<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
FORM 10-Q
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended April 30, 1998
OR
/ / TRANSACTION REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from N/A to N/A
Commission file number 0-1424
ADC Telecommunications, Inc.
----------------------------
(Exact name of registrant as specified in its charter)
Minnesota 41-0743912
- -------------------------------- --------------------
(State or other jurisdiction of (I.R.S. Employer or
incorporation organization) Identification No.)
12501 Whitewater Drive, Minnetonka, MN 55343
---------------------------------------------
(Address of principal executive offices) (zip code)
(612) 938-8080
--------------------------------------
(Registrant's telephone number, including area code)
N/A
-------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
----- -----
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common stock, $.20 par value: 134,406,963 shares as of June 8, 1998
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ADC TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - UNAUDITED
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
APRIL 30, OCTOBER 31,
1998 1997
---------- -----------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 101,771 $ 109,794
Accounts receivable 266,135 246,241
Inventories 175,903 168,379
Prepaid income taxes and other assets 27,557 25,053
---------- ----------
Total current assets 571,366 549,467
PROPERTY AND EQUIPMENT, net 240,213 215,677
OTHER ASSETS, principally goodwill 180,413 171,159
---------- ----------
$ 991,992 $ 936,303
---------- ----------
---------- ----------
<CAPTION>
LIABILITIES AND STOCKHOLDERS' INVESTMENT
<S> <C> <C>
CURRENT LIABILITIES:
Current maturities of long-term debt $ 451 $ 650
Accounts payable 51,200 62,879
Accrued liabilities 117,030 118,870
---------- ----------
Total current liabilities 168,681 182,399
LONG-TERM DEBT, less current maturities 2,930 3,109
---------- ----------
Total liabilities 171,611 185,508
STOCKHOLDERS' INVESTMENT
(134,374 and 133,508 shares outstanding) 820,381 750,795
---------- ----------
$ 991,992 $ 936,303
---------- ----------
---------- ----------
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE>
ADC TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME - UNAUDITED
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FOR THE QUARTERS ENDED FOR THE SIX MONTHS ENDED
APRIL 30, APRIL 30,
------------------------- -------------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
NET SALES $ 334,635 $ 279,199 $ 621,031 $ 535,976
COST OF PRODUCT SOLD 177,668 149,876 330,514 288,984
---------- ---------- ---------- ----------
GROSS PROFIT 156,967 129,323 290,517 246,992
---------- ---------- ---------- ----------
Gross profit percentage 46.9% 46.3% 46.8% 46.1%
---------- ---------- ---------- ----------
EXPENSES:
Research and development 37,097 30,406 68,036 58,525
Selling and administration 64,409 52,840 126,501 102,284
Goodwill amortization 2,968 2,351 5,506 4,873
Non-recurring charges -- -- -- 22,700
---------- ---------- ---------- ----------
Total expenses 104,474 85,597 200,043 188,382
---------- ---------- ---------- ----------
OPERATING INCOME 52,493 43,726 90,474 58,610
OTHER INCOME (EXPENSE), NET:
Interest 1,115 1,795 2,559 3,581
Other (780) (425) (1,114) (852)
---------- ---------- ---------- ----------
INCOME BEFORE INCOME TAXES 52,828 45,096 91,919 61,339
PROVISION FOR INCOME TAXES 18,489 16,235 32,172 22,083
---------- ---------- ---------- ----------
NET INCOME $ 34,339 $ 28,861 $ 59,747 $ 39,256
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
AVERAGE COMMON SHARES OUTSTANDING
(BASIC) 134,275 131,009 133,997 130,724
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
EARNINGS PER SHARE (BASIC) $ 0.26 $ 0.22 $ 0.45 $ 0.30
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
AVERAGE COMMON SHARES OUTSTANDING
(DILUTED) 136,283 133,827 136,367 133,778
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
EARNINGS PER SHARE (DILUTED) $ 0.25 $ 0.22 $ 0.44 $ 0.29
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
ADC TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED
APRIL 30,
------------------------
1998 1997
--------- ---------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 59,747 $ 39,256
Adjustments to reconcile net income to net cash from
operating activities -
Non-recurring charges -- 22,700
