NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
IN MILLIONS, EXCEPT SHARE AND PER-SHARE DATA
1. Basis of Presentation
We prepared the accompanying unaudited consolidated financial statements in accordance with U.S. generally accepted accounting
principles (U.S. GAAP) for interim financial statements, the requirements of Form 10-Q and applicable rules of the U.S. Securities and Exchange Commissions Regulation S-X. Therefore, they do not include all disclosures normally required by
U.S. generally accepted accounting principles for complete financial statements. Accordingly, the financial statements and notes herein are to be read in conjunction with our Annual Report on Form 10-K for the year ended December 28, 2012.
In our opinion, the accompanying unaudited consolidated financial statements include all adjustments (consisting of normal recurring
accruals) that are necessary for a fair presentation. Operating results for interim periods are not necessarily indicative of operating results for the full year.
2. New Accounting Pronouncements
In July 2013, the Financial Accounting Standards Board (FASB) issued an update to its accounting guidance which requires unrecognized
tax benefits to be netted with net operating loss or tax credit carryforwards in the consolidated balance sheet if specific criteria are met. The standard is effective for the interim and annual periods beginning after December 15, 2013. Early
adoption is permitted. We will adopt this standard for the interim period ending March 28, 2014. Adoption of this standard is not expected to have a material effect on our consolidated financial statements.
3. Restructuring and Other Charges
On January 31, 2013, management initiated a restructuring plan that is designed to align expenses with revenue. Tellabs
discontinued the development of the 9200 product and reducing operating expenses. The pretax charges for this plan will consist of approximately $15 million for workforce reductions of approximately 255 employees, $18 million for facility- and
asset-related charges, and $4 million for software license and other contract cancellations. Restructuring expense for this plan for the third quarter of 2013 was $0.8 million, which consists of a reduction of expense of $0.5 million for
severance-related charges and charges of $1.3 million for facility- and asset-related charges. Restructuring expense for this plan for the first nine months of 2013 was $37.1 million, which consists of $15.6 million for severance-related charges,
$17.3 million for facility- and asset-related charges, and $4.2 million for other obligations. By segment, total charges to date under this plan are $0.9 million for Optical, $35.8 million for Data, and $0.4 million for Services. Estimated cash
payments under this plan are expected to be $22.1 million, of which $16.0 million has been paid through the third quarter of 2013. Other than the cash payments, actions under this plan are expected to be substantially completed by the end of the
fourth quarter of 2013.
On October 24, 2012, management initiated a restructuring plan that is designed to further align expenses with
revenue and current market conditions. In order to reduce costs and operating expenses, this plan includes moving certain functions to lower cost geographies. The pretax charges will consist of approximately $8 million for severance-related charges
that will affect approximately 165 employees, and $1 million for facility- and asset-related charges. A reduction of restructuring expense for this plan for the third quarter of 2013 was $0.8 million, which consists of a reduction of expense of $0.9
million for severance-related charges and a charge of $0.1 million for facility- and asset-related charges. Restructuring expense for this plan for the first nine months of 2013 was negligible, which consists of a reduction of expense of $0.4
million for severance-related charges and charges of $0.4 million for facility- and asset-related charges. Cumulative restructuring charges for this plan are $9.4 million, which consists of $8.8 million for severance-related charges and $0.6 million
for facility- and asset-related charges. By segment, total charges to date under this plan are $3.1 million for Optical, $2.3 million for Data, $0.6 million for Access, and $3.4 million for Services. Estimated cash payments under this plan are
expected to be $8.7 million, of which $6.6 million has been paid through the third quarter of 2013. Other than the cash payments, actions under this plan are expected to be substantially completed by the end of the fourth quarter of 2013.
On January 30, 2012, management initiated a restructuring plan that aligns expenses with revenue. Tellabs stopped
new development on the Tellabs
®
SMARTCORE 9100 series for mobile packet core and consolidated research and
development into fewer locations. Restructuring expense for this plan for the third quarter of 2013 was $0.1 for severance-related charges. A reduction in expense for this plan for the first nine months of 2013 was $2.4 million, which consists of
reductions of $0.1 million for workforce adjustments and $2.3 million for facility- and asset-related charges. Cumulative restructuring charges for this plan are $106.4 million, which consists of $23.0 million for severance-related charges, $34.5
million for facility- and
7
asset-related charges, $47.7 million for the accelerated amortization of abandoned intangible assets, and $1.2 million for other obligations. By segment, total charges to date under this plan are
$3.1 million for Optical, $99.6 million for Data, $1.5 million for Access, and $2.2 million for Services. Estimated cash payments under this plan have been $28.7 million through the third quarter of 2013. Remaining cash payments are expected to be
offset by future sub-lease receipts. Other than the cash payments, actions under this plan were completed in the first quarter of 2013.
There
was no restructuring expense for previous restructuring plans for the third quarter of 2013. Restructuring expense for the first nine months of 2013 was $0.6 million, which consists of a reduction of expense of $0.2 million for severance-related
charges, charges of $0.7 million for facility- and asset-related charges and $0.1 million of other obligations.
The balance for restructuring
plans relates to net lease obligations that expire through 2017 and cash severance that we expect to pay through the first quarter of 2015.
The following table summarizes restructuring and other charges recorded for the plans mentioned above, as well as adjustments to reserves recorded for
prior restructurings:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third Quarter
|
|
|
Nine Months
|
|
|
|
9/27/13
|
|
|
9/28/12
|
|
|
9/27/13
|
|
|
9/28/12
|
|
Severance and other termination benefits
|
|
$
|
(1.3
|
)
|
|
$
|
2.3
|
|
|
$
|
14.9
|
|
|
$
|
24.4
|
|
Facility and other exit costs
|
|
|
1.4
|
|
|
|
1.0
|
|
|
|
16.1
|
|
|
|
36.9
|
|
Accelerated amortization of intangible assets
|
|
|
|
|
|
|
|
|
|
|
4.3
|
|
|
|
47.7
|
|
Other obligations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total restructuring and other charges
|
|
$
|
0.1
|
|
|
$
|
3.3
|
|
|
$
|
35.3
|
|
|
$
|
110.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes restructuring and other charges activity by segment for the third quarter and the first
nine months of 2013 and the status of the reserves at September 27, 2013:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third Quarter Activity
|
|
|
|
|
|
|
Balance at
6/28/13
|
|
|
Restructuring
Expense
|
|
|
Cash
Payments
|
|
|
Other
Activities
1
|
|
|
Balance at
9/27/13
|
|
2013 Restructuring Plan
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Optical
|
|
$
|
0.3
|
|
|
$
|
(0.1
|
)
|
|
$
|
(0.2
|
)
|
|
$
|
|
|
|
$
|
|
|
Data
|
|
|
9.0
|
|
|
|
0.9
|
|
|
|
(2.9
|
)
|
|
|
(1.3
|
)
|
|
|
5.7
|
|
Access
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal 2013 Restructuring Plan
|
|
|
9.3
|
|
|
|
0.8
|
|
|
|
(3.1
|
)
|
|
|
(1.3
|
)
|
|
|
5.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2012 Restructuring Plans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Optical
|
|
|
1.4
|
|
|
|
(0.4
|
)
|
|
|
(0.4
|
)
|
|
|
0.1
|
|
|
|
0.7
|
|
Data
|
|
|
2.7
|
|
|
|
(0.2
|
)
|
|
|
(1.6
|
)
|
|
|
(0.1
|
)
|
|
|
0.8
|
|
Access
|
|
|
0.7
|
|
|
|
(0.2
|
)
|
|
|
(0.1
|
)
|
|
|
|
|
|
|
0.4
|
|
Services
|
|
|
1.3
|
|
|
|
0.1
|
|
|
|
(0.9
|
)
|
|
|
|
|
|
|
0.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal 2012 Restructuring Plans
|
|
|
6.1
|
|
|
|
(0.7
|
)
|
|
|
(3.0
|
)
|
|
|
|
|
|
|
2.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Previous Restructuring Plans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Optical
|
|
|
0.7
|
|
|
|
(0.2
|
)
|
|
|
(0.3
|
)
|
|
|
|
|
|
|
0.2
|
|
Data
|
|
|
2.4
|
|
|
|
0.1
|
|
|
|
(0.6
|
)
|
|
|
|
|
|
|
1.9
|
|
Access
|
|
|
0.7
|
|
|
|
0.1
|
|
|
|
(0.3
|
)
|
|
|
|
|
|
|
0.5
|
|
Services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal Previous Restructuring Plans
|
|
|
3.8
|
|
|
|
|
|
|
|
(1.2
|
)
|
|
|
|
|
|
|
2.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total All Restructuring Plans
|
|
$
|
19.2
|
|
|
$
|
0.1
|
|
|
$
|
(7.3
|
)
|
|
$
|
(1.3
|
)
|
|
$
|
10.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Activity
|
|
|
|
|
|
|
Balance at
12/28/12
|
|
|
Restructuring
Expense
|
|
|
Cash
Payments
|
|
|
Other
Activities
1
|
|
|
Balance at
9/27/13
|
|
2013 Restructuring Plan
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Optical
|
|
$
|
|
|
|
$
|
0.9
|
|
|
$
|
(0.9
|
)
|
|
$
|
|
|
|
$
|
|
|
Data
|
|
|
|
|
|
|
35.8
|
|
|
|
(14.7
|
)
|
|
|
(15.4
|
)
|
|
|
5.7
|
|
Access
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Services
|
|
|
|
|
|
|
0.4
|
|
|
|
(0.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal 2013 Restructuring Plan
|
|
|
|
|
|
|
37.1
|
|
|
|
(16.0
|
)
|
|
|
(15.4
|
)
|
|
|
5.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2012 Restructuring Plans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Optical
|
|
|
3.9
|
|
|
|
(0.8
|
)
|
|
|
(2.5
|
)
|
|
|
0.1
|
|
|
|
0.7
|
|
Data
|
|
|
8.6
|
|
|
|
(1.9
|
)
|
|
|
(5.5
|
)
|
|
|
(0.4
|
)
|
|
|
0.8
|
|
Access
|
|
|
1.5
|
|
|
|
(0.3
|
)
|
|
|
(0.8
|
)
|
|
|
|
|
|
|
0.4
|
|
Services
|
|
|
2.8
|
|
|
|
0.6
|
|
|
|
(2.9
|
)
|
|
|
|
|
|
|
0.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal 2012 Restructuring Plans
|
|
|
16.8
|
|
|
|
(2.4
|
)
|
|
|
(11.7
|
)
|
|
|
(0.3
|
)
|
|
|
2.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Previous Restructuring Plans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Optical
|
|
|
0.6
|
|
|
|
0.1
|
|
|
|
(0.5
|
)
|
|
|
|
|
|
|
0.2
|
|
Data
|
|
|
3.1
|
|
|
|
0.4
|
|
|
|
(1.6
|
)
|
|
|
|
|
|
|
1.9
|
|
Access
|
|
|
1.4
|
|
|
|
0.1
|
|
|
|
(1.0
|
)
|
|
|
|
|
|
|
0.5
|
|
Services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal Previous Restructuring Plans
|
|
|
5.1
|
|
|
|
0.6
|
|
|
|
(3.1
|
)
|
|
|
|
|
|
|
2.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total All Restructuring Plans
|
|
$
|
21.9
|
|
|
$
|
35.3
|
|
|
$
|
(30.8
|
)
|
|
$
|
(15.7
|
)
|
|
$
|
10.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
|
Other activities include accelerated depreciation of property, plant and
equipment to be disposed, the effects of currency translation as well as other changes that do not flow through restructuring expense.
