e10vq
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
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QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended May 4, 2007
OR
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o |
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TRANSACTION REPORT PURSUANT TO SECTION 13 or 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from N/A to N/A
Commission file number 0-1424
ADC Telecommunications, Inc.
(Exact name of registrant as specified in its charter)
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Minnesota
(State or other jurisdiction of incorporation or organization)
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41-0743912
(I.R.S. Employer Identification No.) |
13625 Technology Drive, Eden Prairie, MN 55344-2252
(Address of principal executive offices) (Zip code)
(952) 938-8080
(Registrants telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
YES þ NO o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
file, or a non-accelerated filer. See definition of accelerated filer and large
accelerated filer in Rule 12b-2 of the Exchange Act.
Large Accelerated filer þ Accelerated filer o Non-accelerated filer o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act).
YES o NO þ
Indicate the number of shares outstanding of each of the issuers classes of common stock, as
of the latest practicable date.
Common stock, $.20 par value: 117,406,627 shares as of June 4, 2007
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ADC TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETSUNAUDITED
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May 4, |
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October 31, |
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2007 |
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2006 |
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(In millions) |
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ASSETS |
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Current Assets: |
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Cash and cash equivalents |
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$ |
118.9 |
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$ |
142.3 |
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Available-for-sale securities |
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537.2 |
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395.4 |
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Accounts receivable, net of reserves of $8.8 and $10.2 |
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175.3 |
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169.3 |
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Unbilled revenue |
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30.2 |
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23.8 |
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Inventories, net of reserves of $34.2 and $35.1 |
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172.8 |
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165.5 |
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Assets of discontinued operations |
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2.6 |
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14.9 |
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Prepaid and other current assets |
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29.7 |
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31.5 |
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Total current assets |
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1,066.7 |
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942.7 |
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Property and equipment, net of accumulated depreciation of $384.0 and $370.3 |
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204.3 |
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206.5 |
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Restricted cash |
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13.1 |
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14.0 |
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Goodwill |
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239.0 |
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238.5 |
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Intangibles, net of accumulated amortization of $75.8 and $66.5 |
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131.2 |
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142.0 |
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Available-for-sale securities |
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7.2 |
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10.7 |
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Long term assets of discontinued operations |
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0.4 |
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0.3 |
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Other assets |
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54.6 |
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56.7 |
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Total assets |
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$ |
1,716.5 |
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$ |
1,611.4 |
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LIABILITIES AND SHAREOWNERS INVESTMENT |
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Current Liabilities: |
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Accounts payable |
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$ |
96.6 |
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$ |
88.4 |
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Accrued compensation and benefits |
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53.8 |
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43.6 |
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Other accrued liabilities |
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55.8 |
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60.6 |
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Income taxes payable |
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18.1 |
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17.7 |
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Restructuring accrual |
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20.5 |
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28.4 |
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Liabilities of discontinued operations |
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8.2 |
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21.4 |
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Total current liabilities |
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253.0 |
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260.1 |
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Pension obligations and other long-term liabilities |
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83.5 |
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77.8 |
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Long-term notes payable |
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400.0 |
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400.0 |
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Total liabilities |
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736.5 |
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737.9 |
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Shareowners Investment: |
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(117.3 and 117.2 shares outstanding, respectively) |
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980.0 |
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873.5 |
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Total liabilities and shareowners investment |
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$ |
1,716.5 |
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$ |
1,611.4 |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
3
ADC TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONSUNAUDITED
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Three Months Ended |
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Six Months Ended |
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May 4, 2007 |
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April 28, 2006 |
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May 4, 2007 |
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April 28, 2006 |
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(In millions) |
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Net Sales: |
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Product |
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$ |
312.0 |
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$ |
320.7 |
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$ |
573.8 |
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$ |
562.8 |
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Service |
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37.4 |
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37.4 |
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72.8 |
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68.1 |
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Total net sales |
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349.4 |
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358.1 |
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646.6 |
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630.9 |
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Cost of Sales: |
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Product |
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195.9 |
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207.5 |
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364.7 |
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367.3 |
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Service |
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33.0 |
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28.9 |
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66.4 |
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55.7 |
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Total cost of sales |
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228.9 |
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236.4 |
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431.1 |
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423.0 |
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Gross Profit |
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120.5 |
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121.7 |
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215.5 |
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207.9 |
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Operating Expenses: |
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Research and development |
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18.1 |
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19.0 |
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35.3 |
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38.0 |
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Selling and administration |
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69.2 |
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75.7 |
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139.5 |
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143.9 |
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Restructuring and impairment charges |
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(0.9 |
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1.8 |
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(0.3 |
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3.2 |
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Total operating expenses |
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86.4 |
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96.5 |
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174.5 |
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185.1 |
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Operating Income |
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34.1 |
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25.2 |
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41.0 |
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22.8 |
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Other income, net |
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61.7 |
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2.5 |
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65.3 |
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4.9 |
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Income before income taxes |
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95.8 |
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27.7 |
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106.3 |
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27.7 |
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Provision for income taxes |
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2.7 |
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2.6 |
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3.8 |
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3.9 |
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Income from continuing operations |
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93.1 |
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25.1 |
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102.5 |
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23.8 |
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Discontinued Operations, Net of Tax |
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Loss from discontinued operations |
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(1.2 |
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(2.3 |
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(1.9 |
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(3.4 |
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Gain (loss) on sale of discontinued operations, net |
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0.2 |
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(4.9 |
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Total discontinued operations |
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(1.0 |
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(2.3 |
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(6.8 |
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(3.4 |
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Earnings before the cumulative effect of a change in
accounting principle |
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92.1 |
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22.8 |
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95.7 |
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20.4 |
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Cumulative effect of a change in accounting principle |
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0.6 |
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Net Income |
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$ |
92.1 |
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$ |
22.8 |
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$ |
95.7 |
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$ |
21.0 |
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Weighted Average Common Shares Outstanding (Basic) |
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117.3 |
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117.1 |
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117.3 |
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116.9 |
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Weighted Average Common Shares Outstanding (Diluted) |
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131.8 |
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117.9 |
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131.6 |
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117.6 |
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Basic Earnings (Loss) Per Share: |
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Continuing operations |
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$ |
0.79 |
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$ |
0.21 |
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$ |
0.87 |
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$ |
0.20 |
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Discontinued operations |
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$ |
(0.01 |
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$ |
(0.02 |
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$ |
(0.05 |
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$ |
(0.03 |
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Cumulative effect of a change in accounting principle |
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$ |
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$ |
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$ |
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$ |
0.01 |
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Net income per share |
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$ |
0.78 |
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$ |
0.19 |
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$ |
0.82 |
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$ |
0.18 |
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Diluted Earnings (Loss) Per Share: |
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Continuing operations |
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$ |
0.73 |
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$ |
0.21 |
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$ |
0.83 |
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$ |
0.20 |
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Discontinued operations |
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$ |
(0.01 |
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$ |
(0.02 |
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$ |
(0.05 |
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$ |
(0.03 |
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Cumulative effect of a change in accounting principle |
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$ |
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$ |
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$ |
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$ |
0.01 |
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Net income per share |
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$ |
0.72 |
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$ |
0.19 |
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$ |
0.78 |
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$ |
0.18 |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
4
ADC TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWSUNAUDITED
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Six Months Ended |
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May 4, 2007 |
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April 28, 2006 |
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(In millions) |
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Operating Activities: |
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Income from continuing operations |
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$ |
102.5 |
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$ |
23.8 |
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Adjustments to reconcile income from continuing operations to net cash provided
by (used for) operating activities from continuing operations: |
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Impairments |
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0.1 |
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0.6 |
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Depreciation and amortization |
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34.2 |
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33.6 |
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Change in bad debt reserve |
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(0.9 |
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0.2 |
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Non-cash stock compensation |
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4.6 |
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6.5 |
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Change in deferred income taxes |
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0.5 |
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1.4 |
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Loss on sale of property and equipment |
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0.5 |
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0.7 |
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Gain on sale of investments |
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(57.5 |
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Other, net |
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(2.5 |
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(0.5 |
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Changes in operating assets and liabilities, net of divestitures: |
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Accounts receivable and unbilled revenues increase |
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(7.8 |
) |
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(17.4 |
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Inventories increase |
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(4.9 |
) |
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(4.3 |
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Prepaid and other assets (increase)/decrease |
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4.1 |
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(7.0 |
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Accounts payable increase |
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6.9 |
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27.1 |
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Accrued liabilities decrease |
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(3.8 |
) |
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(34.4 |
) |
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Total cash provided by operating activities from continuing operations |
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76.0 |
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30.3 |
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Total cash used for operating activities from discontinued operations |
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(9.1 |
) |
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(1.9 |
) |
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Total cash provided by operating activities |
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66.9 |
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28.4 |
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Investing Activities: |
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Acquisitions, net of cash acquired |
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(2.0 |
) |
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Divestitures, net of cash disposed |
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0.3 |
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Property, equipment and patent additions |
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(18.3 |
) |
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(13.5 |
) |
Proceeds from disposal of property and equipment |
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0.5 |
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0.3 |
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Proceeds from collection of notes receivable |
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2.3 |
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Proceeds from sale of investments |
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59.8 |
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Warrant exercise |
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(1.8 |
) |
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Decrease in restricted cash |
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1.2 |
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1.6 |
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Purchase of available-for-sale securities |
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(674.3 |
) |
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(240.4 |
) |
Sale of available-for-sale securities |
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|
536.0 |
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|
229.6 |
|
Other |
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0.1 |
|
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Total cash used for investing activities from continuing operations |
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(98.6 |
) |
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(20.0 |
) |
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Total cash provided by investing activities from discontinued operations |
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1.1 |
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0.4 |
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Total cash used for investing activities |
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(97.5 |
) |
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(19.6 |
) |
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Financing Activities: |
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Common stock issued |
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2.0 |
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9.6 |
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Total cash provided by financing activities |
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2.0 |
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9.6 |
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Effect of Exchange Rate Changes on Cash |
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5.2 |
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1.8 |
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Increase/(Decrease) in Cash and Cash Equivalents |
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(23.4 |
) |
|
|
20.2 |
|
Cash and Cash Equivalents, beginning of period |
|
|
142.3 |
|
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|
108.4 |
|
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Cash and Cash Equivalents, end of period |
|
$ |
118.9 |
|
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$ |
128.6 |
|
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|
The accompanying notes are an integral part of these condensed consolidated financial statements.
5
ADC TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTSUNAUDITED
Note 1: Basis of Presentation
These interim unaudited condensed consolidated financial statements have been prepared in
accordance with the rules and regulations of the United States Securities and Exchange Commission
(SEC). Accordingly, they do not include all of the information and footnotes required by U.S.
generally accepted accounting principles for complete financial statements. The interim information
furnished in this report reflects all normal recurring adjustments, which are necessary, in the
opinion of our management, for a fair presentation of the results for the interim periods. The
operating results for the three and six months ended May 4, 2007 are not necessarily indicative of
the operating results to be expected for the full fiscal year. These statements should be read in
conjunction with our most recent Annual Report on Form 10-K/A for the fiscal year ended October 31,
2006.
During the third quarter of fiscal 2006, our Board of Directors approved a plan to divest our
professional services business in France (APS France). During the first quarter of fiscal 2007,
we completed this divestiture. In accordance with SFAS No. 144 Accounting for the Impairment or
Disposal of Long-Lived Assets, this business was classified as discontinued operations for all
periods presented.
Fiscal Year
Our first three quarters end on the Friday nearest to the end of January, April and July,
respectively, and our fiscal year ends on October 31.