Depreciation and amortization 26,430 23,226
Reduction in deferred compensation 278 552
Decrease in deferred income taxes (873) (1,956)
Other 1,536 (680)
Changes in assets and liabilities
Accounts receivable (19,235) (15,194)
Inventories (7,589) (9,736)
Prepaid income taxes and other assets (4,137) (5,554)
Accounts payable (11,434) (10,324)
Accrued liabilities (973) (3,710)
--------- ---------
Total cash from operating activities 43,750 38,580
--------- ---------
INVESTMENT ACTIVITIES:
Acquisitions (16,000) (33,713)
Property and equipment additions, net (46,702) (47,905)
Long-term investments 888 (3,728)
--------- ---------
Total cash used for investment activities (61,814) (85,346)
--------- ---------
FINANCING ACTIVITIES:
Decrease in long-term debt (189) (4,951)
Common stock issued 10,494 3,860
--------- ---------
Total cash from (used for) financing activities 10,305 (1,091)
--------- ---------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (264) (990)
--------- ---------
DECREASE IN CASH AND CASH EQUIVALENTS (8,023) (48,847)
CASH AND CASH EQUIVALENTS, beginning of period 109,794 183,221
--------- ---------
CASH AND CASH EQUIVALENTS, end of period $ 101,771 $ 134,374
--------- ---------
--------- ---------
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
ADC TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
SUPPLEMENTAL FINANCIAL INFORMATION - UNAUDITED
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
2ND 1ST 4TH 3RD
QUARTER QUARTER QUARTER QUARTER
1998 1998 1997 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
NET SALES $ 334,635 $ 286,396 $ 335,162 $ 293,312
COST OF PRODUCT SOLD 177,668 152,846 176,561 156,266
---------- ---------- ---------- ----------
GROSS PROFIT 156,967 133,550 158,601 137,046
---------- ---------- ---------- ----------
Gross profit percentage 46.9% 46.6% 47.3% 46.7%
---------- ---------- ---------- ----------
EXPENSES:
Research and development 37,097 30,938 34,774 29,339
Selling and administration 64,409 62,094 64,721 54,619
Goodwill amortization 2,968 2,538 2,597 2,543
---------- ---------- ---------- ----------
Total expenses 104,474 95,570 102,092 86,501
---------- ---------- ---------- ----------
OPERATING INCOME 52,493 37,980 56,509 50,545
OTHER INCOME(EXPENSE), NET:
Interest 1,115 1,444 1,824 1,571
Other (780) (333) (797) (934)
---------- ---------- ---------- ----------
INCOME BEFORE INCOME TAXES 52,828 39,091 57,536 51,182
PROVISION FOR INCOME TAXES 18,489 13,682 20,712 18,425
---------- ---------- ---------- ----------
NET INCOME $ 34,339 $ 25,409 $ 36,824 $ 32,757
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
AVERAGE COMMON SHARES
OUTSTANDING (BASIC) 134,275 133,719 133,405 131,820
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
EARNINGS PER SHARE (BASIC) $ 0.26 $ 0.19 $ 0.28 $ 0.25
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
AVERAGE COMMON SHARES
OUTSTANDING (DILUTED) 136,283 136,914 136,358 134,843
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
EARNINGS PER SHARE (DILUTED) $ 0.25 $ 0.19 $ 0.27 $ 0.24
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
ADC TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
Note 1 ACCOUNTING POLICIES: The interim information furnished in this report
is unaudited but reflects all adjustments which are necessary, in the
opinion of management, for a fair statement of the results for the
interim periods. The operating results for the six months ended April
30, 1998, are not necessarily indicative of the operating results to
be expected for the full fiscal year. These statements should be read
in conjunction with the Company's most recent Annual Report on Form
10-K.
Note 2 INVENTORIES: Inventories include material, labor and overhead and are
stated at the lower of first-in, first-out cost or market.
Inventories at April 30, 1998, and October 31, 1997, consisted of (in
thousands):
<TABLE>
<CAPTION>
April 30, October 31,
1998 1997
----------- -----------
<S> <C> <C>
Purchased materials and
manufactured products $ 160,581 $ 154,403
Work-in-process 15,322 13,976
----------- -----------
$ 175,903 $ 168,379
----------- -----------
----------- -----------
</TABLE>
Note 3 NON-RECURRING CHARGES: The Company recorded a non-recurring charge of
$22.7 million in 1997. This charge primarily represents the write-off
of purchased research and development from the acquisition of the
Wireless Infrastructure Group of Pacific Communication Sciences, Inc.
