our management and resources be diverted from our core business to assist implementation of such upgrades or new technology. There can be no assurance that the time and resources our management will need to devote to these upgrades, service outages or delays due to the installation of any new or upgraded technology (and customer issues therewith), or the impact on the reliability of our data from any new or upgraded technology will not have a material adverse effect on our business, financial condition or results of operations.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
Our corporate headquarters is located in Naperville, Illinois, approximately 35 miles west of Chicago. During 2009, we operated 49 facilities globally, totaling 1.3 million square feet to support:
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Research and development: 628,000 square feet, of which 58% was used by the Broadband segment and 42% was used by the Transport segment.
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Sales and services: 291,000 square feet.
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Operations: 211,000 square feet.
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Corporate and administration: 173,000 square feet.
We own approximately 0.9 million square feet of the total, which includes our headquarters facility and four facilities in Espoo, Finland. We lease facilities in 33 countries that total approximately 0.4 million square feet, including 8 facilities in North America; 19 facilities in Europe, Middle East and Africa; 14 facilities in the Asia Pacific region; and 3 facilities in Latin America.
Our leases included 195,000 square feet in North America; 75,000 square feet in Europe, Middle East and Africa; 51,000 square feet in Asia Pacific; and 12,199 square feet in Latin America.
We own substantially all of our equipment used in our business, other than that related to outsourced activities. We believe our facilities are in good condition and are suitable and adequate for our current needs.
ITEM 3. LEGAL PROCEEDINGS
Makor Issues & Rights, Ltd. v. Tellabs, Inc. On June 18, 2002, a class action complaint was filed in the United States District Court of the Northern District of Illinois against Tellabs, Michael Birck (Chairman of the Board of Tellabs) and Richard Notebaert (former CEO, President and Director of Tellabs). Thereafter, eight similar complaints were also filed in the United States District Court of the Northern District of Illinois. All nine of these actions were subsequently consolidated, and on December 3, 2002, a consolidated amended class action complaint was filed against Tellabs, Mr. Birck, Mr. Notebaert, and certain other of our current or former officers and/or directors. The consolidated amended complaint alleged that during the class period (December 11, 2000-June 19, 2001) the defendants violated the federal securities laws by making materially false and misleading statements, including, among other things, allegedly providing revenue forecasts that were false and misleading, misrepresenting demand for our products, and reporting overstated revenue for the fourth quarter 2000 in our financial statements. Further, certain of the individual defendants were alleged to have violated the federal securities laws by trading our securities while allegedly in possession of material, non-public information about us pertaining to these matters. The consolidated amended complaint seeks unspecified restitution, damages and other relief.
On January 17, 2003, Tellabs and the other named defendants filed a motion to dismiss the consolidated amended class action complaint in its entirety. On May 19, 2003, the Court granted our motion and dismissed all counts of the consolidated amended complaint, while affording plaintiffs an opportunity to replead. On July 11, 2003, plaintiffs filed a second consolidated amended class action complaint against Tellabs, Messrs. Birck and Notebaert, and many (although not all) of the other previously named individual defendants, realleging claims similar to those contained in the previously dismissed consolidated amended class action complaint. We filed a second motion to dismiss on August 22, 2003, seeking the dismissal with prejudice of all claims alleged in the second consolidated amended class action complaint. On February 19, 2004, the Court issued an order granting that motion and dismissed the action with prejudice. On March 18, 2004, the plaintiffs filed a Notice of Appeal to the United States Federal Court of Appeal for the Seventh Circuit, appealing the dismissal. The appeal was fully briefed and oral argument was heard on January 21, 2005. On January 25, 2006, the Seventh Circuit issued an opinion affirming in part and reversing in part the judgment of the district court, and remanding for further proceedings. On February 8, 2006, defendants filed with the Seventh Circuit a petition for rehearing with suggestion for rehearing en banc. On April 19, 2006, the Seventh Circuit ordered plaintiffs to file an answer to the petition for rehearing, which was filed by the plaintiffs on May 3, 2006. On July 10, 2006, the Seventh Circuit denied the petition for rehearing with a minor modification to its opinion, and remanded the case to the district court. On September 22, 2006, defendants filed a motion in the district court to dismiss some (but not all) of the remaining claims. On October 3, 2006, the defendants filed with the United States Supreme Court a petition for a writ of certiorari seeking to appeal the Seventh Circuit’s decision. On January 5, 2007, the defendants’ petition was granted. The United States Supreme Court heard oral arguments on March 28, 2007. On June 21, 2007, the United States Supreme Court vacated the Seventh Circuit’s judgment and remanded the case for further proceedings. On November 1, 2007, the Seventh Circuit heard oral arguments for the remanded case. On January 17, 2008, the Seventh Circuit issued an opinion adhering to its earlier opinion reversing in part the judgment of the district court, and remanded the case to the district court for further proceedings. On February 24, 2009, the district court granted plaintiffs’ motion for class certification. The case is now proceeding in the district court and discovery is ongoing. We believe that we have valid defenses to the lawsuit.