|
4. Fair Value Measurements
Our financial instruments consist of cash equivalents, accounts receivable, accounts payable, marketable securities and derivatives.
The carrying value of the cash equivalents, accounts receivable and accounts payable are reasonable estimates of their fair value because of their short-term nature. We determine the fair value of marketable securities and derivatives based on
observable inputs such as quoted prices in active markets, or other than quoted prices in active markets, that are observable either directly or indirectly.
Fair value is measured as an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such,
fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions, a three-tier fair value hierarchy has been
established, which prioritizes the inputs used in measuring fair value as follows:
|
|
|
Level 1 Observable inputs, such as quoted prices in active markets;
|
|
|
|
Level 2 Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and
|
|
|
|
Level 3 Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.
|
A financial instruments level within the fair value hierarchy is based on the lowest level of any input that is
significant to the fair value measurement. In determining fair value for recurring financial assets and liabilities, we separate our financial instruments into three categories: marketable securities, other marketable securities and loan related to
other marketable securities, and derivative financial instruments. These assets and liabilities are all valued based on the market approach that uses prices and other relevant information generated by market transactions involving identical or
comparable assets or liabilities.
Marketable Securities
We use a third-party provider to determine fair values of marketable securities. The third-party provider receives market prices for each marketable security from a variety of industry-standard data
providers, security master files from large financial institutions and other third-party sources with reasonable levels of price transparency. The third-party provider uses these multiple prices as inputs into a pricing model to determine a weighted
average price for each security. Tellabs
9
management compares the third-party pricing with pricing from outside investment managers and other market sources to ensure the third-party pricing is reasonable. We classify U.S. Treasury
bills and bonds as Level 1 based upon quoted prices in active markets. All other marketable securities are classified as Level 2 based upon the other than quoted prices with observable market data. The type of instruments valued based upon the
observable market data include U.S. government sponsored enterprise (agency) debt obligations, Federal Deposit Insurance Corporation (FDIC)-backed corporate debt obligations, investment grade corporate bonds, state and municipal debt obligations,
mortgaged backed debt obligations guaranteed by the Government National Mortgage Association (GNMA), certain FDIC-backed bank certificates of deposit, foreign government debt obligations and foreign corporate debt obligations guaranteed by foreign
governments.
Other Marketable Securities and Loan Related to Other Marketable Securities
We classify holdings in other marketable securities (Cisco common stock) and the related loan as Level 1 in the fair value hierarchy. We classify these as
Level 1 since they are actively traded through a governed exchange.
Derivative Financial Instruments
Our foreign currency forward contracts are executed as exchange-traded. Market participants can be described as large money center or regional banks.
Exchange-traded derivatives typically fall within Level 1 or Level 2 in the fair value hierarchy depending on whether they are deemed to be actively traded or not.
We value derivatives as Level 2, using observable market data at the measurement date and standard valuation techniques to convert future amounts to a single present amount (discounted). Key inputs for
currency derivatives are the spot rate, interest rates and credit derivative swap spreads. The spot rate for each currency is the same spot rate used for all balance sheet translations at the measurement date. The following values are calculated
from commonly quoted intervals available from a third-party financial information provider. Forward points and LIBOR rates are used to calculate a discount rate to apply to assets and liabilities. One-year credit default swap spreads are used to
discount derivative assets, all of which have final maturities of less than 12 months. We calculate the discount to the derivative liabilities to reflect the potential credit risk to lenders and have used the spread over LIBOR based on the credit
risk of our counterparties. Each asset is individually discounted to reflect our potential credit risk and we have used the spread over LIBOR based on similar credit risk. We do not adjust the fair value for immaterial credit risk.
We have applied a valuation method for financial assets and liabilities consistently during this period and prior periods. The following table sets forth
by level within the fair value hierarchy Financial instruments owned at fair value. Assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.
Assets and liabilities measured at fair value on a recurring basis are:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at September 27, 2013
|
|
|
|
Balance at
9/27/13
|
|
|
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
|
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level
3)
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments in marketable securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government debt obligations
|
|
$
|
60.2
|
|
|
$
|
60.2
|
|
|
$
|
|
|
|
$
|
|
|
Corporate debt obligations
|
|
|
53.5
|
|
|
|
|
|
|
|
53.5
|
|
|
|
|
|
Mortgaged backed debt obligations guaranteed by GNMA
|
|
|
94.1
|
|
|
|
|
|
|
|
94.1
|
|
|
|
|
|
Certificates of deposit guaranteed by FDIC
|
|
|
1.2
|
|
|
|
|
|
|
|
1.2
|
|
|
|
|
|
Foreign corporate debt obligations guaranteed by foreign governments
|
|
|
25.6
|
|
|
|
|
|
|
|
25.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
234.6
|
|
|
|
60.2
|
|
|
|
174.4
|
|
|
|
|
|
Other marketable securities
|
|
|
234.0
|
|
|
|
234.0
|
|
|
|
|
|
|
|
|
|
Derivative financial instruments
|
|
|
0.4
|
|
|
|
|
|
|
|
0.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
469.0
|
|
|
$
|
294.2
|
|
|
$
|
174.8
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan related to other marketable securities
|
|
$
|
234.0
|
|
|
$
|
234.0
|
|
|
$
|
|
|
|
$
|
|
|
Derivative financial instruments
|
|
|
0.1
|
|
|
|
|
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
$
|
234.1
|
|
|
$
|
234.0
|
|
|
$
|
0.1
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at December 28, 2012
|
|
|
|
Balance at
12/28/12
|
|
|
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
|
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level
3)
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments in marketable securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government debt obligations
|
|
$
|
31.1
|
|
|
$
|
31.1
|
|
|
$
|
|
|
|
$
|
|
|
Corporate debt obligations
|
|
|
9.6
|
|
|
|
|
|
|
|
9.6
|
|
|
|
|
|
Mortgaged backed debt obligations guaranteed by GNMA
|
|
|
55.5
|
|
|
|
|
|
|
|
55.5
|
|
|
|
|
|
Certificates of deposit guaranteed by FDIC
|
|
|
1.2
|
|
|
|
|
|
|
|
1.2
|
|
|
|
|
|
Foreign government debt obligations
|
|
|
161.1
|
|
|
|
|
|
|
|
161.1
|
|
|
|
|
|
Foreign corporate debt obligations guaranteed by foreign governments
|
|
|
122.2
|
|
|
|
|
|
|
|
122.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
380.7
|
|
|
|
31.1
|
|
|
|
349.6
|
|
|
|
|
|
Other marketable securities
|
|
|
195.1
|
|
|
|
195.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
575.8
|
|
|
$
|
226.2
|
|
|
$
|
349.6
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan related to other marketable securities
|
|
$
|
195.1
|
|
|
$
|
195.1
|
|
|
$
|
|
|
|
$
|
|
|
Derivative financial instruments
|
|
|
0.1
|
|
|
|
|
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
$
|
195.2
|
|
|
$
|
195.1
|
|
|
$
|
0.1
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5. Investments
Investments in marketable securities
At September 27, 2013, and December 28, 2012, available-for-sale marketable securities consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 27, 2013
|
|
Amortized
Cost
|
|
|
Unrealized
Gain
|
|
|
Unrealized
Loss
|
|
|
Fair
Value
|
|
U.S. government debt obligations
|
|
$
|
60.9
|
|
|
$
|
|
|
|
$
|
(0.7
|
)
|
|
$
|
60.2
|
|
Corporate debt obligations
|
|
|
53.7
|
|
|
|
|
|
|
|
(0.2
|
)
|
|
|
53.5
|
|
Mortgaged backed debt obligations guaranteed by GNMA
|
|
|
95.8
|
|
|
|
|
|
|
|
(1.7
|
)
|
|
|
94.1
|
|
Certificates of deposit guaranteed by FDIC
|
|
|
1.2
|
|
|
|
|
|
|
|
|
|
|
|
1.2
|
|
Foreign corporate debt obligations guaranteed by foreign governments