("PCSI"), as well as expenses related to the consolidation of the
Company's West Coast operations.
Note 4 ACQUISITIONS: During the first quarter of 1998, the Company acquired
substantially all of the assets and liabilities of W.E. Tech, Inc. for
$16 million in cash. W.E. Tech, Inc., located in Fort Lauderdale,
Florida, is a provider of systems integration services. The
acquisition was accounted for as a purchase, and resulted in the
recognition of goodwill of approximately $14.5 million. The inclusion
of W.E. Tech, Inc. operating results for periods prior to the
acquisition would not have materially affected results of operations.
6
<PAGE>
Note 5 EARNINGS PER SHARE: Basic earnings per common share was calculated by
dividing net income by the weighted average number of common shares
outstanding during the period. Diluted earnings per share was
calculated by dividing net income by the sum of the weighted average
number of common shares outstanding plus all additional common shares
that would have been outstanding if potentially dilutive common shares
had been issued. The following table reconciles the number of shares
utilized in the earnings per share calculations for the three and six
month periods ended April 30, 1998 and 1997.
<TABLE>
<CAPTION>
Quarters Ended Six months ended
April 30, April 30,
-----------------------------------------
(IN THOUSANDS EXCEPT EARNINGS PER SHARE)
1998 1997 1998 1997
------ ------ ------ ------
<S> <C> <C> <C> <C>
Net income $34,339 $28,861 $59,747 $39,256
Earnings per common share (basic) $0.26 $0.22 $0.45 $0.30
Earnings per common share (diluted) $0.25 $0.22 $0.44 $0.29
Weighted average common shares
outstanding (basic) 134,275 131,009 133,997 130,724
Effect of dilutive securities - stock
options 2,008 2,818 2,370 3,054
Weighted average common shares
outstanding (diluted) 136,283 133,827 136,367 133,778
</TABLE>
Note 6 STOCK REPURCHASE PROGRAM: In April 1998, the Company announced a stock
repurchase program under which the Company may purchase up to 6.7
million shares of common stock in open market transactions as market
and business conditions warrant. The Company may also utilize forward
repurchase agreements, "equity collar" arrangements using call and put
options, or other arrangements as part of this stock repurchase
program.
In connection with the stock repurchase program, the Company sold put
options to an independent third party in April 1998 that entitles the
holder of the options to sell 2 million shares of Common Stock to the
Company at $29.43 per share. Additionally, the Company purchased call
options from the same party that entitle the Company to buy 2 million
shares of its Common Stock at $31.30 per share. The put options and
call options expire on August 31, 1998. The premiums received with
respect to the put options equaled the premiums paid with respect to
the call options. The options will be settled with shares of Common
Stock having a value equal to the difference between the exercise
price and market value at the time of exercise. These securities have
no significant dilutive effect on net income per share for the periods
presented.
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
ADC Telecommunications, Inc. (the "Company" or "ADC") offers a broad
range of products and services that enable its customers to construct and
upgrade their telecommunications networks to support increasing user demand for
voice, data and video services. Telephone companies, cable television
operators, wireless service providers and other public network service providers
are building the infrastructure required to offer high speed Internet access,
higher speed data, video and telephony services, entertainment and other
interactive services to residential and business customers. Greater and greater
amounts of network bandwidth are required for these services, and the Company's
development efforts and product offerings are focused on "unlocking the capacity
of the local loop" by eliminating bottlenecks and increasing the speed and
efficiency of the network. The local loop is the portion of the public network
from the local central office through the equipment that connects to the
subscriber's equipment on the customer premise and across the enterprise or
residential network. The Company offers hardware, software, services and
integrated solutions within the following general functional product groups:
transmission, enterprise networking and broadband connectivity. The Company's
transmission products are designed for use in copper-based, coaxial-based,
fiber-optic-based or wireless transmission networks and are sold primarily to
public network service providers worldwide. The Company's enterprise networking
products are designed for use in copper-based, fiber-optic-based and wireless
networks and are sold primarily to providers of private voice, data and video
services around the world. The Company's broadband connectivity products are
designed for use in copper-based, coaxial-based, fiber-optic-based or wireless
transmission networks and are sold to both public and private global service
providers.