Fujitsu Network Communications Inc. v. Tellabs, Inc. On January 28, 2008, Fujitsu Network Communications, Inc. and Fujitsu Limited filed a complaint in the United States District Court for the Eastern District of Texas against Tellabs in a case captioned Fujitsu Network Communications, Inc. and Fujitsu Limited v. Tellabs, Inc. and Tellabs Operations, Inc., Civil Action No. 6:08-cv-00022-LED. The complaint alleges infringement of U.S. Patent Nos. 5,526,163, 5,521,737, 5,386,418 and 6,487,686, and seeks unspecified damages including enhanced damages, as well as attorney fees and other remedies including injunctive relief. On March 21, 2008, Tellabs filed its answer, defenses and counterclaims in response to the complaint. A trial date had been set for May 10, 2010, in the Eastern District of Texas, however on July 7, 2009, the court granted Tellabs’ motion to transfer and issued an order transferring the action to the United States District Court for the Northern District of Illinois. On September 15, 2009, the Court in the Northern District of Illinois consolidated this action, for discovery purposes only, with the action instituted by Tellabs against Fujitsu in the Northern District of Illinois. A trial date has not yet been set for the transferred action. We believe that we have valid defenses to the lawsuit.
Tellabs Operations, Inc. v. Fujitsu Limited and Fujitsu Network Communications Inc. On June 11, 2008, Tellabs Operations, Inc. filed a complaint in the United States District Court for the Northern District of Illinois against Fujitsu Limited and Fujitsu Network Communications, Inc. in a case captioned Tellabs Operations, Inc. v. Fujitsu Limited and Fujitsu Network Communications, Inc. Civil Action No. 1:08-cv-3379. The complaint alleges infringement of Tellabs Operations, Inc.’s U.S. Patent No. 7,369,772, and seeks unspecified damages including enhanced damages, as well as attorney fees and other remedies including injunctive relief. On September 5, 2008, each of Fujitsu Limited and Fujitsu Network Communications, Inc. served its answer, defenses and counterclaims in response to the complaint. Fujitsu Limited also brought counterclaims against Tellabs, Inc. and Tellabs Operations, Inc. alleging infringement of U.S. Patent Nos. 5,533,006 and 7,227,681, seeking unspecified damages including enhanced damages, as well as attorney fees and other remedies including injunctive relief. On September 22, 2008, Tellabs Operations, Inc. filed its answer to the counterclaims of Fujitsu Network Communications, Inc., and also filed its counterclaims and reply to counterclaims of Fujitsu Limited. On that same date, Tellabs, Inc. filed its answer and counterclaims against Fujitsu Limited. A trial date has not yet been set in the case. We believe that we have valid defenses to Fujitsu’s counterclaims.