|
|
|
25.5
|
|
|
|
0.1
|
|
|
|
|
|
|
|
25.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
237.1
|
|
|
$
|
0.1
|
|
|
$
|
(2.6
|
)
|
|
$
|
234.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 28, 2012
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government debt obligations
|
|
$
|
31.1
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
31.1
|
|
Corporate debt obligations
|
|
|
9.5
|
|
|
|
0.1
|
|
|
|
|
|
|
|
9.6
|
|
Mortgaged backed debt obligations guaranteed by GNMA
|
|
|
54.9
|
|
|
|
0.6
|
|
|
|
|
|
|
|
55.5
|
|
Certificates of deposit guaranteed by FDIC
|
|
|
1.2
|
|
|
|
|
|
|
|
|
|
|
|
1.2
|
|
Foreign government debt obligations
|
|
|
159.3
|
|
|
|
1.8
|
|
|
|
|
|
|
|
161.1
|
|
Foreign corporate debt obligations guaranteed by foreign governments
|
|
|
121.5
|
|
|
|
0.7
|
|
|
|
|
|
|
|
122.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
377.5
|
|
|
$
|
3.2
|
|
|
$
|
|
|
|
$
|
380.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11
The following table summarizes the maturities of our available-for-sale marketable securities at
September 27, 2013:
|
|
|
|
|
|
|
|
|
|
|
Amortized
Cost
|
|
|
Fair Value
|
|
Less than 12 months
|
|
$
|
56.2
|
|
|
$
|
56.3
|
|
Due in 1 to 5 years
|
|
|
85.1
|
|
|
|
84.1
|
|
Due after 5 years
|
|
|
95.8
|
|
|
|
94.2
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
237.1
|
|
|
$
|
234.6
|
|
|
|
|
|
|
|
|
|
|
Gross unrealized gains and losses related to fixed-income securities were caused by interest rate fluctuations. We review
investments held with unrealized losses to determine if the loss is other-than-temporary. We evaluated near-term prospects of the security in relation to the severity and duration of the unrealized loss. We also assessed our intent to sell the
security, whether it is more likely than not that the security will be required to be sold before recovery, or the security is not expected to recover its entire amortized cost basis. Based on our review, we do not intend to sell these securities
and believe that they will recover their entire amortized cost basis; therefore, we do not consider these investments to be other-than-temporarily impaired at September 27, 2013. No other-than-temporary impairments were recorded in the third
quarter or first nine months of 2013 and 2012.
Investments in marketable securities with unrealized losses at September 27, 2013, were
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized Loss
Less than 12 months
|
|
|
Unrealized
Loss
Greater than 12 months
|
|
|
Total
|
|
September 27, 2013
|
|
Fair
Value
|
|
|
Unrealized
Loss
|
|
|
Fair
Value
|
|
|
Unrealized
Loss
|
|
|
Fair
Value
|
|
|
Unrealized
Loss
|
|
U.S. government debt obligations
|
|
$
|
44.2
|
|
|
$
|
(0.7
|
)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
44.2
|
|
|
$
|
(0.7
|
)
|
Corporate debt obligations
|
|
|
41.9
|
|
|
|
(0.2
|
)
|
|
|
|
|
|
|
|
|
|
|
41.9
|
|
|
|
(0.2
|
)
|
Mortgaged backed debt obligations guaranteed by GNMA
|
|
|
83.1
|
|
|
|
(1.7
|
)
|
|
|
|
|
|
|
|
|
|
|
83.1
|
|
|
|
(1.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
169.2
|
|
|
$
|
(2.6
|
)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
169.2
|
|
|
$
|
(2.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments in marketable securities with unrealized losses at December 28, 2012, were negligible.
The following table presents gross realized gains and losses related to fixed income investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third Quarter
|
|
|
Nine Months
|
|
|
|
9/27/13
|
|
|
9/28/12
|
|
|
9/27/13
|
|
|
9/28/12
|
|
Gross realized gains
|
|
$
|
0.1
|
|
|
$
|
1.0
|
|
|
$
|
1.8
|
|
|
$
|
1.5
|
|
Gross realized losses
|
|
|
(0.3
|
)
|
|
|
(0.2
|
)
|
|
|
(1.0
|
)
|
|
|
(0.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(0.2
|
)
|
|
$
|
0.8
|
|
|
$
|
0.8
|
|
|
$
|
0.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other marketable securities
and
Loan related to other marketable securities
With the acquisition of Advanced Fibre Communications, Inc. (AFC) in 2004, we acquired 10.6 million shares of Cisco common stock, shown as
Other
marketable securities
in
Current Assets
in our Consolidated Balance Sheets. Our Cisco common stock is classified as a trading security. In addition, we have a share loan arrangement with a financial institution for the same number of
shares of Cisco common stock shown as
Loan related to other marketable securities
in
Current Liabilities
in our Consolidated Balance Sheets, which is due on demand.
As a result, we own the same number of Cisco shares as we have borrowed under the share loan arrangement; thereby, eliminating any market risk exposure associated with the share loan arrangement as
increases (or decreases) in the value of Cisco stock are off-set equally by increases (or decreases) in the value of the shares of Cisco stock we own. In the event the counter-party financial institution to the share loan arrangement demands return
of the borrowed Cisco shares, we will settle the obligation with our Cisco shares or with shares borrowed from another lender.
Other
marketable securities
and
Loan related to other marketable securities
was $234.0 million at a market price of $23.33 per share at September 27, 2013, and $195.1 million at a market price of $19.45 per share at December 28, 2012.
The fees associated with the stock loan agreement of $0.4 million in the third quarter of 2013, $0.2 million in the third quarter of 2012, $1.0 million in the first nine months of 2013 and $0.9 million in the first nine months of 2012, are included
in
Interest income, net
in the Consolidated Statements of Operations.
12
Additionally, in connection with our acquisition of AFC, we recorded a tax liability associated with a
deferred gain relating to a settled hedging arrangement on the acquired Cisco shares. The deferred tax liability was $184.0 million as of September 27, 2013, and as of December 28, 2012.
The Cisco shares and related loan discussed above are maintained by us in order to defer recognition of the tax gain for income tax purposes. In the
fourth quarter of 2012, we settled 0.6 million shares, reducing the number of borrowed shares to 10.0 million. In the future we may settle all or a portion of the remaining borrowed shares to the extent we are able to offset the gain by
utilizing net operating loss or tax credit carryforwards. To the extent we cannot offset all or a portion of the gain, we may incur cash tax payments that could significantly reduce our cash and cash equivalents.
Long-term equity investments
In
addition to the above investments, we maintain investments in partnerships and start-up technology companies. We include these investments in
Other Assets,
at cost. These investments totaled $1.5 million at September 27, 2013, and $1.8
million at December 28, 2012. We review each investment quarterly, including historical and projected financial performance, expected cash needs and recent funding events. We recognize other-than-temporary impairments if the market value of the
investment is below its cost basis for an extended period of time or if the issuer has experienced significant financial declines or difficulties in raising capital to continue operations. We did not record otherthan-temporary impairments for
the third quarters and nine months ended September 27, 2013, and September 28, 2012. Gains on the sale of long-term equity investments and other-than-temporary impairments are included in
Other expense, net
in the Consolidated
Statements of Operations.
6. Derivative Financial Instruments
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 the 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 Revenue
. Ineffectiveness is recorded to
Other 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 expense, net.
We continue to monitor the Companys overall
currency exposure and may elect to add additional cash flow hedges in the future if deemed necessary. At September 27, 2013, we had a net unrealized gain of $0.6 million in
Accumulated other comprehensive income,
which is expected to be
reclassified to income within the next 12 months. At September 27, 2013, we held derivatives designated as cash flow hedges in one currency, with a gross notional equivalent of $6.2 million. We did not hold any derivatives designated as cash
flow hedges at September 28, 2012.
Balance Sheet Hedges (Non-designated Hedges)
Short-term monetary assets and liabilities denominated in currencies other than the functional currency 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. These derivative contracts are not designated as hedges. At September 27, 2013, we held non-designated foreign
currency forward contracts in 10 currencies, with a gross notional equivalent of $102.1 million. At September 28, 2012, we held non-designated foreign currency forward contracts in 13 currencies, with a gross notional equivalent of $222.1
million.
