ADC Telecommunications’ Profit Tops

Yesterday, after market close ADC Telecommunications Inc. (ADCT) declared financial results for the third quarter of fiscal 2010 that beats our expectations. Due to change of the company’s reporting fiscal year, management has compared results for the three month period ended July 2, 2010 with the proforma results of its prior-year third quarter ended June 26, 2009. In the after-market trade in NASDAQ, the stock price of ADC Telecommunications was up 2 cents (0.16%) to $12.74.
 
Tyco Electronics to Acquire ADC Telecommunications
 
On July 12, 2010, Tyco Electronics Ltd. (TEL - Snapshot Report) and ADC Telecommunications jointly announced that the two companies have entered into an agreement under which Tyco Electronics will acquire ADC Telecommunications for a consideration of $1.25 billion. The deal is subject to various closing conditions including regulatory approval and is expected to be completed by the fourth quarter of the calendar year 2010.
 
Third Quarter Results in Detail
 
On a GAAP basis, net income from continuing operations in the third quarter of fiscal 2010 was $75.8 million or an income of 68 cents per share compared with a net income of $15.2 million or an income of 16 cents per share in the prior-year quarter.
 
However, in the reported quarter, the company received a one-time gain of $55.2 million on settlement of auction rate securities. Excluding this, third quarter fiscal 2010 adjusted EPS was 21 cents beating the Zacks Consensus Estimate of 21 cents. This solid result was primarily due to higher sales volume, operating cost efficiency, and favorable product-mix.
 
Quarterly total revenue was $304.4 million, up 4.9% year over year and also above the Zacks Consensus Estimate of $300 million. The year-over-year increase in revenue is mainly due to improving global economic condition that resulted in higher carrier spending for next-generation networks.
 
Third quarter fiscal 2010 gross margin was 37.1% compared with 35.2% in the year-ago quarter. This reflects the aggressive cost cutting measures taken by management during the past one year. Quarterly operating expenses were $86.8 million compared with $80.3 million in the prior-year quarter.
 
Cash flow from continuing operations, during the first nine months of fiscal 2010 was $102.2 million compared with $68.9 million in the year-ago period. Free cash flow (cash flow from operation less capital expenditure) in the same period was $80.4 million compared with $40.9 million in the year-ago quarter.
 
At the end of the third quarter of fiscal 2010, ADC Telecommunications had $704.1 million of cash & marketable securities on its balance sheet compared with $586.6 million at the end of fiscal 2009. Total debt was $651.2 million at the end of the reported quarter compared with $651.6 million at the end of fiscal 2009. At the end of the third quarter of fiscal 2010, debt-to-capitalization ratio was 0.60 compared with 0.64 at the end of fiscal 2009.
 
Global Connectivity Solutions Segment
 
Quarterly total revenue was $230.1 million, down 1.1% year over year. This segment provided 76% of total revenue as a whole. Out of this, Fiber Connectivity accounted for 36%, Copper Connectivity 24%, Enterprise Connectivity 14%, and the rest 2% was provided by Wireline Connectivity products. Quarterly operating income of this segment was $24.7 million, down 11.8% year over year.
 
Network Solutions Segment
 
Quarterly total revenue was $28.8 million, up 41.2% year over year. This segment provided 9% of total revenue as a whole. Quarterly operating loss of this segment was ($2.6) million, down 40.9% year over year.
 
Professional Services Segment
 
Quarterly total revenue was $45.5 million, up 22.3% year over year. This segment provided 15% of total revenue as a whole. Quarterly operating income of this segment was $2.9 million, remains flat year over year.
 
Future Financial outlook by Management
 
Management has given a guidance that its net sales in the fourth quarter of fiscal 2010 will be within the range of $290 million - $310 million. EPS, on a GAAP basis expected within the range of 8 cents to 18 cents, which includes non-cash amortization expense of 4 cents per share and excludes potential non-cash charges or restructuring charges.

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