Recently Issued Accounting Pronouncements
In May 2005, the Financial Accounting Standards Board (FASB) issued SFAS No. 154,
Accounting Changes and Error Corrections-a replacement of APB Opinion No. 20 and FASB Statement
No. 3 (SFAS 154). SFAS 154 replaces APB Opinion No. 20, Accounting Changes, and FASB Statement
No. 3, Reporting Accounting Changes in Interim Financial Statements, and changes the requirements
for the accounting for and reporting of a change in accounting principle. APB Opinion No. 20
previously required that most voluntary changes in an accounting principle be recognized by
including the cumulative effect of changing to the new accounting principle in net income in the
period of the change. SFAS 154 requires retrospective application to prior periods financial
statements of changes in accounting principle applied as if that principle had always been used.
SFAS 154 is effective for changes and error corrections made in fiscal years beginning after
December 15, 2005. We adopted the provisions of SFAS 154 on November 1, 2006. The adoption of SFAS
154 will only impact us if there are accounting changes or error corrections.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets
and Financial Liabilities Including an amendment of FASB Statement No. 115 (SFAS 159). SFAS
159 permits entities to choose to measure many financial instruments and certain other items at
fair value. The objective is to improve financial reporting by allowing entities to mitigate
volatility in reported earnings caused by measuring related assets and liabilities differently
without having to apply complex hedge accounting provisions. SFAS 159 is effective as of the
beginning of an entitys first fiscal year that begins after November 15, 2007. We are required to
adopt the provisions of SFAS 159 in our fiscal year beginning November 1, 2008. We are currently
evaluating the impact, if any, that SFAS 159 may have on our financial statements.
Summary of Significant Accounting Policies
A detailed description of our significant accounting policies can be found in our most recent
Annual Report on Form 10-K/A for the fiscal year ended October 31, 2006.
Warranty
We provide reserves for the estimated cost of product warranties at the time revenue is
recognized. We estimate the costs of our warranty obligations based on our warranty policy or
applicable contractual warranty, our historical experience of known product failure rates, and use
of materials and service delivery costs incurred in correcting product failures. In addition, from
time to time, specific warranty accruals may be made if unforeseen technical problems arise.
The following table provides detail on the activity in the warranty reserve accrual balance as
of May 4, 2007:
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrual |
|
Charged to costs |
|
|
|
|
|
Accrual |
|
|
October 31, 2006 |
|
and expenses |
|
Deductions |
|
May 4, 2007 |
|
|
(In millions) |
Warranty Reserve |
|
$ |
9.5 |
|
|
$ |
1.2 |
|
|
$ |
1.6 |
|
|
$ |
9.1 |
|
Note 2: Share-Based Compensation
Share-based compensation recognized under SFAS No. 123(R) Share-Based Payment: An amendment
of FASB Statement No. 123 and 95, for the three and six months ended May 4, 2007 was $2.7 million
and $4.6 million, respectively. Share-based compensation expense for the three and six months
ended April 28, 2006 was $3.1 million and $6.5 million, respectively. The decrease for the three
and six months ended May 4, 2007 compared to the three and six months ended April 28, 2006 was due
to the full vesting of certain share-based awards during fiscal 2006. The share-based compensation
expense is calculated on a straight-line basis over the vesting periods of the related share-based
awards.
Note 3: Discontinued Operations
APS France
During the third quarter of fiscal 2006, our Board of Directors approved a plan to divest APS
France. On January 12, 2007, we completed the sale of certain assets of APS France to a subsidiary
of Groupe Circet, a French company, for a cash price of $0.1 million, a portion of which is held in
escrow for six months. In connection with this transaction, we compensated Groupe Circet for
assuming certain facility and vehicle leases. APS France had been included in our Professional
Services segment. We classified this business as a discontinued operation in the third quarter of
fiscal 2006. We recorded a loss on the sale of the business of $22.6 million during fiscal 2006,
which includes a provision for employee severance. In the first and second quarters of fiscal
2007, we recorded an additional loss of $5.1 million and a gain of $0.2 million, respectively,
resulting in a total loss on sale of $27.5 million. These adjustments were due to subsequent
working capital adjustments and additional expenses related to the finalization of the sale.
The financial results of APS France are reported separately as discontinued operations for all
periods presented in accordance with SFAS No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets. The financial results of APS France included in discontinued operations are:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
May 4, |
|
|
April 28, |
|
|
May 4, |
|
|
April 28, |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
|
(In millions) |
|
|
(In millions) |
|
Net sales |
|
$ |
1.4 |
|
|
$ |
8.5 |
|
|
$ |
8.5 |
|
|
$ |
18.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from discontinued operations |
|
$ |
(1.2 |
) |
|
$ |
(2.3 |
) |
|
$ |
(1.9 |
) |
|
$ |
(3.4 |
) |
Gain (loss) on sale of discontinued operations |
|
|
0.2 |
|
|
|
|
|
|
|
(4.9 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from discontinued operations |
|
$ |
(1.0 |
) |
|
$ |
(2.3 |
) |
|
$ |
(6.8 |
) |
|
$ |
(3.4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 4: Net Income (Loss) from Continuing Operations Per Share
The following table presents a reconciliation of the numerators and denominators of basic and
diluted income (loss) per share from continuing operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
May 4, |
|
|
April 28, |
|
|
May 4, |
|
|
April 28, |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
|
(In millions, except |
|
|
(In millions, except |
|
|
|
per share amounts) |
|
|
per share amounts) |
|
Numerator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income from continuing operations |
|
|
93.1 |
|
|
|
25.1 |
|
|
|
102.5 |
|
|
|
23.8 |
|
Interest expense for convertible notes |
|
|
3.4 |
|
|
|
|
|
|
|
6.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income from continuing operations diluted |
|
$ |
96.5 |
|
|
$ |
25.1 |
|
|
$ |
109.3 |
|
|
$ |
23.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding basic |
|
|
117.3 |
|
|
|
117.1 |
|
|
|
117.3 |
|
|
|
116.9 |
|
Convertible bonds converted to common stock |
|
|
14.2 |
|
|
|
|
|
|
|
14.2 |
|
|
|
|
|
Employee options and other |
|
|
0.3 |
|
|
|
0.8 |
|
|
|
0.1 |
|
|
|
0.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding diluted |
|
|
131.8 |
|
|
|
117.9 |
|
|
|
131.6 |
|
|
|
117.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic income per share from continuing operations |
|
$ |
0.79 |
|
|
$ |
0.21 |
|
|
$ |
0.87 |
|
|
$ |
0.20 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted income per share from continuing operations |
|
$ |
0.73 |
|
|
$ |
0.21 |
|
|
$ |
0.83 |
|
|
$ |
0.20 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7
Excluded from the dilutive securities described above are employee stock options to acquire
6.1 million and 3.0 million shares for the three months ended May 4, 2007, and April 28, 2006,
respectively. Also excluded are employee stock options to acquire 6.2 million and 4.2 million
shares for the six months ended May 4, 2007 and April 28, 2006, respectively. These employee stock
options are excluded if the exercise prices of these options are greater than the average market
price of our common stock for the period, or if we have a net loss for the period, both of which
would have had an anti-dilutive effect.
Warrants to acquire 14.2 million shares issued in connection with our convertible notes were
excluded from the dilutive securities described above for the three and six months ended May 4,
2007 and April 28, 2006. This exclusion occurred because the exercise price of these warrants was
greater than the average market price of our common stock.
We are required to use the if-converted method for computing diluted earnings per share with
respect to the shares reserved for issuance upon conversion of the notes. Under this method, we add
back the interest expense on the convertible notes to net income and then divide this amount by
outstanding shares, including all 14.2 million shares that could be issued upon conversion of the
notes. If this calculation results in further dilution of the earnings per share, our diluted
earnings per share will include all 14.2 million shares of common stock reserved for issuance upon
conversion of our convertible notes. If this calculation is anti-dilutive, the net-of-tax interest
expense on the convertible notes is deducted, and the 14.2 million shares of common stock reserved
for issuance upon conversion of our convertible notes are excluded. Based upon these calculations,
all shares reserved for issuance upon conversion of our convertible notes were excluded for the
three and six months ended April 28, 2006 because of their anti-dilutive effect. However, these
shares were included for the three and six months ended May 4, 2007.
Note 5: Inventories
Inventories consist of:
|
|
|
|
|
|
|
|
|
|
|
May 4, |
|
|
October 31, |
|
|
|
2007 |
|
|
2006 |
|
|
|
(In millions) |
|
Purchased materials |
|
$ |
72.0 |
|
|
$ |
66.9 |
|
Manufactured products |
|
|
130.8 |
|
|
|
129.2 |
|
Work-in-process |
|
|
4.2 |
|
|
|
4.5 |
|
Less: Inventory reserve |
|
|
(34.2 |
) |
|
|
(35.1 |
) |
|
|
|
|
|
|
|
Total inventories, net |
|
$ |
172.8 |
|
|
$ |
165.5 |
|
|
|
|
|
|
|
|
Note 6: Property & Equipment
Property & equipment consists of:
|
|
|
|
|
|
|
|
|
|
|
May 4, |
|
|
October 31, |
|
|
|
2007 |
|
|
2006 |
|
|
|
(In millions) |
|
Land and buildings |
|
$ |
142.1 |
|
|
$ |
141.2 |
|
Machinery and equipment |
|
|
394.7 |
|
|
|
386.3 |
|
Furniture and fixtures |
|
|
39.6 |
|
|
|
39.0 |
|
Less: Accumulated depreciation |
|
|
(384.0 |
) |
|
|
(370.3 |
) |
|
|
|
|
|
|
|
Total |
|
|
192.4 |
|
|
|
196.2 |
|
Construction-in-progress |
|
|
11.9 |
|
|
|
10.3 |
|
|
|
|
|
|
|
|
Total property & equipment, net |
|
$ |
204.3 |
|
|
$ |
206.5 |
|
|
|
|
|
|
|
|
Note 7: Goodwill and Intangible Assets
We recorded
$239.0 million of goodwill in connection with our acquisitions of the KRONE group
(KRONE), Fiber Optic Network Solutions Corp. (FONS) and an additional eleven percent of the
outstanding shares in our majority-owned Indian based subsidiary KRONE Communications Ltd. (KCL).
All of the goodwill derived from these acquisitions has been assigned to our Global Connectivity
Solutions segment. Most of this goodwill is not deductible for tax purposes.
8
On April 26, 2007,
we completed the acquisition of an additional eleven percent of
the outstanding shares in KCL from Karnataka State Electronics Development Corporation Limited for
a purchase price of approximately $2.0 million. We now own 62% of the outstanding shares of KCL.
Goodwill of $0.5 million was recorded in the transaction. KCLs results have been and continue to
be fully consolidated in our results of operations.
The changes in the carrying amount of goodwill for the six months ended May 4, 2007 are as
follows (in millions):
|
|
|
|
|
Balance as of October 31, 2006 |
|
$ |
238.5 |
|
Goodwill acquired during the year |
|
|
0.5 |
|
|
|
|
|
Balance as of May 4, 2007 |
|
$ |
239.0 |
|
|
|
|
|
We recorded intangible assets of $78.1 million in connection with the acquisition of KRONE,
consisting primarily of trademarks, technology and a distributor network. We recorded additional
intangible assets of $83.3 million in connection with the acquisition of FONS, consisting primarily
of customer relationships, existing technology and non-compete agreements. Another $4.7 million of
intangible assets related to patents and a non-compete agreement was recorded in connection with
our acquisition of OpenCell Corp. from Crown Castle International Corp. in fiscal 2005.
Note 8: Income Taxes
Under the liability method of accounting for income taxes, a deferred tax asset represents
future tax benefits to be received when certain expenses and losses previously recognized in the
financial statements become deductible under applicable income tax laws. The realization of a
deferred tax asset is dependent on future taxable income against which these deductions can be
applied. SFAS No. 109, Accounting for Income Taxes, requires that a valuation allowance be
established when it is more likely than not that all or a portion of deferred tax assets will not
be realized. As a result of the cumulative losses we incurred in prior years, we previously
concluded that a nearly full valuation allowance should be recorded. In fiscal 2006, we determined
that our recent experience generating U.S. income, along with our projection of future U.S. income,
constituted significant positive evidence for partial realization of our U.S. deferred tax assets.