Telcordia Technologies Inc. v. Tellabs, Inc. On May 4, 2009, Telcordia Technologies, Inc. filed a complaint against Tellabs in the United States District Court for the District of New Jersey in a case captioned Telcordia Technologies Inc. v. Tellabs, Inc., Civil
Action No. 2:09-cv-02089. The complaint alleges infringement of U.S. Patent Nos. 4,893,306, 4,835,763 and Re. 36,633, and seeks unspecified damages including enhanced damages, as well as attorney fees and other remedies including injunctive relief. On July 27, 2009, Telcordia filed a first amended complaint adding Tellabs Operations, Inc. and Tellabs North America, Inc. as additional defendants. On September 1, 2009, Tellabs filed answers, defenses and counterclaims in response to the first amended complaint. On December 15, 2009, the Court granted Tellabs’ motion to transfer, which resulted in a transfer of the action to the United States District Court for the District of Delaware. A trial date has not yet been set for the transferred action. We believe that we have valid defenses to the lawsuit.
Apart from the matters described above, we are subject to various legal proceedings, claims and litigation arising in the ordinary course of business. Based on our historical experience for these types of litigation, we do not expect that the ultimate costs to resolve these matters will have a material adverse effect on our results of operations, financial position or cash flows.
ITEM 4. RESERVED
FORWARD-LOOKING STATEMENTS
Except for historical information, the matters discussed or incorporated by reference into this report may include forward-looking statements made pursuant to the safe harbor provisions of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These statements reflect management’s expectations, estimates and assumptions, based on current and available information at the time the document was prepared. These forward-looking statements include, but are not limited to, statements regarding future events, plans, goals, objectives and expectations. The words “anticipate,” “believe,” “estimate,” “target,” “expect,” “predict,” “plan,” “possible,” “project,” “intend,” “likely,” “will,” “should,” “could,” “may,” “foreseeable,” “would” and similar expressions are intended to identify forward-looking statements. Forward-looking statements are not guarantees of future performance and involve risks, uncertainties and other factors that may cause our actual performance or achievements to be materially different from any future results, performance or achievements expressed or implied by those statements. Important factors that could cause our actual results to differ materially from those in forward-looking statements include, but are not limited to: overall negative economic conditions generally and disruptions in credit and capital markets, including specific impacts of these conditions on the telecommunications industry; financial condition of telecommunications service providers, equipment vendors and contract manufacturers, including the impact of any bankruptcies; the impact of customer and vendor consolidation; integration of a new business; successful expansion into adjacent markets with new and existing products and platforms; new product acceptance; product demand and industry capacity; competitive products and pricing; competitive pressures from new entrants to the telecommunications industry; initiatives to improve profitability that may have financial consequences including further restructuring charges and the ability to realize anticipated savings under such cost-reduction initiatives; exiting businesses and product areas; impairment charges and other cost cutting initiatives and related charges and costs; manufacturing efficiencies; research and new product development; protection of and access to intellectual property, patents and technology; ability to attract and retain highly qualified personnel; availability of components and critical manufacturing equipment and capacity; foreign economic conditions, including currency rate fluctuations; the regulatory and trade environment; the impact of new or revised accounting rules or interpretations, including revenue recognition requirements; availability and terms of future acquisitions; divestitures and investments; uncertainties relating to synergies; charges and expenses associated with business combinations and other transactions; and other risks and future factors that may be detailed from time to time in the Company’s filings with the SEC. For a further description of such risks and future factors, see Item 1A of this Form 10-K. Our actual future results could differ materially from those predicted in such forward-looking statements. In light of the foregoing risks, uncertainties and other factors, investors are advised not to rely on these forward-looking statements when making investment decisions. These factors are not intended to be an all-encompassing list of risks and uncertainties that may affect the operations, performance, development and results of our business. We undertake no obligation to publicly update or revise any forward-looking statements to reflect changed assumptions, the occurrence of anticipated or unanticipated events or changes to future results over time. The foregoing discussion should be read in conjunction with the risk factors, financial statements and related notes and management’s discussion and analysis included in our 2009 Annual Report, included herein as Exhibit 13, and incorporated in this report by reference.
