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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
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(Mark One) |
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
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For the fiscal year ended October 31, 2005. |
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OR |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
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For the transition period
from to . |
Commission File No. 0-1424
ADC Telecommunications, Inc.
(Exact name of registrant as specified in its charter)
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Minnesota |
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41-0743912 |
(State or other jurisdiction of
incorporation or organization) |
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(I.R.S. Employer
Identification No.) |
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13625 Technology Drive
Eden Prairie, Minnesota
(Address of principal executive offices) |
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55344-2252
(Zip Code) |
Registrants telephone number, including area code:
(952) 938-8080
Securities registered pursuant to Section 12(b) of the
Act:
None
Securities registered pursuant to Section 12(g) of the
Act:
Common Stock, $.20 par value
Preferred Stock Purchase Rights
Indicate by checkmark if the registrant is a well-known seasoned
issuer, as defined in Rule 405 of the Securities
Act. þ Yes o No
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act. o Yes þ No
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. þ Yes o No
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K is
not contained herein, and will not be contained, to the best of
registrants knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this
Form 10-K or any
amendment to this
Form 10-K. þ
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, or a non-accelerated
filer. See definition of accelerated filer and large
accelerated filer in
Rule 12b-2 of the
Exchange Act. (Check one):
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Large accelerated filer þ
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Accelerated filer o
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Non-accelerated filer o
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Indicate by check mark whether registrant is a shell company (as
defined in
Rule 12b-2 of the
Exchange
Act). o Yes þ No
The aggregate market value of voting and non-voting stock held
by non-affiliates of the registrant based on the last sale price
of such stock as reported by The NASDAQ Stock
Market®
on April 29, 2005, was $1,672,086,540.00.
The number of shares outstanding of the registrants common
stock, $0.20 par value, as of January 11, 2006, was
116,801,210.
DOCUMENTS INCORPORATED BY REFERENCE
A portion of the information required by Part III of this
Form 10-K is
incorporated by reference from portions of our definitive proxy
statement for our 2006 Annual Meeting of Shareowners to be filed
with the Securities and Exchange Commission.
PART I
ADC Telecommunications, Inc. (we, us or
ADC) was incorporated in Minnesota in 1953 as
Magnetic Controls Company. We adopted our current name in 1985.
Our World Headquarters is located at 13625 Technology Drive in
Eden Prairie, Minnesota.
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 are primarily used in
the last mile/kilometer portion of networks. This
network of copper, coaxial cable, fiber lines, wireless
facilities and related equipment link 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.
Our customers include local and long-distance telephone
companies, 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. We offer broadband connectivity systems,
enterprise systems, wireless transport and coverage optimization
systems, business access systems and professional services to
our customers through the following two reportable business
segments:
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Broadband Infrastructure and Access; and |
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Professional Services (previously known as Integrated Solutions). |
Our Broadband Infrastructure and Access business provides
network infrastructure products for wireline, wireless, cable,
broadcast and enterprise network applications. These products
consist of:
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connectivity systems and components that provide the
infrastructure to networks to connect Internet, data, video and
voice services over copper, coaxial and fiber-optic
cables; and |
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access systems used in the last mile/kilometer of wireline and
wireless networks to deliver high-speed Internet, data and voice
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 corporate website address is www.adc.com. In the
Financial Information category of the Investor
Relations section of our website, we make our annual reports on
Form 10-K,
quarterly reports on
Form 10-Q, current
reports on
Form 8-K and
amendments to these reports available free of charge as soon as
reasonably practicable after such reports are filed with or
furnished to the United States Securities and Exchange
Commission (the SEC). The Corporate
Governance category of the Investor Relations section of
our website also contains copies of our Financial Code of
Ethics, our Principles of Corporate Governance, our Global
Business Conduct Program, our Articles of Incorporation and
Bylaws and the charter of each committee of our Board of
Directors. Each of these documents can also be obtained free of
charge (except for a reasonable charge for duplicating exhibits
to our reports on
Forms 10-K, 10-Q
or 8-K) in print
by any shareowner who requests them from our Investor Relations
department. The Investor Relations departments email
address is investor@adc.com and its mail address is: Investor
Relations, ADC Telecommunications,
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Inc., P.O. Box 1101, Minneapolis, Minnesota 55440-1101.
Information on our website is not incorporated by reference into
this Form 10-K.
As used in this report, fiscal 2003, fiscal 2004, fiscal 2005
and fiscal 2006 refer to our fiscal years ended or ending
October 31, 2003, 2004, 2005 and 2006, respectively.
Industry Background
Our products and services are deployed primarily by
communications service providers and the owners/operators of
private enterprise networks. The competition to attract and
retain customers in our industry is intense. Further, the market
for communications services being demanded by end-users is
undergoing an evolution in which customers expect to receive a
variety of broadband communications services over a single
network at lower, often flat-rate, prices. In this environment,
we believe those equipment providers who provide products and
services that permit network operators and communications
service providers to operate more efficiently and at a lower
cost, while meeting the changing demands of end-users, will be
in the best position to win market share and grow their
businesses.
The competition in our industry has been extremely intense
following the downturn in the communications industry that
occurred generally during calendar years 2001 through 2003. In
connection with the downturn, many of our customers reduced
their equipment purchases and deferred capital spending from
previous levels. Our customers are dependent on the level of
end-user demand for Internet, data, video and voice services,
and they are likely to defer significant network expansions when
they do not believe there is significant demand for these
services. In addition, some of our customers experienced serious
financial difficulties, including bankruptcy filings or
cessation of operations. These factors, among others, led to the
existing fierce competition among vendors of communications
equipment and related services to protect their market shares
and placed significant pressure on the prices at which companies
such as ours are able to sell their products and services.
Coupled with this intense competition, the market for
communications services being demanded by
end-users continues to
evolve. Specifically, we believe there are two key elements in
this evolution:
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First, businesses and consumers worldwide are becoming
increasingly dependent on broadband, multiservice communications
networks to conduct daily communications tasks. People and
businesses increasingly are accessing the Internet and using
Web-based software applications through broadband connections.
The growing popularity of applications such as digital video and
audio programs, 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
further increasing the need for broadband network infrastructure; |
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Second, end-users of communications services increasingly expect
to do business with service providers or develop their own
networks that can provide all of their communications needs over
a single network connection at a low price. 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 as opposed to each
service being conducted over a separate connection. We believe
the competition among service providers to retain new customers
over these more fully integrated networks is causing services to
be offered more frequently at low, flat-rate prices as opposed
to prices based on metered usage. |
Other factors such as regulatory changes and industry
consolidation among our customers and competitors also will
likely impact the competitive landscape of our industry
significantly. Fundamentally, however, we expect the demand for
greater levels of communications network capacity provided in
low priced, bundled services will create new
opportunities to develop and market infrastructure elements that
will allow networks to provide more robust services while
operating more efficiently. We believe this will be especially
true in the last mile/kilometer portion of networks
where our products and services are primarily
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used. It is in this section of networks where bottlenecks in the
high-speed delivery of communications services are most likely
to be pronounced.
Strategy
Our aim is to be the global leader in the provisioning of
communications network infrastructure solutions and services.
The core of our business has long been based in providing the
infrastructure elements that connect equipment in communications
networks with an emphasis on solutions serving the last
mile/kilometer of a network. We believe our experience
with network infrastructure solutions provides us with
sustainable competitive advantages in this core business. To
advance this core business, in recent years we have divested
businesses that were not profitable or did not aid our strategic
vision. In addition, we have grown our business in ways that we
believe complement our strategic focus.
Ultimately we are working to implement a growth strategy around
our network infrastructure business that includes the following
key elements:
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a heightened focus on the needs of our customer, delivering
customer-specific solutions, high quality products and
world-class customer service; |
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sales growth through market share gains, new product
introductions and expansion into adjacent and related markets; |
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development of new sales channels and market opportunities
through the use of partnerships and alliances with other
equipment vendors, distributors, resellers and systems
integrators; |
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lowering our cost structure through improved operational
efficiencies and economies of scale to compete effectively in a
more cost-conscious marketplace; and |
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product portfolio additions and enhancements through both
strategic acquisitions and our own research and development
process. |
Customer Focus. We are committed to helping our customers
maximize their return on investment, evolve their networks and
simplify network deployment challenges in providing
communications services to end-users. We strive to offer
customer-specific solutions, price competitive products that
offer great functionality and quality, and world-class customer
service that offers on-time product delivery and highly
responsive support. We believe those companies that best service
their customers with compelling value propositions that include
the aforementioned elements hold a competitive advantage in
efforts to grow their businesses.
Growing Sales. In the current environment of constrained
capital spending by communications service providers, we believe
that we must grow our market share to significantly grow our
business. We are undertaking several initiatives in our efforts
to gain market share. Specifically, we look to sell more of our
current portfolio to our existing customers, introduce new
products to our existing customers, and introduce the entire ADC
product portfolio to new customers. The cornerstone of these
initiatives is our commitment to focus on the needs of our
customers. We are an industry leader in the areas of Engineer to
Order and Configure to Order. These two processes provide our
customers with customized product solutions that fulfill their
requirements. We also are committed to the development and
introduction of new products that have applications in our
current markets and as adjacent markets focused primarily on the
last mile/kilometer of networks. Examples of this
are new products and services for IPTV (Internet Protocol TV),
VOIP (Voice over Internet Protocol), Carrier Ethernet, Metro
Ethernet, and Wireless Coverage and Capacity solutions. The
results of our market share growth initiatives can be seen in
our 2005 fiscal year results with 23.5% growth (excluding KRONE)
in our core business against an overall market growth of
approximately 9%.
Development of New Sales Channels. We also are committed
to the development of more sales channels that can deliver our
products into various market segments. We continuously seek to
partner with other companies serving the public and private
communication network markets to offer more complete solutions
to customer needs. Our connectivity products in particular are
conducive to incorporation by other equipment vendors into a
systems-level solution. We also believe there are opportunities
for us to sell more of
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our products through indirect sales channels, including System
Integrators and Value Added Resellers. We now have over 500
Value Added Reseller partners worldwide. In addition, we are
partnering and expanding our relationships with distribution
companies such as Anixter and Rexel that make our products more
readily available to a wider base of customers worldwide.
Lowering Cost Structure. We remain committed to lower our
overall cost structure and be a low-cost industry leader. Over
the next three years we want to work toward an operating margin
of 14% or better (exclusive of impairment, restructuring and
acquisition-related charges, amortization of purchased
intangibles and stock-based compensation expenses). To meet this
goal we must contain costs. We have several initiatives
currently underway that include relocating production facilities
from high-cost geographic areas to lower cost areas and
streamlining certain warehousing activities to reduce
duplicative functions. For instance, we are moving certain
manufacturing operations to the Czech Republic to take advantage
of reduced operating costs there compared to other areas in
Europe. We also are aggressively pursuing manufacturing
opportunities in the Asia-Pacific region. In fiscal 2006 we also
intend to advance towards our operating margin goal by
transitioning our operations in Europe and Asia onto our global
enterprise resource planning system.
Product Portfolio Additions. We continue to invest in
research and development initiatives and to search for
appropriate acquisition opportunities to strengthen our core
product portfolio. Our efforts are focused on opportunities
within our existing markets, as well as opportunities in
adjacent or related markets that will strengthen our product
offerings. In addition, we are focused on acquisitions that may
enhance our geographic operations. We also will continue to
evaluate and monitor our existing business and product lines for
growth and profitability potential. If we believe it necessary,
we will deemphasize or divest product lines and businesses that
we no longer believe can advance our strategic vision.
In fiscal 2004 and 2005, we divested five businesses that either
were not profitable or that we did not believe fit within our
strategic focus. We also completed three important acquisitions
during this time.
In fiscal 2004, we acquired the KRONE Group (KRONE),
a global supplier of connectivity solutions and cabling products
used in public access and enterprise networks. KRONEs
product and service offerings are an extension of our own core
connectivity competencies. The acquisition of KRONE expanded our
presence in the global marketplace and increased our percentage
of sales outside the United States from approximately 25% in
fiscal 2003 to approximately 45% in fiscal 2005. The acquisition
also provided us with an established position in the enterprise
customer market that augmented our historical service provider
customer base.
In fiscal 2005, we acquired Fiber Optic Network Solutions Corp.
(FONS) and OpenCell, Corp. (OpenCell).
FONS is a leading manufacturer of high-performance passive
optical components and fiber optical cable packaging,
distribution and connectivity solutions. The FONS acquisition
expanded and enhanced our existing line of
fiber-to-the-x
solutions (i.e., the deployment of fiber based networks closer
to the ultimate consumer, which is sometimes referred to as
FTTX) in a fast growing market. OpenCell is a
manufacturer of digital fiber-fed Distributed Antenna Systems
and shared multi-access radio frequency network equipment. The
OpenCell acquisition enhanced our
Digivance®
wireless solutions that are used to extend coverage and
accommodate growing capacity demands of wireless networks.
Specifically, we believe the OpenCell technology will allow us
to develop a
Digivance®
platform that will work across a wider range of communications
frequencies and network protocols.
Our ability to implement our strategy effectively is subject to
numerous uncertainties, the most significant of which are
described in Part 1, Item 1A Risk Factors
in this Form 10-K.
We cannot assure you that our efforts will be successful.
Product and Service Offering Groups
Our Broadband Infrastructure and Access business focuses on
broadband connectivity products for a variety of network
applications, DSL offerings and wireless products that improve
and extend network coverage and capacity. Broadband
Infrastructure and Access products accounted for approximately
80.7%, 80.9%, and 77.2% of our net sales in fiscal 2005, 2004,
and 2003, respectively.
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Our Professional Services business focuses on planning,
deploying and maintaining network infrastructure. Professional
Services products and services accounted for approximately
19.3%, 19.1%, and 22.8% of our net sales in fiscal 2005, 2004,
and 2003, respectively. The primary products and services
offered by each of these segments are described below.
See Note 15 to the Consolidated Financial Statements in
Item 8 of this
Form 10-K for
financial information regarding our two business segments as
well as information regarding our assets and sales by geographic
region.
Broadband Infrastructure and Access
Our Broadband Infrastructure and Access products are used in
both public and enterprise (private business and government)
networks. In public networks, our products are located primarily
in serving offices for telephone, cable tv, wireless and other
communication service providers. These facilities contain the
equipment used in switching, routing and transmitting incoming
and outgoing communications channels. Some of our products are
also located in the public networks outside the serving offices
and on end-users premises. As FTTX and the need for more
flexible wireless coverage solutions continue to expand, we
expect to see growth in the use of our products outside the
serving offices. Our enterprise, private and governmental
network customers generally purchase our products for
installation in the networks located on their premises. We also
sell connection products for broadcast and entertainment
facilities. Broadband Infrastructure and Access products consist
of the following general product groupings:
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Broadband Connectivity Systems and Components |
Our connectivity devices are used in copper (twisted pair),
coaxial, fiber-optic, wireless and broadcast communications
networks. These products provide the physical interconnections
between network components or access points into networks.
Principally, these products include:
DSX and DDF Products. We manufacture digital signal
cross-connect (DSX) and digital distribution frame
(DDF) modules, panels and bays, which are designed
to terminate and cross-connect copper channels and gain access
to digital channels for Internet, data, video and voice
transmission. Within our DSX and DDF product group, we offer
solutions to meet global market needs for both twisted-pair and
coaxial cable solutions.
FTTX Products. ADCs
OmniReachtm
product family of fiber distribution terminals, fiber access
terminals, passive optical splitter modules, wavelength division
multiplexer modules, connectors and drop cables is designed to
bring flexibility in implementation and optimization of capital
infrastructure to customers deploying FTTX.
Fiber Distribution Panels and Frame Products. Fiber
distribution panels and frames, which are functionally similar
to copper cross-connect modules and bays, provide
interconnection points between
fiber-optic cables
entering a service providers serving office and
fiber-optic cables connected to fiber-optic equipment within the
serving office. Our fiber distribution panels and frames are
designed with special consideration of fiber-optic properties.
RF Signal Management Products. Our series of Radio
Frequency (RF) products are designed to meet the
unique performance requirements of video, voice and data
transmission over coaxial cable used in todays cable
television networks and telephony carrier networks. Our
RFWorx®
product family leads the industry by offering the
plug-and-play flexibility of combiners, splitters,
couplers and forward/reverse amplification modules in a single
platform designed for optimum cable management. The RFWorx
system provides network design engineers with the full breadth
of RF signal management tools that are essential in an evolving
video, voice and data communications environment.
Power Distribution and Protection Panels. Our
PowerWorx®
family of circuit breaker and fuse panels are designed to power
and protect network equipment in multi-service broadband
networks.
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Modular Fiber-Optic Cable Management Systems. Our
FiberGuide®
system is a modular cable management system that provides a
segregated, protected method of storing and managing fiber-optic
patch cords and cables within a service providers serving
office.
Structured Cabling Products. Our
TrueNet®
Structured cabling products are the cables, jacks, plugs,
jumpers, frames and panels used to connect desk top systems like
personal computers to the network switches and servers in large
enterprise campuses and condominium high-rise buildings. Our
TrueNet®
cabling products include various generations of unshielded
twisted-pair copper cable and apparatus capable of supporting
varying bandwidth requirements, as well as multi-mode fiber
systems used primarily to interconnect switches, servers and
commercial campus locations.
Broadcast and Entertainment Products. Broadcast and
Entertainment products are audio, video, data patching and
connectors used to connect and access worldwide broadcast radio
and television networks. The industry leading
Pro-Patch®
brand is recognized as the leader in digital broadcast patching.
Products include our
ProAxtm
triaxial connectors preferred by operators of mobile broadcast
trucks, DBS satellite and large venue, live broadcasts like the
Olympic games. A new line of our HDTV products exceeds the
highest performance standards in the new digital broadcast
industry.
Other Connectivity Products. A variety of other products
are used by telecommunications service providers and private
networks to connect, monitor and test portions of their
networks, such as patch cords, media converters, splitter
products and jacks and plugs.
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Wireless Systems and Components |
Our wireless systems and components help improve and extend the
coverage and capacity of wireless communications networks. These
products include:
Cellular Coverage/ Capacity Enhancement Solutions. Our
Digivance®
family of wireless systems products includes solutions that
address a wide range of coverage and capacity challenges for
wireless network operators. These solutions include
(i) applications to address challenging locations such as
tunnels, traffic corridors and urban centers, (ii) cellular
base station hotels that serve significant segments of a
metropolitan area, (iii) neutral host applications that
serve multiple carriers simultaneously, and (iv) indoor
products that provide complete coverage for a single building or
an entire campus. These solutions are sold directly to the major
cellular operators, to the national and regional carriers
including those in rural markets, and to neutral host facility
providers who lease or resell coverage and capacity to the
cellular carriers.
Tower Top Amplifiers. We develop, manufacture and market
the
ClearGain®
family of tower-top amplifier products, which are distributed
globally for all major air interfaces. These products amplify a
wireless signal and are sold primarily to wireless carriers.
Our wireless products improve signal quality by boosting the
uplink signal of mobile systems to increase receiver performance
and improve overall coverage. The improvements in quality of
service allow mobile subscribers to place more calls, make
longer calls, and successfully complete calls in an expanded
geographic area.
Our
Soneplex®
and
HiGain®
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. The LoopStar product family provides
our customers with a flexible and economical optical transport
platform for both legacy voice and next-generation protocols.
The LoopStar portfolio provides last mile/kilometer
and inter-office data transport to support a variety of business
service offerings at a variety of different transmission rates.
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Professional Services
Professional services, which we offer in North America and
Europe, consist of systems 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 to consumers and
businesses.
Our professional services support both the multi-vendor and
multi-service delivery requirements of our customers. These
services support customers throughout the technology life-cycle,
from network design, build-out,
turn-up and testing to
ongoing maintenance and training, and are utilized by our
customers in creating and maintaining intra-office, inter-office
or coast-to-coast
networks. The provision of such services also allows us
additional opportunities to sell our hardware products, thereby
complementing our hardware business.
Sales and Marketing
Our products and services are used by customers in four primary
markets:
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the U.S. public communications network market, which
includes the four major U.S. telephone companies (Verizon,
BellSouth, SBC and Qwest), other local telephone companies,
long-distance carriers,
wireless service providers, cable television operators and
broadcasters; |
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the public and private network markets outside of the United
States; |
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the U.S. private and governmental markets, which include
business customers and governmental agencies that own and
operate their own Internet, data, video and voice networks for
internal use; and |
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other communications equipment vendors, who incorporate our
products into products and systems that they in turn sell into
the three markets listed above. |
Our customer base is relatively concentrated, with our top ten
customers accounting for 42.7%, 46.9%, and 56.7% of our net
sales in fiscal 2005, 2004, and 2003, respectively. The decline
in these customer concentration levels from 2004 to 2005 is
largely due to the KRONE acquisition, which gave us a more
diversified customer base throughout the world. The majority of
our sales are made to U.S. telecommunications service
providers. Verizon, BellSouth, Qwest and SBC collectively
accounted for approximately 25.7%, 30.7%, and 34.3% of our net
sales during fiscal 2005, 2004, and 2003, respectively. Our
largest customer, Verizon, accounted for 12.5%, 13.5%, and 12.9%
of our sales in fiscal 2005, 2004, and 2003, respectively.
Outside the United States, we market our products to telephone
operating companies, owners and operators of private enterprise
networks, cable television operators and wireless service
providers for networks located around the world. Our
non-U.S. net sales
accounted for approximately 45.4%, 39.5%, and 24.8% of our net
sales in fiscal 2005, 2004, and 2003, respectively. Although the
sales are not concentrated in any one country, our EMEA region
(Europe, Middle East and Africa) accounted for the largest
percentage of sales outside of North America. The increase in
international sales is due primarily to our 2004 acquisition of
KRONE, which has a greater mix of international sales.
Our direct sales force completes a majority of our sales. We
maintain sales offices throughout the world. In the United
States, our products are sold directly by our sales personnel as
well as through value-added resellers, distributors and
manufacturers representatives. Outside the United States,
our products are sold directly by our field sales personnel and
by independent sales representatives and distributors, as well
as through other public and private network providers that
distribute products. Nearly all of our sales to enterprise
networks outside the United States are conducted through third
party distributors who have historical relationships with KRONE.
We use these relationships to sell our historical products as
well as KRONEs historical products.
We maintain a customer service group that supports our field
sales personnel and our third-party distributors. The customer
service group is responsible for application engineering,
customer training, entering
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orders and supplying delivery status information. We also have a
field service-engineering group that provides
on-site service to
customers.
Research and Development
We believe that our future success depends, in part, on our
ability to adapt to the rapidly changing communications
environment, to maintain our significant expertise in core
technologies and continue to meet and anticipate our
customers needs. We continually review and evaluate
technological changes affecting the communications market and
invest in applications-based research and development. The focus
of our research and development activities will change over time
based on particular customer needs and industry trends as well
as our decisions regarding those areas in which we believe we
are most likely to achieve success. As part of our long-term
strategy, we intend to continue an ongoing program of new
product development that combines internal development efforts
with acquisitions and strategic alliances relating to new
products and technologies from sources outside ADC. Our expenses
for internal research and development activities were
$71.6 million, $59.1 million, and $59.9 million
in fiscal 2005, 2004, and 2003, respectively. These amounts
represented 6.1%, 7.6%, and 10.3% of our total revenues in each
of those respective fiscal years. These percentages have
decreased over time as we became more focused on the initiatives
we will fund and as our operations became more concentrated in
infrastructure products.
During fiscal 2005, our research and development activities were
directed at primarily the following areas:
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connectivity products for FTTX initiatives; |
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high-performance structured cables, jacks, plugs, jumpers,
frames and panels to enable the use of increasingly
higher-performance IP network protocols within private networks; |
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connectivity products that enable the use of network protocols
within the public communications network, which is used by our
customers to more effectively deploy data services over their
historic voice-based networks; and |
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digital interfaces for wireless networks that will enable
software-based products to interact with the physical elements
of these networks. |
New product development often requires long-term forecasting of
market trends, the development and implementation of new
processes and technologies and a prioritization of substantial
capital commitment. Due to the uncertainties inherent in each of
these elements, there can be no assurance that any new products
we develop will achieve market acceptance or be profitable. In
addition, as we balance product development with our efforts to
achieve sustained profitability, we are more selective in our
research and development in order to focus on projects that we
believe directly advance our strategic aims and have a higher
probability to return our investment.
Competition
Competition in the communications equipment industry is intense,
particularly in light of reduced spending levels by our
customers as well as the consolidation of our customer base.
Many of our competitors have more extensive engineering,
manufacturing, marketing, financial and personnel resources than
us. In addition, rapid technological developments within the
communications industry result in frequent changes among our
group of competitors. Currently, our primary competitors include:
For Broadband Infrastructure and Access products: 3M,
ADTRAN, Andrew, CommScope, Corning, Furukawa, Nexans, Powerwave,
Schmitt, Telect, and Tyco.
For Professional Services: Alcoa Fujikawa, Butler,
Graniou, Lucent Technologies, NEC, SAG, and SPIE.
8
We believe that our success in competing with other
communications product manufacturers depends primarily on the
following factors:
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our long-term customer relationships; |
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our brand recognition and reputation as a financially sound
long-term supplier to our customers; |
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our engineering (research and development), manufacturing, sales
and marketing skills; |
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the price, quality and reliability of our products; and |
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our delivery and service capabilities. |
We experience increased pricing pressures from competitors, as
well as general pricing pressure from our customers as part of
their cost reduction efforts. Price will likely continue to be a
major factor in the markets in which we compete and we believe
our potential ability to offset any downward pressure on prices
primarily would be driven by the above listed success factors.
We believe that technological change, the increasing addition of
Internet, data, video and voice services to integrated
broadband, multimedia networks, continuing regulatory changes
and industry consolidation will continue to cause rapid
evolution in the competitive environment of the communications
equipment market. At this time, it is difficult to predict the
full scope and nature of these changes. There can be no
assurance that we will be able to compete successfully with
existing or new competitors. Competitive pressures may
materially and adversely affect our business, operating results
or financial condition.
Manufacturing and Suppliers
We manufacture a variety of products that are primarily
fabricated, assembled and tested in our own facilities around
the world. In an effort to reduce costs and improve customer
service, we generally attempt to manufacture our products in the
region of the world where they will be deployed. Our strategy to
reduce costs includes looking for opportunities to locate
manufacturing in low-cost areas as competitive dynamics require.
For instance, we recently announced an initiative to establish a
manufacturing facility in the Czech Republic, which will
replace and supplement other activities in Europe. We are also
looking for ways in which we can respond quickly to changes in
market factors in our manufacturing and supply chain. Like many
companies in our industry, we are focusing on the Asia Pacific
region as a potential place to locate manufacturing facilities.
As part of our acquisition of FONS, we obtained additional
manufacturing capabilities in China and Mexico. Our global
sourcing team uses vendors from around the world to procure key
components and raw materials at advantageous prices and lead
times. The manufacturing process for our electronic products
consists primarily of assembly and testing of electronic systems
built from fabricated parts, printed circuit boards and
electronic components. The manufacturing process for our
connectivity products is vertically integrated and consists
primarily of the fabrication of jacks, plugs, cables and other
basic components from raw materials as well as the assembly of
components and the testing of products. Our sheet metal, plastic
molding, stamping and machining capabilities permit us to
configure components to customer specifications, provide
competitive lead times and control production costs. We also
utilize several outsourced manufacturing companies to
manufacture, assemble and test certain of our products within
our Broadband Infrastructure and Access segment. We estimate
that products obtained from outsourced manufacturers accounted
for approximately 20% of our net sales for the Broadband
Infrastructure and Access segment in fiscal 2005.
We purchase raw materials and component parts from many
suppliers. These purchases consist primarily of copper wire,
optical fiber, steel, brass, nickel-steel alloys, gold,
plastics, printed circuit boards, solid state components,
discrete electronic components and similar items. Although many
of these items are
single-sourced, we have
experienced no significant difficulties to date in obtaining
adequate quantities. At this time, we are experiencing some
increase in the prices for raw materials we use to make our
products. To date, we have been able to mitigate most of these
increases through the greater purchasing power we now have
following our acquisitions of KRONE and FONS. These
circumstances could change, however, and we
9
cannot guarantee that sufficient quantities or quality of raw
materials and component parts will be as readily available in
the future or, if available, that we will be able to obtain them
at favorable prices.
Proprietary Rights
We own a portfolio of U.S. and foreign patents relating to our
products. These patents, in the aggregate, constitute a valuable
asset. We do not believe, however, that our business is
dependent upon any single patent or any particular group of
related patents.
We registered the initials ADC as well as the word
KRONE, each alone and in conjunction with specific
designs, as trademarks in the United States and various foreign
countries.
Seasonality
We believe the historical seasonality of our sales whereby there
was stronger demand for our products during our fourth fiscal
quarter ending October 31 may no longer apply to our
business. This seasonality trend in our sales generally existed
prior to the 2001-2003 downturn in the telecommunications
equipment market when our business was more focused on
central-office-based products. We believe our expansion into new
growth markets of FTTX, wireless and enterprises may have
changed this seasonality in our business. Our sales of these
products have so far fluctuated from quarter to quarter,
something we expect to continue. In addition, in fiscal 2005, it
appears that many of our customers may have accelerated their
annual capital spending in the first calendar-half of 2005.
While the historical seasonality trend of our
central-office-based business may no longer be apparent, we
still expect sales in our first fiscal quarter to be lower than
in other quarters. This is because of the number of holidays in
that quarter and the development of capital spending budgets
that many of our customers undertake during that time frame.
The working days by quarter in fiscal 2006 is 59 days in
the first quarter, 65 days in the second quarter,
62 days in the third quarter and 66 days in the fourth
quarter.
Employees
As of October 31, 2005, we employed approximately 8,200
people worldwide, which is an increase of approximately 700
employees since October 31, 2004. The increase includes
employees hired for our manufacturing operations and
approximately 90 employees who joined ADC as a result of the
OpenCell and FONS acquisitions.
Executive Officers of the Registrant
Our executive officers are:
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Officer | |
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Name |
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Robert E. Switz
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President and Chief Executive Officer |
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1994 |
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59 |
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Gokul V. Hemmady
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Vice President, Chief Financial Officer |
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1997 |
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45 |
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Michael K. Pratt
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Vice President, President, Wireline and Wireless Business Unit |
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2002 |
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51 |
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Patrick D. OBrien
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Vice President, President, Connectivity Business Unit |
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2002 |
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42 |
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Jeffrey D. Pflaum
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Vice President, General Counsel and Secretary |
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1999 |
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46 |
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Laura N. Owen
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Vice President, Human Resources |
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1999 |
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49 |
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Mary E. Quay
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Vice President, Worldwide Operations |
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2002 |
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James G. Mathews
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Vice President and Controller |
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2005 |
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54 |
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Mr. Switz joined ADC in January 1994 and served as
ADCs Chief Financial Officer from that date until August
2003, when he was named Chief Executive Officer. From 1988 to
1994, Mr. Switz was employed by
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Burr-Brown Corporation, a manufacturer of precision
micro-electronics, most recently as Vice President, Chief
Financial Officer and Director, Ventures and Systems Business.
Mr. Hemmady joined ADC in October 1997.
Mr. Hemmady served as ADCs Vice President and
Treasurer from October 1997 until August 2003. From May 2002
until August 2003, he also served as our Controller.
Mr. Hemmady was named Chief Financial Officer in August
2003. Prior to joining ADC, Mr. Hemmady was employed by
U S WEST International, a communications service
provider, where he served as Director of International Finance
from January 1996 to September 1997.