13
Net Investment Hedges
Periodically we may enter into foreign currency 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, less applicable deferred income taxes 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 September 27, 2013, we
had a net unrealized gain of $15.3 million in
Accumulated other comprehensive income
related to settled contracts. At September 27, 2013, we did not have any net investment hedges outstanding. As of September 28, 2012, we had a net
unrealized gain of $17.4 million in
Accumulated other comprehensive income
related to settled contracts and a net loss of $0.1 million related to unsettled contracts
.
We held net investment hedges with a notional value of
150 million Euros at the end of September 28, 2012.
The fair value of derivative instruments in the Consolidated Balance Sheet as
of September 27, 2013, was as follows:
|
|
|
|
|
|
|
|
|
|
|
Asset Derivatives
Reported in
Miscellaneous
Receivables and Other
Current
Assets
|
|
|
Liability Derivatives
Reported in Other
Accrued Liabilities
|
|
Cash flow hedges
|
|
$
|
0.3
|
|
|
$
|
|
|
Balance sheet hedges (Non-designated hedges)
|
|
|
0.1
|
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
Total derivatives
|
|
$
|
0.4
|
|
|
$
|
0.1
|
|
|
|
|
|
|
|
|
|
|
The fair value of derivative instruments in the Consolidated Balance Sheet as of December 28, 2012, was as follows:
|
|
|
|
|
|
|
|
|
|
|
Asset Derivatives
Reported in
Miscellaneous
Receivables and Other
Current
Assets
|
|
|
Liability Derivatives
Reported in Other
Accrued Liabilities
|
|
Balance sheet hedges (Non-designated hedges)
|
|
$
|
|
|
|
$
|
0.1
|
|
|
|
|
|
|
|
|
|
|
The effect of derivative instruments designated as hedging instruments on the Consolidated Statements of Operations
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
Loss Recognized in
Accumulated
OCI, net (Effective
Portion)
|
|
|
Gain Recognized in Revenue
|
|
|
Loss Recognized in
Other
Expense net: Excluded from
Effectiveness Testing Gain (Loss)
|
|
|
|
9/27/13
|
|
|
9/28/12
|
|
|
9/27/13
|
|
|
9/28/12
|
|
|
9/27/13
|
|
|
9/28/12
|
|
Cash flow hedges
|
|
$
|
(0.1
|
)
|
|
$
|
|
|
|
$
|
0.2
|
|
|
$
|
|
|
|
$
|
(0.2
|
)
|
|
$
|
|
|
Net investment hedges
|
|
$
|
(0.9
|
)
|
|
$
|
(3.8
|
)
|
|
|
N/A
|
|
|
|
N/A
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
Gain (Loss) Recognized in
Accumulated OCI, net (Effective
Portion)
|
|
|
Gain Recognized in Revenue
|
|
|
(Loss) Gain Recognized in Other
Expense,
net: Excluded from
Effectiveness Testing Gain (Loss)
|
|
|
|
9/27/13
|
|
|
9/28/12
|
|
|
9/27/13
|
|
|
9/28/12
|
|
|
9/27/13
|
|
|
9/28/12
|
|
Cash flow hedges
|
|
$
|
0.6
|
|
|
$
|
|
|
|
$
|
0.4
|
|
|
$
|
|
|
|
$
|
(0.3
|
)
|
|
$
|
|
|
Net investment hedges
|
|
$
|
(0.9
|
)
|
|
$
|
(1.3
|
)
|
|
|
N/A
|
|
|
|
N/A
|
|
|
$
|
|
|
|
$
|
0.2
|
|
14
The effect of derivative instruments not designated as hedging instruments on the Consolidated Statements of
Operations follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third Quarter
|
|
|
Nine Months
|
|
|
|
Gain Recognized in
Other
Expense, net
1
|
|
|
Loss Recognized in
Other
Expense, net
1
|
|
|
|
9/27/13
|
|
|
9/28/12
|
|
|
9/27/13
|
|
|
9/28/12
|
|
Foreign currency forward and option contracts
|
|
$
|
1.8
|
|
|
$
|
0.1
|
|
|
$
|
(2.7
|
)
|
|
$
|
(0.5
|
)
|
1
|
The gains or losses from changes in the fair value of the derivative
contracts are generally offset by gains or losses of the underlying transactions being hedged.
|
7. Product Warranties
We provide warranties for all of our products. The specific terms and conditions of those warranties vary depending on the product. We
provide a basic limited warranty for periods ranging from 90 days to 6 years.
The estimate of warranty liability involves many factors,
including the number of units shipped, historical and anticipated rates of warranty claims, and cost per claim. We periodically assess the adequacy of the recorded warranty liability and adjust the amounts as necessary. Other adjustments to accruals
for product warranties represent reductions due to favorable experience to previous estimates.
We classify the portion of warranty liability
that we expect to incur in the next 12 months as a current liability. We classify the portion of warranty liability that we expect to incur more than 12 months in the future as a long-term liability. Product warranty liabilities are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third Quarter
|
|
|
Nine Months
|
|
|
|
9/27/13
|
|
|
9/28/12
|
|
|
9/27/13
|
|
|
9/28/12
|
|
Balance beginning of period
|
|
$
|
16.4
|
|
|
$
|
16.3
|
|
|
$
|
15.8
|
|
|
$
|
17.0
|
|
Accruals for product warranties
|
|
|
4.6
|
|
|
|
2.0
|
|
|
|
7.4
|
|
|
|
4.9
|
|
Settlements
|
|
|
(0.9
|
)
|
|
|
(1.2
|
)
|
|
|
(2.7
|
)
|
|
|
(3.4
|
)
|
Other adjustments to accruals for product warranties
|
|
|
(0.8
|
)
|
|
|
(1.7
|
)
|
|
|
(1.2
|
)
|
|
|
(3.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance end of period
|
|
$
|
19.3
|
|
|
$
|
15.4
|
|
|
$
|
19.3
|
|
|
$
|
15.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
9/27/13
|
|
|
Balance at
9/28/12
|
|
|
|
|
|
|
|
Balance sheet classification end of period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other accrued liabilities
|
|
$
|
9.4
|
|
|
$
|
6.7
|
|
|
|
|
|
|
|
|
|
Other long-term liabilities
|
|
|
9.9
|
|
|
|
8.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total product warranty liabilities
|
|
$
|
19.3
|
|
|
$
|
15.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8. Equity-Based Compensation
The Tellabs, Inc. Amended and Restated 2004 Incentive Compensation Plan (2004 Plan) provides for the grant of short-term and long-term
incentives, including stock options, stock appreciation rights (SARs), restricted stock and performance stock units (PSUs). Equity-based grants vest over one to three years, with the majority vesting over a three-year period. We recognize
compensation expense for stock options, restricted stock and PSUs over the service period based on the fair value on the grant date. Stock options and SARs granted but unexercised expire 10 years from the grant date. Stockholders previously approved
53,889,977 shares for grant under the 2004 Plan, of which 17,255,267 remain available for grant at September 27, 2013.
Stock Options
We estimate the fair value of stock options using the Black-Scholes option-pricing model. This model requires the use of assumptions that
will have a significant impact on the fair value estimate. There were no stock options granted during the third quarter and first nine months of 2013.
15
The following table summarizes the assumptions used to compute the weighted average fair value of stock
option grants:
|
|
|
|
|
|
|
9/28/12
|
|
Expected volatility
|
|
|
43.3
|
%
|
Risk-free interest rate
|
|
|
0.9
|
%
|
Expected term (in years)
|
|
|
5.3
|
|
Expected dividend yield
|
|
|
2.0
|
%
|
We based our calculation of expected volatility on a combination of historical and implied volatility for options
granted. We based the risk-free interest rate on the U.S. Treasury yield curve in effect at the date of grant. We estimated the expected term of the options using their vesting period, post-vesting employment termination behavior and historical
exercise patterns. We based the expected dividend yield on the options exercise price and annualized dividend rate at the date of grant.
The following is a summary of stock option activity during 2013 as of September 27, 2013:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average
Remaining
Contractual
Term (in years)
|
|
|
Aggregate
Intrinsic
Value
(in
millions)
|
|
Outstanding beginning of year
|
|
|
16,713,155
|
|
|
$
|
7.50
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(470
|
)
|
|
$
|
0.16
|
|
|
|
|
|
|
|
|
|
Forfeited/expired
|
|
|
(5,547,586
|
)
|
|
$
|
6.76
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding end of period
|
|
|
11,165,099
|
|
|
$
|
7.87
|
|
|
|
3.7
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable end of period
|
|
|
10,148,061
|
|
|
$
|
8.21
|
|
|
|
3.3
|
|
|
$
|
|
|
Shares vested or expected to vest
|
|
|
11,091,481
|
|
|
$
|
7.89
|
|
|
|
3.7
|
|
|
$
|
|
|
The aggregate intrinsic value in the preceding table represents the total pretax intrinsic value, based on our closing
stock price as of September 27, 2013, that the option holders would have received had all holders exercised their options as of that date. There were no stock option exercises during the third quarter of 2013.
Cash-Settled Stock Appreciation Rights
The 2004 Plan provides for the granting of cash-settled SARs in conjunction with, or independent of, the stock options under the 2004 Plan. These SARs
allow the holder to receive in cash the difference between the cash-settled SARs grant price (the market value of our stock on the grant date) and the market value of our stock on the date the holder exercises the SAR. There were no SARs
granted during the first nine months of 2013. There were no cash payments during the first nine months of 2013 and 2012.
