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June 6 - ADC (NASDAQ:ADCT; www.adc.com) announced results for its second quarter ended May 4, 2007 prepared in accordance with generally accepted accounting principles (GAAP). The results from continuing operations are summarized below for ADC's four reportable business segments: Global Connectivity Solutions, Wireless Solutions, Wireline Solutions and Professional Services.
"Our second quarter sales and earnings in 2007 were stronger than expected and built on our outperformance in the first quarter of 2007. This strength occurred even though several customers have not yet returned to normal spending post-merger and others have moved more slowly on new network builds and subscriber services," said Robert E. Switz, president and CEO of ADC. "We are particularly pleased with the progress we've made in improving profitability through driving manufacturing efficiencies and gaining operating expense leverage. While we acknowledge that timing variables create quarter-to-quarter fluctuations in our results, we are encouraged by a growing number of worldwide opportunities to sell our broad range of communications network infrastructure solutions over a longer-term horizon. As a result, we remain focused on our work to build ADC's long-term value as a leading global network infrastructure company."
Progress on Profits and Cash Flow Generation
"In the second quarter of 2007, our gross margin improved to 34.5% from 32.0% in the first quarter of 2007 and $45 million of cash was provided by operating activities from continuing operations," said James G. Mathews, ADC's chief financial officer. "In the past 6 and 12 months, cash provided by operating activities from continuing operations was $76 million and $140 million, respectively."
Diluted EPS Calculation
The calculation of GAAP diluted EPS from continuing operations includes the if-converted method, which assumes that ADC's convertible notes are converted to common stock, if such treatment is dilutive. This method results in the fully diluted EPS calculation for continuing operations using a: Numerator equal to the sum of income from continuing operations plus the addback of after-tax interest expense from the convertible notes. The convertible notes consist of $200 million in 1.0% fixed rate notes maturing on June 15, 2008 and $200 million in variable rate notes maturing on June 15, 2013, with an interest rate equal to 6-month LIBOR plus 0.375%. The interest rate for the variable rate notes will be reset on each June 15 and December 15. The interest rate on the variable rate notes is 5.729% for the six-month period ending June 15, 2007.
Denominator equal to weighted average common shares outstanding for basic EPS plus employee stock options (where dilutive) plus 14.2 million shares assuming the convertible notes are converted to common stock.
If adjusting GAAP earnings for the certain expenses (benefits) in the above table, the variables below may be used in determining adjusted diluted EPS from continuing operations, with and without the if-converted method to determine which is the most dilutive treatment to use.
GAAP Segment Results (dollars in millions), Continuing Operations
During the first quarter of 2007, our reportable segments changed to conform to our current management reporting presentation by business unit. The Broadband Infrastructure and Access business segment has been separated into three new reportable segments - Global Connectivity Solutions (GCS), Wireless Solutions and Wireline Solutions. Prior-year segment disclosures have also been reclassified to conform to this new segment presentation.
Global Connectivity Solutions
GCS sales of $272 million decreased 3% in the second quarter of 2007 compared to the same quarter in 2006 primarily from lower sales of global copper connectivity solutions by 9% partially offset by a 2% increase in sales of global fiber connectivity solutions and a 6% increase in global enterprise connectivity products. Global copper connectivity shipments were affected by decreased sales of outside cabinets in Europe partially offset by a small increase in central-office copper sales. Global fiber connectivity sales were driven by a small increase of central-office fiber sales partially offset by a small decease in fiber-to-the-x (FTTX) sales. Global enterprise connectivity sales increased as a result of favorable business infrastructure spending for both new buildings and upgrading existing facilities.
GCS sales in the second quarter of 2007 increased 19% from the first quarter of 2007. Sales of global fiber connectivity products increased 31%, global copper connectivity products increased 16% and enterprise connectivity products increased 7%. Global fiber connectivity sales increased primarily from strong demand for central office and FTTX products. Global copper connectivity sales increased primarily due to strong demand for central office solutions. Global enterprise connectivity sales increased, as expected, because of construction seasonality.
Wireless Solutions
Wireless Solutions sales of $13 million increased 36% in the second quarter of 2007 compared to the same quarter in 2006 and increased 73% compared to the first quarter of 2007. This increase was generated as a result of increased spending by existing customers on Digivance coverage and capacity systems.
Wireline Solutions
Wireline Solutions sales of $14 million decreased 18% in the second quarter of 2007 compared to the same quarter in 2006 and decreased 10% compared to the first quarter of 2007. The decrease in wireline product sales was the result of a long-term, industry-wide product substitution trend. This decline in market demand for high-bit-rate digital subscriber line products is expected to continue as carriers are delivering fiber and Internet Protocol services closer to end-user premises.
Professional Services
Professional Services' second quarter 2007 sales of $51 million decreased 3% from the same quarter in 2006 and increased 9% from the first quarter of 2007. Both changes were predominately in the United States market, with lower year-over-year sales primarily due to merger integration activity among customers and higher sequential sales mainly due to a major customer continuing to expand its network build programs.
ADC's total cash, cash equivalents and available-for-sale securities (short- and long-term) were $676 million as of May 4, 2007. The increase from both February 2, 2007 and April 28, 2006 was primarily a result of total cash provided by operating activities supplemented by $60 million in proceeds from the sale of investments. ADC believes that its cash and securities balance is sufficient to meet anticipated needs for executing our near-term business plan. ADC's $200 million of fixed rate convertible notes outstanding mature on June 15, 2008, and the $200 million of variable rate convertible notes mature on June 15, 2013. All convertible notes have a conversion price of $28.091 per share. In addition, ADC's deferred tax assets, which are substantially reserved at this time, should reduce its income tax payable on U.S. taxable earnings in future years.