Therefore, in the fourth quarter of fiscal 2006, we released our valuation allowance on $49.0
million of U.S. deferred tax assets which were expected to be realized over the following two-year
period. We plan to maintain net U.S. deferred tax assets on our balance sheet at this amount until
there is sufficient positive evidence that it is more likely than not a benefit will be realized
with respect to a higher level of deferred tax assets.
Our income tax provision for the three and six months ended May 4, 2007 primarily relates to
foreign income taxes and deferred tax liabilities attributable to U.S. tax amortization of
purchased goodwill from the acquisition of KRONE.
As of May 4, 2007, our net deferred tax assets were $985.8 million with a related valuation
allowance of $940.9 million. Most of our deferred tax assets are related to U.S. income tax net
operating losses and are not expected to expire until after fiscal 2021. There is, however, $212.5
million relating to capital loss carryforwards that can be utilized only against realized capital
gains through fiscal 2009.
Note 9: Comprehensive Income
Comprehensive income has no impact on our net income (loss) but is reflected in our balance
sheet through adjustments to shareowners investment. Comprehensive income is derived from foreign
currency translation adjustments and unrealized gains on available-for-sale securities.
The components of comprehensive income are:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
May 4, |
|
|
April 28, |
|
|
May 4, |
|
|
April 28, |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
|
(In millions) |
|
|
(In millions) |
|
Net income (loss) |
|
$ |
92.1 |
|
|
$ |
22.8 |
|
|
$ |
95.7 |
|
|
$ |
21.0 |
|
Change in cumulative translation adjustment (1) |
|
|
4.1 |
|
|
|
(1.4 |
) |
|
|
4.6 |
|
|
|
0.8 |
|
Unrealized gain (loss) from securities classified as available-for-sale |
|
|
|
|
|
|
0.4 |
|
|
|
|
|
|
|
0.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
$ |
96.2 |
|
|
$ |
21.8 |
|
|
$ |
100.3 |
|
|
$ |
22.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
There was no net tax impact for the components of comprehensive income due to the valuation
allowance.
|
|
|
(1) |
|
The change in cumulative translation adjustment for the three and six months ended May 4,
2007 was mainly due to the strengthening of the Euro and Indian Rupee in relation to the
U.S. dollar. |
9
Note 10: Pension Benefits
We sponsor a defined benefit pension plan that is an unfunded general obligation of one of our
German subsidiaries. Cash payments are expected to approximate the net periodic benefit cost.
Components of net periodic benefit cost are:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
May 4, |
|
|
April 28, |
|
|
May 4, |
|
|
April 28, |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
|
(In millions) |
|
|
(In millions) |
|
Service cost |
|
$ |
0.1 |
|
|
$ |
0.1 |
|
|
$ |
0.1 |
|
|
$ |
0.2 |
|
Interest cost |
|
|
0.8 |
|
|
|
0.7 |
|
|
|
1.6 |
|
|
|
1.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost |
|
$ |
0.9 |
|
|
$ |
0.8 |
|
|
$ |
1.7 |
|
|
$ |
1.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 11: Segment and Geographic Information
During the first quarter of fiscal 2007, we made certain organizational changes that have
eliminated the use of a management structure based on a business and geographical matrix. Primarily
as a result of these changes, we have changed our reportable segments, as described below. These
changes conform to our current management reporting presentation. We have reclassified prior year
segment disclosures to conform to the new segment presentation.
|
|
|
Our Broadband Infrastructure and Access business segment has been redefined into three
reportable segments Global Connectivity Solutions, Wireless Solutions and Wireline
Solutions. |
|
|
|
|
In the prior periods, our business unit level reports presented results through
contribution margin. Our current reporting presents fully allocated business unit results
through operating income. |
|
|
|
|
We have eliminated reporting at the regional level. |
We are organized into operating segments based on product grouping. The reportable segments
are determined in accordance with how our executive managers develop and execute our global
strategies to drive growth and profitability. These strategies include product positioning,
research and development programs, cost management, capacity and capital investments for each of
the reportable segments. Segment performance is evaluated on several factors, including, but not limited to, operating
income. Segment operating income excludes restructuring and impairment charges, interest income or
expense, other income or expense and provision for income taxes. Assets are not allocated to the
segments.
Our four reportable business segments are:
|
|
|
Global Connectivity Solutions |
|
|
|
|
Wireless Solutions |
|
|
|
|
Wireline Solutions |
|
|
|
|
Professional Services |
Our Global Connectivity Solutions (Connectivity) products connect wireline, wireless, cable,
enterprise and broadcast communications networks over copper (twisted pair), coaxial, fiber-optic
and wireless media. These products provide the physical interconnections between network components
and access points into networks.
Our Wireless Solutions (Wireless) products help improve and extend the coverage and capacity
of wireless communications networks. These products improve signal quality by boosting the uplink
signal of mobile systems to increase receiver performance.
10
These improvements allow mobile subscribers to place more calls successfully, make longer
calls, and successfully complete calls in an expanded geographic area.
Our Wireline Solutions (Wireline) products enable communications service providers to
deliver high capacity voice and data services over copper or optical facilities in the last
mile/kilometer of communications networks, while integrating functions and capabilities that help
reduce the capital and operating costs of delivering such services.
Our Professional Services business provides integration services for broadband, multiservice
communications over wireline, wireless, cable and enterprise networks. Professional services are
used to plan, deploy and maintain communications networks that deliver Internet, data, video and
voice services.
Our largest customer, Verizon, accounted for 21.0% and 19.5% of our sales in the three months
ended May 4, 2007 and April 28, 2006, respectively. Also, Verizon accounted for 19.3% and 17.6% of
our sales in the six months ended May 4, 2007 and April 28, 2006, respectively. Revenue from
Verizon is included in each of the four reportable segments. The recently completed merger of AT&T,
BellSouth and Cingular (now collectively AT&T) has created another large customer for us. For the
three and six months ended May 4, 2007, AT&T represented approximately 15.0% and 14.6%,
respectively, of our net sales.
Intersegment sales of $6.8 million and $11.3 million and operating income of $5.5 million and
$9.5 million are eliminated from Professional Services for the three and six months ended May 4,
2007, respectively. Additionally, intersegment sales of $9.6 million and $16.5 million and
operating income of $7.9 million and $13.4 million are eliminated from Professional Services for
the three and six months ended April 28, 2006, respectively. These intersegment sales represent
Connectivity, Wireless and Wireline products sold by Professional Services.
The following table sets forth certain financial information for each of our above described
reportable segments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Professional |
|
|
|
|
|
|
Restructuring and |
|
|
GAAP |
|
|
|
Connectivity |
|
|
Wireless |
|
|
Wireline |
|
|
Services |
|
|
Consolidated |
|
|
Impairment |
|
|
Consolidated |
|
|
|
(In millions) |
|
Three Months Ended May 4, 2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
External net sales: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products |
|
$ |
272.1 |
|
|
$ |
12.8 |
|
|
$ |
13.7 |
|
|
$ |
13.4 |
|
|
$ |
312.0 |
|
|
|
|
|
|
$ |
312.0 |
|
Services |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
37.4 |
|
|
|
37.4 |
|
|
|
|
|
|
|
37.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total external net sales |
|
$ |
272.1 |
|
|
$ |
12.8 |
|
|
$ |
13.7 |
|
|
$ |
50.8 |
|
|
$ |
349.4 |
|
|
|
|
|
|
$ |
349.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
$ |
14.6 |
|
|
$ |
0.8 |
|
|
$ |
0.5 |
|
|
$ |
1.2 |
|
|
$ |
17.1 |
|
|
|
|
|
|
$ |
17.1 |
|
Operating income (loss) |
|
$ |
38.3 |
|
|
$ |
(3.2 |
) |
|
$ |
(0.3 |
) |
|
$ |
(1.6 |
) |
|
$ |
33.2 |
|
|
$ |
0.9 |
|
|
$ |
34.1 |
|
Three Months Ended April 28, 2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
External net sales: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products |
|
$ |
279.6 |
|
|
$ |
9.4 |
|
|
$ |
16.8 |
|
|
$ |
14.9 |
|
|
$ |
320.7 |
|
|
|
|
|
|
$ |
320.7 |
|
Services |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
37.4 |
|
|
|
37.4 |
|
|
|
|
|
|
|
37.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total external net sales |
|
$ |
279.6 |
|
|
$ |
9.4 |
|
|
$ |
16.8 |
|
|
$ |
52.3 |
|
|
$ |
358.1 |
|
|
|
|
|
|
$ |
358.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
$ |
13.6 |
|
|
$ |
0.7 |
|
|
$ |
0.8 |
|
|
$ |
2.0 |
|
|
$ |
17.1 |
|
|
|
|
|
|
$ |
17.1 |
|
Operating income (loss) |
|
$ |
32.2 |
|
|
$ |
(6.4 |
) |
|
$ |
1.1 |
|
|
$ |
0.1 |
|
|
$ |
27.0 |
|
|
$ |
(1.8 |
) |
|
$ |
25.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Professional |
|
|
|
|
|
|
Restructuring and |
|
|
GAAP |
|
|
|
Connectivity |
|
|
Wireless |
|
|
Wireline |
|
|
Services |
|
|
Consolidated |
|
|
Impairment |
|
|
Consolidated |
|
|
|
(In millions) |
|
Six Months Ended May 4, 2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
External net sales: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products |
|
$ |
499.9 |
|
|
$ |
20.2 |
|
|
$ |
28.9 |
|
|
$ |
24.8 |
|
|
$ |
573.8 |
|
|
|
|
|
|
$ |
573.8 |
|
Services |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
72.8 |
|
|
|
72.8 |
|
|
|
|
|
|
|
72.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total external net sales |
|
$ |
499.9 |
|
|
$ |
20.2 |
|
|
$ |
28.9 |
|
|
$ |
97.6 |
|
|
$ |
646.6 |
|
|
|
|
|
|
$ |
646.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
$ |
29.2 |
|
|
$ |
1.6 |
|
|
$ |
1.0 |
|
|
$ |
2.4 |
|
|
$ |
34.2 |
|
|
|
|
|
|
$ |
34.2 |
|
Operating income (loss) |
|
$ |
52.8 |
|
|
$ |
(7.5 |
) |
|
$ |
1.6 |
|
|
$ |
(6.2 |
) |
|
$ |
40.7 |
|
|
$ |
0.3 |
|
|
$ |
41.0 |
|
Six Months Ended April 28, 2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
External net sales: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products |
|
$ |
487.5 |
|
|
$ |
14.4 |
|
|
$ |
32.4 |
|
|
$ |
28.5 |
|
|
$ |
562.8 |
|
|
|
|
|
|
$ |
562.8 |
|
Services |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
68.1 |
|
|
|
68.1 |
|
|
|
|
|
|
|
68.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total external net sales |
|
$ |
487.5 |
|
|
$ |
14.4 |
|
|
$ |
32.4 |
|
|
$ |
96.6 |
|
|
$ |
630.9 |
|
|
|
|
|
|
$ |
630.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
$ |
26.5 |
|
|
$ |
1.2 |
|
|
$ |
1.6 |
|
|
$ |
4.3 |
|
|
$ |
33.6 |
|
|
|
|
|
|
$ |
33.6 |
|
Operating income (loss) |
|
$ |
38.0 |
|
|
$ |
(12.7 |
) |
|
$ |
2.6 |
|
|
$ |
(1.9 |
) |
|
$ |
26.0 |
|
|
$ |
(3.2 |
) |
|
$ |
22.8 |
|
11
Geographic Information
The following table sets forth certain geographic information concerning our U.S. and foreign
sales and ownership of property and equipment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
May 4, |
|
|
April 28, |
|
|
May 4, |
|
|
April 28, |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
|
(In millions) |
|
|
(In millions) |
|
Sales: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inside the United States |
|
$ |
225.8 |
|
|
$ |
219.5 |
|
|
$ |
398.8 |
|
|
$ |
375.7 |
|
Outside the United States: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asia Pacific (Australia, China, Hong Kong, India, Japan,
Korea, New Zealand, Southeast Asia and Taiwan) |
|
|
30.5 |
|
|
|
26.5 |
|
|
|
61.6 |
|
|
|
50.0 |
|
EMEA (Europe (excluding Germany), Middle East and Africa) |
|
|
45.4 |
|
|
|
44.5 |
|
|
|
89.9 |
|
|
|
81.2 |
|
Germany |
|
|
26.2 |
|
|
|
43.5 |
|
|
|
52.9 |
|
|
|
80.0 |
|
Americas (Canada, Central and South America) |
|
|
21.5 |
|
|
|
24.1 |
|
|
|
43.4 |
|
|
|
44.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net sales |
|
$ |
349.4 |
|
|
$ |
358.1 |
|
|
$ |
646.6 |
|
|
$ |
630.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and Equipment, Net: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inside the United States |
|
$ |
131.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Outside the United States |
|
|
73.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total property and equipment, net |
|
$ |
204.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
No single country outside of the U.S. has property and equipment sufficiently material to
disclose.