The following is a
summary of cash-settled SARs activity during 2013 as of September 27, 2013:
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
|
Weighted
Average
Exercise Price
|
|
Outstanding beginning of year
|
|
|
456,195
|
|
|
$
|
6.67
|
|
Forfeited/expired
|
|
|
(36,835
|
)
|
|
$
|
5.95
|
|
|
|
|
|
|
|
|
|
|
Outstanding end of period
|
|
|
419,360
|
|
|
$
|
6.73
|
|
|
|
|
|
|
|
|
|
|
Restricted Stock
The fair market value of restricted stock vested was $3.4 million in the first nine months of 2013. The weighted average grant date fair value of restricted stock was $2.09 per share in the first nine
months of 2013 and $3.88 per share in the first nine months of 2012.
16
The following is a summary of restricted stock activity during 2013 as of September 27, 2013:
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
|
Weighted
Average
Grant Date
Fair Value
|
|
Non-vested beginning of year
|
|
|
3,899,865
|
|
|
$
|
4.68
|
|
Granted
|
|
|
1,125,021
|
|
|
$
|
2.09
|
|
Vested
|
|
|
(1,615,562
|
)
|
|
$
|
5.21
|
|
Forfeited
|
|
|
(670,830
|
)
|
|
$
|
4.26
|
|
|
|
|
|
|
|
|
|
|
Non-vested end of period
|
|
|
2,738,494
|
|
|
$
|
3.40
|
|
|
|
|
|
|
|
|
|
|
Performance Stock Units
The 2004 Plan provides for the granting of PSUs. We granted 5,282,045 PSUs in the first nine months of 2013 and 1,963,478 PSUs in the first nine months of 2012. The PSUs granted in the first nine months
of 2013 entitle the recipients to receive shares of our common stock commencing in the first quarter of 2014, contingent on the achievement of operating earnings, performance related to revenue and attainment of strategic objectives for the 2013
fiscal year. Following achievement of these measures and subject to continued employment, one-third of such shares will be issued in annual installments beginning in the first quarter of 2014. At maximum target performance, we will issue one share
for each PSU granted. The weighted average price of PSUs granted in the first nine months of 2013 was $2.20 per share and the weighted average price of PSUs granted in the first nine months of 2012 was $3.98 per share. Since 2013 non-GAAP operating
earnings are forecasted to be below breakeven, no expense for the 2013 grants has been recognized for the first nine months of 2013.
The PSUs
granted in 2012 entitle the recipients to receive shares of our common stock commencing in the first quarter of 2013, contingent on the achievement of operating earnings targets and strategic goals for the 2012 fiscal year. Under the executive plan,
100% of the PSUs were earned and one share for each PSU will be paid out, subject to continued employment. We issued one-third (255,573 shares) of the total shares in the first quarter of 2013 and generally, one-third of such shares will be issued
in annual installments in the first quarter of 2014 and the first quarter of 2015.
The following is a summary of PSU activity during 2013 as
of September 27, 2013:
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
|
Weighted
Average
Grant Date
Fair Value
|
|
Non-vested beginning of year
|
|
|
1,633,866
|
|
|
$
|
4.40
|
|
Granted
|
|
|
5,282,045
|
|
|
$
|
2.20
|
|
Vested
|
|
|
(949,516
|
)
|
|
$
|
4.61
|
|
Forfeited
|
|
|
(831,707
|
)
|
|
$
|
2.69
|
|
|
|
|
|
|
|
|
|
|
Non-vested end of period
|
|
|
5,134,688
|
|
|
$
|
2.38
|
|
|
|
|
|
|
|
|
|
|
Equity-Based Compensation Expense
The following table sets forth the total equity-based compensation expense resulting from stock options, SARs, restricted stock, and PSUs by line item on the Statements of Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third Quarter
|
|
|
Nine Months
|
|
|
|
9/27/13
|
|
|
9/28/12
|
|
|
9/27/13
|
|
|
9/28/12
|
|
Cost of revenue products
|
|
$
|
|
|
|
$
|
0.3
|
|
|
$
|
0.4
|
|
|
$
|
0.9
|
|
Cost of revenue services
|
|
|
0.2
|
|
|
|
0.4
|
|
|
|
0.8
|
|
|
|
1.3
|
|
Research and development
|
|
|
0.4
|
|
|
|
1.0
|
|
|
|
1.3
|
|
|
|
4.2
|
|
Sales and marketing
|
|
|
0.2
|
|
|
|
0.6
|
|
|
|
1.0
|
|
|
|
2.3
|
|
General and administrative
|
|
|
0.9
|
|
|
|
3.1
|
|
|
|
3.3
|
|
|
|
7.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity-based compensation expense before income taxes
|
|
|
1.7
|
|
|
|
5.4
|
|
|
|
6.8
|
|
|
|
15.8
|
|
Income tax benefit
|
|
|
|
|
|
|
(0.1
|
)
|
|
|
(0.1
|
)
|
|
|
(0.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total equity-based compensation expense after income taxes
|
|
$
|
1.7
|
|
|
$
|
5.3
|
|
|
$
|
6.7
|
|
|
$
|
15.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17
The following table sets forth the total equity-based compensation expense by type:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third Quarter
|
|
|
Nine Months
|
|
|
|
9/27/13
|
|
|
9/28/12
|
|
|
9/27/13
|
|
|
9/28/12
|
|
Stock options
|
|
$
|
0.4
|
|
|
$
|
1.6
|
|
|
$
|
1.3
|
|
|
$
|
3.6
|
|
Cash-settled SARs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(0.1
|
)
|
Restricted stock
|
|
|
1.1
|
|
|
|
3.3
|
|
|
|
4.6
|
|
|
|
9.1
|
|
Performance stock units
|
|
|
0.2
|
|
|
|
0.5
|
|
|
|
0.9
|
|
|
|
3.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1.7
|
|
|
$
|
5.4
|
|
|
$
|
6.8
|
|
|
$
|
15.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 27, 2013, we had $7.4 million of unrecognized equity-based compensation cost that we expect to
recognize over a weighted average period of 1.3 years.
9. Income Taxes
We recorded tax expense of $2.9 million in the third quarter and the first nine months of 2013. Our tax expense results in an effective
tax rate that varies from the federal statutory rate of 35% because we are unable to recognize tax benefits on domestic losses due to the valuation allowance maintained against domestic deferred tax assets, combined with tax expense on income from
foreign operations. We expect to continue to maintain a valuation allowance against domestic and certain non-U.S. deferred tax assets until a sufficient level of profitability is attained.
10. Accumulated Other Comprehensive Income
Accumulated other comprehensive income has no impact on our net loss but is reflected in our consolidated balance sheet through
adjustments to stockholders equity. Accumulated other comprehensive income derives from unrealized gains (losses) and related adjustments on available-for-sale securities, unrealized gains (losses) on cash flow hedges, foreign currency
translation adjustments, unrecognized prior service costs and unrecognized net gains (losses) on our retiree medical plan.
Accumulated other
comprehensive income (net of tax) for the first nine months of 2013 consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized Net
Gain (Loss) on
Available-for-
Sale Securities
|
|
|
Unrealized
net Gain on
Cash Flow
Hedges
|
|
|
Foreign
Currency
Translation
Adjustments
|
|
|
Unrecognized
Prior Service
Cost
|
|
|
Unrecognized
Net Gain on
Retiree
Medical Plan
|
|
|
Accumulated
Other
Comprehensive
Income
|
|
Balance at December 28, 2012
|
|
$
|
2.4
|
|
|
$
|
|
|
|
$
|
94.9
|
|
|
$
|
(0.1
|
)
|
|
$
|
1.8
|
|
|
$
|
99.0
|
|
Amounts reclassified from other comprehensive income
|
|
|
(1.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1.9
|
)
|
Other comprehensive (loss) gain
|
|
|
(3.3
|
)
|
|
|
0.6
|
|
|
|
(2.8
|
)
|
|
|
|
|
|
|
|
|
|
|
(5.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net other comprehensive loss
|
|
|
(5.2
|
)
|
|
|
0.6
|
|
|
|
(2.8
|
)
|
|
|
|
|
|
|
|
|
|
|
(7.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 27, 2013
|
|
$
|
(2.8
|
)
|
|
$
|
0.6
|
|
|
$
|
92.1
|
|
|
$
|
(0.1
|
)
|
|
$
|
1.8
|
|
|
$
|
91.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts reclassified from accumulated other comprehensive income to net loss in the Consolidated Statements of Operations
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Third Quarter
|
|
|
|
Details about Accumulated Other Comprehensive Income Components
|
|
9/27/13
|
|
|
9/28/12
|
|
|
Affected Line Item in the Consolidated
Statements of Operations
|
Unrealized net (loss) gain on available-for-sale securities
|
|
$
|
(0.1
|
)
|
|
$
|
0.7
|
|
|
Other expense, net
|
|
|
|
|
|
|
|
(0.2
|
)
|
|
Income tax expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(0.1
|
)
|
|
$
|
0.5
|
|
|
Net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months
|
|
|
|
Details about Accumulated Other Comprehensive Income Components
|
|
9/27/13
|
|
|
9/28/12
|
|
|
Affected Line Item in the Consolidated
Statements of Operations
|
Unrealized net gain on available-for-sale securities
|
|
$
|
2.6
|
|
|
$
|
0.9
|
|
|
Other expense, net
|
|
|
|
(0.7
|
)
|
|
|
(0.2
|
)
|
|
Income tax expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1.9
|
|
|
$
|
0.7
|
|
|
Net of tax
|
|
|
|
|
|
|
|
|
|
|
|
18
11. Segment Information
We report in four segments: Optical, Data, Access and Services.