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Tellabs’ common stock is listed on the NASDAQ Global Select Market under the symbol “TLAB”. As of February 12, 2010, there were approximately 6,961 stockholders of record and 384,361,574 outstanding shares. There are also stockholders holding stock in street name. The section entitled “Common Stock Market Data” in our 2009 Annual Report, included herein as Exhibit 13, is incorporated herein by reference.
As detailed below, our Board of Directors has authorized a number of repurchase programs during recent years. We record repurchased shares as Treasury stock.
We repurchase outstanding common stock under Rule 10b5-1. We intend to continue to use cash generated by employee stock option exercises (other than those of company officers and board members) to repurchase stock in the manner provided under this program. As of January 1, 2010, we purchased 7.5 million shares of our common stock under this program since February 2006, at a total cost of $93.4 million, including $1.8 million (0.2 million shares) in 2009 and $0.9 million (0.2 million shares) in 2008. On January 27, 2010, our Board of Directors authorized a one-year extension of this program.
On July 31, 2006, our Board of Directors authorized a repurchase program of up to $300 million of outstanding common stock. As of February 1, 2008, we purchased 37.0 million shares of our common stock under this program at a total cost of $300 million, completing this program. This total includes purchases of $29.9 million (4.6 million shares) in 2008.
On November 8, 2007, our Board of Directors authorized a repurchase program of up to $600 million of outstanding common stock. As of January 1, 2010, we purchased 32.4 million shares of our common stock under this program at a total cost of $204.0 million, leaving $396.0 million available to be purchased under this program. This total includes purchases of $81.1 million (12.7 million shares) in 2009 and $122.9 million (19.7 million shares) in 2008. We provide no assurance that we will continue our repurchase activity and we may change our repurchase activity in the future.
In addition, during 2009 we purchased 0.5 million shares for $2.6 million to cover withholding taxes on shares issued under employee stock plans. In 2008, we purchased 0.4 million shares for $2.0 million to cover withholding taxes on shares issued under employee stock plans.
Repurchases of Common Stock:
The amounts in this column represent the remaining amounts under the current $600 million program described above. The Rule 10b5-1 repurchase program described above does not have a repurchase amount limit; therefore, it is not included in the remaining value of shares.
ITEM 6. SELECTED FINANCIAL DATA
The five years of selected financial data, for our 2009, 2008, 2007, 2006 and 2005 fiscal years is included in the 5-Year Summary of Selected Financial Data in our 2009 Annual Report, included herein as Exhibit 13, and such five years of selected data is incorporated herein by reference.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
The Management’s Discussion and Analysis of Results of Operations and Financial Condition in our 2009 Annual Report, included herein as Exhibit 13, is incorporated herein by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Investments in Marketable Securities
During the normal course of business, we invest a portion of our cash and cash equivalents in marketable securities. For a discussion of our investments in marketable securities for the fiscal years ended January 1, 2010, and January 2, 2009, see the notes to our consolidated financial statements in our 2009 Annual Report, included herein as Exhibit 13, and incorporated herein by reference.
Financial Contracts and Market Risk
We conduct business on a global basis in U.S. and foreign currencies subjecting us to risks associated with fluctuating foreign exchange rates. To mitigate these risks, we use derivative foreign exchange contracts to address nonfunctional exposures that are expected to be settled in one year or less. The derivative foreign exchange contracts consist of foreign currency forward and option contracts.
Derivative financial contracts involve elements of market and credit risk. The market risk that results from these contracts relates to changes in foreign currency exchange rates, which generally are offset by changes in the value of the underlying assets or liabilities being held. Credit risk relates to the risk of nonperformance by a counterparty to one of our derivative contracts. We do not believe there is a significant credit risk associated with our hedging activities. We monitor the counterparties’ credit ratings and other market data to minimize credit risk. In addition, we also limit the aggregate contract amount entered into with any one financial institution to mitigate credit risk.