Note 12: Restructuring Charges
During the three and six months ended May 4, 2007 and April 28, 2006, we incurred
restructuring charges associated with workforce reductions as well as the consolidation of excess
facilities. The restructuring charges resulting from our actions, by category of expenditures,
adjusted to exclude those activities specifically related to discontinued operations, are as
follows for the three and six months ended May 4, 2007 and April 28, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
May 4, |
|
|
April 28, |
|
|
May 4, |
|
|
April 28, |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
|
(In millions) |
|
|
(In millions) |
|
Employee severance |
|
$ |
0.4 |
|
|
$ |
1.1 |
|
|
$ |
0.6 |
|
|
$ |
2.4 |
|
Facilities consolidation and lease termination |
|
|
(1.4 |
) |
|
|
0.1 |
|
|
|
(1.0 |
) |
|
|
0.2 |
|
Fixed asset write-downs |
|
|
0.1 |
|
|
|
0.6 |
|
|
|
0.1 |
|
|
|
0.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total restructuring and impairment charges |
|
$ |
(0.9 |
) |
|
$ |
1.8 |
|
|
$ |
(0.3 |
) |
|
$ |
3.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring charges include employee severance and facility consolidation costs resulting
from the closure of leased facilities and other workforce reductions attributable to our efforts to
reduce costs. During the three and six months ended May 4, 2007, 24 and 71 employees,
respectively, were impacted by reductions in force. These reductions included 23 employees in our
Professional Services segment in Germany and 48 employees in our Connectivity segment (47 employees
located in Mexico and one located in Australia). During the three and six months ended April 28,
2006, 36 and 79 employees, respectively were impacted by reductions in force. These reductions were
principally in our Connectivity segment (36 employees located in Minnesota) and our Wireline
segment (43 employees located in North Carolina). The costs of these reductions have been and will
be funded through cash from operations.
Facility consolidation and lease termination expenses represent costs associated with our
decision to consolidate and close duplicative or excess manufacturing and office facilities. During
the three and six months ended May 4, 2007, we recorded credits of $1.4 million and $1.0 million,
respectively, due primarily to the recognition and collection of subtenant rental income that had
been previously written off as uncollectible. For the three and six months ended April 28, 2006,
we incurred charges of $0.1 million and $0.2 million, respectively, related to facility
consolidations.
During the three and six months ended May 4, 2007, we incurred $0.1 million of impairment
charges related to internally developed capitalized software costs. During the three and six
months ended April 28, 2006, we incurred $0.6 million of
impairment charges related to property and equipment as a result of our continued consolidation of excess
facilities.
12
The following table provides details on our restructuring activity and the remaining accrual
balance by category as of May 4, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing |
|
|
|
|
|
|
|
|
|
Accrual |
|
|
Operations Net |
|
|
Cash Payments |
|
|
Accrual |
|
Type of Charge |
|
October 31, 2006 |
|
|
Additions |
|
|
Charged to Accrual |
|
|
May 4, 2007 |
|
|
|
(In millions) |
|
Employee severance costs |
|
$ |
12.5 |
|
|
$ |
0.6 |
|
|
$ |
5.2 |
|
|
$ |
7.9 |
|
Facilities consolidation |
|
|
15.9 |
|
|
|
(1.0 |
) |
|
|
2.3 |
|
|
|
12.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total restructuring accrual |
|
$ |
28.4 |
|
|
$ |
(0.4 |
) |
|
$ |
7.5 |
|
|
$ |
20.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We expect that substantially all of the remaining $7.9 million of cash expenditures relating
to employee severance costs incurred as of May 4, 2007, will be paid by the end of fiscal 2007. Of
the $12.6 million to be paid for the consolidation of facilities, we expect that approximately $2.4
million will be paid by the end of fiscal 2007 and that the balance will be paid from unrestricted
cash over the respective lease terms of the facilities through 2015. Based on our intention to
continue to consolidate and close duplicative or excess manufacturing operations in order to reduce
our cost structure, we may incur additional restructuring charges (both cash and non-cash) in
future periods. These restructuring charges may have a material effect on our operating results.
In addition to the restructuring accrual described above, we have $1.0 million of assets held
for sale at May 4, 2007. We classified these as other current assets as we expect to sell or
dispose of these assets before the end of fiscal 2007.
Note 13: Other Income (Expense), Net
Other income (expense), net consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Six months ended |
|
|
|
May 4, |
|
|
April 28, |
|
|
May 4, |
|
|
April 28, |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
|
(In millions) |
|
|
(In millions) |
|
Interest income on investments |
|
$ |
8.2 |
|
|
$ |
4.9 |
|
|
$ |
15.4 |
|
|
$ |
9.5 |
|
Interest expense on borrowings |
|
|
(4.2 |
) |
|
|
(3.6 |
) |
|
|
(8.3 |
) |
|
|
(6.9 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income, net |
|
|
4.0 |
|
|
|
1.3 |
|
|
|
7.1 |
|
|
|
2.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange income |
|
|
0.9 |
|
|
|
0.8 |
|
|
|
1.5 |
|
|
|
1.4 |
|
Loss on sale of fixed assets |
|
|
(0.2 |
) |
|
|
(0.2 |
) |
|
|
(0.5 |
) |
|
|
(0.7 |
) |
Gain on sale of investments |
|
|
57.1 |
|
|
|
|
|
|
|
57.5 |
|
|
|
|
|
Other, net |
|
|
(0.1 |
) |
|
|
0.6 |
|
|
|
(0.3 |
) |
|
|
1.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal |
|
|
57.7 |
|
|
|
1.2 |
|
|
|
58.2 |
|
|
|
2.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense), net |
|
$ |
61.7 |
|
|
$ |
2.5 |
|
|
$ |
65.3 |
|
|
$ |
4.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On January 26, 2007, we entered into an agreement with certain other holders of securities of
BigBand Networks, Inc. (BigBand) to sell our entire interest in BigBand for approximately $58.9
million in gross proceeds. Our interest in BigBand had been carried at a nominal value. A portion
of our interest was held in the form of a warrant to purchase BigBand shares with an aggregate
exercise price of approximately $1.8 million. On February 16, 2007, we exercised our warrant and
completed the sale of our BigBand stock. This resulted in a gain of approximately $57.1 million.
This gain did not have a tax provision impact due to a reduction of the valuation allowance
attributable to U.S. deferred tax assets utilized to offset the gain.
On January 10, 2007, we sold our interest in Redback Networks, Inc. (Redback) for gross
proceeds of $0.9 million which resulted in a gain of $0.4 million.
The increase in net interest income is due to higher cash balances and higher interest rates.
Note 14: Commitments and Contingencies
Legal Contingencies: We are a party to various lawsuits, proceedings and claims arising in the
ordinary course of business or otherwise. Many of these disputes may be resolved without formal
litigation. The amount of monetary liability resulting from the ultimate resolution of these
matters cannot be determined at this time. As of May 4, 2007, we had recorded approximately $4.9
million in loss reserves for certain
13
of these matters. In light of the reserves we have recorded, at
this time we believe the ultimate resolution of these lawsuits, proceedings and claims will not
have a material adverse impact on our business, results of operations or financial condition.
Because of the uncertainty inherent in litigation, however, it is possible that unfavorable
resolutions of one or more of these lawsuits, proceedings and claims could exceed the amount
currently reserved and could have a material adverse effect on our business, results of operations
or financial condition.
We became
aware of a potential reporting violation of the Emergency Planning and Community
Right to Know Act at our Sydney, Nebraska facility during an internal audit of the
facility. Subsequently, we voluntarily disclosed this matter and submitted complete and updated
reports to the United States Environmental Protection Agency and the State of Nebraska. We will
work closely with the Environmental Protection Agency to resolve this matter. At the current time,
we cannot, with reasonable certainty, estimate the amount of any costs ADC may incur in connection
with this matter, however, we do not expect the resolution of this matter to have a material impact
on our financial statements.
Income Tax Contingencies: Our effective tax rate is impacted by reserve provisions and changes
to reserves that we consider appropriate. We establish reserves when, despite our belief that our
tax returns reflect the proper treatment of all matters, we believe that the treatment of certain
tax matters could be challenged and that we may not ultimately be successful.
Significant judgment is required to evaluate and adjust the reserves in light of changing
facts and circumstances, such as the progress of a tax audit. Furthermore, a number of years may
lapse before a particular matter for which we have established a reserve is audited and finally
resolved. While it is difficult to predict the final outcome or the timing of resolution of any
particular tax matter, we believe that our reserves reflect the probable outcome of known tax
contingencies.
Other Contingencies: As a result of the divestiture of APS France discussed in Note 3, we may
incur charges related to obligations retained based on the sale agreement, primarily related to
income tax contingencies. At this time, none of those obligations are probable or estimable.
In the second quarter of fiscal 2007, we incurred charges of approximately $1.3 million
related to delays in the deployment of our ACX cross-connect product. We face continued
uncertainty around both the scope and timing of potential deployments for our ACX product by key
customers in Europe. We are currently conducting a review of the product, market and business case
for an automated cross-connect solution. If the outcome of this review is unfavorable, it would
result in future write-offs or impairments of the inventory and fixed assets related to ACX and
other charges related to purchase commitments. We cannot determine the amount of any potential additional
charges until this review is complete.
Change of Control: Our Board of Directors has approved the extension of certain employee
benefits, including salary continuation to key employees, in the event of a change of control of
ADC.
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
We are a leading global provider of communications network infrastructure solutions and
services. Our products and services provide connections for communications networks over copper,
fiber, coaxial and wireless media and enable the use of high-speed Internet, data, video and voice
services by residences, businesses and mobile communications subscribers. Our products include
fiber optic, copper and coaxial based frames, cabinets, cables, connectors, cards and other
physical components essential to enable the delivery of communications for wireline, wireless,
cable, and broadcast networks by service providers and enterprises. Our products also include
network access devices such as high-bit-rate digital subscriber line and wireless coverage
solutions. Our products primarily are used in the last mile/kilometer portion of networks. This
network of copper, coaxial cable, fiber lines, wireless facilities and related equipment links
voice, video and data traffic from the end-user of the communications service to the serving office
of our customer. In addition, we provide professional services relating to the design, equipping
and building of networks. The provision of such services also allows us additional opportunities to
sell our hardware products, thereby complementing our hardware business.
14
Our customers include local and long-distance telephone service providers, private enterprises
that operate their own networks, cable television operators, wireless service providers, new
competitive service providers, broadcasters, governments, system integrators and communications
equipment manufacturers and distributors.