Mr. Pratt joined ADC in June 2002 as President of
ADCs Wireline Business Unit. In September 2004 he also was
named President of ADCs Wireless Business Unit. Prior to
joining ADC, Mr. Pratt served in a variety of positions,
including Vice President and General Manager of the Access
Systems Division of RELTEC Corporation, from 1996 to 1999. In
March 1999, RELTEC Corporation was acquired by Marconi, Inc., a
subsidiary of Marconi plc, a global telecommunications equipment
and solutions company. Mr. Pratt continued to serve as the
Vice President and General Manager of this business following
its acquisition, until he was promoted to Executive Vice
President of Marconi, Inc. in July 2000, a position he held
until joining ADC.
Mr. OBrien joined ADC in 1993 as a product
manager for the companys industry-leading DSX products
and, during the following eight years, he held a variety of
positions of increasing responsibility in the product management
area, including positions such as Vice President and General
Manager of copper and fiber connectivity products. He was named
President of ADCs Global Connectivity Solutions Business
Unit in September 2004. From May 2004 through August 2004,
Mr. OBrien served as President and Regional Director
of the Americas Region for ADC. Mr. OBrien also
served as President of our Copper and Fiber Connectivity
Business Unit from October 2002 to May 2004. Prior to joining
ADC, Mr. OBrien was employed by Contel Telephone for
six years in a network planning capacity.
Mr. Pflaum joined ADC in April 1996. Mr. Pflaum
became Vice President, General Counsel and Secretary of ADC in
March 1999 after having served as Associate General Counsel
since April 1996. Prior to joining ADC, he was an attorney with
the Minneapolis-based law firm of Popham Haik
Schnobrich & Kaufman.
Ms. Owen joined ADC as Vice President, Human
Resources in December 1997. Prior to joining ADC, Ms. Owen
was employed by Texas Instruments and Raytheon (which purchased
the Defense Systems and Electronics Group of Texas Instruments
in 1997), manufacturers of high-technology systems and
components. From 1995 to 1997, she served as Vice President of
Human Resources for the Defense Systems and Electronics Group of
Texas Instruments.
Ms. Quay joined ADC in 1977 and has served in a
variety of positions over her
28-year career at ADC.
During the last five years, Ms. Quay served as Vice
President of Manufacturing/ Operations, and during 2002,
Ms. Quay was named Vice President, Worldwide Operations.
Mr. Mathews joined ADC in 2005 as Vice President and
Controller. Prior to joining ADC, Mr. Mathews served as
Vice President-Finance and Chief Accounting Officer for
Northwest Airlines from 2000 to 2005. Prior to joining Northwest
Airlines, Mr. Mathews was chief financial and
administrative officer at
CARE-USA, the
worlds largest private relief and development agency.
Mr. Mathews also has held a variety of positions at Delta
Air Lines, including service as Deltas corporate
controller and corporate treasurer.
Our business faces many risks, all of which may not be described
below. Additional risks of which we are currently unaware or
believe to be immaterial may also result in events that could
impair our business operations. If any of the events or
circumstances described in the following risks actually occur,
our business, financial condition or results of operations may
suffer, and the trading price of our common stock could decline.
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Risks Related to Our Business
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Our operating results were adversely affected by the
significant downturn in the communications equipment industry
and the slowdown in the United States economy that occured
generally from 2001-2003, and there can be no assurance that we
will consistently maintain operating profitability in the
future. |
Our operating results during fiscal 2001, 2002 and 2003 were
significantly impacted by the substantial downturn in the
telecommunications equipment industry. We incurred significant
losses from continuing operations in our fiscal years 2001, 2002
and 2003. While we returned to profitability in fiscal 2004 and
are currently profitable, it is not clear that we will be able
to continue to achieve revenue and gross margin levels needed to
sustain profitability. Further, the increase in our 2004 revenue
was primarily because of our acquisition of KRONE in May 2004.
During this downturn, many of our customers reduced their
equipment purchases and deferred capital spending. Our customers
are dependent on the level of end-user demand for communications
services, and they are likely to defer significant network
expansions when they do not believe there is significant demand
for greater Internet, data, video and voice services. During the
downturn of the telecommunications industry that occurred in our
fiscal years 2001, 2002 and 2003, some of our customers
experienced serious financial difficulties, including bankruptcy
filings or cessation of operations.
The general slowdown in the United States economy in the early
part of this decade negatively impacted our business and
operating results. If general economic conditions in the United
States and globally do not continue to improve, and especially
if they worsen, we may experience material adverse effects on
our business, financial condition and results of operations.
Further, when our customers announce spending initiatives that
might positively impact sales of one or more of our products, it
is possible these customers contemporaneously will reduce
spending in a manner that would negatively impact one or more of
our other products.
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Shifts in our product mix may result in declines in our
gross margin. |
Our gross margins vary among our product groups and have
fluctuated from quarter to quarter as a result of shifts in
product mix (that is, how much of each product type we sell in
any particular quarter), the introduction of new products,
decreases in average selling prices and our ability to reduce
manufacturing and other costs. We expect such fluctuation in
gross profit to continue in the future. Both KRONE and FONS
historically sold certain products at margins lower than the
margins at which the majority of our products sold. The
integration of KRONE has negatively impacted our gross profit
margins, and it is likely that the integration of FONS will do
so as well. In addition, our gross margins could decrease based
on the amount of new products we sell that have lower startup
gross margins.
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We are becoming increasingly dependent on significant
capital deployment initiatives driven by our customers. |
Increasingly our business is focused upon the sale of products
serving significant customer initiatives for increased broadband
capabilities deep into their networks. Examples of products
serving these initiatives include our FTTX products, wireless
coverage solutions and products used in enterprise networks.
These products generally are utilized outside the central
offices, where we traditionally sold most of our products, of
our customer and 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 specific projects. For this reason, the demand for
our products can fluctuate significantly from quarter to
quarter. In addition, the competition to sell our products can
be very intense as the projects often utilize new products that
are not incumbent to networks. The continued sale of these
products by us will also be contingent upon the continued
build-out by our customers of networks that utilize these
products and the acceptance of our products into such networks.
We cannot assure that these deployments will continue or that
our products will be selected for these deployments on a
consistent basis.
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Consolidation among our customers could result in our
losing a customer or experiencing a slowdown as integration
takes place. |
We believe there likely will be continued consolidation among
our customers in order for them to increase market share,
diversify product portfolios and achieve greater economies of
scale. Consolidation may impact our business as our customers
focus on integrating their operations. We believe that in
certain instances customers engaged in integrating large-scale
acquisitions may scale back their purchases of network equipment
while the integration is ongoing. Further, once consolidation
occurs, our customers may choose to pare down the number of
vendors they use to source their equipment, although we have not
yet seen this impact. After a consolidation occurs, there can be
no assurance that we will continue to supply equipment to the
surviving communications service provider. The impact of
significant mergers on our business is likely to be unclear
until sometime after such transactions have closed.
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Our sales could be negatively impacted if one or more of
our key customers substantially reduces orders for our
products. |
Our customer base is relatively concentrated, with our top ten
customers accounting for 42.7%, 46.9%, and 56.7% of net sales
for fiscal years 2005, 2004, and 2003, respectively. While our
acquisition of KRONE diversified our customer base, our recent
acquisitions of FONS may have the effect of mitigating some of
this diversification. If we lose a significant customer for any
reason, including consolidation among our customer base, our
sales and gross margins would be negatively impacted. Further,
in the product areas where we believe the potential for revenue
growth is most pronounced (e.g., FTTX initiatives and wireless
products), our sales remain highly concentrated with the major
telephone companies. The loss of sales due to a decrease in
orders from a key customer could require us to record additional
impairment and restructuring charges or exit a particular
business or product line.
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In the aftermath of Hurricane Katrina, we may experience a
change in the sales of our products and services. |
We sell our products and services to customers operating in some
of the areas hardest hit by Hurricane Katrina. Communications
networks have been impacted adversely, along with other
infrastructure in this area. Although we are not certain about
the effect that Hurricane Katrina may have on sales of our
products and services, it is possible that we will experience
slower sales in the near term while affected customers work to
stabilize their networks and normalize operations. Moving
forward, there may also be a temporary upturn in our sales as
our customers work to replace damaged or destroyed network
elements in the areas impacted by the hurricane. Conversely, our
sales could decrease as our customers divert money from other
parts of their budgets to spend on rebuilding.
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Our market is subject to rapid technological change, and
to compete effectively, we must continually introduce new
products that achieve market acceptance. |
The communications equipment industry is characterized by rapid
technological changes, evolving industry standards, changing
market conditions and frequent new product and service
introductions and enhancements by our competitors. The
introduction of products using new technologies or the adoption
of new industry standards can make our existing products or
products under development obsolete or unmarketable. For
example, it is possible that FTTX initiatives may negatively
impact sales of non-fiber products. In order to grow and remain
competitive, we will need to adapt to these rapidly changing
technologies, to enhance our existing solutions and to introduce
new solutions to address our customers changing demands.
We may not accurately predict technological trends or the
success of new products in the communications equipment market.
New product development often requires long-term forecasting of
market trends, development and implementation of new
technologies and processes and a substantial capital commitment.
In addition, we do not know whether our products and services
will meet with market acceptance or be profitable. Many of our
competitors have greater engineering and product development
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resources than we do. Although we expect to continue to invest
substantial resources in product development activities, our
efforts to achieve and maintain profitability will require us to
be more selective and focused with our research and development
expenditures. If we fail to anticipate or respond in a
cost-effective and timely manner to technological developments,
changes in industry standards or customer requirements, or if we
have any significant delays in product development or
introduction, our business, operating results and financial
condition could be materially adversely affected.
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Strategic changes to our product portfolio may not yield
the benefits that we expect. |
In connection with the downturn in the communications industry,
we divested or ceased operating numerous product lines and
businesses that either were not profitable or did not match our
new strategic focus. We may make further divestitures or
closures of product lines and businesses. In addition, we have
recently made acquisitions that we believe are aligned with our
current strategic focus.
The impact of potential changes to our product portfolio and the
effect of such changes on our business, operating results and
financial condition are evolving and not fully known at this
time. If we acquire other businesses in our areas of strategic
focus, we may have difficulty assimilating these businesses and
their products, services, technologies and personnel into our
operations. These difficulties could disrupt our ongoing
business, distract our management and workforce, increase our
expenses and adversely affect our operating results and
financial condition. Furthermore, we may not be able to retain
key management, technical and sales personnel after an
acquisition. In addition to these integration risks, if we
acquire new businesses, we may not realize all of the
anticipated benefits of these acquisitions. Divestitures or
elimination of existing businesses or product lines could also
have disruptive effects and may cause us to incur material
expenses.
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If we are unable to garner customer support for our
combined portfolio following the FONS acquisition, we may not be
able to realize the gains we anticipated. |
Both ADC and FONS rely heavily on the business generated from
one customer for a large percentage of sales in the FTTX space.
If this particular customer decreases the amount of products it
purchases, or seeks out additional suppliers for products rather
than allowing us to consolidate the combined revenue share of
both ADC and FONS, the efficiencies that we projected with this
acquisition may not materialize.
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If we seek to secure additional financing, we may not be
able to obtain it. Also, if we are able to secure additional
financing, our shareowners may experience dilution of their
ownership interest or we may be subject to limitations on our
operations. |
We currently anticipate that our available cash resources, which
include existing cash, cash equivalents and available-for sale
securities, will be sufficient to meet our anticipated needs for
working capital and capital expenditures to execute our
near-term business plan, based on current business operations
and economic conditions. If our estimates are incorrect and we
are unable to generate sufficient cash flows from operations, we
may need to raise additional funds. In addition, if one or more
of our strategic acquisition opportunities exceeds our existing
resources, we may be required to seek additional capital. We do
not currently have any significant available lines of credit or
other significant credit facilities, and we are not certain that
we can obtain commercial bank financing on acceptable terms. If
we raise additional funds through the issuance of equity or
equity-related securities, our shareowners may experience
dilution of their ownership interests and the newly issued
securities may have rights superior to those of common stock.
See Risks Related to our Common Stock below. If we
raise additional funds by issuing debt, we may be subject to
restrictive covenants that could limit our operating flexibility
and interest payments could dilute earnings per share.
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Our industry is highly competitive and subject to
significant downward pricing pressure for our products. |
Competition in the communications equipment and related services
industry is intense. We believe our success in competing with
other manufacturers of communications equipment products and
related services will depend primarily on our engineering,
manufacturing and marketing skills, the price, quality and
reliability of our products, our delivery and service
capabilities and our control of operating expenses. We have
experienced and anticipate greater pricing pressures from
current and future competitors as well as our customers. Our
industry is currently characterized by many vendors pursuing
relatively few and very large customers, which provides our
customers with the ability to exert significant pressure on
their suppliers, both in terms of pricing and contractual terms.
Many of our competitors have more extensive engineering,
manufacturing, marketing, financial and personnel resources than
we do. As a result, other competitors may be able to respond
more quickly to new or emerging technologies or changes in
customer requirements, or offer more aggressive price reductions.
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Possible consolidation among our competitors could result
in a loss of sales. |
We expect to see continued consolidation among communication
equipment vendors. This could result in our competitors becoming
financially stronger and obtaining broader product portfolios.
It is possible that such consolidation could lead to a loss of
sales for us as our competitors increase their resources through
consolidation.
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Our operating results fluctuate significantly, and if we
miss quarterly financial expectations, our stock price could
decline. |
Our operating results are difficult to predict and may fluctuate
significantly from quarter to quarter. It is likely that our
operating results in some periods will be below investor
expectations. If this happens, the market price of our common
stock is likely to decline. Fluctuations in our future quarterly
earnings may be caused by many factors, including without
limitation:
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the volume and timing of orders from and shipments to our
customers; |
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work stoppages and other developments affecting the operations
of our customers; |
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the timing of and our ability to obtain new customer contracts
and sales recognition; |
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the timing of new product and service announcements; |
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the availability of products and services; |
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the overall level of capital expenditures by our customers; |
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market acceptance of new and enhanced versions of our products
and services; |
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variations in the mix of products and services we sell; |
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the location and utilization of our production capacity and
employees; and |
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the availability and cost of key components. |
Our expense levels are based in part on expectations of future
revenues. If revenue levels in a particular period are lower
than expected, our operating results will be affected adversely.
In addition, prior to fiscal 2001 and during fiscal 2004, our
operating results were subject to seasonal factors. We
historically had stronger demand for our products and services
in our fourth fiscal quarter ending October 31. Conversely,
we typically experienced weaker demand for our products and
services in the first fiscal quarter, primarily as a result of
the number of holidays in late November, December and early
January, the development of annual capital budgets by our
customers, as well as a general industry slowdown, during that
period. In our fourth fiscal quarter of 2005, we did not
experience this historical pattern of seasonality, primarily
because of less predictable spending patterns for our FTTX and
wireless products.
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The regulatory environment in which our customers operate
is changing. |
Although our business is not subject to a significant amount of
direct regulation, the communications service industry in which
our customers operate is subject to significant and evolving
federal and state regulation in the United States as well as
regulation in other countries. The United States
Telecommunications Act of 1996 (the Act) lifted
certain restrictions on the ability of companies, including the
major telephone companies and other ADC customers, to compete
with one another. The Act also made other significant changes in
the regulation of the telecommunications industry. These changes
generally increased our opportunities to provide solutions for
our customers Internet, data, video and voice needs. The
established telecommunications providers have stated that some
of these changes have diminished the profitability of additional
investments made by them in their networks, which reduces their
demand for our products. Recently, however, the Federal
Communications Commission (FCC) ended the practice
of forced
line-sharing,
which means that major telephone companies are no longer legally
mandated to lease space to DSL resellers. This ruling also
included language allowing major telephone companies to maintain
sole ownership of newly built networks that include fiber
deployment (i.e., FTTX). While it is anticipated that this
ruling will benefit us, there can be no assurance that it will
have any impact on sales of our products.
Additional regulatory changes affecting the communications
industry are anticipated both in the United States and
internationally. A European Union directive on waste electrical
and electronic equipment (WEEE) and the restriction
of hazardous substances (RoHS) in such equipment is
in the process of being implemented in member states. The
directive sets a framework for producers obligations in
relation to manufacturing (including the amounts of named
hazardous substances contained in products sold), labeling, and
treatment, recovery and recycling of electronic products in the
European Union. We have established policies and procedures to
comply with these directives as they are implemented in various
member states. Detailed regulations on practices and procedures
related to WEEE and RoHS are evolving in member states.
These changes could affect our customers and alter demand for
our products. Recently announced or future changes could also
come under legal challenge and be altered, thereby reversing the
effect of such regulations or changes and the impact we
expected. In addition, competition in our markets could
intensify as the result of changes to existing or new
regulations. Accordingly, changes in the regulatory environment
could adversely affect our business and results of operations.
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Customer payment defaults could have an adverse effect on
our financial condition and results of operations. |
As a result of adverse conditions in the communications market,
some of our customers have experienced and may continue to
experience serious financial difficulties. In some cases these
difficulties have resulted or may result in bankruptcy filings
or cessation of operations. If customers experiencing financial
problems default on paying amounts owed to us, we may not be
able to collect these amounts or recognize expected revenue. It
is possible those customers from whom we expect to derive
substantial revenue will default or that the level of defaults
will increase. Any material payment defaults by our customers
would have an adverse effect on our results of operations and
financial condition.
Some of our competitors engage in financing transactions with
some of their customers for the purchase of equipment. To remain
competitive, it may become necessary for us to offer similar
financing arrangements. If such financings occur, it would be
our intent to sell all or a portion of these commitments and
outstanding receivables to third parties. In the past, we have
sold some receivables with recourse and have had to compensate
the purchaser for the related losses.
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|
|
Conditions in global markets could affect our
operations. |
Our sales outside the United States accounted for approximately
45.4%, 39.5%, and 24.8% of our net sales in fiscal 2005, 2004,
and 2003, respectively. We expect
non-U.S. sales to
remain a significant percentage of net sales in the future. In
addition to sales and distribution in numerous countries, we own
or lease operations located in Australia, Austria, Belgium,
Brazil, Canada, Chile, France, Germany, Hungary, India,
Indonesia, Ireland, Italy, Japan, Malaysia, Mexico, New Zealand,
Norway, Philippines, Puerto Rico,
16
Russia, Singapore, South Africa, South Korea, Spain,
Sweden, Taiwan, Thailand, the United Arab Emirates, the United
Kingdom, the United States, Venezuela and Vietnam. Due to our
non-U.S. sales and
our
non-U.S. operations,
we are subject to the risks of conducting business globally.
These risks include, without limitation:
|
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|
local economic and market conditions; |
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|
political and economic instability; |
|
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|
unexpected changes in or impositions of legislative or
regulatory requirements; |
|
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|
fluctuations in foreign currency exchange rates; |
|
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|
tariffs and other barriers and restrictions; |
|
|
|
longer payment cycles; |
|
|
|
difficulties in enforcing intellectual property and contract
rights; |
|
|
|
greater difficulty in accounts receivable collection; |
|
|
|
potentially adverse taxes; and |
|
|
|
the burdens of complying with a variety of
non-U.S. laws and
telecommunications standards. |
We also are subject to general geopolitical and environmental
risks, such as terrorism, political and economic instability,
changes in the costs of key resources such as oil, changes in
diplomatic or trade relationships and natural disasters.
Economic conditions in many of the
non-U.S. markets
in which we do business represent significant risks to us.
We cannot predict whether our sales and business operations in
these markets will be affected adversely by these conditions.
Instability in
non-U.S. markets,
which we believe is most likely to occur in the Middle East,
Asia and Latin America, could have a negative impact on our
business, financial condition and operating results. The wars in
Afghanistan and Iraq and other turmoil in the Middle East and
the global war on terror also may have negative effects on the
operating results of some of our businesses. In addition to the
effect of global economic instability on
non-U.S. sales,
sales to United States customers having significant
non-U.S. operations
could be impacted negatively by these conditions.
|
|
|
Our intellectual property rights may not be adequate to
protect our business. |
Our future success depends in part upon our proprietary
technology. Although we attempt to protect our proprietary
technology through patents, trademarks, copyrights and trade
secrets, these protections are limited. Accordingly, we cannot
predict whether such protection will be adequate, or whether our
competitors can develop similar technology independently without
violating our proprietary rights. In addition, rights that may
be granted under any patent application in the future may not
provide competitive advantages to us. Intellectual property
protection in foreign jurisdictions may be limited or
unavailable. In addition, many of our competitors have
substantially larger portfolios of patents and other
intellectual property rights than us.
As the competition in the communications equipment industry
intensifies and the functionality of the products further
overlaps, we believe that companies are becoming increasingly
subject to infringement claims. We have received and may
continue to receive notices from third parties, including some
of our competitors, claiming that we are infringing third-party
patents or other proprietary rights. We have also asserted
certain of our patents against third parties. We cannot predict
whether we will prevail in any litigation over third-party
claims, or whether we will be able to license any valid and
infringed patents on commercially reasonable terms. It is
possible that unfavorable resolution of such litigation could
have a material adverse effect on our business, results of
operations or financial condition. Any of these claims, whether
with or without merit, could result in costly litigation, divert
our managements time, attention and resources, delay our
product shipments or require us to enter into royalty or
licensing agreements, which
17
could be expensive. A third party may not be willing to enter
into a royalty or licensing agreement on acceptable terms, if at
all. If a claim of product infringement against us is successful
and we fail to obtain a license or develop or license
non-infringing technology, our business, financial condition and
operating results could be affected adversely.
|
|
|
We are dependent upon key personnel. |
Like all technology companies, our success is dependent on the
efforts and abilities of our employees. Our ability to attract,
retain and motivate skilled employees is critical to our
success. In addition, because we may acquire one or more
businesses in the future, our success will depend, in part, upon
our ability to retain and integrate our own personnel with
personnel from acquired entities who are necessary to the
continued success or the successful integration of the acquired
businesses.
Our recent initiatives to focus our business on core operations
and products by restructuring and streamlining operations,
including substantial reductions in our workforce, have created
uncertainty on the part of our remaining employees regarding
future employment with us. This uncertainty, together with our
recent past history of operating losses and general industry
uncertainty, may have an adverse effect on our ability to retain
and attract key personnel.
Although we have now completed the documentation and testing of
the effectiveness of our internal control over financial
reporting for fiscal 2005, as required by Section 404 of
the Sarbanes-Oxley Act of 2002, we expect we will have to incur
continuing costs, including increased accounting fees and
increased staffing levels, in order to maintain compliance with
that section of the Sarbanes-Oxley Act. Further, if we complete
acquisitions in the future, our ability to integrate operations
of the acquired company could impact our compliance with
Section 404. In the future, if we fail to complete the
Sarbanes-Oxley 404 evaluation in a timely manner, or if our
independent registered public accounting firm cannot attest in a
timely manner to our evaluation or to the efficacy of our
internal controls, we could be subject to regulatory scrutiny
and a loss of public confidence in our internal controls. In
addition, any failure to implement required new or improved
controls, or difficulties encountered in their implementation,
could harm our operating results or cause us to fail to meet our
reporting obligations.
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|
Integration of Key Finance Employees. |
In recent weeks, we have hired many new employees in our
internal finance and accounting staff. Until such personnel
become familiar with our operations, our ability to maintain
effective internal controls over financial reporting could be
impaired.
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|
|
Product defects could cause us to lose customers and
revenue or to incur unexpected expenses. |
If our products do not meet our customers performance
requirements, our customer relationships may suffer. Also, our
products may contain defects. Any failure or poor performance of
our products could result in:
|
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|
|
|
delayed market acceptance of our products; |
|
|
|
delayed product shipments; |
|
|
|
unexpected expenses and diversion of resources to replace
defective products or identify and correct the source of errors; |
|
|
|
damage to our reputation and our customer relationships; |
|
|
|
delayed recognition of sales or reduced sales; and |
|
|
|
product liability claims or other claims for damages that may be
caused by any product defects or performance failures. |
18
Our products are often critical to the performance of
communications systems. Many of our supply agreements contain
limited warranty provisions. If these contractual limitations
are unenforceable in a particular jurisdiction or if we are
exposed to product liability claims that are not covered by
insurance, a successful claim could harm our business.
|
|
|
We may encounter difficulties obtaining raw materials and
supplies needed to make our products and the prices of these
materials and supplies are subject to fluctuation. |
Our ability to produce our products is dependent upon the
availability of certain raw materials and supplies. The
availability of these raw materials and supplies is subject to
market forces beyond our control. From time to time, there may
not be sufficient quantities of raw materials and supplies in
the marketplace to meet the customer demand for our products. In
addition, the costs to obtain these raw materials and supplies
are subject to price fluctuations because of global market
demands. Further, some raw materials or supplies may be subject
to regulatory actions, which may affect available supplies. Many
companies utilize the same raw materials and supplies in the
production of their products as we use in our products.
Companies with more resources than our own may have a
competitive advantage in obtaining raw materials and supplies
due to greater purchasing power. Reduced supply and higher
prices of raw materials and supplies may affect our business,
operating results and financial condition adversely.
|
|
|
We rely upon our contract manufacturing
relationships. |
We have significant reliance on contract manufacturers to make
certain of our products on our behalf. If these contract
manufacturers do not fulfill their obligations to us, or if we
do not properly manage these relationships, our existing
customer relationships may suffer. We may outsource additional
functions in the future.
|
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|
We may encounter litigation that has a material impact on
our business. |
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 amicably without resort to formal
litigation. The amount of monetary liability resulting from the
ultimate resolution of these matters cannot be determined at
this time. As of October 31, 2005, we had recorded
approximately $8.4 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, it is
possible that unfavorable resolutions of these lawsuits,
proceedings and claims could exceed the amount currently
reserved and could have a material adverse affect on our
business, results of operations or financial condition.
|
|
|
We are subject to risks associated with changes in
commodity prices, interest rates, security prices, and foreign
currency exchange rates. |
We face market risks from changes in certain commodity prices,
security prices and interest rates. Market fluctuations could
affect our results of operations and financial condition
adversely. At times, we reduce this risk through the use of
derivative financial instruments. However, we do not enter into
derivative instruments for the purpose of speculation.
Also, we are exposed to market risks from changes in foreign
currency exchange rates. From time to time, we hedge our foreign
currency exchange risk. The objective of this program is to
protect our net monetary assets and liabilities in
non-functional currencies from fluctuations due to movements in
foreign currency exchange rates. We attempt to minimize exposure
to currencies in which hedging instruments are unavailable or
prohibitively expensive by managing our operating activities and
net assets position. As a result of our increased international
exposure due to the KRONE acquisition, we may expand our foreign
currency hedging program in the future. At October 31,
2005, the principal currency for which we have implemented a
hedging strategy is the Australian dollar.
19
Risks Related to Our Common Stock
|
|
|
Our stock price is volatile. |
Based on the trading history of our common stock and the nature
of the market for publicly traded securities of companies in our
industry, we believe that some factors have caused and are
likely to continue to cause the market price of our common stock
to fluctuate substantially. These fluctuations could occur from
day-to-day or over a
longer period of time. The factors that may cause such
fluctuations include, without limitation:
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|
|
announcements of new products and services by us or our
competitors; |
|
|
|
quarterly fluctuations in our financial results or the financial
results of our competitors or our customers; |
|
|
|
customer contract awards to us or our competitors; |
|
|
|
increased competition with our competitors or among our
customers; |
|
|
|
consolidation among our competitors or customers; |
|
|
|
disputes concerning intellectual property rights; |
|
|
|
the financial health of ADC, our competitors or our customers; |
|
|
|
developments in telecommunications regulations; |
|
|
|
general conditions in the communications equipment industry; |
|
|
|
general economic conditions in the U.S. or
internationally; and |
|
|
|
rumors or speculation regarding ADCs future business
results and actions. |
In addition, stocks of companies in our industry in the past
have experienced significant price and volume fluctuations that
are often unrelated to the operating performance of such
companies. This market volatility may adversely affect the
market price of our common stock.
|
|
|
We have not in the past and do not intend in the
foreseeable future to pay cash dividends on our common
stock. |
We have not in the past and currently do not pay any cash
dividends on our common stock and do not anticipate paying any
cash dividends on our common stock in the foreseeable future. We
intend to retain future earnings, if any, to finance our
operations and for general corporate purposes.
|
|
|
Anti-takeover provisions in our charter documents, our
shareowner rights plan and Minnesota law could prevent or delay
a change in control of our company. |
Provisions of our articles of incorporation and bylaws, our
shareowner rights plan (also known as a poison pill)
and Minnesota law may discourage, delay or prevent a merger or
acquisition that a shareowner may consider favorable and may
limit the market price for our common stock. These provisions
include the following:
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|
advance notice requirements for shareowner proposals; |
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|
|
authorization for our Board of Directors to issue preferred
stock without shareowner approval; |
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|
authorization for our Board of Directors to issue preferred
stock purchase rights upon a third partys acquisition of
15% or more of our outstanding shares of common stock; and |
|
|
|
limitations on business combinations with interested shareowners. |
20
Some of these provisions may discourage a future acquisition of
ADC even though our shareowners would receive an attractive
value for their shares or a significant number of our
shareowners believe such a proposed transaction would be in
their best interest.
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|
Item 1B. |
UNRESOLVED STAFF COMMENTS |
None.
We own our 500,000 sq. ft. corporate headquarters facility,
which is located in Eden Prairie, Minnesota. During 2005, we
reached agreement with Wells Fargo Financial Acceptance
Minnesota, Inc. whereby they will lease approximately
110,000 square feet of this facility for a period of ten
years.
In addition to our headquarters facility, our principal
facilities as of October 31, 2005, consisted of the
following:
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|
Shakopee, Minnesota approximately 360,000 sq.
ft., owned; general purpose facility used for engineering,
manufacturing, and general support of our global connectivity
products; and a second facility, approximately
50,000 sq. ft., leased; general purpose facility used
for engineering, testing and general support for our wireless
products; |
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|
Juarez and Delicias, Mexico approximately
327,000 sq. ft. and 139,000 sq. ft., respectively,
owned; manufacturing facilities used for our global connectivity
products; |
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|
Berlin, Germany approximately 619,000 sq.
ft., leased; general purpose facility used for engineering,
manufacturing, and general support of our global connectivity
products; |
|
|
|
Sidney, Nebraska approximately 382,000 sq.
ft., owned; manufacturing facility used for our global
connectivity products; |
|
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|
Berkely Vale, Australia approximately 98,000
sq. ft., owned; general purpose facility for engineering,
manufacturing, and general support of our global connectivity
products; |
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|
Bangalore, India approximately 88,000 sq.
ft., owned; manufacturing facility used for our global
connectivity products; and a second site in Bangalore,
approximately 22,000 sq. ft., leased; general purpose
facilities for engineering, sales, finance, information
technology and back office applications; |
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|
Santa Teresa, New Mexico approximately
290,000 sq. ft., leased; global warehouse and distribution
center facility with approximately 60,000 sq. ft.
dedicated to selected finished product assembly
operations; and |
|
|
|
Muggelheim, Germany approximately 127,000 sq.
ft., leased; general purpose facility used for engineering,
staging, distribution and sales for our professional services
business. |
We also own or lease approximately 103 other facilities in the
following locations: Australia, Austria, Belgium, Brazil,
Canada, Chile, China, France, Germany, Hungary, India,
Indonesia, Ireland, Italy, Japan, Malaysia, Mexico, New Zealand,
Norway, Philippines, Puerto Rico, Russia, Singapore, South
Africa, South Korea, Spain, Sweden, Taiwan, Thailand, the
United Arab Emirates, the United Kingdom, the
United States, Venezuela and Vietnam.