Employees
Total employees were approximately 9,750 as of May 4, 2007, 8,600 as of February 2, 2007 and 9,300 as of April 28, 2006. The increases are primarily the addition of temporary manufacturing personnel in Mexico. As demand for products increases or decreases, we vary the number of manufacturing employees we utilize in our Mexico facilities to accommodate our manufacturing needs.
Outlook for 2007 Annual Guidance and Information on Long-term Business Direction
"As in fiscal year 2006, our results in the second fiscal quarter of 2007 are likely to represent the peak quarter for the year due to our first-half outperformance. We currently expect the results in the second half of fiscal 2007 will be relatively flat to down modestly from the first half of fiscal 2007 (net of the one-time nonoperating gain from the sale of Big Band stock), but do not expect that the quarterly pattern of results in fiscal 2007 will fluctuate as sharply as in fiscal 2006. Our outperformance in the first half of 2007 was primarily due to stronger than expected demand for FTTX deployments and central office fiber and copper connectivity solutions to enable higher bandwidth applications for new video, data and voice services. Strength in Digivance wireless sales also contributed favorably to the outperformance," said Switz. "We also believe that there are significant long-term growth opportunities ahead of us; however, forecasting the timing of these opportunities remains difficult due to the uncertainty of (1) how long and to what degree spending by some of our substantial customers will be deferred during the integration period following their mergers, (2) rates at which new networks are built and related subscribers adopt the new service deployments, (3) when regulatory reviews of our customers' new networks are resolved, and (4) when capital allocation to new network/service initiatives is decided. These factors could shift some sales opportunities from 2007 to 2008. At this time, we are raising the low end of our 2007 sales and earnings guidance ranges (net of the one-time nonoperating gain from the sale of Big Band stock), while holding unchanged the top end of these ranges at the prevailing guidance levels until the uncertainties of the timing and extent of our remaining 2007 growth opportunities are resolved. If the current timing uncertainties of our growth opportunities are resolved favorably, we would expect to see a positive impact on our business in the second half of fiscal 2007 and fiscal year 2008. Gross profit margins are expected to rise and decline with sales volume levels from quarter to quarter."
ADC Priorities
ADC is working to execute a multi-faceted, multi-year approach to growing value for our shareowners in a market with ever increasing competitive pressures. We intend to continue building ADC into the leading global network infrastructure company. We have established balanced sales growth, competitive cost transformation and business execution excellence as the main priorities in our plan to grow sales, profitability and value.
Balanced Sales Growth. We are targeting certain market and product segments, as well as certain geographies as core to future growth plans. Key product segments include next-generation core networks, FTTX, wireless capacity/coverage, network automation, and enterprise network upgrades.
Competitive Cost Transformation. ADC is executing many initiatives designed to improve the speed, quality and simplicity of our customers' experience, while improving our cost position and profit margins. Core processes are being redesigned based on our customers' changing demands. ADC is migrating to a modular design approach to enable a more efficient configure-to-order business model. We plan to reduce the overall amount of part numbers, thereby allowing ADC to reduce customer delivery intervals, while improving operations efficiencies. ADC continues to move more of its manufacturing and support processes from the United States, Germany and Australia to lower-cost operations in China, the Czech Republic, India and Mexico. We also will continue to focus on optimizing operating expenses by utilizing shared services, simplifying our business structure and consolidating facilities. These transformational and on-going changes are designed to enable ADC to serve its customers more rapidly and cost-effectively.
Business Execution Excellence. We believe the quality of our customer service, products and services have long differentiated ADC in the marketplace. We will continue to work on better understanding the market and the needs of our customers. At ADC, we define our products and services based on our belief that ADC will continue to succeed if we can consistently deliver value to our customers. We will focus on ensuring that our current and future customers can depend on ADC to meet schedule, product, quality and service commitments.
Income Tax Expense
As of May 4, 2007, ADC had a total of $986 million in deferred tax assets (primarily for U.S. income taxes) that have been offset by a valuation allowance of $941 million. Approximately $213 million of these deferred tax assets relate to capital loss carryovers that can be utilized only against realized capital gains through October 31, 2009. Excluding the deferred tax assets related to capital loss carryovers, most of the remaining deferred tax assets are not expected to expire until after 2021. During the fourth quarter of 2006, the valuation allowance was reduced by $49 million attributable to deferred tax assets that are expected to be utilized over the subsequent two-year period. As it generates pre-tax income in future periods, ADC currently expects to record reduced income tax expense until either its deferred tax assets are fully utilized to offset future income tax liabilities or the value of its deferred tax assets are fully restored on the balance sheet.
A copy of this news release, including the financial guidance it contains, can be accessed at www.adc.com/investorrelations/newsandcommunications/earningsreleases/.
Today's 5:00 p.m. Eastern Earnings Conference Call and Webcast
ADC will discuss its second quarter 2007 results and current outlook on a conference call scheduled today, June 6, at 5:00 p.m. Eastern time. The conference call can be accessed by domestic callers at (800) 399-7506 and by international callers at (706) 634-2489 or on the Internet at www.adc.com/investor, by clicking on Webcasts. Starting today at 7:30 p.m. Eastern time, the replay of the call can be accessed until 11:59 p.m. Eastern time on June 12 by domestic callers at (800) 642-1687 and by international callers at (706) 645-9291 (conference ID number is 8434145) or on the Internet at www.adc.com/investor, by clicking on Webcasts.
About ADC
ADC provides the connections for wireline, wireless, cable, broadcast, and enterprise networks around the world. ADC's innovative network infrastructure equipment and professional services enable high-speed Internet, data, video, and voice services to residential, business and mobile subscribers. ADC (NASDAQ:ADCT) has sales into more than 130 countries. Learn more about ADC at www.adc.com.
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