During the first quarter of fiscal 2007, we made certain organizational changes that have
eliminated the use of a management structure based on a business and geographical matrix. Primarily
as a result of these changes, we have changed our reportable segments, as described below. These
changes conform to our current management reporting presentation. We have reclassified prior year
segment disclosures to conform to the new segment presentation.
|
|
|
Our Broadband Infrastructure and Access business segment has been redefined into three
reportable segments Global Connectivity Solutions, Wireless Solutions and Wireline
Solutions. |
|
|
|
|
In the prior periods, our business unit level reports presented results through
contribution margin. Our current reporting presents fully allocated business unit results
through operating income. |
|
|
|
|
We eliminated reporting at the regional level. |
As a result, we offer broadband connectivity products, wireless capacity and coverage
optimization products, wireline access products and professional services to our customers through
the following four reportable business segments:
|
|
|
Connectivity |
|
|
|
|
Wireless |
|
|
|
|
Wireline |
|
|
|
|
Professional Services |
Our Connectivity solutions connect wireline, wireless, cable, enterprise and broadcast
communications networks over copper (twisted pair), coaxial, fiber-optic and wireless media. These
products provide the physical interconnections between network components and access points into
networks.
Our Wireless solutions help improve and extend the coverage and capacity of wireless
communications networks. These products improve signal quality by boosting the uplink signal of
mobile systems to increase receiver performance. These improvements allow mobile subscribers to
place more calls successfully, make longer calls, and successfully complete calls in an expanded
geographic area.
Our Wireline solutions enable communications service providers to deliver high capacity voice
and data services over copper or optical facilities in the last mile/kilometer of communications
networks, while integrating functions and capabilities that help reduce the capital and operating
costs of delivering such services.
Our Professional Services business provides integration services for broadband, multiservice
communications over wireline, wireless, cable and enterprise networks. Professional services are
used to plan, deploy and maintain communications networks that deliver Internet, data, video and
voice services.
Marketplace Conditions
Our products and services are deployed primarily by communications service providers and the
owners/operators of private enterprise networks. We believe the communications industry is in the
midst of a multi-year migration to next-generation networks that can deliver broadband services at
low, often flat-rate, prices over any medium anytime and anywhere. We believe this transformation
especially will impact the last mile/kilometer portion of networks where our products and
services primarily are used. It is in this section of networks where bottlenecks in the high-speed
delivery of communications services are most likely to occur.
While factors such as regulatory changes will impact the communications industry
significantly, we believe there are two key elements driving the migration to next-generation
networks:
15
|
|
|
First, businesses and consumers worldwide increasingly are becoming dependent on
broadband, multi-service communications networks to conduct daily communications tasks.
People and businesses are increasingly accessing the Internet and using Web-based software
applications through broadband connections. Further, the growing popularity of applications
such as digital video and audio programs, uploading and downloading content, podcasting,
wireless data and video services, video conferencing from personal computers, video e-mail,
video on demand, interactive entertainment and gaming via the Internet, distance learning,
telemedicine and high-speed imaging is increasing the need for broadband network
infrastructure. |
|
|
|
|
Second, end-users of communications services increasingly expect to do business over a
single network connection at a low price either with service providers or by developing
their own networks that can provide all of their communications needs. Both public networks
operated by communications service providers and private enterprise networks are evolving to
provide combinations of Internet, data, video and voice services that can be offered over
the same high-speed network connection versus individual services being conducted over
separate connections. We believe the competition among service providers to retain new
customers over these more fully integrated networks is causing services to be offered more
often at low, flat-rate prices as opposed to prices based on metered usage. |
The evolution to next generation networks that offer services at ever lower prices is
affecting our industry significantly. We believe there are increased opportunities to provide
market infrastructure elements that are designed to allow networks to provide more robust services
and operate more efficiently. In recent years, our industry has experienced modest overall spending
increases and we presently expect this trend to continue. The mix of products purchased by our
customers, however, is shifting towards new initiatives, such as the deployment of fiber-optic
networks beyond the central office of service providers and closer to the ultimate end-user, as
well as to the development of more powerful private enterprise networks. The products that support
these new initiatives often have lower margins than many of our legacy products, such as our copper
connectivity products for central office infrastructure. These changes have negatively affected our
gross margins. Further, sales of these products are often project-based, causing our sales to
fluctuate from period to period and making the timing of our sales harder to predict. For
instance, we face continued uncertainty around the timing of potential deployments for our ACX
cross-connect product by key customers in Europe. We continue to invest in the development and
deployment of an ACX product that will meet the technical and cost needs of our customers; however,
both the scope and timing of potential deployments of such a solution by our customers are
uncertain at this time. If our ACX product is not deployed, we would realize lost revenue
opportunities as well as incur inventory and other charges related to this product initiative.
Overall, we continue to expect our sales to grow over time, primarily as a result of broadband
initiatives as well as enterprise projects. Our ability to take advantage of any spending increases
will depend on the acceptance of such products as our fiber connectivity for central offices and
fiber-to-the-X (FTTX), our automated network solutions, our TrueNet® and CopperTen structured
cabling solutions, our Digivance® and FlexWave wireless coverage and our Wi-Fi and WiMAX
solutions.
In addition, competitive pressures to win and retain customers are causing many of our service
provider customers to consolidate with one another in order to gain greater scale as well as the
ability to offer a wider range of wireline and wireless services. Consolidation results in larger
customers who have increased buying power and fewer competitors. As these large customers seek to
renegotiate pricing terms, we expect consolidation will place pressure on the prices at which we
and other vendors can sell products and services. We also believe that consolidation among our
customers is likely to cause short-term spending deferrals while the combined companies focus on
integration activities. Currently, however, as customers complete integration activities, we are
experiencing some increased sales demand from these customers. Ultimately, the rate at which our
customers respond to each others competitive threats, the buying power they likely are to gain
from consolidation and the products they elect to purchase will impact our sales growth and profit
margins and those of other equipment vendors.
Coupled with the need for revenue growth, we must also become more cost efficient in order to
increase profitability on a more consistent basis. We therefore are focusing aggressively on ways
to conduct our operations more efficiently. We remain committed to being a low-cost industry leader
and are implementing the following initiatives as part of an overall project we call competitive
cost transformation:
|
|
|
relocating certain manufacturing, engineering and other operations from higher-cost geographic areas to lower-cost areas; |
|
|
|
|
redesigning product lines to utilize more common components; |
|
|
|
|
increasing direct material savings from strategic sourcing globally;
|
16
|
|
|
sunsetting end of life products; and |
|
|
|
|
improving our order-to-delivery processes. |
While we are beginning to see the benefits of this strategy, our ability to implement this
strategy is subject to numerous risks and uncertainties and we cannot assure you our efforts with
this strategy will be successful.
Our customer base is relatively concentrated, with our top five telecommunication customers
accounting for 45.3% and 40.0% of our net sales for the three and six months ended May 4, 2007,
respectively, and 42.0% and 40.1% of our net sales for the three and six months ended April 28,
2006, respectively. Our largest customers, Verizon and AT&T, accounted for 19.3% and 12.5%,
respectively, of our net sales for the six months ended May 4, 2007. Verizon accounted for 17.6% of
our net sales for the six months ended April 28, 2006.
To grow our business further we believe we must continue to invest in research and development
initiatives and to search for appropriate acquisition opportunities. Our internal research and
development efforts are focused on those areas where we believe we are most likely to achieve
success and on projects that we believe directly advance our strategic aims. This includes a
portfolio of projects with varying risk and reward profiles. We seek acquisitions primarily to
strengthen our core product portfolio. Our efforts are focused on opportunities within our existing
markets, as well as in adjacent or related markets that we believe will strengthen our core
offerings. In addition, we are focused on finding acquisitions that may enhance our geographic
operations. Because several of our largest customers are consolidating to gain greater scale and
broaden their service offerings, we also believe it is appropriate for companies in our industry to
consolidate in order to gain greater scale and position themselves to offer a wider array of
products. We expect to fund potential acquisitions with existing cash resources, the issuance of
shares of common or preferred stock, the issuance of debt or equity linked securities or through
some combination of these alternatives. We also will continue to evaluate and monitor our existing
business and product lines for growth and profitability potential. If we believe it to be
necessary, we will deemphasize or divest product lines and businesses that we no longer believe can
advance our strategic vision.
A more detailed description of the risks to our business can be found in Item 1A of our Annual
Report on Form 10-K/A for the year ended October 31, 2006 and in Part II of both our Quarterly
Report on Form 10-Q for the quarter ended February 2, 2007 and this Quarterly Report on Form 10-Q.
Results of Operations
Net Sales
The following table shows the percentage change in net sales and expense items from continuing
operations for the three and six months ended May 4, 2007 and April 28, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Percentage |
|
|
|
May 4, |
|
|
April 28, |
|
|
Increase (Decrease) |
|
|
|
2007 |
|
|
2006 |
|
|
Between Periods |
|
|
|
(In millions) |
|
|
Net sales |
|
$ |
349.4 |
|
|
$ |
358.1 |
|
|
|
(2.4 |
)% |
|
|
|
|
|
|
|
|
|
|
Cost of sales |
|
|
228.9 |
|
|
|
236.4 |
|
|
|
(3.2 |
) |
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
120.5 |
|
|
|
121.7 |
|
|
|
(1.0 |
) |
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Research and development |
|
|
18.1 |
|
|
|
19.0 |
|
|
|
(4.7 |
) |
Selling and administration |
|
|
69.2 |
|
|
|
75.7 |
|
|
|
(8.6 |
) |
Restructuring and impairment charges |
|
|
(0.9 |
) |
|
|
1.8 |
|
|
|
(150.0 |
) |
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
86.4 |
|
|
|
96.5 |
|
|
|
(10.5 |
) |
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
34.1 |
|
|
|
25.2 |
|
|
|
35.3 |
|
Other income (expense), net: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest income, net |
|
|
4.0 |
|
|
|
1.3 |
|
|
|
207.7 |
|
Other, net |
|
|
57.7 |
|
|
|
1.2 |
|
|
|
4,708.3 |
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
95.8 |
|
|
|
27.7 |
|
|
|
245.8 |
|
Provision for income taxes |
|
|
2.7 |
|
|
|
2.6 |
|
|
|
3.8 |
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
$ |
93.1 |
|
|
$ |
25.1 |
|
|
|
270.9 |
% |
|
|
|
|
|
|
|
|
|
|
17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended |
|
|
Percentage |
|
|
|
May 4, |
|
|
April 28, |
|
|
Increase (Decrease) |
|
|
|
2007 |
|
|
2006 |
|
|
Between Periods |
|
|
|
(In millions) |
|
|
Net sales |
|
$ |
646.6 |
|
|
$ |
630.9 |
|
|
|
2.5 |
% |
|
|
|
|
|
|
|
|
|
|
Cost of sales |
|
|
431.1 |
|
|
|
423.0 |
|
|
|
1.9 |
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
215.5 |
|
|
|
207.9 |
|
|
|
3.7 |
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Research and development |
|
|
35.3 |
|
|
|
38.0 |
|
|
|
(7.1 |
) |
Selling and administration |
|
|
139.5 |
|
|
|
143.9 |
|
|
|
(3.1 |
) |
Restructuring and impairment charges |
|
|
(0.3 |
) |
|
|
3.2 |
|
|
|
(109.4 |
) |
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
174.5 |
|
|
|
185.1 |
|
|
|
(5.7 |
) |
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
41.0 |
|
|
|
22.8 |
|
|
|
79.8 |
|
Other income (expense), net: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest income, net |
|
|
7.1 |
|
|
|
2.6 |
|
|
|
173.1 |
|
Other, net |
|
|
58.2 |
|
|
|
2.3 |
|
|
|
2,430.4 |
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
106.3 |
|
|
|
27.7 |
|
|
|
283.8 |
|
Provision for income taxes |
|
|
3.8 |
|
|
|
3.9 |
|
|
|
(2.6 |
) |
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
$ |
102.5 |
|
|
$ |
23.8 |
|
|
|
330.7 |
% |
|
|
|
|
|
|
|
|
|
|
The following table sets forth our net sales for the three and six months ended May 4, 2007
and April 28, 2006 for each of our reportable segments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Percentage |
|
|
|
May 4, |
|
|
April 28, |
|
|
Increase (Decrease) |
|
Reportable Segment |
|
2007 |
|
|
2006 |
|
|
Between Periods |
|
|
|
(In millions) |
|
|
Connectivity |
|
$ |
272.1 |
|
|
$ |
279.6 |
|
|
|
(2.7 |
)% |
Wireless |
|
|
12.8 |
|
|
|
9.4 |
|
|
|
36.2 |
|
Wireline |
|
|
13.7 |
|
|
|
16.8 |
|
|
|
(18.5 |
) |
Professional Services: |
|
|
|
|
|
|
|
|
|
|
|
|
Product |
|
|
13.4 |
|
|
|
14.9 |
|
|
|
(10.1 |
) |
Service |
|
|
37.4 |
|
|
|
37.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Professional Services |
|
|
50.8 |
|
|
|
52.3 |
|
|
|
(2.9 |
) |
|
|
|
|
|
|
|
|
|
|
Total Net Sales |
|
$ |
349.4 |
|
|
$ |
358.1 |
|
|
|
(2.4 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended |
|
|
Percentage |
|
|
|
May 4, |
|
|
April 28, |
|
|
Increase (Decrease) |
|
Reportable Segment |
|
2007 |
|
|
2006 |
|
|
Between Periods |
|
|
|
(In millions) |
|
|
Connectivity |
|
$ |
499.9 |
|
|
$ |
487.5 |
|
|
|
2.5 |
% |
Wireless |
|
|
20.2 |
|
|
|
14.4 |
|
|
|
40.3 |
|
Wireline |
|
|
28.9 |
|
|
|
32.4 |
|
|
|
(10.8 |
) |
Professional Services: |
|
|
|
|
|
|
|
|
|
|
|
|
Product |
|
|
24.8 |
|
|
|
28.5 |
|
|
|
(13.0 |
) |
Service |
|
|
72.8 |
|
|
|
68.1 |
|
|
|
6.9 |
|
|
|
|
|
|
|
|
|
|
|
Total Professional Services |
|
|
97.6 |
|
|
|
96.6 |
|
|
|
1.0 |
|
|
|
|
|
|
|
|
|
|
|
Total Net Sales |
|
$ |
646.6 |
|
|
$ |
630.9 |
|
|
|
2.5 |
% |
|
|
|
|
|
|
|
|
|
|
Our net sales declined for the three months ended May 4, 2007, compared to the three months
ended April 28, 2006, driven primarily by a sales decline in Connectivity products. However, our
net sales increased for the six months ended May 4, 2007, compared to the six months ended April
28, 2006, driven primarily by sales increases in Connectivity during the first quarter of fiscal
2007. International sales comprised 35.4% and 38.3% of our net sales for the three and six months
ended May 4, 2007, respectively and comprised 38.7% and 40.4% of our net sales for the three and
six months ended April 28, 2006, respectively.