Historically, the Company's principal product offerings generally consisted
of copper-based and fiber-optic-based products designed to address the needs of
its customers for transmission, enterprise networking and connectivity on
traditional telephony networks. With the growth of multimedia applications and
the related development of enhanced voice, data and video services, the
Company's more recent product offerings and research and development efforts
have increasingly focused on emerging technologies and hardware, software and
service offerings for broadband telecommunications applications. The market for
broadband telecommunications hardware, software and services is evolving and
rapidly changing. The Company's growth is dependent in part on its ability to
successfully develop and commercially introduce new products in each of its
product groups addressing this market and also dependent on the growth of the
market. The growth in the market for such broadband telecommunications products
is dependent on a number of factors, including the amount of capital
expenditures by public network service providers, regulatory and legal
developments, changes to overall market capital expenditure rates (which could
result from the ongoing consolidation of customers in theses market as well as
the addition of new customer entrants to the market) and end-user demands for
integrated voice, data video and other network services. There can be no
assurance
8
<PAGE>
that the Company's new or enhanced products and services will meet with market
acceptance or be profitable.
The Company's operating results may fluctuate significantly from quarter to
quarter due to several factors. The Company is growing through acquisition and
expansion, and results of operations described in this report may not be
indicative of results to be achieved in future periods. The Company's expense
levels are based in part on management's expectations of future revenues.
Although management has and will continue to take measures to adjust expense
levels, if revenue levels in a particular period fluctuate, operating results
may be adversely affected. In addition, the Company's results of operations are
subject to seasonal factors. The Company historically has experienced a
stronger demand for its products in the fourth fiscal quarter, primarily as a
result of customer budget cycles and Company year-end incentives, and has
experienced a weaker demand for its products in the first fiscal quarter,
primarily as a result of the number of holidays in late November, December and
early January and a general industry slowdown during that period. There can be
no assurance that these historical seasonal trends will continue in the future.
In addition to seasonality, the Company's operating results for the quarter
ended January 31, 1998 were adversely affected by unstable conditions in
Asian markets as well as the spending patterns of certain telecommunications
service providers as they reevaluated their equipment needs in light of
industry consolidation.
YEAR 2000 MATTERS
The Company is currently evaluating the potential impact of the situation
commonly referred to as the "Year 2000 Issue," which involves the inability of
certain software and systems to properly recognize and process date information
relating to the Year 2000. In this regard, the Company has assigned a team to
evaluate the nature and extent of the work required to make its systems,
products and infrastructure Year 2000 compliant. The Company's product
development processes currently contain steps to include Year 2000 compliance
verification for all current and future products. ADC continues to evaluate the
estimated costs associated with its efforts to ensure that its existing systems,
products and infrastructure are Year 2000 compliant. While these on-going
efforts will involve additional costs, ADC believes, based on available
information, that it is and will continue to effectively manage its total Year
2000 transition without any material adverse effect on its business, results of
operations or financial condition.