Optical segment products are primarily used to manage large volumes of telecommunication traffic in metro areas. The Optical segment
includes Tellabs
®
5000 Series of Digital Cross-Connect systems, the Tellabs
®
6300 Managed Transport System, the Tellabs
®
7100 OTS and the Tellabs
®
7300 Metro Ethernet Switching Series.
Data segment products are primarily used in mobile backhaul applications, and for
business services and various edge routing applications. The Data segment includes the Tellabs
®
8100 Managed
Access Systems and the Tellabs 8600 and 8800 Smart Routers.
Access segment products are primarily used to enable service
providers to bundle Internet, video, and voice over high-speed fiber-based networks and in Optical LAN applications. The Access segment includes the Tellabs
®
1000 and 1100 Multi-service Access systems, and the Tellabs
®
1600 Optical Network Terminals (ONTs).
The Services
segment delivers deployment, training, support and professional services to Tellabs customers. Through these offerings, Tellabs serves its customers through the phases of planning, deploying and operating a network.
We define segment profit (loss) as gross profit less research and development expenses. Segment profit (loss) excludes sales and marketing expenses,
general and administrative expenses, the amortization of intangibles, restructuring and other charges, and the impact of equity-based compensation.
Consolidated revenue by segment follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third Quarter
|
|
|
Nine Months
|
|
|
|
9/27/13
|
|
|
9/28/12
|
|
|
9/27/13
|
|
|
9/28/12
|
|
Optical
|
|
$
|
88.4
|
|
|
$
|
108.0
|
|
|
$
|
294.2
|
|
|
$
|
334.8
|
|
Data
|
|
|
44.1
|
|
|
|
66.2
|
|
|
|
112.8
|
|
|
|
213.3
|
|
Access
|
|
|
20.6
|
|
|
|
42.3
|
|
|
|
79.0
|
|
|
|
115.5
|
|
Services
|
|
|
45.4
|
|
|
|
47.9
|
|
|
|
134.0
|
|
|
|
146.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
198.5
|
|
|
$
|
264.4
|
|
|
$
|
620.0
|
|
|
$
|
810.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment profit (loss) and reconciliation to operating loss by segment follows:
|
|
|
|
|
|
|
Third Quarter
|
|
|
Nine Months
|
|
|
|
9/27/13
|
|
|
9/28/12
|
|
|
9/27/13
|
|
|
9/28/12
|
|
Optical
|
|
$
|
14.6
|
|
|
$
|
23.5
|
|
|
$
|
52.8
|
|
|
$
|
67.3
|
|
Data
|
|
|
0.9
|
|
|
|
1.4
|
|
|
|
(16.4
|
)
|
|
|
1.8
|
|
Access
|
|
|
2.4
|
|
|
|
11.1
|
|
|
|
11.9
|
|
|
|
23.5
|
|
Services
|
|
|
16.5
|
|
|
|
15.6
|
|
|
|
45.9
|
|
|
|
48.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total segment profit
|
|
$
|
34.4
|
|
|
$
|
51.6
|
|
|
$
|
94.2
|
|
|
$
|
140.6
|
|
Sales and marketing expenses
|
|
|
(21.7
|
)
|
|
|
(29.7
|
)
|
|
|
(71.9
|
)
|
|
|
(98.3
|
)
|
General and administrative expenses
|
|
|
(17.1
|
)
|
|
|
(17.9
|
)
|
|
|
(52.4
|
)
|
|
|
(58.7
|
)
|
Equity-based compensation
|
|
|
(0.6
|
)
|
|
|
(1.7
|
)
|
|
|
(2.5
|
)
|
|
|
(6.5
|
)
|
Intangible asset amortization
|
|
|
(1.1
|
)
|
|
|
(1.1
|
)
|
|
|
(3.2
|
)
|
|
|
(4.3
|
)
|
Restructuring and other charges
|
|
|
(0.1
|
)
|
|
|
(3.3
|
)
|
|
|
(35.3
|
)
|
|
|
(110.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
$
|
(6.2
|
)
|
|
$
|
(2.1
|
)
|
|
$
|
(71.1
|
)
|
|
$
|
(137.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The segments use many of the same assets. For internal reporting purposes, we do not allocate assets by segment and
therefore asset, depreciation and amortization, or capital expenditure by segment information is not provided to our chief operating decision maker.
19
12. Contingencies
Legal Proceedings
We are subject to legal claims and litigation arising in the ordinary course of business, such as employment or intellectual property claims, including the matters described below. We are unable to
determine the likelihood of an unfavorable outcome against us and are unable to reasonably estimate a range of loss, if any.
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 (163 patent),
5,521,737 (737 patent), 5,386,418 (418 patent) and 6,487,686 (686 patent), and seeks unspecified damages including enhanced damages, as well as attorney fees and other remedies including injunctive relief. The case was thereafter
transferred to the United States District Court for the Northern District of Illinois (Case No. 1:09-cv-04530). As to Fujitsus 686 patent, on November 4, 2010, the Court dismissed with prejudice Fujitsus claim for
infringement of the patent and Fujitsu signed a covenant not to sue Tellabs for infringement of the patent as to any Tellabs products as they currently exist or existed in the past. As to Fujitsus 418 patent, on March 31, 2011, the
Court denied Tellabs motion for summary judgment of invalidity based on indefiniteness and granted Fujitsus motion for summary judgment for judicial correction of an error in asserted Claim 1. On September 26, 2012, the Court
granted a motion by Tellabs for summary judgment of invalidity of all asserted claims of the 418 patent, and judgment was entered in favor of Tellabs on its counterclaim for declaratory judgment of invalidity of the patent. Fujitsus
appeal of this order and judgment was withdrawn and the appeal dismissed. As to Fujitsus 737 patent, on September 27, 2012, the Court denied a motion by Tellabs for summary judgment of invalidity. A trial date of
January 14, 2013 had been set by the Court to commence trial of Fujitsus 163 and 737 patents, however on November 1, 2012, the scheduled trial date was struck from the Courts calendar in favor of an alternative
trial date to be later determined. On December 21, 2012, the Court granted a motion by Tellabs for summary judgment on lost profits damages, and as a result Fujitsu Limited is precluded from pursuing the theory of lost profits. Tellabs contests
any liability and will continue to vigorously defend itself accordingly. On May 15, 2013, the Court consolidated Civil Action Nos. 1:09-cv-04530 and 1:12-cv-03229 for purposes of trial of Fujitsus 163 and 737
patents. On May 23, 2013, the Court issued an Amended Memorandum Opinion and Order granting Tellabs motion for summary judgment on lost profits damages, which Fujitsu petitioned for permission to appeal to the U.S. Court of Appeals
for the Federal Circuit (docketed June 4, 2013, as Fujitsu Limited v. Tellabs, Inc., Misc. No. 154). On September 11, 2013, the Federal Circuit denied Fujitsus petition for permission to appeal, and the District Court granted a
motion filed by Fujitsu to consolidate the 4991 action with the 4530 action. On August 20, 2013, the Court granted Tellabs motion for summary judgment of invalidity of all asserted claims of the 163 patent, and denied as moot
Fujitsus motion for summary judgment of infringement of claims 5 and 6 of the 163 patent. On October 10, 2013, the Court struck February 24, 2014 as a trial date for the 737 patent and instead reset the date for trial on
the 737 patent to July 14, 2014.
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 alleged infringement of Tellabs Operations, Inc.s U.S. Patent No. 7,369,772 (772 patent), and sought unspecified damages
including enhanced damages, as well as attorney fees and other remedies including injunctive relief. Fujitsu Limited brought counterclaims alleging infringement of two U.S. patents, namely U.S. Patent Nos. 5,533,006 (006 patent) and 7,227,681
(681 patent), seeking unspecified damages including enhanced damages, as well as attorney fees and other remedies including injunctive relief. On March 31, 2011, the Court issued an Order granting Tellabs motion for summary judgment
of invalidity of all claims of Fujitsus 006 patent. As to Tellabs 772 patent, Fujitsu pursued an
inter partes
reexamination of the patent in the Patent Office which resulted in a December 12, 2011, decision by the
Board of Patent Appeals and Interferences (BPAI) to reverse the Examiners decision to not reject the claims of the patent, as well as a January 9, 2013, BPAI decision affirming the Examiners rejection of amended claims of the
patent. On February 14, 2013, Tellabs moved to dismiss all claims related to the 772 patent. As to Fujitsus 681 patent, in July, 2012, the Court denied a Tellabs motion for summary judgment of invalidity and granted
Fujitsus motion for summary judgment finding no inequitable conduct. Trial on Fujitsus 681 patent commenced on August 27, 2012, and concluded on September 7, 2012, whereupon the jurys verdict the Court entered
judgment in favor of Tellabs on Fujitsus claim for infringement of the 681 patent and in favor of Fujitsu on Tellabs claim for invalidity of the same patent, and the parties respective post-trial motions were denied by the
Court on January 24, 2013. Both Tellabs and Fujitsu are appealing the denial of post-trial motions related to the 681 patent. On February 19, 2013, the Court granted Tellabs motion to dismiss claims related to Tellabs
772 patent and terminated Civil Action No. 1:08-cv-3379.