We believe the facilities used in our operations are suitable
for their respective uses and are adequate to meet our current
needs. On October 31, 2005 we maintained approximately
3.8 million square feet of active space (1.8 million
square feet leased and 2.0 million square feet owned), and
have irrevocable commitments for an additional 0.8 million
square feet of inactive space, totaling approximately
4.6 million square feet of space at locations around the
world. During fiscal year 2005, we continued to take steps to
reduce and consolidate our facilities to use them more
efficiently. In comparison, at the end of fiscal year 2004, we
had 4.1 million square feet of active space, and
irrevocable commitments for 1.5 million square feet of
inactive space, totaling approximately 5.6 million square
feet of space at locations around the world.
21
|
|
Item 3. |
LEGAL PROCEEDINGS |
On May 19, 2003, we were served with a lawsuit that was
filed in the United States District Court for the District of
Minnesota. The complaint named ADC and several of our current
and former officers, employees and directors as defendants.
After this lawsuit was served, we were served with two
substantially similar lawsuits. All three of these lawsuits were
consolidated into a single lawsuit captioned In Re ADC
Telecommunications, Inc. ERISA Litigation. This lawsuit has
been brought by individuals who seek to represent a class of
participants in our Retirement Savings Plan who purchased our
common stock as one of the investment alternatives under the
Retirement Savings Plan from February 2000 to present. The
lawsuit alleges a breach of fiduciary duties under the Employee
Retirement Income Security Act. On October 26, 2005, after
mediation, the parties reached a conditional agreement to settle
the case subject to various approvals, including approvals from
an independent fiduciary and the court. Pending finalization,
the amount and terms of the settlement are confidential. We do
not expect, based on the conditional agreement, the resolution
of this matter to have a material impact on our financial
statements.
We are a party to various other lawsuits, proceedings and claims
arising in the ordinary course of business or otherwise. Many of
these disputes may be resolved amicably without resort to formal
litigation. The amount of monetary liability resulting from the
ultimate resolution of these matters cannot be determined at
this time. As of October 31, 2005, we had recorded
approximately $8.4 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, it is
possible that unfavorable resolutions of these lawsuits,
proceedings and claims could exceed the amount currently
reserved and could have a material adverse affect on our
business, results of operations or financial condition.
|
|
Item 4. |
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS |
None.
22
PART II
|
|
Item 5. |
MARKET FOR REGISTRANTS COMMON EQUITY, RELATED
STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY
SECURITIES |
Our common stock, $0.20 par value, is traded on The NASDAQ
Stock Market under the symbol ADCT. The following
table sets forth the high and low sales prices of our common
stock for each quarter during our fiscal years ended
October 31, 2005 and 2004, as reported on that market.
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|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
|
High | |
|
Low | |
|
High | |
|
Low | |
|
|
| |
|
| |
|
| |
|
| |
First Quarter
|
|
$ |
19.88 |
|
|
$ |
14.70 |
|
|
$ |
26.95 |
|
|
$ |
16.24 |
|
Second Quarter
|
|
|
18.06 |
|
|
|
12.88 |
|
|
|
25.28 |
|
|
|
16.24 |
|
Third Quarter
|
|
|
26.27 |
|
|
|
15.33 |
|
|
|
19.96 |
|
|
|
14.70 |
|
Fourth Quarter
|
|
|
27.14 |
|
|
|
16.95 |
|
|
|
17.08 |
|
|
|
12.25 |
|
As of January 11, 2006, there were 11,026 holders of record
of our common stock. We do not pay cash dividends on our common
stock and do not intend to pay cash dividends in the foreseeable
future. On April 18, 2005, we announced a one-for-seven
reverse split of our common stock. The effective date of the
reverse split was May 10, 2005. All share, share equivalent
and per share amounts have been adjusted to reflect the reverse
stock split for all periods presented in this Form 10-K. We
did not issue any fractional shares of our new common stock as a
result of the reverse split. Instead, shareowners who were
otherwise entitled to receive a fractional share of new common
stock, received cash for the fractional share in an amount equal
to the fractional share multiplied by the split adjusted price
of one share of ADCs common stock. As a result, we have a
treasury stock balance of 4,272 shares at $16.10 per
share.
23
|
|
Item 6. |
SELECTED FINANCIAL DATA |
The following table presents selected financial data for ADC.
The data included in the following table has been restated to
exclude the assets, liabilities and results of operations of
certain businesses that have met the criteria for treatment as
discontinued operations. The following summary information
should be read in conjunction with the Consolidated Financial
Statements and related notes thereto set forth in Item 8 of
this Form 10-K.
FIVE-YEAR FINANCIAL SUMMARY
Years ended October 31
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|
|
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|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
2003 | |
|
2002 | |
|
2001 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(Dollars in millions, except per share data) | |
Income Statement Data from Continuing Operations
|
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|
|
|
|
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|
|
|
|
|
|
Net sales
|
|
$ |
1,169.2 |
|
|
$ |
773.4 |
|
|
$ |
579.8 |
|
|
$ |
803.4 |
|
|
$ |
2,103.2 |
|
Gross profit
|
|
|
420.9 |
|
|
|
302.3 |
|
|
|
208.0 |
|
|
|
161.6 |
|
|
|
625.6 |
|
Research and development expense
|
|
|
71.6 |
|
|
|
59.1 |
|
|
|
59.9 |
|
|
|
106.8 |
|
|
|
201.9 |
|
Selling and administration expense
|
|
|
262.0 |
|
|
|
205.0 |
|
|
|
158.9 |
|
|
|
247.1 |
|
|
|
560.9 |
|
Operating (loss) income
|
|
|
72.3 |
|
|
|
24.6 |
|
|
|
(54.0 |
) |
|
|
(734.3 |
) |
|
|
(855.2 |
) |
Income (loss) before income taxes
|
|
|
92.7 |
|
|
|
35.6 |
|
|
|
(44.9 |
) |
|
|
(728.0 |
) |
|
|
(1,728.6 |
) |
Provision (benefit) for income taxes
|
|
|
7.2 |
|
|
|
2.0 |
|
|
|
(5.1 |
) |
|
|
249.4 |
|
|
|
(577.3 |
) |
Income (loss) from continuing operations
|
|
|
85.5 |
|
|
|
33.6 |
|
|
|
(39.8 |
) |
|
|
(977.4 |
) |
|
|
(1,151.3 |
) |
Earnings (loss) per diluted share from continuing operations
|
|
|
0.72 |
|
|
|
0.29 |
|
|
|
(0.35 |
) |
|
|
(8.60 |
) |
|
|
(10.24 |
) |
Balance Sheet Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets
|
|
|
853.0 |
|
|
|
836.1 |
|
|
|
1,032.6 |
|
|
|
718.7 |
|
|
|
1,390.7 |
|
Current liabilities
|
|
|
286.6 |
|
|
|
302.0 |
|
|
|
266.8 |
|
|
|
405.8 |
|
|
|
604.2 |
|
Total assets
|
|
|
1,535.0 |
|
|
|
1,428.1 |
|
|
|
1,296.9 |
|
|
|
1,144.2 |
|
|
|
2,499.7 |
|
Long-term notes payable
|
|
|
400.0 |
|
|
|
400.0 |
|
|
|
400.0 |
|
|
|
10.5 |
|
|
|
2.1 |
|
Total long-term obligations
|
|
|
474.5 |
|
|
|
466.8 |
|
|
|
402.4 |
|
|
|
11.7 |
|
|
|
2.1 |
|
Shareowners investment
|
|
|
773.9 |
|
|
|
659.3 |
|
|
|
627.7 |
|
|
|
732.2 |
|
|
|
1,893.4 |
|
24
|
|
Item 7. |
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS |
Marketplace Conditions
Our operating results for fiscal 2005 reflected significant
growth in net sales when compared with fiscal 2004, even when
excluding sales of KRONE and FONS, which we acquired in the
third quarter of fiscal 2004 and the fourth quarter of fiscal
2005, respectively.
We believe that there is a general trend in our industry toward
modest overall spending increases from the historical low levels
experienced from fiscal 2001 through fiscal 2003. However,
overall spending on communications equipment and services
remains at significantly lower levels than existed prior to
fiscal 2001 and customers appear to be selective about areas
where they are willing to increase spending. Specifically, we
believe that spending increases by our customers are likely to
be more pronounced in FTTX initiatives as well as in the
wireless and enterprise areas. We undertook our recent
acquisition of FONS to help expand our position as a leader in
the FTTX space.
We also believe that capital spending budgets remain
constrained, and any increases in spending in specific areas
therefore may cause service providers to decrease spending in
other areas. Initiatives to increase spending on FTTX projects
may be causing decreases in spending on other wireline
initiatives. Ongoing consolidation among communications service
providers may cause such companies to defer spending while they
focus on integrating combined businesses. In addition, our
industry continues to experience very intense competition and
increased pricing pressure from our customers. Subject to
telecom industry spending cycles, we currently anticipate at
least slow year-over-year growth in the overall market for
spending on communications equipment and services in the near
term. There is increased competition among telephone, wireless
and cable providers. This is causing service providers to
upgrade their networks to offer Internet, voice, video and data
services at low, often flat-rate, prices to attract and retain
customers. The rate at which these providers respond to each
others competitive threats may impact the rate of sales
growth we might experience and place pressure on our gross
profit margins.
While we are cautious about our ability to be successful in
achieving continued revenue growth, we believe several factors
may provide us with the opportunity to increase our sales faster
than growth in the overall market in our fiscal 2006. Such sales
growth could be achieved through:
|
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|
new product offerings, such as our
OmniReachtm
FTTX solutions being deployed by several communications service
providers and the growing acceptance of our
Digivance®
wireless coverage solution and our
TrueNet®
and
CopperTentm
enterprise solutions; |
|
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|
opportunities to cross-sell products among ADCs
traditional customer base and the traditional customer base of
KRONE following our acquisition of KRONE in May 2004; and |
|
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|
increasing our market share in certain areas as we have done
recently with respect to some of our product lines. |
We continue to be dependent on telecommunications service
providers for a majority of our sales, although this dependence
has recently declined to some degree because of our KRONE
acquisition. The four major U.S. telephone companies
(Verizon, BellSouth, Qwest and SBC) accounted for 25.7%, 30.7%
and 34.3% of our net sales for fiscal 2005, 2004 and 2003,
respectively. The decline in these customer concentration levels
from fiscal 2004 to fiscal 2005 is largely because the KRONE
acquisition gave us a more diversified customer base throughout
the world. However, the increased diversification may be offset
by mergers among our customers or acquisitions we undertake,
such as our recent acquisition of FONS. The long-term impact of
customer mergers on our business is difficult to predict. In
addition, in the product areas where we believe the potential
for sales growth is most pronounced (e.g., FTTX initiatives,
wireless products and enterprise), our sales remain highly
concentrated with the large U.S. telephone and wireless
companies.
We believe the historical seasonality of our sales, whereby the
strongest demand for our products was during our fourth fiscal
quarter ending October 31, may no longer apply to our
business. This seasonality trend in our sales generally existed
prior to the 2001-2003 downturn in the telecommunications
equipment
25
market when our business was more focused on
central-office-based products. We believe our expansion into new
growth markets of FTTX, wireless and enterprises may have
changed this seasonality in our business. Our sales of these
products have fluctuated from quarter to quarter, something we
expect to continue. In addition, in fiscal 2005, it appears that
many of our customers may have accelerated their annual capital
spending in the first calendar-half of 2005. While the
historical seasonality trend of our central-office-based
business may no longer be apparent, we still expect sales in our
first fiscal quarter to be lower than in other quarters. This is
because of the number of holidays in that quarter and the
development of annual capital spending budgets that many of our
customers undertake during that time frame.
The working days by quarter in fiscal 2006 is 59 days in
the first quarter, 65 days in the second quarter,
62 days in the third quarter and 66 days in the fourth
quarter.
We are continuing to focus on ways to conduct our operations
more efficiently and to reduce costs. During the downturn in the
telecommunications equipment industry in fiscal years 2001
through 2003, we took significant cost-reduction measures. We
believe most of our restructuring activity related to that
downturn is completed, but we continue to pursue expense
reductions. For example, the integration of the KRONE
acquisition has presented opportunities to reduce costs through
the consolidation of duplicative facilities, the movement of
operations into lower cost locations and the elimination of
duplicative processes and personnel functions. Following our
acquisition of FONS, we will seek additional opportunities to
reduce costs and gain economies of scale, although such
opportunities are more limited because the operations of FONS
are significantly smaller than were those of KRONE when we
completed that acquisition. Accordingly, we anticipate incurring
additional restructuring charges in future periods associated
with our ongoing initiative to be a cost leader.
We intend to continue to explore additional product line or
business acquisitions that are complimentary to our
communications infrastructure business. We believe our
acquisition of FONS will enhance our FTTX and other connectivity
solution offerings. In addition, we recently completed the
acquisition of OpenCell, which should enhance our Digivance
wireless coverage solution offering. We expect to fund other
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. In addition, we will continue to monitor all
of our businesses and may determine that it is appropriate to
sell or otherwise dispose of certain operations. For example, in
the third quarter of fiscal 2005, we completed the sale of our
professional services operations in the United Kingdom. This
sale was completed primarily because the business was not
profitable and we did not believe we were realizing sufficient
sales of our hardware products through this part of our services
operation.
A detailed description of many of the risks to our business can
be found in Item 1A under the caption Risk
Factors.
26
Results of Operations
The following table contains information regarding the
percentage of net sales represented by certain income and
expense items from continuing operations for the three fiscal
years ended October 31, 2005, 2004, and 2003 and the
percentage changes in the dollar amounts of these income and
expense items from year to year:
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Percentage | |
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|
Increase (Decrease) | |
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|
Percentage of Net Sales | |
|
Between Periods | |
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| |
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| |
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|
2005 | |
|
2004 | |
|
2003 | |
|
2005 vs. 2004 | |
|
2004 vs. 2003 | |
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| |
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| |
|
| |
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| |
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| |
Net sales
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|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
51.2 |
% |
|
|
33.4 |
% |
Cost of sales
|
|
|
(64.0 |
) |
|
|
(60.9 |
) |
|
|
(64.1 |
) |
|
|
58.8 |
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|
26.7 |
|
Gross profit
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|
36.0 |
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|
|
39.1 |
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35.9 |
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|
39.2 |
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|
45.3 |
|
Operating expenses:
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Research and development
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(6.1 |
) |
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(7.7 |
) |
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(10.3 |
) |
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21.2 |
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(1.3 |
) |
Selling and administration
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(22.4 |
) |
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(26.5 |
) |
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(27.4 |
) |
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27.8 |
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29.0 |
|
Impairment charges
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|
(0.2 |
) |
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|
(2.7 |
) |
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|
(82.4 |
) |
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|
(89.1 |
) |
Restructuring charges
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|
(1.3 |
) |
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|
(1.5 |
) |
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|
(4.8 |
) |
|
|
23.5 |
|
|
|
(56.9 |
) |
Operating income (loss)
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|
6.2 |
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3.2 |
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|
(9.3 |
) |
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|
193.9 |
|
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|
145.6 |
|
Other income (expense), net:
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Interest income, net
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0.6 |
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0.5 |
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1.1 |
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91.9 |
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(39.3 |
) |
Other, net
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1.1 |
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0.9 |
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0.5 |
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82.2 |
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143.3 |
|
Income (loss) before income taxes
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7.9 |
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4.6 |
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(7.7 |
) |
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160.4 |
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179.3 |
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(Provision) benefit for income taxes
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(0.6 |
) |
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(0.3 |
) |
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0.9 |
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260.0 |
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139.2 |
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Income (loss) from continuing operations
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7.3 |
% |
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4.3 |
% |
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(6.8 |
)% |
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154.5 |
% |
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184.4 |
% |
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The table below sets forth our net sales from continuing
operations for the three fiscal years ended October 31 for
each of our reportable segments described in Item 1 of this
Form 10-K (in
millions).
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2005 | |
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2004 | |
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2003 | |
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Operating Segment |
|
Net Sales | |
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% | |
|
Net Sales | |
|
% | |
|
Net Sales | |
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% | |
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| |
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| |
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| |
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| |
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| |
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| |
Broadband Infrastructure and Access
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$ |
943.9 |
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80.7 |
% |
|
$ |
625.8 |
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80.9 |
% |
|
$ |
447.4 |
|
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|
77.2 |
% |
Professional Services:
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Product
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54.0 |
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55.4 |
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|
37.3 |
|
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Service
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|
171.3 |
|
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92.2 |
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95.1 |
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Total Professional Services
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|
225.3 |
|
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|
19.3 |
% |
|
|
147.6 |
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|
|
19.1 |
% |
|
|
132.4 |
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|
22.8 |
% |
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Total
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|
$ |
1,169.2 |
|
|
|
100.0 |
% |
|
$ |
773.4 |
|
|
|
100.0 |
% |
|
$ |
579.8 |
|
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|
100.0 |
% |
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Overview of Acquisition and Divestiture Activities
On August 26, 2005, we completed the acquisition of Fiber
Optic Network Solutions Corp. (FONS), a leading
manufacturer of high-performance passive optical components and
fiber optic cable packaging, distribution and connectivity
solutions. With the addition of FONS, we became one of the
largest suppliers of FTTX solutions in the United States
according to proprietary market share estimates. The results of
FONS subsequent to August 26, 2005 are included in our
results of operations.
On May 24, 2005, we sold ADC Systems Integration UK Limited
(SIUK), which was our professional services unit in
the United Kingdom, for a nominal amount and recorded a loss of
$6.3 million
27
on the disposition. This business had been included in our
Professional Services segment. The results of SIUK are reported
separately as discontinued operations for all periods presented.
On May 6, 2005, we completed the acquisition of OpenCell,
Corp. (OpenCell), a manufacturer of digital
fiber-fed Distributed Antenna systems and shared multi-access
radio frequency network equipment. The acquisition of OpenCell
allows us to incorporate OpenCells technology into our
existing Digivance wireless solutions, which are used by
wireless carriers to extend network coverage and accommodate
ever-growing capacity
demands. The results of OpenCell subsequent to May 6, 2005
are included in our results of operations.
On November 19, 2004, we completed the sale of our Metrica
service assurance software group and recorded a gain of
$32.6 million on the disposition. This business had been
included in our Professional Services segment. The results of
Metrica are reported separately as discontinued operations for
all periods presented.
On May 18, 2004, we completed the acquisition of KRONE, a
global supplier of connectivity solutions and cabling products
used in public access and enterprise networks, from GenTek, Inc.
This acquisition increased our network infrastructure business
and expanded our presence in the international marketplace. The
results of KRONE subsequent to May 18, 2004 are included in
our results of operations.
During fiscal 2004, we sold our BroadAccess40 business, the
business related to our Cuda cable modem termination system
product line and related FastFlow Broadband Provisioning Manager
software, and the business related to our Singl.eView product
line. The results of these businesses are reported separately as
discontinued operations for all periods presented.
Net Sales
|
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|
Fiscal 2005 vs. Fiscal 2004 |
Net sales were $1,169.2 million and $773.4 million for
fiscal 2005 and 2004, respectively, a 51.2% increase (23.5%
exclusive of the KRONE acquisition). The KRONE acquisition
accounted for 64.2% of the net sales increase over fiscal 2004.
Sales generated from FONS and OpenCell in fiscal 2005 following
their acquisitions do not constitute a significant portion of
2005 net sales. Excluding the KRONE acquisition, our sales
growth for fiscal 2005 was driven by strong, broad-based growth
among our comprehensive communication infrastructure solutions.
International net sales were 45.4% and 39.5% of our net sales in
fiscal 2005 and 2004, respectively. The increase in
international sales is due primarily to our acquisition of
KRONE, which has a greater mix of international sales.
During fiscal 2005, net sales of Broadband Infrastructure and
Access products increased by 50.8% compared to fiscal 2004. Our
Broadband Infrastructure and Access segment includes
infrastructure (Connectivity) and access (Wireless and Wireline)
products. The inclusion of sales by KRONE beginning on
May 18, 2004, accounts for 69.0% of the increase for fiscal
2005, with the remaining increase primarily due to increased
sales of our legacy Broadband Infrastructure and Access products.
For fiscal 2005, net sales of our Connectivity products
increased 70.1% compared to fiscal 2004, with the KRONE
acquisition accounting for 66.2% of the increase. Sales of our
fiber connectivity products represented 27.7% of the net
connectivity increase over fiscal 2004, largely the result of
increased sales of our OmniReach FTTX products, which had
minimal sales in fiscal 2004. Sales of FTTX products have
fluctuated quarter over quarter, and we expect this trend to
continue, based on the timing of customer deployments.
For fiscal 2005, net sales of our Wireless products increased
38.6% compared to fiscal 2004. This was largely a result of
increased demand for our Digivance products, due to production
of a new product, as well as an improved supply chain for
certain Digivance components. Sales of our Digivance products
are continuing to grow because of sales to Verizon and Nextel
for deployments in large North American cities. However, sales
of Digivance have fluctuated, and are expected to continue to
fluctuate, from one quarter to the next due to the timing of new
products and customer deployments.
28
In fiscal 2005, net sales of our Wireline products decreased by
27.6% compared to fiscal 2004. This decrease was caused
primarily by 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
into the future.
Net sales of our Professional Services segment increased 52.6%
compared to fiscal 2004, with the KRONE acquisition representing
44.5% of the increase. In addition, increased sales to several
key customers contributed to the growth in net sales of
professional services.
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Fiscal 2004 vs. Fiscal 2003 |
Net sales were $773.4 million and $579.8 million for
fiscal 2004 and 2003, respectively, which was a 33.4% increase.
International net sales were 39.5% and 24.8% of our net sales in
fiscal 2004 and 2003, respectively.
During fiscal 2004, net sales of Broadband Infrastructure and
Access products increased by 40.6% compared to fiscal 2003. Our
Broadband Infrastructure and Access segment includes
infrastructure (Connectivity) and access (Wireless and Wireline)
products. The inclusion of sales by the KRONE Group beginning on
May 18, 2004, accounts for 82.8% of the increase for fiscal
2004 with the remaining increase being accounted for primarily
through increased sales of Connectivity and Wireless products.
For fiscal 2004, sales of our Connectivity and Wireless products
increased 67.1% and 98.7%, respectively, compared to fiscal
2003. The inclusion of $149.2 million in sales by KRONE
beginning on May 18, 2004, as well as FTTX sales, accounted
for 87.8% of the increase in Connectivity product sales for
fiscal 2004. The remaining increase in Connectivity sales was
attributable primarily to increased spending by our customers in
the legacy central office space. Wireless sales increased
primarily due to growing acceptance of our Digivance product.
For fiscal 2004, net sales of our Wireline products decreased by
21.6% from the comparable 2003 period. The decrease in Wireline
product sales was caused by a combination of decreased volumes
and price reductions resulting from decreased demand for certain
types of products within the industry generally and competitive
pressures.
Net sales of our Professional Services segment increased by
11.5% from $132.4 million in fiscal 2003 to
$147.6 million in fiscal 2004. The inclusion of
KRONEs professional services business (KRONE
Services) resulted in a $22.1 million increase in net
sales in fiscal 2004. This increase, however, was partially
offset by a 5.2% decline in sales of ADCs historical
professional services. Excluding KRONE Services, a significant
customer of our Professional Services segment represented 11.9%
of revenue in fiscal 2004 compared to 31.3% in fiscal 2003. The
decreased spending by this customer, however, was largely offset
by market share gains with other customers.
Gross Profit
|
|
|
Fiscal 2005 vs. Fiscal 2004 |
Gross profit percentages were 36.0% (37.3% exclusive of the
KRONE acquisition) and 39.1% (39.7% exclusive of the KRONE
acquisition) during fiscal 2005 and 2004, respectively. The
acquisition of FONS and OpenCell do not constitute a significant
portion of 2005 gross profit. The decrease in gross profit
percentage was due to increases in sales of lower margin
products, many of which came to us through our acquisition of
KRONE. Overall, increased sales from FTTX products and
Professional Services segment, both of which are lower margin
businesses, were partially offset by an increase in sales of our
higher margin Connectivity and Wireless products. The mix of
products we sell is variable; as a result, our future gross
margin rate is difficult to predict accurately.
29
|
|
|
Fiscal 2004 vs. Fiscal 2003 |
During fiscal 2004 and 2003, gross profit percentages were 39.1%
and 35.9%, respectively. The 3.2% increase in gross profit
percentage was due to a more favorable sales mix toward higher
margin products and a reduction in our fixed costs of sales as a
result of our restructuring activities.
We also benefited from production efficiencies and cost
reductions resulting from more favorable supplier pricing, which
was the result of increased purchasing power due to the KRONE
acquisition and the outsourcing of portions of our manufacturing
operations.
Operating Expenses
|
|
|
Fiscal 2005 vs. Fiscal 2004 |
Total operating expenses for fiscal 2005 and 2004 were
$348.6 million and $277.7 million, respectively,
representing 29.8% and 35.9% of net sales, respectively. KRONE
operating expenses were $96.4 million and
$44.8 million for fiscal 2005 and 2004, respectively. The
acquisitions of FONS and OpenCell do not constitute a
significant portion of fiscal 2005 operating expenses. Excluding
the effect of the KRONE operating expenses, operating expenses
increased 8.3% compared to fiscal 2004, mainly due to the change
in selling and administration expenses discussed below.
Research and development: Research and development
expenses were $71.6 million and $59.1 million for
fiscal 2005 and fiscal 2004, respectively, an increase of 21.2%
compared to fiscal 2004. This increase was almost entirely
attributable to spending on projects related to KRONE based
products. 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 in each of
our segments. Most of our research and development will be
directed towards projects that we believe directly advance our
strategic aims and have a higher probability to return our
investment.
Selling and administration: Selling and administration
expenses were $262.0 million and $205.0 million for
fiscal 2005 and fiscal 2004, respectively, an increase of 27.8%
(11.4% exclusive of the KRONE acquisition) compared to fiscal
2004. The increase in selling and administrative expenses is due
primarily to incentive payments made to employees in fiscal 2005
that have been partially offset by a decrease in the number of
leased facilities. In addition, in fiscal 2004, there were
$6.0 million of one-time benefits, primarily due to bad
debt recoveries for which we previously had established reserves.
In fiscal 2005, we incurred added administrative expense,
including external advisory fees of $4.0 million associated
with the requirements to comply with Section 404 of the
Sarbanes-Oxley Act of 2002. Compliance with Section 404
requires us to conduct a thorough evaluation of our internal
control over financial reporting. While we expect such fees to
decline in the future, there is an ongoing need for us to
allocate internal resources and to work with independent
advisors in this process.
Impairment charges: Impairment charges declined in fiscal
2005 ($0.3 million compared to $1.7 million in fiscal
2004). In fiscal 2005 we wrote-off certain manufacturing
equipment and leasehold improvements when it was determined that
these assets had no further value.
Restructuring charges: Restructuring charges of
$14.7 million in fiscal 2005 and $11.9 million in
fiscal 2004 relate principally to employee severance and
facility consolidation costs resulting from the closure of
facilities and other workforce reductions attributable to our
efforts to reduce costs. During fiscal 2005, approximately 500
employees were impacted by reductions in force, principally in
our Broadband Infrastructure and Access segment. During fiscal
2004, approximately 200 employees were impacted by reductions in
force, principally in corporate functions.
|
|
|
Fiscal 2004 vs. Fiscal 2003 |
Total operating expenses for fiscal 2004 and 2003 were
$277.7 million and $262.0 million, respectively,
representing 35.9% and 45.2% of net sales, respectively.
Included in these operating expenses were
30
restructuring charges of $11.9 million and
$27.6 million, respectively, and impairment charges of
$1.7 million and $15.6 million, respectively. KRONE
operating expenses were $44.8 million in fiscal 2004,
representing costs incurred from and after the close of the
acquisition on May 18, 2004. Excluding KRONE, operating
expenses decreased 11.1% in fiscal 2004. Although the largest
factor in the decrease in operating expenses was the reduction
in the amount of our restructuring and impairment charges, our
operating expenses also declined due to the ongoing cost savings
from those restructuring efforts.
Research and development: Research and development
expenses were $59.1 million for fiscal 2004 compared to
$59.9 million for fiscal 2003, a decrease of 1.3%. KRONE
represented 5.8% of the fiscal 2004 expense. We allocate
substantial resources, as a percentage of net sales, to product
development in each of our operating segments.
Selling and administration: Selling and administration
expenses increased 29.0% from $158.9 million in fiscal 2003
to $205.0 million in fiscal 2004. KRONE represented 93.9%
of the increase in fiscal 2004. The remaining increase was due
to $3.8 million of KRONE integration costs and
$6.6 million of increased incentive accruals, partially
offset by $4.4 million of decreased facility costs
resulting from ongoing restructuring.
Impairment charges: Impairment charges represent a
write-down of the carrying value of fixed assets to their
estimated fair market value. These charges declined in fiscal
2004 compared to fiscal 2003 ($1.7 million compared to
$15.6 million). In fiscal 2004, we recorded an impairment
charge for a building included in assets held for sale when it
was determined the carrying value for the property exceeded
market value. The fair market value was determined based on an
examination of sales prices for similar properties. Impairment
charges affected both the Broadband Infrastructure and Access
segment and the Professional Services segment.
Fiscal 2003 impairment charges consisted solely of property and
equipment impairments, which impacted both the Broadband
Infrastructure and Access segment and the Professional Services
segment, and were caused by our plan to dispose of excess
equipment. The fair market value was determined using external
sources, primarily proceeds received from previous equipment
sales or estimates of discounted cash flows.
Restructuring charges: Restructuring charges represent
the direct costs of consolidating certain leased facilities and
severance costs for workforce reductions. Our restructuring
charges also declined significantly in fiscal 2004 compared to
fiscal 2003 ($11.9 million compared to $27.6 million).
The fiscal 2004 restructuring charges consisted of
$9.3 million of employee severance for workforce reductions
and $2.6 million of facility consolidation charges.
Employee terminations affected both the Broadband Infrastructure
and Access segment and the Professional Services segment.
The $27.6 million of restructuring charges in fiscal 2003
related to our actions to downsize our business in response to
declining sales. These restructuring charges include
$23.5 million of employee severance and $4.1 million
of facility consolidation charges.
See Note 16 to the Consolidated Financial Statements in
Item 8 of this
Form 10-K for a
further discussion of our impairment and restructuring charges.
Other Income, Net
|
|
|
Fiscal 2005 vs. Fiscal 2004 |
Other income, net for fiscal 2005 and 2004 was
$20.4 million and $11.0 million, respectively.
The net interest income (expense) category represents
interest income on cash and cash equivalents and
available-for-sale securities as well as interest expense on
debt. Interest income was $18.3 million in fiscal 2005
compared to $12.4 million in fiscal 2004. Interest income
increased in fiscal 2005 due to higher yields on our short-term
investments. Interest expense was $11.2 million in fiscal
2005 compared to $8.8 million in fiscal 2004. Interest
expense increased in fiscal 2005 due to an increase in the
interest rate on the variable rate convertible notes. In
addition, we recorded both a $9.0 million gain on a sale of
a note receivable and a $4.2 million gain on the sale of
fixed assets in other income.
31
|
|
|
Fiscal 2004 vs. Fiscal 2003 |
Other income, net for fiscal 2004 and 2003 was
$11.0 million and $9.1 million, respectively.
Interest income was $12.4 million and $9.7 million in
fiscal 2004 and 2003, respectively. Interest income increased in
fiscal 2004 compared to fiscal 2003 primarily due to higher
average cash balances maintained during the first half of fiscal
2004 and higher yields on our short-term investments. Interest
expense was $8.8 million and $3.6 million in fiscal
2004 and 2003, respectively. Interest expense increased in
fiscal 2004 due to inclusion of interest expense for the
convertible notes for a full year.
|
|
|
Write-down, sale or conversion of investments |
During fiscal 2005, 2004 and 2003, we sold common stock of
certain companies in our portfolio and two investments in
non-publicly traded securities for aggregate gains of
$0.0 million, $4.8 million and $0.9 million,
respectively.