9
<PAGE>
RESULTS OF OPERATIONS
The percentage relationships to net sales of certain income and expense
items for the quarters and six months ended April 30, 1998 and 1997 and the
percentage changes in these income and expense items between periods are
contained in the following table:
<TABLE>
<CAPTION>
Percentage
Increase (Decrease)
Percentage of Net Sales Between Periods
--------------------------------------------------- -------------------------
Quarters Ended Six Months Ended
April 30, April 30, Quarters Six Months
--------------------- --------------------- Ended Ended
1998 1997 1998 1997 April 30, April 30,
------ ------ ------ ------ ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
NET SALES 100.0% 100.0% 100.0% 100.0% 19.9% 15.9%
COST OF PRODUCT SOLD 53.1 (53.7) 53.2 (53.9) 18.5 14.4
------ ------ ------ ------ ---------- ----------
GROSS PROFIT 46.9 46.3 46.8 46.1 21.4 17.6
EXPENSES:
Research and development (11.1) (10.9) (10.9) (10.9) 22.0 16.3
Selling and administration (19.2) (18.9) (20.4) (19.1) 21.9 23.7
Goodwill amortization (0.9) (0.8) (0.9) (0.9) 26.2 13.0
Non-recurring charges - - - (4.3) - -
------ ------ ------ ------ ---------- ----------
OPERATING INCOME 15.7 15.7 14.6 10.9 20.0 54.4
OTHER INCOME (EXPENSE), NET:
Interest 0.3 0.7 0.4 0.7 (37.9) (28.5)
Other (0.2) (0.2) (0.2) (0.2) 83.5 30.8
------ ------ ------ ------ ---------- ----------
INCOME BEFORE INCOME TAXES 15.8 16.2 14.8 11.4 17.1 49.9
PROVISION FOR INCOME TAXES (5.5) (5.9) (5.2) (4.1) 13.9 45.7
------ ------ ------ ------ ---------- ----------
NET INCOME 10.3% 10.3% 9.6% 7.3% 19.0 52.2
------ ------ ------ ------ ---------- ----------
------ ------ ------ ------ ---------- ----------
</TABLE>
NET SALES: The following table sets forth the Company's net sales for the
quarters and six-month periods ended April 30, 1998 and 1997 for each of the
Company's functional product groups described above (dollars in thousands):
<TABLE>
<CAPTION>
Quarters Ended April 30, Six Months Ended April 30,
---------------------------------------------- ----------------------------------------------
1998 1997 1998 1997
--------------------- --------------------- --------------------- ---------------------
Product Group Net Sales % Net Sales % Net Sales % Net Sales %
- -------------- --------- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
TRANSMISSION $ 149,203 44.6% $ 115,833 41.5% $ 284,966 45.9% $ 221,145 41.3%
ENTERPRISE
NETWORKING 35,665 10.7 39,763 14.2 67,861 10.9 79,591 14.8
BROADBAND
CONNECTIVITY 149,767 44.7 123,603 44.3 268,204 43.2 235,240 43.9
--------- --------- --------- --------- --------- --------- --------- ---------
TOTAL $ 334,635 100.0% $ 279,199 100.0% $ 621,031 100.0% $ 535,976 100.0%
--------- --------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- --------- ---------
</TABLE>
Net sales for the three-month and six-month periods ended April 30, 1998
were $334.6 million and $621.0 million, reflecting 19.9% and 15.9% increases,
respectively, over the comparable 1997 time periods. These increases in total
net sales are the result of increases in net sales for the transmission and
broadband connectivity product groups plus revenue contributions from acquired
companies. Revenue contributions from companies acquired since
10
<PAGE>
May 1, 1997 totaled $9.0 million for the quarter ended April 30, 1998 and $15.6
million for the six months ended April 30, 1998.
During the quarter and six months ended April 30, 1998, net sales of
transmission products increased 28.8% and 28.9%, respectively, over the
comparable 1997 time periods. In addition to revenue contributions from
companies acquired since May 1, 1997, the increases predominantly reflect
increased sales of transmission systems sold to public telecommunications
network providers - cable TV, telephone and wireless systems, as well as systems
integration.
Net sales of broadband connectivity products increased 21.2% and 14.0%
during the quarter and six months ended April 30, 1998, respectively, over the
comparable 1997 time periods. The increase in sales for the quarter reflects
the resumption of telephone company spending that was deferred in the first
quarter of 1998 as a result of the consolidation of various telephone customers
during 1997. The Company believes that future sales of broadband connectivity
products will continue to account for a substantial portion of the Company's
revenues, although net sales of these products may continue to decline as a
percentage of total net sales primarily due to the ongoing evolution of
technologies in the telecommunications marketplace.
During the quarter and six months ended April 30, 1998, net sales of
enterprise networking products decreased 10.3% and 14.7%, respectively, over the
quarter and six months ended April 30, 1997. The area is focused on upgrading
the functionality of its current products and building on the competitive
position of its industry-leading installed base of channel service units/data
service units and ATM access concentrators.
GROSS PROFIT: During the three-month periods ended April 30, 1998 and
1997, the gross profit percentages were 46.9% and 46.3%, respectively. During
the six-month periods ended April 30, 1998 and 1997, the gross profit
percentages were 46.8% and 46.1%, respectively. The increase in gross profit
percentage during the three-month and six-month periods ended April 30, 1998
were primarily the result of improved product mix and continued cost reductions.