Our Connectivity products net sales decreased for the three months ended May 4, 2007, as
compared to the three months ended April 28, 2006, primarily as the result of a sales decline in
global copper connectivity solutions. This decline was caused by lower sales of outside plant
cabinets in Europe, as we participated in projects for these products in fiscal 2006 for which our sales are largely complete. The global copper connectivity decline was partially offset by higher
global fiber connectivity sales across all of our sales regions as more customers shift to
18
fiber in the central office, seeking increased bandwidth
compared to copper. For the six months ended May 4, 2007, as compared to the six months ended
April 28, 2006, net sales from our Connectivity products increased as the result of growth in FTTX
deployments in the U.S., supplemented by an increase in central-office fiber sales. In addition,
global enterprise connectivity sales increased as a result of favorable business infrastructure
spending for new buildings and upgrades of existing facilities mainly outside of the U.S. This
increase was partially offset by a decline in sales of global copper connectivity solutions as a
result of the previously referenced lower sales of outside plant cabinets in Europe.
Our Wireless products net sales increased for the three and six months ended May 4, 2007, as
compared to the three and six months ended April 28, 2006. This increase was due to increased
spending by existing customers on our Digivance® coverage and capacity systems.
Our Wireline products net sales decreased for the three and six months ended May 4, 2007, as
compared to the three and six months ended April 28, 2006. This decrease resulted from a general
industry-wide decline in the market demand for high-bit-rate digital subscriber line products as
carriers undertake product substitution by delivering fiber and Internet Protocol services closer
to end-user premises. We expect this industry-wide trend in market demand to continue.
Our Professional Services net sales decreased for the three months ended May 4, 2007, as
compared to the three months ended April 28, 2006. However, Professional Services net sales
increased for the six months ended May 4, 2007 as compared to the six months ended April 28, 2006.
Sales in Professional Services have fluctuated due to ongoing merger and integration activity among
customers. We believe this integration activity affects contract timing and network
deployment plans.
Gross Profit
During the three and six months ended May 4, 2007, our gross profit percentages were 34.5% and
33.3%, respectively, compared to 34.0% and 33.0%, respectively, for the comparable 2006 periods.
The mix of products we sell can vary substantially. As a result, our future gross margin rate is
difficult to predict accurately.
The increases in gross profit are primarily driven by our Connectivity products. The increase
in our Connectivity segment gross profit is a combination of product mix, cost reductions and
supply chain efficiencies. As described in the net sales section above, we have experienced lower
sales of outside plant cabinets in Europe as compared to comparable fiscal 2006 periods. Outside
plant cabinets typically have lower than average margins compared to our other Connectivity
products. Gross profit also increased in our Wireless segment as compared to the same fiscal 2006
periods, mainly due to increased customer deployments of our Digivance® coverage and capacity
systems. These increases in gross profit were partially offset by lower margins in our Wireline and
Professional Services segments as compared to the same fiscal 2006 periods. The reduction in our
Wireline gross profit was driven by higher freight costs. The reduction in gross profit for our
Professional Services segment was the result of costs associated with preparing for increased
demand for services from a large customer and for deployment of future projects.
Operating Expenses
Total operating expenses for the three and six months ended May 4, 2007 represented 24.7% and
27.0% of net sales, respectively. These amounts respectively represented 26.9% and 29.3% of net
sales for the same fiscal 2006 periods. As discussed below, operating expenses include research and
development, selling and administration expenses and restructuring charges.
Research and development: Research and development expenses for the three and six months ended
May 4, 2007 represented 5.2% and 5.5% of net sales, respectively. For the three and six months
ended April 28, 2006, these expenses represented 5.3% and 6.0% of net sales, respectively. This
decrease in research and development was mainly the result of the consolidation of research and
development activities across several of our segments. Given the rapidly changing technological and
competitive environment in the communications equipment industry, continued commitment to product
development efforts will be required for us to remain competitive. Accordingly, we intend to
continue to allocate substantial resources, as a percentage of our net sales, to product
development. Most of our research will be directed towards projects that we believe directly
advance our strategic aims in segments in the marketplace that we believe are most likely to grow.
Selling and administration: Selling and administration expense was $6.5 million and $4.4
million lower during the three and six months ended May 4, 2007, compared to the same periods in
fiscal 2006. These decreases were driven by lower stock based compensation expense and also reflected
the employee retention costs related to the FONS acquisition in fiscal 2006. Share-based
compensation recognized under SFAS 123(R) for the three and six months ended May 4, 2007 was $2.7
million and $4.6 million, respectively. Share-based compensation expense
19
for the three and six months ended April 28,
2006 was $3.1 million and $6.5 million, respectively. The decrease for the three and six months
ended May 4, 2007, compared to the three and six months ended April 28, 2006, was due to the full
vesting of certain awards during fiscal 2006. During the three and six months ended April 28, 2006,
we incurred $2.1 million and $4.5 million of employee retention expense related to the FONS
acquisition. The last retention payment associated with this acquisition was made in May 2006.
Therefore, there were no retention expenses in fiscal 2007 related to the FONS acquisition.
Restructuring and impairment charges: Restructuring charges include employee severance and
facility consolidation costs resulting from the closure of leased facilities and other workforce
reductions attributable to our efforts to reduce costs. During the three and six months ended May
4, 2007, 24 and 71 employees, respectively, were impacted by reductions in force. These reductions
included 23 employees in our Professional Services segment in Germany and 48 employees in our
Connectivity segment (47 employees located in Mexico and one located in Australia). During the
three and six months ended April 28, 2006, 36 and 79 employees, respectively, were impacted by
reductions in force. These reductions were principally in our Connectivity segment (36 employees
located in Minnesota) and our Wireline segment (43 employees located in North Carolina).
Facility consolidation and lease termination expenses represent costs associated with our
decision to consolidate and close duplicative or excess manufacturing and office facilities. During
the three and six months ended May 4, 2007, we recorded credits of $1.4 million and $1.0 million,
respectively, due primarily to the recognition and collection of sub-tenant rental income that had
been previously written-off as uncollectible. For the three and six months ended April 28, 2006,
we incurred charges of $0.1 million and $0.2 million, respectively, related to facility
consolidations.
During the three and six months ended May 4, 2007, we incurred $0.1 million of impairment
charges related to internally developed capitalized software costs. During the three and six
months ended April 28, 2006, we incurred $0.6 million of impairment charges related to property and
equipment as a result of our continued consolidation of excess facilities.
Other Income (Expense), Net
Other income (expense), net consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Six months ended |
|
|
|
May 4, |
|
|
April 28, |
|
|
May 4, |
|
|
April 28, |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
|
(In millions) |
|
|
(In millions) |
|
Interest income on investments |
|
$ |
8.2 |
|
|
$ |
4.9 |
|
|
$ |
15.4 |
|
|
$ |
9.5 |
|
Interest expense on borrowings |
|
|
(4.2 |
) |
|
|
(3.6 |
) |
|
|
(8.3 |
) |
|
|
(6.9 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income, net |
|
|
4.0 |
|
|
|
1.3 |
|
|
|
7.1 |
|
|
|
2.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange income |
|
|
0.9 |
|
|
|
0.8 |
|
|
|
1.5 |
|
|
|
1.4 |
|
Loss on sale of fixed assets |
|
|
(0.2 |
) |
|
|
(0.2 |
) |
|
|
(0.5 |
) |
|
|
(0.7 |
) |
Gain on sale of investments |
|
|
57.1 |
|
|
|
|
|
|
|
57.5 |
|
|
|
|
|
Other, net |
|
|
(0.1 |
) |
|
|
0.6 |
|
|
|
(0.3 |
) |
|
|
1.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal |
|
|
57.7 |
|
|
|
1.2 |
|
|
|
58.2 |
|
|
|
2.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense), net |
|
$ |
61.7 |
|
|
$ |
2.5 |
|
|
$ |
65.3 |
|
|
$ |
4.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On January 26, 2007, we entered into an agreement with certain other holders of securities of
BigBand to sell our entire interest in BigBand for approximately $58.9 million in gross proceeds.
Our interest in BigBand had been carried at a nominal value. A portion of our interest was held in
the form of a warrant to purchase BigBand shares with an aggregate exercise price of approximately
$1.8 million. On February 16, 2007, we exercised our warrant and completed the sale of our BigBand
stock. This resulted in a gain of approximately $57.1 million. This gain did not have a tax
provision impact due to a reduction of the valuation allowance attributable to U.S. deferred tax
assets utilized to offset the gain.
On January 10, 2007, we sold our interest in Redback for gross proceeds of $0.9 million which
resulted in a gain of $0.4 million.
The increase in net interest income is due to higher cash balances and higher interest rates.