On August 26, 2005 we completed the acquisition of FONS, a
leading manufacturer of high-performance passive optical
components and fiber optic cable packaging, distribution and
connectivity solutions. With the addition of FONS, we become one
of the largest suppliers of FTTX solutions in the United States.
The results of FONS subsequent to August 26, 2005 are
included in our results of operations.
In this transaction, we acquired all of the outstanding shares
of FONS in exchange for cash paid of $166.1 million (net of
cash acquired) and certain assumed liabilities of FONS.
$34.0 million of the purchase price will be held in escrow
for up to two years to address potential indemnification claims
of ADC. In addition, ADC placed approximately
$6.7 million into a trust account to be paid to FONS
employees over the course of nine months. As of October 31,
2005, $4.1 million had been paid to FONS employees. We
acquired $83.3 million of intangible assets as part of the
purchase (see Note 7 to the Consolidated Financial
Statements in Item 8 of this
Form 10-K for
further discussion of intangible assets). $3.3 million was
allocated to in-process research and development for new
technology development, which was immediately written-off.
Goodwill of $70.9 million was recorded in the transaction
and assigned to our Broadband Infrastructure and Access segment.
None of this goodwill, intangible assets and in-process research
and development is deductible for tax purposes.
On May 6, 2005, we completed the acquisition of OpenCell, a
manufacturer of digital fiber-fed distributed antenna systems
and shared multi-access radio frequency network equipment. The
acquisition of OpenCell will allow us to incorporate
OpenCells technology into our existing Digivance wireless
solutions, which are used by wireless carriers to extend network
coverage and accommodate ever-growing capacity demands. The
results of OpenCell subsequent to May 6, 2005 are included
in our results of operations.
We purchased OpenCell from Crown Castle International Corp for
$7.1 million in cash and certain assumed liabilities.
Included in the purchase was $4.7 million of intangible
assets (see Note 7 to the Consolidated Financial Statements
in Item 8 of this
Form 10-K for
further discussion of intangible assets). No amounts were
allocated to in-process research and development, because
OpenCell did not have any new products in development at the
time of the acquisition. No goodwill was recorded in the
transaction.
On May 18, 2004, we completed the acquisition of KRONE from
GenTek, Inc. This acquisition increased our network
infrastructure business and substantially expanded our presence
in the international marketplace. The results of KRONE
subsequent to May 18, 2004 are included in our results of
operations.
In this transaction, we acquired all of the outstanding capital
stock of KRONE in exchange for $294.4 million in cash (net
of cash acquired) and certain assumed liabilities of KRONE. The
purchase included $78.1 million of intangible assets (see
Note 7 to the Consolidated Financial Statements in
Item 8 of this
Form 10-K for
further discussion of intangible assets). No amounts were
allocated to in-process research and development, because KRONE
did not have any new products in development at the time of the
32
acquisition. Goodwill of $169.6 million was recorded in the
transaction and assigned to our Broadband Infrastructure and
Access segment. Substantially none of this goodwill is
deductible for tax purposes.
No businesses were acquired during fiscal 2003.
In the third quarter of fiscal 2005, we sold our SIUK business.
In the first quarter of fiscal 2005, we sold our Metrica service
assurance software group. During fiscal 2004, we sold our
BroadAccess40 business, the business related to our Cuda cable
modem termination system product line and related FastFlow
Broadband Provisioning Manager software, and the business
related to our Singl.eView product line. In accordance with
SFAS No. 144, Accounting for the Impairment
or Disposal of Long-Lived Assets these businesses were
classified as discontinued operations in fiscal 2005 and 2004
and the financial results are reported separately as
discontinued operations for all periods presented.
|
|
|
ADC Systems Integration UK Limited |
During the third quarter of fiscal 2005, we sold our SIUK
business for a nominal amount. As of October 31, 2005, a
loss of $6.3 million has been recorded in connection with
the sale. The transaction closed on May 24, 2005. This
business had been included in our Professional Services segment.
We classified this business as a discontinued operation in the
third quarter of fiscal 2005.
During the fourth quarter of fiscal 2004, we entered into an
agreement to sell the business related to our Metrica service
assurance software group to Vallent Corporation (formerly known
as WatchMark Corporation) (Vallent) for a cash
purchase price of $35.0 million, subject to purchase price
adjustments, and a $3.9 million equity interest in Vallent.
The transaction closed on November 19, 2004. The equity
interest constitutes less than a five percent ownership in
Vallent and is therefore accounted for under the cost method.
This business had been included in our Professional Services
segment. We classified this business as a discontinued operation
in the fourth quarter of fiscal 2004. We recognized a gain on
the sale of $32.6 million.
During the first quarter of fiscal 2004, we entered into an
agreement to sell our BroadAccess40 business, which was included
in our Broadband Infrastructure and Access segment. This
transaction closed on February 24, 2004. We classified this
business as a discontinued operation beginning in the first
quarter of fiscal 2004. We recorded a loss on the sale of
$6.8 million.
The purchasers of the BroadAccess40 business acquired all of the
capital stock of our subsidiary that operated this business and
assumed substantially all associated liabilities, with the
exception of a $7.5 million note payable that we paid in
full prior to the closing of the transaction. The purchasers
issued a promissory note for $3.8 million that was fully
paid to us in May of 2005.
During the third quarter of fiscal 2004, we entered into an
agreement to sell the business related to our Cuda cable modem
termination system product line and related FastFlow Broadband
Provisioning Manager software to BigBand Networks, Inc.
(BigBand). This transaction closed on June 29,
2004. The business had been included in our Broadband
Infrastructure and Access segment. In consideration for this
sale, we were issued a non-voting minority interest in BigBand,
which has a nominal value. We also provided BigBand with a
non-revolving credit facility of up to $12.0 million with a
term of three years. As of October 31, 2005,
$7.0 million was drawn on the credit facility. We
classified this business as a discontinued operation beginning
in the third quarter of fiscal 2004. We recorded a loss on the
sale of $4.9 million.
33
During the third quarter of fiscal 2004, we entered into an
agreement to sell the business related to our Singl.eView
product line to Intec Telecom Systems PLC (Intec)
for a cash purchase price of $74.5 million, subject to
purchase price adjustments. The transaction closed on
August 27, 2004. This business had been included in our
Professional Services segment. We also agreed to provide Intec
with a $6.0 million non-revolving credit facility with a
term of 18 months. As of October 31, 2005,
$4.0 million was drawn on the credit facility. We
classified this business as a discontinued operation in the
third quarter of fiscal 2004. In the fourth quarter of fiscal
2004, we recognized a gain on the sale of $61.7 million. In
fiscal 2005, we recognized an income tax benefit of
$3.7 million from the resolution of certain income tax
contingencies related to Singl.eView. In connection with the
sale, the parties agreed to a post closing financial true-up
mechanism related to certain working capital measurements.
The financial results of our BroadAccess40, Cuda/ FastFlow,
Singl.eView, Metrica and SIUK businesses included in
discontinued operations are as follows (in millions):
|
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|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
Revenue
|
|
$ |
8.4 |
|
|
$ |
113.9 |
|
|
$ |
198.7 |
|
|
|
|
|
|
|
|
|
|
|
Loss from discontinued operations
|
|
$ |
(1.3 |
) |
|
$ |
(67.2 |
) |
|
$ |
(36.9 |
) |
Gain on sale of discontinued operations, net
|
|
|
26.5 |
|
|
|
50.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (loss) from discontinued operations
|
|
$ |
25.2 |
|
|
$ |
(17.2 |
) |
|
$ |
(36.9 |
) |
|
|
|
|
|
|
|
|
|
|
No businesses were discontinued during fiscal 2003.
Income Taxes
|
|
|
Fiscal 2005 vs. Fiscal 2004 vs. Fiscal 2003 |
Note 10 to the Consolidated Financial Statements in
Item 8 of this
Form 10-K
describes the items which have impacted our effective income tax
rate for fiscal 2005, 2004 and 2003.
As a result of our cumulative losses in fiscal 2001 and 2002 and
the full utilization of our loss carryback potential, we
concluded during the third quarter of fiscal 2002 that a full
valuation allowance against our net deferred tax assets was
appropriate. Since the third quarter of fiscal 2002, we have
continued to provide a nearly full valuation allowance against
our net deferred tax assets. See Note 10 to the
Consolidated Financial Statements in Item 8 of this
Form 10-K for
further information regarding the valuation allowance.
We recorded an income tax provision totaling $7.2 million
and $2.0 million for fiscal 2005 and 2004, respectively,
primarily attributable to our foreign operations. The income tax
provision attributable to our U.S. operations is minimal
since the tax on this income is offset with the realization of
deferred tax assets, which have a full valuation allowance.
In fiscal 2003, we recorded an income tax benefit totaling
$5.1 million. This benefit is primarily attributable to the
reversal of accrued income tax liabilities resulting from the
finalization of federal, state and foreign income tax
examinations.
Income (Loss) from Continuing Operations
Income from continuing operations was $85.5 million (or
$0.72 per diluted share) for fiscal 2005, compared to
income from continuing operations of $33.6 million (or
$0.29 per diluted share) for fiscal 2004. Loss from
continuing operations was $(39.8) million (or $(0.35) per
diluted share) for fiscal 2003.
34
Segment Disclosures
|
|
|
Broadband Infrastructure and Access Segment |
Detailed information regarding our Broadband Infrastructure and
Access segment is provided in the following table:
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|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended | |
|
|
October 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
|
(Dollars in millions) | |
Operating income (loss)
|
|
$ |
99.3 |
|
|
$ |
58.3 |
|
|
$ |
(37.7 |
) |
Depreciation and amortization
|
|
|
58.3 |
|
|
|
32.7 |
|
|
|
41.9 |
|
|
|
|
|
|
|
|
|
|
|
During fiscal 2005, operating income for the Broadband
Infrastructure and Access segment increased by 70.3% to
$99.3 million compared to $58.3 million in fiscal
2004. This increase is primarily due to our KRONE acquisition,
which is included in our results for the full year of fiscal
2005 compared to approximately five months during fiscal 2004.
The remaining increase was largely the result of growth in
ADCs copper and fiber connectivity sales.
During fiscal 2004, operating income for the Broadband
Infrastructure and Access segment increased by 254.6% to
$58.3 million compared to an operating loss of
$(37.7) million in fiscal 2003. The inclusion of operating
income by KRONE beginning on May 18, 2004, accounts for
12.6% of the increase in operating income for fiscal 2004. The
remaining increase in operating income for the Broadband
Infrastructure and Access segment resulted from increased
Connectivity sales, which was attributable primarily to
increased sales to our customers for products used in either the
core central office space or FTTX networks.
We recorded impairment and restructuring charges of
$8.7 million, $10.9 million and $34.3 million
during fiscal 2005, 2004 and 2003, respectively, related
principally to employee severance and facility consolidation
costs.
Depreciation and amortization increased $25.6 million, or
78.3%, and decreased $9.2 million, or 22.0%, in fiscal 2005
and 2004, respectively. The increase from 2004 to 2005 is
attributable to our acquisition of KRONE, which is included in
our results for the full year of fiscal 2005 and for only five
months during fiscal 2004.
|
|
|
Professional Services Segment |
Detailed information regarding our Professional Services segment
is provided in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended | |
|
|
October 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
|
(Dollars in millions) | |
Operating loss
|
|
$ |
(27.0 |
) |
|
$ |
(33.7 |
) |
|
$ |
(16.3 |
) |
Depreciation and amortization
|
|
|
8.9 |
|
|
|
8.7 |
|
|
|
11.5 |
|
|
|
|
|
|
|
|
|
|
|
During fiscal 2005, the operating loss of the Professional
Services segment decreased $6.7 million compared to 2004.
The addition of KRONE, which is included in our results for the
full year of fiscal 2005 and for five months during fiscal 2004
following its acquisition, as well as market share gains with
several key customers, contributed to the overall improvement.
During fiscal 2004, operating loss for the Professional Services
segment increased $17.4 million compared to fiscal 2003.
Lower operating losses due to the addition of KRONE were offset
by reductions in customer spending.
We recorded impairment and restructuring charges of
$6.3 million, $2.7 million and $8.9 million
during fiscal 2005, 2004 and 2003, respectively, related
principally to employee severance and facility consolidation
costs.
35
Depreciation and amortization increased by $0.2 million in
fiscal 2005 compared to fiscal 2004, and decreased by
$2.8 million in fiscal 2004 compared to fiscal 2003. The
fiscal 2005 increase is the result of our acquisition of KRONE,
which is included in our results for the full year of fiscal
2005. The decrease in fiscal 2004 was the result of
restructuring efforts, which reduced the amount of property,
plant and equipment offset by the addition of KRONE.
Application of Critical Accounting Policies and Estimates
The preparation of financial statements and related disclosures
in conformity with accounting principles generally accepted in
the United States requires us to make judgments, assumptions,
and estimates that affect the amounts reported in our
Consolidated Financial Statements and accompanying notes.
Note 1 to the Consolidated Financial Statements in
Item 8 of this
Form 10-K
describes the significant accounting policies and methods used
in preparing the Consolidated Financial Statements. We consider
the accounting policies described below to be our most critical
accounting policies because they are impacted significantly by
estimates we make. We base our estimates on historical
experience or various assumptions that we believe to be
reasonable under the circumstances, and the results form the
basis for making judgments about the reported values of assets,
liabilities, revenues and expenses. Actual results may differ
materially from these estimates.
Inventories: We state our inventories at the lower of
first-in, first-out
cost or market. In assessing the ultimate realization of
inventories, we are required to make judgments as to future
demand requirements compared with current or committed inventory
levels. Our reserve requirements generally increase as our
projected demand requirements decrease due to market conditions,
technological and product life cycle changes as well as longer
than previously expected usage periods for previously sold
equipment. We have experienced significant changes in required
reserves in recent periods due primarily to improving market
conditions. It is possible that significant increases in
inventory reserves may be required in the future if there is a
decline in market conditions. Alternatively, if we are able to
sell previously reserved inventory, we will reverse a portion of
the reserves. Changes in inventory reserves are recorded as a
component of cost of sales. As of October 31, 2005 and
2004, we had $35.7 million and $41.9 million,
respectively, reserved against our inventories, which represents
20.3% and 30.0%, respectively, of total inventory on-hand.
Restructuring Accrual: During fiscal 2005 and 2004, we
recorded restructuring charges representing the direct costs of
exiting leased facilities and employee severance. If such costs
constitute an ongoing benefit arrangement that is probable and
estimable, accruals are established pursuant to FASB Statement
No. 112, Employers Accounting for
Postemployment Benefits An Amendment of FASB
Statements No. 5 and 43,
(SFAS No. 112). All other restructuring
accruals are established pursuant to FASB Statement
No. 146, Accounting for Costs Associated with Exit
or Disposal Activities,
(SFAS No. 146). Restructuring charges
represent our best estimate of the associated liability at the
date the charges are taken. Significant judgment is required in
estimating the restructuring costs of leased facilities. For
example, we make certain assumptions with respect to when a
facility will be subleased and the amount of sublease income.
Adjustments for changes in assumptions are recorded as a
component of operating expenses in the period they become known.
Changes in assumptions could have a material effect on our
restructuring accrual as well as our consolidated results of
operations.
Revenue Recognition: We recognize revenue, net of
discounts, when product ownership and the risk of loss has
transferred to the customer, we have no remaining obligation,
persuasive evidence of a final agreement exists, delivery has
occurred, the selling price is fixed or determinable and
collectibility is reasonably assured.
Revenue from product sales is generally recognized upon shipment
of the product to the customer in accordance with the terms of
the sales agreement. Revenue from services consists of fees for
systems requirements, design and analysis, customization and
installation services, ongoing system management, enhancements
and maintenance. We primarily apply the
percentage-of-completion
method to arrangements consisting of design, customization and
installation.
36
The assessment of collectibility is particularly critical in
determining whether revenue should be recognized in the current
market environment. As part of the revenue recognition process,
we determine whether collection of trade and notes receivable
are reasonably assured based on various factors, including an
evaluation of whether there has been deterioration in the credit
quality of our customers that could result in us being unable to
collect or sell the receivables. In situations where it is
unclear whether we will be able to sell or collect the
receivable, revenue and related costs are deferred. Related
costs are recognized when it has been determined that the
collection of the receivable is unlikely.
We record provisions against our gross revenue for estimated
product returns and allowances in the period when the related
revenue is recorded. These estimates are based on factors that
include, but are not limited to, historical sales returns,
analyses of credit memo activities, current economic trends and
changes in our customers demands. Should our actual
product returns and allowances exceed our estimates, additional
reductions to our revenue would result.
Allowance for Uncollectible Accounts: We are required to
estimate the collectibility of our trade receivables and notes
receivable. A considerable amount of judgment is required in
assessing the realization of these receivables, including the
current creditworthiness of each customer and related aging of
the past due balances. In order to assess the collectibility of
these receivables, we perform ongoing credit evaluations of our
customers financial condition. Through these evaluations,
we may become aware of a situation where a customer may not be
able to meet its financial obligations due to deterioration of
its financial viability, credit ratings or bankruptcy. The
reserve requirements are based on the best facts available to us
and are reevaluated and adjusted as additional information is
received. Our reserves are also derived using percentages
applied to certain aged receivable categories. These percentages
are determined by a variety of factors including, but not
limited to, current economic trends, historical payment and bad
debt write-off experience. Significant increases may occur in
the future due to deteriorating market conditions. We are not
able to predict changes in the financial condition of our
customers and, if circumstances related to our customers
deteriorate, our estimates of the recoverability of our
receivables could be materially affected and we may be required
to record additional allowances. Alternatively, if we provided
more allowances than are ultimately required, we will reverse a
portion of such provisions in future periods based on our actual
collection experience. Changes in the allowance are recorded as
a component of operating expenses. As of October 31, 2005
and 2004, we had $9.6 million and $15.8 million,
respectively, reserved against our accounts receivable, which
represents 4.7% and 9.2%, respectively, of total accounts
receivable. The decrease in allowance for uncollectible accounts
from 2004 to 2005 is due to improved collections.
Warranty: We provide reserves for the estimated cost of
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. Should our actual
experience relative to these factors be worse than our
estimates, we will be required to record additional warranty
reserves. Alternatively, if we provide more reserves than we
need, we will reverse a portion of such provisions in future
periods. Changes in warranty reserves are recorded as a
component of cost of sales. As of October 31, 2005 and
2004, we reserved $10.8 million and $14.4 million,
respectively, related to future estimated warranty costs.
Recoverability of Long-Lived Assets: Goodwill is tested
for impairment annually, or more frequently if events or changes
in circumstances indicate that the asset might be impaired. We
perform impairment reviews at a reporting unit level and use a
discounted cash flow model based on managements judgment
and assumptions to determine the estimated fair value of each
reporting unit. An impairment loss generally would be recognized
when the carrying amount of the reporting units net assets
exceeds the estimated fair value of the reporting unit.
Impairment testing indicated that the estimated fair value of
each reporting unit exceeded its corresponding carrying amount,
including recorded goodwill and, as such, no impairment existed
at that time.
The assessment of the recoverability of long-lived assets
reflects managements assumptions and estimates. Factors
that management must estimate when performing impairment tests
include sales volume,
37
prices, inflation, discount rates, exchange rates, tax rates,
and capital spending. Significant management judgment is
involved in estimating these factors, and they include inherent
uncertainties. The measurement of the recoverability of these
assets is dependent upon the accuracy of the assumptions used in
making these estimates and how the estimates compare to the
eventual future operating performance of the specific businesses
to which the assets are attributed. All assumptions utilized in
the impairment analysis are consistent with managements
internal planning. If other assumptions and estimates had been
used, the balances for long-lived assets could have been
materially impacted.
Income Taxes and Deferred Taxes: We currently have
significant deferred tax assets (primarily in the United States)
as a result of net operating loss carryforwards, tax credit
carryforwards and temporary differences between taxable income
on our income tax returns and income before income taxes under
U.S. generally accepted accounting principles. A deferred
tax asset represents future tax benefits to be received when
these carryforwards can be applied against future taxable income
or when expenses previously reported in our financial statements
become deductible for income tax purposes.
In the third quarter of fiscal 2002, we recorded a full
valuation allowance against our net deferred tax assets because
we concluded that it was more likely than not that we would not
realize these assets. Our decision was based on the cumulative
losses we had incurred to that point as well as the full
utilization of our loss carryback potential. From the third
quarter of fiscal 2002 to date, we have maintained our policy of
providing a nearly full valuation allowance against all future
tax benefits produced by our operating results. We expect to
continue to provide a nearly full allowance on any future tax
benefits until we can sustain a level of profitability that
demonstrates our ability to utilize these assets.
As of October 31, 2005, our net deferred tax assets were
$1,038.6 million with a related valuation allowance of
$1,039.9 million. As of October 31, 2004, our net
deferred tax assets were $1,067.4 million with a related
valuation allowance of $1,068.9 million. See Note 10
to the Consolidated Financial Statements in Item 8 of this
Form 10-K for
further discussion of the accounting treatment for income taxes.
Litigation Reserves: As of October 31, 2005 and
2004, we had recorded approximately $8.4 million and
$5.2 million in loss reserves for pending litigation. This
reserve is based on the application of FASB Statement
No. 5, Accounting for Contingencies,
which requires us to record a reserve if we believe an
adverse outcome is probable and the amount of the probable loss
is capable of reasonable estimation. As explained in
Note 14 to the Consolidated Financial Statements in
Item 8, and in Part I, Item 3 of this
Form 10-K (Legal
Proceedings), we are a party to numerous lawsuits, proceedings
and claims. Litigation by its nature is uncertain and the
determination of whether any particular case involves a probable
loss or the amount thereof requires the exercise of considerable
judgment, which is applied as of a certain date. The required
reserves may change in the future due to new matters,
developments in existing matters or if we determine to change
our strategy with respect to any particular matter.
Pensions: We acquired KRONE in May 2004, which maintains
a defined benefit pension for a portion of its German workforce.
A participating individuals post-retirement pension
benefit is based primarily on the individuals years of
service and earnings. The plan is accounted for in accordance
with FASB Statement No. 87, Employers
Accounting for Pensions, which requires that amounts
recognized in the financial statements be determined on an
actuarial basis. That measurement includes estimates relating to
the discount rate used to measure plan liabilities, which
reflects the current rate at which the pension liability could
effectively be settled at the end of the year. In estimating
this discount rate, we considered rates of return on high-grade
fixed-income investments with similar duration to the plan
liability. We used a discount rate of 4.25% at October 31,
2005. A quarter percentage point increase (decrease) in the
assumed discount rate would (decrease) increase the
post-retirement benefit obligation by approximately
$2.3 million and $(2.3) million, respectively.
Recently Issued Accounting Pronouncements
In May 2005, 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
38
Financial Statements, and changes the requirements for
the accounting for and reporting of a change in accounting
principle. Opinion 20 previously required that most voluntary
changes in accounting principle be recognized by including the
cumulative effect of changing to the new accounting principle in
net income of 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 or as the adjustment of
previously issued financial statements to reflect a change in
the reporting entity. SFAS 154 also requires that a change
in depreciation, amortization, or depletion method for
long-lived, nonfinancial assets be accounted for as a change in
accounting estimate effected by a change in accounting
principle. SFAS 154 is effective for changes and error
corrections made in fiscal years beginning after
December 15, 2005. We are required to adopt the provisions
of SFAS 154 in our fiscal year beginning November 1,
2006.
In December 2004, the FASB issued SFAS No. 153,
Exchanges of Nonmonetary Assets an
amendment of APB Opinion No. 29,
(SFAS 153). SFAS 153 amends Opinion 29
to eliminate the exception for nonmonetary exchanges of similar
productive assets and replaces it with a general exception for
exchanges of nonmonetary assets that do not have commercial
substance. A nonmonetary exchange has commercial substance if
the future cash flows of the entity are expected to change
significantly as a result of the exchange. SFAS 153 is
effective for fiscal years beginning after June 15, 2005.
We are required to adopt the provisions of SFAS 153 in our
fiscal year beginning November 1, 2005.
In November 2004, FASB issued SFAS No. 151,
Inventory Costs, (SFAS 151).
This statement requires that abnormal amounts of idle facility
expense, freight, handling costs and spoilage be recognized as
current-period charges. This statement also requires that fixed
production overhead be allocated to inventory conversion costs
based on normal capacity of the production facilities.
SFAS 151 is effective for inventory costs incurred by us
beginning in fiscal 2006. We do not expect that the adoption of
this statement will have a material impact on our consolidated
financial statements.
In December 2004, FASB issued SFAS No. 123R,
Share-Based Payment: an amendment of
FASB Statements No. 123 and 95,
(SFAS 123R) which requires companies to
recognize in the income statement the grant-date fair value of
stock options and other equity-based compensation issued to
employees. SFAS 123R is effective for financial statements
issued for periods that begin after June 15, 2005, which is
our first quarter beginning November 1, 2005. We will use
the modified prospective transition method. Under the modified
prospective method, awards that are granted, modified or settled
after the date of adoption will be measured and accounted for in
accordance with SFAS 123R. Compensation cost for awards
granted prior to, but not vested, as of the date SFAS 123R
is adopted would be based on the grant date attributes
originally used to value those awards for proforma purposes
under SFAS 123.
We expect the adoption of this standard will reduce fiscal
2006 net income by approximately $8.6 million. This
estimate is based on the number of options currently outstanding
and exercisable and could change based on the number of options
granted or forfeited in fiscal 2006.
In December 2004, FASB issued FASB Staff Position
No. FAS 109-2, Accounting and Disclosure
Guidance for Foreign Earnings Repatriation Provision within the
American Jobs Creation Act of 2004, (FSP
109-2). FSP 109-2 allows a company time beyond the
financial reporting period of enactment to evaluate the effect
of the American Jobs Creation Act of 2004 (the Act)
on its plan for reinvestment or repatriation of foreign
earnings. The Act creates a temporary incentive for
U.S. corporations to repatriate accumulated income earned
abroad by providing an 85 percent deduction for certain
dividends received from controlled foreign corporations. The
deduction is subject to a number of limitations. FSP 109-2 will
not impact us because we do not plan on repatriating our foreign
earnings.
39
Liquidity and Capital Resources
Cash and cash equivalents and current available-for-sale
securities not subject to restrictions were $445.4 million
at October 31, 2005, a decrease of $55.4 million
compared to $500.8 million as of October 31, 2004. The
reasons for this decrease are described below.
We invest a large portion of our available cash in highly liquid
government bonds 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 our investment guidelines.
Auction rate securities reclassified from cash and cash
equivalents to current available-for-sale securities as of
October 31, 2005 and 2004 were $307.5 million and
$427.3 million, respectively. Certain prior year amounts
have been reclassified to conform to the current year
presentation. These reclassifications have no effect on current
assets, working capital or any amounts reported on the statement
of operations.
Restricted cash balances that are pledged primarily as
collateral for letters of credit and lease obligations affect
our liquidity. As of October 31, 2005, we had restricted
cash of $23.6 million compared to $21.9 million as of
October 31, 2004, an increase of $1.7 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. In addition, we have
$6.7 million of restricted cash related to our FONS
acquisition, which is held in trust to be paid to FONS employees
over the course of the next nine months. We are entitled to the
interest earnings on our restricted cash balances and interest
earned on restricted cash is included in cash and cash
equivalents.
Net cash provided by operating activities from continuing
operations for fiscal 2005 totaled $60.0 million, a
$13.5 million decrease from the cash provided by operating
activities from continuing operations for fiscal 2004. This
decrease was largely driven by an increase in inventory and
accounts receivable related to the manufacture and sales of FTTX
and wireless products, along with an $8.5 million reduction
in accrued liabilities, primarily for restructuring and
incentive payments. Offsetting this additional cash outflow was
increased year-over-year net income from continuing operations.
Working capital requirements will typically 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.
Our employee incentive payments are accrued throughout the
fiscal year but paid during the first quarter of the subsequent
fiscal year. Net cash provided by operating activities from
continuing operations for fiscal 2004 totaled
$73.5 million, a $37.9 million increase from cash
provided by operating activities from continuing operations for
fiscal 2003. This increase was primarily related to increased
year-over-year net income from continuing operations.
Investing activities used $23.7 million during fiscal year
2005. Cash used by investing activities included
$7.1 million for the acquisition of OpenCell and
$166.1 million for the FONS acquisition, plus
$30.2 million for property and equipment additions. Cash
provided by investing activities consisted primarily of
$16.7 million in proceeds from the disposal of property and
equipment, $9.0 million related to the sale of a vendor
note receivable, $9.2 million from receipts on notes
receivable and $32.8 million related to proceeds from the
sale of our Metrica service assurance software group. Investing
activities used $190.0 million during fiscal 2004. Cash
used by investing activities included $295.2 primarily related
to the KRONE acquisition. Cash provided by investing activities
included $67.9 million related to proceeds from the sale of
our divested entities. Investing activities used
$397.0 million during fiscal 2003. Cash used by investing
activities included $69.5 million for property and
equipment additions and a net increase of $492.7 million in
available for sale securities, primarily related to the
investment of proceeds related to the sale our convertible
notes. Cash provided by investing activities included an
increase of $161.4 million in restricted cash.
40
Financing activities provided $13.6 million of cash during
fiscal 2005, primarily consisting of the proceeds from the
issuance of common stock for certain employee benefit plans.
Financing activities used $7.0 million during fiscal 2004.
This was primarily related to $10.7 million payments on
notes payable. Financing activities provided $345.4 million
during fiscal 2003, primarily related to the net proceeds from
issuance of our $400.0 million convertible unsecured
subordinated notes.
As of October 31, 2005 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 and 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 3.99625% for the
six-month period ending
December 15, 2005, but rose to 5.045% for the period
December 15, 2005 to June 15, 2006. 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.
As a part of the divestitures of Cuda and Singl.eView, we agreed
to extend to the parties non-revolving credit facility financing
arrangements. As of October 31, 2005, we had commitments to
extend credit of $18.0 million. The total amount drawn and
outstanding under these arrangements was approximately
$11.0 million on both October 31, 2005 and 2004. The
commitments to extend credit are conditional agreements
generally having fixed expiration or termination dates and
specific interest rates, conditions and purposes. These
commitments may expire without being drawn. We regularly review
all outstanding commitments and the results of these reviews are
considered in assessing the overall risk for possible credit
losses.