The Company anticipates that its future gross profit percentage will continue to
be affected by product mix, the timing of new product introductions and
manufacturing volume, among other factors.
OPERATING EXPENSES: Total operating expenses for the quarters ended April
30, 1998 and 1997 were $104.5 million and $85.6 million, representing 31.2% and
30.6% of net sales, respectively. The increase in operating expenses as a
percentage of net sales during the three months ended April 30, 1998 reflects
increased investments in development, sales and service to support new product
deployment and growth in international markets.
Total operating expenses for the six months ended April 30, 1998 and 1997
were $200.0 million and $188.4 million, representing 32.2% and 35.1% of net
sales, respectively. The decrease in operating expenses as a percentage of net
sales during the six months ended April 30, 1998 reflects the $22.7 million of
non-recurring charges recorded during the quarter ended January 31, 1997. Such
charges primarily represent the write-off of purchased research and
11
<PAGE>
development resulting from the acquisition of the wireless infrastructure group
from Pacific Communication Sciences, Inc., as well as expenses related to a
consolidation and streamlining of the Company's West Coast operations.
Operating expenses before non-recurring charges for the six months ended April
30, 1997 were $165.7 million, representing 30.9% of net sales.
The dollar increases in operating expenses before non-recurring charges
during the three-month and six-month periods ended April 30, 1998 were due
primarily to expanded operations associated with higher revenue levels.
Research and development expenses were $37.1 million for the quarter ended
April 30, 1998, an increase of 22.0% over $30.4 million for the quarter ended
April 30, 1997. For the six months ended April 30, 1998, research and
development expenses were $68.0 million, an increase of 16.3% over $58.5 million
for the six months ended April 30, 1997. These increases reflect substantial
product development and introduction efforts in each of the Company's three
functional product groups.
The Company believes that, given the rapidly changing technological and
competitive environment in the telecommunications equipment industry, continued
commitment to product development efforts will be required for the Company to
remain competitive. Accordingly, the Company intends to continue to allocate
substantial resources to product development for each of its three functional
product groups. However, the Company recognizes the need to balance the cost of
product development with expense control and remains committed to carefully
managing the rate of increase of such expenses.
Selling and administration expenses were $64.4 million for the quarter
ended April 30, 1998, an increase of 21.9% over $52.8 million for the quarter
ended April 30, 1997. For the six months ended April 30, 1998, selling and
administration expenses were $126.5 million, an increase of 23.7% over $102.3
million for the six months ended April 30, 1997. These increases reflect
selling activities associated with new product introductions and additional
personnel costs related to expanded operations.
Several of the Company's acquisitions have been accounted for as purchase
transactions in which the initial purchase prices exceeded the fair value of the
acquired assets. The amortization of these "goodwill" amounts over five to 15
years on a straight line basis resulted in goodwill amortization expense for the
quarter ended April 30, 1998 of $3.0 million, an increase of 26.2% over the $2.4
million recorded during the quarter ended April 30, 1997. For the six months
ended April 30, 1998, goodwill amortization of $5.5 million represented an
increase of 13.0% over the $4.9 million recorded in the six months ended April
30, 1997. These increases reflect acquisitions subsequent to April 30, 1997.
OTHER INCOME (EXPENSE), NET: For the three-month and six-month periods
ended April 30, 1998, net interest income was $1.1 million and $2.6 million,
respectively, representing net interest income on cash balances. Net interest
income for the three-month and six-month periods ended April 30, 1997 was $1.8
million and $3.6 million, respectively, reflecting net interest
12
<PAGE>
income on higher 1997 cash balances. See "Liquidity and Capital Resources"
below for a discussion of cash levels.
INCOME TAXES: The Company's effective income tax rate was 35.0% for the
three-month and six-month periods ended April 30, 1998 and 36.0% for the three-
month and six-month periods ended April 30, 1997. In addition to the non-
deductible goodwill amortization included in operating expenses each period,
these rates reflect the beneficial impact of tax credits.