Cash Flow Hedges
We use foreign currency forward and option contracts, designated as cash flow hedges, to mitigate currency risk related to an imbalance of nonfunctional currency denominated costs and related revenue. We conduct monthly effectiveness tests of these hedging relationships on a spot-to-spot basis, excluding forward points. Effective gains and losses from derivative contracts are recorded in Accumulated other comprehensive income until the underlying transactions occur, at which time they are reclassified to Total cost of revenue. Ineffectiveness is recorded to Other income (expense), net. If it becomes probable that an anticipated transaction that is hedged will not occur, we immediately reclassify the gains or losses related to that hedge from Accumulated other comprehensive income to Other income (expense), net. At January 1, 2010, we had a net unrealized loss of $1.4 million in Accumulated other comprehensive income, which is expected to be reclassified to income within the next 12 months. At January 1, 2010, we held derivatives designated as cash flow hedges in one currency, with a gross notional equivalent of $29.3 million. Maturities on the outstanding hedges range from one to five months.
The notional amounts reflected in the following table represent the U.S. dollar values of the agreed-upon amounts that will be delivered to a third party on the agreed-upon date:
Balance Sheet Hedges (Non-designated Hedges)
Short-term monetary assets and liabilities denominated in currencies other than the functional currency of the Tellabs entity entering into the transaction are remeasured through income as foreign currency rates fluctuate. Changes in the value of derivative contracts intended to offset these fluctuations are also recorded in income. The gain or loss from changes in the fair value of the derivative contracts are generally offset by gains or losses of the underlying transactions being hedged. These derivative contracts are not designated as hedges. At January 1, 2010, we held non-designated foreign currency forward contracts in nine currencies, with a gross notional equivalent of $173.3 million. Forward contracts with approximately 30 day maturities were used to hedge the exposures.
Our net foreign currency exposure is diversified among a broad number of currencies. The notional amounts reflected in the following table represent the U.S. dollar values of the agreed-upon amounts that will be delivered to a third party on the agreed-upon date:
Net Investment Hedges
We entered into three-month foreign currency forward contracts, designated as net investment hedges, to hedge a portion of our net investment in one of our foreign subsidiaries to preserve the U.S. dollar value of our Euro cash. Effective changes in the fair value of these contracts due to exchange rate fluctuations are recorded within Accumulated other comprehensive income. Those amounts will be reflected in income only when we dispose of the investment in the foreign subsidiary. We conduct monthly effectiveness tests of net investment hedges on a spot-to-spot basis, excluding forward points, and any measurement of ineffectiveness is recorded in income. As of January 1, 2010, we had a net unrealized gain of $10.2 million in Accumulated other comprehensive income, which includes a net gain of $9.3 million related to settled contracts and a net gain of $0.9 million related to unsettled contracts. We held net investment hedges with a notional value of 100 million Euros at the end of 2009. All net investment hedges were contracted with three month maturities.
The notional amounts reflected in the following table represent the U.S. dollar values of the agreed-upon amounts that will be delivered to a third party on the agreed-upon date:
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Financial Statements and Notes, Report of Independent Registered Public Accounting Firm and Report of Independent Registered Public Accounting Firm on Internal Control over Financial Reporting in our 2009 Annual Report, included herein as Exhibit 13, are incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
As of the end of the period covered by this report our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”) carried out an evaluation under their supervision and with the participation of our management, of the effectiveness of disclosure controls and procedures and internal control over financial reporting.
Based on that evaluation, the CEO and CFO concluded that our disclosure controls and procedures are effective and there were no changes in internal control over financial reporting that have materially affected or are reasonably likely to materially affect internal control over financial reporting.
Management’s report on internal control over financial reporting and the attestation report of Ernst and Young LLP, our independent registered public accounting firm, on internal control over financial reporting is set forth in our 2009 Annual Report, included herein as Exhibit 13, and is incorporated herein by reference.