In the past we have worked with customers and third-party
financiers to negotiate financing arrangements for projects. As
of October 31, 2005 and 2004, approximately
$10.2 million was outstanding relating to such financing
arrangements. At October 31, 2005 and 2004, we have
recorded approximately $9.4 million in loss reserves in the
event of non-performance related to these financing arrangements.
|
|
|
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 is based on current
business operations and economic conditions so long as we are
able to maintain breakeven or positive cash flows from
operations. We expect that our entire restructuring accrual of
$33.3 million as of October 31, 2005 will be paid from
our unrestricted cash as follows:
|
|
|
|
|
$8.7 million for employee severance will be paid by the end
of fiscal 2006; |
|
|
|
$10.0 million for facilities consolidation costs, which
relate principally to excess leased facilities, will be paid in
fiscal 2006; and |
|
|
|
the remainder of $14.6 million, which also relates to
excess leased facilities, will be paid over the respective lease
terms ending through 2015. |
41
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 million of fixed rate convertible notes do not
mature until June 15, 2008 and the other $200 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 nearly fully
reserved at this time, should reduce our income tax payable on
taxable earnings in future years.
|
|
|
Contractual Obligations and Commercial Commitments |
As of October 31, 2005, the following table summarizes our
commitments (in millions) to make long-term debt and lease
payments and certain other contractual obligations.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period | |
|
|
| |
|
|
|
|
Less | |
|
|
|
|
|
|
Than | |
|
1-3 | |
|
3-5 | |
|
More Than | |
Contractual Obligations |
|
Total | |
|
1 Year | |
|
Years | |
|
Years | |
|
5 Years | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
Long-Term Debt Obligations(1)
|
|
$ |
486.7 |
|
|
$ |
11.1 |
|
|
$ |
224.5 |
|
|
$ |
20.4 |
|
|
$ |
230.7 |
|
Operating Lease Obligations
|
|
|
124.8 |
|
|
|
30.5 |
|
|
|
39.3 |
|
|
|
28.5 |
|
|
|
26.5 |
|
Purchase Obligations(2)
|
|
|
26.8 |
|
|
|
24.5 |
|
|
|
1.9 |
|
|
|
0.4 |
|
|
|
|
|
Minimum Pension Obligations
|
|
|
71.9 |
|
|
|
3.7 |
|
|
|
7.5 |
|
|
|
7.7 |
|
|
|
53.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
710.2 |
|
|
$ |
69.8 |
|
|
$ |
273.2 |
|
|
$ |
57.0 |
|
|
$ |
310.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Includes interest on the fixed rate debt of 1% and interest on
our variable rate debt of 5.045%. The interest rate for our
variable rate debt resets on each semi-annual interest payment
date. For purposes of this schedule, we used the rate as reset
on December 15, 2005. |
|
(2) |
Amounts represent non-cancelable commitments to purchase goods
and services, including items such as inventory and information
technology support. |
|
|
Item 7A. |
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK |
Our major market risk exposures relate to adverse fluctuations
in certain commodity prices, interest rates, security prices and
foreign currency exchange rates. Market fluctuations could
affect our results of operations and financial condition
adversely. At times, we attempt to reduce this risk through the
use of derivative financial instruments. We do not enter into
derivative financial instruments for the purpose of speculation.
We are exposed to interest rate risk as a result of issuing
$200.0 million of convertible unsecured subordinated notes
on June 4, 2003, that have a variable interest rate equal
to 6-month LIBOR
plus 0.375%. The interest rate on these notes is reset
semiannually on each interest payment date, which is June 15 and
December 15 of each year until their maturity in fiscal 2013.
The interest rate for the six-month period ending
December 15, 2005 was 3.99625%, but rose to 5.045% for the
current six-month period ending June 15, 2006. Assuming
interest rates rise an additional 100 basis points,
500 basis points and 1,000 basis points, our annual
interest expense would increase by $2.0 million,
$10.0 million and $20.0 million, respectively.
42
We offer a non-qualified 401(k) excess plan to allow certain
executives to defer earnings in excess of the annual individual
contribution and compensation limits on 401(k) plans imposed by
the U.S. Internal Revenue Code. Under this plan, the salary
deferrals and our matching contributions are not placed in a
separate fund or trust account. Rather, the deferrals represent
our unsecured general obligation to pay the balance owing to the
executives upon termination of their employment. In addition,
the executives are able to elect to have their account balances
indexed to a variety of diversified mutual funds (stock, bond
and balanced), as well as to our common stock. Accordingly, our
outstanding deferred compensation obligation under this plan is
subject to market risk. As of October 31, 2005, our
outstanding deferred compensation obligation related to the
401(k) excess plan was $4.6 million, of which approximately
$0.7 million was indexed to ADC common stock. Assuming a
20%, 50% or 100% aggregate increase in the value of the
investment alternatives to which the account balances may be
indexed, our outstanding deferred compensation obligation would
increase by $0.9 million, $2.3 million and
$4.6 million, respectively, and we would incur an expense
of a like amount.
We also are exposed to market risk from changes in foreign
currency exchange rates. Our primary risk is the effect of
foreign currency exchange rate fluctuations on the
U.S. dollar value of foreign currency denominated operating
sales and expenses. Our largest exposure comes from the Mexican
peso. The result of a 10% weakening in the U.S. dollar to
Mexican peso denominated sales and expenses would result in a
reduction of operating income of $4.4 million for the year
ended October 31, 2005. This exposure remained unhedged as
of October 31, 2005.
We are also exposed to foreign currency exchange risk as a
result of changes in intercompany balance sheet accounts and
other balance sheet items. At October 31, 2005, these
balance sheet exposures were mitigated through the use of
foreign exchange forward contracts with maturities of less than
12 months. The principal currency exposure being mitigated
was the Australian dollar.
During July 2005, the Peoples Bank of China announced that
it would change from its policy of fixing the value of the Yuan
to the U.S. dollar to a floating rate regime managed
against a basket of currencies. Although this change may create
additional foreign currency risk, we do not expect that it will
have a material impact on our results of operations or foreign
currency risk management strategy.
See Note 1 to the Consolidated Financial Statements in
Item 8 of this
Form 10-K for
information about our foreign currency exchange-derivative
program.
43
|
|
Item 8. |
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
Report of Independent Registered Public Accounting Firm
Board of Directors and Shareowners
ADC Telecommunications, Inc.
We have audited the accompanying consolidated balance sheets of
ADC Telecommunications, Inc. and subsidiaries as of
October 31, 2005 and 2004, and the related consolidated
statements of operations, shareowners investment, and cash
flows for each of the three years in the period ended
October 31, 2005. Our audits also included the financial
statement schedule listed in the index at Item 15. These
financial statements and the schedule are the responsibility of
the Companys management. Our responsibility is to express
an opinion on these financial statements and the schedule based
on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the consolidated
financial position of ADC Telecommunications, Inc. and
subsidiaries at October 31, 2005 and 2004, and the
consolidated results of their operations and their cash flows
for each of the three years in the period ended October 31,
2005, in conformity with U.S. generally accepted accounting
principles. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic
financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
effectiveness of ADC Telecommunications, Inc. and
subsidiaries internal control over financial reporting as
of October 31, 2005, based on criteria established in
Internal Control-Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission and our
report dated January 12, 2006 expressed an unqualified
opinion thereon.
Minneapolis, Minnesota
January 12, 2006
44
ADC Telecommunications, Inc. and Subsidiaries
Consolidated Statements of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended October 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
|
(In millions, except earnings | |
|
|
per share) | |
Net Sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products
|
|
$ |
997.9 |
|
|
$ |
681.2 |
|
|
$ |
484.7 |
|
|
Services
|
|
|
171.3 |
|
|
|
92.2 |
|
|
|
95.1 |
|
|
|
|
|
|
|
|
|
|
|
Total net sales
|
|
|
1,169.2 |
|
|
|
773.4 |
|
|
|
579.8 |
|
Cost of Sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products
|
|
|
588.6 |
|
|
|
372.0 |
|
|
|
270.0 |
|
|
Services
|
|
|
159.7 |
|
|
|
99.1 |
|
|
|
101.8 |
|
|
|
|
|
|
|
|
|
|
|
Total cost of sales
|
|
|
748.3 |
|
|
|
471.1 |
|
|
|
371.8 |
|
|
|
|
|
|
|
|
|
|
|
Gross Profit
|
|
|
420.9 |
|
|
|
302.3 |
|
|
|
208.0 |
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
71.6 |
|
|
|
59.1 |
|
|
|
59.9 |
|
|
Selling and administration
|
|
|
262.0 |
|
|
|
205.0 |
|
|
|
158.9 |
|
|
Impairment charges
|
|
|
0.3 |
|
|
|
1.7 |
|
|
|
15.6 |
|
|
Restructuring charges
|
|
|
14.7 |
|
|
|
11.9 |
|
|
|
27.6 |
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
348.6 |
|
|
|
277.7 |
|
|
|
262.0 |
|
|
|
|
|
|
|
|
|
|
|
Operating Income (Loss)
|
|
|
72.3 |
|
|
|
24.6 |
|
|
|
(54.0 |
) |
Other Income, Net
|
|
|
20.4 |
|
|
|
11.0 |
|
|
|
9.1 |
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
92.7 |
|
|
|
35.6 |
|
|
|
(44.9 |
) |
Provision (benefit) for income taxes
|
|
|
7.2 |
|
|
|
2.0 |
|
|
|
(5.1 |
) |
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
|
85.5 |
|
|
|
33.6 |
|
|
|
(39.8 |
) |
Discontinued Operations, Net of Tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from discontinued operations
|
|
|
(1.3 |
) |
|
|
(67.2 |
) |
|
|
(36.9 |
) |
|
Gain on sale of discontinued operations, net
|
|
|
26.5 |
|
|
|
50.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25.2 |
|
|
|
(17.2 |
) |
|
|
(36.9 |
) |
|
|
|
|
|
|
|
|
|
|
Net Income (Loss)
|
|
$ |
110.7 |
|
|
$ |
16.4 |
|
|
$ |
(76.7 |
) |
|
|
|
|
|
|
|
|
|
|
Weighted Average Common Shares Outstanding (Basic)
|
|
|
116.0 |
|
|
|
115.5 |
|
|
|
114.8 |
|
|
|
|
|
|
|
|
|
|
|
Weighted Average Common Shares Outstanding (Diluted)
|
|
|
131.1 |
|
|
|
116.0 |
|
|
|
114.8 |
|
|
|
|
|
|
|
|
|
|
|
Basic Income (Loss) Per Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$ |
0.74 |
|
|
$ |
0.29 |
|
|
$ |
(0.35 |
) |
|
|
|
|
|
|
|
|
|
|
|
Discontinued operations
|
|
$ |
0.21 |
|
|
$ |
(0.15 |
) |
|
$ |
(0.32 |
) |
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$ |
0.95 |
|
|
$ |
0.14 |
|
|
$ |
(0.67 |
) |
|
|
|
|
|
|
|
|
|
|
Diluted Income (Loss) Per Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$ |
0.72 |
|
|
$ |
0.29 |
|
|
$ |
(0.35 |
) |
|
|
|
|
|
|
|
|
|
|
|
Discontinued operations
|
|
$ |
0.19 |
|
|
$ |
(0.15 |
) |
|
$ |
(0.32 |
) |
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$ |
0.91 |
|
|
$ |
0.14 |
|
|
$ |
(0.67 |
) |
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
Consolidated Financial Statements.
45
ADC Telecommunications, Inc. and Subsidiaries
Consolidated Balance Sheets
|
|
|
|
|
|
|
|
|
|
|
|
|
October 31, | |
|
October 31, | |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
|
(In millions) | |
ASSETS |
Current Assets:
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$ |
110.1 |
|
|
$ |
66.2 |
|
|
Available-for-sale securities
|
|
|
335.3 |
|
|
|
434.6 |
|
|
Accounts receivable, net of reserves of $9.6 and $15.8
|
|
|
195.6 |
|
|
|
156.2 |
|
|
Unbilled revenues
|
|
|
38.1 |
|
|
|
34.8 |
|
|
Inventories, net of reserves of $35.7 and $41.9
|
|
|
140.5 |
|
|
|
97.6 |
|
|
Assets of discontinued operations
|
|
|
|
|
|
|
22.0 |
|
|
Prepaid and other current assets
|
|
|
33.4 |
|
|
|
24.7 |
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
853.0 |
|
|
|
836.1 |
|
Property and equipment, net of accumulated depreciation of
$351.2 and $314.9
|
|
|
221.1 |
|
|
|
232.5 |
|
Assets held for sale
|
|
|
|
|
|
|
6.6 |
|
Restricted cash
|
|
|
23.6 |
|
|
|
21.9 |
|
Goodwill
|
|
|
240.5 |
|
|
|
180.1 |
|
Intangibles, net of accumulated amortization of $35.5 and
$13.9
|
|
|
165.0 |
|
|
|
93.0 |
|
Available-for-sale securities
|
|
|
12.1 |
|
|
|
26.8 |
|
Other assets
|
|
|
19.7 |
|
|
|
31.1 |
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$ |
1,535.0 |
|
|
$ |
1,428.1 |
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREOWNERS INVESTMENT |
Current Liabilities
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$ |
77.4 |
|
|
$ |
72.5 |
|
|
Accrued compensation and benefits
|
|
|
80.9 |
|
|
|
65.6 |
|
|
Other accrued liabilities
|
|
|
78.8 |
|
|
|
80.9 |
|
|
Income taxes payable
|
|
|
15.9 |
|
|
|
27.6 |
|
|
Restructuring accrual
|
|
|
33.3 |
|
|
|
38.4 |
|
|
Liabilities of discontinued operations
|
|
|
|
|
|
|
16.7 |
|
|
Notes payable
|
|
|
0.3 |
|
|
|
0.3 |
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
286.6 |
|
|
|
302.0 |
|
Pension obligations and other long-term liabilities
|
|
|
74.5 |
|
|
|
66.8 |
|
Long-term notes payable
|
|
|
400.0 |
|
|
|
400.0 |
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
$ |
761.1 |
|
|
$ |
768.8 |
|
|
|
|
|
|
|
|
Shareowners investment:
|
|
|
|
|
|
|
|
|
|
Preferred stock, $0.00 par value; authorized
10.0 shares; None issued or outstanding
|
|
|
|
|
|
|
|
|
|
Common stock, $0.20 par value; authorized
1,200.0 shares; issued and outstanding 116.5 and
115.7 shares
|
|
|
23.3 |
|
|
|
162.0 |
|
|
Paid-in capital
|
|
|
1,397.9 |
|
|
|
1,250.8 |
|
|
Accumulated deficit
|
|
|
(622.9 |
) |
|
|
(733.6 |
) |
|
Deferred compensation
|
|
|
1.2 |
|
|
|
(6.4 |
) |
|
Accumulated other comprehensive loss
|
|
|
(25.6 |
) |
|
|
(13.5 |
) |
|
|
|
|
|
|
|
|
|
Total shareowners investment
|
|
|
773.9 |
|
|
|
659.3 |
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareowners investment
|
|
$ |
1,535.0 |
|
|
$ |
1,428.1 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
Consolidated Financial Statements.
46
ADC Telecommunications, Inc. and Subsidiaries
Consolidated Statements of Shareowners Investment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated | |
|
|
|
|
Common Stock | |
|
|
|
Retained | |
|
|
|
Other | |
|
|
|
|
| |
|
Paid-In | |
|
Earnings | |
|
Deferred | |
|
Comprehensive | |
|
|
|
|
Shares | |
|
Amount | |
|
Capital | |
|
(Deficit) | |
|
Compensation | |
|
Income (Loss) | |
|
Total | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(In millions) | |
Balance, October 31, 2002
|
|
|
799.6 |
|
|
$ |
159.9 |
|
|
$ |
1,272.6 |
|
|
$ |
(673.3 |
) |
|
$ |
(12.3 |
) |
|
$ |
(14.7 |
) |
|
$ |
732.2 |
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(76.7 |
) |
|
|
|
|
|
|
|
|
|
|
(76.7 |
) |
Other comprehensive loss, net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Translation loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(10.7 |
) |
|
|
(10.7 |
) |
|
Unrealized gain on securities, net of taxes of $0.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4.2 |
|
|
|
4.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(83.2 |
) |
Exercise of common stock options
|
|
|
2.7 |
|
|
|
0.5 |
|
|
|
3.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4.1 |
|
Stock issued for employee benefit plans, net of forfeitures
|
|
|
4.3 |
|
|
|
0.9 |
|
|
|
5.2 |
|
|
|
|
|
|
|
(1.4 |
) |
|
|
|
|
|
|
4.7 |
|
Reduction of deferred compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4.4 |
|
|
|
|
|
|
|
4.4 |
|
Purchased call option
|
|
|
|
|
|
|
|
|
|
|
(137.3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(137.3 |
) |
Sale of warrants
|
|
|
|
|
|
|
|
|
|
|
102.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
102.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, October 31, 2003
|
|
|
806.6 |
|
|
|
161.3 |
|
|
|
1,246.9 |
|
|
|
(750.0 |
) |
|
|
(9.3 |
) |
|
|
(21.2 |
) |
|
|
627.7 |
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16.4 |
|
|
|
|
|
|
|
|
|
|
|
16.4 |
|
Other comprehensive income, net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Translation gain, net of taxes of $0.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12.3 |
|
|
|
12.3 |
|
|
Unrealized loss on securities, net of taxes of $0.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(0.4 |
) |
|
|
(0.4 |
) |
|
Adjustment for sale of securities, net of taxes of $0.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4.2 |
) |
|
|
(4.2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24.1 |
|
Exercise of common stock options
|
|
|
2.0 |
|
|
|
0.4 |
|
|
|
2.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.6 |
|
Reduction of deferred compensation
|
|
|
1.5 |
|
|
|
0.3 |
|
|
|
1.7 |
|
|
|
|
|
|
|
2.9 |
|
|
|
|
|
|
|
4.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, October 31, 2004
|
|
|
810.1 |
|
|
|
162.0 |
|
|
|
1,250.8 |
|
|
|
(733.6 |
) |
|
|
(6.4 |
) |
|
|
(13.5 |
) |
|
|
659.3 |
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
110.7 |
|
|
|
|
|
|
|
|
|
|
|
110.7 |
|
Other comprehensive income, net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Translation loss, net of taxes of $0.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4.6 |
) |
|
|
(4.6 |
) |
|
Unrealized loss on securities, net of taxes of $0.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(0.3 |
) |
|
|
(0.3 |
) |
|
Minimum pension liability adjustment, net of taxes of $0.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7.2 |
) |
|
|
(7.2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
98.6 |
|
Reverse stock split
|
|
|
(694.9 |
) |
|
|
(139.0 |
) |
|
|
138.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(0.1 |
) |
Stock issued for employee incentive plan, net of forfeitures
|
|
|
0.1 |
|
|
|
|
|
|
|
0.2 |
|
|
|
|
|
|
|
(0.6 |
) |
|
|
|
|
|
|
(0.4 |
) |
Exercise of common stock options
|
|
|
1.2 |
|
|
|
0.3 |
|
|
|
13.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13.5 |
|
Reduction of deferred compensation
|
|
|
|
|
|
|
|
|
|
|
(5.2 |
) |
|
|
|
|
|
|
8.2 |
|
|
|
|
|
|
|
3.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, October 31, 2005
|
|
|
116.5 |
|
|
$ |
23.3 |
|
|
$ |
1,397.9 |
|
|
$ |
(622.9 |
) |
|
$ |
1.2 |
|
|
$ |
(25.6 |
) |
|
$ |
773.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
Consolidated Financial Statements.
47
ADC Telecommunications, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended October 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
|
(In millions) | |
Operating Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) from continuing operations
|
|
$ |
85.5 |
|
|
$ |
33.6 |
|
|
$ |
(39.8 |
) |
Adjustments to reconcile net income (loss) from continuing
operations to net cash provided by operating activities from
continuing operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inventory and fixed asset write-offs
|
|
|
0.3 |
|
|
|
1.7 |
|
|
|
15.6 |
|
|
Depreciation and amortization
|
|
|
67.2 |
|
|
|
41.4 |
|
|
|
53.4 |
|
|
Change in bad debt reserves
|
|
|
(3.0 |
) |
|
|
(2.7 |
) |
|
|
4.5 |
|
|
Change in inventory reserves
|
|
|
5.7 |
|
|
|
(0.4 |
) |
|
|
|
|
|
Non-cash stock compensation
|
|
|
3.0 |
|
|
|
2.9 |
|
|
|
4.4 |
|
|
Change in deferred income taxes
|
|
|
2.5 |
|
|
|
1.5 |
|
|
|
|
|
|
(Gain) loss on sale of investments
|
|
|
|
|
|
|
(4.8 |
) |
|
|
(0.9 |
) |
|
(Gain) loss on sale of property and equipment
|
|
|
(4.2 |
) |
|
|
(0.5 |
) |
|
|
1.0 |
|
|
(Gain) loss on sale of business
|
|
|
|
|
|
|
(2.8 |
) |
|
|
1.4 |
|
|
Other, net
|
|
|
1.9 |
|
|
|
(1.8 |
) |
|
|
(1.0 |
) |
|
Changes in operating assets and liabilities, net of acquisitions
and divestitures:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable and unbilled revenues (increase)/decrease
|
|
|
(31.5 |
) |
|
|
(10.7 |
) |
|
|
1.9 |
|
|
|
Inventories (increase)/decrease
|
|
|
(40.8 |
) |
|
|
(5.2 |
) |
|
|
9.4 |
|
|
|
Prepaid and other assets (increase)/decrease
|
|
|
(20.1 |
) |
|
|
19.3 |
|
|
|
138.8 |
|
|
|
Accounts payable increase/(decrease)
|
|
|
0.8 |
|
|
|
1.9 |
|
|
|
(29.5 |
) |
|
|
Accrued liabilities increase/(decrease)
|
|
|
(8.5 |
) |
|
|
0.1 |
|
|
|
(123.6 |
) |
|
|
Pension liabilities
|
|
|
1.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cash provided by operating activities from continuing
operations
|
|
|
60.0 |
|
|
|
73.5 |
|
|
|
35.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cash used by operating activities from discontinued
operations
|
|
|
(1.4 |
) |
|
|
(68.0 |
) |
|
|
(3.6 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Total cash provided by operating activities
|
|
|
58.6 |
|
|
|
5.5 |
|
|
|
32.0 |
|
|
|
|
|
|
|
|
|
|
|
Investing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisitions, net of cash acquired
|
|
|
(173.2 |
) |
|
|
(295.2 |
) |
|
|
|
|
|
Divestitures, net of cash disposed
|
|
|
32.8 |
|
|
|
67.9 |
|
|
|
1.9 |
|
|
Property and equipment additions
|
|
|
(30.2 |
) |
|
|
(10.3 |
) |
|
|
(69.5 |
) |
|
Proceeds from disposal of property and equipment
|
|
|
16.7 |
|
|
|
11.2 |
|
|
|
1.9 |
|
|
Proceeds from sale/collection of note receivable
|
|
|
18.2 |
|
|
|
|
|
|
|
|
|
|
(Increase) decrease in restricted cash
|
|
|
(1.8 |
) |
|
|
(6.3 |
) |
|
|
161.4 |
|
|
Purchase of available for sale securities
|
|
|
(957.4 |
) |
|
|
(2,073.2 |
) |
|
|
(652.2 |
) |
|
Sale of available for sale securities
|
|
|
1,071.2 |
|
|
|
2,115.9 |
|
|
|
159.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cash (used for) provided by investing activities
|
|
|
(23.7 |
) |
|
|
(190.0 |
) |
|
|
(397.0 |
) |
|
|
|
|
|
|
|
|
|
|
Financing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Repayments) Issuance of debt
|
|
|
|
|
|
|
(10.7 |
) |
|
|
371.7 |
|
|
Purchase of call spread option
|
|
|
|
|
|
|
|
|
|
|
(34.5 |
) |
|
Common stock issued
|
|
|
13.6 |
|
|
|
3.7 |
|
|
|
8.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cash (used for) provided by financing activities
|
|
|
13.6 |
|
|
|
(7.0 |
) |
|
|
345.4 |
|
|
|
|
|
|
|
|
|
|
|
Effect of Exchange Rate Changes on Cash
|
|
|
(4.6 |
) |
|
|
(0.2 |
) |
|
|
0.8 |
|
|
|
|
|
|
|
|
|
|
|
(Decrease) Increase in Cash and Cash Equivalents
|
|
|
43.9 |
|
|
|
(191.7 |
) |
|
|
(18.8 |
) |
Cash and Cash Equivalents, Beginning of Year
|
|
|
66.2 |
|
|
|
257.9 |
|
|
|
276.7 |
|
|
|
|
|
|
|
|
|
|
|
Cash and Cash Equivalents, End of Year
|
|
$ |
110.1 |
|
|
$ |
66.2 |
|
|
$ |
257.9 |
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
Consolidated Financial Statements.
48
ADC Telecommunications, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
|
|
Note 1: |
Summary of Significant Accounting Policies |
Business: 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. Our
products also include network access devices such as
high-bit-rate digital subscriber line and wireless coverage
solutions. Our products are primarily used in the last
mile/kilometer portion of networks. This network of
copper, coaxial cable, fiber lines, wireless facilities and
related equipment link voice, video and data traffic from the
end-user of the communications service to the serving office of
our customer. In addition, we compliment our hardware business
through the provision of professional services relating to the
design, equipping and building of networks.
Our customers include local and long-distance telephone
companies, 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. We offer broadband connectivity systems,
enterprise systems, wireless transport and coverage optimization
systems, business access systems and professional services to
our customers through the following two reportable business
segments: Broadband Infrastructure and Access and Professional
Services (previously known as Integrated Solutions).
Principles of Consolidation: The consolidated financial
statements include the accounts of ADC Telecommunications,
Inc., a Minnesota corporation, and all significant subsidiaries
in which ADC Telecommunications, Inc. has more than a 50%
equity ownership. In these Notes to Consolidated Financial
Statements, these companies are collectively referred to as
ADC, we, us or
our. All significant intercompany transactions and
balances have been eliminated in consolidation.
Basis of Presentation: During fiscal 2005, we sold our
ADC Systems Integration UK Limited (SIUK) business
and Metrica service assurance software group. During fiscal
2004, we sold our BroadAccess40 business, the business related
to our Cuda cable modem termination system product line and
related FastFlow Broadband Provisioning Manager software, and
the business related to our Singl.eView product line. In
accordance with SFAS No. 144, these businesses were
classified as discontinued operations in fiscal 2005 and 2004
and the financial results are reported separately as
discontinued operations for all periods presented.
Fair Value of Financial Instruments: At October 31,
2005 and 2004, our financial instruments included cash and cash
equivalents, restricted cash, accounts receivable,
available-for-sale securities and accounts payable. The fair
values of these financial instruments approximated carrying
value because of the short-term nature of these instruments. In
addition, we have long-term notes payable. We estimate that the
carrying value of our $200.0 million variable rate notes is
its fair market value. As of October 31, 2005, the fair
value of our $200.0 million fixed rate notes was
$182.7 million. Fair value was estimated based on the
quoted market price at October 31, 2005.
Reclassifications: Certain prior year amounts have been
reclassified to conform to the current year presentation. These
reclassifications have no effect on reported earnings. Auction
rate securities, which previously had been classified as cash
and cash equivalents, are now classified as current
available-for-sale securities for all periods presented. This
reclassification had no impact on current assets, working
capital, or any amounts reported on the statement of operations.
Changes in available-for-sale securities are shown in the
investing section of the statement of cash flows. As of
October 31, 2005 and 2004, we held auction rate securities
with a value of $307.5 million and $427.3 million,
respectively.
49
ADC Telecommunications, Inc. and Subsidiaries
Notes to Consolidated Financial
Statements (Continued)
Reverse Stock Split: On April 18, 2005, we announced
a one-for-seven reverse split of our common stock. The effective
date of the reverse split was May 10, 2005. All share,
share equivalent and per share amounts have been adjusted to
reflect the reverse stock split for all periods presented in
this Form 10-K. We did not issue any fractional shares of
our new common stock as a result of the reverse split. Instead,
shareowners who would otherwise be entitled to receive a
fractional share of new common stock received cash for the
fractional share in an amount equal to the fractional share
multiplied by the split adjusted price of one share of
ADCs common stock. As a result, we have a treasury stock
balance of 4,272 shares at $16.10 per share. The
treasury stock balance is included as a reduction to the common
shares and a reduction to paid-in capital.
Cash and Cash Equivalents: Cash equivalents represent
short-term investments in money market instruments with original
maturities of three months or less. The carrying amounts of
these investments approximate their fair value due to their
short maturities. At October 31, 2005, the majority of our
cash equivalents were spread between three major financial
institutions to avoid any significant concentration risk.
Restricted Cash: Restricted cash consists primarily of
collateral for letters of credit and lease obligations, which is
expected to become available to us upon satisfaction of the
obligations pursuant to which the letters of credit or
guarantees were issued. In addition, we have $6.7 million
of restricted cash held in trust related to our FONS
acquisition, which is to be paid to FONS employees over the
course of the next nine months.
Available-for-Sale Securities: We classify debt
securities with maturities of more than three months but less
than one year and equity securities in publicly held companies
as current available-for-sale securities. Debt securities with
maturities greater than one year on their acquisition date are
classified as long-term available-for-sale securities. We intend
to hold the long-term available-for-sale securities for a period
longer than 12 months.
Inventories: Inventories include material, labor and
overhead and are stated at the lower of
first-in, first-out
cost or market. In assessing the ultimate realization of
inventories, we are required to make judgments as to future
demand requirements compared to current or committed inventory
levels. Our reserve requirements generally increase as our
projected demand requirements decrease due to market conditions,
technological and product life cycle changes, and longer than
previously expected usage periods.
Property and Equipment: Property and equipment are
recorded at cost and depreciated using the straight-line method
over estimated useful lives of three to thirty years or, in the
case of leasehold improvements, over the term of the lease, if
shorter. Both straight-line and accelerated methods of
depreciation are used for income tax purposes.
Impairment of Long-Lived Assets: In fiscal 2003, we
adopted SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets. We record
impairment losses on long-lived assets used in operations and
definite lived intangible assets when events and circumstances
indicate the assets might be impaired and the undiscounted cash
flows estimated to be generated by those assets are less than
their carrying amounts. The impairment loss is measured by
comparing the fair value of the asset to its carrying amount.
See Note 16 for details of our impairment charges.
Goodwill and Other Intangible Assets: Goodwill is tested
for impairment annually, or more frequently if events or changes
in circumstances indicate that the asset might be impaired. We
perform impairment reviews at a reporting unit level and use a
discounted cash flow model based on managements judgment
and assumptions to determine the estimated fair value of each
reporting unit. An impairment loss generally would be recognized
when the carrying amount of the reporting units net assets
exceeds the estimated fair value of the reporting unit.
Impairment testing indicated that the estimated fair value of
each reporting unit exceeded its corresponding carrying amount,
including recorded goodwill and, as such, no impairment existed
at that time. Our other intangible assets (consisting primarily
of technology, trademarks, customer lists, non-compete
agreements, distributor network and patents) are amortized over
their useful lives, which are from one to twenty years. Refer to
Note 7 for details of our goodwill and intangible assets.
50
ADC Telecommunications, Inc. and Subsidiaries
Notes to Consolidated Financial
Statements (Continued)
Research and Development Costs: Our policy is to expense
all research and development costs in the period incurred.
Revenue Recognition: We recognize revenue, net of
discounts, when product ownership and the risk of loss has
transferred to the customer, we have no remaining obligation,
persuasive evidence of a final agreement exists, delivery has
occurred, the selling price is fixed or determinable and
collectibility is reasonably assured.
Revenue from product sales is generally recognized upon shipment
of the product to the customer in accordance with the terms of
the sales agreement. Revenue from services consists of fees for
systems requirements, design and analysis, customization and
installation services, ongoing system management, enhancements
and maintenance. We primarily apply the
percentage-of-completion
method to arrangements consisting of design, customization and
installation. We measure progress towards completion by
comparing costs incurred to total planned project costs.
We record provisions against our gross revenue for estimated
product returns and allowances in the period when the related
revenue is recorded.
Allowance for Uncollectible Accounts: We are required to
estimate the collectibility of our trade and notes receivable. A
considerable amount of judgment is required in assessing the
realization of these receivables, including the current
creditworthiness of each customer and related aging of past due
balances. In order to assess the collectibility of these
receivables, we perform ongoing credit evaluations of our
customers financial condition. Through these evaluations
we may become aware of a situation where a customer may not be
able to meet its financial obligations due to deterioration of
its financial viability, credit ratings or bankruptcy. The
reserve requirements are based on the best facts available to us
and are reevaluated and adjusted as additional information is
received.