20
Fujitsu Limited v. Tellabs, Inc.
On April 30, 2012, Fujitsu Limited filed a complaint in the
United States District Court for the Northern District of Illinois against Tellabs in a case captioned Fujitsu Limited v. Tellabs Operations, Inc., Tellabs, Inc., and Tellabs North America, Inc., Civil Action No. 1:12-cv-03229. The
complaint alleges infringement of U.S. Patent Nos. 5,526,163 (163 patent), 5,521,737 (737 patent), 5,386,418 (418 patent) and 7,227,681 (681 patent), the same patents at issue in Civil Action Nos. 1:09-cv-04530 and
1:08-cv-3379, and seeks unspecified damages including enhanced damages, as well as attorney fees and other remedies including injunctive relief. The complaint includes allegations of infringement that Fujitsu previously sought unsuccessfully to add
to Civil Action Nos. 1:09-cv-04530 and 1:08-cv-3379. On June 4, 2012, the Tellabs defendants filed a motion to dismiss the Complaint pursuant to Fed. R. Civ. P. 12(B)(6), which the Court granted in part and denied in part on
January 30, 2013. On May 1, 2013, the Tellabs defendants answered Fujitsus complaint, and asserted counterclaims against Fujitsu Limited and Fujitsu Network Communications, Inc. On May 15, 2013, the Court consolidated Civil
Action Nos. 1:09-cv-04530 and 1:12-cv-03229 for purposes of trial of Fujitsus 163 and 737 patents. On Tellabs motion the Court, on June 25, 2013, dismissed with prejudice Fujitsus claims of infringement of
Fujitsus 418 patent. On August 20, 2013, the Court granted Tellabs motion in the 4530 action for summary judgment of invalidity of all asserted claims of the 163 patent. On October 10, 2013, the Court struck
February 24, 2014, as a trial date for the 737 patent and instead reset the date for trial on the 737 patent to July 14, 2014. On this same date the Court also denied Fujitsus motion to dismiss Tellabs counterclaim
and third-party claim for misappropriation of trade secrets.
Fujitsu Limited v. Tellabs, Inc.
On July 12, 2013, Fujitsu Limited
filed a complaint in the United States District Court for the Northern District of Illinois against Tellabs in a case captioned Fujitsu Limited v. Tellabs Operations, Inc., Tellabs, Inc., and Tellabs North America, Inc., Civil Action
No. 1:13-cv-04991. The complaint alleges infringement of U.S. Patent Nos. 5,526,163 ( 163 patent) and 5,521,737 (737 patent), two of the same patents at issue in Civil Action Nos. 1:09-cv-04530 and 1:12-cv-03229, and seeks
unspecified damages including enhanced damages, as well as interests, costs and other remedies including injunctive relief. The complaint includes allegations of infringement that Fujitsu previously sought unsuccessfully to add to Civil Action
Nos. 1:09-cv-04530 and 1:12-cv-03229. On July 24, 2013, Fujitsu filed a first amended complaint that removes allegations of continuing infringement as well as Fujitsus prior request for injunctive relief relative to the expired
163 and 737 patents. On August 20, 2013, the Court granted Tellabs motion in the 4530 action for summary judgment of invalidity of all asserted claims of the 163 patent. On September 11, 2013, the Court denied
a motion filed by the Tellabs defendants to dismiss the 4991 action, and the Court granted a cross-motion filed by Fujitsu to consolidate the 4991 action with the 4530 action. The Tellabs defendants answered the first amended complaint on
September 25, 2013. On October 10, 2013, the Court struck February 24, 2014 as a trial date for the 737 patent and instead reset the date for trial on the 737 patent to July 14, 2014.
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 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 (Case
No. 1:2009cv00978). On April 12, 2013, after a period of inactivity in the case, the Court closed the case with a Docket Text that reads: Case Closed.
Cheetah Omni, LLC v. Alcatel-Lucent USA Inc. et al.
On July 29, 2011, a complaint was filed in the United States District Court for the Eastern District of Texas, Tyler Division, against
Tellabs and several other companies in a case captioned
Cheetah Omni LLC v. Alcatel-Lucent USA Inc. et al.
, Civil Action No. 6:11cv390. The complaint includes allegations of infringement by Tellabs, Inc., Tellabs Operations, Inc.,
and Tellabs North America, Inc., of U.S. Patent Nos. 6,888,661; 6,847,479; 6,856,459; and 6,940,647, and seeks unspecified damages, as well as interest, costs, disbursements, attorney fees and other remedies including injunctive relief. The
accused products include products from the Tellabs 7100 product line. On December 5, 2012, the Court entered an order staying the proceedings with respect to US Patents 6,888,661 and 6,847,479 until such time as an injunction issued by the
Court of the Eastern District of Michigan in a separate action involving the two patents is lifted. The parties are completing discovery, which closed September 12, 2013. A Markman hearing was held on February 14, 2013, and on
April 11, 2013, the Court issued an order that construes disputed claim language of various patents in suit. A trial date has been set for March 10, 2014.
Internet Machines LLC v. Avnet, Inc., et al.
On February 13, 2012, a second amended complaint was filed in the United States District Court for the Eastern District of Texas, Tyler Division,
naming Tellabs, Inc. among several defendants in a case captioned
Internet Machines LLC v. Avnet, Inc., et al
., Civil Action Nos. 6:10-CV-548-MHS and 6:11-CV-250-MHS (Consolidated). The plaintiff thereafter filed a third amended
complaint on March 2, 2012. The amended complaints allege infringement of U.S. Patent Nos. 7,454,552, 7,421,532, 7,814,259 and 7,945,722, and seek unspecified damages including enhanced damages, as well as interest, costs, expenses, attorney
fees and other remedies including injunctive relief. On
21
March 27, 2012, Tellabs filed its answer, defenses and counterclaims in response to the third amended complaint. On September 4, 2012, the Court issued an Order granting a motion by the
defendants to stay the litigation, whereby the litigation is stayed pending entry of a final non-appealable judgment in a prior proceeding in which Tellabs is not named (
Internet Machines LLC v. Alienware Corp.
, No 6:10-cv-23 (E.D. Tex. Filed
Feb. 2, 2010)).
Cirrex Sys., LLC v. Verizon Communications Inc., et al.
On May 22, 2013, a complaint was filed in the United
States District Court for the District of Delaware, naming Tellabs, Inc., Tellabs Operations, Inc., and Tellabs North America, Inc., among several defendants in a case captioned
Cirrex Sys., LLC v. Verizon Communications Inc., et al
., Civil
Action No. 1:13-cv-00921-UNA. The complaint alleges infringement of U.S. Patent No. 6,404,953 (953 patent), and seeks unspecified damages including supplemental damages, as well as interest and other remedies including
injunctive relief. On July 19, 2013, plaintiff filed a first amended complaint that contains additional allegations of infringement directed to co-defendant Verizon Communications Inc. under U.S. Patent Nos. 6,208,783 and 6,222,970. The
Tellabs defendants answered the complaint on August 19, 2013. A trial date has been set for January 11, 2016.
Gordium
Innovations LLC v. Tellabs, Inc.
On August 28, 2013, a complaint was filed in the United States District Court for the District of Delaware, naming Tellabs, Inc. as defendant in a case captioned
Gordium Innovations LLC v. Tellabs, Inc.,
Civil Action No. 1:13-cv-01501-UNA. The complaint alleges infringement of U.S. Patent No. 6,697,385 (385 patent) , and seeks unspecified damages including treble damages, as well as interest, costs, expenses and other
remedies including injunctive relief. Tellabs, Inc.s response to the complaint is currently due November 11, 2013.
Mahmood
Alizadeh v. Tellabs, Inc., et al.
and
Lawrence Sasala v. Tellabs, Inc., et al.
Beginning on January 23, 2013, two purported stockholder class action lawsuits were filed in the United States District Court for the Northern District of
Illinois, against Tellabs, Inc. and certain of our former officers alleging violations of the federal securities laws. The lawsuits were consolidated and the court appointed co-lead plaintiffs and co-lead counsel. Plaintiffs filed an amended
complaint on June 3, 2013, which purports to bring claims on behalf of those who purchased the Companys publicly traded securities between June 9, 2010, and April 26, 2011. Plaintiffs allege that defendants made false and
misleading statements regarding the Companys revenues and prospects, and seek unspecified compensatory damages and other relief. The Company filed a motion to dismiss on July 24, 2013. The Company believes these claims are without merit
and intends to defend the actions vigorously.
John Nicholas v. Michael J. Birck, et al.
On March 19, 2013, a shareholder
derivative complaint was filed in the United States District Court for the Northern District of Illinois against current and former officers and directors of the Company alleging breaches of fiduciary duties, insider trading and unjust enrichment
between October 26, 2010, and July 27, 2012. The Company is named as a nominal defendant. The Plaintiff seeks to recover unspecified damages on behalf of the Company and other relief. The lawsuit has been stayed by the court pending the
outcome of the motion to dismiss in the consolidated
Alizadeh
stockholder class action lawsuit.