NET INCOME: Net income was $34.3 million (or $.26 per basic share) for the
quarter ended April 30, 1998, an increase of 19.0% over $28.9 million (or $.22
per share) for the quarter ended April 30, 1997. Net income was $59.7 million
(or $.45 per basic share) for the six months ended April 31, 1998, an increase
of 52.2% over $39.3 million (or $.30 per basic share) for the six months ended
April 30, 1997. Before taking into account the non-recurring charges of $22.7
million, net income was $53.8 million (or $.41 per share) for the six months
ended April 30, 1997.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents, primarily short-term investments in commercial
paper with maturities of less than 90 days, decreased $8.0 million and $48.8
million during the six months ended April 30, 1998 and 1997, respectively. The
major elements of the 1998 decrease were net income before depreciation and
amortization of $86.2 million offset by the $43.4 million net increase in
working capital elements (reflecting growth in business), property and equipment
additions of $46.7 million and acquisition payments of $16.0 million. The major
elements of the 1997 decrease were net income before non-recurring charges,
depreciation and amortization of $85.2 million, offset by the $44.5 million
increase in working capital elements (reflecting growth in business),
acquisition payments of $33.7 million and property and equipment additions of
$47.9 million.
At April 30, 1998 and October 31, 1997, the Company had approximately $3.4
million and $3.8 million of debt outstanding, respectively. All such debt
represents debt of companies acquired during 1996 and 1997.
Management believes that current cash balances and cash generated from
operating activities will be adequate to fund working capital requirements
and planned capital expenditures for 1998 (approximately $23.4 million was
committed for capital expenditures as of April 30, 1998). However, the
Company may seek additional sources of financing to support its capital
needs, for additional working capital, potential investments or acquisitions,
or otherwise. As of the date of this Report on Form 10-Q, the Company is
negotiating with a financial institution to obtain a revolving credit facility
of up to $100 million. The terms and conditions of such proposed credit
facility have not been finalized and there can be no assurance that the
proposed credit agreement will be consummated.
13
<PAGE>
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995.
The foregoing Management's Discussion and Analysis of Financial Condition
and Results of Operations contains various "forward-looking statements" within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking
statements represent the Company's expectations or beliefs concerning future
events, including the following: any statements regarding future sales and
gross profit percentages, any statements regarding the continuation of
historical trends, and any statements regarding the sufficiency of the Company's
cash balances and cash generated from operating and financing activities for the
Company's future liquidity and capital resource needs. The Company cautions
that any forward-looking statements made by the Company in this Form 10-Q or in
other announcements made by the Company are further qualified by important
factors that could cause actual results to differ materially from those in the
forward-looking statements, including, without limitations, the factors set
forth on Exhibit 99 to the Company's Report on Form 10-K for the year ended
October 31, 1997.
14
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is involved in legal actions in the ordinary course
of its business. Although the outcomes of any such legal actions
cannot be predicted, in the opinion of management there is no
legal proceeding currently pending against or involving the
Company for which the outcome is likely to have a material
adverse effect upon the business, operating results and financial
condition of the Company.
ITEM 2. CHANGES IN SECURITIES
(c) In April, 1998, the Company (i) purchased "call" options that
entitle the Company to purchase 2,000,000 shares of its Common
Stock, par value $0.20 per share, at an exercise price of $31.30
per share, and (ii) sold "put" options that entitle the holder
to sell 2,000,0000 shares of the Company's Common Stock at a
price of $29.43 per share, in a transaction that was not
registered under the Securities Act of 1933, as amended (the
"Securities Act"). The put options were sold to and the call
options were purchased from an independent investment bank as
part of a stock repurchase program that was approved by the
Company's Board of Directors during April, 1998. The purchase
price payable for the call options ($5.88 million) equaled the
purchase price payable for the put options, and therefore, no
cash was exchanged at the time the option agreements were
executed. The options will be settled with shares having a value
equal to the difference between the option exercise price and the
market value of the shares at the time of exercise. The put
options were issued by the Company in a transaction exempt
pursuant to Section 4(2) of the Securities Act. No underwriter
or placement agent was involved in the issuance of the options.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
15
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
4-a Form of certificate for shares of Common Stock of ADC
Telecommunications, Inc. (Incorporated by reference to
Exhibit 4-a to the Company's Form 10-Q for the quarter ended
January 31, 1996.)
4-b Restated Articles of Incorporation of ADC
Telecommunications, Inc., as amended. (Incorporated by
reference to Exhibit 4.1 to the Company's Registration
Statement on Form S-3 dated April 15, 1997.)