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 changes in the amount of warranty reserve for the fiscal
years ended October 31, 2005, 2004 and 2003 is as follows:
|
|
|
|
|
|
|
(In millions) | |
Balance as of October 31, 2002
|
|
$ |
10.5 |
|
Charged to other accounts
|
|
|
|
|
Charged to costs and expenses
|
|
|
5.7 |
|
Deductions (write-offs)
|
|
|
5.8 |
|
|
|
|
|
Balance as of October 31, 2003
|
|
|
10.4 |
|
Charged to other accounts
|
|
|
5.3 |
|
Charged to costs and expenses
|
|
|
4.0 |
|
Deductions (write-offs)
|
|
|
(5.3 |
) |
|
|
|
|
Balance as of October 31, 2004
|
|
|
14.4 |
|
Charged to other accounts
|
|
|
|
|
Charged to costs and expenses
|
|
|
2.7 |
|
Deductions (write-offs)
|
|
|
(6.3 |
) |
|
|
|
|
Balance as of October 31, 2005
|
|
$ |
10.8 |
|
|
|
|
|
51
ADC Telecommunications, Inc. and Subsidiaries
Notes to Consolidated Financial
Statements (Continued)
Deferred Financing Costs: Deferred financing costs are
capitalized and amortized as interest expense on a basis that
approximates the effective interest method over the terms of the
related notes.
Income Taxes and Deferred Taxes: We utilize the liability
method of accounting for income taxes. Deferred tax liabilities
or assets are recognized for the expected future tax
consequences of temporary differences between the book and tax
bases of assets and liabilities. We regularly assess the
likelihood that our deferred tax assets will be recovered from
future taxable income, and we record a valuation allowance to
reduce our deferred tax assets to the amounts we believe to be
realizable. We consider projected future taxable income and
ongoing tax planning strategies in assessing the amount of the
valuation allowance. If we determine we will not realize all or
part of our deferred tax assets, an adjustment to the deferred
tax asset will be charged to earnings in the period such
determination is made. We concluded during the third quarter of
fiscal 2002 that a full valuation allowance against our net
deferred tax assets was appropriate as a result of our
cumulative losses to that point and the full utilization of our
loss carryback potential. In addition, we expect to provide a
nearly full valuation allowance on any future tax benefits until
we can sustain a level of profitability that demonstrates, on a
more likely than not basis, our ability to utilize these assets.
Foreign Currency Translation: We convert assets and
liabilities of foreign operations to their U.S. dollar
equivalents at rates in effect at the balance sheet dates, and
we record translation adjustments in shareowners
investment. Income statements of foreign operations are
translated from the operations functional currency to
U.S. dollar equivalents at the exchange rate on the
transaction dates. Foreign currency exchange transaction gains
and losses are reported in other income (expense), net.
We are also exposed to foreign currency exchange risk as a
result of changes in intercompany balance sheet accounts and
other balance sheet items. At October 31, 2005, these
balance sheet exposures were mitigated through the use of
foreign exchange forward contracts with maturities of less than
12 months. Derivatives entered into for this purpose are
classified as economic hedges of foreign currency cash flows. We
record these instruments at fair value on our balance sheet,
with gains and losses recorded in other income (expense) as
foreign currency transactions. The principal currency exposure
being mitigated was the Australian dollar. As of
October 31, 2005, the fair value of these derivative
instruments are immaterial to the financial statements.
Our foreign currency forward contracts contain credit risk to
the extent that our bank counterparties may be unable to meet
the terms of the agreements. We minimize such risk by limiting
our counterparties to major financial institutions of high
credit quality.
Stock-Based Compensation: We have recognized and measured
our stock option compensation by the intrinsic value method in
accordance with APB Opinion 25, Accounting for
Stock Issued to Employees, and related
interpretations. Compensation cost for employee stock options is
measured as the excess, if any, of the quoted market price of
our common stock at the date of the grant over the amount that
the employee is required to pay for the stock. No compensation
expense was recognized for options issued in fiscal 2005, 2004
and 2003 as all stock options were issued at fair market value
on the date of grant. We have also issued restricted stock
awards and restricted stock units (hereafter sometimes
collectively called restricted stock). The fair
market value of the restricted stock is amortized over the
projected remaining vesting period.
We adopted the disclosure provisions of SFAS No. 148,
Accounting for Stock-Based Compensation.
SFAS No. 148 requires disclosure of how stock
compensation expense would be computed under
SFAS No. 123, using the fair value method. We
estimated the fair value using the Black-Scholes option-
52
ADC Telecommunications, Inc. and Subsidiaries
Notes to Consolidated Financial
Statements (Continued)
pricing model. The following table summarizes what our operating
results would have been if the fair value method of accounting
for stock options had been utilized (in millions, except for per
share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
Net income (loss) as reported
|
|
$ |
110.7 |
|
|
$ |
16.4 |
|
|
$ |
(76.7 |
) |
Plus: Stock-based employee compensation expense included in
reported income (loss)
|
|
|
3.0 |
|
|
|
2.9 |
|
|
|
4.4 |
|
Less: Stock compensation expense fair value based
method
|
|
|
(20.5 |
) |
|
|
(36.6 |
) |
|
|
(46.7 |
) |
|
|
|
|
|
|
|
|
|
|
Pro Forma Income (Loss)
|
|
$ |
93.2 |
|
|
$ |
(17.3 |
) |
|
$ |
(119.0 |
) |
|
|
|
|
|
|
|
|
|
|
Income (Loss) Per Share Basic and Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
As reported Basic
|
|
$ |
0.95 |
|
|
$ |
0.14 |
|
|
$ |
(0.67 |
) |
As reported Diluted
|
|
$ |
0.91 |
|
|
$ |
0.14 |
|
|
$ |
(0.67 |
) |
Pro forma Basic
|
|
$ |
0.80 |
|
|
$ |
(0.15 |
) |
|
$ |
(1.04 |
) |
Pro forma Diluted
|
|
$ |
0.78 |
|
|
$ |
(0.15 |
) |
|
$ |
(1.04 |
) |
During the third quarter of fiscal 2003, we offered eligible
employees the right to exchange certain of their employee stock
options for a lesser number of new options to be granted six
months and one day following the surrender of their existing
options. The new options, which were granted on
December 29, 2003, have an exercise price of
$19.81 per share. This exercise price is equal to the
average of the high and low trading price of our common stock on
the grant date. These options will vest over a two-year period
from the grant date. For purposes of the above tabular
disclosure, the unrecognized compensation cost of the cancelled
options and the incremental fair value of the replacement
options are being amortized over a
30-month period,
consisting of the
24-month vesting period
for the replacement options and the six month and one day period
between the cancellation of the surrendered options and the
grant of the replacement options.
Use of Estimates: The preparation of financial statements
in conformity with accounting principles generally accepted in
the United States requires us to make estimates and assumptions
that affect the amounts reported in the financial statements and
accompanying notes. Estimates are used in determining such items
as returns and allowances, depreciation and amortization lives
and amounts recorded for contingencies and other reserves.
Although these estimates are based on our knowledge of current
events and actions we may undertake in the future, these
estimates ultimately may differ from actual results.
Comprehensive Income (Loss): Components of comprehensive
income (loss) include net income, foreign currency translation
adjustments, unrealized gains (losses) on available-for-sale
securities, and adjustments to record minimum pension liability,
net of tax. Comprehensive income is presented in the
consolidated statements of shareowners investment.
Dividends: No cash dividends have been declared or paid
during the past three years.
Off-Balance Sheet Arrangements: We do not have any
off-balance sheet arrangements.
Recently Issued Accounting Pronouncements: In May 2005,
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. Opinion
20 previously required that most voluntary changes in accounting
principle be recognized by including the cumulative effect of
changing to the new accounting principle in net income of 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 or as the adjustment of previously issued
financial statements to reflect a
53
ADC Telecommunications, Inc. and Subsidiaries
Notes to Consolidated Financial
Statements (Continued)
change in the reporting entity. SFAS 154 also requires that
a change in depreciation, amortization, or depletion method for
long-lived, nonfinancial assets be accounted for as a change in
accounting estimate effected by a change in accounting
principle. SFAS 154 is effective for changes and error
corrections made in fiscal years beginning after
December 15, 2005. We are required to adopt the provisions
of SFAS 154 in our fiscal year beginning November 1,
2006.
In December 2004, the FASB issued SFAS No. 153,
Exchanges of Nonmonetary Assets an
amendment of APB Opinion No. 29,
(SFAS 153). SFAS 153 amends Opinion 29
to eliminate the exception for nonmonetary exchanges of similar
productive assets and replaces it with a general exception for
exchanges of nonmonetary assets that do not have commercial
substance. A nonmonetary exchange has commercial substance if
the future cash flows of the entity are expected to change
significantly as a result of the exchange. SFAS 153 is
effective for fiscal years beginning after June 15, 2005.
We are required to adopt the provisions of SFAS 153 in our
fiscal year beginning November 1, 2005.
In November 2004, FASB issued SFAS No. 151,
Inventory Costs, (SFAS 151).
This statement requires that abnormal amounts of idle facility
expense, freight, handling costs and spoilage be recognized as
current-period charges. This statement also requires that fixed
production overhead be allocated to inventory conversion costs
based on normal capacity of the production facilities.
SFAS 151 is effective for inventory costs incurred by us
beginning in fiscal 2006. We do not expect that the adoption of
this statement will have a material impact on our consolidated
financial statements.
In December 2004, FASB issued SFAS No. 123R,
Share-Based Payment: an amendment of FASB Statements
No. 123 and 95, (SFAS 123R)
which requires companies to recognize in the income statement
the grant-date fair value of stock options and other
equity-based compensation issued to employees.
SFAS No. 123R is effective for financial statements
issued for periods that begin after June 15, 2005, which is
our first quarter beginning November 1, 2005. We will use
the modified prospective transition method. Under the modified
prospective method, awards that are granted, modified or settled
after the date of adoption will be measured and accounted for in
accordance with SFAS 123R. Compensation cost for awards
granted prior to, but not vested, as of the date SFAS 123R
is adopted would be based on the grant date attributes
originally used to value those awards for pro forma purposes
under SFAS 123.
We expect the adoption of this standard will reduce fiscal
2006 net income by approximately $8.6 million. This
estimate is based on the number of options currently outstanding
and exercisable and could change based on the number of options
granted or forfeited in fiscal 2006.
In December 2004, FASB issued FASB Staff Position
No. FAS 109-2, Accounting and Disclosure
Guidance for Foreign Earnings Repatriation Provision within the
American Jobs Creation Act of 2004 (FSP
109-2). FSP 109-2 allows a company time beyond the
financial reporting period of enactment to evaluate the effect
of the American Jobs Creation Act of 2004 (the Act)
on its plan for reinvestment or repatriation of foreign
earnings. The Act creates a temporary incentive for
U.S. corporations to repatriate accumulated income earned
abroad by providing an 85 percent deduction for certain
dividends received from controlled foreign corporations. The
deduction is subject to a number of limitations. FSP 109-2 will
not impact us because we do not plan on repatriating our foreign
earnings.
54
ADC Telecommunications, Inc. and Subsidiaries
Notes to Consolidated Financial
Statements (Continued)
|
|
Note 2: |
Other Financial Statement Data (in millions) |
|
|
|
Other Income (Expense), Net: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
Interest income on short-term investments
|
|
$ |
18.3 |
|
|
$ |
12.4 |
|
|
$ |
9.7 |
|
Interest expense on variable rate convertible notes
|
|
|
(11.2 |
) |
|
|
(8.8 |
) |
|
|
(3.6 |
) |
|
|
|
|
|
|
|
|
|
|
Interest income, net
|
|
|
7.1 |
|
|
|
3.6 |
|
|
|
6.1 |
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange income (loss)
|
|
|
0.6 |
|
|
|
(0.5 |
) |
|
|
5.9 |
|
Gain on sale of note receivable
|
|
|
9.0 |
|
|
|
|
|
|
|
|
|
Gain (loss) on divested product lines
|
|
|
|
|
|
|
3.5 |
|
|
|
(1.4 |
) |
Gain on investments
|
|
|
|
|
|
|
4.8 |
|
|
|
0.9 |
|
Gain (loss) on sale of fixed assets
|
|
|
4.2 |
|
|
|
0.5 |
|
|
|
(0.8 |
) |
Other
|
|
|
(0.5 |
) |
|
|
(0.9 |
) |
|
|
(1.6 |
) |
|
|
|
|
|
|
|
|
|
|
Other, net
|
|
|
13.3 |
|
|
|
7.4 |
|
|
|
3.0 |
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense), net
|
|
$ |
20.4 |
|
|
$ |
11.0 |
|
|
$ |
9.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Cash Flow Information: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
Income taxes paid (refunds received)
|
|
$ |
9.0 |
|
|
$ |
1.2 |
|
|
$ |
(142.7 |
) |
Interest paid
|
|
$ |
10.0 |
|
|
$ |
8.5 |
|
|
$ |
1.5 |
|
|
|
|
Supplemental Schedule of Investing Activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
Acquisitions:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of assets acquired
|
|
$ |
179.4 |
|
|
$ |
454.9 |
|
|
$ |
|
|
Less: Liabilities assumed
|
|
|
(5.8 |
) |
|
|
(148.8 |
) |
|
|
|
|
Acquisition costs
|
|
|
|
|
|
|
5.6 |
|
|
|
|
|
Cash acquired
|
|
|
(0.4 |
) |
|
|
(16.5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisitions, net of cash acquired
|
|
$ |
173.2 |
|
|
$ |
295.2 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
Divestitures:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from divestitures
|
|
$ |
33.6 |
|
|
$ |
78.9 |
|
|
$ |
|
|
Carrying value of assets disposed
|
|
|
|
|
|
|
|
|
|
|
2.6 |
|
Less: Liabilities disposed
|
|
|
|
|
|
|
|
|
|
|
(0.7 |
) |
Cash disposed
|
|
|
(0.8 |
) |
|
|
(11.0 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Divestitures, net of cash disposed
|
|
$ |
32.8 |
|
|
$ |
67.9 |
|
|
$ |
1.9 |
|
|
|
|
|
|
|
|
|
|
|
55
ADC Telecommunications, Inc. and Subsidiaries
Notes to Consolidated Financial
Statements (Continued)
|
|
|
Consolidated Balance Sheet Information: |
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
Inventories:
|
|
|
|
|
|
|
|
|
Purchased materials
|
|
$ |
100.2 |
|
|
$ |
81.0 |
|
Manufactured products
|
|
|
66.9 |
|
|
|
50.8 |
|
Work-in-process
|
|
|
9.1 |
|
|
|
7.7 |
|
Less: Inventory reserve
|
|
|
(35.7 |
) |
|
|
(41.9 |
) |
|
|
|
|
|
|
|
Total
|
|
$ |
140.5 |
|
|
$ |
97.6 |
|
|
|
|
|
|
|
|
Property and Equipment:
|
|
|
|
|
|
|
|
|
Land and buildings
|
|
$ |
137.2 |
|
|
$ |
135.3 |
|
Machinery and equipment
|
|
|
364.3 |
|
|
|
363.0 |
|
Furniture and fixtures
|
|
|
50.8 |
|
|
|
38.1 |
|
Less accumulated depreciation
|
|
|
(351.2 |
) |
|
|
(314.9 |
) |
|
|
|
|
|
|
|
Total
|
|
|
201.1 |
|
|
|
221.5 |
|
Construction-in-process
|
|
|
20.0 |
|
|
|
11.0 |
|
|
|
|
|
|
|
|
Total, net
|
|
$ |
221.1 |
|
|
$ |
232.5 |
|
|
|
|
|
|
|
|
Other Assets:
|
|
|
|
|
|
|
|
|
Notes receivable, net
|
|
$ |
7.8 |
|
|
$ |
22.6 |
|
Deferred financing costs
|
|
|
6.5 |
|
|
|
6.9 |
|
Other
|
|
|
5.4 |
|
|
|
1.6 |
|
|
|
|
|
|
|
|
Total
|
|
$ |
19.7 |
|
|
$ |
31.1 |
|
|
|
|
|
|
|
|
Other Accrued Liabilities:
|
|
|
|
|
|
|
|
|
Deferred Revenue
|
|
$ |
2.5 |
|
|
$ |
4.5 |
|
Warranty reserve
|
|
|
10.8 |
|
|
|
14.4 |
|
Accrued taxes (non-income)
|
|
|
51.2 |
|
|
|
15.7 |
|
Non-trade payables
|
|
|
8.7 |
|
|
|
31.8 |
|
Other
|
|
|
5.6 |
|
|
|
14.5 |
|
|
|
|
|
|
|
|
Total
|
|
$ |
78.8 |
|
|
$ |
80.9 |
|
|
|
|
|
|
|
|
On August 26, 2005 we completed the acquisition of FONS, a
leading manufacturer of high-performance passive optical
components and fiber optic cable packaging, distribution and
connectivity solutions. With the addition of FONS, we became one
of the largest suppliers of FTTX solutions in the United States
according to proprietary market share estimates. The results of
FONS, subsequent to August 26, 2005, are included in our
results of operations.
In this transaction, we acquired all of the outstanding shares
of FONS in exchange for cash paid of $166.1 million (net of
cash acquired) and certain assumed liabilities of FONS.
$34.0 million will be held in escrow for up to two years to
address potential indemnification claims of ADC. In addition,
approximately $6.7 million was placed into a trust account
by ADC to be paid to FONS employees over the course of nine
months. As of October 31, 2005, $4.1 million had been
paid to FONS employees. We acquired $83.3 million of
intangible assets as part of the purchase. $3.3 million was
allocated to in-process research and development
56
ADC Telecommunications, Inc. and Subsidiaries
Notes to Consolidated Financial
Statements (Continued)
for new technology development, which was immediately
written-off. Goodwill of $70.9 million was recorded in the
transaction and assigned to our Broadband Infrastructure and
Access segment. None of this goodwill, intangible assets and
in-process research and development is deductible for tax
purposes.
On May 6, 2005 we completed the acquisition of OpenCell, a
manufacturer of digital fiber-fed Distributed Antenna Systems
(DAS) and shared multi-access radio
frequency network equipment. The acquisition of OpenCell
allows us to incorporate OpenCells technology into our
existing Digivance wireless solutions, which are used by
wireless carriers to extend network coverage and accommodate
ever-growing capacity demands. The results of OpenCell
subsequent to May 6, 2005 are included in our results of
operations.
We purchased OpenCell from Crown Castle International Corp. for
$7.1 million in cash and certain assumed liabilities.
Included in the purchase was $4.7 million of intangible
assets. No amounts were allocated to in-process research and
development, because OpenCell did not have any new products in
development at the time of the acquisition. No goodwill was
recorded in the transaction.
On May 18, 2004 we completed the acquisition of KRONE from
GenTek, Inc. This acquisition has increased our network
infrastructure business and substantially expanded our presence
in the international marketplace. The results of KRONE
subsequent to May 18, 2004 are included in our results of
operations.
In this transaction, we acquired all of the outstanding capital
stock of KRONE in exchange for $294.4 million in cash (net
of cash acquired) and certain assumed liabilities of KRONE. The
purchase included $78.1 million of intangible assets. No
amounts were allocated to in-process research and development
because KRONE did not have any new products in development at
the time of the acquisition. Goodwill of $169.6 million was
recorded in the transaction and assigned to our Broadband
Infrastructure and Access segment. Substantially none of this
goodwill is deductible for tax purposes.
The following table summarizes the allocation of the purchase
price to the fair values of the assets acquired and liabilities
assumed at the date of acquisition (in millions), in accordance
with the purchase method of accounting, including adjustments to
the purchase price made through October 31, 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FONS | |
|
OpenCell | |
|
KRONE | |
|
|
| |
|
| |
|
| |
|
|
August 26, 2005 | |
|
May 6, 2005 | |
|
May 18, 2004 | |
|
|
| |
|
| |
|
| |
Current assets
|
|
$ |
14.6 |
|
|
$ |
1.4 |
|
|
$ |
119.8 |
|
Intangible assets
|
|
|
83.3 |
|
|
|
4.7 |
|
|
|
78.1 |
|
Goodwill
|
|
|
70.9 |
|
|
|
|
|
|
|
169.6 |
|
Other long-term assets
|
|
|
3.2 |
|
|
|
1.3 |
|
|
|
83.9 |
|
|
|
|
|
|
|
|
|
|
|
Total assets acquired
|
|
|
172.0 |
|
|
|
7.4 |
|
|
|
451.4 |
|
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
|
5.5 |
|
|
|
0.3 |
|
|
|
76.4 |
|
Long-term liabilities
|
|
|
|
|
|
|
|
|
|
|
64.1 |
|
|
|
|
|
|
|
|
|
|
|
Total liabilities assumed
|
|
|
5.5 |
|
|
|
0.3 |
|
|
|
140.5 |
|
|
|
|
|
|
|
|
|
|
|
Net assets acquired
|
|
|
166.5 |
|
|
|
7.1 |
|
|
|
310.9 |
|
Less cash acquired
|
|
|
0.4 |
|
|
|
|
|
|
|
16.5 |
|
|
|
|
|
|
|
|
|
|
|
Net cash paid
|
|
$ |
166.1 |
|
|
$ |
7.1 |
|
|
$ |
294.4 |
|
|
|
|
|
|
|
|
|
|
|
KRONE goodwill, other long-term assets and current liabilities
were adjusted during our fiscal third and fourth quarter of 2005
largely due to the resolution of certain income tax
contingencies and valuation allowance reversals.
57
ADC Telecommunications, Inc. and Subsidiaries
Notes to Consolidated Financial
Statements (Continued)
Unaudited pro forma consolidated results of continuing
operations, as though the acquisition of KRONE had taken place
at the beginning of fiscal 2003 and the acquisitions of OpenCell
and FONS had taken place at the beginning of fiscal 2004, are as
follows (in millions, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
Revenue
|
|
$ |
1,240.1 |
|
|
$ |
988.0 |
|
|
$ |
883.4 |
|
Income (loss) from continuing operations(1)
|
|
$ |
97.5 |
|
|
$ |
18.8 |
|
|
$ |
(50.2 |
) |
Net income per share basic
|
|
$ |
0.84 |
|
|
$ |
0.16 |
|
|
$ |
(0.44 |
) |
Net income per share diluted
|
|
$ |
0.74 |
|
|
$ |
0.16 |
|
|
$ |
(0.44 |
) |
|
|
(1) |
Includes restructuring and impairment charges of
$14.7 million and $0.3 million, respectively, for the
year ended October 31, 2005, $11.9 million and
$1.7 million, respectively, for the year ended
October 31, 2004, and $27.6 million and
$15.6 million, respectively, for the year ended
October 31, 2003 for the ADC stand-alone business. KRONE
stand-alone business includes restructuring charges of
$2.4 million and $4.3 million for the years ended
October 31, 2004 and 2003, respectively. FONS stand-alone
business includes impairment charges of $2.5 million for
the year ended October 31, 2004. |
The unaudited pro forma results of operations are for
comparative purposes only and do not necessarily reflect the
results that would have occurred had the acquisitions occurred
at the beginning of the periods presented or the results that
may occur in the future.
|
|
Note 4: |
Discontinued Operations |
We sold our business related to our Metrica service assurance
software group in the first quarter of our fiscal year 2005 and
our SIUK business in the third quarter of fiscal 2005. During
fiscal 2004, we sold our BroadAccess40 business, the business
related to our Cuda cable modem termination system product line
and related FastFlow Broadband Provisioning Manager software,
and the business related to our Singl.eView product line. In
accordance with SFAS No. 144, Accounting for
the Impairment or Disposal of Long-Lived Assets these
businesses were classified as discontinued operations in fiscal
2005 and 2004. The financial results are reported separately as
discontinued operations for all periods presented.
|
|
|
ADC Systems Integration UK Limited. |
During the third quarter of fiscal 2005 we sold our SIUK
business for a nominal amount. As of October 31, 2005, a
loss of $6.3 million has been recorded in connection with
the sale. The transaction closed on May 24, 2005. This
business had been included in our Professional Services segment.
We classified this business as a discontinued operation in the
third quarter of fiscal 2005.
During the fourth quarter of fiscal 2004, we entered into an
agreement to sell the business related to our Metrica service
assurance software group to Vallent for a cash purchase price of
$35 million, subject to purchase price adjustments, and a
$3.9 million equity interest in Vallent. The transaction
closed on November 19, 2004. The equity interest
constitutes less than a five percent ownership in Vallent and is
therefore accounted for under the cost method. This business had
been included in our Professional Services segment. We
classified this business as a discontinued operation in the
fourth quarter of fiscal 2004. We recognized a gain on the sale
of $32.6 million.
58
ADC Telecommunications, Inc. and Subsidiaries
Notes to Consolidated Financial
Statements (Continued)
During the first quarter of fiscal 2004, we entered into an
agreement to sell our BroadAccess40 business, which was included
in our Broadband Infrastructure and Access segment. This
transaction closed on February 24, 2004. We classified this
business as a discontinued operation beginning in the first
quarter of fiscal 2004. We recorded a loss on the sale of the
business of $6.8 million.
The purchasers of the BroadAccess40 business acquired all of the
stock of our subsidiary that operated this business and assumed
substantially all associated liabilities, with the exception of
a $7.5 million note payable that was paid in full by us
prior to the closing of the transaction. The purchasers issued a
promissory note for $3.8 million that was paid to us in
full in May of 2005.
During the third quarter of fiscal 2004, we entered into an
agreement to sell the business related to our Cuda cable modem
termination system product line and related FastFlow Broadband
Provisioning Manager software to BigBand Networks, Inc
(BigBand). This transaction closed on June 29,
2004. The business had been included in our Broadband
Infrastructure and Access segment. In consideration for this
sale, we were issued a voting minority interest in BigBand,
which has a nominal value. We also provided BigBand with a
non-revolving credit facility of up to $12.0 million with a
term of three years. As of October 31, 2005,
$7.0 million was drawn on the credit facility. We
classified this business as a discontinued operation beginning
in the third quarter of fiscal 2004. We recorded a loss on the
sale of $4.9 million.
During the third quarter of fiscal 2004, we entered into an
agreement to sell the business related to our Singl.eView
product line to Intec Telecom Systems PLC (Intec)
for a cash purchase price of $74.5 million, subject to
purchase price adjustments. The transaction closed on
August 27, 2004. This business had been included in our
Professional Services segment. We also agreed to provide Intec
with a $6.0 million non-revolving credit facility with a
term of 18 months. As of October 31, 2005,
$4.0 million was drawn on the credit facility. We
classified this business as a discontinued operation in the
third quarter of fiscal 2004. In the fourth quarter of fiscal
2004, we recognized a gain on the sale of $61.7 million. In
fiscal 2005, we recognized an income tax benefit of
$3.7 million relating to resolution of certain income tax
contingencies related to Singl.eView. In connection with the
sale, the parties agreed to a post-closing financial true-up
mechanism related to certain working capital measurements.
The financial results of our BroadAccess40, Cuda/ FastFlow,
Singl.eView, SIUK, and Metrica businesses included in
discontinued operations are as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
Revenue
|
|
$ |
8.4 |
|
|
$ |
113.9 |
|
|
$ |
198.7 |
|
|
|
|
|
|
|
|
|
|
|
Loss from discontinued operations, net
|
|
$ |
(1.3 |
) |
|
$ |
(67.2 |
) |
|
$ |
(36.9 |
) |
Gain on sale of discontinued operations, net
|
|
|
26.5 |
|
|
|
50.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (loss) from discontinued operations
|
|
$ |
25.2 |
|
|
$ |
(17.2 |
) |
|
$ |
(36.9 |
) |
|
|
|
|
|
|
|
|
|
|
59
ADC Telecommunications, Inc. and Subsidiaries
Notes to Consolidated Financial
Statements (Continued)
|
|
Note 5: |
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 (in millions, except for per share
amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) from continuing operations
|
|
$ |
85.5 |
|
|
$ |
33.6 |
|
|
$ |
(39.8 |
) |
Convertible note interest
|
|
|
8.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
94.1 |
|
|
$ |
33.6 |
|
|
$ |
(39.8 |
) |
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
|
116.0 |
|
|
|
115.5 |
|
|
|
114.8 |
|
Convertible notes assumed converted to common stock
|
|
|
14.2 |
|
|
|
|
|
|
|
|
|
Employee options and other
|
|
|
0.9 |
|
|
|
0.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
|
131.1 |
|
|
|
116.0 |
|
|
|
114.8 |
|
|
|
|
|
|
|
|
|
|
|
Basic income (loss) per share from continuing operations
|
|
$ |
0.74 |
|
|
$ |
0.29 |
|
|
$ |
(0.35 |
) |
Diluted income (loss) per share from continuing operations
|
|
$ |
0.72 |
|
|
$ |
0.29 |
|
|
$ |
(0.35 |
) |
|
|
|
|
|
|
|
|
|
|
Excluded from the dilutive securities described above are
employee stock options to acquire 4.4 million,
6.6 million and 5.9 million shares as of fiscal 2005,
2004 and 2003, respectively. These exclusions were made because
the exercise prices of these options were greater than the
average market price of the common stock for the period, or
because of our net losses, 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 fiscal 2004 and 2003,
respectively, because the exercise price of these warrants was
greater than the average market price of our common stock.
We were 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 is excluded. Based upon
these calculations, all shares reserved for issuance upon
conversion of our convertible notes were excluded for fiscal
2004 and 2003 because of their anti-dilutive effect. However,
these shares were included for the fiscal year 2005.
60
ADC Telecommunications, Inc. and Subsidiaries
Notes to Consolidated Financial
Statements (Continued)
As of October 31, 2005 and 2004, our available-for-sale
securities consisted of the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost | |
|
Unrealized |
|
Unrealized | |
|
Fair | |
|
|
Basis | |
|
Gain |
|
Loss | |
|
Value | |
|
|
| |
|
|
|
| |
|
| |
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury and other U.S. government agencies
|
|
$ |
26.2 |
|
|
$ |
|
|
|
$ |
0.3 |
|
|
$ |
25.9 |
|
Corporate bonds
|
|
|
13.9 |
|
|
|
|
|
|
|
0.2 |
|
|
|
13.7 |
|
Equity securities
|
|
|
0.5 |
|
|
|
|
|
|
|
0.2 |
|
|
|
0.3 |
|
Auction rate securities
|
|
|
307.5 |
|
|
|
|
|
|
|
|
|
|
|
307.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total available-for-sale securities
|
|
$ |
348.1 |
|
|
$ |
|
|
|
$ |
0.7 |
|
|
$ |
347.4 |
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury and other U.S. government agencies
|
|
$ |
25.7 |
|
|
$ |
|
|
|
$ |
0.1 |
|
|
$ |
25.6 |
|
Corporate bonds
|
|
|
8.3 |
|
|
|
|
|
|
|
|
|
|
|
8.3 |
|
Equity securities
|
|
|
0.5 |
|
|
|
|
|
|
|
0.3 |
|
|
|
0.2 |
|
Auction rate securities
|
|
|
427.3 |
|
|
|
|
|
|
|
|
|
|
|
427.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total available-for-sale securities
|
|
$ |
461.8 |
|
|
$ |
|
|
|
$ |
0.4 |
|
|
$ |
461.4 |
|
The fair values of investments in debt securities at
October 31, 2005 by contractual maturities are shown below
(in millions). Expected maturities will differ from contractual
maturities because borrowers may have the right to call or
prepay obligations.
|
|
|
|
|
|
|
Fair Value | |
|
|
| |
Due in one year or less
|
|
$ |
335.3 |
|
Due in one year through two years
|
|
|
12.1 |
|
|
|
|
|
Total
|
|
$ |
347.4 |
|
|
|
|
|
In accordance with our policy, we reviewed our investment
portfolio for declines that may be other than temporary, and
have determined no write-downs were required on
available-for-sale securities during fiscal 2005, 2004 or 2003.