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required is incorporated herein by reference to the sections entitled “Voting Information-Election of Directors,” “Committees of the Board-Audit and Ethics Committee,” and “Section 16(a) Beneficial Ownership Reporting Compliance” in our Proxy Statement for our 2010 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission not later than 120 days after the fiscal year ended January 1, 2010, and the sections entitled “Officers” and “Corporate Responsibility” in our 2009 Annual Report, included herein as Exhibit 13, and is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required is incorporated herein by reference to the sections entitled “Executive Compensation,” “Director Compensation,” and “Corporate Governance,” in our Proxy Statement for our 2010 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission not later than 120 days, after the fiscal year ended January 1, 2010.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The information required is incorporated herein by reference to the sections entitled “Security Ownership of Management” and “Security Ownership of Certain Beneficial Owners” in our Proxy Statement for our 2010 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission not later than 120 days after the fiscal year ended January 1, 2010. Securities authorized for issuance under equity compensation plans is included in the notes to our 2009 Annual Report, included herein as Exhibit 13, and is incorporated herein by reference.
Equity Compensation Plan Table
The following table summarizes information as of January 1, 2010, relating to equity compensation plans of the Company pursuant to which Common Stock is authorized for issuance:
Includes 29,827,886 securities available under the Amended and Restated 2004 Incentive Compensation Plan and 8,845,990 securities available under the 2005 Employee Stock Purchase Plan, which has been suspended by the Company.
All of these options were issued pursuant to option plans that were assumed in merger transactions. The Company has not made, and will not make, any future grants or awards of equity securities under these plans.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required is incorporated herein by reference to the section entitled “Transactions with Related Persons,” “Policies and Procedures for Review and Approval of Related-Person Transactions” and “Corporate Governance” in our Proxy Statement for our 2010 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission not later than 120 days after the fiscal year ended January 1, 2010.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required is incorporated herein by reference to the section entitled “Independent Auditor’s Fees and Services” in our Proxy Statement for our 2010 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission not later than 120 days after the fiscal year ended January 1, 2010.
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) 1. Financial Statements:
The following Consolidated Financial Statements of Tellabs, Inc. and Subsidiaries, included in the registrant’s 2009 Annual Report, included herein as Exhibit 13, were previously incorporated by reference in Item 8:
Report of Independent Registered Public Accounting Firm
Report of Independent Registered Public Accounting Firm and Internal Control over Financial Reporting
Consolidated Balance Sheets: January 1, 2010 and January 2, 2009
Consolidated Statements of Operations: Years ended January 1, 2010, January 2, 2009 and December 28, 2007
Consolidated Statements of Stockholders’ Equity: Years ended January 1, 2010, January 2, 2009 and December 28, 2007
Consolidated Statements of Cash Flows: Years ended January 1, 2010, January 2, 2009 and December 28, 2007
Notes to Consolidated Financial Statements
2. Financial Statement Schedule:
The following Consolidated Financial Statement Schedule of Tellabs, Inc. and Subsidiaries and related Report of Independent Registered Public Accounting Firm are included herein pursuant to Item 15(d):
Schedule II. Valuation and Qualifying Accounts and Reserves
Other schedules have been omitted because they are not applicable or the required information is shown in the Consolidated Financial Statements or Notes thereto.