4-c Restated Bylaws of ADC Telecommunications, Inc., as amended.
(Incorporated by reference to Exhibit 4.2 to the Company's
Registration Statement on Form S-3 dated April 15, 1997.)
4-d Second Amended and Restated Rights Agreement, amended and
restated as of November 28, 1995, between ADC
Telecommunications, Inc. and Norwest Bank Minnesota, N.A.
(amending and restating the Rights Agreement dated as of
September 23, 1986, as amended and restated as of August 16,
1989), which includes as Exhibit A thereto the form of Right
Certificate. (Incorporated by reference to Exhibit 4 to the
Company's Form 8-K dated December 11, 1995.)
27-a Financial Data Schedule.
b. Reports on Form 8-K
Current Report on Form 8-K dated February 18, 1998 filed on
February 19, 1998 in connection with the Company's press release
dated February 18, 1998 announcing final results for the first
fiscal quarter.
16
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Dated: June 11, 1998 ADC TELECOMMUNICATIONS, INC.
By: /s/ Robert E. Switz
-----------------------------------------------
Robert E. Switz
Senior Vice President, Chief Financial Officer
(Principal Financial Officer,
Duly Authorized Officer)
17
<PAGE>
ADC TELECOMMUNICATIONS, INC.
EXHIBIT INDEX TO FORM 10-Q
FOR THE QUARTER ENDED APRIL 30, 1998
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<C> <S>
4-a Form of certificate for shares of Common Stock of ADC
Telecommunications, Inc. (Incorporated by reference to
Exhibit 4-a to the Company's Form 10-Q for the quarter ended
January 31, 1996.)
4-b Restated Articles of Incorporation of ADC
Telecommunications, Inc., as amended.
(Incorporated by reference to Exhibit 4.1 to the
Company's Registration Statement on Form S-3 dated
April 15, 1997.)
4-c Restated Bylaws of ADC Telecommunications, Inc.,
as amended. (Incorporated by reference to Exhibit
4.2 to the Company's Registration Statement on
Form S-3 dated April 15, 1997.)
4-d Second Amended and Restated Rights Agreement,
amended and restated as of November 28, 1995,
between ADC Telecommunications, Inc. and Norwest
Bank Minnesota, N.A. (amending and restating the
Rights Agreement dated as of September 23, 1986,
as amended and restated as of August 16, 1989),
which includes as Exhibit A thereto the form of
Right Certificate. (Incorporated by reference to
Exhibit 4 to the Company's Form 8-K dated December 11,
1995.)
27-a Financial Data Schedule ....................................
</TABLE>
18
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS FOR ADC TELECOMMUNICATIONS, INC. AND SUBSIDIARIES FOR THE
SIX MONTH PERIOD ENDED APRIL 30, 1998, AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> OCT-31-1998
<PERIOD-START> NOV-01-1997
<PERIOD-END> APR-30-1998
<CASH> 101,771
<SECURITIES> 0
<RECEIVABLES> 266,135<F1>
<ALLOWANCES> 3,988
<INVENTORY> 175,903<F2>
<CURRENT-ASSETS> 571,366
<PP&E> 438,972
<DEPRECIATION> 198,759
<TOTAL-ASSETS> 991,992
<CURRENT-LIABILITIES> 168,681
<BONDS> 0
0
0
<COMMON> 26,875
<OTHER-SE> 793,506
<TOTAL-LIABILITY-AND-EQUITY> 991,992
<SALES> 621,031
<TOTAL-REVENUES> 621,031
<CGS> 330,514
<TOTAL-COSTS> 330,514
<OTHER-EXPENSES> 200,043
<LOSS-PROVISION> 702
<INTEREST-EXPENSE> 322
<INCOME-PRETAX> 91,919
<INCOME-TAX> 32,172
<INCOME-CONTINUING> 59,747
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 59,747
<EPS-PRIMARY> .45
<EPS-DILUTED> .44
<FN>
<F1>AMOUNT IS NET OF ALLOWANCE FOR BAD DEBTS AND RETURNS AND ALLOWANCES.
<F2>AMOUNT IS NET OF OBSOLESCENCE RESERVES.
</FN>
</TABLE>