During fiscal 2005, 2004 and 2003, we sold common stock of
certain companies and two investments in non-publicly traded
securities for aggregate gains of $0.0 million,
$4.8 million and $0.9 million, respectively.
|
|
Note 7: |
Goodwill and Intangible Assets |
We recorded $240.5 million in goodwill in connection with
our acquisitions of KRONE and FONS. Goodwill related to KRONE
was adjusted during the third and fourth quarter of 2005 largely
due to the resolution of certain income tax contingencies and a
valuation allowance reversal. All the goodwill has been assigned
to our Broadband Infrastructure and Access segment.
Substantially none of this goodwill is deductible for tax
purposes.
61
ADC Telecommunications, Inc. and Subsidiaries
Notes to Consolidated Financial
Statements (Continued)
The changes in the carrying amount of goodwill for the fiscal
years ended October 31, 2005 and 2004 are as follows:
|
|
|
|
|
Balances as of October 31, 2003
|
|
$ |
|
|
Goodwill acquired during the year
|
|
|
175.7 |
|
Purchase accounting adjustments
|
|
|
4.4 |
|
|
|
|
|
Balance as of October 31, 2004
|
|
|
180.1 |
|
|
|
|
|
Goodwill acquired during the year
|
|
|
70.9 |
|
Purchase accounting adjustments
|
|
|
(10.5 |
) |
|
|
|
|
Balance as of October 31, 2005
|
|
$ |
240.5 |
|
|
|
|
|
It is our practice to assess goodwill for impairment annually
under the requirements of SFAS 142, Goodwill and
Other Intangible Assets, or when impairment indicators
arise. No goodwill impairment indicators existed as of
October 31, 2005 or October 31, 2004.
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
$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
was recorded related to contract assets and a non-compete
agreement purchased from OpenCell.
The following table represents intangible assets by category and
accumulated amortization as of October 31, 2005 and 2004
(in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross | |
|
|
|
|
|
Estimated | |
|
|
Carrying | |
|
Accumulated | |
|
|
|
Life Range | |
2005 |
|
Amounts | |
|
Amortization | |
|
Net | |
|
(In Years) | |
|
|
| |
|
| |
|
| |
|
| |
Technology
|
|
$ |
54.0 |
|
|
$ |
11.3 |
|
|
$ |
42.7 |
|
|
|
5-7 |
|
Trade name/trademarks
|
|
|
26.2 |
|
|
|
2.0 |
|
|
|
24.2 |
|
|
|
2-20 |
|
Distributor network
|
|
|
10.1 |
|
|
|
1.5 |
|
|
|
8.6 |
|
|
|
10 |
|
Customer list
|
|
|
41.8 |
|
|
|
3.5 |
|
|
|
38.3 |
|
|
|
2-7 |
|
Patents
|
|
|
25.4 |
|
|
|
10.7 |
|
|
|
14.7 |
|
|
|
3-7 |
|
Non-compete agreements
|
|
|
12.6 |
|
|
|
0.6 |
|
|
|
12.0 |
|
|
|
2-5 |
|
Other
|
|
|
30.4 |
|
|
|
5.9 |
|
|
|
24.5 |
|
|
|
1-13 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
200.5 |
|
|
$ |
35.5 |
|
|
$ |
165.0 |
|
|
|
8 |
(1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross | |
|
|
|
|
|
Estimated | |
|
|
Carrying | |
|
Accumulated | |
|
|
|
Life Range | |
2004 |
|
Amounts | |
|
Amortization | |
|
Net | |
|
(In Years) | |
|
|
| |
|
| |
|
| |
|
| |
Technology
|
|
$ |
28.9 |
|
|
$ |
2.3 |
|
|
$ |
26.6 |
|
|
|
5-7 |
|
Trade name/trademarks
|
|
|
25.3 |
|
|
|
.6 |
|
|
|
24.7 |
|
|
|
5-20 |
|
Distributor network
|
|
|
10.1 |
|
|
|
.5 |
|
|
|
9.6 |
|
|
|
10 |
|
Customer list
|
|
|
4.5 |
|
|
|
.5 |
|
|
|
4.0 |
|
|
|
2 |
|
Patents
|
|
|
19.8 |
|
|
|
7.9 |
|
|
|
11.9 |
|
|
|
3-7 |
|
Other
|
|
|
18.3 |
|
|
|
2.1 |
|
|
|
16.2 |
|
|
|
1-13 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
106.9 |
|
|
$ |
13.9 |
|
|
$ |
93.0 |
|
|
|
10 |
(1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Weighted average life. |
62
ADC Telecommunications, Inc. and Subsidiaries
Notes to Consolidated Financial
Statements (Continued)
Amortization expense was $21.4 million and
$7.1 million for the years ended October 31, 2005 and
2004, respectively. Included in amortization expense is
$18.1 million and $4.4 million of acquired intangible
amortization for the years ended October 31, 2005 and 2004,
respectively. There was no acquired intangible amortization
expense for the year ended October 31, 2003. The estimated
amortization expense for identified intangible assets is as
follows for the periods indicated (in millions):
|
|
|
|
|
2006
|
|
$ |
29.6 |
|
2007
|
|
|
27.4 |
|
2008
|
|
|
26.7 |
|
2009
|
|
|
24.1 |
|
2010
|
|
|
18.2 |
|
Thereafter
|
|
|
39.0 |
|
|
|
|
|
Total
|
|
$ |
165.0 |
|
|
|
|
|
On June 4, 2003, we issued $400.0 million of
convertible unsecured subordinated notes in two separate
transactions pursuant to Rule 144A under the Securities Act
of 1933. This issuance was made through an initial offering of
$350.0 million of convertible notes on May 29, 2003,
and the subsequent exercise in full by the underwriters of such
offering of their option to purchase an additional
$50.0 million of convertible notes. The net proceeds to us
from this offering were $355.5 million after underwriting
discounts of $10.0 million and the net payment for the
purchased call options and warrant transactions described below.
In the first transaction, we issued $200.0 million of 1.0%
fixed rate convertible unsecured subordinated notes that mature
on June 15, 2008. In the second transaction, we issued
$200.0 million of convertible unsecured subordinated notes
that have a variable interest rate and mature on June 15,
2013. The interest rate for the variable rate notes is equal to
6-month LIBOR plus
0.375%. The interest rate for the variable rate notes will be
reset on each semi-annual interest payment date, which is June
15 and December 15 of each year beginning on December 15,
2003, for both the fixed and variable rate notes.
The interest rate on the variable rate notes for the six-month
periods ending June 15 and December 15, 2005 was 3.065% and
3.99625%, respectively. The interest rate rose to 5.045% for the
current six-month period ending June 15, 2006. 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.
Concurrent with the issuance of the fixed and variable rate
notes, we purchased five-year and ten-year call options on our
common stock to reduce the potential dilution from conversion of
the notes. Under the terms of these call options, which become
exercisable upon conversion of the notes, we have the right to
purchase from the counterparty at a purchase price of
$28.091 per share the aggregate number of shares that we
are obligated to issue upon conversion of the fixed and variable
rate notes, which is a maximum of 14.2 million shares. We
also have the option to settle the call options with the
counterparty through a net share settlement or cash settlement,
either of which would be based on the extent to which the
then-current market price of our common stock exceeds
$28.091 per share. The total cost of all the call options
was $137.3 million, which was recognized in
shareowners investment. The cost of the call options was
partially offset by the sale of warrants to acquire shares of
our common stock with terms of five and ten years to the same
counterparty with whom we entered into the call options. The
warrants are exercisable for an aggregate of 14.2 million
shares at an exercise price of $36.96 per share. The
warrants become exercisable upon conversion of the notes, and
may be settled, at our option, either through a net share
settlement or a net cash
63
ADC Telecommunications, Inc. and Subsidiaries
Notes to Consolidated Financial
Statements (Continued)
settlement, either of which would be based on the extent to
which the then-current market price of our common stock exceeds
$36.96 per share. The gross proceeds from the sale of the
warrants were $102.8 million, which was recognized in
shareowners investment. The call options and the warrants
are subject to early expiration upon conversion of the notes.
The net effect of the call options and the warrants is to either
reduce the potential dilution from the conversion of the notes
(if we elect net share settlement) or to increase the net cash
proceeds of the offering (if we elect net cash settlement) if
the notes are converted at a time when the current market price
of our common stock is greater than $28.091 per share.
We have used and plan to use the cash proceeds from this
offering for general corporate purposes and strategic
opportunities, including financing for possible acquisitions or
investments in complementary businesses, technologies or
products.
|
|
Note 9: |
Shareowner Rights Plan |
We have a shareowner rights plan intended to preserve the
long-term value of ADC to our shareowners by discouraging a
hostile takeover. This plan was amended and restated during
fiscal 2003. Under the shareowner rights plan, each outstanding
share of our common stock has an associated preferred stock
purchase right. The rights are exercisable only if a person or
group acquires 15% or more of our outstanding common stock. If
the rights become exercisable, the rights would allow their
holders (other than the acquiring person or group) to purchase
fractional shares of our preferred stock (each of which is the
economic equivalent of a share of common stock) or stock of the
company acquiring us at a price equal to one-half of the
then-current value of our common stock. The dilutive effect of
the rights on the acquiring person or group is intended to
encourage such person or group to negotiate with our board of
directors prior to attempting a takeover. If our board of
directors believes a proposed acquisition of ADC is in the best
interests of ADC and our shareowners, our board of directors may
amend the shareowner rights plan or redeem the rights for a
nominal amount in order to permit the acquisition to be
completed without interference from the plan.
The components of the income (loss) from continuing operations
before income taxes are (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
United States
|
|
$ |
95.9 |
|
|
$ |
29.0 |
|
|
$ |
(12.3 |
) |
Foreign
|
|
|
(3.2 |
) |
|
|
6.6 |
|
|
|
(32.6 |
) |
|
|
|
|
|
|
|
|
|
|
Total income (loss) before income taxes
|
|
$ |
92.7 |
|
|
$ |
35.6 |
|
|
$ |
(44.9 |
) |
|
|
|
|
|
|
|
|
|
|
64
ADC Telecommunications, Inc. and Subsidiaries
Notes to Consolidated Financial
Statements (Continued)
The components of the (benefit) provision for income taxes from
continuing operations are (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
Current taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$ |
|
|
|
$ |
|
|
|
$ |
(1.0 |
) |
Foreign
|
|
|
6.8 |
|
|
|
2.1 |
|
|
|
(0.1 |
) |
State
|
|
|
(0.5 |
) |
|
|
(0.7 |
) |
|
|
(4.0 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
6.3 |
|
|
$ |
1.4 |
|
|
$ |
(5.1 |
) |
|
|
|
|
|
|
|
|
|
|
Deferred taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
|
|
|
0.9 |
|
|
|
0.6 |
|
|
|
|
|
State
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.9 |
|
|
|
0.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total (benefit) provision
|
|
$ |
7.2 |
|
|
$ |
2.0 |
|
|
$ |
(5.1 |
) |
|
|
|
|
|
|
|
|
|
|
The effective income tax rate differs from the federal statutory
rate from continuing operations as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
Federal statutory rate
|
|
|
35 |
% |
|
|
35 |
% |
|
|
(35 |
)% |
Impairment charges
|
|
|
|
|
|
|
|
|
|
|
(22 |
) |
Research and development tax credits
|
|
|
|
|
|
|
|
|
|
|
(2 |
) |
Change in deferred tax asset valuation allowance
|
|
|
(13 |
) |
|
|
(25 |
) |
|
|
59 |
|
State income taxes, net
|
|
|
1 |
|
|
|
(2 |
) |
|
|
(38 |
) |
Foreign income taxes
|
|
|
(14 |
) |
|
|
(4 |
) |
|
|
35 |
|
Other, net
|
|
|
(1 |
) |
|
|
1 |
|
|
|
(8 |
) |
|
|
|
|
|
|
|
|
|
|
Effective income tax rate
|
|
|
8 |
% |
|
|
5 |
% |
|
|
(11 |
)% |
|
|
|
|
|
|
|
|
|
|
65
ADC Telecommunications, Inc. and Subsidiaries
Notes to Consolidated Financial
Statements (Continued)
Deferred tax assets (liabilities) as of October 31,
2005 and 2004 are composed of the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
Current deferred tax assets:
|
|
|
|
|
|
|
|
|
Asset valuation reserves
|
|
$ |
19.6 |
|
|
$ |
20.6 |
|
Accrued liabilities
|
|
|
19.7 |
|
|
|
22.7 |
|
|
|
|
|
|
|
|
Subtotal
|
|
$ |
39.3 |
|
|
$ |
43.3 |
|
|
|
|
|
|
|
|
Non-current deferred tax assets:
|
|
|
|
|
|
|
|
|
Intangible assets
|
|
$ |
237.2 |
|
|
$ |
316.7 |
|
Depreciation
|
|
|
17.5 |
|
|
|
12.3 |
|
Net operating loss and tax credit carryover
|
|
|
532.3 |
|
|
|
468.0 |
|
Capital loss carryover
|
|
|
225.6 |
|
|
|
226.7 |
|
Investments and other
|
|
|
27.4 |
|
|
|
42.2 |
|
|
|
|
|
|
|
|
Subtotal
|
|
|
1,040.0 |
|
|
|
1,065.9 |
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
$ |
1,079.3 |
|
|
$ |
1,109.2 |
|
|
|
|
|
|
|
|
Current deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Accrued liabilities
|
|
$ |
(4.1 |
) |
|
$ |
(4.7 |
) |
|
|
|
|
|
|
|
Subtotal
|
|
|
(4.1 |
) |
|
|
(4.7 |
) |
|
|
|
|
|
|
|
Non-current deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Intangible assets
|
|
$ |
(27.5 |
) |
|
$ |
(29.0 |
) |
Investments and other
|
|
|
(9.1 |
) |
|
|
(8.1 |
) |
|
|
|
|
|
|
|
Subtotal
|
|
|
(36.6 |
) |
|
|
(37.1 |
) |
|
|
|
|
|
|
|
Total deferred tax liabilities
|
|
$ |
(40.7 |
) |
|
$ |
(41.8 |
) |
|
|
|
|
|
|
|
Net deferred tax assets
|
|
$ |
1,038.6 |
|
|
$ |
1,067.4 |
|
Deferred tax asset valuation allowance
|
|
|
(1,039.9 |
) |
|
|
(1,068.9 |
) |
|
|
|
|
|
|
|
Net deferred tax liabilities
|
|
$ |
(1.3 |
) |
|
$ |
(1.5 |
) |
|
|
|
|
|
|
|
During the third quarter of fiscal 2002, we concluded that a
full valuation allowance against our net deferred tax assets was
appropriate. A deferred tax asset represents future tax benefits
to be received when certain expenses and losses previously
recognized in our income statement become deductible under
applicable income tax laws. Thus, 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. A review of all available positive and negative
evidence needs to be considered, including a companys
performance, the market environment in which the company
operates, the utilization of past tax credits, length of
carryback and carryforward periods, and existing contracts or
sales backlog that will result in future profits. The accounting
guidance further states that forming a conclusion that a
valuation allowance is not needed is difficult when there is
negative evidence such as cumulative losses in recent years. As
a result of the cumulative losses we had incurred to that point
and the full utilization of our loss carryback potential, we
concluded that a full valuation allowance should be recorded.
From the third quarter of fiscal 2002 to date, we have
maintained our policy of providing a nearly full valuation
allowance against all future tax benefits produced by our
operating results. We expect to continue to provide a nearly full
66
ADC Telecommunications, Inc. and Subsidiaries
Notes to Consolidated Financial
Statements (Continued)
allowance on any future tax benefits until we can sustain a
level of profitability that demonstrates our ability to utilize
these assets.
We recorded an income tax provision (benefit) relating to
discontinued operations, which was primarily related to income
tax contingencies, of $(3.7) million, $(0.1) million
and $(0.2) million during fiscal 2005, 2004 and 2003,
respectively.
The U.S. Internal Revenue Service has completed its
examination of our federal income tax returns for all years
prior to fiscal 2003. In addition, we are subject to
examinations in several states and foreign jurisdictions.
Federal and state net operating loss carryforwards for tax
purposes, available to offset future income, were approximately
$1,110.3 million at October 31, 2005. Most of the
federal operating loss carryforwards expire between fiscal 2019
and fiscal 2025, and the state operating loss carryforwards
expire between fiscal 2006 and fiscal 2025. Federal capital loss
carryforwards were approximately $609.7 million at
October 31, 2005, most of which expire in fiscal 2009.
Federal credit carryforwards were approximately
$77.6 million at October 31, 2005, and expire between
fiscal 2009 and fiscal 2025. Foreign operating loss
carryforwards were approximately $115.6 million at
October 31, 2005, of which $62.9 million is generally
available for indefinite carryforward periods and
$52.7 million is expected to either expire or not be
utilized.
Deferred federal income taxes are not provided on the
undistributed cumulative earnings of foreign subsidiaries
because such earnings are considered to be invested permanently
in those operations. At October 31, 2005, such earnings
were approximately $56.2 million. The amount of
unrecognized deferred tax liability on such earnings was
approximately $4.5 million.
In connection with our acquisition of FONS, we recorded
$0.2 million of income tax receivable, $8.8 million of
deferred tax assets, and $29.6 million of deferred tax
liabilities. The recording of the net deferred tax liabilities
relating to the acquisition of FONS results in a
$20.8 million reduction of the companys previously
recorded valuation allowance on its deferred tax assets as part
of the purchase price asset allocation.
In connection with our acquisition of KRONE during fiscal 2004,
we recorded $5.9 million of income taxes payable,
$64.0 million of deferred tax assets, $38.2 million of
deferred tax liabilities and a valuation allowance of
$27.8 million. The recording of the valuation allowance
resulted in a corresponding increase in the goodwill recorded in
the KRONE acquisition. As this valuation allowance is reduced in
the future, goodwill will be reduced accordingly. During fiscal
2005 and 2004, goodwill was reduced $1.5 million and
$0.6 million, respectively, as a result of a reduction of a
portion of this valuation allowance.
During fiscal 2005, our valuation allowance decreased from
$1,068.9 million to $1,039.9 million. The decrease is
comprised of $(20.8) million recorded in connection with
our acquisition of FONS, $(12.3) million related to
continuing operations and $4.1 million related to
discontinued operations and other items.
|
|
Note 11: |
Employee Benefit Plans |
Retirement Savings Plans: U.S. employees and
employees in many other countries are eligible to participate in
retirement savings plans. In the United States, effective
April 1, 2003, we match employee contributions to our plan
($0.50 for every dollar contributed) up to 6% of eligible pay,
and depending on our financial performance, we voluntarily may
make an additional contribution up to 120% of employee
contributions on 6% of wages. Prior to April 1, 2003, we
matched employee contributions ($1.00 for every dollar
contributed) to our plan up to 6% of wages, and depending on our
financial performance, we voluntarily could make an additional
contribution up to 70% of employee contributions on 6% of wages.
Employees are fully vested in all contributions at the time the
contributions are made. Our contributions to
67
ADC Telecommunications, Inc. and Subsidiaries
Notes to Consolidated Financial
Statements (Continued)
our U.S. retirement savings plan were $7.0 million,
$5.5 million and $6.1 million during fiscal 2005, 2004
and 2003, respectively. If so elected by the participants, the
trustee for our U.S. retirement savings plan invests a
portion of our cash contributions in our common stock. In
addition, other retirement savings plans exist in other of our
global (non-U.S.) locations, which are aligned with local custom
and practice. We contributed $5.7 million,
$4.0 million and $2.6 million to our global (non-U.S.)
retirement savings plans in fiscal 2005, 2004 and 2003,
respectively.
Pension Benefits: With our acquisition of KRONE, we
assumed certain pension obligations of KRONE related to its
German workforce. The KRONE pension plan is an unfunded general
obligation of our German subsidiary (which is a common
arrangement for German pension plans) and, as part of the
acquisition we recorded a liability of $62.8 million for
this obligation as of October 31, 2004. As of
October 31, 2005 we had a liability of $71.9 million
for this obligation. We use a measurement date of
October 31 for the plan. The plan was closed to employees
hired after 1994. Accordingly, only employees and retirees hired
before 1995 are covered by the plan. Pension payments will be
made to eligible individuals upon reaching eligible retirement
age, and the cash payments are expected to approximately equal
the net periodic benefit cost.
The following provides reconciliations of benefit obligations,
plan assets and funded status of the KRONE pension plan.
|
|
|
|
|
|
|
|
|
|
|
October 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
Reconciliation of projected benefit obligation
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$ |
62.8 |
|
|
$ |
|
|
Amount assumed in the KRONE acquisition
|
|
|
|
|
|
|
63.9 |
|
Service cost
|
|
|
0.2 |
|
|
|
0.2 |
|
Interest cost
|
|
|
3.0 |
|
|
|
1.5 |
|
Actuarial (gain) loss
|
|
|
9.2 |
|
|
|
(1.1 |
) |
Foreign currency exchange rate changes
|
|
|
0.1 |
|
|
|
|
|
Benefit payments
|
|
|
(3.4 |
) |
|
|
(1.7 |
) |
|
|
|
|
|
|
|
Ending Balance
|
|
$ |
71.9 |
|
|
$ |
62.8 |
|
|
|
|
|
|
|
|
Funded status of the plan
|
|
|
|
|
|
|
|
|
Plan assets at fair value less than benefit obligation
|
|
$ |
(71.9 |
) |
|
$ |
(62.8 |
) |
Unrecognized net actuarial (gain) loss
|
|
|
8.5 |
|
|
|
(1.1 |
) |
|
|
|
|
|
|
|
Net amount recognized
|
|
$ |
(63.4 |
) |
|
$ |
(63.9 |
) |
|
|
|
|
|
|
|
Amounts recognized in the Consolidated Balance Sheet as of
October 31
|
|
|
|
|
|
|
|
|
Prepaid benefit cost
|
|
$ |
|
|
|
$ |
|
|
Accumulated Benefit Obligation
|
|
|
70.6 |
|
|
|
63.9 |
|
Accumulated other comprehensive income, pre-tax
|
|
|
(7.2 |
) |
|
|
|
|
|
|
|
|
|
|
|
Net amount recognized
|
|
$ |
63.4 |
|
|
$ |
63.9 |
|
|
|
|
|
|
|
|
68
ADC Telecommunications, Inc. and Subsidiaries
Notes to Consolidated Financial
Statements (Continued)
Net periodic pension cost includes the following components:
|
|
|
|
|
|
|
|
|
|
|
October 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
Service cost
|
|
$ |
0.2 |
|
|
$ |
0.2 |
|
Interest cost
|
|
|
3.0 |
|
|
|
1.5 |
|
|
|
|
|
|
|
|
Net periodic pension cost
|
|
$ |
3.2 |
|
|
$ |
1.7 |
|
|
|
|
|
|
|
|
The following assumptions were used to determine the plans
benefit obligations as of the end of the plan year and the
plans net periodic pension cost:
|
|
|
|
|
|
|
|
|
|
|
October 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
Weighted average assumptions used to determine benefit
obligations
|
|
|
|
|
|
|
|
|
Discount rate
|
|
|
4.25 |
% |
|
|
5.25 |
% |
Compensation rate increase
|
|
|
2.50 |
% |
|
|
2.50 |
% |
Weighted average assumptions used to determine net cost for
the years ended
|
|
|
|
|
|
|
|
|
Discount rate
|
|
|
5.25 |
% |
|
|
5.25 |
% |
Compensation rate increase
|
|
|
2.50 |
% |
|
|
2.50 |
% |
Since the plan is an unfunded general obligation, we do not
expect to contribute to the plan in fiscal 2006 except to make
the benefit payments described below.
Expected future employee benefit plan payments (in millions):
|
|
|
|
|
2006
|
|
$ |
3.7 |
|
2007
|
|
|
3.7 |
|
2008
|
|
|
3.8 |
|
2009
|
|
|
3.8 |
|
2010
|
|
|
3.9 |
|
Five Years Thereafter
|
|
$ |
20.5 |
|
|
|
Note 12: |
Stock Option Plans |
We maintain a Global Stock Incentive Plan (GSIP) to
grant various stock awards, including stock options at fair
market value and restricted stock units and restricted stock
awards, to key employees and to our non-employee directors.
Restricted stock units are a grant of the right to receive
shares of common stock upon the vesting of the restricted stock
unit. Restricted stock awards are grants of common stock, which
cannot be transferred until vesting is achieved. These units
incrementally vest over four years following the date of
issuance. A maximum of 21.3 million stock awards can be
granted under the GSIP. Restricted stock awards, restricted
stock units, and performance awards are limited to
4.3 million shares. As of October 31, 2005,
13.2 million shares were available for stock awards,
inclusive of a maximum of 3.6 million shares available for
issuance as restricted stock awards, restricted stock units and
performance awards. All options granted under this plan were
made at fair market value. Stock options under our plan vest
over a four-year period. There are no performance or market
conditions for vesting or exercising of the options. The
contract life of our options is ten years.
69
ADC Telecommunications, Inc. and Subsidiaries
Notes to Consolidated Financial
Statements (Continued)
The following schedule summarizes activity in our GSIP (shares
in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Options | |
|
Restricted | |
|
|
Stock Option | |
|
Weighted Average | |
|
Stock | |
|
|
Shares | |
|
Exercise Price | |
|
Awards | |
|
|
| |
|
| |
|
| |
Outstanding at October 31, 2002
|
|
|
15.4 |
|
|
$ |
66.78 |
|
|
|
0.2 |
|
Granted
|
|
|
4.3 |
|
|
|
15.96 |
|
|
|
0.4 |
|
Exercised
|
|
|
(0.4 |
) |
|
|
(9.94 |
) |
|
|
|
|
Restrictions lapsed
|
|
|
|
|
|
|
|
|
|
|
(0.1 |
) |
Canceled
|
|
|
(8.7 |
) |
|
|
(72.03 |
) |
|
|
(0.2 |
) |
|
|
|
|
|
|
|
|
|
|
Outstanding at October 31, 2003
|
|
|
10.6 |
|
|
|
42.98 |
|
|
|
0.3 |
|
Granted
|
|
|
3.5 |
|
|
|
22.33 |
|
|
|
|
|
Exercised
|
|
|
(0.3 |
) |
|
|
(10.99 |
) |
|
|
|
|
Restrictions lapsed
|
|
|
|
|
|
|
|
|
|
|
(0.1 |
) |
Canceled
|
|
|
(5.5 |
) |
|
|
(49.77 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at October 31, 2004
|
|
|
8.3 |
|
|
|
29.53 |
|
|
|
0.2 |
|
Granted
|
|
|
1.1 |
|
|
|
18.65 |
|
|
|
|
|
Exercised
|
|
|
(0.8 |
) |
|
|
(15.90 |
) |
|
|
|
|
Restrictions lapsed
|
|
|
|
|
|
|
|
|
|
|
(0.1 |
) |
Canceled
|
|
|
(1.8 |
) |
|
|
(31.05 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at October 31, 2005
|
|
|
6.8 |
|
|
|
28.95 |
|
|
|
0.1 |
|
|
|
|
|
|
|
|
|
|
|
Exercisable at October 31, 2005
|
|
|
4.6 |
|
|
$ |
33.70 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table contains details of our outstanding stock
options as of October 31, 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average | |
|
|
|
|
|
|
|
|
Number | |
|
Remaining | |
|
|
|
Number | |
|
Weighted | |
|
|
Outstanding | |
|
Contractual Life | |
|
Weighted Average | |
|
Exercisable | |
|
Average | |
Range of Exercise Prices Between |
|
(In Thousands) | |
|
(In Years) | |
|
Exercise Price | |
|
(In Thousands) | |
|
Exercise Price | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
$ 8.05 - $ 15.26
|
|
|
282 |
|
|
|
7.54 |
|
|
$ |
12.65 |
|
|
|
227 |
|
|
$ |
12.06 |
|
15.68 - 15.82
|
|
|
1,223 |
|
|
|
7.09 |
|
|
|
15.82 |
|
|
|
1,120 |
|
|
|
15.82 |
|
16.03 - 18.62
|
|
|
658 |
|
|
|
8.17 |
|
|
|
17.12 |
|
|
|
318 |
|
|
|
16.97 |
|
18.69 - 18.76
|
|
|
952 |
|
|
|
9.13 |
|
|
|
18.76 |
|
|
|
|
|
|
|
|
|
19.11 - 19.81
|
|
|
836 |
|
|
|
5.40 |
|
|
|
19.78 |
|
|
|
612 |
|
|
|
19.79 |
|
20.02 - 24.22
|
|
|
749 |
|
|
|
8.29 |
|
|
|
20.62 |
|
|
|
244 |
|
|
|
20.93 |
|
24.43 - 30.59
|
|
|
806 |
|
|
|
5.98 |
|
|
|
29.63 |
|
|
|
806 |
|
|
|
29.63 |
|
31.08 - 53.76
|
|
|
702 |
|
|
|
4.57 |
|
|
|
42.03 |
|
|
|
692 |
|
|
|
41.93 |
|
53.92 - 286.56
|
|
|
590 |
|
|
|
3.49 |
|
|
|
97.45 |
|
|
|
590 |
|
|
|
97.45 |
|
$293.56 - $293.56
|
|
|
7 |
|
|
|
4.68 |
|
|
|
293.56 |
|
|
|
7 |
|
|
|
293.56 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,805 |
|
|
|
6.71 |
|
|
$ |
28.95 |
|
|
|
4,616 |
|
|
$ |
33.70 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
70
ADC Telecommunications, Inc. and Subsidiaries
Notes to Consolidated Financial
Statements (Continued)
The weighted average fair value per option at the date of grant
for options granted in fiscal 2005, 2004 and 2003 was $9.61,
$10.36 and $7.91 per share, respectively. The fair value
was estimated using the Black-Scholes option-pricing model with
the following weighted average assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
Risk-free interest rate
|
|
|
3.83 |
% |
|
|
3.13 |
% |
|
|
2.62 |
% |
Expected dividend
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected volatility factor
|
|
|
50.2 |
% |
|
|
59.4 |
% |
|
|
66.9 |
% |
Expected option term
|
|
|
4.5 years |
|
|
|
4.6 years |
|
|
|
3.2 years |
|
Under the fair value based method, compensation cost is measured
at the grant date based on the value of the award and is
recognized over the service period, which is usually the vesting
period. Fair value is determined using an option-pricing model,
such as Black-Scholes, that takes into account the stock price
at the grant date, the exercise price, the expected life of the
option, the volatility of the underlying stock, the expected
dividends and the risk-free interest rate over the expected life
of the option.
Non-cash stock compensation expense of $0.9 million was
recognized in fiscal 2003, as a result of unvested stock options
and restricted stock converted into ADC awards in connection
with our fiscal 2000 acquisition of Broadband Access Systems.
There were no non-cash stock compensation expenses recognized in
fiscal 2005 or 2004. The exercise prices on the date of grant
were deemed to be less than the estimated fair values of the
awards. Such amounts are reflected in research and development
and selling and administration expenses in the consolidated
statements of operations.
In addition, we incurred $3.0 million, $2.9 million
and $3.5 million of deferred compensation expense in fiscal
2005, 2004 and 2003, respectively, related to restricted stock
issued as part of employee incentive plans, and such expense was
included in research and development and selling and
administration expenses.
As of October 31, 2005, 299,829 restricted stock units were
issued and outstanding. Total compensation expense attributable
to these restricted stock units was $4.0 million during
fiscal 2005. During the year ended October 31, 2005, we
issued 220,426 restricted stock units at fair values between
$16.10 and $21.77, cancelled 49,089 restricted stock units at
fair values between $14.98 and $20.72, and released 31,405
restricted stock units upon vesting of the units.
