ADC Telecommunications Outperforms

ADC Telecommunications Inc. (ADCT) declared excellent financial results for full-year 2010 that beat our expectations. Due to the change in the company’s reporting fiscal year, management has compared results for the 12 month-period ended September 30, 2010 with the results of 11 months ended September 30, 2009. 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 end 2010.

Full-Year 2010 Results

On a GAAP basis, net income from continuing operations in fiscal 2010 was $78.5 million or 78 cents per share compared to a net loss of $452.9 million or a loss of $4.64 per share in the previous year. Fiscal 2010 earnings per share of 78 cents was far ahead of the Zacks Consensus Estimate of 52 cents.

Fiscal 2010 total revenue was $1,156.6 million, up 16.8% year over year and also above the Zacks Consensus Estimate of $1,147 million. The year-over-year increase in revenue was mainly driven by improving global economic conditions that resulted in higher carrier spending for next-generation networks.

Fiscal 2010 gross margin was 36.1% compared to 33% in the previous year. This reflects the aggressive cost cutting measures taken by management during the past one year. Operating expenses were $372 million compared to $743.9 million in the previous year.

During fiscal 2010, cash flow from continuing operations was $136.6 million compared to $79.9 million in fiscal 2009. Free cash flow (cash flow from operation less capital expenditure) in fiscal 2010 was $102.8 million compared to $44.4 million in fiscal 2009.

At the end of fiscal 2010, ADC Telecommunications had $746.7 million of cash & marketable securities on its balance sheet compared to $586.6 million at the end of fiscal 2009. Total debt was $651.1 million at the end of fiscal 2010 compared to $651.6 million at the end of fiscal 2009. Debt-to-capitalization ratio was 0.60 compared to 0.64 at the end of fiscal 2009.

Segmental Performance

Global Connectivity Solutions: Revenue from the segment was $870.5 million in fiscal 2010, up 10.5% year over year. This segment provided nearly 75.3% of total revenue. Full-year 2010 operating income generated by this segment was $64.9 million, up 27.5% year over year.

Network Solutions: Fiscal 2010 total revenue was $87 million, up 66% year over year. This segment provided around 9.7% of total revenue. Full-year 2010 operating loss of this segment was $13.9 million, down 51.2% year over year.

Professional Services: Fiscal 2010 total revenue was $172.8 million, up 26.8% year over year. This segment provided nearly 15% of total revenue. Full-year 2010 operating income of this segment was $8.9 million, up 122.5% year over year.

Geographic Sales Distribution

During fiscal 2010, total sales in the U.S. were $701.4 million, up 19.2% year over year. Asia-Pacific region generated $127.3 million, up 38.8% year over year. China alone generated $70.6 million of revenue, down 1.4% year over year. Total sales in the EMEA (Europe, Middle East, and Africa) were $172.9 million, up 1.5% year over year. Sales in Americas (Canada, Central/South America) region were $84.4 million, up 23.6% year over year.

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