(b) Exhibits:
Exhibit
Number
Description
2.1
Agreement and Plan of Merger among Tellabs, Inc., Tellabs Willow Corp. and WiChorus, Inc. dated as of October 20, 2009 22/
3.1
Restated Certificate of Incorporation and Amendments 9/
3.2
Fourth Amended and Restated By-Laws dated January 29, 2009 19/
10.1
Tellabs, Inc. Deferred Income Plan 16/
10.2
1986 Non-Qualified Stock Option Plan, as amended and restated 1/
10.3
Amendment to Tellabs, Inc. 1986 Non-Qualified Stock Option Plan (As Amended and Restated June 26, 1992) 4/
10.4
1991 Stock Option Plan, as amended and restated 1/
10.5
Amendment to Tellabs, Inc. 1991 Stock Option Plan (As Amended and Restated June 26, 1992) 4/
10.6
1994 Stock Option Plan 2/
10.7
Amendment to the Tellabs, Inc. 1994 Stock Option Plan 4/
10.8
Tellabs, Inc. 1998 Stock Option Plan 3/
10.9
Amendment to the Tellabs, Inc. 1998 Stock Option Plan 4/
10.10
Tellabs, Inc. 2001 Stock Option Plan 5/
10.11
Ocular Networks, Inc. Amended and Restated 2000 Stock Incentive Plan 6/
10.12
Tellabs Advantage Plan, as amended and restated 8/
10.13
First Amendment to the Tellabs Advantage Plan 8/
10.14
Second Amendment to the Tellabs Advantage Plan 8/
10.15
2004 Amendment to the Tellabs Advantage Plan 10/
10.16
2006 Amendment to the Tellabs Advantage Plan 14/
10.17
Vivace Networks, Inc. 1999 Equity Incentive Plan, as amended 13/
10.18
Tellabs, Inc. 2004 Incentive Compensation Plan 7/
10.19
Forms of Stock Award Statement, Stock Award Agreement and RSU Award Statement pertaining to Tellabs, Inc. 2004 Incentive Compensation Plan 10/
10.20
Advanced Fibre Communication, Inc. 1996 Stock Incentive Plan 10/
10.21
Form of Stock Option Agreement pertaining to the Advanced Fibre Communication, Inc. 1996 Plan 10/
10.22
Form of Automatic Stock Option Agreement pertaining to the Advanced Fibre Communication, Inc. 1996 Plan 10/
10.23
Form of Notice of Grant of Stock Option pertaining to the Advanced Fibre Communication, Inc. 1996 Plan 10/
10.24
Form of Notice of Grant of Non-Employee Director Automatic Stock Option pertaining to the Advanced Fibre Communication, Inc. 1996 Plan 10/
10.25
Form of Stock Issuance Agreement pertaining to the Advanced Fibre Communication, Inc. 1996 Plan 10/
10.26
2005 Tellabs, Inc. Employee Stock Purchase Plan 11/
10.27
Tellabs, Inc. Executive Continuity and Protection Program 11/
10.28
Form of Executive Performance Stock Units Statement and Award Agreement 12/
10.29
401(k) Plan as Amended and Restated Effective January 1, 2007 15/
10.30
Addendum Incorporating Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) to Tellabs 401(k) Plan 15/
10.31
2008 Form of Executive Performance Stock Units Award Statement 18/
10.32
Tellabs, Inc. Amended and Restated 2004 Incentive Compensation Plan 17/
10.33
2009 Form of Executive Performance Stock Units Statement and Award Agreement 20/
10.34
Amendment to Tellabs 401(k) Plan 21/
Annual Report to Stockholders
Subsidiaries of Tellabs, Inc.
Consent of Independent Registered Public Accounting Firm
31.1
CEO Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2
CFO Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1
CEO Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2
CFO Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Exhibits 10.1 through 10.34 contain, among other documents, management contracts or compensatory plans or arrangements required to be filed as an Exhibit to this Form 10-K pursuant to Item 15(b) hereof.
(c) Schedules: See Item 15(a)2 above.
1/ Incorporated by reference from Tellabs, Inc. Post-effective Amendment No. 1 on Form S-8 to Form S-4 filed on or about June 29, 1992 (File No. 33-45788).
2/ Incorporated by reference from Tellabs, Inc. Form 10-K Annual Report for the year ended December 31, 1993 (File No. 0-9692).
3/ Incorporated by reference from Tellabs, Inc. Definitive Proxy Statement filed on or about March 16, 1998 (File No. 0-9692).
4/ Incorporated by reference from Tellabs, Inc. Form 10-Q Quarterly Report for the quarter ended June 30, 2000 (File No. 0-9692).
5/ Incorporated by reference from Tellabs, Inc. Form 10-Q Quarterly Report for the quarter ended March 30, 2001 (File No. 0-9692).
6/ Incorporated by reference from Tellabs, Inc. Form S-8 filed on January 25, 2002 (File No. 333-81360).
7/ Incorporated by reference from Tellabs, Inc. Definitive Proxy Statement filed March 19, 2004 (File No. 0-9692).