As of October 31, 2004, restricted stock units totaled
159,897 units. These units incrementally vest over four
years following the date of issuance. Total compensation expense
attributable to these restricted stock units was
$4.4 million during fiscal 2004. During the year ended
October 31, 2004, we issued 219,718 restricted stock units
at fair values between $14.42 and $21.49, cancelled 59,821
restricted stock units at fair values between $17.78 and $20.72,
and released no restricted stock units.
For restricted stock units awarded as of October 31, 2005,
compensation expense attributable to the restricted stock units
during the years ending October 31, 2006, October 31,
2007, and October 31, 2008 will be approximately
$2.1 million, $2.1 million, and $1.3 million,
respectively. The weighted average fair value of our restricted
stock units outstanding as of October 31, 2005 is $18.95.
|
|
Note 13: |
Accumulated Other Comprehensive Income (Loss) |
Accumulated other comprehensive income (loss) has no impact on
our net income (loss) but is reflected in our balance sheet
through adjustments to shareowners investment. Accumulated
other comprehensive income (loss) derives from foreign currency
translation adjustments, unrealized gains (losses) on the sale
of available-for-sale securities and adjustments to reflect our
minimum pension liability. We specifically identify
71
ADC Telecommunications, Inc. and Subsidiaries
Notes to Consolidated Financial
Statements (Continued)
the amount of unrealized gain (loss) recognized in other
comprehensive income for each available-for-sale
(AFS) security. When an AFS security is sold or
impaired, we remove the securitys cumulative unrealized
gain (loss), net of tax, from accumulated other comprehensive
loss. The components of accumulated other comprehensive loss are
as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign | |
|
Unrealized | |
|
Minimum | |
|
|
|
|
Currency | |
|
Gain (Loss) | |
|
Pension | |
|
|
|
|
Translation | |
|
On AFS | |
|
Liability | |
|
|
|
|
Adjustment | |
|
Securities, net | |
|
Adjustment | |
|
Total | |
|
|
| |
|
| |
|
| |
|
| |
Balance, October 31, 2002
|
|
$ |
(14.7 |
) |
|
$ |
|
|
|
$ |
|
|
|
$ |
(14.7 |
) |
Translation loss
|
|
|
(10.7 |
) |
|
|
|
|
|
|
|
|
|
|
(10.7 |
) |
Unrealized gain on securities, net of taxes of $0.0
|
|
|
|
|
|
|
4.2 |
|
|
|
|
|
|
|
4.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, October 31, 2003
|
|
|
(25.4 |
) |
|
|
4.2 |
|
|
|
|
|
|
|
(21.2 |
) |
Translation gain, net of taxes of $0.0
|
|
|
12.3 |
|
|
|
|
|
|
|
|
|
|
|
12.3 |
|
Unrealized loss on securities, net of taxes of $0.0
|
|
|
|
|
|
|
(0.4 |
) |
|
|
|
|
|
|
(0.4 |
) |
Adjustment for sale of securities, net of taxes of $0.0
|
|
|
|
|
|
|
(4.2 |
) |
|
|
|
|
|
|
(4.2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, October 31, 2004
|
|
|
(13.1 |
) |
|
|
(0.4 |
) |
|
|
|
|
|
|
(13.5 |
) |
Translation loss, net of taxes of $0.0
|
|
|
(4.6 |
) |
|
|
|
|
|
|
|
|
|
|
(4.6 |
) |
Minimum pension liability adjustment, net of taxes of $0.0
|
|
|
|
|
|
|
|
|
|
|
(7.2 |
) |
|
|
(7.2 |
) |
Unrealized loss on securities, net of taxes of $0.0
|
|
|
|
|
|
|
(0.3 |
) |
|
|
|
|
|
|
(0.3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, October 31, 2005
|
|
$ |
(17.7 |
) |
|
$ |
(0.7 |
) |
|
$ |
(7.2 |
) |
|
$ |
(25.6 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 14: |
Commitments and Contingencies |
Vendor Financing: In the past we have worked with
customers and third-party financiers to negotiate financing
arrangements for projects. As of October 31, 2005 and 2004,
approximately $10.2 million was outstanding relating to
such financing arrangements. At October 31, 2005 and 2004,
we have recorded approximately $9.4 million in loss
reserves in the event of non-performance related to these
financing arrangements.
Letters of Credit: As of October 31, 2005, we had
$12.6 million of outstanding letters of credit. These
outstanding commitments are fully collateralized by restricted
cash.
Operating Leases: Portions of our operations are
conducted using leased equipment and facilities. These leases
are non-cancelable and renewable, with expiration dates ranging
through the year 2015. The rental expense included in the
accompanying consolidated statements of operations was
$13.3 million, $14.3 million and $18.2 million
for fiscal 2005, 2004 and 2003, respectively.
We were party to an operating lease agreement related to our
world headquarters facility in Eden Prairie, Minnesota, that was
set to expire in October 2006. This operating lease, the form of
which is sometimes referred to as a synthetic lease,
contained a minimum residual value guarantee at the end of the
lease term, and also gave us a purchase option at the end of the
lease term. During the third quarter of fiscal 2003, we
purchased this property for an aggregate purchase price of
$46.8 million. The entire purchase price was paid out of
pledged collateral that was classified as restricted cash on our
consolidated balance sheet.
In addition, during fiscal 2003 we purchased a total of four
other properties held under synthetic leases for an aggregate
$101.4 million. All of the properties were purchased using
restricted cash previously pledged to secure the lease
obligations. Two properties were purchased for
$55.9 million and were recorded at their
72
ADC Telecommunications, Inc. and Subsidiaries
Notes to Consolidated Financial
Statements (Continued)
fair market value of $15.7 million, which resulted in a
$5.2 million impairment charge and a $35.0 million
reduction in a previously recorded restructuring accrual. These
two properties were sold in fiscal 2004. The remaining two
properties that were purchased for $45.5 million were
immediately sold for total proceeds of $15.3 million, with
the $30.2 million difference also reducing the previously
recognized restructuring accrual.
The following is a schedule of future minimum rental payments
required under non-cancelable operating leases as of
October 31, 2005 (in millions):
|
|
|
|
|
2006
|
|
$ |
30.5 |
|
2007
|
|
|
22.0 |
|
2008
|
|
|
17.3 |
|
2009
|
|
|
14.9 |
|
2010
|
|
|
13.6 |
|
Thereafter
|
|
|
26.5 |
|
|
|
|
|
Total
|
|
$ |
124.8 |
|
|
|
|
|
The aggregate amount of future minimum rentals to be received
under noncancelable subleases as of October 31, 2005 is
$38.4 million.
Legal Contingencies: On May 19, 2003, we were served
with a lawsuit that was filed in the United States District
Court for the District of Minnesota. The complaint named ADC and
several of our current and former officers, employees and
directors as defendants. After this lawsuit was served, we were
served with two substantially similar lawsuits. All three of
these lawsuits were consolidated into a single lawsuit captioned
In Re ADC Telecommunications, Inc. ERISA Litigation. This
lawsuit has been brought by individuals who seek to represent a
class of participants in our Retirement Savings Plan who
purchased our common stock as one of the investment alternatives
under the Retirement Savings Plan from February 2000 to present.
The lawsuit alleges a breach of fiduciary duties under the
Employee Retirement Income Security Act. On October 26,
2005, after mediation, the parties settled the case subject to
various approvals, including approvals from an independent
fiduciary and the court. Pending finalization, the amount and
terms of the settlement are confidential. We do not expect,
based on the conditional agreement, the resolution of this
matter to have a material impact on our financial statements.
We are a party to various other lawsuits, proceedings and claims
arising in the ordinary course of business or otherwise. Many of
these disputes may be resolved amicably without resort to formal
litigation. The amount of monetary liability resulting from the
ultimate resolution of these matters cannot be determined at
this time. As of October 31, 2005, we had recorded
approximately $8.4 million in loss reserves for certain of
these matters. In light of the reserves we 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, it is
possible that unfavorable resolutions of these lawsuits,
proceedings and claims could exceed the amount currently
reserved and could have a material adverse affect on our
business, results of operations or financial condition.
Income Tax Contingencies: Our effective tax rate is
impacted by reserve provisions and changes to reserves, which 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 is
likely to 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. Further, 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
73
ADC Telecommunications, Inc. and Subsidiaries
Notes to Consolidated Financial
Statements (Continued)
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.
Purchase Obligations: At October 31, 2005 we had
non-cancellable commitments to purchase goods and services
valued at $26.8 million, including items such as inventory
and information technology support.
Other Contingencies: As a result of the divestitures
discussed in Note 4, we may incur charges related to
obligations retained based on the sale agreement, primarily
related to income tax contingencies or working capital
adjustments. At this time, none of those obligations are
probable or estimable.
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.
|
|
Note 15: |
Segment and Geographic Information |
We have two reportable segments: the Broadband Infrastructure
and Access segment and the Professional Services segment.
Broadband Infrastructure and Access products consist of:
|
|
|
|
|
Connectivity systems and components that provide the
infrastructure to wireline, wireless, cable, broadcast and
enterprise networks to connect high-speed Internet, data, video
and voice services over copper, coaxial and fiber-optic
cables, and |
|
|
|
Access systems used in the last mile/kilometer of
wireline and wireless networks to deliver high-speed Internet,
data and voice services. |
Professional Services (previously known as Integrated Solutions)
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.
As a result of our KRONE acquisition, we implemented reporting
at a regional level in addition to reporting at a business unit
level during fiscal 2005. Business unit level reports present
results through contribution margin. Regional level reports
present fully allocated results to the operating income level,
before restructuring costs. For presentation purposes, we have
allocated regional and corporate costs beyond contribution
margin to the segment disclosures below in order to arrive at
fully-allocated operating income for the segment. These
allocations were made based on associated revenues. Assets are
not allocated to the segments. Accounting policies used by the
segments are the same as those described in Note 1.
Intersegment sales of $42.9 million, $22.9 million and
$16.3 million, and operating income of $30.7 million,
$17.6 million and $14.2 million are eliminated from
Professional Services for the fiscal years ended
October 31, 2005, 2004 and 2003. These intersegment sales
primarily represent products of Broadband Infrastructure and
Access sold by the Professional Services segment.
No single country has property and equipment sufficiently
material to disclose. Our largest customer accounted for 12.5%,
13.5% and 12.9% of our sales in fiscal 2005, 2004 and 2003,
respectively. Revenue from this customer is included in both the
Broadband Infrastructure and Access and the Professional
Services segments.
74
ADC Telecommunications, Inc. and Subsidiaries
Notes to Consolidated Financial
Statements (Continued)
The following table sets forth net sales information for each of
our functional operating segments described above (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
Infrastructure Products (Connectivity)
|
|
$ |
804.4 |
|
|
$ |
472.8 |
|
|
$ |
283.0 |
|
Access Products (Wireline and Wireless)
|
|
|
139.0 |
|
|
|
150.9 |
|
|
|
161.3 |
|
Eliminations, Divested Entities and Other
|
|
|
0.5 |
|
|
|
2.1 |
|
|
|
3.1 |
|
|
|
|
|
|
|
|
|
|
|
Broadband Infrastructure and Access
|
|
|
943.9 |
|
|
|
625.8 |
|
|
|
447.4 |
|
|
|
|
|
|
|
|
|
|
|
Professional Services
|
|
|
225.3 |
|
|
|
147.6 |
|
|
|
132.4 |
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
1,169.2 |
|
|
$ |
773.4 |
|
|
$ |
579.8 |
|
|
|
|
|
|
|
|
|
|
|
The following table sets forth certain financial information for
each of our functional operating segments described above (in
millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Broadband | |
|
|
|
|
|
|
Infrastructure | |
|
Professional | |
|
|
Segment Information |
|
and Access | |
|
Services | |
|
Consolidated | |
|
|
| |
|
| |
|
| |
|
|
(In millions) | |
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
External sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
Products
|
|
$ |
943.9 |
|
|
$ |
54.0 |
|
|
$ |
997.9 |
|
Services
|
|
|
|
|
|
|
171.3 |
|
|
|
171.3 |
|
|
|
|
|
|
|
|
|
|
|
Total external sales
|
|
$ |
943.9 |
|
|
$ |
225.3 |
|
|
$ |
1,169.2 |
|
|
|
|
|
|
|
|
|
|
|
Contribution margin
|
|
|
291.5 |
|
|
|
14.8 |
|
|
|
|
|
Depreciation and amortization
|
|
$ |
58.3 |
|
|
$ |
8.9 |
|
|
$ |
67.2 |
|
Operating income (loss)
|
|
$ |
99.3 |
|
|
$ |
(27.0 |
) |
|
$ |
72.3 |
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
|
External sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
Products
|
|
$ |
625.8 |
|
|
$ |
55.4 |
|
|
$ |
681.2 |
|
Services
|
|
|
|
|
|
|
92.2 |
|
|
|
92.2 |
|
|
|
|
|
|
|
|
|
|
|
Total external sales
|
|
$ |
625.8 |
|
|
$ |
147.6 |
|
|
$ |
773.4 |
|
|
|
|
|
|
|
|
|
|
|
Contribution margin
|
|
|
207.1 |
|
|
|
8.5 |
|
|
|
|
|
Depreciation and amortization
|
|
$ |
32.7 |
|
|
$ |
8.7 |
|
|
$ |
41.4 |
|
Operating income (loss)
|
|
$ |
58.3 |
|
|
$ |
(33.7 |
) |
|
$ |
24.6 |
|
2003
|
|
|
|
|
|
|
|
|
|
|
|
|
External sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
Products
|
|
$ |
447.4 |
|
|
$ |
37.3 |
|
|
$ |
484.7 |
|
Services
|
|
|
|
|
|
|
95.1 |
|
|
|
95.1 |
|
|
|
|
|
|
|
|
|
|
|
Total external sales
|
|
$ |
447.4 |
|
|
$ |
132.4 |
|
|
$ |
579.8 |
|
|
|
|
|
|
|
|
|
|
|
Contribution margin
|
|
|
120.4 |
|
|
|
18.6 |
|
|
|
|
|
Depreciation and amortization
|
|
$ |
41.9 |
|
|
$ |
11.5 |
|
|
$ |
53.4 |
|
Operating loss
|
|
$ |
(37.7 |
) |
|
$ |
(16.3 |
) |
|
$ |
(54.0 |
) |
75
ADC Telecommunications, Inc. and Subsidiaries
Notes to Consolidated Financial
Statements (Continued)
As a result of our KRONE acquisition, we implemented reporting
at a regional level during fiscal 2005. Operating income by
region is fully allocated for all costs except restructuring
costs. The following table sets forth operating income by region
for fiscal 2005 (in millions).
2005 Regional Operating Income
|
|
|
|
|
|
Americas
|
|
$ |
59.6 |
|
EMEA
|
|
|
16.3 |
|
Indo-Pac
|
|
|
13.7 |
|
Asia
|
|
|
(1.5 |
) |
|
|
|
|
Subtotal
|
|
|
88.1 |
|
Intercompany elimination
|
|
|
(1.1 |
) |
|
|
|
|
|
Operating income before restructuring costs
|
|
|
87.0 |
|
Restructuring costs
|
|
|
(14.7 |
) |
|
|
|
|
|
Operating income after restructuring costs
|
|
$ |
72.3 |
|
|
|
|
|
The following table sets forth certain geographic information
concerning our U.S. and foreign sales and ownership of property
and equipment (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
Geographic Sales Information |
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
|
(In millions) | |
Inside the United States
|
|
$ |
639.0 |
|
|
$ |
467.5 |
|
|
$ |
436.5 |
|
Outside the United States:
|
|
|
|
|
|
|
|
|
|
|
|
|
Asia Pacific (China, Hong Kong, and Korea, Australia, India,
Japan, and Southeast Asia)
|
|
|
102.7 |
|
|
|
52.9 |
|
|
|
16.3 |
|
EMEA (Europe (Excluding Germany), Middle East, and Africa)
|
|
|
175.3 |
|
|
|
107.3 |
|
|
|
82.1 |
|
Germany
|
|
|
167.4 |
|
|
|
78.0 |
|
|
|
|
|
Americas (Canada, Central and South America)
|
|
|
84.8 |
|
|
|
67.7 |
|
|
|
44.9 |
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
1,169.2 |
|
|
$ |
773.4 |
|
|
$ |
579.8 |
|
|
|
|
|
|
|
|
|
|
|
Property and Equipment, Net:
|
|
|
|
|
|
|
|
|
|
|
|
|
Inside the United States
|
|
$ |
141.6 |
|
|
$ |
144.1 |
|
|
$ |
145.4 |
|
Outside the United States
|
|
|
79.5 |
|
|
|
88.4 |
|
|
|
29.5 |
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
221.1 |
|
|
$ |
232.5 |
|
|
$ |
174.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 16: |
Impairment, Restructuring, and Other Disposal Charges |
During fiscal 2005, 2004 and 2003, we continued our plan to
improve operating performance by restructuring and streamlining
our operations. As a result, we incurred impairment charges
related to the disposal of excess equipment, restructuring
charges associated with workforce reductions as well as the
consolidation of excess facilities, other disposal charges
associated with inventory write-offs and certain administrative
charges related to product line divestitures. We recorded
impairment and restructuring charges of $8.7 million,
$10.9 million and $34.3 million during fiscal 2005,
2004 and 2003, respectively, to our
76
ADC Telecommunications, Inc. and Subsidiaries
Notes to Consolidated Financial
Statements (Continued)
Broadband Infrastructure and Access segment. We recorded
impairment and restructuring charges of $6.3 million,
$2.7 million and $8.9 million during fiscal 2005, 2004
and 2003, respectively, to our Professional Services segment.
The impairment, restructuring and other disposal charges
resulting from our actions, by category of expenditures,
adjusted to exclude those activities specifically related to
discontinued operations, are as follows for 2005, 2004 and 2003,
respectively (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impairment | |
|
Restructuring | |
|
|
Fiscal 2005 |
|
Charges | |
|
Charges | |
|
Total | |
|
|
| |
|
| |
|
| |
Employee severance costs
|
|
$ |
|
|
|
$ |
11.2 |
|
|
$ |
11.2 |
|
Facilities consolidation and lease termination
|
|
|
|
|
|
|
3.5 |
|
|
|
3.5 |
|
Fixed asset write-downs
|
|
|
0.3 |
|
|
|
|
|
|
|
0.3 |
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
0.3 |
|
|
$ |
14.7 |
|
|
$ |
15.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impairment | |
|
Restructuring | |
|
|
Fiscal 2004 |
|
Charges | |
|
Charges | |
|
Total | |
|
|
| |
|
| |
|
| |
Employee severance costs
|
|
$ |
|
|
|
$ |
9.3 |
|
|
$ |
9.3 |
|
Facilities consolidation and lease termination
|
|
|
|
|
|
|
2.6 |
|
|
|
2.6 |
|
Fixed asset write-downs
|
|
|
1.7 |
|
|
|
|
|
|
|
1.7 |
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
1.7 |
|
|
$ |
11.9 |
|
|
$ |
13.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impairment | |
|
Restructuring | |
|
|
Fiscal 2003 |
|
Charges | |
|
Charges | |
|
Total | |
|
|
| |
|
| |
|
| |
Employee severance costs
|
|
$ |
|
|
|
$ |
23.5 |
|
|
$ |
23.5 |
|
Facilities consolidation and lease termination
|
|
|
|
|
|
|
4.1 |
|
|
|
4.1 |
|
Fixed asset write-downs
|
|
|
15.6 |
|
|
|
|
|
|
|
15.6 |
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
15.6 |
|
|
$ |
27.6 |
|
|
$ |
43.2 |
|
|
|
|
|
|
|
|
|
|
|
Impairment Charges: As a result of our intention to sell,
scale-back or exit non-strategic businesses, we regularly
evaluate our goodwill and property and equipment assets for
impairment in accordance with SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived
Assets, and SFAS No. 142, Goodwill
and other Intangible Assets. As a result of applying
SFAS No. 144 to our property and equipment, non-cash
impairment charges have been required. For fiscal 2005, 2004 and
2003, we recorded impairment charges of $0.3 million,
$1.7 million and $15.6 million, respectively.
Restructuring Charges: Restructuring charges relate
principally to employee severance and facility consolidation
costs resulting from the closure of facilities and other
workforce reductions attributable to our efforts to reduce
costs. During fiscal 2005, 2004 and 2003, we terminated the
employment of approximately 500, 200 and 1,300 employees,
respectively, through reductions in force. The costs of these
reductions have been and will be funded through cash from
operations. These reductions have impacted both of our business
segments.
Facility consolidation and lease termination costs represent
costs associated with our decision to consolidate and close
duplicative or excess manufacturing and office facilities. We
incurred charges of $6.2 million and $16.0 million for
the fiscal years ended October 31, 2005 and
October 31, 2004, respectively, primarily due to our
decision to close unproductive and excess facilities and the
continued softening of real estate markets, which resulted in
lower sublease income.
77
ADC Telecommunications, Inc. and Subsidiaries
Notes to Consolidated Financial
Statements (Continued)
The following table provides detail on the activity and our
remaining restructuring accrual balance by category as of 2005,
2004 and 2003 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrual | |
|
Discontinued | |
|
Continuing | |
|
|
|
Accrual | |
|
|
October 31, | |
|
Operations | |
|
Operations | |
|
Cash | |
|
October 31, | |
Type of Charge |
|
2004 | |
|
Net Additions | |
|
Net Additions | |
|
Charges | |
|
2005 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
Employee severance costs
|
|
$ |
9.6 |
|
|
$ |
0.1 |
|
|
$ |
11.2 |
|
|
$ |
12.2 |
|
|
$ |
8.7 |
|
Facilities consolidation
|
|
|
28.8 |
|
|
|
2.7 |
|
|
|
3.5 |
|
|
|
10.4 |
|
|
|
24.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
38.4 |
|
|
$ |
2.8 |
|
|
$ |
14.7 |
|
|
$ |
22.6 |
|
|
$ |
33.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrual | |
|
Discontinued | |
|
Continuing | |
|
|
|
Accrual | |
|
|
October 31, | |
|
Operations | |
|
Operations | |
|
Cash | |
|
October 31, | |
Type of Charge |
|
2003 | |
|
Net Additions | |
|
Net Additions | |
|
Charges | |
|
2004 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
Employee severance costs
|
|
$ |
3.0 |
|
|
$ |
4.5 |
|
|
$ |
9.3 |
|
|
$ |
7.2 |
|
|
$ |
9.6 |
|
Facilities consolidation
|
|
|
26.1 |
|
|
|
13.4 |
|
|
|
2.6 |
|
|
|
13.3 |
|
|
|
28.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
29.1 |
|
|
$ |
17.9 |
|
|
$ |
11.9 |
|
|
$ |
20.5 |
|
|
$ |
38.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in the October 31, 2004 accrual balance of
$38.4 million is $4.4 million related to reserves
acquired with the KRONE acquisition, of which $4.1 million
was paid as of October 31, 2005.
We expect that substantially all of the remaining
$8.7 million of cash expenditures relating to employee
severance costs incurred through October 31, 2005 will be
paid by the end of fiscal 2006. Of the $24.6 million to be
paid for the consolidation of facilities, we expect that
approximately $10.0 million will be paid from unrestricted
cash in fiscal 2006, 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.
During the fiscal year ended October 31, 2005, we sold
three properties previously classified as held for sale, for
proceeds of $8.0 million and a net gain of
$1.5 million.
78
ADC Telecommunications, Inc. and Subsidiaries
Notes to Consolidated Financial
Statements (Continued)
|
|
Note 17: |
Quarterly Financial Data (Unaudited in millions, except
earnings per share) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First | |
|
Second | |
|
Third | |
|
Fourth | |
|
|
|
|
Quarter | |
|
Quarter | |
|
Quarter | |
|
Quarter | |
|
Total | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales
|
|
$ |
240.6 |
|
|
$ |
312.4 |
|
|
$ |
314.6 |
|
|
$ |
301.6 |
|
|
$ |
1,169.2 |
|
Net Sales Outside the United States
|
|
|
121.4 |
|
|
|
137.3 |
|
|
|
135.1 |
|
|
|
136.4 |
|
|
|
530.2 |
|
Gross Profit
|
|
|
82.1 |
|
|
|
116.9 |
|
|
|
115.8 |
|
|
|
106.1 |
|
|
|
420.9 |
|
Income (Loss) Before Income Taxes
|
|
|
15.1 |
|
|
|
37.1 |
|
|
|
35.6 |
|
|
|
4.9 |
|
|
|
92.7 |
|
Provision (Benefit) for Income Taxes
|
|
|
1.0 |
|
|
|
2.3 |
|
|
|
1.5 |
|
|
|
2.4 |
|
|
|
7.2 |
|
Income (Loss) From Continuing Operations
|
|
|
14.1 |
|
|
|
34.8 |
|
|
|
34.1 |
|
|
|
2.5 |
|
|
|
85.5 |
|
Discontinued Operations, Net of Tax
|
|
|
38.4 |
|
|
|
(1.4 |
) |
|
|
(10.2 |
) |
|
|
(1.6 |
) |
|
|
25.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss)
|
|
$ |
52.5 |
(1) |
|
$ |
33.4 |
(2) |
|
$ |
23.9 |
(3) |
|
$ |
0.9 |
(4) |
|
$ |
110.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Common Shares Outstanding Basic
|
|
|
115.6 |
|
|
|
115.7 |
|
|
|
116.0 |
|
|
|
116.5 |
|
|
|
116.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Common Shares Outstanding Diluted
|
|
|
115.9 |
|
|
|
130.5 |
|
|
|
131.4 |
|
|
|
117.7 |
|
|
|
131.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic Income (Loss) Per Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$ |
0.12 |
|
|
$ |
0.30 |
|
|
$ |
0.29 |
|
|
$ |
0.02 |
|
|
$ |
0.74 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued operations
|
|
$ |
0.33 |
|
|
$ |
(0.01 |
) |
|
$ |
(0.09 |
) |
|
$ |
(0.01 |
) |
|
$ |
0.21 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss)
|
|
$ |
0.45 |
|
|
$ |
0.29 |
|
|
$ |
0.20 |
|
|
$ |
0.01 |
|
|
$ |
0.95 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted Income (Loss) Per Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$ |
0.12 |
|
|
$ |
0.28 |
|
|
$ |
0.28 |
|
|
$ |
0.02 |
|
|
$ |
0.72 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued operations
|
|
$ |
0.33 |
|
|
$ |
(0.01 |
) |
|
$ |
(0.08 |
) |
|
$ |
(0.01 |
) |
|
$ |
0.19 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss)
|
|
$ |
0.45 |
|
|
$ |
0.27 |
|
|
$ |
0.20 |
|
|
$ |
0.01 |
|
|
$ |
0.91 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
79
ADC Telecommunications, Inc. and Subsidiaries
Notes to Consolidated Financial
Statements (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First | |
|
Second | |
|
Third | |
|
Fourth | |
|
|
|
|
Quarter | |
|
Quarter | |
|
Quarter | |
|
Quarter | |
|
Total | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales
|
|
$ |
134.1 |
|
|
$ |
150.7 |
|
|
$ |
224.9 |
|
|
$ |
263.7 |
|
|
$ |
773.4 |
|
Net Sales Outside the United States
|
|
|
37.4 |
|
|
|
42.9 |
|
|
|
101.4 |
|
|
|
124.1 |
|
|
|
305.8 |
|
Gross Profit
|
|
|
53.8 |
|
|
|
62.5 |
|
|
|
85.8 |
|
|
|
100.2 |
|
|
|
302.3 |
|
Income (Loss) Before Income Taxes
|
|
|
16.8 |
|
|
|
(2.1 |
) |
|
|
4.1 |
|
|
|
16.8 |
|
|
|
35.6 |
|
Provision (Benefit) for Income Taxes
|
|
|
(0.1 |
) |
|
|
0.6 |
|
|
|
0.3 |
|
|
|
1.2 |
|
|
|
2.0 |
|
Income (Loss) From Continuing Operations
|
|
|
16.9 |
|
|
|
(2.7 |
) |
|
|
3.8 |
|
|
|
15.6 |
|
|
|
33.6 |
|
Discontinued Operations, Net of Tax
|
|
|
(19.3 |
) |
|
|
(23.9 |
) |
|
|
(18.1 |
) |
|
|
44.1 |
|
|
|
(17.2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss)
|
|
$ |
(2.4 |
)(5) |
|
$ |
(26.6 |
)(6) |
|
$ |
(14.3 |
)(7) |
|
$ |
59.7 |
(8) |
|
$ |
16.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Common Shares Outstanding Basic
|
|
|
115.3 |
|
|
|
115.4 |
|
|
|
115.6 |
|
|
|
115.6 |
|
|
|
115.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Common Shares Outstanding Diluted
|
|
|
130.3 |
|
|
|
115.4 |
|
|
|
116.0 |
|
|
|
130.0 |
|
|
|
116.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic Income (Loss) Per Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$ |
0.15 |
|
|
$ |
(0.02 |
) |
|
$ |
0.03 |
|
|
$ |
0.13 |
|
|
$ |
0.29 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued operations
|
|
$ |
(0.17 |
) |
|
$ |
(0.21 |
) |
|
$ |
(0.15 |
) |
|
$ |
0.39 |
|
|
$ |
(0.15 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss)
|
|
$ |
(0.02 |
) |
|
$ |
(0.23 |
) |
|
$ |
(0.12 |
) |
|
$ |
0.52 |
|
|
$ |
0.14 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted Income (Loss) Per Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$ |
0.14 |
|
|
$ |
(0.02 |
) |
|
$ |
0.03 |
|
|
$ |
0.13 |
|
|
$ |
0.29 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued operations
|
|
$ |
(0.15 |
) |
|
$ |
(0.21 |
) |
|
$ |
(0.15 |
) |
|
$ |
0.34 |
|
|
$ |
(0.15 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss)
|
|
$ |
(0.01 |
) |
|
$ |
(0.23 |
) |
|
$ |
(0.12 |
) |
|
$ |
0.47 |
|
|
$ |
0.14 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Includes $3.1 million restructuring charges and
$9.0 million gain on the sale of a notes receivable. |
|
(2) |
Includes $3.2 million restructuring charges and
$0.1 million impairment charges. |
|
(3) |
Includes $1.0 million restructuring charges. |
|
(4) |
Includes $7.4 million restructuring charges and
$0.2 million impairment charges. |
|
(5) |
Includes $1.7 million restructuring charges;
$4.4 million nonoperating gain on sale of investments; and
$3.5 million net nonoperating gain for divested product
lines. |
|
(6) |
Includes $10.1 million restructuring charges and
$1.5 million impairment charges. |
|
(7) |
Includes $0.6 million restructuring charges. |
|
(8) |
Includes $(0.5) million restructuring charges
(reversal) and $0.2 million impairment charges. |
80
ADC Telecommunications, Inc. and Subsidiaries
Notes to Consolidated Financial
Statements (Continued)
Our quarters end on the last Friday of the calendar month for
the respective quarter end. Our fiscal year end is
October 31. As a result, any quarter may have greater or
fewer days than other quarters in a fiscal year.
We sold our business related to our Metrica service assurance
software group in the first quarter of fiscal 2005 and our SIUK
business in the third quarter of fiscal 2005. During fiscal
2004, we sold our BroadAccess40 business, the business related
to our Cuda cable modem termination system product line and
related FastFlow Broadband Provisioning Manager software, and
the business related to our Singl.eView product line. In
accordance with SFAS No.