20
Income Taxes
Our effective income tax rate from continuing operations for the three and six months ended
May 4, 2007 was 2.8% and 3.6%, respectively, compared to 9.4% and 14.1% for the comparable fiscal
2006 periods. The lower effective income tax rate between comparable periods is due primarily to a
reduction of the valuation allowance attributable to U.S. deferred tax assets utilized to offset
the gain on the sale of our interest in BigBand in the second quarter of fiscal 2007. The effective
tax rate reduction attributable to the gain is discrete to the second quarter of fiscal 2007 and
will not impact the effective tax rate in future quarters. Substantially all of our income tax
provision for the three and six months ended May 4, 2007 relates to foreign income taxes and
deferred tax liabilities attributable to U.S. tax amortization of purchased goodwill from the
acquisition of KRONE. In addition, our effective income tax rate has been reduced by changes in the
valuation allowance recorded for our deferred tax assets. See Note 8 to the financial statements
for a detailed description of the accounting standards related to our recording of the valuation
allowance.
Beginning in fiscal 2002, we discontinued recording income tax benefits in most jurisdictions
where we incurred pretax losses because the deferred tax assets generated by the losses have been
offset with a corresponding increase in the valuation allowance. Likewise, we have not recorded
income tax expense in most jurisdictions where we have pretax income because the deferred tax
assets utilized to reduce income taxes payable have been offset with a corresponding reduction in
the valuation allowance. In fiscal 2006, we determined that our recent experience generating U.S.
income, along with our projection of future U.S. income, constituted significant positive evidence
for partial realization of our U.S. deferred tax assets. Therefore, in the fourth quarter of fiscal
2006, we reduced our valuation allowance on $49.0 million of U.S. deferred tax assets which were
expected to be realized over the following two-year period. We plan to maintain net U.S. deferred
tax assets on our balance sheet at this amount until there is sufficient positive evidence that it
is more likely than not a benefit will be realized with respect to higher level of U.S. deferred
tax assets.
Discontinued Operations
APS France
During the third quarter of fiscal 2006, our Board of Directors approved a plan to divest APS
France. On January 12, 2007, we completed the sale of certain assets of APS France to a subsidiary
of Groupe Circet, a French company, for a cash price of $0.1 million, a portion of which is held in
escrow for six months. In connection with this transaction, we compensated Groupe Circet for
assuming certain facility and vehicle leases. APS France had been included in our Professional
Services segment. We classified this business as a discontinued operation in the third quarter of
fiscal 2006. We recorded a loss on the sale of the business of $22.6 million during fiscal 2006,
which includes a provision for employee severance. In the first and second quarters of fiscal
2007, we recorded an additional loss of $5.1 million and a gain of $0.2 million, respectively,
resulting in a net loss on sale of $4.9 million. These adjustments were due to subsequent working
capital adjustments and additional expenses related to the finalization of the sale. The total loss
on sale was $27.5 million.
Application of Critical Accounting Policies and Estimates
See our most recent Annual Report on Form 10-K/A for fiscal 2006 for a discussion of our
critical accounting policies and estimates.
Liquidity and Capital Resources
Liquidity
Cash and cash equivalents and current available-for-sale securities not subject to
restrictions were $656.1 million at May 4, 2007, an increase of $118.4 million compared to $537.7
million as of October 31, 2006. The reasons for this increase are described below under the caption
Operating Activities.
During our second fiscal quarter, we received net cash of approximately $57.1 million related
to the sale of our interest in BigBand. See note 13 for more information.
We invest a large portion of our available cash in highly liquid government securities and
high quality corporate debt securities of varying maturities. Our investment policy is to manage
these assets to preserve principal, maintain adequate liquidity at all times, and maximize returns
subject to investment guidelines we maintain.
21
Restricted cash balances that are pledged primarily as collateral for letters of credit and
lease obligations affect our liquidity. As of May 4, 2007, we had restricted cash of $13.1 million
compared to $14.0 million as of October 31, 2006, a decrease of $0.9 million. Restricted cash is
expected to become available to us upon satisfaction of the obligations pursuant to which the
letters of credit or guarantees were issued. Generally, we are entitled to the interest earnings on
our restricted cash balance, and interest earned on restricted cash is included in cash and cash
equivalents.
Operating Activities
Net cash provided by operating activities from continuing operations for the six months ended
May 4, 2007 was $76.0 million. This cash inflow was due to $102.5 million of income from continuing
operations and a $3.1 million increase in operating liabilities. These cash inflows were partially
offset by $21.0 million of adjustments to reconcile income from continuing operations to net cash
provided by operating activities and a $8.6 million increase in operating assets. The adjustments
of $21.0 million to reconcile net income to net cash provided by operating activities include the
$57.5 million of gain on the sale of our positions in BigBand and Redback. Working capital
requirements typically will increase or decrease with changes in the level of net sales. In
addition, the timing of certain accrued payments will affect the annual cash flow.
Net cash provided by operating activities from continuing operations for the six months ended
April 28, 2006 was $30.3 million. This cash inflow was primarily due to $23.8 million of income
from continuing operations and $42.5 million of adjustments to reconcile income from continuing
operations to net cash provided by operating activities. These cash inflows were partially offset
by a $28.7 million increase in operating assets and a $7.3 million decrease in operating
liabilities.
Investing Activities
Cash used by investing activities from continuing operations was $98.6 million for the six
months ended May 4, 2007, which was largely due to net purchases of available-for-sale securities
of $138.3 million, $18.3 million for property and equipment additions, and $1.8 million for warrant
exercises related to BigBand. These were offset by $59.8 of proceeds from the sale of investments,
which included BigBand and Redback.
Cash used by investing activities from continuing operations was $20.0 million for the six
months ended April 28, 2006, including $13.5 million for property and equipment additions and $10.8
million in net purchases of available-for-sale securities. These were offset by a $1.6 million
decrease in restricted cash and $2.3 million of proceeds from the collection of notes receivable.
Financing Activities
Cash provided by financing activities was $2.0 million for the six months ended May 4, 2007,
compared with cash provided by financing activities of $9.6 million for the six months ended April
28, 2006. This primarily was related to the issuance of common stock under stock option plans
during the quarter in both years. The decrease from the six months ended April 28, 2006 was due to
a significant reduction in stock option exercises.
Unsecured Debt
As of May 4, 2007, we had outstanding $400.0 million of convertible unsecured subordinated
notes, consisting of $200.0 million in 1.0% fixed rate convertible unsecured subordinated notes
maturing on June 15, 2008, and $200.0 million of convertible unsecured subordinated notes with a
variable interest rate maturing on June 15, 2013. The interest rate for the variable rate notes is
equal to the 6-month LIBOR plus 0.375% and is reset on each semi-annual interest payment date (June
15 and December 15 of each year beginning on December 15, 2003). The interest rate on the variable
rate notes was 5.795% for the six-month period ending December 15, 2006 and declined to 5.729% for
the period December 16, 2006 to June 15, 2007. The holders of both the fixed and variable rate
notes may convert all or some of their notes into shares of our common stock at any time prior to
maturity at a conversion price of $28.091 per share. We may not redeem the fixed rate notes anytime
prior to their maturity date. We may redeem any or all of the variable rate notes at any time on or
after June 23, 2008.
Off-Balance-Sheet Arrangements and Contractual Obligations
We do not have any off-balance-sheet arrangements. There has been no material change in our
contractual obligations not in the ordinary course of our business since the end of fiscal 2006.
See our Annual Report on Form 10-K/A for the fiscal year ended October 31, 2006, for additional
information regarding our contractual obligations.
22
Working Capital and Liquidity Outlook
Our main source of liquidity continues to be our unrestricted cash resources, which include
existing cash, cash equivalents and available-for-sale securities. We currently anticipate that our
existing cash resources will be sufficient to meet our anticipated needs for working capital and
capital expenditures to execute our near-term business plan. This expectation is based on current
business operations and economic conditions and assumes we are able to maintain breakeven or
positive cash flows from operations. We expect that our entire restructuring accrual of $20.5
million as of May 4, 2007, will be paid from our unrestricted cash as follows:
|
|
|
$7.9 million for employee severance will be paid by the end of fiscal 2007; |
|
|
|
|
$2.4 million for facilities consolidation costs, which relate principally to excess
leased facilities, will be paid in fiscal 2007; and |
|
|
|
|
the remainder of $10.2 million, which also relates to excess leased facilities, will be
paid over the respective lease terms ending through 2015. |
We also believe that our unrestricted cash resources will enable us to pursue strategic
opportunities, including possible product line or business acquisitions. However, if the cost of
one or more acquisition opportunities exceeds our existing cash resources, additional sources may
be required. We do not currently have any committed lines of credit or other available credit
facilities, and it is uncertain whether such facilities could be obtained in sufficient amounts or
on acceptable terms. Any plan to raise additional capital may involve an equity-based or
equity-linked financing, such as another issuance of convertible debt or the issuance of common
stock or preferred stock, which would be dilutive to existing shareowners. If we raise additional
funds by issuing debt, we may be subject to restrictive covenants that could limit our operational
flexibility and higher interest expense could dilute earnings per share.
Our $200.0 million of fixed rate convertible notes mature on June 15, 2008. We believe we
have sufficient resources to meet this obligation. The other $200.0 million of variable rate
convertible notes do not mature until June 15, 2013. All convertible notes have a conversion price
of $28.091 per share.
In addition, our deferred tax assets, which are substantially reserved at this time, should
reduce our income tax payable on taxable earnings in future years.
Cautionary Statement Regarding Forward Looking Information
The discussion herein, including, but not limited to, Managements Discussion and Analysis of
Financial Condition and Results of Operations as well as the Notes to the Condensed Consolidated
Financial Statements, contain various forward-looking statements within the meaning of Section
27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of
1934, as amended. Forward-looking statements represent our expectations or beliefs concerning
future events, including but not limited to the following: any statements regarding future sales;
profit percentages; earnings per share and other results of operations; expectations or beliefs
regarding the marketplace in which we operate; the sufficiency of our cash balances and cash
generated from operating and financing activities for our future liquidity; capital resource needs,
and the effect of regulatory changes. We caution that any forward-looking statements made by us in
this report or in other announcements made by us are qualified by important factors that could
cause actual results to differ materially from those in the forward-looking statements. These
factors include, without limitation: the demand for equipment by telecommunication service
providers, from which a majority of our sales are derived; the fact our business is increasingly
dependent on project-based capital deployment initiatives by our customers for which sales are more
prone to significant fluctuations; our ability to operate our business to achieve, maintain and
grow operating profitability; macroeconomic factors that influence the demand for
telecommunications services and the consequent demand for communications equipment; consolidation
among our customers, competitors or vendors which could cause disruption in our customer
relationships or displacement of us as an equipment vendor to the surviving entity in a customer
consolidation; our ability to keep pace with rapid technological change in our industry; our
ability to make the proper strategic choices with respect to product line acquisitions or
divestitures; our ability to integrate the operations of any acquired businesses with our own
operations; increased competition within our industry and increased pricing pressure from our
customers; our dependence on relatively few customers for a majority of our sales as well as
potential sales growth in market segments we presently feel have the greatest growth potential;
fluctuations in our operating results from quarter-to-quarter, which are influenced by many factors
outside of our control, including variations in demand for particular products in our portfolio
that have varying profit margins; the impact of regulatory changes on our customers willingness to
make capital expenditures for our equipment and services; financial problems, work interruptions in
operations or other difficulties faced by some of our customers or vendors,
23
which can influence
future sales to these customers as well as our ability to collect amounts due us or obtain necessary materials and components; economic and regulatory
conditions both in the United States and outside of the United States, as a significant portion of
our sales come from non-U.S. jurisdictions; our ability to protect our intellectual property rights
and defend against infringement claims made by other parties; possible limitations on our ability
to raise additional capital if required, either due to unfavorable market conditions or lack of
investor demand; our ability to attract and retain qualified employees in a competitive
environment; potential liabilities that could arise if there are design or manufacturing defects
with respect to any of our products; our ability to obtain raw materials and components and the
prices of those materials and components which could be subject to volatility, and our dependence
on contract manufacturers to make certain of our products; changes in interest rates, foreign
currency exchange rates and equity securities prices, all of which will impact our results; our
ability to successfully defend or satisfactorily settle any pending litigation or litigation that
may arise; fluctuations in the telecommunications market and other risks and uncertainties,
including those identified in Item 1A of our Annual Report on Form 10-K/A for the year ended
October 31, 2006 and in Part II, Item 1A of both this Quarterly Report on Form 10-Q and our
Quarterly Report on Form 10-Q for the quarter ended February 2, 2007. We disclaim any intention or
obligation to update or revise any forward-looking statements, whether as a result of new
information, future events or otherwise.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As disclosed in our Annual Report on Form 10-K/A for the year ended October 31, 2006, our
major market risk exposure relates to adverse fluctuations in certain commodity prices, interest
rates, security prices and foreign currency exchange rates. We believe our exposure associated with
these market risks has not changed materially since October 31, 2006. We have not acquired any new
derivative financial instruments since October 31, 2006.
ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
In connection with the restatement of our Annual Report on Form 10-K/A for the year ended
October 31, 2006 and the preparation of our Quarterly Report on Form 10-Q for the quarter ended
February 2, 2007, and under the supervision and with the participation of our management, including
our Chief Executive Officer and Chief Financial Officer, we evaluated the effectiveness of the
design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under
the Securities Exchange Act of 1934 (the Exchange Act)). This evaluation identified a material
weakness in our internal control over financial reporting related to the timing of certain
impairment charges associated with the placement of APS France into discontinued operations.
Specifically, we did not consider the application of EITF 01-5, Application of FASB Statement No.
52 to an Investment Being Evaluated for Impairment That Will Be Disposed of (EITF 01-5) at the
time of the preparation and review of our third quarter and fiscal year end financial statements
for fiscal 2006. As a result, we did not record in our third quarter of fiscal 2006 an impairment
charge related to the write off of the currency translation adjustment account balance, in
accordance with the requirements of EITF 01-5. This issue came to our attention during the process
of preparing financial statements for our first fiscal quarter of 2007. These impairment charges
should have been recorded in fiscal 2006 through the application of EITF 01-5. Solely as a result
of this material weakness, we have concluded that our disclosure controls and procedures were not
effective as of the end of our fiscal year ended October 31, 2006, and as of the end of our first
fiscal quarter ended February 2, 2007.
Management has taken specific actions to remediate the material weakness described above. Key
internal personnel have thoroughly reviewed EITF 01-5 and have implemented controls to ensure that
it is considered and appropriately applied to future transactions. After these actions were taken,
and under the supervision and with the participation of our management, including our Chief
Executive Officer and Chief Financial Officer, we evaluated the effectiveness of the design and
operation of our disclosure controls and procedures. Based upon that evaluation, the Chief
Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered
by this report, our disclosure controls and procedures were effective.
Changes in Internal Control over Financial Reporting
As described above, management has taken specific actions to remediate the material weakness
related to the identification of accounting requirements for foreign currency translation
adjustments for discontinued operations. Key internal personnel have thoroughly reviewed EITF 01-5
and have implemented controls to ensure that EITF 01-5 is considered and appropriately applied to
future transactions. We believe these actions have effectively remediated the material weakness
reported previously.
24
In addition to the remediation activities described above, we also upgraded our SAP enterprise
resource planning system from version 4.6 to ECC 6.0. The upgrade will allow us to install
significant functionality improvements and changes that would not have been available with the
previous version of SAP. The upgrade was not a response to any identified deficiency or weakness
in our internal control over financial reporting.
Other than as described above, there was no change in our internal control over financial
reporting identified in connection with the evaluations referred to above that occurred during the
fiscal quarter ended May 4, 2007 that materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting. Because of its inherent limitations,
internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that degree of compliance with
the policies or procedures may deteriorate.
25
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are a party to various lawsuits, proceedings and claims arising in the ordinary course of
business or otherwise. Many of these disputes may be resolved without formal litigation. The amount
of monetary liability resulting from the ultimate resolution of these matters cannot be determined
at this time. As of May 4, 2007, we had recorded approximately $4.9 million in loss reserves for
certain of these matters. In light of the reserves we have recorded, at this time we believe the
ultimate resolution of these lawsuits, proceedings and claims will not have a material adverse
impact on our business, results of operations or financial condition. Because of the uncertainty
inherent in litigation, however, it is possible that unfavorable resolutions of one or more of
these lawsuits, proceedings and claims could exceed the amount currently reserved and could have a
material adverse effect on our business, results of operations or financial condition.
We
became aware of a potential reporting violation of the Emergency Planning and Community
Right to Know Act at our Sydney, Nebraska facility during an internal audit of the
facility. Subsequently, we voluntarily disclosed this matter and submitted complete and updated
reports to the United States Environmental Protection Agency and the State of Nebraska. We will
work closely with the Environmental Protection Agency to resolve this matter. At the current time,
we cannot, with reasonable certainty, estimate the amount of any costs ADC may incur in connection
with this matter, however, we do not expect the resolution of this matter to have a material impact
on our financial statements.
ITEM 1A. RISK FACTORS
The discussion of our business and operations should be read together with the risk factors
contained in Item 1A of our Annual Report on Form 10-K/A for the fiscal year ended October 31, 2006
and in Part II, Item 1A of our Quarterly Report on Form 10-Q for the quarter ended February 2, 2007
filed with the Securities and Exchange Commission, which describe various risks and uncertainties
to which we are or may become subject. These risks and uncertainties have the potential to affect
our business, financial condition, results of operations, cash flows, strategies or prospects in a
material and adverse manner. We are updating the risk factors set forth in our Annual Report on
Form 10-K/A by including the following risk factor:
We are becoming increasingly dependent on significant capital deployment initiatives driven by
our customers.
Our business increasingly is focused upon the sale of products serving significant
customer initiatives for expanded broadband capabilities deep into their networks. Examples of
products serving these initiatives include our FTTX solutions and products used in enterprise
networks. These generally are utilized outside the central offices of our customers, where we
traditionally sold most of our products, and they often are deployed in connection with the
construction of specific network projects. To date, our experience has been that the deployment of
capital for such network projects is driven by our customers priorities and the needs of their
specific projects. For this reason, the short-term demand for our products can fluctuate
significantly and our ability to forecast sales from quarter to quarter is diminished
significantly. Further, changes in the scope, our ability to meet the requirements of a project or a customers
commitment to a project can result in deferred or lost revenues as well as potential charges (such
as, but not limited to, inventory write-offs or charges associated with terminating the employment
of employees) in the event a planned project is delayed, changed or never implemented. In
addition, the competition to sell our products can be very intense as the projects often utilize
new products that were not previously used in networks. The continued sale of these products by us
also will depend upon the continued build-out by our customers of networks that utilize these
products. We cannot assure that these deployments will continue or that our products will be
selected for these deployments on a consistent basis.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
26
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Our annual meeting of shareowners was held on March 6, 2007. At the annual meeting, John J.
Boyle III, William R. Spivey, Ph.D., Robert E. Switz and Larry W. Wangberg were elected as
directors for terms expiring at the annual meeting of our shareowners in 2010. The following table
shows the vote totals with respect to the election of these directors:
|
|
|
|
|
|
|
|
|
|
|
For |
|
Withheld |
John J. Boyle III |
|
|
94,007,314 |
|
|
|
7,325,986 |
|
William R. Spivey Ph.D. |
|
|
98,543,039 |
|
|
|
2,790,261 |
|
Robert E. Switz |
|
|
98,480,971 |
|
|
|
2,852,328 |
|
Larry W. Wangberg |
|
|
98,869,590 |
|
|
|
2,463,710 |
|
At the annual meeting our shareowners also approved the setting of the number of directors on
the board of directors at ten. The following table shows the vote totals with respect to setting
the number of directors at ten:
|
|
|
|
|
For |
|
Against |
|
Abstain |
94,936,912
|
|
5,567,729
|
|
828,657 |
Finally, the shareowners ratified the appointment of Ernst & Young LLP as our independent
registered public accounting firm for the fiscal year ending October 31, 2007. The following table
shows the vote totals with respect to the ratification of Ernst & Young LLP as our independent
registered public accounting firm:
|
|
|
|
|
For |
|
Against |
|
Abstain |
99,988,174
|
|
522,511
|
|
822,614 |
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS
a. Exhibits
See Exhibit Index
on page 29 for a description of the documents that are filed as exhibits to
this Quarterly Report on Form 10-Q or incorporated by reference herein. Any document incorporated
by reference is identified by a parenthetical referencing the SEC filing which included the
document.
27
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
|
|
|
|
|
Dated: June 6, 2007 |
ADC TELECOMMUNICATIONS, INC.
|
|
|
By: |
/s/ James G. Mathews
|
|
|
|
James G. Mathews |
|
|
|
Vice President, Chief Financial Officer
(Principal Financial Officer and Duly Authorized Officer) |
|
|
28
ADC TELECOMMUNICATIONS, INC.
EXHIBIT INDEX TO FORM 10-Q
FOR THE THREE MONTHS ENDED MAY 4, 2007
|
|
|
Exhibit |
|
|
No. |
|
Description |
|
|
|
3a
|
|
Restated Articles of Incorporation of ADC Telecommunications, Inc., conformed to
incorporate amendments dated January 20, 2000, June 30, 2000, August 13, 2001, March
2, 2004 and May 9, 2005. (Incorporated by reference to Exhibit 3-a to ADCs Quarterly
Report on Form 10-Q for the quarter ended July 29, 2005.) |
|
|
|
3b
|
|
Restated Bylaws of ADC Telecommunications, Inc. effective April 18, 2005.
(Incorporated by reference to Exhibit 3-f to ADCs Quarterly Report on Form 10-Q for
the quarter ended July 29, 2005.) |
|
|
|
4a
|
|
Form of certificate for shares of Common Stock of ADC Telecommunications, Inc.
(Incorporated by reference to Exhibit 4-a to ADCs Quarterly Report on Form 10-Q for
the quarter ended April 29, 2005.) |
|
|
|
4b
|
|
Rights Agreement, as amended and restated as of May 9, 2007, between the Company and
Computershare Investor Services, LLC, as Rights Agent (which includes as Exhibit A,
the Form of Certificate of Designation, Preferences and Right of Series A Junior
Participating Preferred Stock, as Exhibit B, the Form of Rights Certificate, and as
Exhibit C, the Summary of Rights to Purchase Preferred Shares). (Incorporated by
reference to Exhibit 4-b to ADCs Form 8-A/A filed on May 10, 2007.) |
|
|
|
4c
|
|
Indenture dated as of June 4, 2003, between ADC Telecommunications, Inc. and U.S. Bank
National Association. (Incorporated by reference to Exhibit 4-g of ADCs Quarterly
Report on Form 10-Q for the quarter ended July 31, 2003.) |
|
|
|
4d
|
|
Registration Rights Agreement dated as of June 4, 2003, between ADC
Telecommunications, Inc. and Banc of America Securities LLC, Credit Suisse First
Boston LLC and Merrill Lynch Pierce Fenner & Smith Incorporated as representations of
the Initial Purchase of ADCs 1% Convertible Subordinated Notes due 2008 and Floating
Rate Convertible Subordinated Notes due 2013. (Incorporated by reference to Exhibit
4-h to ADCs Quarterly Report on Form 10-Q for the quarter ended July 31, 2003.) |
|
|
|
31a
|
|
Certification of principal executive officer required by Exchange Act Rule 13a-14(a). |
|
|
|
31b
|
|
Certification of principal financial officer required by Exchange Act Rule 13a-14(a). |
|
|
|
32
|
|
Certifications furnished pursuant to 18 U.S.C. 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002. |
29