8/ Incorporated by reference from Tellabs, Inc. Form 10-K Annual Report for the year ended January 2, 2004 (File No. 0-9692).
9/ Incorporated by reference from Tellabs, Inc. Form S-4 filed June 23, 2004 (File No. 333-116794).
10/ Incorporated by reference from Tellabs, Inc. Form 10-K Annual Report for the year ended December 31, 2004 (File No. 0-9692).
11/ Incorporated by reference from Tellabs, Inc. Form 10-Q Quarterly Report for the quarter ended March 31, 2005 (File No.
0-9692).
12/ Incorporated by reference from Tellabs, Inc. Form 10-Q Quarterly Report for the quarter ended September 29, 2006 (File No.
0-9692).
13/ Incorporated by reference from Tellabs, Inc. Form S-8 filed on July 29, 2003 (File No. 333-107457).
14/ Incorporated by reference from Tellabs, Inc. Form 10-K Annual Report for the year ended December 29, 2006 (File No. 0-9692).
15/ Incorporated by reference from Tellabs, Inc. Form 10-Q Quarterly Report for the quarter ended September 28, 2007 (File No.
0-9692).
16/ Incorporated by reference from Tellabs, Inc. Form 10-K Annual Report for the year ended December 28, 2007 (File No. 0-9692).
17/ Incorporated by reference from Tellabs, Inc. Definitive Proxy Statement filed March 19, 2008 (File No. 0-9692).
18/ Incorporated by reference from Tellabs, Inc. Form 10-Q Quarterly Report for the quarter ended March 28, 2008 (File No.
0-9692).
19/ Incorporated by reference from Tellabs, Inc. Form 8-K Current Report dated February 3, 2009 (File No. 0-9692).
20/ Incorporated by reference from Tellabs, Inc. Form 10-Q Quarterly Report for the quarter ended April 3, 2009 (File No. 0-9692).
21/ Incorporated by reference from Tellabs, Inc. Form 10-Q Quarterly Report for the quarter ended October 2, 2009 (File No.
0-9692).
22/ Incorporated by reference from Tellabs, Inc. Form 8-K Current Report filed October 22, 2009 (File No. 0-9692).
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
TELLABS, INC.
March 1, 2010
/s/ Robert W. Pullen
Robert W. Pullen
President, Chief Executive Officer and Director
(Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
/s/ Robert W. Pullen
March 1, 2010
Robert W. Pullen
President, Chief Executive Officer and Director
(Principal Executive Officer)
/s/ Timothy J. Wiggins
March 1, 2010
Timothy J. Wiggins
Executive Vice President and Chief Financial Officer
(Principal Financial Officer)
/s/ Thomas P. Minichiello
March 1, 2010
Thomas P. Minichiello
Vice President of Finance and Chief Accounting Officer
(Principal Accounting Officer)
/s/ Michael J. Birck
March 1, 2010
Michael J. Birck
Chairman and Director
/s/ Bo Hedfors
March 1, 2010
Bo Hedfors
Director
/s/ Frank Ianna
March 1, 2010
Frank Ianna
Director
/s/ Linda Wells Kahangi
March 1, 2010
Linda Wells Kahangi
Director
/s/ Frederick A. Krehbiel
March 1, 2010
Frederick A. Krehbiel
Director
/s/ Michael E. Lavin
March 1, 2010
Michael E. Lavin
Director
/s/ Stephanie Pace Marshall
March 1, 2010
Stephanie Pace Marshall
Director
/s/ William F. Souders
March 1, 2010
William F. Souders
Director
/s/ Jan H. Suwinski
March 1, 2010
Jan H. Suwinski
Director
TELLABS, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
Three Years Ended January 1, 2010, January 2, 2009 and December 28, 2007
Accounts Receivable Allowances
NOTE:
(A) - Net uncollectible accounts charged off.
Exhibit Index
Annual Report to Stockholders
Subsidiaries of Tellabs, Inc.
Consent of Independent Registered Public Accounting Firm
31.1
CEO Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2
CFO Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1
CEO Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2
CFO Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002