Apart from the matters described
above, we are and in the future may be subject to various legal proceedings, claims and litigation arising in the ordinary course of business. Such claims may include indemnification and/or other obligations on the part of Tellabs relative to
infringement assertions brought by third parties against our customers or partners, and relative to commercial assertions brought by our customers or partners.
The proceedings described above, including the Fujitsu matters, the Telcordia matter, the Cheetah Omni matter, the Internet Machines matter, the Cirrex Systems matter, the Gordium Innovations matter, the
stockholder class action matters and the shareholder derivative complaint, involve costly litigation and may result in diverting managements time, attention and resources, delaying or halting product shipments or services delivery, requiring
us to pay amounts in any damages and/or settlements, requiring us to enter into royalty-bearing licensing arrangements or to obtain substitute technology of lower quality or higher costs, and otherwise imposing obligations or restrictions on us and
our business. We may be unsuccessful in any such litigation, despite the time, money, energy and bases for our assertion and/or defense of the matters. We may also be unable, if necessary, to enter into licensing arrangements or to obtain substitute
technology on commercially reasonable terms or any terms. Any such settlements or inability to prevail or mitigate any liability or to obtain such licensing arrangements or substitute technology may adversely affect our business, financial condition
and operating results.
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13. Stock Repurchase Programs
We repurchase outstanding common stock under two plans authorized by our Board of Directors. In addition, we purchase shares to cover
withholding taxes on shares issued under employee stock plans.
We intend to use cash generated by employee stock option exercises (other than
those of Company officers and board members) to repurchase stock through the use of a 10b5-1 plan. There were no purchases in the third quarter and negligible purchases in the first nine months of 2013 under this plan.
As of September 27, 2013, we have purchased 70.4 million shares of our common stock under the $600 million repurchase plan at a total cost of
$405.7 million, leaving $194.3 million available to be purchased under this plan. There were no purchases in the third quarter of 2013, and we purchased 13.8 million shares for $30.3 million in the first nine months of 2013 under this plan.
We may change our repurchase activity and we provide no assurance that we will continue our repurchase activity in the future.
In addition, we purchased 26 thousand shares for $57 thousand in the third quarter of 2013 and 0.7 million shares for $1.5 million in the first
nine months of 2013 to cover minimum withholding taxes on shares issued under employee stock plans.
We record repurchased shares as
Treasury stock
.
14. Net Loss Per Share
The following table sets forth the computation of net loss per share:
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Third Quarter
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Nine Months
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9/27/13
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9/28/12
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9/27/13
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9/28/12
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Numerator:
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Net loss
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$
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(9.8
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)
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$
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(3.9
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)
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$
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(73.5
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)
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$
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(148.4
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)
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Denominator:
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Denominator for basic net loss per share weighted average shares outstanding
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355.7
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367.7
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357.1
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366.8
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Effect of dilutive securities:
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Employee stock options and restricted and performance stock awards
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Denominator for diluted net loss per share adjusted weighted average shares outstanding and assumed
conversions
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355.7
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367.7
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357.1
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366.8
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Net loss per share, basic
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$
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(0.03
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)
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$
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(0.01
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)
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$
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(0.21
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)
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$
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(0.40
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)
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Net loss per share, diluted
1
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$
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(0.03
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)
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$
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(0.01
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)
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$
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(0.21
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)
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$
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(0.40
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)
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1
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Dilutive securities are not included in the computation of diluted earnings per share when a company is in a loss position. As such, the numerator and
the denominator used in computing both basic and diluted net loss per share for the third quarter and first nine months of 2013 and the third quarter and first nine months of 2012 are the same. Diluted weighted average shares outstanding were
356.2 million in the third quarter of 2013, 358.2 million in the first nine months of 2013, and 368.2 million in the third quarter of 2012 and 368.6 million in the first nine months of 2012.
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15. Subsequent Event
On October 18, 2013, we entered into a definitive agreement with entities affiliated with Marlin Equity Partners (Marlin), which
provides that Marlin entities will acquire all of the outstanding shares of Tellabs for $2.45 per share in cash.
Under the terms of the
merger agreement, an affiliate of Marlin is required to commence a tender offer to acquire all outstanding shares of Tellabs outstanding common stock for $2.45 per share in cash no later than November 1, 2013. The merger agreement
provides that, promptly after the closing of the tender offer, any shares not tendered in the tender offer (other than shares for which appraisal is properly sought under applicable law) will be acquired in a second-step merger at the same cash
price as paid in the tender offer.
23
Closing of the tender offer and closing of the merger are subject to certain conditions, including the
tender of at least a majority of the outstanding shares of Tellabs common stock (on a fully-diluted basis) and the expiration or termination of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act. The transaction is
expected to close in the fourth quarter of 2013. The transaction is not subject to a financing condition.
Our Board of Directors has
unanimously approved the transaction.
If the proposed merger is completed between Marlin Equity Partners and Tellabs, Inc., pursuant to the
Merger Agreement dated October 18, 2013, we may be required to liquidate the current marketable securities that we own to fulfill our obligation for the Company Contribution. Depending on market conditions, Tellabs may generate a gain or a loss
from selling these marketable securities. As of September 27, 2013, these marketable securities had an unrealized loss of $2.6 million. Subsequent to September 27, 2013, we have begun the process of selling some of our marketable
securities in preparation for the anticipated merger.
During the fourth quarter of 2013 and prior to completion of this transaction, we may
be required to repatriate approximately $40.0 million from certain of our foreign subsidiaries. We do not expect to incur any withholding tax or U.S. income tax on such repatriations.
Tellabs also intends to use its 10.0 million shares of Cisco common stock to terminate the
Loan related to other marketable securities,
prior to completion of this transaction. Upon
termination of the loan, both
Other Marketable Securities
and the
Loan related to other marketable securities
, currently reported on our balance sheet at $234.0 million at September 27, 2013, will be reduced to zero. We currently
estimate that we would incur a minimal tax liability after utilizing available loss and tax credit carry forwards.
If the merger is
completed, on the closing date all unvested restricted stock units and unvested performance stock units would vest, and cash payments (subject to payroll withholding) for the equivalent share value would be provided to participants. For the
performance stock units granted in 2013, they would be considered 100% vested. For the 2.7 million unvested restricted stock units and the 5.1 million unvested performance stock units outstanding as of September 27, 2013, the
aggregate value would have been $19.3 million (expense would be $17.9 million).
Outstanding stock options with an exercise price per share
that is less than the merger price will be provided a cash payment (subject to payroll withholding) for the intrinsic value. For stock options outstanding as of September 27, 2013, the aggregate intrinsic value would have been $30 thousand.
In conjunction with the decision to enter into the merger agreement, Tellabs cancelled the 10b5-1 plan associated with employee stock option
exercises. In addition, Tellabs terminated the $600 million open market repurchase plan.
These are certain contingent costs relating to the
merger. These contingent costs include a $10.0 million fee due to Goldman, Sachs & Co. upon consummation of the merger.
Goodwill
We review goodwill annually for impairment, unless potential interim indicators exist that could result in an impairment. We completed an
interim step one review of the Services segment goodwill for the third quarter of 2013, as a result of the subsequent merger agreement between Tellabs and Marlin. Based on this review, which compares the segments fair value to carrying value,
we concluded that the Services segment goodwill is not impaired.
Litigation related to the Merger Agreement
On October 21, 2013, a lawsuit captioned
Freedman v. Tobkin, et al.
, Case No. 2013L000994, was filed in the Circuit Court for the
Eighteenth Judicial Circuit, DuPage County, Illinois, Chancery Division against Tellabs and the members of the Tellabs board of directors. The lawsuit also named as defendants Marlin Equity Partners and Marlin Equity Partners wholly-owned
subsidiaries, Blackhawk Holding Vehicle LLC and Blackhawk Merger Sub Inc. The
Freedman
complaint, which purports to be brought on behalf of a class consisting of the public stockholders of Tellabs, alleges that the Tellabs directors
breached their fiduciary duties by entering into the merger agreement with Marlin Equity Partners for a price that is alleged to be unfair, as the result of a process alleged to be unfair and inadequate, and including no-solicitation, matching
rights and termination fee provisions alleged to be designed to ensure that no competing offers would emerge for Tellabs. The
Freedman
complaint also includes a claim for aiding and abetting against Marlin Equity Partners. The
Freedman
complaint seeks, among other things, injunctive relief against the proposed transaction with Marlin Equity Partners as well as other equitable relief, damages, and attorneys fees and costs.
On October 22, 2013 an additional complaint,
Phelps v. Tellabs, Inc., et al.
, Case No. 2013L000999, was filed in the Circuit Court for
the Eighteenth Judicial Circuit, DuPage County, Illinois. Also on October 22, 2013, two additional complaints (
Englehart v. Hedfors, et al.
, Case No. 13 CH 23886, and
City of Lakeland and Employees Pension Plan v. Tellabs,
Inc.
, Case No. 13 CH 23890) were filed in the Circuit Court of Cook County, Illinois, Chancery Division. Finally, on October 23, 2013, a complaint captioned
Mehta v. Tellabs, Inc.
, Case No. 9028, was filed in the Court of
Chancery of the State of Delaware.
All four of these additional complaints contain claims and allegations similar to those in the original
Freedman
complaint, with certain of such complaints also alleging that the Tellabs board of
directors acted with material conflicts of interest and so as to benefit themselves, and seek similar relief on behalf of the same putative class.
24